Washington right now is supposed to be all about slashing budgets and tightening belts — but the Department of Defense has recently asked Congress for over a billion dollars. To buy rocks.

Specifically, to buy rare earths and other minerals that are crucial to the U.S. defense industry, and whose supply is currently at the mercy of China and its opaque political system. Japan, for example, was starved of rare earth elements during a maritime dispute with China in 2010. The United States wants to hedge that risk, given the damaging consequences an abrupt clampdown could entail.

The DoD has in previous years noted China’s near-monopoly on global rare earth metal production, but the present report, delivered to the House Armed Services Committee in late March, describes the risks in stark terms, and sketches out a range of scenarios.
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One scenario has China embargoing exports of some key rare earth elements, and notes that currently the U.S. would be hamstrung.

Stockpiling some of the crucial elements is one of the proposed remedies for China’s control. It’s an idea that has hardly been heard since the later years of the Cold War, given the growth of globalized and largely unfettered trade that has characterized the last several decades.

Daniel McGroarty, principal of American Resources, a policy group, and president of U.S. Rare Earths, a mining company, referred to a reflection made by Adam Smith, the ideological father of free markets, over two hundred years ago: that when it comes to strategic items like sailcloth and gunpowder, “it might not always be prudent to depend upon our neighbors for the supply.”

Rare earth metals are to the the modern world what gunpowder and sailcloth were to 18th century Britain, McGroarty says, which explains the DoD’s concern.

                  

“I think we lost sight of the geopolitical or strategic element that might cause countries to intervene in industry for reasons of advantage that are not just economic,” McGroarty said in a telephone interview. “I think we just didn’t see that. And now when we do see it, the situation has changed drastically.”

Two decades ago, McGroarty said, the rare earth market was split between the United States and China. “Now it’s become extraordinarily lopsided,” with China producing over 90 percent of supplies of rare earths.

The Department presents its report on Strategic and Critical Materials Report on Stockpile Requirements every other year. In the past it has noted China’s predominance in the rare earth metal space, but had not previously evinced the concerns seen now.

In a strategic risk assessment given in Appendix 12, the possibility of China cutting off rare earth exports was assigned a mean probability of only 4 percent, though with dire consequences. “Gross domestic product losses would be high, and the consequences would extend over a significant timeframe,” the report said.

It continued: “Economic consequences of war with China are high based on the mutual dependence between the two countries. Militarily the conflict would be violent, but quick; and we would get the better of it, at least in the next ten years. Politically, there would be some loss of credibility on both sides, due to the failure to prevent the war. Trade disruptions would also have major Chinese domestic political consequences.”

A scenario where China cuts off exports of some key minerals for a year “in an effort to coerce or punish the United states… as well as to drive up commodity prices,” was also considered. There would be a $1.2 billion shortfall for the 72 minerals considered.

Complicating the assessment is the sometimes haphazard and fragmented nature of how rare earths are obtained from China: in the south of the country, tens of thousands of metric tonnes of rare earths are thought to be wrung from the ground, and refined and exported, by a chaotic chain of fly-by-night mining operators — none of those figures go into the official books. Estimates for that illicit activity range from 10,000 to 40,000 metric tonnes per year.

At the height of its production, Molycorp, a U.S.-based miner of rare earth elements that was hit hard by China’s rock-bottom prices, says it planned to produce 20,000 metric tonnes of product in 2012. This means the underground Chinese supply component could be as much as double the entire U.S. supply, which goes some way to illustrating the opaque and potentially volatile nature of Chinese supply.

“Think about how nervous that would make a Pentagon planner,” McGroarty says.
 

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The monthly Rare Earths MMI® slipped by one point, registering a value of 42 in April – a decrease of 2.3 percent from 43 in March.

Metalminer's rare earth  metal prices index continues as the worst performing MMI of all 10 MMI indexes.

“Like we have seen in previous months, we note that the entire Rare Earth index has not slid; rather, the slide comes down to a few key rare earth metals,” said Lisa Reisman, managing editor of MetalMiner.

“In particular, we see price weakness for yttria, samarium oxide, neodymium oxide, lanthanum oxide and europium oxide,” she continued.

The fact that that the price drops continue to impact only a handful of rare earth metals suggests to apply caution to any press or pundit statements slamming the entire sector. Price has been seen weakness in specific metals based upon the supply and demand fundamentals for that particular metal, but other rare earth metal prices remain well-supported, indicating a market in greater balance.

