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Policymakers and officials across China’s industrial minerals complex face an uneasy Chinese New Year break as they assess how best to balance new policy imperatives from Beijing with their own often competing interests.

The historic ‘third plenary’ meeting of China’s top leaders in Beijing last November concluded with a “resolution” pledging to allow the market to play a more “decisive” role in the allocation of resources.

The policy statement committed the government to solving overcapacity issues, both through promoting innovation and relaxing investment access rules for foreign and domestic private capital, fostering greater competition.

However, experts warn that in regards to China’s key rare earths sector, these reforms will take time to filter through to Chinese miners, processors and traders.

“Minerals are considered a natural monopoly industry in China, so we can reasonably expect that the government will retain a certain degree of interest in those industries,” said Simona Gambarini, associate director of research at ETF Securities.

“So far, the government has pledged to separate the government’s regulatory functions from business management and operations to be conducted by the state in the mineral industry. Moreover, a franchise system is planned so that the natural monopoly sectors will be operated by franchisees independent of government agencies, but in compliance with relevant state regulations,” she added.

Exactly how this franchise system will operate in practice has yet to be fleshed out, and for the time being, it is business as usual in the rare earths sector, save one notable exception.

Export quotas

In mid-December, China’s ministry of commerce announced the first round of rare earth export quotas for 2014, in direct contravention of the World Trade Organisation’s (WTO) ruling against Beijing’s quota policy in late October last year.

However, there was a nod towards implementing one of the plenum’s overarching policy goals to reduce environmental degradation, in that Inner Mongolia Baotou HEFA Rare Earth Co. was omitted from the list because of “environmental issues”.

“The market will play a decisive role, but only in so far as the central government is comfortable with the impact on a range of contentious issues: the shift from exports to domestic consumption, reform of the financial sector, environmental remediation, and other[s],” said Jeff Green, president of JA Green and Company, a governmental strategic affairs consultant.

“The rare earths sector touches several of these at once – overcapacity, environmental hazards, and a generally decentralised industry with some very powerful state owned enterprise – reforms are taking place, like the crackdowns on environmental violations and closing some illegal mines. However, these changes surely are neither at the pace nor at the magnitude at which the ‘decisive role in allocation of resources’ mantra would seem to suggest,” he told IM.

Earlier this month, the government unveiled a plan to offer support to six rare earths industry leaders, including Inner Mongolia Baotou Steel Rare Earth Hi-Tech Co.; China Minmetals; aluminium producer Chinalco; Ganzhou Rare Earths Co.; Xiamen Tungsten Co.; and Guangdong Rising Nonferrous Metals Co., to spearhead industry consolidation in their regional power bases.

“Rare earths is a special market in which the Chinese government will continue the tight grip over the sector by accelerating domestic consolidation,” said Beijing-based North Square Blue Oak analyst, Frank Tang.

“Generally speaking, the mining and separation businesses will still be controlled by the government through state-owned enterprises, while downstream applications court more foreign participation due to their technical limitations,” he added.

“China may be willing to accept much more participation of private capital (foreign and domestic) in research and development joint ventures or joint ventures with existing producers for the purposes of expanding and sharing environmental best practices and more efficient utilisation of rare earth resources,” added Jeff Green. “The latter is particularly important because many Chinese magnet manufacturers, for example, are much less efficient than their Japanese and European counterparts.”

That inefficiency has not prevented capacity far outstripping utilisation rates. The Association of China Rare Earth Industry’s secretary general Ma Rongzhang recently told Chinese media that the combined capacity of China’s more than 110 rare earth melting and separating firms is more than double the average global demand for about 120,000 tpa.

Indeed, Tang expected central and local government to issue new capacity targets for specific minerals in the coming months, following up broader guidelines issued in October on curbing overcapacity in production.

As for compliance with the WTO rare earths ruling, Green suggests China might replace export quotas with other controls, including crackdowns on illegally produced rare earths, sold to international markets despite the quota system.

“This interplay of interests, and whether Xi Jinping’s administration can do a better job of pushing through central government policy in the provinces than its predecessors, will be the key factor in determining the success or failure of the plenary policies, as well as Xi’s wider reformist economic goals,” said Green.

One market-based mechanism that might be applied to industrial minerals is being trialled in the aluminum industry; tiered electricity pricing linked to production efficiency.

“This should help reducing the glut in the market that has plagued prices so far,” said ETF’s Gambarini, adding that the real challenge will be bringing local governments in line with Beijing’s policy if broadened to other sectors. Of course, those producers reliant on the state grid would be hardest hit.

Analysts offer mixed views on what the plenary policies mean for domestic industrial minerals demand, though most agree that it is China’s future urbanisation rate that will prove the key factor.

While Gambarini points out that plenum’s $6.4 trillion programme to bring 400m people into cities over the coming 10 years will probably spur demand for industrial metals and raw materials, with an important caveat; “Recent government moves call for slowdown of urbanisation aimed at ensuring adequate provision of public services for new migrants,” explained Tang.

Such slower, more sustainable growth, stoking consumption while winding down investment, is a primary theme of the plenum.

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