CHINA S GOLD VS. ROMANIA S RARE EARTH ELEMENTS

B&L Business & Leadership Nr. 2 - 2011, pp. 7-15 ISSN 2069-4814 RARE EARTH ELEMENTS CHINA’S „GOLD” VS. ROMANIA’S „RARE EARTH ELEMENTS” Author Oana ...
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Business & Leadership Nr. 2 - 2011, pp. 7-15 ISSN 2069-4814

RARE EARTH ELEMENTS

CHINA’S „GOLD” VS. ROMANIA’S „RARE EARTH ELEMENTS” Author Oana Maria Stnculescu∗ Abstract: When I begin to speak about the rare earths issue I can not ignore to mention the impact that this subject had on me. I never thought that the underlying groups of Mendeleev’s periodic table, the existence of which I didn’t know, could be so important and desired internationally. The equation became complicated when we added the independent variable: China, on which all the rare earth trade depends. So, in my research I tried to emphasize the importance of these “future technological elements” through prices, calculating the market concentration level in America, Canada and Australia through the concentration rate and HerfindahlHirschman index. I have reserved the conclusions to an interesting parallel, and their structure will bring to light some unbelievable, but true information, guaranteed by the specialists from the field. Keywords: market concentration, concentration ratio, Herfindahl-Hirschman Index, royalties, coherent policies

1. Introduction “Avatar”, James Cameron’s movie, made reference to those metals called “unobtainium” which were exploited on a planet, Pandora, inhabited by the Na'vi. These minerals were very expensive (20 million dollars / kilogram) and represented the future. The reality, however, is not far from this scenario. Rare earths are triggering a big interest from all nations, representing the future materials for modern technologies. So, in my attempt to demonstrate the importance of these elements which are the future of technology and one of

∗ Assistant PhD, Faculty of [email protected]

Economics

and

Business

Administration,

Babe-Bolyai

University;

e-mail:

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Oana Maria Stnculescu

China’s strengths, is inevitable an approach of the market by calculating the rare earth indicators, and also the situation of prices of these elements.. In a time when the world’s appetite for rare earth oxides is growing, supply is limited. China, which supplies 97% of these items, reduced exports of rare earths by 50% in the last two years. One of the reasons why China has resorted to this was keeping a large percentage of them in order to produce other high value products such as rare earth metals, alloys and magnets. In addition, illegal mining in southern China has a destructive impact on the environment. As the demand for rare earth oxides exceeded supply, oxide prices and rare earth metals have soared. One of the oldest rare earth, samarium, grew by 1120% in price over the last six months. Sellers have insignificant quantities available for sale and buyers are more concerned with finding stable and secure sources of supply being price sensitive. In response to the price increases, several countries such as Korea, Japan and even China have announced the plan to create strategic stocks of rare earths. 2. The evolution of rare earth prices Rare earths are not exchange traded, so prices are less volatile and are not subject to speculation. Prices are based on off-take contracts. Most rare earths deposits contain 97% light earths (Light Rare Earth Elements). Deposits with a high proportion of heavy rare earths are scarce. Consequently, the heavy rare earths are more valuable. From 1 April 2011, the Chinese government decided to apply a tax rate of 60 yuan per tonne of light rare earths and 30 yuan for the heavy rare earths. China said the heavy rare earths resources are finite and that they are enough for merely another 15 years. In terms of rare earth operation overseas, this is difficult to execute because the beginning of the operation is very long and the expertise is limited in the rest of the world. Global supply and demand balance is not in equilibrium, the demand is much higher than the supply, and this problem becomes more acute given that China announced its refusal to export. It’s good to know that the prices of rare earth have little impact on final product price, and recyclability of products composed of rare earths is limited. In 2006, prices of rare earth were as follows: cerium - $ 40 / kg ($ 40.000 / tonne), lanthanum - $ 30 / kg ($ 30.000 / tonne), ytterbium - $ 400 / kg ($ 400.000 / tonne), yttrium - $ 50 / kg ($ 50.000 / tonne), scandium - $ 70 / kg ($ 70.000 / tonne). In 2003, 85.000 tonnes of rare earths have been delivered worldwide, worth 500 million dollars, which meant that in 2003, a tonne of rare earths costs $ 5.882,35. This year, sales are expected to increase to 125.000 tonnes, worth about $ 2 billion. After some simple calculations, it appears that in 2011 a tonne of rare earths is worth nearly triple, about $ 16.000.

