Overcapacity of China's upstream rare earth sector intensifies

- Since July 2011, prices of rare earth products in China have been falling continuously with a cumulative fall of more than 70 percent now.

One of the main reasons behind the price plunge is the severely excessive capacity in the upstream rare earth sector, said Chen Zhanheng, deputy secretary general of the Association of China Rare Earth Industry.

--- Increasing upstream capacity

Processing chain of the rare earth sector can be divided into four parts, including smelting and separation products, alloy materials, components and parts, and terminal application products.

In recent four years, capacity of the upstream smelting and separation products such as rare earth oxides and metals has been excessive and shown an uptrend.

Due to the lack of intellectual property protection, threshold of rare earth smelting and separation technologies de facto does not exist, leading to the growing number of participants. Meanwhile, booms in the previous years led to blind investment and capacity expansion. Plus, local governments' push for those projects also resulted in excessive capacity.

Before 2011, capacity of the country's rare earth smelting and separation products amounted to somewhere between 180,000 metric tons (tonnes) and 200,000 tonnes (measured by rare earth oxides thereafter). Due to the booming market, the capacity surged to about 300,000 tonnes at the end of 2011 and further jumped to more than 400,000 tonnes at the end of 2014, according to statistics of the association.

The midstream rare earth alloy materials sector has also seen excessive capacities now.

Last year, annual capacity of the country's NdFeB permanent magnet materials reached about 300,000 tonnes, while output of the materials was only 145,000 tonnes. The country's rare earth luminescent materials sector saw its annual capacity reach nearly 20,000 tonnes last year, while its output was only 3,600 tonnes, said Zhang Anwen, deputy secretary general of the Chinese Society of Rare Earths.

--- Challenges for industrial development

The severely excessive capacity of the upstream rare earth smelting and separation has weakened the authorities' policies to tame the sector, industry insiders noted.

It has triggered excessive competition among enterprises, leading to plunges in prices. In July 2011, most light and heavy rare earth products saw their prices peak.

The following table shows prices of some rare earth metals in July 2011 and now. (Unit: yuan/tonne)

(Source: Association of China Rare Earth Industry)

Majority of rare earth smelting and separation enterprises have turned from profit to losses. Last year, 18 key rare earth enterprises in China were in the red. Due to continuous falls of prices, the number of money-losing enterprises still increased in the first half of the year.

For example, Xiamen Tungsten (600549.SH) and Rising Nonferrous Metals Co. Ltd. (600259.SH) suffered losses of more than 70 million yuan and 30 million yuan, respectively, in the first half of 2015.

The overcapacity makes China a supplier of unreasonably cheap rare-earth raw materials.

Given that the technical content of the downstream rare earth products is much higher than that of the upstream, the downstream sector levers more output value and strategic value.

The U.S., Japan and European countries import rare earth smelting and separation products and alloy materials from China and then process them into high-end materials, components and terminal application products which can generate considerable economic benefits. Output value of the rare earth products in the end-user application field reaches trillions of U.S. dollars each year, said industry insiders.

--- More measures taken to promote healthy development

Industry insides suggest that the authorities take measures to promote healthy development of the rare earth sector.

For example, the authorities should further strengthen resources management to strictly control mining and production of rare earth smelting and separation products, earnestly implement the policy of mining quota, enhance thresholds of technology and environmental protection, and quicken the pace of eliminating outdated capacities.

It is reported that the six rare-earth companies including China North Rare Earth (Group) Hi-Tech Corp, China Minmetals Rare Earth (000831.SZ), Chinalco Rare Earth (Jiangsu) Corp., Ganzhou Rare Earth Group, Rising Nonferrous Metals Co. Ltd. and Xiamen Tungsten Co. Ltd. are expected to complete integration as of the end of the year.

Experts believe that while promoting substantial consolidation, the authorities should strictly inspect the six companies' performance in reducing capacities.

Experts also suggest that the authorities introduce rare earth application into the national 13th Five-Year (2016-2020) plan and persistently support its development while expand domestic demand.