China tightens grip on output of rare earths

By Leslie Hook in Hong Kong

Published: October 6 2010 17:23 | Last updated: October 6 2010 17:23

When the Olympic torch toured the world on its way to Beijing in August 2008, one of the Chinese cities it passed through was Baotou, an unassuming town of 2m in the middle of Inner Mongolia.

Today Baotou is back in the limelight thanks to its outsized role in the production of rare earths, a group of 17 minerals used in the manufacturing of products from car batteries, video cameras to military equipment.

China produced 97 per cent of the world’s rare earths last year, and global concerns about that monopoly have peaked in recent weeks, after Japanese traders reported their rare earth shipments were halted during a diplomatic dispute between their country and China.

At the centre of this debate sits the Inner Mongolia Baotou Steel Rare Earth Hi-Tech Company, which has quietly grown into the world’s largest producer of the minerals, contributing nearly half of China’s production.

During the 1980s, global rare earths production shifted from the US to China because of lower labour costs and also lower environmental standards – the mining and processing of these elements can be highly polluting.

Today, the Baotou company is listed in Shanghai with a market capitalisation of Rmb62bn ($9.3bn) and it produces 55,000 tonnes of processed rare earths a year, about 44 per cent of global production.

Net profit fell because of the global decline in demand last year to Rmb56m but its interim net profit this year bounced back to more than double that amount, which has been reflected by its share price which is up 172 per cent since January.

“They’ve always been the single most powerful force in the rare earth industry,” says Ian Higgins, general manager of Less Common Metals. “Over time Baotou has been getting stronger and stronger.”

Baotou’s position could grow further thanks to China’s plans to consolidate the rare earths mining sector.

In September, the powerful National Development and Reform Commission announced that Baotou Iron and Steel Group, the parent of the listed rare earths company, would have a monopoly on rare earths production in Baotou by the end of the year, taking over smaller mines in the area. China has 129 legally registered rare earths mines – and many more that operate illegally, usually at great environmental cost.

Baotou Iron and Steel Group also began to extend its reach into southern China, investing Rmb232m in August to buy minority stakes in three rare earth miners in the south eastern Jiangxi province.

The company has received approval to develop China’s first rare earths reserves, which will eventually grow to 200,000 tonnes of processed rare earths, equivalent to roughly 19 months of global production based on 2009 levels.

For the industry as a whole, however, there are signs that the Beijing government does not wish it to get too big. The consolidation of China’s rare earths sector is part of a broader national effort to shift away from this type of low value-added, high environmental impact products.

As a result, China has cut export quotas for rare earths and raised export taxes for the minerals.

Export taxes for rare earths are currently around 15 to 25 per cent, and quotas for the mineral are so tight that they are traded around between the companies that receive quota allocations.

The going rate is about $30 per kilogram, according to Mr Higgins.

These efforts to increase prices may eventually spur more countries to start rare earths production, and cut the number of Chinese rare earths miners, although China’s industrial consolidation efforts often exhibit a large gap between policy and practice.