China Moves to Tighten Rare-Earths Control, Pave Way for Consolidation

China Moves to Tighten Rare-Earths Control, Pave Way for Consolidation

Minerals Are Used in Sensitive Industries Such as Defense, Telecommunications

CHUIN-WEI YAP

Jan. 3, 2014 8:03 p.m. ET

China dominates global production of rare-earth metals. Here, a mining site in Jiangxi province in 2010.Reuters

BEIJING—China is moving to tighten control over its far-flung rare-earths industry, paving the way for state-backed mining giants to acquire smaller producers and carry out Beijing’s consolidation mandate.The central government faces increased urgency to corral an unruly industry. Beijing is under pressure from the World Trade Organization to give up its rare-earths export quota, a key tool for influencing global prices. Roughly 80% of the world’s output of rare earths, used in strategic industries such as defense and telecommunications, comes from China.

But the country’s rare-earths industry has been plagued by smuggling and unlicensed players, according to government officials, contributing to pollution and low prices despite the supply dominance. Analysts estimate that 80% of China’s rare-earths miners, processors and traders are unlicensed.

The use of state-owned companies to consolidate sprawling resources industries is also apparent with coal and aluminum.

State-owned Inner Mongolia Baotou Steel Rare-Earth Group Hi-Tech Co. 600111.SH +2.98% , China’s largest rare-earths producer, said on Friday it had acquired nine rare-earths mining companies from the government of China’s Inner Mongolia region. It isn’t clear how much volume the nine would add to Baotou’s portfolio, which already accounts for about 53% of China’s total output. Analysts say the purchases look to be the finishing touches to Baotou’s achieving dominance in the northern region before it embarks on absorbing capacity in southwestern Sichuan province.

Baotou, in a filing to the Shanghai Stock Exchange, said it will “properly manage the strategic conservation and development of rare-earth resources, to set the foundation for a national rare-earth group.” The official Xinhua news agency said Friday that Beijing will set up such a group to coordinate rare-earths production quotas, mining permits and other policies.

The group will comprise six state producers, Xinhua said: Baotou, China Minmetals Corp., Aluminum Corp. of China, Ganzhou Rare Earth Group Co., Guangdong Rising Nonferrous Metal Co. and Xiamen Tungsten Co. 600549.SH +0.25% They account for about 85% of China’s rare-earths production.

“China has almost completed the state consolidation of rare-earth mining, and is now starting to consolidate its processing industries,” said North Square Blue Oak analyst Frank Tang. The estimated number of rare-earths processors in China ranges from 120 to 400.

Baotou has fortified its position in China’s north since 2010. Ganzhou, in the southeastern province of Jiangxi, is surrounded by five provinces similarly rich in rare earths. Xiamen Tungsten’s base of Xiamen is the capital of Fujian province in the south, home to China’s third-largest reserve of the minerals. Minmetals and Aluminum Corp. of China, also known as Chinalco, are powerful Beijing corporations with rare-earth assets in the Jiangxi and Guangxi regions.

The consolidation reinforces signals that China is preparing to tighten global supply of the metals. In December, the Ministry of Commerce said it would trim the initial batch of its 2014 export quota for the first time in two years, though the final quota will be confirmed only in July.

Rare-earths prices are still weak. Lanthanum oxide is around $6 a kilogram, far below the peak of $104 it hit in 2011, according to data provided by Australian rare-earths producer Lynas Corp. and Mineralprices.com, a pricing platform. Twice in the past three years Baotou suspended rare-earths production, but prices kept sliding. Weaker global demand for rare earths, the development of new sources and greater efficiency in their use have contributed to a sharp price drop, following the even more dramatic price surge of three years ago.