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Informative note: Suppose a multinational company that manufactures wind turbines. A single turbine takes approximately 0.27 tons of rare earths per megawatt. For a 5 MW wind turbine 1.35 tons of rare earths are required. Taking into account the price of a tonne for the year 2011, $ 16.000, it appears that the company is supplying these raw materials that costs 21.600 $ to manufacture only a single 5 MW wind turbines. Below we have a five-year prices evolution for Dysprosium (heavy) and Neodymium (light).

Date Range: August 2004 – August 2009 Source: “Rare Earth Elements and the Green Energy Economy”, Avalon Rare Metals Inc.

From this figure we can see significant price differences between heavy rare earth (Heavy Rare Earth Element), namely Dysprosium and one light (Light Rare Earth Element), Neodymium. If in February 2004, a kilogram of neodymium costs about $ 9, a kilogram of dysprosium costs $ 50. One kilogram of neodymium has come to cost only $ 50 in 2007, when a kilogram of dysprosium worth almost $ 120. In 2010, a kilogram of neodymium costs $ 20 and one of dysprosium costs 142 dollars. Toyota uses for each Prius model one kilogram of neodymium and ten of lanthanum. In September 2010 it manufactured and sold over two million units, i.e. 40 million dollars needed to buy only the necessary amount of neodymium for the production models, and China has provided 2.000 tonnes of neodymium to Japan from the total production. I asked myself the following question: if dysprosium is so rare, resources being relatively limited, why in 2010, its price fell compared with 2008 instead of increasing? And also why Neodymium prices fell from $ 45 per kilogram in 2008 to $ 20 in 2010? Mentioning that these are the prices at which China exported rare earths, given that global demand may not be fully satisfied. I, however, think that there is an

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explanation. China wants, in the near future, to attract more multinational companies on its territory, because they are closer to sources of rare earth, and this is made through the pricing policy. Table 1. The prices of selected rare earths oxides on 22 Nov 2010 were: Rare Earth Oxide Cerium Dysprosium Erbium Europium Gadolinium Lanthanum Neodymium Praseodymium Samarium Terbium Yttrium

Price ($/kg) 59 - 62 284 – 305 84 – 94 585 – 605 43 – 46 55 – 58 79 – 83 71 – 80 33 – 35 595 – 615 53 – 70

Table 2. The prices of selected rare earths metals on 22 Nov 2010 were: Rare Earth Metal Cerium Dysprosium Europium Gadolinium Lanthanum Neodymium Praseodymium Samarium Terbium Yttrium Source: www.metal-pages.com and www.asianmetal.com

Price ($/kg) 43 – 55 372 – 415 710 – 800 53 – 56 42 – 46 97 – 100 84 – 106 44,5 – 53 750 – 792 61 – 63

About lanthanum oxide prices, cerium and neodymium we can say that during 2001 - 2006 they showed insignificant increases, neodymium did not exceed $ 5 per kilogram, in 2007 reached $ 30 per kilogram and in 2010 a kilogram of neodymium costs $ 80. Price evolution of cerium and lanthanum are similar, which is upward since 2010, when one kilogram of cerium costs 59 dollars and one kilogram of lanthanum costs $ 55. Europium, terbium and dysprosium oxide have had fluctuating prices compared with other oxides in the range of analysis from 2001 to 2010. For example, the price of dysprosium oxide has increased since 2005, reaching $ 101 per kilogram in 2008 and about $ 300 in 2010. This is due to the explosion of technologies, especially those green which require a large part of these rare earths. Terbium oxide’s highest price was recorded in 2010 amounting to $ 615 per kilogram. The figure shows the evolution of prices being moderate by the end of this decade and the surge in prices is due to the increasing of global demand and the reducing of Chinese exports. The price surge affects not

