Chinese Production of Rare Earths: The Real Crisis

by Jack Lifton on June 4, 2010 · 12 comments

in China, Rare Earths

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The Chinese rare earth mining industry has angered the officials of the Chinese government in charge of meeting the environmental requirements of the current five-year plan. Of this we can be certain from the number of breathless stories now proliferating on the Web.

I only urge those of you who are still rational to note that the issue for the rare earth industry, as with every other “smokestack” industry in the People’s Republic of China, is to operate in such a way as to ensure that energy intensity – the amount of energy used per unit of production – goes down, not up, as it has been doing lately in the reversal of a long term trend. The lessening of efficiency and productivity indicated by the rise in energy intensity has embarrassed the Chinese government, which pledged to reduce carbon emissions per capita through raising energy use efficiency and thus lowering energy intensity by the end of the 2006-2010 five year plan to a level at or below those in 2005. Note that the source of 87% of China’s energy is coal.

This “embarrassment” is the driver for the State Council’s fury at the rare earth mining industry, which allowed Western reporters to see the devastation from environmental disregard and rogue (illegal) mining and smuggling of goods.

NOTE: The Chinese government can only insure that it gets reliable data on such topics as energy intensity, from closely monitored large state owned and run operations. So figure out for yourself why this might cause a “restructuring” of a notoriously opaque industry.

The so-called emphasis on the Sichuan rare earth production from the “ionic clays” is a direct result of China’s governmental worries about pollution impacting efficiency, health, and safety.

You won’t have seen many photos of Sichuan located rare earth “mining operations” that were taken in the last 20 years or so. Why? These operations were of the open above ground acid leach type and are said to have had devastating effects on the local ecology and ruined actual or potential farmland in a country where agriculture is a critical industry.

Remember that China imported grain from the USA as recently as last month (May) due to the drought and “other conditions” in China.

Rare earths are nowhere near as important to the China State Council as they are to Western stock promoters, trying their P.T. Barnum Best to get us alarmed over a non-existent direct threat, from a battered industry in a country trying to raise its standard of living and meet stated national economic goals.

China is not the USA. China’s central government is embarrassed when its planned economic advances are not on track; it doesn’t seem to blame its shortfalls on a US conspiracy to deprive China of domestic economic progress.

China, like the USA today, apparently, believes in strong central government ensuring the health, safety, and well being of its citizens. The difference is that China’s one party rule allows decisions to be made for any and all industry, which, “private” or public, must follow the rules and attain the goals set by the State Council. China’s state councilors are notably better educated and informed than their American counterparts, and clearly do not seem to simply follow industry advice given at lavish dinners and on expensive fact finding missions to beautiful beaches, to discuss mining issues.

I wonder if any of the punditry on rare earths can even imagine a Western government that asks reasonable questions of a natural resource industry, and then having received answers, makes decisions on the allowable operations of that industry based on a pre-determined set of national economic and political goals.

This bulls*** about the threat from China or the sinister machinations of the China State Council is of the same type as the commentary by those who read defense contingency plans, and write headlines shouting “US has Plan to Attack Canada!”

It is clear that China is trying to minimize environmental damage where it can without disrupting the general economy.

The Chinese rare earth industry is part of a larger supply chain that ends, in China, in a large number of end use technology products for both domestic use and export. Thus the production of rare earths cannot be slowed down, much less stopped, without negatively impacting the general economy.

It is because of its, the rare earth production industries’ critical spot in the supply chain for so many goods, that China is regulating it rather than just shutting it down for environmental remediation.

China’s government believes in direct central control of the economy; that is in fact its central philosophy of the correct path to the betterment of mankind. Therefore the Chinese government will do whatever it can to minimize a negative effect on the central economy by a rogue or misguided industry.

This is accomplished by putting direct control of that industry into the hands of state corporations reporting to officials in Beijing who are directly responsible for meeting goals and who, in Beijing, have the power and authority to shut down state industries or to change managers.

Any capitalist would agree that this is the best way to manage a business: by setting goals and judging managers by performance to objective. It is also obviously a test of the goals themselves, but that is a political not wholly an economic issue.

