Rare Earth Rectification Campaign Obtained Special Instructions from Officials of the State Council, 1+5 Plan Intensified Shuffling

When eight ministries and commissions jointly issued decrees to rectify rectification the rare earth industry, and cracked down on “illegal rare earth”, enterprises inside the industry are also developing joint union and coalition to usurp resources.

In the evening of October 13, Hongda Xingye published public notice, saying that it planned to acquire 100% stock equity of Damao Rare Earth in Baotou City, invest and construct rare earth deep processing and application industrial chain project in Baotou.Meanwhile,as a strong contender of the North China Rare Earth Big Group,Baotou Steel Rare Earth also announced on the same day that it had signed agreement with Hongda Xingye,through which it obtained 0.4%stock equity of Gansu Rare Earth.

It is worth noting that, while enterprises within the industry are making active deployment to obtain more upstream resources, new policy threshold also forced a large number of companies failing to meet capacity target to be eliminated.

The Ministry of Industry and Information Technology (MIIT) published a name list of enterprises with outdated and surplus capacity for phase-out in the industrial sectors in 2014(second batch) in August this year, which involved ten industries including iron and steel,iron alloy, copper smelting, lead-acid battery,and rare earth totaling 132 enterprises,wherein,the number of rare earth enterprises totaled 28.

When receiving interviews from the 21st Century Business Herald, a number of rare earth industry insiders said that, as the plan of“1+5” big rare earth group formulated by the MIIT early this year made progress, at the present stage the M&A in domestic rare earth industry had undoubtedly entered the hottest stage, the industry pattern of 6 big rare earth giants had initially taken shape.

“Today rare earth enterprises in South China and North China are all devising ways to obtain more resources, meanwhile, local governments also have their own needs, coupled with a new round of rectification campaign kicked off by the supervision departments, then entire industry’s ‘shuffling’ storm will continue.” A senior executive of one rare earth company in Baotou told the reporter of the 21st Century Business Herald.

According to official website of the Ministry of Land and Resources, recently, eight ministries and commissions including MIIT, the Ministry of Public Security, and the Ministry of Land and Resources jointly issued decree, which decided to unfold a special campaign to crack down on law-violating and rule-breaking behaviors in illegal rare earth mining,production, circulation, and export steps from October 2014 to March 31,2015. Relevant key rare earth production zones also need to focus on investigating and handling 2-3 typical cases based on clues such as special invoices and tipoff info.

According to the execution plan, the special campaign will include three stages of self examination period (October 10 to November 25,2014),rectification period(November 26 to January 31, 2015), and examination and acceptance period (February 1 to March 31,2015).

According to insiders of the Association of China Rare Earth Industry, China’s rare earth export policy is facing change, at such moment the eight ministries and commissions again joined hands to rectify rare earth industry, and the its half-year long duration will help reverse the existing downward rare earth prices.

“The decline in rare earth prices on the one hand is affected by drop in overseas demand,but illegal mining and smuggling are another key factor leading to price decline. Though last year eight ministries and commissions also carried out a joint rectification, illegal trading,processing and tax evasion phenomena could in no way be eliminated due to ineffective supervision and ineffective enforcement by local governments in some resource regions.”Said the above-mentioned insider of the Association of China Rare Earth Industry.

According to the latest data obtained by 21st Century Business Herald, from January to August this year, China exported a total of 18,700 tonnes of rare earth, up by 39%compared with the same period in the previous year, the growth rate continued to slow down.After the October 1 National Day holiday period, prices of light and heavy rare earth oxides respectively dropped by 2.01% and 2.03%, main rare earth varieties such as Praseodymium-Neodymium, Dysprosium,Terbium, Europium, Cerium, and Lanthanum recorded accumulated decline of 4.1%,18.55%,30.14%, 48.35%, 39.58%, and 35.42% in 2014 respectively, marking the lowest records in the year.

In fact, since 2010, rare earth prices began to drop sharply, Baotou Steel Rare Earth, a leading enterprise in North China, was forced to adopt production suspension to seek price stabilization; nonetheless, against the background of increasingly fierce unauthorized and wanton mining and illegal smuggling in the industry, the space of existence for legitimate enterprises was seriously squeezed, which continued till today.

In 2012, the MIIT took the initiative to carry out multiple special rectification campaigns,which destroyed a total of 14 illegal rare earth mining sites,closed down 20 dressing,smelting and separation enterprises, and suspended production capacity of about 30,000 tonnes,but the rectification weapon did not totally remove industry chaos, and rare earth mined and manufactured outside the plan is still affecting normal market order.

One year later, in 2013, MIIT again joined hands with several ministries and commissions to issue“Rectification Decree”.After rare earth prices rallied momentarily, illegal mining cropped up again in several major resource concentration regions including Jiangxi, Inner Mongolia,and Sichuan.

Compared with the two previous rectifications,the above-mentioned Association insider disclosed to the reporter that, this time’s rectification obtained special instructions from officials of the State Council, the rectification magnitude is also unprecedented; furthermore,such insider also disclosed that, at the current stage, the supervision officials are preparing to unveil ”Rare Metal Management Regulation”,this regulation will also push forward setup of long-term mechanism for supervision of rare earth industry at legal level.

Aside from industry special rectification, rare earth M&A and big group strategy are also quickening the pace in marching forward.

According to the public notice published by Hongda Xingye,the company planned to invest and construct “Rare Earth Deep Processing and Application Industrial Chain” project in Baotou, through newly establishing or integrating Baotou’s existing manufacturing enterprises, construct 100,000 t/a rare earth additive and catalyst, and 1,000 t/a rare earth colorant production projects.

In order to obtain rare earth raw material supply, Hongda Xingye respectively signed“Letter of Cooperation Intention” with Baotou Damao Rare Earth Co., Ltd and all its shareholders, and signed “Framework Agreement for Strategic Cooperation” with Inner Mongolia Baotou Steel Union Co., Ltd(2.83, -0.05, -1.74%), signed “Rare Earth industry Strategic Cooperation Agreement”with Baotou Steel Rare Earth. According to the agreement, the company planned to acquire 100% stock equity of Damao Rare Earth, and invest and set up new dressing factory at Barun Mining Zone of Inner Mongolia Baotou Steel Union Co., Ltd through Damao Rare Earth,Inner Mongolia Baotou Steel Union Co., Ltd guaranteed to supply 200,000 tonnes of iron ore to the company each year. Furthermore,Hongda Xingye would also transfer 20% stock equity of the fully acquired Damao Rare Earth plus 0.4% stock equity of Gansu Rare Earth New Material Co., Ltd held by Damao rare earth to Baotou Steel Rare Earth, Baotou Steel Rare Earth would use raw material supply,access and market as consideration, and guarantee to supply 20,000 tonnes of rare earth concentrate each year to the Damao Rare Earth after integration.

In fact, Hongda Xingye and Baotou Steel Rare Earth are merely one representative case of the maneuvering of rare earth industry enterprises at the current stage.

According to what the reporter of 21st Century Business Herald has learned, as another key enterprise in South China’s rare earth market,Shenghe Resources (20.37, -0.21, -1.02%) also signed a “Memorandum of Understanding”with Arafura Resources Limited last month,both sides will also again hold in-depth negotiation within the valid period of the memorandum, in order to push forward the setup of cooperation relation.

“According to requirements of MIIT, by the end of this year, it is scheduled to complete all integration work of big rare earth groups;therefore at the final stage,everyone tried every means to scramble for the control power.” The above-mentioned insider of Baotou Rare Earth person told the reporter of the 21st Century Business Herald.