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Baotou Steel Rare-Earth

China’s Inner Mongolia Baotou Steel Rare-Earth Hi-Tech Co. Ltd.



By Jack Lifton

It's got a five year plan to help China retain controloftheglobal supply of rare earths.


Chances are very good that you’ve never heard of”InnerMongoliaBaotou Steel Rare-Earth Hi-Tech Co Ltd”(600111.SS).Nonethelessthat mouthful is the official name inEnglish of aChine******panythat is today one of the world’s largestproducersof rare earthsin the nation, China. It’s essentially theworld’sonly miner ofrare earths.

Let’s just call the company “Baotou” as itinfactis usually referred to outside of China. InsideChina,however, andamong the world’s small band of rareearthcognoscenti itbecomes necessary to give the companyitsentire name so that, inconversation, or on paper one willknowthat one is speaking only ofa part of the operations ofBaotouSteel. It’s known in the west asone of China’s largeststeelproducers, iron ore miners, and iron oreconsumers and as themainproprietor and mine operator of thesedimentarycarbonate-hostedgiant Bayan Obo (rare earth element)REE-Fe-Nb oredeposits ofInner Mongolia, the world’s largestknown REE oredeposits.

On Monday, 25 August, Reuterscarriedthefollowing headline: Baotou Rare Earth plans 300,000tonnestockpile.Neither the headline nor the story under theheadlineseems to haveyet attracted much attention. However, it isa reportof the plansand intentions of the largest operator of REEmining,refining, andend-use product manufacturing on the largestREEorebody in theworld. So it bears a close examination by endusersand investorsoperating in the REE space.

The story, in fractured English, someofitconfusing, seems to say that Inner Mongolia BaotouSteelRare-EarthHi-Tech Co Ltd will:

  1. Invest 675 million Yuan ($98.62 million)inareserve project that will store 300,000 tonnes ofrareearthconcentrates;
  2. Is trying to consolidate thesector[rareearths] and boost efficiency; and that
  3. It would take five years to buildupthestockpiles, which would boost its production byincreasingitsrecycle rate.

Before we look at the serious implicationsfortheglobal REE market of the above points let’s look atsomeofficialstatements of production by Inner Mongolia BaotouSteelRare-EarthHi-Tech Co Ltd.

On 29 May,NewsnChina, reportedthat the “China SecuritiesJournal” had said:Rare-earthConcentrate Production Halted (by INNERMONGOLIA BAOTOUSTEELRARE-EARTH HI-TECH CO., LTD (600111). Thereport’s statedreasonfor the halt was, “To stabilize decreasingmarket pricesforrare-earth products, Inner Mongolia Baotou SteelRare-EarthHi-TechCo., Ltd. (600111) announced that it would haltthe supplyofrare-earth concentrate for one month and halt its ownrefiningforone month.” It continued saying that, “The companyexpectsthesuspension to reduce its production volume ofseparationproductsby 1,400 tons. The company said it would make upfor theproductionlosses in the second half of the year. Duringthesuspension inproduction, the company will sell products fromitsinventory, thussales revenue for 2008 will not be affected.”

I think we can deduce from thisearlierreportthat INNER MONGOLIA BAOTOU STEEL RARE-EARTH HI-TECHCO.,LTD(600111) normally produces at least 1,400 x 12 = 16,800tonnesofrare-earth “concentrate” a year.

I will add here, myself, that a fairlytypicalREEore from Bayan Obo will consist of bastnaesite andmonazite andthatthe ore concentrates form the first will contain55-60% REOsand fromthe second 47% REOs (rare earth oxides), sothat themixedconcentrates will report at above 50%. This istherichestconcentrate of so-called “light rare earth elements,”LREEs,thatcan be produced today anywhere onearth.   

It’s clear that, at this point intime,theChinese government is trying to “encourage “economies ofscaleinmany of its basic industries. Historically in China thishasmeantthat the large eat the small, literally. Compare thisapproachwiththe West where a relatively small player likeArcelorMittalSteel,at its beginnings in India, can by superbfinancialmanipulationacquire larger companies, which are typicallynot wellmanaged, andgrow to become the world’s largest steelproducer. Thisis not whatis happening or is allowed to happen inChina. Thosenaturalresource producers with the largest numbersofdirectemployees—typically state-owned—are the only ones thatcanadapt tosudden changes in government regulations that favorlargerandlarger entities. This is happening in the Chinesesteelindustryand it is now happening in the Chinese rare earths’miningindustrywhere what we perceive as a monolith is, in fact, amélangeofcompanies ranging from artisanal individual miners all thewayupto INNER MONGOLIA BAOTOU STEEL RARE-EARTHHI-TECHCO.,LTD(600111).

The 14,400 tonnes minimumofconcentrateproduction—that I am estimating just forBaotouSteelRare-Earths—represents probably 10% of China’s mostrecentannualproduction of rare earths. Nonetheless, it is verysmallcomparedto the projection for what I am going to call an”inventorybuild”of 300,000 tonnes of concentrates in just the nextfiveyears.

I am not today even going to try anddecipherwhatthe Reuter’s article is reporting; I am just going totellyouwhat it cannot be reporting.

Even if Baotou Steel Rare-Earth werespeakingasthe representative of the entire, Chineserare-earthmining,refining, and fabricating industry, building aninventoryof300,000 tonnes of concentrate in just five yearswouldrequireincreasing current yearly production of rare earthsby25-50%! Thisnumber wildly exceeds any estimates that have beenmadeof theChinese rare-earth industry’s ability to increaseitsconcentrateoutput.

Now the Chinese rare-earth miningindustryisentering a period of intense concentration. Common sensetellsusthat this will decrease not increase annualproductionuntilit is over. Logic and experience tell us, forexample, thatsmallmines will be closed and evaluated and thosedeemed worthytocontinue will have to be upgraded in equipment,safety, andhealth.

Are we being told that withChineseinternaldemand increasing, or, at worst, holding steadythatconcentrateswill be withdrawn from the export market or evenfromthe domesticmarket in order to build this immense inventory?

Are we being told that equipmentcapacitiesofwhich we in the west are unaware have been or will beshortlybuiltand in operation across the Chinese rare earthminingindustry?

Is this ‘report’ a trial balloon to tryandreducethe world price for rare earths? How could that be? Ifthereis thecapacity and finance to build an inventory of more thanayear’sworth of total global demand by 2013 then surely theREEsmarket isalready in surplus. But prices have increased thisyearsharply on anet, year to year basis.

On top of that I was myself interviewedbytheWashington Post’s Beijing Bureau last Juneaboutthepricing trends for REES. I was assured by theinterviewerthatChinese REE producers felt that they were being‘short changed’onthe prices they were getting for REES. They citedthose towhomthey directly export and that large prices were beingobtainedbyresellers such as trading companies inprivatelynegotiatedcontracts—from which the 25 official Chineseexporters ofrareearth official allocations were not benefitting.Thereforeit’spossible therefore that Chinese producers, such asBaotou, wanttodrive these intermediaries out of business bydepressingpriceslong enough to force them out. This was done in the1990swithstrontium and in the 2000s in tungsten, bothnowChinesemonopolies.

Of course the same strategy would go a longwaytokilling any incentive for the non-Chinese rare earthproducerstocontinue or to even get additional funding. The resultwould bethatno matter whether or not the inventory building goalwas metor notpricing control would remain with the soleproducer.

Posted by Resource Investor





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