More consolidation for China’s rare earths industry as Beijing seeks geopolitical leverage
Beijing has taken another step in the decade-long consolidation of its rare earth mining industry, which gives it control over elements that are crucial for the electric car industry.
Rare earths comprise a set of 17 elements used in electrical and electronic components, and in various industrial processes, including glass, ceramics, and metallurgy. Crucially, they are essential for the production of magnets for electric vehicles (EVs) and in many renewable energy technologies.
China has had a stranglehold on global rare earths production for decades, as the U.S. and other countries outsourced the dirty processes of mining and refinement. But this started to change in 2010, when Beijing cut off all rare earths exports to Japan over a fishing trawler dispute. Since then, the explosion of the EV industry has made rare earths even more critical, leading the U.S. and other countries to get back in the game. China’s share of global production decreased from 86% in 2014 to 58.3% in 2020, when it held 37% of global rare earths reserves.
Beijing has long seen rare earths as a strategic industry, and seeks to maintain or even expand its control over global prices and production. One key component of this policy is the consolidation of domestic rare earths mining companies, which Beijing has pursued for the last decade. Having production concentrated in a few huge conglomerates will enable these firms to dominate global production (and prices), and to make large foreign acquisitions.
Yesterday, one of China’s largest rare earths producers, China Northern Rare Earth (Group) 中国北方稀土(集团), announced that it will be merging two of its holding companies:
- Baotou Huaxing Rare Earths 包头市华星稀土, a producer of rare earth alloys and processing products, with total assets of 122 million yuan ($18.31 million), and net profits in 2021 of 8.43 million yuan ($1.26 million).
- Baotou Keri Rare Earth Materials 包头科日稀土材料, a producer of high-value rare earth products, with assets of 25.11 million yuan ($3.76 million).
As a state-owned enterprise (SOE), China Northern Rare Earth implemented the merger as part of Beijing’s three-year SOE reform process that commenced in 2020, which aims to improve industrial concentration, enhance competitiveness, and reduce management costs. The company is one of China’s largest miners of rare earths, and its controlling shareholder, Baogang Group 包头钢铁(集团), owns exclusive rights to Bayan Obo in Inner Mongolia, the world’s largest rare earths mine.
The context
Beijing’s three-year SOE reform period has seen significant changes in China’s rare earths mining industry, which is entirely state-controlled:
- In December last year, a megafirm, China Rare Earth Group 中国稀土集团, was formed of a merger of three state entities. The merger created the world’s second-largest producer, accounting for about 30% of China’s total rare earths production.
- The merger reduced the number of China’s big rare earths producers from six to four.
- From 2018 to 2021, the total amount of rare earths mined in China increased from 120,000 tons to 168,000 tons, and the total amount of rare earths smelting and separation increased from 115,000 tons to 162,000 tons.
In 2021, huge demand from EV companies outstripped supplies of rare earths, and prices have skyrocketed to levels not seen since 2011:
- The average spot price of rare earth carbonate from January to April 2022 was 78,300 yuan per ton ($11,752), about 90% higher than the average price of last year.
As a result, companies like China Northern Rare Earth are highly profitable:
- The company reported revenues of 30.41 billion yuan ($4.56 billion) in 2021, a year-on-year increase of 39%, and net profits of 5.13 billion yuan ($769.96 million), a year-on-year increase of 462%. In the first quarter, revenues and net profits increased by a further 50% and 89%, respectively.
- The company’s stock price rose by 376% in 2021, and as of May 27, the company’s market capitalization was 123.70 billion yuan ($18.56 billion).
The takeaway
Even though its share of production has declined, China retains a crucial advantage in regard to rare earths: It has the world’s most complete rare earth industry chain, and 86% of the world’s rare earth mines rely on China’s smelting and separation capacity.
Consolidation of the domestic rare earths mining industry is ongoing, and China will remain central to global production and prices of rare earths, and hence EVs — providing Beijing with important leverage in a period of geopolitical instability.
