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China's Rare Earth Export Quotas: Some Observations Posted on 1/16/2012 7:00:00 AM A lot of attention is being paid in the news media to China's recent announcement of its rare earth export quotas for 2012. Nearly all of that coverage focuses on whether or not the export quotas will be higher or lower than 2011's quotas, and what impact that may have on forward pricing for rare earths. This focus misses what's really going on in China with regard to rare earths. Let me share a few observations from Molycorp's perspective in the wake of this announcement.
- China's rare earth export quotas are becoming less and less relevant to global rare earth supply in the face of China's continuing efforts to limit its own production through environmental reforms and vertical integration. China's consolidation of its rare earth separations companies enables it to exercise much tighter control on what ultimately gets produced, consumed internally, and exported. Its increasing control of rare earth production also allows for more effective control over what it considers "illegal" production, which gets exported outside of government controls. All of this points to the likelihood of continuing future constraints on global rare earth supply out of China.
- China is withholding 2012 export quotas to more than 20 companies until they can pass environmental reviews. These 20 companies represent the bulk of China's production capacity, and they have yet to be granted approvals to export rare earth materials. While a number are likely to pass environmental reviews, this move demonstrates that China is serious about cleaning up its environmental act when it comes to rare earth production. That is certainly good for the environment, both in China and globally. But it also is leading to higher rare earth production costs in China. Additionally, it puts pressure on China's ability to increase its own production in line with increasing rare earth demand in China.
- It is not yet clear how China will define "light" rare earths versus "medium/heavy" rare earths for purposes of the split in export quotas it announced. However, if the "medium/heavy" category includes didymium, (a combination of neodymium and praseodymium that is a critical to high-powered, permanent rare earth magnets), as most reports in China now assume, it may lead to supply constraints for those magnetic rare earths. This is because processors in northern China will use their heavies export quotas for didymium exports, while processors in the South will not have enough heavies quotas and will need to seek to purchase those from the North. However, it remains to be seen where the Chinese will draw this split between the elements. While this announcement concerning a split between heavy, medium, and light rare earth quotas for 2012 was a surprise, it is not clear what impact it will ultimately have when almost everyone in the rare earth business is forecasting China to become a net importer of at least certain rare earths in the 2014-15 timeframe.
- Supplies of heavy rare earths, such as terbium (Tb) and dysprosium (Dy), are forecast to remain very tight. That is why Molycorp is making investments in downstream technologies that rely less and less on these relatively scarce rare earths. Our joint venture with Daido Steel and Mitsubishi Corporation to manufacture permanent rare earth magnets will utilize a new and novel approach to neodymium-iron-boron magnets that requires significantly less Dy and/or Tb. Our investment in Boulder Wind Power is designed to facilitate the commercial sale of permanent magnet generators, for use in wind turbines, that use zero Dy and/or Tb. The work we are doing to develop commercially viable recycling of heavy rare earth recycling from fluorescent lighting could produce significant new quantities. And the new process technologies we pioneered and are building into our new facilities at Mountain Pass — which allow us to process multiple rare earth minerals beyond bastnasite — also will help us increase our production of HREEs.
- China continues to rapidly build up a downstream manufacturing base that consumes more of its own rare earth production. Clearly, its intent is to export less of its rare earth production and export more finished products that utilize rare earths. Those downstream manufacturing facilities help China employ more of its own citizens while building a stronger manufacturing base for its economy. But it also points to the likelihood that China will continue to seek to limit its export of rare earth materials to the rest of the world.
- Molycorp is relatively insulated from any global oversupply conditions that may evolve around cerium, given that most, if not all, of our cerium production can be allocated to our proprietary cerium-based XSORBX™ water treatment products. We have the ability to sell XSORBX™ into four separate markets: municipal wastewater treatment, industrial wastewater treatment, recreational/pool/spa water treatment, and drinking water treatment. These are all large markets, and could consume a significant volume of the cerium we produce at both our Phase 1 and Phase 2 production levels. Additionally, the price we can receive for our cerium through XSORBX™ sales is independent of spot market prices for cerium.
All of these trends point to long-term constraints on the supply of rare earth materials to the rest of the world. They are major factors in our commitment to accelerate our construction schedule at Mountain Pass, bring our new rare earth manufacturing facilities online as soon as possible, and produce at our Phase 1 production rate by the end of the third quarter of 2012.
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Safe Harbor Statement Regarding Forward-Looking Statements
This release contains forward-looking statements that represent Molycorp’s beliefs, projections, and predictions about future events or future performance. Forward-looking statements can be identified by terminology such as “may,” “will,” “would,” “could,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue” or the negative of these terms or other similar expressions or phrases. These forward-looking statements are necessarily subjective and involve known and unknown risks, uncertainties and other important factors that could cause Molycorp’s actual results, performance or achievements or industry results to differ materially from any future results, performance or achievement described in or implied by such statements.
Factors that may cause actual results to differ materially from expected results described in forward-looking statements include, but are not limited to: Molycorp’s ability to secure additional capital to implement its business plans; Molycorp’s ability to complete its initial modernization and expansion efforts, including the accelerated start-up of the Mountain Pass facility, which management refers to as Project Phoenix Phase 1, and the second phase capacity expansion plan, which management refer to as Project Phoenix Phase 2, and reach full planned production rates for REOs and other planned downstream products; the final costs of the Project Phoenix Phase 1, including with accelerated start-up of the Mountain Pass facility, and Project Phoenix Phase 2, which may differ from estimated costs; uncertainties associated with Molycorp’s reserve estimates and non-reserve deposit information; uncertainties regarding the results of exploratory drilling programs; uncertainties regarding global supply and demand for rare earths materials; Molycorp’s ability to successfully integrate recently acquired businesses; our ability to enter into additional definitive agreements with our customers and our ability to maintain customer relationships; uncertainties regarding our ability to successfully market and sell XSORBX™; changes in China's rare earth export quotas and other policies regarding rare earths; our ability to successfully implement new technologies, including our approach to neodymium-iron-boron magnets and recycling of heavy rare earths; completion of the formation of the proposed sintered NdFeB rare earth magnet joint venture, which remains subject to the satisfaction of customary closing conditions; the proposed sintered NdFeB rare earth magnet joint venture’s ability to successfully manufacture magnets within its expected timeframe; Molycorp’s ability to maintain appropriate relations with unions and employees; Molycorp’s ability to successfully implement its “mine-to-magnets” strategy; environmental laws, regulations and permits affecting Molycorp’s business, directly and indirectly, including, among others, those relating to mine reclamation and restoration, climate change, emissions to the air and water and human exposure to hazardous substances used, released or disposed of by Molycorp; and uncertainties associated with unanticipated geological conditions related to mining.
For more information regarding these and other risks and uncertainties that Molycorp may face, see the section entitled “Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 and of the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2011. Any forward-looking statement contained in this press release or the Annual Report on Form 10-K or the Quarterly Report on Form 10-Q reflects Molycorp’s current views with respect to future events and is subject to these and other risks, uncertainties and assumptions relating to Molycorp’s operations, operating results, growth strategy and liquidity. You should not place undue reliance on these forward-looking statements because such statements speak only as to the date when made. Molycorp assumes no obligation to publicly update or revise these forward-looking statements for any reason, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future, except as otherwise required by applicable law.
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