No Reason to Expect a Sudden Rare Earths Turn

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China is planning to end tariffs and quotas on exports of rare earths elements after a World Trade Organization panel, siding with the US and Japan, found the rules discriminatory back in March. People familiar with the matter have said Beijing will end the tariffs and duties late this year or, possibly, in early 2015.

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Many analysts are saying this is the reason that the chemically similar metals and metalloids, used in everything from flat screen TVs to cell phones will see their prices increase and the values of the companies that mine them increase, as well.

China controls 90% of rare earths production and while the coming end to quotas and tariffs is certainly a good thing for global trade, there are MANY conflicting signals coming out of Beijing these days. China may “significantly” raise the resource tax on rare earths with an announcement coming in the second half of the year, the Economic Information Daily reported on May 20, citing an unidentified person familiar with the matter. If the resource tax is raised, Chinese rare earths mining companies could simply pass that cost on to end buyers. Depending on the size of the increase, that alone could effectively outstrip any savings gained from the tariffs coming to an end.

Zachary Schumacher, rare earths analyst for Asian Metal, told MetalMiner that the Chinese likely won’t impose a value tax as part of an ambitious environmental clean-up plan anytime soon, since their domestic interests are primary.

“Even if the companies receive some sort of tax break opposite and equal in value to counteract the new tax, it’s simply going to damage Chinese consumers and improve the condition of foreign projects relative to the Chinese mines,” Schumacher said.

“From my sources, the quota does not appear to be getting removed this time around (likely Q1 2015), and so it wouldn’t make sense yet to implement the tax. They could implement it in order to keep prices stable, but it’s unlikely to cause prices to rise (unless greater than the average 20-25% to replace the existing RE tariff) and not a great way to support the domestic sector.”

So, if the tariffs and quotas are dropped at the same time that the value tax is created, the BEST result for rare earths consumers would be an end price wash. If the tax actually gets imposed BEFORE the tariffs and quotas are dropped that would create a net-price increase.

Production of rare earths dropped to 110,000 metric tons last year from 133,000 in 2010, according to the US Geological Survey. Demand is actually going down, not up. It’s waning as manufacturers have found less-costly alternatives and used less. What was once irreplaceable raw material is rapidly becoming replaceable by not-very-rare-at-all minerals.

For every analyst citing the lowering of tariffs as a reason to be bullish on rare earths such as neodymium oxide and terbium, there should be two or three citing waning demand, the continued poor performance of domestic rare earths mining companies such as Molycorp and the general ambiguity of news coming out of China.

 

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