So despite the index registering a value of 42, Metalminer won't draw general conclusions that all rare earth metal prices have declined.
 

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Europium oxide finished as the week’s biggest mover – and, in fact, the only mover after dropping 4.5 percent.

Cerium oxide remained unchanged for the week. The price of dysprosium oxide did not change since the previous week.

Lanthanum oxide, neodymium, neodymium oxide and samarium oxide, among others, also remained essentially flat.

Following a 25.5 percent decline in price, yttria finished the month down hard. A 13.3 percent drop over the past month hit neodymium oxide. Lanthanum oxide prices dropped by 12.8 percent this month. Samarium oxide was down 9.5 percent for the month. After falling 6.8 percent, europium oxide finished the month down as well. Cerium oxide prices fell 6.0 percent. Praseodymium oxide prices decreased by 2.0 percent, and the value of praseodymium neodymium oxide weakened by 1.6 percent. In a whole, rare earth oxides prices fell down in the past week.
 

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Jiangxi Ganzhou Rare Earth Group was established on March 30. Zhang Anwen, Deputy Secretary General of the Chinese Society of Rare Earths (CSRE), said the establishment of Jiangxi Ganzhou Rare Earth Group marks the formation of “4+1” framework on China’s rare earth industry restructuring.

The “4+1” framework involves Inner Mongolia Baotou Steel Rare-Earth (Group) Hi-Tech (hereinafter referred to as Baotou Steel Rare-Earth), Aluminum Corporation of China (Chalco), China Minmetals Corporation, Rising Nonferrous Metals Share and Ganzhou Rare Earth Group.

Jiangxi Ganzhou Rare Earth Group is the parent company of Ganzhou Rare Earth Mineral Industry and is now the only owner of rare earth mining rights in Ganzhou. Namely, it owns all of the 44 rare earth mining rights in Jiangxi. The group will merge rare earth smelting & separating enterprises and application enterprises in Ganzhou, enabling it to have access to 70-80% of rare earth mining and smelting capacity in Ganzhou. It plans to produce 40,000 to 60,000 mt of rare earth, compared with China’s rare earth mining indicator of 90,000 mt for 2012.     

Back in May 2011, the State Council issued the Opinions on Promoting Sustainable and Healthy Development of Rare Earth Industry. According to the opinions, rare earth industry shall be dominated by large firms, and the industry concentration of top three ion-type rare earth enterprises must exceed 80%.

                  

China Minmetals Corporation, Chalco, China Non-ferrous Metal Industry’s Foreign Engineering and Construction (NFC), Jiangxi Copper, Rising Nonferrous Metals Share, Xiamen Tungsten and Ganzhou Rare Earth Industry all tried to join in the merging and restructuring of rare earth industry.

According to Mr. Zhang, Chalco has merged rare earth enterprises in Jiangsu. Rising Nonferrous Metals Share has been in charge of M&As of rare earth companies in Guangdong. Ganzhou Rare Earth Group will be responsible for rare earth industry integration in Ganzhou. China Minmetals Corporation intends to join in restructuring of Guangdong’s rare earth industry following its acquisition of some rare earth enterprises in Jiangxi, Guangxi and Hunan. Baotou Steel Rare-Earth will be responsible for M&As in rare earth industry in north China.

Rare earth industry restructuring in south and north China is led by Ganzhou Rare Earth Group and Baotou Steel Rare-Earth, respectively.

Light rare earth in north China is concentrated in Baotou in Inner Mongolia, Liangshan in Sichuan, Weishanhu in Shandong, while heavy rare earth in south China is centered on Jiangxi’s Ganzhou. Baotou Rare Earth, is actively seeking alliance with enterprises in Sichuan and Shandong.

Baiyun Erbo Rare Earth Mine is China’s biggest rare earth mine, containing 87.7% of rare earth. As Baotou Steel Rare-Earth’s rare earth industry integration accelerates, it will have access to more rare earth.

Heavy ion-type rare earth in Jiangxi accounts for roughly 40% of China’s total ion-type rare earth reserves, most of which is located in Ganzhou. All rare earth mining rights in Ganzhou are exclusively owned by Ganzhou Rare Earth Group.

Rising Nonferrous Metals Share also owns large quantities of rare earth. In comparison, China Minmetals Corporation and Chalco have less rare earth.
 