As for prices: I have said before, and I will say it again. “Private” industry in China has been keeping the prices of the rare earths low by fierce competition without regard for environmental or efficiency standards. The central government has two fears:

  1. INFLATION of commodity prices,
  2. CURRENCY APPRECIATION without government sanction.

The rare earths are clearly due for a price correction.

Competition is the life blood of free market capitalism I am told by Larry Kudlow and lesser lights in the firmament of punditry on that topic.

So, I recommend to all of the institutional investors reading this that they take a hard look at the non-Chinese rare earth mining opportunities, and to use whatever fantasy price increases come out of learned reports and surveys in the near term to assess their risk of making/losing money by investing in a rare earth mining venture.

Then they need to take a hard look with a laser up the you-know-what of the management, of their choices from the above to weed out the grossly incompetent from the just plain incompetent. Then the institutional investors can place financial MANAGEMENT SUPERINTENDING PERSONNEL WHEREVER THEY INVEST.

Then they need to GO TO China and Japan to round up end use customers for the short term as well as the long term.

Then they can securitize the off-takes from the chosen mines and sell them to the end use customers, or speculators, or stockpile agents, everywhere to distribute the risk of non-performance.

And then… the world can go on to the next rare metals supply crisis.

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1 Tek June 4, 2010 at 3:49 pm

It is now apparent that the Chinese will pursue their stated goals of cleaning up their mess (at huge expense) during an upcoming period when they will simultaneously put significant restraints on additional production of Rare Earths. The article on Rare Metal Blog about China tightening controls on these products seems to further illuminate how dire a situation they have put themselves in. They now admit that prices MUST rise for themsleves as well as the general world market. And though they are actively encouragin companies to move their businesses to China to acquire Rare Earths, it seems much more likely that Western businessmen and institutional investors will realize the wisdom of taking this opportunity to develop a secure supply chain of these critical materials, while investing in their own western industries and keeping the money here.
But how long will our institutional investors wait? Have they waited too long already?
Given the time frame now being apparently shortened, there is simply no time to waste. Unfortunately, the plethora of “more pressing” interntional issues like the Gulf Oil Spill, the Koreans, the mideast , and two wars, continue to overwhelm Rare Earths’ little voice in the wilderness.

2 robit June 4, 2010 at 5:01 pm

Jack
Are you familiar with the coal gasification technology from Synthesis Energy Systems which is now being used in China? Gasification could be a major boon to air quality in China and they could also use their coal for synthetic natural gas and launch their own Pickens Plan.

Also, is China at the point in relations with the rest of the world for technology companies to build facilities in China without undue danger of having their investment nationalized or their intellectual property stolen?

3 James Murray June 4, 2010 at 6:44 pm

I read it twice and am confused. Are you saying that the statements that China is “holding back export of REE’s to save them for themselves” , or that “production will just be less due to their trying to improve the ecological situation?” And where does that put good USA/Canadian REE prospects? ie., Avalon, Great Western, etc. Jab Murray

4 Prescient11 June 5, 2010 at 12:31 am

I too am confused by this post. Hopefully, some commentary will follow from Mr. Lifton.

If I understand it somewhat, it is that China has no secret plan to screw the world out of rare earths. Any supply constraints will simply be the result of the fact that China is cleaning its act up.

And regardless, these polluters have been driving REE prices artificially low for years, so obviously for margins to be proper in a “consolidated” industry, these prices are going to have to rise.

Am I on target here?

5 loquacite June 7, 2010 at 6:50 am

Lynas has just stated the following in a new release: “…according to the Chinese Society of Rare Earths… prices are only up 20% since 1979 despite demand that has tripled in the past decade” and many other bullish statements.

Despite Mr. Lifton’s lyricism, I would much sooner believe Lynas, who is the world leader in this business, no doubt bringing to bear a team of analysts and other professionals who have studied this space for years or decades.

For those of you who think Jack Lifton is confused, may I suggest that he is even more confused than you.

