Smuggling of Rare Earths: A Serious Issue

By Michael Montgomery—Exclusive to Rare Earth Investing News

The two reasons that have been given by Chinese officials over the drastic cutbacks in export policy are environmental protection and illegal smuggling of rare earth oxides. The first is clear, after years of cutting costs with little concern over environmental protection, the Chinese dominated the market with low cost rare earths putting almost every competitor out of business. The detrimental effects to the environment mounted until something had to be done. The second reason, the smuggling of rare earths is less clear. While every report of rare earth policy includes this fact, too often real figures are not included. As with smuggling the true total may never be known.

It stands to reason that the reduction of export quotas would increase the level of smuggling as producers, stuck with excess inventory, would look to offload their supply by nefarious means if necessary. The official stance is that the halt in mining activities and the consolidation of small mining operations will decrease the scatter and disorder of the rare earth industry, making control an easier task.

The actual figures of how many tones of rare earths are smuggled each year vary. Some reports state that illegal smuggling siphons off 20-30 percent of output. Other reports put a tonnage on the figures. The highest figure came from the Chinese Society of Rare Earths (CSRE). “It is estimated that there were about 30 to 40 thousand tons of rare earth products smuggled from China every year,” stated Dr. Chen Zhanheng, Deputy Director of the CSRE. In July, seven suspects were arrested for smuggling over 4,000 tonnes of rare earth metals and compounds worth approximately $16 million.

Regardless of the actual numbers, which may never be fully realized, the question remains: who is are the main recipients of the smuggled minerals, and how does this affect the market as a whole?

Japan, the largest importer of Chinese rare earths,  is also a main recipient of smuggled rare earths. “If the Chinese export quota limits were the reality of what comes into Japan each year, we would be even more worried than we already are,” stated Kazunori Fukuda, a deputy director at the Japanese Ministry of Economy, Trade and Industry. The admission of illegal rare earths entering Japan isn’t exactly earth shattering, but is telling of the relationship between the two countries.

Smuggling of rare earths holds prices of rare earths down. In 2010, export quotas of rare earths were held to just 30,258 tonnes, the illegal smuggling of upwards of 40,000 tonnes represents a serious threat to prices. The Chinese producers of the metals have becoming increasingly determined to cash in on their monopoly after years of low prices, where the true cost has been felt by the environment around Baotou, the center of China’s rare earth industry.

With the creation of the Baotou Rare Earth High-Tech Zone, the Chinese are hoping to entice foreign firms to move operations to the zone to save costs and streamline production of high tech goods, green energy solutions, and even automobile production plants.

“About 30 projects are already operating in the zone, including France’s Rhodia SA, while the Korea Development Bank recently signed a cooperation agreement to encourage South Korean electronics companies and automakers to establish processing plants there alone or with Chinese partners. A total of 9 billion yuan has so far been invested in the zone and expects that figure to reach 30 billion yuan by 2015,” reported the China Daily.

The crackdown of illegal mining, if successful, will not only drive prices higher, but also persuade firms to move operations to the rare earth zone as they will not be able to secure rare earth supplies any other way.