INDUSTRY BULLETIN: Chinese Export Quotas for H2 2011... Increased Rare Earth Supply or Not?
Sydney, Australia (ABN Newswire) - In Avalon Rare Metal's (NYSE:AVL) ongoing efforts to provide broader communications and industry information, we are pleased to issue this Industry Bulletin which provides our readers with an update and brief analysis on last week's announced export quota from China.
China's Ministry of Commerce announced on Thursday, July 14th, that the rare earth export quota for the second half of 2011 will be 15,738 tonnes. Much of the initial media reaction interpreted this as a significant increase in supply. Some media reports concluded that the Chinese export quota had increased in reaction to a recent WTO ruling. Traders reacted negatively to these reports and share prices of rare earth companies outside China declined as a result.
This appears to be an overreaction due to confusion arising from how the numbers were presented. In reality, the 2011 export quota on a year-over-year basis, as illustrated below, is essentially unchanged from 2010, making the announcement effectively a non-event.
The confusion stems from the fact that the H2 2011 quota is 97.3% higher than the H2 2010 quota giving the appearance that there has been a significant relaxation of the Chinese export policy.
Further, the H2 2011 quota is 8.9% higher than the H1 2011 quota (The latter being a 70% reduction from H1 2010), also giving an appearance of a relaxation of export quotas.
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China Rare Earth
Export Quotas
Period (tonnes)
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H1 2010 22,282
H2 2010 7,976
2010 Total 30,258
H1 2011 14,446
H2 2011 15,738
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2011 Total 30,184
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Percentage
Periods Change (%)
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H1 2010 to H2 2010 -64.2
H1 2010 to H1 2011 -35.2
H1 2010 to H2 2011 -29.4
H2 2010 to H1 2011 81.1
H2 2010 to H2 2011 97.3
H1 2011 to H2 2011 8.9
Year 2010 to Year 2011 -0.2
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Of further significance, an earlier announcement stated that ferroalloys containing 10% or greater Rare Earths (not previously subject to the export quotas) are now to be included. Lynas Corp., in a press release dated July 15th, estimated that these ferroalloys would account for at least 2,000 tonnes of annual exports, resulting in a minimum 7% reduction in the aggregate amount of rare earths available for export compared to 2010.
Link: http://tinyurl.com/64frcwp
Export quotas are important if they limit exports. It is Avalon's understanding from market participants that quotas are not being used up and that exports have essentially been falling since 2006 (see chart below), not because of export quotas, but because of the difference between rare earth prices inside China versus outside China. Businesses are moving to China to avoid paying the higher export prices.
The Chinese Government has been making great strides in controlling their rare earth business over the last five years, in a very consistent way in order to be able to control and reduce exports. They have concentrated production in the North and the South to a limited number of companies. They have limited foreign ownership in the sector, they have stopped issuing mining licenses, and they have worked to reduce illegal mining. They have imposed export taxes, and not refunded value added tax (VAT) on exports of rare earths.
Avalon's view is that the July 14th announcement is a continuation of China's strategy to target 30,000 tonnes as the exports quota for the next five years. However, as pointed out by John Kaiser in his Kaiser Bottom Fish Online (KBFO) commentary on the export quotas published on July 15th, if recent Chinese guidance is accurate on how much production will be shut down this year, then domestic supply in 2012 may only exceed domestic demand by some 6,800 tonnes suggesting potential for a sharp reduction in rare earths available for export next year.
After 2016, when a few select rare earth projects outside China will be in production, there will be no need for the Chinese to restrict exports as they will no longer need to export. China's overall rare earth export strategy has not changed and industry outside China still needs new rare earth production from outside China to meet increasing global demand.
If you have any comments or questions on this article or the rare earths generally, please do not hesitate to contact Avalon directly at ir@avalonraremetals.com.
About Avalon Rare Metals Inc.:
Avalon Rare Metals Inc. (TSX:AVL) (NYSE:AVL) is a mineral exploration and development company focused on rare metals deposits in Canada. Its flagship project, the 100%-owned Nechalacho Deposit, Thor Lake, NWT, is emerging as one of the largest undeveloped rare earth elements resources in the world. Its exceptional enrichment in the more valuable 'heavy' rare earth elements, which are key to enabling advances in green energy technology and other growing high-tech applications, is one of the few potential sources of these critical elements outside of China, currently the source of 95% of world supply. Avalon is well funded, has no debt and its work programs are progressing steadily. Social responsibility and environmental stewardship are corporate cornerstones.
Source:
Avalon Rare Metals Inc.
Contact:
Web: www.avalonraremetals.com
Email: ir@avalonraremetals.com