It has been reported in China Daily that recommendations have been made to the Chinese government to scrap the export quota system. This recommendation may or may not be taken up, but it is worthy of consideration in it’s impact should that arise. Let’s look at why the export quota system was introduced. Primarily to regulate the export of rare earths. Not control, not restrict, not limit, but to regulate; the use of the system came later. This is a prime, fast acting, reactive approach to influencing the dynamics of a system. Tackle the output. What is then done within a regulated system is open for conjecture. History has shown that the quota system was then used to control and restrict, progressively stifling ROW (rest-of-the-world) growth in value-add opportunities. It also gave them time to implement more effective proactive controls which I will talk about later. So where are we today? The quota of rare earths has not been utilised for the last twelve months. Why? Because of world economics. However, the Chinese can claim that the quota is not restricting trade since quota has not been utilised. So dropping the quota system now should have little impact on volume; today! But what happens as the world economies pick up? Again, look back over the last few years at the other measures that China has brought in. Shut down environmentally poor operations, tackled smuggling head on, consolidated mines and processing plants, and, introduced production licensing. All very proactive ways of influencing the dynamics of a system and much more effective. So the inputs to the system are well regulated. With such input regulation, there is no need for output regulation, ie export volume, so the quota system could be scrapped with little logical effect in the short term. With significant international political success however. But there is an issue to be considered in the medium term.
With the export quota removed and production volumes controlled, can any additional material be exported? Obviously, none of the current production. But what of previous production that remains unsold? What of the stockpiles of cerium and lanthanum that have amassed in China while they have been preferentially targeting neodymium (and HREO) output for the more lucrative magnets markets? Unless carefully released, such dumping of cerium and lanthanum will have major negative impact on the prices for those two rare earths. Warning: this is the same dumping that occurred at the end of 2010 and early 2011 that many commentators saw as the end of the rare earth boom. This is a cerium and lanthanum issue only and can only last whilst those stockpiles exist. There are no fundamentals to support the thought that significant rare earths stockpiles of other than cerium and lanthanum exist.
What does removing the quota system mean in the long term? Should it happen, it would mean that the Chinese government is sufficiently confident in it’s proactive controls, that it no longer needs this cumbersome and only partially effective, reactive control. This is a massive show of confidence in their ability to control raw material input to a system. A system that involves the world’s needs for all rare earths. Another significant warning sign to the ROW.