About 90% of China’s rare earth producers are currently operating at a loss as prices for the coveted elements — used in high-tech sectors — continue to drop due to overcapacity and illegal mining.
According to the Association of China Rare Earth Industry, local companies have been losing money for months and many are expected to close up shop before year-end.
Chen Zhanheng, the group’s deputy secretary-general, told China Daily the main issues weighing on the market are oversupply and illegal mining.
Many companies rushed into rare earth mining and production business when prices were high, he told the paper, producing much more than what the market really needed.
“Rare earths are not as difficult to mine and process as many seem to think, so many illegal miners are bypassing regulations to dig and smelt the metals. This, in turn, has led to a glut in the market,” he said.
The situation has not only affected small producers. The country’s six largest rare earth miners are also feeling the pinch, according to Investorintel:
Xiamen Tungsten, for instance, reported a sharp drop in its net profit in the first half of 2015, the company’s rare earth business has suffered a loss of $11.5 million during the period, $8.8 million more than the year before. Guangdong Rising Nonferrous is forecast to lose $5 to $6 million, down about 600% when compared to the $1 million reported last year last year. China Minmetals Rare Earth expected its net profits in the first half to stand at up to $470,000.
End of a monopoly
Until 2010, China controlled around 97% of the supply of the coveted metals, used in advanced electronics, defense and renewable energy. But when it sought to impose export controls to give an advantage to domestic electronics producers, prices soared by up to 20 or 30 times previous levels.
Attractive prices encouraged investment in the sector in the U.S., Australia and other places outside China. But, at the same time, it fired up smuggling from the Asian nation and a consequent drop in prices.
Rare earths were further battered earlier this year, when China scrapped export tariffs, which had inflated international prices, after a World Trade Organization ruling.
Now market observers are saying that prices for the 17 sought-after elements should start picking up by year-end. However, they also warn that a glut of supplies, including from illegal mines and smuggling in China, could cause the market to crash back down.
Investment confidence has been badly hit by the poor performances of the two major producers outside China — Molycorp (NYSE:MCP-A) and Lynas Corp (ASX:LYC).
Canadian rare earth companies have also shed nearly all of their value in the last few years. Shares of Avalon Rare Metals (TSE:AVL) are down 96% from their 2011 high, while Quest Rare Minerals’ (TSE:QRM) stocks have dropped about the same, since March 2012.
Meanwhile, China continues to restrict the number of firms allowed to produce and export rare earths. This means there will remain a significant supply bottleneck that is likely to encourage smuggling as well as illegal production in the nation, with the feared consequences in prices.