Rare earths, known as "industrial vitamins" and the "mother of new materials," hold an irreplaceable strategic position in fields such as new energy, energy conservation, environmental protection, and national defense. Although there are 17 rare earth elements, the one that contributes the most to the smelting and separation industry is praseodymium-neodymium oxide (PrNd oxide), accounting for about 80%, while terbium oxide and dysprosium oxide together account for about 10%. Any rare earth smelting and separation enterprise globally relies primarily on PrNd oxide for its output value and profit.
Recently, the rare earth market has become volatile again, possibly influenced by rumors circulating online about a whitelist for rare earth enterprises and verification of total control quotas: last Friday, the price of PrNd oxide jumped by 24,000 yuan in a single day, and today it jumped again by 29,000 yuan, approaching the 600,000 yuan/ton mark. Superficially, this appears to be a sign of a hot market, but for the entire industry chain, it represents both an opportunity and hidden risks. This article attempts to offer some views on this matter; corrections are welcome for any inaccuracies.
On one hand, history has proven that excessively high prices directly suppress downstream demand. The most typical example is the wind power industry. Rare earth permanent magnet direct-drive technology was once a landmark breakthrough for domestic wind turbine manufacturers. However, as rare earth prices continued to soar, leading companies like Goldwind had to adjust their strategies, shifting towards semi-direct drive and double-fed technologies to reduce their reliance on rare earths. On the other hand, excessively high rare earth prices provide breathing room and development opportunities for the overseas rare earth industry, thereby intensifying international competition and aiding the establishment of overseas rare earth supply chains.
If we examine the rare earth industry within a longer historical context, we find that: besides the advantage of resource endowment, the true international competitive advantage of China's rare earth industry is fundamentally the cost competitiveness achieved after technological breakthroughs. This is both the root reason why we were able to defeat competitors and dominate the international market, and the key to whether we can maintain this advantage in the future.
I. Cost Advantage Established China's International Dominance in Rare Earths
The rise of China's rare earth industry actually started with "cost."
(1) The Exit of the United States: Closing its Domestic Rare Earth Industry in 2002
In the 1980s, when China's rare earth industry was just beginning, the United States was still the absolute hegemon of the global rare earth industry. At that time, the US possessed the world-class rare earth resource, the Mountain Pass mine in California, and mastered the entire industry chain from mining and separation to application, once accounting for over 65% of global rare earth supply. This situation changed completely with the development of rare earth science and technology in China. Under the leadership of esteemed figures in the rare earth field such as Academicians Xu Guangxian, Zhang Guocheng, and Yu Yongfu, China successively broke through key technologies in rare earth beneficiation and separation. These innovations were widely applied in production practice, successfully breaking the long-term monopoly held by the United States and France in rare earth smelting and separation technology. This not only significantly improved the quality of China's rare earth products but also markedly increased production efficiency. Since the 1990s, Chinese enterprises, leveraging unique resource advantages, competitive labor costs, relatively lenient environmental policies, and continuously optimized smelting and separation technologies, have continuously reduced production costs. This series of advantages made it difficult for American companies to compete, ultimately ceding dominance of the global rare earth industry. By 2002, the US finally closed the Mountain Pass mine and exited the rare earth smelting and separation segment. The decline of the US rare earth industry was not due to resource depletion but resulted from losing to China's cost advantage.
(2) The Struggles of Australia's Lynas: Near Bankruptcy in 2016
The power of China's cost advantage can also be seen in the experience of Australia's Lynas. Lynas is the largest rare earth company outside of China, but its separation plant in Malaysia has been plagued by environmental controversies and immense financial pressure. By 2016, Lynas was in severe financial crisis, burdened with debt, and even publicly sought a buyer.
However, precisely in 2017, China initiated domestic crackdowns on illegal activities, stockpiling, and verification of total control quotas in the rare earth sector, leading to strengthened supply-side control and driving the price of PrNd oxide up to 520,000 yuan/ton. This rapid price increase, in turn, gave Lynas a temporary breather, allowing it to sustain operations. Had it not been for this price surge, Lynas might have already disappeared from the global rare earth landscape. With the recent price jumps, it feels like history is repeating itself.
Facts prove that China's cost advantage is not eternal; when prices become too high, it can inadvertently support overseas competitors. Today, Lynas has become the largest overseas competitor to China's rare earth industry.
II. The "Scissors Gap" Between Rare Earth Prices and the Industry Chain
The rare earth industry is a typical "tightly coupled upstream and downstream" industrial chain. Excessively high upstream prices often lead to hindered downstream innovation and even shifts in technological routes.
Taking wind power as an example, rare earth permanent magnet direct-drive technology was dominant between 2008 and 2015, considered an important direction for improving turbine reliability and efficiency. However, if rare earth prices remain high for an extended period, turbine manufacturers are forced to turn to alternatives. Now, Goldwind has significantly increased the proportion of double-fed and semi-direct drive products, indicating that out-of-control upstream prices are forcing downstream players to abandon the rare earth permanent magnet route.
This not only affects domestic demand absorption but also influences the global market's acceptance of rare earth permanent magnets. In other words, imbalances in rare earth prices not only harm downstream enterprises but also shake the overall international competitiveness of China's rare earth industry chain.
III. International Competitive Landscape: Cost Advantage and Policy Games
(1) Gradual Development of Overseas Resources
Over the past decade, the US, Australia, Canada, Vietnam, Greenland, and others have been actively relaunching their rare earth industries. Particularly, the US-led Mountain Pass mine restarted in 2017 with plans to build a supply chain independent of China.