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There might be a crack in China's domination of rare earth metals – a mud-filled crack, thanks to a discovery by Japanese scientists. Vast reserves of rare earth metals that can be mined cheaply have been found in deep-sea mud on the Pacific ocean seabed. These essential metals are needed for a wide range of technologies – from consumer electronics like smartphones and TVs to advanced weapons systems and hybrid and electric vehicles.

"We have found deposits that are just two to four (meters) from the seabed surface at higher concentrations than anybody ever thought existed, and it won't cost much at all to extract," said professor Yasuhiro Kato from Tokyo University, the leader of the team, to The Telegraph.

                  

Some of the rare earth metals are found in other parts of the world, but the heavier metals such as dysprosium, terbium, europium, and ytterbium are the most important. After driving rivals out of the business in the 1990s, China became the source of 97 percent of these heavy rare earth metals. In 2009, China decided to restrict exports, which caused protests and legal complaints from the US and the European Union. China's actions also motivated more companies to set up shop in China to access the rare earth metals.

The team of Japanese scientists first discovered the Pacific ocean reserves two years ago, with that supply possibly being 1,000 times the supply of land-based deposits. The team's latest discovery is in Japan's Exclusive Economic Zone in deep-sea mud. It's 5,700 meters below sea level around the island of Minami-Torishama. The researchers says that while the rare earth metals are down deep, they can easily be distracted with minimal disturbance off the seafloor using pressurized air.

Professor Kato thinks the exploration will take another two years before it can be scaled up for production. Over 50 percent of the discovered deposit is heavy rare earth metals and they doen't need the radioactive by-product thorium that makes the metals hard to mine in China.


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Hafnium, indium, neodymium, erbium, europium...These are a few of the rare earth metals that make up most of the electronic guts of the world’s high technology.

“Rare earth” refers to the scarcity of easily-mined ores of the elements. Last month, we discussed a breakthrough in large-scale electrolysis that could make refining these ores and oxides much easier; now, Japan’s announcement of the discovery of a huge deposit of rare earths could make the market that much more competitive.

For us, that means cheaper electronics. If Japan can produce its own rare earth metals, as opposed to depending on imports from China (where 97 percent of rare earth metals in the world are produced), then China will have to lower its own prices on metals to remain commercially competitive. Breaking China’s monopoly on rare-earth resources could have wide-ranging consequences for the entire electronics industry.

This is the second major deposit discovery made by Japan in the last two years. A team led by Yasuhiro Kato of the University of Tokyo found caches near Hawaii and Tahiti in 2011 that were so rich in rare earths that one square kilometer of seabed could produce as much as 20 percent of the world’s annual consumption. Now, they’ve discovered a second plot of rich mud at the bottom of the Pacific.

Undersea mining has its own set of environmental issues; it’s not entirely clear yet how the techniques used can disrupt deep-sea life. Kato and his team will be investigating the new cache in a two-year study before attempting to start the mining process.


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Ganzhou Rare Earth Group was founded recently, and that means the core industrial group in major domestic rare earth producing region came online, and it's also an important step of domestic large rare earth leading company construction.

As high-tech industries develop rapidly in recent years, global demand for rare earth and consumption have been growing fast. China’s rare earth reserves accounts for 30% of the total volume in the world, and the country supplies 90% rare earth to the world. But the rare earth industry in China has been dispersed, disordered and polluting.

China’s rare earth industry needs to inspect exploration orders and raise industry consolidation ratio to develop healthily. China has taken effective measures recent years to the rare earth industry. On May 10th, 2010, China released the Proposals Regarding Promoting Sustainable and Healthy Development of Rare Earth Industry, pointing out China should form a rare earth industry led by large groups, and the consolidation rate of the top 3 enterprises in rare earth industry in south China should reach 80%.

The Suggestions Regarding Accelerating M & A at Major Industries was released on January 22nd, 2013, ordering China should push resources consolidation, and reduce the number of rare earth miners, smelters and separators, raise industrial consolidation rate and form the rare earth industry led by large enterprises.

Baotou and Ganzhou are major rare earth producing regions in north and south China, with rare earth output value accounting for 2/3 of total domestic rare earth output value.

Ganzhou is a major rare earth producing region in south China, and has developed rare earth mining and processing for over four decades. Of the 6 existing rare earth mining permits, 44 are in Ganzhou.

