China's Plan for Rare Earths until 2020

On October 18, 2016, China's Ministry of Industry & Information Technology (MIIT) issued the "Rare Earth Industry Development Plan (2016-2020)".

Basically it is the implementation plan for the
Rare Earth Industrial Standard Regulation, published on July 1, 2016.

The plan covers all aspects of rare earths in China, from industrial consolidation via environmental sustainability and resource preservation to value chains and application research with subsequent nationalization of the entire value chains of applications.

Turbo-charged growth in RE consumption

The plan bases on the assumption of a annual growth rate of rare earths consumption of 15%, basing on projections of demand for new energy, energy storage and high tech applications.

RE smelting capacity and exports to be reduced by 1/3

Among the hard targets of the plan are reduction of smelting separation capacity from 300,000 t (2015) to 200,000 t (2020), output increase from 105,000 t (2016) to maximum 140,000 t and a reduction of rare earths exports from 57% of 2015 output to 30% of 2020 output.

Profitability to double, environmental compliance to triple

Profitability of rare earths enterprises shall rise from 5.8% (2015) to 12% (2020), while 90% of China's rare earths enterprises shall be environmentally and energy compliant by 2020, up from currently 30%.

Government support for overseas investments in RE

MIIT also pledges support for domestic enterprises engaging in overseas mineral resources development and application of industrial cooperation, as well as highly intensified application research with the objective to bring the entire rare earths value chains to China.

Further mergers, no new mining

The plan calls for further industry consolidation and no new mining rights for anyone apart from the "Big 6" state-owned Chinese rare earth groups.
If all that is really implemented, what would that mean for international stakeholders in rare earths?
  1. The total export quantity may go down by up to 30%. That primarily affects Japan, which buys around 3/4 of China's rare earths exports. It not entirely clear if this target bases on the assumption of reduced world demand for rare earths or on expectation of WTO non-compliant state intervention in trade. In any case, it does not match with the MIIT's own 15% rare earths consumption growth forecast.
  2. The reduction of capacity looks like it shall bring the rare earths capacity utilization rate on par with the plans regarding other metal industries in China, for example steel: 70%. This, however, will have no impact on the actual output.
  3. Chinese enterprises will seek more acquisition or joint investment abroad, such as the recent investment of Shandong Taizhong Energy/Huaitai Mining in Northern Minerals (see ASX publication of August 2, 2016)
While the regulations are good and the plan is ambitious, the prospects of success may be rather low, primarily because it may be basing on wrong assumptions, possibly even on wrong data:

Rare earths research outside China is focusing on how to use less, not more
  1. Growth rate: Excluding currently nascent applications with unknown potential, established mature rare earths applications such as permanent magnets, ca. 30% of REO consumption, the most ambitious growth forecast outside China until 2024 is rather 7% than 15% per year. Part of the MIIT plan is the repeated commitment to support much increased R&D spending in rare earths applications, which basically is an acknowledgement that outside China, particularly in Japan, research goes in the opposite direction, reducing or even eliminating rare earths in numerous applications, which eventually will be at the expense of consumption growth.
  2. Output: The capacity reduction in combination with the export reduction would mean that China's domestic apparent consumption of REO (incl. substantial stocks) should double, which is highly unlikely by applying whatever market scenario.
  3. Industry profitability: We are unable to follow where China's rare earths profitability rate of over 5% in 2015 should be coming from. The Chinese press reported 1 year ago MIIT's very own information, that during 2015 90% of China's rare earths companies were continuously running up operating losses.

Dire situation

We recently analyzed the numbers of a potential rare earths supplier, state controlled, and found that the company basically loses US$0.90 for every US$ 1 of sales. It holds finished REO inventory equivalent to more than 7 years of 2015 sales volume and even after restructuring measures continues producing 20% more product than it sells. While the losses are also related to aggressive down-valuation of stocks and about 1/3 of sales and 1/2 of procurement go to related parties who potentially siphon off money, this is an absolutely dismal, hopeless picture.

While this may be an extreme example, nonetheless picked accidentally, overall profitability of over 5% in China's rare earth industry 2015 can only be the result of adding non-rare earth related business results, in our view.

There is evidence of state-owned enterprises dodging environmental measures and publicizing obviously false environmental disclosure reports, state-owned rare earths enterprises cannibalizing each other rather than be damaged by shrewd, non-compliant private enterprise, leading the ministry to wrong assumptions and thereby to wrong conclusions.

This plan might turn out to have been entirely unrealistic, even on the premise of asking for the impossible in order to achieve the maximum achievable.

The Decision of the 3rd Plenum of the 18th Central Committee, which MIIT pledged to adhere to in this document, calls for state-owned enterprise domination, achieved in rare earths, but also for the market to regulate, which is somewhat missing from this plan.

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