Rare earth industry adjusts to slow market

Pioneering Park of Baotou National Rear Earth Hi-Tech Industrial Development Zone is in operation. China's rare earth industry is experiencing consolidation and upgrading. CFP

Wang Yu is a worker with the Damao Rare Earth Industrial Park and has been there since establishment of the park in 1984.

"At the beginning, the industrial park was very beautiful with dense grass. Then we were very busy refining as much rare earth as possible. But now only a few workers are left to keep the machines running," Wang said.

The Damao industrial park is the only one with a chimney discharging smoke in open sight of the grasslands.

Damao is the epitome of Bayan Obo, China's top rare earth production base located in rural Baotou, a city of Inner Mongolia autonomous region.

After decades of prosperity, the rare earth industry is in the doldrums.

But insiders said that the slowdown is not a bad thing. The rare earth development industry in China is undergoing consolidation - mergers and acquisitions by giant companies and closings of small plants.

And it is experiencing a transition period from massive-scale operations to more scientifically developed operations that seek long-term, sustainable development versus instant benefits.

Consolidation

The rare earth industry in Baotou was at its peak in 2008, with an industrial output value reaching 9.88 billion yuan and export volume amounting to $131.3 million. In 1998, those numbers were 820 million yuan and $2.16 million yuan, respectively.

Over the last 10 years, Bayan Obo has supplied about 80 percent of the world's supply of rare earth, which is used in high technology industries such as biology, energy, information technology, space and other applications.

But the industry's continuous growth abruptly stopped at the end of last year.

An example of that abrupt halt is Inner Mongolia Baotou Steel Rare Earth Hi-Tech Co Ltd.

Inner Mongolia Baotou Steel, China's biggest rare earth company, reported revenues of 3.23 billion yuan last year, a year-on-year growth of 28 percent.

However, during the first quarter of this year, the company's sales revenues totaled only 375 million yuan -- a 47 percent drop from the same period last year. Its losses exceeded 78 million yuan, and export volumes dropped more than 70 percent.

Zhang Zhong, general manager of the rare earth giant, told China Business Weekly that the drop in business was due in large part to the global financial crisis.

The economic downturn led to plummeting demand from foreign clients, and prices declined sharply, Zhang said.

China is the world's largest rare earth exporter.

Japan and the United States are the top two importers, with 25 percent of China's rare earth exports going to the US and 50 percent to Japan.

The drop in orders this year was accompanied by price slumps caused by an oversupply in the international market and a price war among Chinese suppliers, especially among smaller players.

"Tough market conditions forced hundreds of small miners to close mills. They had no strong capital reserves, and they exploited and processed rare earth with outdated equipment and energy- and resources-wasting technologies," said Huang Xiaowei, a researcher at the Beijing-based General Research Institute for Nonferrous Metals.

The National Development and Reform Commission has formulated development plans for the rare earth industry, which includes a reduction target to less than 20 refiners by 2020.

Inner Mongolia Baotou Steel took over Hefa Resources Co Ltd, the biggest private rare earth producer in the autonomous region, and also Gansu Rare Earth Group.

"We are now in talks with some rare earth producers in southern China," Zhang said.

China Aluminum Corp entered the rare earth sector in 2007, establishing a new subsidiary called China Xiyou Rare Earth Co.

The new company signed a cooperation agreement with the General Research Institute for Nonferrous Metal for co-development of new refining, exploitation and environmental protection technologies.

Environmental protection

Environmental damage has become a major issue following decades of rapid development of the rare earth industry in the area.

When using traditional technology, refining rare earth involves the use of chemicals such as ammonium bicarbonate and oxalic acid.

Refining one ton of rare earth oxide can produce 63,000 cu m of waste gas containing sulfur acid and hydrofluoric acid, 200 cu m of acid-containing sewage water and 1.4 tons of radioactive industrial waste.

These waste materials have led to a string of environmental problems, and workers have become direct victims of the environmental pollution.

"We put many bags of acidic chemicals into the mixer to refine the rare earth in the workshop," said a worker at Inner Mongolia Baotou Steel who declined to provide his name.

"The pungent smell of the powder makes me cough from time to time, and the thick mask does not work at all," the worker said.

The most common disease in Baotou is pneumoconiosis, or black lung.

Also common is occupational poisoning from lead, mercury, benzene and phosphorous, according to data released by the Health Department of the Inner Mongolia autonomous region.

