Following WTO Ruling Against, China to Drop Rare Earth Export Tariffs and Boost Tax on Miners

May. 23, 2014

World Trade Organization rules against China’s industry controls

In March the World Trade Organization (WTO) ruled against China’s export tariffs, export quotas, and other policies imposed on rare earths, tungsten, and molybdenum products.

In its ruling the WTO stated that “the overall effect of the foreign and domestic restrictions is to encourage domestic extraction and secure preferential use of those materials by Chinese manufacturers”. As such, the panel concluded that China’s export restrictions are in discordance with its WTO obligations.

We have since heard from multiple sources that China is planning to drop its rare earth export tariffs in the second half of 2014, at least some of them, while concurrently raising resource taxes for rare earth miners in a bid to boost prices at the source.

The specifics of the changes afoot are currently being ironed out by the State Administration of Taxation, the Ministry of Finance, and other key ministries. What is clear in the meantime, however, is that rare earth production costs in China are poised to rise as of July 2014, and with an increase in costs will come an increase in rare earth prices.

How much will rare earth prices increase?

The answer depends largely on the extent to which resource tax rates are increased for China’s miners. A possible scenario is that prices will not change, but rather China FOB pricing (inclusive of export tariffs) will be eliminated and Chinese domestic rare earth prices, soon to be world prices, will increase to China FOB levels (+20% to +35%).

How much have rare earth resource taxes been historically?

Until 2011, rare earth resource mining in China was taxed under the category of ordinary non-ferrous metals. As such, a tax rate of around $0.10 per tonne of ore mined was levied from ion-adsorption clay and xenotime miners, and $0.50 per tonne of ore mined was levied from bastnaesite and monazite miners. In both cases, the small tax amounted to less than $150 for every tonne of REO they produced.

However, in April 2011, fifteen months after substantially slashing the nation’s rare earth export quotas, China’s Ministry of Finance and State Administration of Taxation announced order-of-magnitude increases to rare earth resource taxes – adding fuel to a fire that would carry rare earth prices to record levels in August of that year.

From just fractions of a dollar, the resource tax increased to roughly $9.60 per tonne of ore mined for bastnaesite and monazite ores, and $4.80 per tonne of ore mined for ion-adsorption clay- and xenotime- rich ores.

Taking into consideration the mineralogies, grades, and recovery rates of China’s major producers, the April 2011 tax increase bolstered mine production costs by roughly $1,000 to $6,400 per tonne of REO produced. For many of China’s rare earth miners, the increased resource tax became one of their largest costs.

Will higher resource taxes catalyze another rare earth price spike?

Doubtfully. It’s important to note that the April 2011 tax hike did not trigger the 2011 price spike, but rather the price spike triggered the tax increase. Taxes may have contributed in part to the continued rise of rare earth prices from April into August 2011, but, in all likelihood the market’s mania regarding perceived shortages did the bulk of the heavy lifting.

That said – we believe it’s reasonable to expect domestic rare earth prices in China to rise to at least FOB levels, and possibly beyond as players in the supply chain work out their new cost structures.

Should end-users in China stock up ahead of the tax increase?

We recommend that all major end-users operate with a three to six month captive supply of key rare earth materials depending on the nature of the business and the rare earths utilized.

For end-users not operating with such a buffer or feeling exposed in advance of the tax increase, we caution them not to purchase in great excess of their normal volumes prior to July as it will increase the likelihood of prices spiking thereafter, negating short-term benefits over the long-term.

At the end of the day, the best purchasing strategy for end-users is one that satisfies short- and long-term interests simultaneously. While it’s critical to buffer against market volatility, it’s equally critical not to over-hedge to the point of hindering competitive agility. At Adamas Intelligence we thrive on helping rare earth end-users find their strategic medium.

 

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