The advancement of these projects often relies on two aspects: firstly, rare earth prices remaining relatively high, ensuring profitability; and secondly, government subsidies and policy support. This indicates that as long as prices are high enough, the overseas rare earth industry can survive and even grow.
(2) China's Cost Advantage Still Exists but is Narrowing
Even today, China still accounts for 70-80% of global rare earth smelting and separation capacity and possesses a complete application industry chain. However, with increasing environmental requirements, rising labor costs, and more internationalized capital markets, our cost advantage is narrowing.
Meanwhile, the international market is consciously supporting non-Chinese rare earth industries. For example, the US and Australia have signed strategic cooperation agreements, and Japan and South Korea are establishing long-term supply relationships with Lynas. This trend of "de-Sinicization" of the supply chain is essentially driven by concerns that China might use rare earth prices or supply as leverage.
IV. The Key to Maintaining the Competitive Advantage of China's Rare Earth Industry
If the victory of China's rare earth industry over the past 30 years relied on "cost competitiveness," then to maintain this advantage in the future, it must "build a synergistic advantage across the entire industry chain based on cost."
(1) Adhere to Supply-Demand Balance to Prevent Excessive Price Fluctuations
Excessively high prices both suppress downstream demand and incentivize overseas competition. Industrial policies that respect market laws should be formulated to help keep market prices within a reasonable range, avoiding a repeat of the 2011 scenario where prices skyrocketed and then plummeted.
(2) Further Reduce Costs Through Technological Innovation
Past cost advantages came more from labor and environmental cost differentials. The implementation of the "Rare Earth Industrial Pollutant Discharge Standards" in 2011 spurred a large number of green environmental technologies. In recent years, industry-wide environmental standards have generally improved, and correspondingly, environmental costs have also increased. In the future, we must rely on technological progress to sustain our advantage. For example:
- Improve smelting and separation efficiency, reducing energy consumption and reagent usage.
- Advance green smelting, reducing environmental management costs.
- Promote material conservation and recycling in application segments like magnetic materials and alloys.
(3) Strengthen Upstream-Downstream Synergy to Form a Domestic Major Cycle Advantage
The value of rare earths lies not only in mineral resources but also in final applications. If upstream and downstream form a positive interaction, for instance through long-term supply contracts, coordinated industrial fund investments, etc., it can avoid the "scissors gap" – where profit maximization at the resource end squeezes the market space of the application end – and enhance competitiveness together.
(4) Create an Internationalized Industrial Layout
Facing international "de-Sinicization," we need to proactively go global. Through investment, joint ventures, and mergers and acquisitions, participate in overseas rare earth resource development and industry chain construction, turning competitors into partners, and incorporating overseas rare earths into our global layout.
V. Conclusion: Cost Advantage is the Foundation, Synergistic Innovation is the Future
Looking back over the past 30 years, the key reason China's rare earth industry transformed from a follower to a global leader lies in the cost advantage achieved after solving key technological problems. The US exit in 2002 and Lynas's financial crisis in 2016 are clear evidence of China's cost advantage.
But today, the situation has subtly changed. Excessively high prices frustrate domestic downstream industries and also provide living space for overseas competitors. If we cannot build a synergistic advantage across the entire industry chain on the basis of cost advantage, we may become passive in future international competition.
International competition in the rare earth industry is essentially about cost, but even more so about systems. Only by ensuring cost advantage while achieving technological progress, upstream-downstream synergy, and global layout can China's rare earth industry truly seize the initiative for the future.
Written in the end: Prices are determined by supply and demand. The jump in PrNd oxide prices indicates tightening supply. Currently, for production enterprises, the worst awkward predicament is that prices have gone up, but they have no goods on hand! China possesses the world's largest proven rare earth resources and the largest global rare earth smelting and separation capacity. Why is there suddenly a supply crunch? The reasons are presumably well understood by everyone. Imagine if imported ore is also brought under the total control plan management in the future, then the market would likely lose its self-adjusting elasticity. When demand grows, prices will inevitably rise. Pursuing profit maximization is the innate nature of enterprises, the internal driving force for their survival and development. From a national strategic perspective, the value of rare earths does not lie in how high the price of rare earth products is sold for, but in how well they are used. A rough estimate of the output value of the rare earth industry chain in 2024, from mines to functional materials like rare earth permanent magnets, is about 200 billion yuan, which is less than the output value of two steel companies, Baotou Steel Group and Ansteel Group. However, the output value of end-terminal industries that indispensable rely on rare earths, such as computer, communication, and consumer electronics (3C) products, new energy vehicles, wind power generation, energy-saving elevators, industrial robots, large-scale integrated circuits, drones, etc., exceeds 20 trillion yuan. Therefore, the formulation of macro policies for the rare earth industry must focus on the synergistic effects of the industry chain, rather than the gains and losses of rare earth price fluctuations.
Disclaimer:
The content described in this article represents only personal views and analysis and does not represent the position of any official institution or specific enterprise. All data and information come from public channels, and every effort has been made to ensure their accuracy and timeliness. However, due to rapid market changes and information updates, the content of this article may contain deviations. The discussion of rare earth market price fluctuations and policy suggestions in this article is intended for reference only and does not constitute investment, decision-making, or market action advice. Readers should bear their own risks when making any decisions based on the content of this article and are advised to further consult relevant professionals.
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