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only the rare earths for which there are forecasted supply gaps, but also rare items such as cerium. For 2011, light rare earth prices differ significantly from those of heavy rare earth. Thus, lanthanum oxide used in rechargeable batteries cost $ 95 / kilogram, praseodymium oxide used in magnets costs 155 dollars / kilogram, and the most expensive light rare earth oxide is neodymium oxide, used in lasers, magnets costs 172 dollars / kilogram. On the other hand, europium oxide used in the manufacture of television costs 830 dollars / kilogram, terbium oxide used to manufacture weapons costs 820 dollars / kilogram and oxide dysprosium costs 522 dollars / kilogram. There is a significant price growth compared with 2010. In the pricing of rare earths, China has something to say, because it has the largest amount of these elements in the world. The prices are not outcomes of the market, made on the relationship between supply and demand, and on the equilibrium price we can not talk because there is no equality between the quantity of goods demanded and the quantity of goods offered. Commercial measures shall reflect on the prices of these items, which grow ever more. The impact of rare earths market control by China manifests by an increase in prices of these items internationally, as an explosion of projects in the exploitation of rare earths, by a decrease in consumption in current and future applications, by recycling of elements or finding substitutes for future technologies or, in the bleak scenario considered in particular by the United States, by not using them anymore. 3. The level of rare earths market concentration In the European legislation, but also in the American one, it is considered necessary to measure concentration levels to assess the impact of economic operations analyzed on markets. Rare earth reserves are spread all over the world. In addition to China, which holds 43% of total reserves, the CIS has 19%, U.S. 13% and Australia 5%.1 In the attempt to review the adequacy of the statement related to the monopoly that China holds in this field, we have chosen to calculate two indicators measuring the level market concentration of rare earths in the United States, Australia and Canada, as in these three countries, besides China, there is a pretty intense activity that should not be neglected. Here are the companies from USA, Australia and Canada that operate in the rare earths industry2:

1

2

http://seekingalpha.com/article/254083-rare-earth-mineral-resource-index-triples-in-value-since-china-s-announcement, accessed on 28/04/2011 http://www.techmetalsresearch.com/2011/01/the-bloomberg-rare-earth-mineral-resources-index/,accessed on 28/04/2011

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Table 3. Bloomberg Rare Earth Mineral Resources Index Country

Company

USA USA USA Australia Australia Australia Australia Australia Canada Canada Canada Canada Canada

Molycorp Avalon Rare Metals Rare Element Resources Lynas Arafura Resources Greenland Minerals and Energy Alkane Resources Navigator Resources Quest Rare Minerals Frontier Rare Earths Tasman Metals Great Western Minerals Group Matamec Explorations

Weighting (%) 16.4 11.4 11.2 15.0 10.0 6.7 5.0 2.1 6.3 5.9 4.6 4.2 1.2

Market share in the home country (%) 42.05 29.23 28.72 38.65 25.78 17.26 12.89 5.42 28.37 26.58 20.72 18.92 5.5

Armed with this information, we could calculate the market share of each company on their home country market (column 4). Next, to measure the market concentration, we will calculate the following indicators: a. Concentration Ratio (CR) – „ignores the disersion of market shares of the companies and it is inversely proportional with the number of companies on the market, still not having relevance regarding the level of symmetry between those companies.” 3

CR = 1/N, where N is the number of companies active on the market Ö CR SUA = 0.33 Ö CR Australia = 0.2 Ö CR Canada = 0.2

b.

Herfindahl-Hirschman Index (HHI) - „it is calculated by squaring the market share of each firm competing in the market.” HHI = (Si)²

The HHI number can range in the interval (0, 10.000]. The closer a market is to being a monopoly, the highr the market’s concentration and the lower is the competition on the market . If HHI were below 1.000 then the market has a reduced level of concentration; if HHI were in the interval 1.000-1.800 then the market it’s consider to have a medium level of concentration, and if it exceeds 1.800 the market is highly concentrated and it could be a concentration problem. Using the data from the table, we will obtain: 3

