China Merges Three Rare Earths State-Owned Entities to Increase Pricing Power and Efficiency

China is consolidating its rare earths industry to control pricing levels, increase efficiency, and secure strategic, economic, and sustainability goals. For instance, the merger of three state entities to establish the China Rare Earth Group Co. Ltd is the largest move of its kind in the world. China’s newly established megafirm will account for approximately 62 percent of its national heavy rare earths supplies. The SOE will have enhanced pricing power of key rare earths, such as dysprosium and terbium, which will likely bring changes to the global rare earths supply chain. 

On December 23, 2021, China Rare Earth Group Co. Ltd, a state-owned enterprise (SOE) directly supervised by China’s state assets regulator was formally established in East China’s Ganzhou, Jiangxi Province. The newly launched rare earth mega SOE is a conglomerate of some top industrial producers, including the rare earth units of three of the “Big Six” SOEs that dominate the rare earth industry – Aluminum Corporation of China (CHALCO), China Minmetals Corporation, and Ganzhou Rare Earth Group Co., Ltd and two research companies – China Iron & Steel Research Institute Group and Grinm Group Corporation Ltd.

Industry analysts believe that the consolidation will enable China to raise its global competitiveness in the rare earth sector and increase its pricing power and production efficiency.

What are rare earths and why are they important?

The merger happened three months after the news was first disclosed. On September 23, 2021, China Minerals Rare Earth Co Ltd reported that its parent company, China Mineral Corp, together with Aluminum Corp of China and the government of Ganzhou (in East China’s Jiangxi Province) were planning to restructure rare earth assets.

Rare earths are a group of 17 chemical elements, including lanthanum, cerium, praseodymium, neodymium, promethium, samarium, europium, gadolinium, terbium, dysprosium, holmium, erbium, thulium, ytterbium, lutetium, scandium, and yttrium.

Rare earths are essential components for a variety of products, such as high-tech consumer products (computers, phones, new energy vehicles, etc.) and military equipment (lasers, guidance systems, radar systems, etc.), among others. Rare earth minerals are used in permanent magnets – its biggest and most important use – without which the spindle motors and voice coils of phones and laptops would be disabled.

While rare earths are relatively abundant in the Earth’s crust, their minable (extractable) concentrations are less common than for most other mineral commodities. This is partially why they are an important national resource and have strategic value.

Why is China consolidating its rare earth assets?

In terms of production, China has been leading the world’s rare earth industry since the 2000s. Based on various estimates, China is responsible for 55 percent to 70 percent of rare earth mining and up to 90 percent of processing.

China’s rare earth industry does face some challenges though.

On one hand, China’s market dominance has been weakened in the past several years. Its share of global output has fallen from 86 percent in 2014 to 58.3 percent in 2020, according to the US Geological Survey. On the other hand, although China has been restructuring its rare earth industry for years, the domestic production is still highly fractured, leading to price-based low-end competition, which not only undermines the value of rare earths, but also causes waste of resources and environmental protection problems. Moreover, the homogeneous domestic competition affects China’s ability to fill in the technological gap with its foreign competitors.

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China wants to change this situation, ramp up its rare earths industry performance amid growing global competition, and safeguard the asset value of rare earth minerals as a ‘rare’ resource.

The previous consolidation of the country’s rare earth industry into six big SOEs failed to achieve these goals. This has led the government to cultivate a new industry leader to develop strategic advantages instead of focusing on short-term economic interests.

Moreover, China requires more rare earths due to its industrial upgrading and to achieve its carbon goals. A highly consolidated rare earth industry will provide more guarantees on these fronts.

Why does this merger matter?

The merger of three state entities to establish China Rare Earth Group Co. Ltd is the largest move of its kind in the world. Based on 2021 data, the new group will have 52,719 metric tons of mining quota (31 percent of China’s national total) and 47,129 metric tons of smelting quota (29 percent of the national total). China Rare Earth Group Co. Ltd will account for about 62 percent of heavy rare earth supplies nationally.

The newly established megafirm will have enhanced pricing power of key rare earths, such as dysprosium and terbium (used to produce permanent magnets), which will certainly trigger changes to the whole supply chain. For example, China believes the minerals have been trading for “cabbage prices”. Under the new merger, prices are expected to be rationalized.

According to Customs data, the average export price of rare earths jumped 36 percent from a year ago in November to US$13,200. And the price for dysprosium and terbium jumped around 50 percent in 2021, reaching multi-year highs.

Considering that it is not possible for the US and other countries to stop relying on China’s rare earths supply in a short period of time, it’s no wonder that this new round of consolidation is concerning to many stakeholders, especially amid intensified geopolitical tension.

On the other hand, the merger will also encourage technology sharing between the companies involved, which will maximize resources and reduce waste of materials that could not be previously processed. This will increase the overall resource utilization rate of China’s medium and heavy rare earths. The resultant increase in efficiency will serve economic and environmental substantiality goals.

Industry insights and potential evolution of the rare earths production chain

Besides industry consolidation, China is also using regulatory tools to promote the healthy development of the rare earths industry and establish key control mechanisms.

It is worth noting that the Negative List 2021 states foreign investments in exploration, mining, and beneficiation of rare earth, radioactive minerals, and tungsten are prohibited.

The Hainan Free Trade Port Negative List, however, provides an exception – stating that foreign investments in these sectors will not be prohibited. This is expected to impact the production chain in the long-term, bringing in fair competition to the sector and improving overall productivity and minimizing environmental costs.

In January 2021, the Ministry of Industry and Information Technology (MIIT) issued the draft version of the Regulations on Rare Earth Management to gather public opinion. Through this upcoming regulation, China intends to protect its national interests and industrial security as well as prevent illegal mining, destructive mining, unplanned and over-planned production, illegal trading of rare earth products, and activities that destroy the ecological environment. The draft Regulations also state the applicability of the Export Control Law to China’s export of rare earths, which will affect industries dependent on these exports.

With the Chinese government intentions to protect and scale up the value of its rare earth elements, industrial players should keep a close eye on regulatory developments for more details.

Moreover, while China Rare Earth Group Co. Ltd, which is located in South China, is focused on heavy and medium rare earths), another rare-earths giant is being planned. Reports suggest that it will be located in North China and will focus on light rare earths.  The government may eventually consolidate all its rare earth miners and processors into these two megafirms. If that happens, China’s pricing power and industry productivity are expected to be further enhanced, allowing China to maintain its dominance in rare earths supply chains.

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