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Focus: Global Supply Chain and Logistics

Our Weekly Feature Article on Topics Related to Global SupplyChain Logistics

From SCDigest's On-Target e-Magazine

August 31, 2011


Global Supply Chain News: China Continues to Flex Rare Earth Metals Muscle, as Companies Moving Factories there to Avoid Shortages and Brutal Prices Increases in Global Markets

Lighting Maker Intematix Would Have Preferred New Factory in California, but Heading to China Instead; Costs up Astronomically in Past Few Years


SCDigest Editorial Staff


As one US company races to ramp up production of rare earth metals, China, which has a near monopoly on the market currently, is using its supply of the these elements to attract manufacturers to the country, the type of scenario many other nations have feared as China clamps down on rare earth exports.

Rare earth metals are a group of 17 elements, such as yttrium and dysprosium, that are used in everything from cars and defense systems to smart phones and "green" energy products. Though they typically only represent a small fraction of the finished product's make-up, these metals add certain key characteristics to the product, such as heat resistance.

SCDigest Says:


Molycorp says its goal is to raise current production rates of 4,000 to 6,000 tons in 2011 to 19,000 metric tons per year by the end of 2012. It says it can eventually reach 40,000 tons of annual production.

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Though several areas of the world naturally contain these metals, over the past few decades China has become almost the sole producer of the products. That has caused increasing concern, as prices have risen dramatically and China has both quietly and publicly made moves to use its near monopoly to give its own manufacturers huge advantages.

Chief among those was limiting the amount of the metals that could be exported. Just a few years ago, China exported 60,000 tons of rate earth metals per year. Last year, the government allowed export licenses for only about 30,000 tons, and said a few months ago that total would remain flat for 2011, even as global demand is rising. However, the list of metals included in the quota expanded, having the practical effect of actually reducing the comparative total from 2010, some say cutting it by a third to just 20,000 tons.

China has also raised export taxes on rare earths to as much as 25%, on top of value-added taxes of 17%, making it increasingly costly for companies buying the metals from China.

Concerns were also raised last Fall when China cut exports to Japan substantially at the same time the countries had military tensions over control of parts of the South China Sea. Though the limits were eventually lifted, the move led to global concerns over how China might use its monopoly in the future to further its political and economic interests.

Currently, manufacturers in China consume about 60% of rare earth metal production. Many experts believe that is now headed to 70% by next year.

It will soon get to the point where "companies can't get these products anymore and have to survive," by moving to China, said Mark Smith, CEO of US-based Molycorp, earlier this year. Molycorp is building rare earth production capabilities in California. "People have been able to survive on either illegal material coming out of China, of their working inventories or a national stockpile in the case of Japan."

Not only does that advantage give current Chinese manufacturers an advantage, the country now appears to be using it as a lever to drive manufacturers in other countries in to China to ensure access to the minerals they need to produce their products and costs they can live with.

CNBC reported last week that Showa Denko and Santoku of Japan and Intematix of the US are adding new factory capacity in China this year instead of elsewhere because they need access to rare earth metals.

“We saw the writing on the wall. We simply bought the equipment and ramped up in China to begin with,” said Mike Pugh, director of worldwide operations for Intematix, which makes lighting products. Pugh says the company would have preferred to build its new factory near its Fremont, Cal. headquarters.

In addition to the access to rare earth metals, the municipal government of Changshu let Intematix move into a newly built, 124,000-square-foot industrial complex near a highway for zero rent for the first three years, under policies aimed at building China's green energy industries.

Price of the metals also plays a key role, given demand outside of China far exceeds supply. Take for example cerium oxide, a rare earth compound used in catalysts and glass manufacturing. The metal now costs $110,000 per metric ton outside China, more than four times the price inside China, and up from $3,100 two years ago, according to the analysts at Asian Metal in Pittsburgh.

(Global Supply Chain Article Continued Below)




Typically, the products made in China using the metals and then exported face no additional export taxes or fees, giving the Chinese companies another huge cost advantage - and a powerful incentive for companies from other nations to move production to China to avoid these brutal costs even if they are lucky enough to procure the metals on the global market.

“When we export materials such as neodymium from China, we have to pay high tariffs,” Junichi Tagaki, a spokesman for Showa Denko, told CNBC. The company announced last month it would significantly expand its production of neodymium-based magnetic alloys, used in everything from hybrid cars to computers, in southern China.

Can Molycorp Come to the Rescue?

As the rare earth crisis began developing a few years ago, two major projects were initiated outside of China. One is the Lynas Corporation's Mount Weld mine in Australia. The other is the Molycorp site in Mountain Pass, CA. There are a scattering of smaller or less developed projects in other parts of the world.

Molycorp says its goal is to raise current production rates of 4,000 to 6,000 tons in 2011 to 19,000 metric tons per year by the end of 2012. It says it can eventually reach 40,000 tons of annual production.

A key barrier is finding "high grade" ore, which contains sufficient levels of the metals. "The cost of the facility to produce the low ore grades is astronomical," Molycorp's Smith says. He says the company has made huge investments to eventually enable it to be the low cost producer, even versus China and its low labor costs.

However, Molycorp is producing only "light" rare earth metals. There is also much demand for some "heavy" elements that Molycorp will not address, though Alaska's Bokan Mountain project is one potential source of heavy rare earths.

Dudley Kingsnorth, executive director of the Industrial Minerals Company of Australia and an expert on rare earth metals, predicts the world may be independent of China at least for light rare earths by 2016. The question for developed countries is how many factories will have moved to China due to rare earth metal availability and cost factors until then.

It is likely US and/or European countries will file complaints with the World Trade Organization over China's rare earth metals export limits, but the process for such complaints can take years and are difficult to enforce in practice even if the WTO eventually rules against China.

What do you make of this whole rare earth metals scenario? Does this need to be a more public issue? Anything the US or other countries can do in the short term? Are you hopeful about Molycorp? Let us know your thoughts at the Feedback button below.


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