Did China Just Solve the Problem of Illegal Rare Earth Production?

May. 3, 2018

China increased rare earth mining quotas by 40% for the first half of 2018

In April 2018, China’s Ministry of Industry and Information Technology (“MIIT”) unveiled the national rare earth mining quota for the first half of 2018 (73,500 tonnes of REO), marking a 40% increase over the quota issued for the first-half of 2017 (52,500 tonnes of REO). (Download a breakdown of the quota by province, along with some key takeaways from the accompanying MIIT announcement).

Despite the ‘sticker shock’ of this increase, Adamas Intelligence believes the near-term impact on global supply will be muted.

Quota increase legitimizes persistent over-production by authorized producers

As noted in a recent whitepaper from Adamas Intelligence, in December 2016 Chinese authorities announced yet another round of domestic rare earth supply chain inspections as part of Beijing’s ongoing effort to reduce unsanctioned rare earth production and enforce environmental standards in the nation.

In what has been perhaps the most thorough and comprehensive review to-date, the ongoing inspections have covered more than 400 companies operating in 23 provinces, with an explicit focus on 180 companies involved in mining, processing, and trading of rare earth products.

Despite the lack of publicized busts, illegal rare earth production in China appears to have declined steadily since the commencement of inspections, suggesting that a substantial share of so-called illegal output in past years may have been the result of over-production by authorized producers, many of which are currently operating under the microscope of central government inspectors.

As such, by increasing mining quotas in the first half of 2018 it is our view that industry authorities are merely legitimizing a large quantity of ‘unsanctioned’ rare earth production that would have flowed into global supply chains irrespectively.

Consolidation has reduced the number of value-adding channels to market

The ongoing inspections follow the recent consolidation of China’s rare earth enterprises into six large groups – a move that has done little to reduce the number of rare earth businesses operating in China – but has been effective in centralizing industry control, increasing government oversight, and strengthening the pricing power of China’s major rare earth producers, as evidenced by a coordinated rise in rare earth prices early in the second half of 2017.

Less illegal means more taxable, adding support for higher prices

With the legitimization of some or all of China’s illegal production, resource taxes will now be levied on a greater proportion of China’s total rare earth production thereby minimizing the undercutting effect that illegal production has historically had on rare earth prices.

 

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