From the point of view of China — Japan is the number one competitor/impediment to its total domination of the global rare earth industry at its currently most profitable point, the manufacture and sale both of the components and of the myriad of consumer devices enabled by the electromagnetic properties of the rare earths.
The economic system of the People’s Republic of China is described in English with a translation of a common Chinese usage by the phrase as “Capitalism with Chinese Characteristics,” the purpose of which (Capitalism) is to support “Socialism with Chinese Characteristics,” the purpose of which is to ultimately create a self-sustaining economy for a Communist China. The 100 million members of the Chinese Communist Party elect from their membership a Central Committee, from whom are chosen the “top” (“Top” is a favorite word in English translation of the Chinese term for ultimate holder of authority-the ancient Romans called this authority “imperium”) leaders with 10 year terms who sit on the “State Council,” euphoniously described as “China’s Cabinet” by the Western press. Theoretically China is “governed” by this council, but its “chairman” and the “chairman of its military committee” are normally the top decision makers. Today both of these positions are held by one man, Xi Jinping, who has just published a book called (in official translation) “The Governance of China.”
In this book he emphasizes that the most important job for a Chinese leader is to ensure the growth of Chinese wealth and power to insure stability (i.e., the continuation in power of the Communist Party) and tranquility (i.e., a satisfied proletariat). The levers of power to affect both goals are securely in his hands.
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Xi Jinping appears to have decided that the continuing drop in the growth of China’s GDP from year to year from its lofty double digit level to its present level of 7.5% cannot be sustained even at that level without a major change in its focus. Up until now, and for the last 25 years, since Deng Xioping put it onto its present course, China’s economy has been driven by exporting its advantages in the cost of labor. The immense amount of money earned by China’s economy through this strategy has gone to build in just one generation an infrastructure of material and intellectual wealth that no other nation in history has achieved in such a short time.
The quality of life of the average Chinese person has improved so dramatically in the last 25 years that China has just now surpassed the USA in what the IMF calls purchasing power parity (PPP). PPP is a measure of the quality and quantity of goods and services a citizen of a country can buy with an average income. The United States had led in this category since the late nineteenth century.
The world’s mining industry has been, in my opinion — most directly affected by China’s growth in the last generation. Today 60% of all of the new metal produced in the world flows to China. The most striking result of this Sino-centric shift in the demand for metals is the simple fact that today – in 2014, China produces one-half of the world’s steel and directly exports as raw steel-only 10% of that figure. Detailed and thoughtful discussions of the impact of the rate of growth of the Chinese economy upon the world’s iron miners permeate the press coverage in resource-focused export economies such as those of Canada, Australia, Brazil, and India. China imports more than half of its needs for iron ore from those countries, because their deposits are larger and of higher grade and better mineralogy than most of those of China and thus require less energy to be fashioned into steel.
It is the same for most other base metals such as aluminum, chrome, manganese, and aluminum.
However superficial and uninformed reporting has confused investors into thinking that China has all along planned to monopolize the production of key technology metals such as the rare earths, tungsten, molybdenum, and antimony to facilitate Chinese military and economic power. In fact China has adopted as its economic planning has developed, the most efficient technique of maximizing its domestic resources of materials, labor, and manufacturing capacity along with the immense position in the reserve currency, the U.S. dollar, which it has acquired. This technique is the monopolization of the production of goods for which it has or has developed a monopoly of critical raw materials in particular of technology metals. The purpose of this monopolization is to create and maintain a self-sufficient Chinese domestic economy.
China is now restructuring its economy away from its total dependence on savings, infrastructure development, urbanization and exports to one driven by domestic consumption and individual credit expansion.
Chinese government policy has until now fiercely protected jobs. It is now moving to insure that protection by protecting industries. This protection means first of all the restructuring of predominantly private industries from the chaos of cowboy (unrestricted and unregulated) capitalism with its ruthless overbuilding of capacity and the bloated inefficiencies, and then, now, of massive state owned manufacturing enterprises with their widespread corruption. The new paradigm is lean and mean efficient enterprises that protect jobs as well as Chinese critical natural resources and recognize that domestic conservation is served by consuming those same resources in balance with recycling and overseas sourcing.
Perspective is the key to objectivity. Neither sound-bites nor word-bites alone can ever provide the necessary breadth of perspective. We all “know,” for example, that until Molycorp and Lynas (?) went into production in the last two years, 2012-14, it was China (since the late 1990s) that produced 95-97% of all of the rare earths utilized by global industry in the twenty-first century. I fully expect to see stock market promoters soon telling us that China’s share of the legal and official production of rare earths for calendar 2014 will have dropped to 85% of the world’s total due to the ramp up of Molycorp and, perhaps, of Lynas. This drop-off in Chinese production, if used to promote the “success” of non-Chinese producers, will be misleading either purposefully or through ignorance. At the same time another “cause and effect” story making the rounds has it that China’s “crack down” on illegal mining (and refining!) has been the cause of the downgrade in overall “reported” rare earth production.
