China is trying to ‘create the ultimate monopoly’ in the rare earth market

9th August 2012

According to rare earth elements specialist site Futuro Markets WTO judges will examine China's export quotas and tariffs on rare earth elements (REEs) following complaints from the US, European Union, and Japan that the restrictions break global commerce rules.

Futuro says: "The announcement has been a long time coming, and all three parties have expressed the opinion that China is setting out to create the ultimate monopoly by driving up export costs in the hope that manufacturers will be forced to relocate facilities to China. China, which controls over 90% of REE production, has responded by stating that the limits are designed to protect dwindling natural resources and the environment."

The investigation co-incides with the opening of the first ever trading platform for rare earth elements this week – this Mindful Money story last month explains the background to these metals and warns against cold-calling firms offering UK investors opportunities in this unregulated investment market.  The Chinese exchange is widely seen as another attempt by the Chinese to control both production and price of these essentials. The Chinese themselves say it will help even out the amounts mined and prevent further environmental erosion.

But if the price goes too high, it could persuade others to enter the market for while China now has 90 per cent or more of world production, the metals themselves are not rare, just difficult to mine without pollutive degradation.

Coming out of Inner Mongolia

Mineweb reports that Inner Mongolia Baotou Steel Rare-Earth (Group) Hi-Tech Co., is leading some 10 major Chinese rare earth-producers to set up the platform. The exchange will be located in Baotou, Inner Mongolia, which is home to nearly half of the world's light rare-earth production.

It adds: "The physical trading bourse will help China exert more control over the pricing of 17 strategically important rare earth metals on the global market. The establishment of the bourse is considered a "breakthrough" in Chinese companies' efforts to establish a unified national exchange that will regulate market flows of rare earths and give them more leverage over foreign buyers."

The move has given a boost to Chinese metal extractors – this Businessweek report shows the effect on Xiamen Tungsten Co. which rose to a three month high in Shanghai after the company said it will accelerate development of its rare earth business, helping to boost  China's benchmark Shanghai Composite Index.

A Chinese conundrum

China faces a rare earth dilemma. It has seen prices halve since last year's boom as manufacturers find alternatives and consumers cut back on laptops and mobile phones. So it needs to force up values. One Chinese source suggests it plans to close 20 per cent of existing capacity – saying this is necessary to prevent pollution.

The nation has cut mining rights for rare earths as average prices of the minerals used in car electronics, laptops and headphones tumbled by more than half from 2011's record levels as users reduced purchases or sought alternative sources.

The province of Guangdong also said on May 31 it's planning to complete the consolidation of its rare earth industry through mergers and joint ventures by 2013. Guangdong will ban the construction of new rare earth projects and the expansion of production capacity in the province, according to the government's statement.

Expert website Rare Metal Blog says it believes the exchange, which specialises in the lighter end of the rare metals spectrum will be followed in November by a second platform focusing on the heavier elements. This will allow China to stockpile to create what it will call strategic reserves but others will dub a stranglehold on prices.

Check the wedding cancellation insurance

Meanwhile the long heralded marriage between mining giants Glencore and Xstrata looks set for a renegotiation of the pre-nuptials at least – and a calling off of the ceremony at most.

The union, once seen as a foregone conclusion – "the logical next step for both companies." according to Xstrata which said that "the transaction represents a natural combination of two complementary businesses, each with an outstanding track record of shareholder value creation, entrepreneurial management teams and a proven ability to see valuable opportunities and execute them. Glencore Xstrata would be positioned to create value from each step of the commodities value chain, from resource extraction to customer sales, at a time when demand for our combined products continues to grow."

But the Qataris, who now control 11 per cent of Xstrata disagree. They want 3.25 Glencore shares for each Xstrata, Glencore only wants to pay 2.8 shares. The Qatari stake is effectively close to a blocker due to the nature of the deal – it needs 75 per cent shareholder approval but Glencore with its 34 per cent holding can't vote. The Qataris only need a few other shareholders to join in its quest for more to prevent the merger.

And with Rio Tinto blaming weaker commodity prices for its 22 per cent profit fall, this may not be the best time to be in natural resources. Rio said that while most commodity prices had fallen, gold had surged by 14% during the six months, while the price of thermal coal had also increased.

It added that despite weak demand in Europe and a fragile US recovery, the group's order books were "full", led by continuing Chinese orders, which were set to increase.

"We expect signs of improvements in Chinese economic activity by the end of the year, with growth picking up," he said.

The group expects China's GDP to be around 8% this year – a more optimistic outlook than the government's own growth target of 7.5%.< /p>

Rio Tinto shares similar challenges with rivals Xstrata and Anglo-American whose earnings were also hit by lower world wide pressure on prices. The Qataris can, however, afford to take a long term view on Xstrata.


More on Mindful Money:

Is global trade about to collapse? Where are oil prices headed? A chat with Mish

America's Holy Grail: Achieving energy self-sufficiency

Rare earths – the elements of a new investor danger

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