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There’s a popular get-rich-quick story in the town of Ganzhou, the rare earths capital of southern China: buy rare earths, and hold.
Though the strategy has lined pockets in Ganzhou for years, it is now being tested by a precipitous drop in prices for rare earths, 17 elements used in electronics and lighting.
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Prices have slid more than 30 per cent from record highs in July and the fall has accelerated in the past week, with some elements down 10 per cent since Chinese holidays ended on October 10.
China’s largest rare earths producer, Baotou, signalled its disquiet by announcing on Tuesday that it was suspending production for one month in an effort to prop up prices.
Beijing’s reforms of the rare earths industry in China, which accounts for 97 per cent of global supply, have thrown into turmoil the global market for these metals, essential raw materials for many everyday goods.
Already analysts have sharply cut forecasts for rare earths demand, particularly outside China. Dudley Kingsnorth, of rare earths consultancy IMCOA, cut by one-third his estimate for this year’s non-China demand, to 40,000 tonnes from 58,000 tonnes forecast a few months ago.
The impact is likely to be long-lasting: In 2015 non-China demand will be about 50,000 tonnes, he believes, down from his earlier estimate of 74,000 tonnes.
"At current prices there are a lot of large commodity applications that clearly don’t make sense,” says Constantine Karayannopoulos, chief executive of Neo Material Technologies, a rare earths producer listed in Canada. “For some other applications: motors, sensors, magnets – that is where it is very hard to replace.”
While Mr Karayannopoulos is sanguine about demand in the long term, some traders are questioning whether Chinese producers will allow prices to fall back to levels that will encourage demand for rare earths to pick up again.
"A significant amount of demand will not materialise if prices stay high,” says one industry executive. “However, this doesn’t necessarily mean prices will fall.”
Baotou’s production halt is a reminder that Chinese producers could co-ordinate to influence prices, although the move has had little impact this week due to high inventories and a relatively quiet market.
Chinese mining companies and officials have consistently denied there are any plans to co-ordinate.
However, traders say Chinese customs officials enforce “minimum” price requirements before allowing shipments to be exported, a practice that sometimes requires rewriting contracts to conform to the new prices. Citing environmental concerns, Chinese authorities have this year closed mines, tightened environmental regulations on rare earths processors, and strengthened export controls.
These measures caused output to fall and prompted domestic traders to build up large, speculative stockpiles. As a result, rare earths prices were driven up eight- to tenfold during the first six months of this year. China’s control over rare earths production raised alarm in September 2010, when Beijing halted shipments of rare earths to Japan following a diplomatic dispute.
Not only did global capitals like Washington and Tokyo protest, but industrial users, from carmakers to white goods manufacturers, started urgently looking for ways to reduce their reliance. Those changes seem to be biting harder than expected. In magnets, which account for about one-fifth of demand, low-end manufacturing processes that once used rare earth magnets can no longer afford to do so.
Chinese rare earth magnet makers have seen orders plummet this year. Some have closed their operations. Rare earths are irreplaceable in some applications, such as fluorescent lighting or military radars.
But in others they are being factored out of products – such as cars, which can use cheaper iron magnets in their electronics.
Chinese stockpiling will provide a floor for prices, as Baotou steadily builds up its 55,000-tonne stockpile – equivalent to roughly half China’s annual production when complete.
However, Chinese traders who have leftover export quota will be seeking to use it up before year-end, which could push prices lower.
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