The Ganzhou Rare Earth Group is a large enterprise engaging in mining, smelting, separating, deep-processing and utilization, trade and researching, and the only group owning rare earth mining permit in Ganzhou.

Domestic rare earth market is under merger and acquisition, covering Minmetals, and Inner Mongolia Baotou Steel Rare-Earth Hi-Tech, Ganzhou Rare Earth and Xiamen Tungsten.

Inner Mongolia Baotou Steel Rare-Earth Hi-Tech is now constructing China Northern Rare Earth Group jointly with Gansu Rare Earth Group, acquiring backbone enterprises in Sichuan and Shandong province. Ganzhou Rare Earth and Inner Mongolia Baotou Steel Rare-Earth Hi-Tech are the two most important rare earth enterprises in south and north China, which will help realize the target of constructing national rare earth industry.


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The joint study group of Yamaguchi University, Ehime University and University of Tokyo released a report on April 2nd saying they had discovered a new mineral that contains rare earth.

Japan is confirmed to have massive high concentration rare earth reserves in seas around Minami-Tori Shima. Japan believes these resources will not run out in 230 years, and the grade of rare earth is about 20 times higher than China's.

Japan has been importing rare earth from China, while China supplies 90% rare earth to the world. But the situation may change. Japan's rare earth reserves is 10 times more than China's, which can be used for hundreds of years. According to Lin Boqiang, Director of Energy Economy Research Center of Xiamen University, the discovery in Japan is in line with China implementing rare earth export quotas.


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Capacity utilization rate at the rare earth industry fell short of 40%. According to China Nonferrous Metals Industry Association President Chen Quanxun, rare earth overcapacity is very severe, with capacity utilization rate below 40%.

Chen Quanxun said capacity of aluminum, industrial silicon and rare earth has been in oversupply. The capacity utilization rate of industrial silicon was less than 30%, with capacity utilization rate of aluminum reaching 80%.

 "Capacity surplus of industrial silicon and rare earth is very significant." Said Chen Quanxun, "The most effective measure to ease capacity surplus is to expand utilization fields."

But China is weak in rare earth utilization, such as rare earth permanent magnetic material, fluorescent material and catalyst. High-end rare earth permanent magnetic materials are mainly produced by Japan, while only several enterprises including Zhongke Sanhuan, Ningbo Yunsheng and Advanced Technology & Materials Co., Ltd (AT&M) produce high-end rare earth permanent magnetic materials in China.

Many domestic enterprises mainly engage in low-end ferrite magnets production, and fierce market competition and high rare earth costs forced them to reduce rare earth utilization or even suspend production. In this context, the capacity utilization rate of rare earth fell short of 40%.

Annual earnings of rare earth enterprises in 2012 slid across the board. Rare earth exploration and separation are most profitable of the industry chain. Rare earth prices dropped sharply in 2012, and upstream profits were also down. Inner Mongolia Baotou Steel Rare-earth (Group) Hi-tech Company ordered its upstream companies in north China to suspend production for three months. According to the company's annual report, net profits in 2012 were RMB 1.51 billion, down 56% from RMB 3.478 billion in 2011. The company reported with high inventories at hand, their cash flows were much lower than annual net profits.


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Rare earth prices have been falling since the start of 2013. Praseodymium-neodymium alloy prices rallied early this year, but transactions were muted, with prices stabilizing between RMB 400,000-405,000/mt, up RMB 15,000/mt from last year’s end. Prices for other rare earth categories maintained downward track.

In 1Q, prices for lanthanum oxide and cerium oxide dropped most steeply. SMM quotes for lanthanum oxide in late March were RMB 33,000-35,000/mt, while SMM quotes for cerium oxide were RMB 38,000-40,000/mt, down 34% and 22.4% respectively from the end of 2012.

In fact, rare earth prices have been weakening after the Chinese New Year holiday, with quotes for lanthanum oxide and cerium oxide leading decreases. Dysprosium oxide and dysprosium ferroalloy also fell. Transactions were muted, with most cargo holders standing on the sidelines.

According to Chen Quanxun, President of the China Nonferrous Metals Industry Association, the rare earth industry has been in severe oversupply, with the capacity utilization rate below 40%.

According to annual reports of listed companies, net profits at Inner Mongolia Baotou Steel Rare-earth (Group) Hi-tech Company last year were RMB 1.51 billion, down 56.57% YoY.


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