January 7, 2015 / 7:56 AM / 5 years ago

China's rare earths quotas go, possible new moves stoke supply doubts

MELBOURNE, Jan 7 (Reuters) - China’s move to scrap export quotas on rare earths, crucial in most modern technology, may not mean an end to the uncertainty over supplies because the top producer can still find ways to control shipments and influence prices, industry players said.

China, which supplies about 90 percent of the world’s rare earths needs, imposed export restrictions and raised tariffs in 2010 as it sought higher prices to help cover the huge environmental costs of production and tried to encourage the growth of domestic industries that use rare earths.

Prices shot up as buyers scrambled to secure supplies, leading Japan, Europe and the United States to file a trade complaint. The World Trade Organization ruled last year that China’s restrictions were discriminatory and told it to scrap the quotas and export tariffs.

In response, Beijing announced in late December it was ending the quotas.

However, that is not expected to affect supply or prices, as China has not filled its export quotas over the past three years anyway, analysts and the world’s only non-Chinese producers of rare earths, Australia’s Lynas Corp and U.S. firm Molycorp, said on Wednesday.

“We don’t think it’ll affect our volume significantly. It’s not like there’s going to suddenly be a flood of product coming on to the market,” Lynas CEO Amanda Lacaze told Reuters.

“What is more of an issue is the sort of uncertainty overhang in the market that has been there since the WTO ruling.

We saw this in the last quarter, where we had customers drawing down inventories rather than buy fresh product.”

That sent prices for various rare earths elements down by as much as 20 percent in the December quarter, Lacaze said.

Beijing is expected to unveil new regulations for rare earth mining, processing and exports, perhaps including a value-added tax to replace the export tariff, which could have some impact, Lacaze and a Molycorp spokesman said.

“There’s a very, very strong market view that there will be a production or environment tax of some sort introduced in China,” Lacaze told Reuters in a phone interview from Kuantan in Malaysia, where Lynas runs its rare earths separation plant.

Rare earth elements include lanthanum used in oil refineries; neodymium and praseodymium used in magnets for motors; dyprosium used in hybrid vehicles, wind turbines and stealth helicopters; and yttrium in military jet engines.

STILL IN CONTROL

American Elements, a U.S. buyer of rare earths that depends on supply from China, said Beijing had been sophisticated in coming up with policies to drive growth of domestic industries that use rare earths by controlling exports and consolidating production and processing among six state-owned entities.

American Elements CEO Michael Silver said China’s plan to introduce export licences would ensure Beijing controlled supplies.

“Control through Baotou (Inner Mongolia Baotou Steel Rare-Earth Hi-Tech Co Ltd ) and the government deciding who gets the export licences should help support rare earths export prices,” Silver told Reuters by phone from Colorado.

But if China decided it wanted to flood the market with rare earths, it could, he added.

That fear led investors to knock Molycorp shares down 10 percent on Tuesday after media reported China had scrapped the export quotas. Lynas’s shares fell 9 percent on Tuesday but inched up on Wednesday.

Both stocks are just above record lows hit in December.

The two companies are saddled with debt and have struggled to bring their plants up to full capacity, but Lacaze said she remained confident her company would achieve a cash breakeven position in the December or March quarter. (Additional reporting by Yuka Obayashi in Tokyo; Editing by Alan Raybould)

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