China's Internal RE War; Nidec Goes for E-Motor Domination; FT In Disinformation Trap;
Rare Earth 2020 October 31
Bayan Obo under Baotou Steel Group is the largest active rare earth mine on the planet.
Last week China’s official state news agency, New China News Agency, a.k.a. Xinhua, reprinted an article of the China Financial Times on a number of issues regarding Bayan Obo, Baotou Steel, China Northern Rare Earth, Baotou Rare Earth Exchange and prices.
This was followed up by an investigative report of Communist Party publication Red Star.
Illegal Mining and Processing around Bayan Obo
Bayan Obo and the adjacent new Barun mine are restricted areas. No unauthorised visits are allowed, no photo, no filming.
There are tens of kilometres of trenches to prevent vehicles from entering and leaving other than through the guarded entrances.
While the main gate to the Bayan Obo mine near Baotou is secure and no unauthorised persons can enter, apart from unguarded footpaths, just a few kilometres along the barrier there are 2-3 m wide access roads, unguarded.
Generally access to the area requires an access card ID from Baotou Steel security department, however, people who wear workers outfits can pass in and out without getting checked.
Even though there are cameras and patrols inside the mining area, there are still numerous rare earth workshops nearby.
Baotou Land and Resources Bureau say, that illegal miners would be arrested and the company suspended, if found in non-compliance and that they have not found any case of illegal mining since 2012.
However, the bureau suspects illegal mining just outside Bayan Obo at ‘Damao Banner’, which is just outside the bureau’s jurisdiction.
Assessing the resource
Even though Baotou Steel insist, that the reserve of Bayan Obo of 40 mio tons TREO is proven, there are doubts.
Mid of September there was the 4th Bayan Obo Resource Strategy Seminar in Baotou and an initiative was formed to re-assess the resource at Bayan Obo and Barun mines.
As cheap as cabbage
According to Red Star, the cost of production at China Northern Rare Earth Group is estimated to be RMB 60,000 - 70,000/t TREO (US$ 8.90 - 9.60/kg TREO) excluding salaries and cost of inventory, net of 13% VAT, based on this composition:
Our ongoing dive into China Northern Rare Earth Group numbers shows cost of production, including labour cost, between RMB 70,000 and RMB 83,000 per ton of rare earth product, depending on the kind of product.
So the above mentioned numbers are within the ballpark.
However, except for minor “application materials”, no product category of China Northern shows an operating loss as per its annual report 2019. Instead there are double digit gross profit rates:
In addition to operating income of RMB 8.3 bio, China Northern consolidates the trade volume of RMB 8.1 bio of its 63% owned Inner Mongolia Baotou Steel Rare Earth International Trade Co., Ltd.
According to Red Star, there is a significant price gap between the prices on the Baotou Rare Earth Exchange and China Northern’s published prices, i.e. that China Northern’s published prices are RMB 18,000/t higher than those listed on the exchange [that seems to be a smoke screen, as actual sales prices are always substantially lower than the list prices, whatever the industry]
The Baotou Rare Earth Exchange was established to win control over the rare earth prices, which China feels are disproportionally dependent on export prices, but also as a fair-priced source of rare earths for users, who have no negotiation power vis-a-vis state-owned behemoth companies, and of course for transparent pricing.
However, in 2019 the Baotou Rare Earth Exchange handled only 3,386 metric tons, which is a pittance in view of the total market and therefore prices quoted at the Baotou Rare Earth Exchange may not necessarily reflect the situation on the ground, which makes the exchange unattractive for buyers.
China Northern say they don’t need the Baotou Rare Earth Exchange, as they can sell everything directly and participate in the domestic and international trade through their Inner Mongolia Baotou Steel Rare Earth International Trade Co., Ltd.
China Northern estimate they only sell about 10% of their volume through the exchange.
But in terms of 2019 China Northern sales numbers of self-produced products it means, these 10% are RMB 832 mio of the exchange’s total turnover of RMB 1.3 billion, that is more than 60% of the exchange’s sales.
Given that dominance, it should be easy for China Northern to pump up prices. They don’t.
Massive increase of RE companies in China
While the official tally of active rare earth enterprises in China comes to ca. 2,000, there have been reports of up to 35,000 RE companies in China, most of them new.
At the height of the steel bubble there were 20,000 steel companies in China, but acting in a 1 billion tons market, so the number of RE companies looks a bit exaggerated.
Whatever the case, new rare earth companies certainly want to hop on to the trend of permanent magnets for e-vehicles.
According to a report of Radio Free Asia, the China domestic demand for rare earth has exploded and some magnet makers can run only 50% of capacity owing to lack of raw material.
China domestic demand would exceed supply by 30%.
The report goes on to describe, that this may be behind the massive increase of import of rare earth ores and concentrates, however, at high prices [we reported the high bids for monazite].