China has in fact reduced its “allowed” production (quota) for rare earths to just over 100,000 metric tons for calendar 2014. In recent years the official, legal, reported production had been as high as 130,000 mt. But today for a number of reasons, the chief of which are lessened demand and a comprehensive total rare earth industry restructuring (read: “downsizing”), China is reducing its production of rare earths. This reduction is not symmetric by which I mean it is not the same reduction proportionately for all of the rare earths. The light rare earths cerium and lanthanum, which constitute on average 80-85% of all large rare earth deposits are not only in surplus but are probably only being produced today in China so that the neodymium and praseodymium, critical for the production of the most common rare earth permanent magnets, the NdFeB type, always co-produced with them, can continue to be produced in quantities that the REPM market requires.
The perspective from which to evaluate this change in the structural demand for the rare earths is that of the geopolitical aspects of the global rare earth permanent magnet industry, which accounts for at least 50% of the revenue derived from rare earth enabled products. North Americans seem to have a distorted view of this most important segment of the global rare earth industry.
Since 2007 I have been watching closely as Molycorp, in my opinion, patched together, seemingly at random, and, in any case, inconsistently, an attempt to create and establish itself as a vertically integrated total rare earth permanent magnet, REPM, supply chain company that would enter the market most profitably as an REPM manufacturer. This business model, not visible at the beginning of the revival of Molycorp in 2007, was born, I believe, out of a kind of desperation to keep up, and be “current,” and be “relevant,” which desperation came from an early realization that just supplying both individual separated and customer-specified blended “oxides” was not a viable business model/plan. Molycorp’s business model’s inconsistency now looks to be drawing to a close as its mine bleeds cash and erodes the value of its wholly owned subsidiary, Magnequench, the successor in interest to the last of the partially integrated North American originated rare earth permanent magnet manufacturers, Neo Materials Technologies, formerly of Toronto, Ontario, Canada, and now known as Molycorp China.
Only in China, until Molycorp’s acquisition of Neo Materials, were there ever genuine integrated total rare earth supply chain companies that produced REPMs and were anchored on mines. But the Chinese companies had grown (logically(?)) over decades of brutal competition beginning with large successful (defined as profitable) ventures in mining, such as Baotou, or in REPMs, such as GQD and integrating downstream (Baotou) or upstream (GQD) with careful analysis of the targeted acquisition’s skills, markets, and managements before making the acquisitions. The Chinese integrated ventures were anything but random and inconsistent. They were however overoptimistic. Today independent (i.e. not part of vertically integrated ventures) Chinese REPM manufacturing has vast overcapacity, but it must also be noted that the independent Chinese REPM manufacturers still produce the majority of Chinese made REPMs.
I have come to realize that all of the subsequent puffing during the last seven years by the junior rare earth miners about each of them creating a total rare earth supply chain, anchored of course on their undeveloped deposits, was done in blissful ignorance of the real deployment then and current status now of the details of the technologies and markets of such well-developed industries as the global rare earth permanent magnet manufacturing industry. The idea, as a business model for a North American junior rare earth venture, of such a vertically integrated total supply chain by a non-Chinese rare earth mining venture was first announced by Great Western Minerals Group in, I believe, 2008-10. The concept was called “Mine to Magnet” by GWMG. In 2010, shortly after an aborted attempt by Molycorp to buy GWMG, Molycorp’s original CEO, Mark Smith, announced that Molycorp’s business model was to create a “Mine to Market” vertically integrated total rare earth supply chain company described as one that would be producing rare earth permanent magnets as a focus. This target was reinforced by immediate announcements about “relationships” with Hitachi, then as now the world’s largest REPM manufacturer.
The majority of the 250 or so rare earth juniors after that time adopted the “mine to market” strategy even though that was, at a time when none of them even knew what rare earth separation was or what it entailed. They believed that the “market” was in fact the one for mixed concentrates out of their planned hydrometallurgical operations. They, the juniors would produce them and (another) “they” would buy them. None of them that at that time, or until actually very recently, that I knew of, ever said their goal was to produce rare earth permanent magnets except for GWMG, and, by actual practice, Molycorp. I have always referred to this business model as the “The Field of Dreams” model.
