There is no country more important to the rare earth metals industry than China. It’s the world’s top producer and consumer – at 90% and 70%, respectively.

However, its rare earth industry recently received an unfavorable decision by the World Trade Organization. The WTO ruled that China had used export restrictions on rare earths to control key markets, push prices higher, and force the global industry to move operations to China.

This led directly to a Chinese government decision to undertake dramatic changes in its domestic rare earths industry.

Changes and Consolidation

First of all, China is removing export taxes on rare earths. Taxes were levied at a 15% to 20% rate.

This will force Chinese rare earth producers to raise prices toward levels outside China.

But the real major change occurring in the Chinese industry is that the government’s focus is shifting from controlling exports to controlling production.

In simple terms, that means China’s government is forcing consolidation in the industry. Many of the smaller, unproductive operations (mines, recycling operations, processors) will be shuttered.

This step will help solve the massive overcapacity in China’s industry. For example, Chinese government data shows that utilization rates in the smelting and separation segment stood between 25% and 35% in the first half of this year.

The remaining rare earth operations will be consolidated mainly into six national rare earth champions – the most interesting of which areInner Mongolia Baotou Iron and Steel Group (600111.SS) and Aluminum Corporation of China (ACH), which is better known as Chinalco.

Rare Earth Investments

Both companies have invested a good deal of money into downstream facilities. Purchasers of raw material that produce downstream rare earth products are eligible for a 16% value-added-tax rebate.

On the day it was announced that Chinalco was among the selected few, its stock in Shanghai jumped by the daily limit of 10% – hitting a nine-month high. Chinalco is heavily involved in rare earths through its subsidiary, Rare Earth Co., Ltd.

Another surprising beneficiary of China’s new-look rare earth policies is Molycorp (MCP). It owns three downstream rare earth plants in China. It got those through its $1.3-billion purchase of Neo Material Technologies in 2012.

The Future for Rare Earths

Molycorp, Chinalco, and others involved in rare earths should benefit from this much-needed consolidation in the Chinese industry.

First of all, Beijing’s output control measures should regulate production and help boost prices.

Also boosting prices will be the Chinese government’s purchase of over 10,000 metric tons of rare earths metal, which is already under way.

The Chinese government, paying much more than the prevailing price, is stockpiling these strategic metals for future use by its increasingly sophisticated industry.

These steps by the government have led to rising prices for rare earths in China. That is likely the first step in the bottoming process for the entire rare earths industry around the globe.