By Nishant Dixit
On December 31, 2014, China’s Ministry of Commerce announced that it had scrapped the quotas restricting exports of rare earth minerals and would replace them with a system of export licenses. The change follows China’s unsuccessful appeal of the World Trade Organization’s (WTO’s) March 2014 ruling that found the quotas were designed to benefit domestic firms and encourage foreign investment.
The export quotas had been in place since 2000 and raised shortage concerns in importers. In 2010, China’s drastic lowering of the quota triggered a sharp increase in the price of rare earth minerals, causing the U.S., the European Union and Japan to formally lodge a trade complaint in the WTO in March 2012.
Rare earth elements are the 17 minerals used to make hi-tech products such as hybrid cars, weapons, and mobile phones. China is the world’s biggest producer of rare earth elements and met 97 percent of global demand from 2005 to 2010.
China is also the world’s largest consumer of rare earth materials, with the country’s downstream industry consuming 70 percent of global production. Permissive climate regulations in China compared with Western jurisdictions mean that China is a leader in rare earth processing. For example, U.S.-based Molycorp sends its rare earth minerals to be processed in China because of strict environmental regulations in its home country.
Despite continued dominance in rare earth production, China’s share of world production slipped to 86 percent in 2013 and is expected to fall to 75 percent in 2015. Concern over shortage and high prices after the drastic quota hikes in 2010 prompted non-Chinese producers to invest in new mines.
Australia’s Lynas Corporation opened the world’s largest rare earth processing facility in Malaysia to process its production from the Mount Weld mine, and Molycorp restarted its mine in Mountainpass, California in 2012.
Other factors, such as innovative uses of cheaper rare earth materials in manufacturing processes and smuggling of rare earths from China, meant that the Chinese quota system became redundant and actual export volumes fell much short of the quotas. For instance, in 2013, China exported 22,493 tons, while that year’s quota was set at 30,996 tons.
The removal of the export quotas follows a year of regulatory changes in the rare earth industry, such as the formation of the Bataou Rare Earths Products Exchange in March 2014 and the consolidation of smaller producers, including illegal mining operations into two state-owned regional monopolies.
The effect of the quota removal may thus be minimal since they were not working in the first place. However, according to the China Daily, a tariff of 15 to 25 percent on rare earths is expected to be removed in May 2015. This step may result in lower prices for rare earth elements.
While Chinese rare earth producers are consolidating with state support, non-Chinese producers like Molycorp and Lynas have struggled since rare earth prices peaked in 2011. Molycorp is at the brink of bankruptcy, while a combination of low rare earth prices and a high debt burden led to the lowest stock prices in 2014 for Lynas in its 14-year history.
According to announcements issued by China’s Ministry of Commerce License Bureau, exports of 39 types of medium and heavy rare earths and 36 types of light rare earth compounds will require export licenses. The companies to receive permission to export are not specified.
The government is also expected to announce a new rare earth policy in the second half of 2015.
Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email firstname.lastname@example.org or visit www.dezshira.com.
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