I just recently (On Weds, October 1, 2014) spoke at and moderated a panel at the CWIEME, the Coil Winding Expo, in Chicago. This is a gathering of the world’s companies that make the equipment to produce, as well as the components (including REPMs) themselves of, electric motors and generators. This international group is now more than ever concerned with the security of their supplies of rare earth permanent magnets and even the Chinese members of this trade association are concerned with the security of the supplies of the rare earth magnet metals, neodymium, praseodymium, samarium, terbium, and dysprosium and the alloys of them from which all REPMs are made
China’s rare earth permanent magnet manufacturing industry, which accounts for 80% or more of the world’s annual production of rare earth permanent magnets is in an existential crisis. There are several reasons for this including:
- China’s economy,
- Overcapacity,
- Reorganization of their supply base, and
- Raw material uncertainty
In the real world of industrial demand, not the one described in the junior mining share promoting financial press, the Japanese Global1000 company, Hitachi, dominates the REPM industry technologically. In fact the total of all of the Japanese REPM makers or their subsidiaries, JVs, and licensees (outside of as well as in China) make nearly half of the globe’s REPMs (Although it must be noted here again that 80% of the actual manufacturing of REPMs is in China). Hitachi scientists first developed the commercial forms of REPMs and put them into mass production. These events happened over a period beginning in the late 1970s and allowed the miniaturization of electrical and electronic devices and allowed the largest and heaviest components, such as electric motors, speaker magnets and displays, to be replaced by much smaller and lighter components based on the electromagnetic properties of the rare earths. The consumer products we take for granted today as relatively inexpensive and small enough to be non-obtrusive exist courtesy of the magnetic and electronic properties of just a few of the rare earths principally neodymium, praseodymium,samarium, europium, terbium, and dysprosium. If any rare earths are critical in 2014 and the near future it is these six.
Using a patent strategy to get around Western anti-trust/anti-monopoly laws, for which strategy some American companies are famous, Hitachi Metals built up a patent portfolio from the very beginning and has continued to file patents on the composition of and the manufacturing processes for REPMs up to the present. Today it holds several hundred active patents, although many of the key original ones are expired or are in their final months of coverage. Hitachi continues to file new patents, partly, I believe, in the hope of being able to confuse the issue of the expiration of the key ones. This exact strategy it should be noted has allowed America’s Corning Glass to dominate the manufacturing and sale of the synthetic cordierite “honeycomb” substrates for automotive exhaust emission catalytic converters for more than 35 years. In the case of Corning, however the company has been issued more than 5,000 patents for compositions and methods of manufacturing them. Hitachi has “only” 600 for the NdFeB REPM.
Hitachi’s strategy has worked well up until recently, so that even though China’s REPM industry is in aggregate larger than that of Japan’s the only suppliers of mass produced REPMs that are able to supply to the Global1000 supply chains have primarily been Japan’s Hitachi and the relatively few holders of “Hitachi licenses” mainly in China. This is because although it has been Hitachi’s tactic to go after, aggressively, for patent infringement, those who it believes have infringed on their patented compositions or manufacturing technologies this has been in practice done only if they, the alleged infringers, are targeting large volume, Global1000, end-use customers. This tactic has worked to keep the most lucrative high volume contracts in the hands of Hitachi and its licensees.
Until quite recently Japanese REPM manufacturers, other than Hitachi, were reluctant to outsource production and opposed the outsourcing of the production of patented and proprietary REPMs to China in particular, because of their concern with not creating competitors and in particular their belief that proprietary knowledge (i.e., “know-how”) could not be protected effectively in a Chinese toll-manufacturing setting. But the rare earth raw material squeeze, which entered high gear in the 11th five year plan, 2011-2015, forced even Hitachi to move some of its own production to China to make sure that the priority access to raw materials given to Chinese owned manufacturers did not become a major disadvantage. Hitachi’s fear was that given the choice between being shut down or “re-engineering” their REPM specifications to allow for “unlicensed” Chinese REPMs even the Japanese car and appliance makers in China would themselves re-engineer, much less the foreign and Chinese manufacturers producing mostly for the export markets.
Up until now American car makers have refused to re-engineer REPMs just to get lower prices for fear of a perceived Chinese lack of credibility in engineering to their specifications and the Chinese lack of experience in just-in-time supply chain maintenance in the North American market.
An alliance of 7 Chinese REPM manufacturers with a combined capacity of more than 3 times the total demand of the North American OEM automotive industry is determined to break the Hitachi patent monopoly with high volume customers.
The alliance was formed specifically to “break” the Hitachi monopoly by having their patents rescinded or narrowed in their coverage.
The Chinese REPM manufacturer’s alliance is not a marketing group; it has specifically been formed to clear the way for Chinese owned and operated REPM manufacturers to set up marketing operations outside of China, primarily in the USA and Europe, and go after high volume REPM customers with their own patented and proprietary REPM technology. If and when this goal is achieved-and it is going the way of the Chinese litigants in the US Patent Court-then the alliance members plan to immediately set up marketing operations in the American market and then, if and only if, domestic supplies of their critical rare earths, particularly of the heavy rare earths dysprosium and terbium are available outside of China, to build manufacturing facilities in the USA using domestic American raw materials.
