China’s monitoring system to have critical impact on rare earths?

China – The Chinese government has announced that a long-delayed invoicing system designed to monitor the rare earths market entered full operation from 1 June. The authorities hope the system will eliminate illegal activity such as smuggling, though the World Trade Organisation (WTO) and industry specialists warn the development could lead to lead to tightening supplies and further increases in prices that are already at record levels.

The system was conceived to monitor production and sale of rare earths more closely and keep better track of the material flow, rendering ‘€˜off-grid’€™ operations more difficult. According to the government, such precautions were necessary, as 30 000 tonnes of rare earths are shipped illegally every year via Vietnam and Hong Kong ‘€“ roughly the same amount as China’€™s total export quota.

Meanwhile, there are growing reports in the Chinese media that the Ministry of Industry and Information Technology plans to create a strategic stockpile in order to ‘€˜help stabilise prices’€™. Since China possesses 90% of the world’€™s known rare earth reserves and some consumers are thought to have kept in the market only thanks to the smuggling of material, critics believe these apparent steps forward may turn out to have the opposite of the intended effect by pressurising current prices and fuelling tension at industrial and political level.

Justin Pugsley at UK-based market specialist Metal Pages comments: ‘€˜The more successful the Chinese government is in curbing rare earths smuggling and illegal production, the tighter supplies are likely to become in the rest of the world ‘€“ particularly for critical heavier rare earth elements such as dysprosium, terbium and europium.’€™

He predicts that if the invoicing system and other measures to control the market ‘€˜even manage to halve illegal rare earth exports out of China’€™, heavier rare earths would increase in price, benefiting smaller players such as Canada and Australia. However, producers of lighter materials, such as cerium and lanthanum, are seen as ‘€˜unlikely to recover’€™ from a potential growing shortfall of already scarce elements.

In an effort to avert a supply crisis, the US, European Union and Japan have taken the matter to the WTO. They complain that a dominant supplier’€™s implementation of legislation that looks to favour its own domestic industry over foreign competitors represents ‘€˜unfair practice’€™ in the trade in rare earths and other critical elements.

Mr Pugsley believes that in any case it would prove very challenging for China to stamp out illegal activity altogether, as its export quota and tariff system make smuggling such a lucrative business. ‘€˜Smugglers will always try and find a way. In the end, there’s no guarantee the government will succeed,’€™ he notes.