China Flexes It’s Rare Earth Muscles

By: Anthony_David

The stakes of the recent dispute between China and Japan over the Japanese detention of a Chinese fishing trawler has reached a head with China blocking the export of precious rare earth metals to Japan. No official announcement has, however, been released and the Chinese Commerce Ministry has strongly denied the imposition of such an embargo. Any official ban on exports would allow Japan to complain to the World Trade Organization (WTO) but with no official Chinese statement and only the reported prevention of ships being loaded, there’s little room for Japan to react. Japan has not received any official communication about a ban either.

Japan and the US are heavily dependent on China for rare earth metals and are China’s primary customers. Japan has been trying to secure its supplies to some extent by setting up rare earth processing units in northern Vietnam, which has small reserves of the metals. Rare earths smuggled from southern China are also processed here but China has been implementing strong measures to limit smuggling.

As reported last month, China, which owns 97% of the global supplies, produced 120,000 tonnes of rare earth metals in 2008 followed distantly by India with 2,700 tonnes. Further, China’s low prices have pushed most other companies out of the rather costly rare earths production market. To top it all, China has been limiting its export quotas and increasing the fear of a global deficit. Prices of rare earth metals have skyrocketed ever since July when China announced a 72% cut in its export quota for the rest of the year.

The high prices have caused investors and hedge fund managers to focus a great deal of attention on the commodity. However, Chief Executive Constantine Karayannopoulos of Canada’s Neo Material Technologies said that a price bubble has developed in the rare earth metals market, increasing the chances of a sharp price drop in the near future. He said, “At the end of the day, rare earths are not that rare.” In his opinion, while mining makes sense at today’s high prices, he did not think the prices would be sustainable in the long-term.

In reality, rare earths are fairly common and the only reason they are “rare” is the fact that mining and processing them are a highly capital intensive affair. Processing costs are heightened because the metals generally occur mixed with deposits of radioactive uranium and thorium and the cost of preventing radiation leaks is very high. Jack Lifton, who specializes in technology metals and rare metals, said, “The economics of rare earths mining are difficult and challenging. If the goal of a mining company is just to produce unseparated concentrates, it will most likely fail as a free-standing economic enterprise.”

Analysts such as Charles Kaplan, an institutional broker and adviser at du Pasquier, consider the situation as a threat to US supplies and think the US government should subsidize prices of domestic rare earths to ensure a steady supply. Lifton thinks the US could achieve self-sufficiency by focusing on California for the heavy rare earths and on Alaska for the light rare earths. In fact, efforts are already on to reopen the rare earth mine at Mountain Pass, California. The mine was closed in 2002.

Several analysts think there are enough deposits in China, Canada, South Africa and Australia to meet the future global demand. South Africa’s Steenkampskraal Mine, owned by the Rare Earth Extraction Company Limited (Rareco), is being reopened after four years. Rareco has already signed a ten-year offtake agreement with the US rare earths processing company Great Western Minerals Group Limited (GWMG) and production is expected to begin in late 2012. Vice President Richard Hogan of GWMG said, “We are determined that Rareco and GWMG will become the first producer of heavy rare earths outside China.” The icing on the cake is that Steenkampskraal has the world’s highest known grade of heavy rare earths.

By Anthony David

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