Have depressed rare earths prices been engineered by the Chinese state to snuff out non-Chinese rivals before they get going? Or do they simply reflect a weak market, with demand rising more slowly than was expected by the promotors of a slew of new projects?
The chief executive of Australian mineral sands miner Iluka, Tom O’Leary, argues that the Chinese government is manipulating the market.
‘China’s dominance of the rare earths supply chain has led to market failure, and this presents an existential threat to manufacturing in Western and like-minded countries,’ O’Leary told a mining conference in Japan in June.
Iluka is exposed to the weak prices because in April 2022 it committed to build a major rare-earths processing plant it its mineral sands operation at Eneabba in Western Australia. The federal government supported this with a $1.05 billion non-recourse loan advanced through its Critical Minerals Facility.
The project was budgeted in 2022 to have a total cost of $1.2 billion, but in February this year the company revealed the cost had blown out to between $1.7 billion and $1.8 billion. It has been in talks with the government about further support, but at current prices the venture looks troubled.
Since early 2022, the price of the key rare earth for making powerful magnets, an oxide of neodymium and praseodymium, has dived from US$145 a kilogram to US$47. O’Leary, who argues the Chinese government has engineered the price fall, says that at current prices no rare-earths operation can be profitable anywhere.
It can be argued that in early 2022 rare earth prices were in bubble territory. Prices tripled in 2021, with most of the rise occurring in the last few months of the year; they’d spent most of the period from 2012 roughly where they sit now.
Fundamental reasons for a fall in rare earth prices from the early 2022 peak include the disappointing sales growth in plug-in electric vehicles over the past two years and the general slowdown in the Chinese economy.
Mine production, by contrast, is rising rapidly. US data shows a huge surge in production in Myanmar from 12,000 tonnes in 2022 to 38,000 tonnes last year, while official Chinese production rose from 210,000 tonnes to 240,000 tonnes.
A report in Nikkei Asia last week highlights the pain that low prices are causing Chinese state-owned companies. The largest rare earth miner, China Northern Rare Earth (Group) High Tech, is facing a 95 percent fall in half-year profit, while other major state-owned rare earth groups, including Shenghe Resources, China Rare Earth Resources and Technology and Rising Nonferrous Metals are suffering steep losses. Rising Nonferrous Metals attributed its losses to the ‘drastic slide in sales prices of its major rare-earth products.’
New draft regulations to govern the Chinese rare earths industry, which were published at the end of June and take effect from October, provide ammunition for both sides of the argument. The new regulations assert the state’s control of the industry, saying its goal is to ‘ensure national resource security and industrial security’.
‘No organisation or individual may encroach upon or destroy rare-earth resources,’ and those who manage them ‘shall implement the lines, principles, policies, decisions and arrangements of the Party and the State.’
While western rare earth miners like Tom O’Leary claim they are up against the national security priorities of the Chinese state, the new regulation makes this explicit. It is a stance which justifies the Australian government’s direct intervention in providing funding to develop an industry that is independent of China. It also justifies Australian resistance to Chinese efforts to control Australian rare earth deposits.
On the other hand, the assertion of rights of the state in the new regulation reflects the failure of central planning. Eight years’ strenuous effort to stamp out illegal small-scale rare earth operations in southern China, which until 2016 accounted for a quarter of China’s production, has had only mixed success. Chinese media coverage of the new regulation acknowledged it was still a problem.
The new regulation includes draconian penalties for illegal mining, smelting, distribution and international trade of rare earths, and it orders miners to trace where their sales go.
It also tackles imports. China relies on imports for about a quarter of its supply, much of which comes from essentially unregulated operations in Myanmar, often smuggled across the border.
Bloomberg notes that the new regulation bans rare earth refiners from producing more than their government-set quota using imported raw materials. It cited an analyst saying the result could be a 20 percent reduction in China’s supply of rare earth oxides, providing support to rare earth prices.
According to the new regulation, the quotas for mining and refining of rare earths would be determined by factors including the resources’ reserves, industrial development, environmental protection and, significantly, market demand.
The problems of the rare earth industry resemble those confronting Chinese industry generally: the drive to boost production to meet official targets, regardless of demand, results in big surpluses. It is true of electric vehicles, batteries and solar panels as well as industries producing food, chemicals, textiles and pharmaceuticals. Markets seldom obey the dictates of central planners.