This program applies to Europe, an even larger market for REPMs than the USA, also.
Note well that such manufacturing outside of China using non-Chinese materials will not interfere with, it will in fact accelerate, the Chinese focus on utilizing their domestic raw materials increasingly for manufacturing for domestic consumption.
Such overseas expansion would reduce the pressure on the overcapacities in the Chinese domestic REPM manufacturing market and would create a flow of capital (in profits) into China at a time when such flows from exports are to be reduced.
Of course this business model by Chinese REPM manufacturers does not impact the non-existent US REPM manufacturing industry. It is however a direct threat to the Japanese REPM manufacturing industry, which is the dominant player in the USA today. The same is true on Europe although Europe has a fair size REPM manufacturing industry, but the influence of the “Hitachi patents” is much less in Europe today as the principal ones have already or are soon to expire.
America’s, Europe’s, and Australia’s heavy rare earth themed “juniors” stand to benefit from a victory by the Chinese REPM manufacturing industry in its contest with the Japanese, because it is much more likely that the mature Chinese REPM industry will enter the US market at price points with which domestic manufacturers dependent as they are on Chinese raw materials at “export prices” cannot compete.
Chinese investors who are well aware of the changes in their government’s attitude in this area are already openly investing in juniors with significant heavy rare earths such as Australia’s Northern Minerals Limited (ASX: NTU) and Greenland Minerals. North American and European investors and even large Global1000 end-users profess to be well aware of the problems of rare earth supply yet they are reluctant to capitalize the solution to the problem through mine development. Chinese investors have no such problem, because they have a home market ready to accept all of the SEGs and HREEs and, I suspect, the neodymium and praseodymium that can be produced outside of China in profitable mixes of elements.
China already has a large total supply chain for rare earth enabled devices such as magnets, phosphors, alloys, and lasers. But China is seeing the growth of demand in the export markets pitted against the growth of such demand in its domestic markets. In either case shortages of SEGs and HREEs and even of neodymium and praseodymium have either already become apparent or are looming.
No one anywhere is going to build capacity to make rare earth metals and alloys and REPMs until and unless the supply of neodymium, praseodymium, terbium, and dysprosium is assured and secured for a reasonable foreseeable future.
Non-Chinese investors who wait-and-see are going to be left out of the future profits from the growth of the rare earth utilization industry.
Australia’s Northern Minerals and Greenland/Denmark’s Greenland Minerals are already under way because their national governments have welcomed Chinese investors. But both of them have to overcome hurdles of infrastructure and process reagent supplies (more so in the case of Greenland Minerals than of Northern Minerals).
Much easier HREE themed projects to develop such as:
- Tasman Metals Ltd. (TSXV: TSM | NYSE MKT: TAS),
- Ucore Rare Metals Inc. (TSXV: UCU | OTCQX: UURAF)
- Rare Element Resources Ltd. (TSX: RES | NYSE MKT: REE), and
- Texas Rare Earth Resources Corp. (OTCQX: TRER)
Are in need of investment to develop their deposits into mines.
Investors need to be aware of the fact that disruptive technologies based on long understood and long practiced chemical principals are close to commercialization in North America. These newly applied technologies will sharply reduce the cost both of increasing the efficiency of hydrometallurgical extraction of desired values from ore bodies and of separating and purifying the individual elements in closely related mixtures such as those of the rare earths or of the platinum group metals.
I know that North American and European technology allied with North American, European, and Australian capital could turn both America and Europe into producers of rare earth alloying elements and rare earth magnet alloys to rival China in total volume by 2020.
I in fact think this is exactly what is going to happen, but It is up to the institutional investors of North America and Europe whether or not this new volume of material flows to Asia bringing raw materials and profits to Chinese investors or ignites a revival of high tech rare earth based manufacturing in North America and Europe of finished goods.
China is determined that ultimately North American and European high tech that is not manufactured in China should not be available competitively to the Chinese domestic market. They can make sure of this now simply by buying control of the rare earth juniors named above. They have already begun with Greenland Minerals and have a strong position in Northern Minerals.
But we have a short breather; China first target for elimination from the global market for manufacturing high tech devices enabled by the electromagnetic properties of the rare earths is Japan.
China just this week inaugurated a new Asian international development bank to promote investments in infrastructure with a 100 billion dollar initial capitalization. China has pledged 50% of the bank’s first capital. Neither Japan nor South Korea have joined in this effort.
Follow developments such as these before you follow the herd away from or towards the flavor of the moment.
Devices enabled by the electromagnetic properties and the alloying properties of the rare earths make our life style and our safety secure. Don’t let either one of these slip away from our control.