Critical Metals

In an exclusive interview with Rare Earth Investing News, Gareth Hatch, Founding Principal of Technology Metals Research, and Ryan Fletcher Director of Corporate Development for Zimtu Capital Corp., discuss the recent quota data and its effects on the rare earth supply chain.

By Michael Montgomery—Exclusive to Rare Earth Investing News

The Chinese government has released the second half of the 2011 export quota for rare earth elements. Much to the surprise of many industry insiders, the quota was increased to 15,738 tonnes, which is double the amount for the same period last year. However, the quota only represents an increase of 8.9 percent from the first half of 2011. This brings the total export volume for 2011 to 30,246 tonnes, a slight decrease from 30,258 tonnes in 2010. Despite headlines indicating ‘China increases export quota,’  investors should note that tight supply chains are expected to continue throughout the year.

In an interview with Rare Earth Investing News, Gareth Hatch, Founding Principal of Technology Metals Research, and Ryan Fletcher, Director of Corporate Development for Zimtu Capital Corp. (TSXV:ZC), discussed the recent quota data and its effect on the rare earth supply chain.

The picture of the supply chain is much the same as last year, where the diminishing supply outside of China sent companies and governments into a panic.

“In terms of the supply chain, I do not think the announcement makes a difference. For some time I have held the view that companies that need to buy the material will buy it however they can get it,” stated Hatch, adding, “At the end of the day certainly there are concerns in the supply chain about accessing materials. The consequence is rising prices.”

It has been suspected that the reduction in exports is a means for China to entice companies to move production facilities, creating higher paying manufacturing jobs as well as selling value added products. However, many companies do not show a great desire to move their plants, as highlighted by “The end users that I talk to are not interested in the hassle of moving to production facilities.”

Ferroalloys included in quota

New to this round of quota is the inclusion of ferroalloys containing rare earth elements. Ryan Fletcher explained, “Some of the high value dysprosium and terbium were being alloyed into product, exported; and it was a way to get around the quota.” The change in policy to include these alloys could actually reduce total exports.

In a recent Lynas Corp. (ASX:LYC) press release, the company stated that the actual export quota would be reduced by a minimum of 7 percent on the year because of the new regulation.

However, Gareth Hatch does not feel that the new regulation may affect the supply picture as greatly as some analysts and companies are arguing. “It’s a little overblown, it’s just a bunch of noise from my point of view,” he said, adding, “I won’t be surprised if the official export numbers for those alloys mysteriously go down in the next six months. The same amount of material will be exported via unofficial means.”

Potential trade dispute looms

The current export quota are not helping alleviate the tensions towards China. The US has already stated their condemnation of the restrictive quota. US Trade Representative spokeswoman, Nkenge Harmon, stated “We continue to be deeply troubled by China’s use of market distorting export restrictions on raw materials including rare earths.”

Many are questioning whether the recent WTO ruling against Chinese trade policy last week may have influenced the decision to increase the export quota, in an effort to avoid a rare earth trade dispute. However, Chen Deming the Chinese Trade Minister said on Thursday “I am not worried because we have already had some negotiations [with the EU trade commissioner].”

As previously reported, prospects for a WTO trade dispute may be slim. Gareth Hatch also stated that the issue is not likely to gain much traction. “Even if they filled the paperwork, it would be a while before any ruling came down. In that time you could potentially have Molycorp (NYSE:MCP) or Lynas come on stream, so it becomes less of an issue,” stated Hatch.

Secure supply chain needed

For end users of rare earth elements the rising prices have affected their profit margins. Prices for many of the elements exploded, and companies such as SumitomoToyota (NYSE:TM), and Hitachi are looking to non-Chinese rare earth firms to secure future supply. The picture for the supply chain, in light of the 2011 quotas has not changed, as Ryan Fletcher stated, “end users do not want to be at the whim of these quota announcements twice a year, they want to choose their own destiny and secure their own supply.”

The need for a secure and predictable supply chain is an issue that both Fletcher and Hatch stressed was critical for end users of rare earth elements.

“No one wants to be beholden to a single source; no end user wants to pay the prices they are having to pay right now,” stated Hatch, adding, “We have got to diversify our sources of supply from a pragmatic point of view. Even an event like a moderate earthquake in the inner Mongolia region to disrupt the rare earth supply chain, just from simple geography, the supply chain needs the companies outside of China to come on stream.”

For end users, the price of rare earth elements is not likely to be alleviated by the new round of export quota. The reduction in total supply or rare earth elements for the year continues “to be a positive factor for the junior miners in the space,” stated Fletcher. Prices for the various elements, for all intents and purposes, should remain high. This should continue to be a supportive factor in the share prices of rare earth mining firms.



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