LONDON (Reuters) - A crackdown on small, inefficient rare earth producers in China is likely further to restrict supply from the world’s biggest producer of the minerals and support weak prices, mining services group Rare Earths Global (REG) said.
If recommendations in a Chinese white paper are adopted, the minimum output levels they will require from each producer could result in the closure of rivals of REG, which operates in China but is listed on London’s AIM market.
“With the China white paper coming up, I believe this will be advantageous. This will really help us for the next two to three years,” Chief Executive Simon Ong told Reuters in a telephone interview from China on Wednesday.
“That’s going to squeeze a lot of people out of the market in China, so production in China should drop over the next few years as the stragglers are shaken out,” said Luke Webster, a company spokesman.
China produces more than 90 percent of rare earths, a group of 17 elements used in defence, electronics and renewable-energy industries.
On August 6, it proposed new rules saying mixed-production rare earth mines must have a yearly output of no less than 20,000 tonnes a year and smelters must produce at least 2,000 tonnes a year.
This could result in China reducing its mining of rare earths by a fifth, REG said.
“The goal of the Chinese government is to keep price levels at a certain level in the medium term. In the short term, they might drop off a little bit more, but this should be the bottom,” Webster added.
Prices have been falling since a speculative bubble burst last year, but they are still well above levels before China clapped down on exports about two years ago, squeezing supply and propping the rally.
REG’s Sanxie separation and smelting plant in southern China does not currently meet the proposed regulations since it has a annual capacity of 800 tonnes, but the firm is exploring plans to expand to over 2,000 tonnes for about $30 million (18.5 million pounds), Ong said.
Other options would be to agree a joint venture with a state-owned enterprise for a 2,000 tonne plant or add more advanced downstream processing capabilities, which would exempt the firm from the minimum requirement.
On Tuesday, the company posted a normalised pre-tax profit of 0.6 million yuan ($95,200) for the first half, down from 29.2 million in the same period last year.
Profits were hurt by weak rare earth prices, which have declined by an average of 29 percent since the company listed in March, and a delay in receiving government production and export quotas.
Pre-tax profits should rise in the second half and meet a forecast by the company’s house broker of 25 million yuan for the full year, Ong and Webster said.
The company is still waiting for confirmation of its export quota, expected next month, after which activity is due to pick up, Ong said.
“We are still producing and selling to the domestic market, but once the export quota is allocated to us, we will be able to sell overseas,” he said.
REG shares have been volatile since they started trading in late March, opening at 253 pence, soaring to a peak of 1,300 pence in April, but quickly giving up much of the gains. They were quoted at 335 pence on Wednesday. ($1 = 6.3020 Chinese yuan)
Reporting by Eric Onstad; Editing by Anthony Barker