But also these journalists could not get behind, why RE prices don’t sky-rocket.
How does all this tally?
Last year already China Northern increased output double digits for rare earth oxides (REO), rare earth salts (RES) and rare earth metals (REM):
Source: China Northern Rare Earth Group annual report 2019
So where did all the additional output go to?
Source: China Northern Rare Earth Group annual report 2019
The massive 55% increase of sales to East China (Shandong, Shanghai, Jiangsu, Anhui and Zhejiang) must have largely come at the expense of China Aluminium’s market share, who are the dominant manufacturer in Jiangsu.
In Central China China Northern steamrolled the market a handful of smaller RE makers incl. Minmetals.
The large increase in the small Northeast China market likely affected the small RE companies in that area, who typically get their raw materials unofficially from North Korea.
Western China is kind of special, as that area involves domination by a company, whose ultimate controller is a defense enterprise.
Unsurprisingly, the smaller RE companies are ganging up by strategic cooperation agreements against the market might of China Northern.
Reacting to its competitors ganging up, China Northern chairman Zhao Diangqing went further on the offensive and demanded publicly and loudly that loss-making RE companies (=nearly everyone except China Northern) should be closed [we reported].
So, as we said before, China Northern is the problem, engaging in cut-throat competition in order to push other players out of the market.
That under such conditions prices can’t rise sustainably is no surprise.
State-owned enterprise always longs for power, never mind the numbers.
What does this mean for the future?
Perhaps another non-ferrous experience may offer some clue for rare earth:
In antimony China used to dominate the world market up to 90% for decades (and there were no complaints).
However, due to competition between Chinese antimony companies, the product remained cheap. One single China mine was good for 25% of world antimony output, under the control of state-owned Hunan Nonferrous.
When the resource was finally depleted in 2015, it turned out that China had not made any money on antimony during half a century of market domination.
That is one out of many such examples that you can find in China’s raw material sector.
The interests of RE actors in China are clearly not aligned. While the government may be dreaming of world domination, state-owned companies drive diverse agendas on national, local and gras root levels.
There seems to be little chance that China’s rare earth makers will unite to form an oligopoly in order to drive prices up, or the Chinese government doing something unwise for political gain.
Since this is the age of compliance and conformity in China, we should not take the current conditions for granted, however, the likelihood of rare earth following China’s historic repeat patterns is rather high and the only real threat to current conditions would be depletion, which is not remotely in sight.
From the 5th Plenum of the 19th Central Committee we learn, that quality, not quantity are the economic targets of the coming 5-15 years. That means, that large size does not protect Chinese SOE, and even China Northern may end up on the chopping board, if they don’t implement reforms exactly the way they were designed, such as the arms-length principle.
He, who needs to be obeyed, does not tolerate any deviation from the correct path.
How does this affect the rest of the world?
China’s excess quantities of RE will have to go somewhere, and that can only be export.
Going forward, light rare earth lanthanum, cerium and samarium will probably remain as cheap as cabbage, delighting North American catalyst makers, and - in case of China Northern - NdPr and REM will have to earn the money that is lost on these “by-products.”
NdPr price actually have risen 20% since beginning of the year. For every kg of NdPr China Northern turn out 3 kg of lanthanum and cerium, so already hopelessly oversupplied lanthanum and cerium oxide prices dropped 20% during the same period.
The smaller South China makers, apart from NdPr, have the heavy rare earths to lean on, notably dysprosium, terbium, gadolinium and holmium, whose market development looks promising and healthy.
Subject to no shocking rare earth contents of the yet to be published next 5-year plan, no big surprises are to be expected.
Interest in investing in rare earth stocks seems to be waining in China:
On a whole, China rare earth and also permanent magnet share prices are down 10% since the start of the year.
The unfounded myth that started as a China propaganda gimmick is still floating around: “China has become a net importer of rare earth.”
China exports 60 million tons of steel per year, while China imports 1 billion tons of iron ore. Does that make China a net importer of steel?
Same applies to rare earth.
Thanks for reading and have a great weekend!
China plans to make all new vehicles sold in 2035 "eco-friendly," part of a goal that promises to give a tailwind to Japanese automakers like Toyota Motor, which specializes in hybrid engines.
Of all new vehicles sold that year in the world's most populous nation, 50% are to be "new-energy" vehicles -- electric, plug-in hybrid or fuel cell-powered. The other half are to be hybrids.
In 2019, new-energy vehicles made up 5% of all new car sales in China. According to the road map, the ratio will increase incrementally until it reaches 50%. Of the new-energy vehicles, more than 95% are to be EVs.
Meanwhile, the only gasoline-powered vehicles sold in 2035 are to be hybrids. The goals are to raise the ratio of hybrids to 75% of all gasoline cars by 2030 and to 100% by 2035, and to stop manufacturing and selling conventional gasoline vehicles.
