China rare earths invoicing system could worsen WTO dispute

London, 1 June 2012

The announcement on Friday June 1 that China is now implementing its much delayed special invoicing system for rare earths designed to stamp out rampant smuggling could worsen tensions between China and consuming nations. The new invoicing system is designed to enable the Chinese authorities to more closely monitor the sale and production of rare earths and in theory tightens their grip on the industry. Producers who are not part of the system will not be legally able to sell rare earths.

The move is potentially significant because China controls over 90% of the world's rare earths supplies and smuggling has effectively acted as a safety net for consumers outside China. China's official export quotas are set at around 30,000 tonnes of rare earths for this year, roughly similar to last year, however the rare earths trade estimates that almost this much again is smuggled out of the country via Hong Kong and Vietnam every year.

Also, there are media reports from China this morning suggesting that the Ministry of Industry and Information Technology is considering creating a strategic stock pile of rare earths to help stabilise prices – another move that could put pressure on prices of the more critical heavier rare earth elements.

"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 earths elements such as dysprosium, terbium and europium," said Justin Pugsley, a spokesman for UK-based specialist metals pricing and news service, Metal Pages. He added that US-based Molycorp and Australia-based Lynas Corp are mainly geared to the production of lighter rare earths such as cerium and lanthanum and on their own these two companies are unlikely to be able to make up for a potential growing shortfall of heavier rare earths elements.

"If the invoicing system, along with other measures to curb smuggling even manages to halve illegal rare earths exports out of China, it is likely to give heavier rare earths prices a lift," Pugsley said. He added that the main beneficiaries of such an outcome could be the clutch of junior rare earths mining companies operating in countries such as Canada and Australia that are rushing to bring new projects to market. "If their projects are skewered towards heavier rare earths elements then they're more likely to find willing industrial off takers to help fund their projects in exchange for exclusive supplies."

However, Pugsley warned that China's export quota and tariff system will always give smugglers and illegal producers a strong incentive to carry on with their illicit trade as they can undercut official exporters. "The government will find it a challenge to stamp out this activity, because of the lucrative nature of smuggling, smugglers will always try and find a way," Pugsley said. "There's no guarantee the government will succeed."

In the meantime, the US, European Union and Japan are challenging China at the World Trade Organisation alleging that it is pursuing unfair practices in the trade of rare earths and other critical elements to favour its own domestic industries over foreign ones. Should measures, such as the new invoicing system, effectively lead to higher prices and tighter supplies of critical rare earths elements then calls for action from industry and politicians in consuming countries are likely to grow louder.

Rare earth elements are critical for a range of technologies ranging from high powered miniaturised electrical motors, wind turbines, LED lighting through to missile guidance systems.

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Metal Pages: A UK-based provider of prices, news and analysis on rare earths, minor metals and ferro-alloys. Prices published by Metal Pages are used as industry benchmarks for contracts.