Baotou has 5,387 residents suffering from black lung -- more than 50 percent of black lung cases in the autonomous region.

Occupational poisonings have become a growing trend in recent years, according to health department sources.

The local government has been taking steps to upgrade the refining technology in the area.

Inner Mongolia Baotou Steel is planning a 300-million-yuan sewage water treatment project.

"When finished, the project each year will save more than 460,000 tons of raw materials such as crude salt, acid and alkali," general manager Zhang said

Environmental protection efforts have produced early results.

Baotou had 295 days of air quality reaching the Inhabitable Standard of National Air Quality Specification Level II in 2008. In 2003, only 110 days had air quality meeting that standard.

Baotou Research Institute of Rare Earth, the world's largest research institute for the industry, has initiated seven projects applying new refining technologies at a cost of 1.34 billion yuan in 2008.

The seven environmentally friendlier, high-efficiency and low-cost technologies were developed by the institute in partnership with professionals from home and abroad.

The research institute estimates that, when the technological applications are realized, annual output will reach 4.17 billion yuan.

Export outlook

China is the world's No 1 rare earth nation in terms of reserves, production, consumption and exports.

The nation accounts for 95 percent of global production and about 60 percent of consumption of rare earth, which includes such minerals, as dysprosium, terbium, thulium, lutetium and yttrium, according to the US Geological Survey. China supplies more than 90 percent of such materials used by US industry.

The natural resource is used inmaking ultra-lightweight magnets and other hi-tech products.

However, due to over-mining, the nation's rare earth reserves have dropped dramatically. Meanwhile, outdated technologies used by small miners caused low efficiencies and wasted resources.

"At the present rate of mining, China will have no rare earth to mine in the next 20 or 30 years, and then we will have to import rare earth at great cost," said Zhou Hongyu, a deputy to the National People's Congress.

The percentage of China's share of the world's rare earth reserves declined from 88 percent in the 1990s to 52 percent in 2008.

Competition among rare earth producers in China resulted in unreasonably low prices of rare earth exports, observers said.

Since 1990, China's exports of rare earth have grown by nine times while the price has dropped by 36 percent.

Over the past 20 years, the United States, European countries, Japan and South Korea have imported large amounts of rare earth at these low prices.

To adjust the export structure, the Chinese government has issued a series of policies abolishing the export rebate tax, increasing export taxes and reducing export quotas.

China imposed a 15 percent temporary tariff on rare earth exports in June 2007. The tax revenues are used for environmental protection technology research and development, the government said.

According to a recent report from the 21st Century Business Herald, the Ministry of Industry and Information Technology has formulated draft Rare Earth Industry Policies and is seeking internal comments.

In line with the draft policies, China will develop a rare earth commodities export list and different export tariffs will be imposed in line with categories, with the highest set at 20 percent. In addition, the export quotas would be further decreased.

China is limiting this year's rare earth exports to 31,300 tons, down 8.1 percent from last year, China Business News reported, saying that the proposed plan calls for capping exports at 35,000 tons per year in 2010 to 2015.

The Inner Mongolia produces around 75 percent of China's rare earth every year.

Production at high-quality ore mines will be limited to avoid over-exploitation and protect the resources, Zhao Shuanglian, vice chairman of the autonomous region, said at a press conference held in Beijing on Sept 2.

"We are not taking the short-term view of just trying to prop up prices. Imposing controls and reducing exports aim to attract more factories using rare earth metals from home and abroad to Inner Mongolia," he said.

Foreign investment in China's rare earth industry likely will be further regulated, as will exports of rare earth and related products.

The draft policies reportedly would forbid foreign investment in rare earth exploitation and mining, although overseas investment would be allowed for smelting and separation sectors via joint ventures and cooperation.

Meanwhile, China would encourage foreign investors to set up rare earth deep processing companies or become involved in development and manufacturing of rare earth alloy downstream products such as catalyst, permanent magnetic materials, hydrogen-halted materials, battery materials and luminescent powder.

A number of efforts have resulted in higher prices for rare earth since June, but insiders maintain a conservative attitude about the future of the market.

"Although the market has turned slightly better, it is still hard to judge the trend," Zhang said.

"Before the demand for rare earth shows a clear increase, the market will maintain the present situation of excessive supply," he said.

Agencies and Zhang Qi contributed to the story

(China Daily 09/07/2009 page12)