State planning limits on China’s production of rare earth elements is undermining the country’s dominance of the strategic sector, according to Chinese industry executives and analysts.
The production limits, enforced to limit environmental damage from rare earth mines and also keep prices high, are forcing Chinese manufacturers that depend on rare earths for a range of industry applications to turn to overseas suppliers, triggering a surge of imports from the US and Myanmar.
“Production quotas are hurting us financially,” an executive at China Northern Rare Earth Group High-Tech Co, the country’s largest producer, told the Financial Times. “It has also led to unstable supply of the resource that could put [Chinese] end users under stress.
Chinese mining executives argue Beijing should abandon the production quota system and let market forces determine how much rare earths they should produce, provided that environmental standards are met. CNREG has asked the Chinese government to begin by removing quotas for certain rare earth elements the country has rich supplies of, such as lanthanum and cerium.
Comment: FT is falling right into the deception trap of China Northern. China Northern want to finish what they started and push everybody else out of the market.
The strategy of every state-owned enterprise in history: First we become the biggest, then we steamroll the competition and finally we’ll make profits. The latter rarely happens.
The United States’ downfall as a leader in the RE industry was set in motion in 1980, when the U.S. Nuclear Regulatory Commission (NRC) and International Atomic Energy Agency (IAEA) amended its definition of source material (broadly, material containing uranium or thorium) for nuclear weapons. Previously, heavy RE byproducts had not been considered source materials, which meant that they could be easily sold and processed into high-value materials. But under the amended definition, they were suddenly placed under extensive licensing, regulatory, disposal, and liability rules. Given the added cost and liabilities, their production and refining was eventually terminated in the United States and other IAEA member states.
China, meanwhile, is not constrained by IAEA regulations, since it is only an observer of the agency, not a member. It was able to step in to replace the United States in the production and processing of REs.
Over the years, U.S., Japanese, and French companies transferred their intellectual property in refining and metallurgical technologies to China, which had lower cost of production, resulting from cheap labor, lax environmental regulation, and generous Chinese state subsidies.
China took that technology and ran with it.
With most of the economic value from rare earths coming from the production of metals, alloys, and magnets (the materials that make modern technology work), China is now looking to other countries, including Myanmar, Vietnam, Burundi, and the United States to do the dirty work of mining [here the author clearly got something wrong. Too complicated]. This new strategy protects China’s environment, preserves its resources, and creates a highly priced competitive environment among its suppliers.
In 2014, the Alaska Legislature authorized AIDEA to invest up to US$145 million to help finance the development of a mine at Bokan Mountain and Alaska Strategic Metals Complex, a REE separation facility Ucore envisions building near the coastal town of Ketchikan.
During 2019, AIDEA reviewed Ucore's plans to develop the Alaska SMC and Bokan mine. As a result of this evaluation, Alaska's powerful development finance arm continues to see the projects as a good investment.
Comment: We don’t know what they smoke and we don’t want any of it.
Nidec, the world's largest motor maker, said on Monday that it is ready to spend almost $10 billion over the next five years to dominate the market for electric vehicle motors.
The aggressive plan is meant to help the company capture 25% of the market in 2025 and 40% to 45% in 2030, the Kyoto-based company said.
Nidec is building the capacity to supply 2 million drive motors to Chinese electric vehicle makers and 1 million to European makers. With another motor plant set to come online in Mexico, the company's production capacity is expected to reach 5 million by 2025.
The buildup is expected to cost 500 billion yen ($4.8 billion) to 1 trillion yen, said Shigenobu Nagamori, Nidec chairman and CEO.
The world’s largest producer of rare earths outside China said production of neodymium and praseodymium (NdPr), used in everything from iPhones to weapons, rose to 1,342 tonnes in the quarter ended in September from 1,242 tonnes a year earlier. It was just under a UBS estimate of 1,350 tonnes.
Lynas said a NdPr production rate of 75% is enough to meet demand as the coronavirus crisis continues to weigh on demand.
Lutetium-177 is seen as a promising treatment in a number of cancers. Rosatom is currently one of the three largest world manufacturers of this radioisotope. Following a quality assessment, Policlinico di Bari confirmed that V/O Izotop’s lutetium-177 met all the necessary requirements of European legislation and pharmacopoeia (in particular, EU GMP) and could be used for further production of a radiopharmaceutical.
The ILU share price fell over 47% to its lowest point in five years of $5.23 during lunch time trade. This makes the mineral sands miner the worst performer on the S&P/ASX 200 Index (Index:^AXJO) by a country mile!
But shareholders of Iluka aren’t worried. The reason behind the sharp drop is linked to the spin-off of its royalties business.
The Deterra Royalties (ASX:DRR) share price started trading on the ASX today with Iluka’s shareholders receiving one DDR share for every one ILU share they hold.
The DRR share price is currently trading at $4.77 and if you combined the value of both stocks, shareholders are actually sitting on a small gain.