Wednesday, June 15, 2011

"Implications For Investors Of The Dramatically Increasing Chinese Virtual Demand For Rare Earths" (AVL; MCP; REE)

It's not just the 'virtual' demand.
China is not shy about wanting to own the entire supply and fabrication chain:


Source: Molycorp final prospectus, June 9, 2011

Molycorp is attempting to do the same thing to capture more of the value-added, witness the acquisition of Silmet, the investment by Sumitomo and particularly their joint venture with Hitachi:
....This downstream integration, which we refer to as our “mine-to-magnets” strategy, would make us the only fully integrated producer of NdFeB magnets outside of China, helping to secure a rare earth supply chain for the Rest of World. In addition to the foregoing, we continue to explore additional joint ventures or other arrangements with third parties for the production of NdFeB alloys and/or magnets.
Rare earth “mine-to-magnets” production supply chain

For more on the downstream challenges see:
Repost: Hard Truths About the Rare Earth Element Business 
"New Magnets Could Solve Our Rare-Earth Problems" (MCP; REE; AVL; SHZ; GE)
Both posts link to MIT's Technology Review blog.

Here's Technology Metals Research with the headline story:
If you’ve read beyond the title above then you are the audience that I am seeking. The Wall Street Journal (WSJ) published an article this morning with the title “China To Set Up Strategic Reserve For Heavy Rare Earths – Sources“. The WSJ said that:
China plans to set up a strategic reserve for heavy rare earths in what would be another step towards protecting key resources and ensuring supplies for the domestic market, people with direct knowledge of the plan said. The plan, which hasn’t yet received final government approval, would likely reduce volumes for export and boost rare earth prices.
The WSJ goes on to say that
It also would follow an approval in 2009 to build strategic reserves of light rare earths in China’s Inner Mongolian Autonomous Region. That plan is supposed to be undertaken by Inner Mongolia Baotou Steel Rare-Earth (Group) Hi-Tech Co. (600111.SH), the country’s largest rare-earth producer by output.
You can read the rest of the article here, and I suggest you do so before going any further.

As I have been reporting for the last two years, China is going full steam ahead with a critical-materials stockpiling program to protect Chinese domestic manufacturers, from any potential interruption of critical supplies.

Two years ago, it was reported that Baotou Rare Earth (BT) had received permission to stockpile up to 300,000 tonnes of rare earths. BT is the world’s largest producer of light rare earths; last year it produced at least 50,000 tonnes of lanthanum, cerium, neodymium, and praseodymium.

Last year it was announced that the Chinese government had decided to consolidate the rare-earths industry, geographically, under a small number of very large (world-class) Chinese metal producers and metals-trading companies.

Late last year it was announced that for environmental reasons, rare-earth production would be reduced and no new (increased) production or even exploration licenses for mining would be issued, until 2012.

So until this morning we had a total reorganization of, at least, the global (i.e., Chinese) light-rare-earth-supply industry well underway, although only just now being implemented. Today, the equation expands to encompass the heavy rare earths, which are mostly produced outside of the geographic region the rare earth production of which has been totally subsumed under BT ‘s authority and responsibility.

Thus it will now fall mostly to Jiangxi Copper to supervise the creation of a stockpile of heavy rare earths (HREEs) in the geographic region in which it has been given the mandate over the production of rare earths.
China is now committed to:
  • The rationalization (thus restructuring) of the Chinese rare-earth mining industry (its reorganization into efficient profitable units, all operating legally with state-mandated production quotas);
  • The environmental remediation (cleanup) of the industry, which operates today with a large uncontrolled segment of “cowboys’ who don’t obey any health, safety, or TAX rules, and
  • The creation of stockpiles of all of the rare earths at levels of what would now be several years of demand!
Since China is today essentially the only producer of heavy rare earths, as well as the producer of 98% of the light rare earths, and since stockpiles can be viewed as purchased inventory, then this means that the virtual demand for all of the rare earths in China will skyrocket.

China clearly fears that the necessary cleanup of the rare-earth-production industry will be disruptive, if not planned for and executed on a totally controlled grand scale. It has therefore decided to do so and has begun to do so.

This is a national industrial policy in action. America has no such policy and, even if it wanted to have such a policy, there is no possible mechanism to enable it, short of a war footing for the entire economy.

This is a command economy in operation. By contrast, America has a “free market” economy.
Unless the rest of the world now shifts its focus to the production of heavy rare earths and their stockpiling, then by 2015 at the latest, there will be virtually no HREEs available outside of Chinese control, and thus, any manufactured product requiring a HREE will by necessity have to be made within China by a manufacturer who is either Chinese or has access to quota ultimately issued by the Chinese authorities....MORE