Author: Clemens Schmale
China is the world's largest producer of rare earths and is now buying up huge quantities of its own metals. What is behind it?
The Chinese have a market share of 90% in rare earths. So they do not lack the metals, which are absolutely necessary for the production in the technology sector. Nevertheless, the metals are hoarded now. The State Reserve Bureau recently purchased 10.000 tons. The SRB is responsible, among other things, for the management of strategic resources. These include not only raw materials, which China itself can produce, but also other raw materials that it has to import. For example, the SRB announced in late 2013 that they plan to buy up to 2014 tons of copper and 300.000-100.000 tons of nickel in 150.000. Sense of purchases and storage is to avoid a shortage or possibly to compensate for high market prices. That does not always work well. The organization also trades in commodities, not just bought and stored. 2005 had bankrupted a trader of the SRB 200 million USD with a short position on copper.
The SRB is now known less as a trader and mainly as a buyer. Warehouses have been built for rare earths for months. The state-controlled company Baotou Steel Rare-Earth is said to be able to store up to 100.000 tons of the metals. So far, these have mainly been rumors that temporarily affected the price of metals. At some point the market no longer took the rumors seriously until the first purchase of 10.000 tons was actually made that month. The price of many rare earths rose significantly. This allows for a first guess: the prices for rare earths have fallen dramatically since the hype a few years ago. For many producers, subsidies are on the verge of profitability. Even the export quotas have not changed that. The purchase could therefore be seen as a kind of price support, especially since the SRB is said to have paid up to 10% above the market price.
Almost all of the metals bought are represented - except for cerium and lanthanum. These two metals are particularly common and the volume of production is high. Here, China would have had to buy much larger quantities in order to push the price up over the long term. The main reason they didn't do that could be because foreign miners like Molycorp are mining these two metals. The Chinese would probably be reluctant to give foreign competitors higher market prices.
But there can also be a completely different reason for the purchases. Rare earths are quite common (contrary to the name), but the concentration is low. The promotion is complicated, especially in the heavy and somewhat less common metals. It would be quite conceivable that China wants to secure supplies for its own industry in the long term. The heavy rare earths are likely to become rarer in a few years. The price should rise sharply. Chinese companies could then be provided with cheap supplies by the state, while foreign companies would have to pay hawkish prices. That would give the domestic industry an advantage.
It is rather unlikely whether one will have to expect falling funding over the coming years. One theory therefore assumes that the procedure against export quotas at the World Trade Organization could succeed. If China had to abolish the quotas, it would only have a small impact on prices over low exports. The Chinese can only scarce the offer if there is really less on the market. This is only possible if someone buys large quantities. But there are still quotas, why should the Chinese start buying now?
The intention of China is not very clear. Usually they do not say directly what they want to do with such actions. The move came at a time when the sector in China is being forcibly consolidated. 5 large producers are merged into one group. In some cases, the individual groups only had a capacity utilization of 35%. The purchases could support the price and ultimately help companies consolidate. Until the overcapacities are reduced and prices rise again due to the demand situation, the purchases and thus higher prices can keep some companies afloat. The purchase of rare earths is ultimately an indirect subsidy to a sector that has far too much capacity and would face serious solvency problems without price hikes and consolidation.
It can not be said with certainty that this is the reason for the intervention in the market. That would not be unusual.
Source: http://www.godmode-trader.de/artikel/seltene-erden-warum-kauf-china-massenhaft,3868816
