A new tax on Chinese exports of rare earths may be less interesting for the underpinning effect it could have on already firm metals prices than it is for possible policy implications that have little to do with costs.
Depending on the type of rare earth mined, a tax of 30 yuan or 60 yuan per metric ton will be levied starting April 1, according to a perfunctory joint statement (in Chinese) issued by the Ministry of Finance and State Administration for Taxation.
The financial hit – $4.54 to $9.10 per metric ton – appears limited considering export prices that averaged above $20,000 a ton during the first two months of this year, and which have continued rising in March. International buyers of the metals, widely used in the manufacture of electronics, are scooping up China’s rare earth metals so fast that half the initial 2011 quota had already been shipped out by the end of February.
Yet the tax is worth pondering for the possibility it signals a subtle shift in Beijing’s thinking about the obscure but highly politicized sector.
A notable aspect of the tax is the differentiation it makes between light rare earths and heavy rare earths. According to the new policy, medium and heavy rare earths will be taxed at 30 yuan per ton, half the levy on lights.
Heavy and light refers to a rare earth metal’s atomic number and placement on the periodic table. As it stands now, China’s quota makes no distinction between light and heavy, which may have distorted pricing into a two tier system and exaggerated the global impact of Beijing’s policy moves as the quota tightened last year.
The lower-value, lighter rare earths that are used most widely today in magnets soared in price last year, 1256% in the case of cerium, plus another 84% so far this year, according to Lynus Corp. Higher-value, heavier rare earths — which are rarer and primarily considered for their applications in more futuristic technologies — rose less substantially in price, only about 72% for terbium in 2010 and 35% so far this year.
China’s major rare earth mining zone in Inner Mongolia’s Baotou is known for its lights, while the more haphazardly developed Jiangxi region is endowed with heavy rare earths. Internationally, some miners emphasize the heavy content of their reserves, arguing only they will be able to supply the needs of advanced technology, offering an advantage compared with Molycorp Inc. which is focusing on the most commercially in-demand metals.
As China’s quota is based on tonnage and applied to all rare earths together, sellers have preferred to supply the heavier rare earths because their prices and profit margins are higher. Given the way the quota works, analysts say it has ironically made it so that the scarcer heavies (terbium and dysprosium) have remained relatively available, while the lights (lanthanum and neodymium) — more abundant, cheaper and in higher demand — sometimes can’t be found.
Some analysts expect Beijing to adjust its export quota system to reflect the different demand profiles of the categories of rare earth . The tax illustrates that Beijing is looking at rare earths as more than just a single group.
The new tax might also signal Beijing’s intention to further build up its strategic rare earth reserves. The state-run Xinhua news agency this week quoted Yang Wanxi, director of a rare earth expert panel within the Baotou Municipal Committee of Sciences, as suggesting revenues from the new levy could be used to fund the reserves plan.
Foreign governments are concerned bigger reserves will give China even more power to influence global prices for the metals. Government-controlled Baotou Steel Rare-Earth (Group) Hi-Tech Co. has led the effort, building facilities that Chinese state media reports say could eventually store over 100,000 metric tons.
Another, more speculative way of looking at the new tax is by considering how it figures into China’s defense of its quota system.
China counters policymakers in Washington, Berlin and Tokyo who say China is hording the metals and using quotas as a trade weapon by claiming the quotas are necessary to protect the environment. The U.S. Congress is already mobilizingto offset the impact of the quotas and trade lawyers say it is only a matter of time before a case challenges it at the World Trade Organization.
Under WTO rules, the environment is an acceptable reason to have quotas – but only if the environmental protection effort is applied locally as well as internationally.
The tax might allow Beijing to demonstrate it is serious about protecting the environment because it penalizes Chinese miners. While the tax isn’t large, Chinese rare earth producers are at least likely to feel it more than Prius buyers.
– James T. Areddy. Follow him on Twitter @jamestareddy</em