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Jiangxi's crackdown on illegal rare earth mining seen boosting prices

Market watchers believe that China's tougher stance against illegal rare earth mining will boost the price of rare earth and the number of authorized producers.

The Chinese province of Jiangxi, one of its largest rare earth producing regions, launched a four-month crackdown on illegal rare earth mining in September. About 123 enterprises across the province are being verified, including upstream and downstream companies engaging in separating, smelting and trading the commodity.

Dylan Kelly, a Sydney-based resources analyst with CLSA, the international arm of China's CITIC Securities, believes that the impact of the news is positive for rare earth prices as they have remained subdued since July when the last round of environmental crackdowns abated.

The clampdown is the latest in Beijing's ongoing campaign to tighten its grip on the industry since it started restructuring the sector several years ago. The restructuring scheme, which requires six major groups to consolidate rare earth companies across the country by 2020, is also included in China's 13th five-year economic and social development plan.

Under the consolidation led by the Ministry of Industry and Information Technology, China Southern Rare Earth Group consolidated three assets in the province: Ganzhou Rare Earth Group Co. Ltd., Jiangxi Copper Corp. and Jiangxi Rare Earth And Rare Metals Tungsten Group Corp.

According to China's rare earth production quota for 2018, China Southern Rare Earth Group's 15,912-tonne allotted quota for smelting and separation ranks third among the six major groups, and its 28,250-tonne quota for mining output is the second-largest in the country.

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Jiangxi is also the highest producing region of heavy rare earth. According to China's 2018 production quota by province, Jiangxi was assigned a quota of 8,500 tonnes of heavy rare earth mining, which accounts for 44% of the country's total.

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Kelly told S&P Global Market Intelligence that he expects the latest crackdown to impact about 5,000 tonnes of production, or about 10% of neodymium and praseodymium, or NdPr, supply in the industry, which may lead to an increase of between 5% and 25% for NdPr prices by year-end as stockpiles are depleted.

"We believe that once the inventory levels are effectively depleted for NdPr, we could begin to see a slow rise in production. But what could change is if additional crackdowns occur in the other provinces in a short lane because this would have the compounding effect of supply for the new system," he said.

Kelly added that upstream companies would feel the impact first as stockpile levels for them are relatively low due to historical crackdowns. "Downstream companies have average levels of inventory. They can withstand supply disruptions for a short period of time, maybe a month or two before [stockpiles are] exhausted."

Wu Xiaofeng, a rare earth analyst with Shanghai Metals Market, expects tighter regulation to increase the prices of middle rare earth and heavy rare earth products, benefiting producers.

"Rare earth prices are expected to see a rise through several phases in the coming months as the government is shrinking the supply to boost the prices. Restocking of downstream companies during the third quarter and fourth quarter due to seasonally increased order numbers will also bolster the prices," Wu told S&P Global Market Intelligence.

The crackdown also indicates rising awareness of environmental pollution caused by overproduction in the past, said Li Yongxiu, a chemistry professor at Nanchang University in Jiangxi.

Li said the government's stronger control over the industry also shows it is increasing oversight over environmental threats from illegal rare earth mining. "Illegal mining of heavy rare earths led to serious environmental pollution and [wasted] resources in the past as production by the black market did not need to pay for environmental costs."

Li added that some authorized producers also processed their overproduction via the black market in the past, but it will be difficult to continue such practices now as the province's allotted quota this year is 500 tonnes less than 2017.

"For many years, the industry has been producing well below the full cost of production to incorporate the environmental cost. Now we see that supply will be in decline, and the reliance on foreign imports will increase," Kelly said.