6 Jack Lifton June 7, 2010 at 7:50 am

Ladies and Gentlemen and Loquacite,

Look at the econoomics of the situation: If “prices” have only gone up 20% since 1979, then when those prices are normalized for inflation they have fallen dramatically. You see that the dollar today is worth only about 1/3 of its 1970 value in terms of purchasing power as calculated by the US Dept of Commerce.

Note that the all time high for gold in 1980 was $850(1980) per troy ounce, which today is more than $2300(1980) per troy ounce, so gold has fallen dramatically in purchase price.

In fact I said that Chinese production volumes and business practices in the rare earth sector from the beginning have led to internal competition within China that has kept prices artifically low. The consolidation will now eventually cause prices to rise by eliminating that competition against regulated enterprises by rogue enterprises that do not pay the costs of labor, taxes, safety and health.

I doubt very much whether Lynas fails to understand that as Loqucite seems to. I note that Lynas shares have fallen sharply since it was financed indicating a long road ahead to production even for a company with a good deposit, a metallurgy said to be done, and a separation plant under construction. The rare earth mining business is a complex entity not subject to simplistic analysis by day traders. There is a reason that China Nonferrous Mining Company made a substantial offer for Lynas. That reason was that Chinese companies and bankers place a positive value on security of supply, which is something that western bankers, so far, do not do. Lynas is certainly one of the best chances for western independence of China for light rare earths. Time and economics will determine whether or not Lynas is successful.

I will no longer comment on anything Loquacite says, and I will no longer allow ad hominem attacks, even by me, on this web site. Those of you who wish to engage in rational debate please continue.

7 Tek June 7, 2010 at 9:46 am

Lo, you seem equally unencumbered by either common courtesy or professional expertise, so why should I believe you?

8 prescient11 June 7, 2010 at 1:13 pm

Here, here. Loquacite, discourse is better than attacks that really don’t advance the discussion.

As to Lynas’ review of REE prices, may I suggest that they have no idea what they’re talking about.

Mr. Jim Dines (and yes, he is a newsletter/stock promoter) recently released for the first time price charts for four REEs in RMB, and one can see that Cerium, the fairly abundant LREE, has risen in price since the fall of ‘09 by over 140%. Mr. Kaiser has confirmed that the current REE prices are much higher than the 4 year average used by Wardrop.

So, anyone who states that REE prices have dropped or are not rising dramatically, has no idea what they are talking about.

Mr. Lifton, I believe an analysis of all recent news and Dr. Chen’s white paper that you published on the rare earth blog are the clearest indicators of the price direction of REEs. And I believe all of those combined sources indicate that the price movements are going to be significantly northward, above and beyond the rapid price increases that have occured since late ‘09.

Best.

9 alex dolensky June 7, 2010 at 9:36 pm

Mr. Lifton, in the past you have mentioned that you do not promote or own any shares in company you mention, but you have on several occassions talked about GWG, and with the recent south africa news ,i thought you would have a comment or is the news not significant because it is only the 1st step of many to come

10 Prescient11 June 9, 2010 at 11:47 pm

I must say the “discussion” on this site, one I check every day for commentary and thoughts, has waned as of late.

Hopefully it will pick up in the future.

11 Jack Lifton June 12, 2010 at 12:44 pm

Alex,

I think that your comment indicates that you understand how I look at the situation quite well. In fact the extension or renewal of the mining permit is the essential first step in the development or re-development of the Steenkampskraal property. However, as you see, there are many more steps to the process not the least of which is adequate financing. I am optimistic that GWMG will move forward, but I am holding off praise a little while longer so that some key questions about the necessary steps for Steenkampskraal to be of value can be answered. GWMG’s “mine to market’ strategy is perhaps today the only rare earth strategy involving a junior miner that makes any financial sense on its own. Selling that strategy to long term investors requires detailed answers to questions about metallurgy, costs, processing locations, and end-use customers. I await those answers eagerly.

Thanks for being a careful reader.

Jack

12 Tek June 13, 2010 at 11:29 am

Alex,

Here are some responses from GWG staff at the recent Cambridge Conference.

http://www.stockhouse.com/Bullboards/MessageDetail.aspx?p=0&m=28315805&l=0&r=0&s=GWG&t=LIST

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