Consiliul Concurenei, Profil:Concurena, Nr.4/2009

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HHI USA = 42.05² + 29.23² + 28.72² = 3447.4338 => The market is highly concentrated HHI Australia = 38.65² + 25.78² + 17.89² + 12.89² + 5.42² = 2651.867 => The market is highly concentrated HHI Canada = 28.37² + 26.58² + 20.72² + 18.92² + 5.5² = 2328.89 => The market is highly concentrated So, these markets are very close to the monopoly state, as we achieved a very high level of concentration and a low competition. In China, we cannot talk about the existence of a competitive market, given that the deposists are exploited and managed by Baotou Steel Rare Earth, a company with public capital. 4. Conclusions When writing this paper I also had Romania in my mind. I thought about the lessons which our country could learn from China’s example. Protecting and exploiting its own resources can only bring wining to the country that properly does these things. In this context, I can not criticize the mismanagement of gold resource in Transylvania, the region with the largest untapped gold reserves and one of the top three globally. They say that behind the exploitation of natural resources in the Apuseni Mountains (the RMP) there is a hidden stake. Rosia Montana Gold Corporation (RMGC) argues that gold and silver are the main subject of exploitation and not “the future substances” existing in small quantities. From the research I’ve done, I found an interesting thing. The element with the atomic number 52 in Mendeleev’s table is tellurium, which is a chemical element, usually found in combination with other elements such as gold. It isn’t classified as being a part of the lanthanides, but is very rarely used in “green” technologies, especially in the manufacture of solar panels and wind turbines. Tellurium, because of its rarity, is very expensive and the process of separation of tellurium from other metals such as gold is harmful to the environment. First, Robert Bryce said in his book that I quoted that the only country that has Tellurium mines is China. However, this statement is false. Tellurium was discovered in 1782 in Transylvania by the Austrian researcher Franz-Joseph Muller von Reichenstein. To my knowledge, the most famous gold mine in Transylvania is at Rosia Montana, a very important strategic objective for the Gold Corporation company. Whether it proves the existence of rare elements in the mines of Transylvania, the state lost its opportunity to benefit from them, the only one which will have gains in this situation would still be Gold Corporation, the state must be content with the insignificant taxes that will receive. After my discussions with Mr. Aurel Sîntimbrean, former chief engineer at Rosia Montana, and based on the report prepared by the Academy of Economic Studies for “Saving Rosia Montana” I found that gold was present in a much

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lower concentration compared with other rare metals that compose the Rosia Montana deposit. The situation is as follows: Bismuth

20

Arsenic

5000

Gallium

300

Cobalt

30

Chromium

50

Nickel

30

Titanium

1000

Vanadium

2500

Germanium

20

Silver

9

Gold

1,5 0

1000

2000

3000

4000

5000

6000

Average concentration per tonne of ore

From this chart we see that gold is not the predominant component, but rare metals such as arsenic used in laser technology, vanadium, used in nuclear applications, titanium used in the construction of cosmic rocket, in aeronautics and last but not least, gallium, an element of which only 30 tonnes are produced per year worldwide. Worth mentioning is that Gold Corporation shall pay the mining royalties of 4%. Is this fee charged for all components of the ore or just for gold? Take the example of China. The government decided to increase the amount of the fee 10 times last year, so the light rare earths fee reached $ 9 per tonne, while that for heavy rare earths has reached $ 4.5 per tonne. If we take into account the production for 2010, i.e. 120.000 tonnes, in the worst case scenario the state would gain 16.2 million yuan a year in royalties alone. Romania’s benefits brought by the Rosia Montana project are much lower than those of the company. Thus, Romania has the most optimistic scenario (1.000 USD / ounce), benefits in the form of state budget revenues (tax and the profit tax royalties applied to RMGC) worth 863 million dollars over the life of the mine, or 40

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million dollars a year. With the benefits that this project brings Romania will not be richer, but future generations will certainly be poorer by resource exhaustion. I considered this a relevant parallel, as Romania is lagging behind in the “rational and consistent policies”, China being an example of good organization and management of resources that will be the future of technology. Bibliography 1. 2. 3.

4. 5. 6. 7. 8.

9.

Bryce, Robert (2010), Power Hungry : the myths of „green” energy and the real fuels of the future, PublicAffairs Publisher, New York Competition Council, Profil:Concurena, Nr.4/2009 Emilian M. Dobrescu, Economia pmânturilor rare. Prezentul i viitorul unei noi ramuri a tiinelor economice, Paper presented in AFER Summer School, Oradea, 8 septembrie 2010 Roca, Ion (2010), Adevrul despre proiectul Roia Montan, Raportul comisiei Grupului pentru Salvarea Roiei Montane din Academia de Studii Economice, Bucureti, 2010 Sîntimbrean, Aurel, Aurul i argintul Roiei Montane, Altip Publisher, Alba Iulia, 2009 “Rare Earth Elements and the Green Energy Economy”, Avalon Rare Metals Inc. (http://avalonraremetals.com/_resources/REE_101_web.2.pdf) “Rare Earths: Facing New Challenges in the New Decade”, de Dudley J Kingsnorth (Industrial Minerals Company of Australia) “Meeting Demand in 2014: The Critical Issues”, Dudley J Kingsnorth (Industrial Minerals Company of Australia), 5th International Rare Earths Conference, Hong Kong, November 2009 http://www.techmetalsresearch.com/2011/01/the-bloomberg-rare-earth-mineralresources-index/

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