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Baotou, China’s rare earth capital in the province of Inner Mongolia, last month officially implemented (link in Chinese) a raft of new measures aimed at promoting the “high quality” development of the local rare earth industry.

The emphasis on “high quality” is important here. Though China dominates the global rare earths production, Beijing knows that its rare earth sector has lingering strategic weaknesses. It’s a heavyweight in the up- and midstream sectors of mining and processing, but in the high-tech and lucrative downstream sector it continues to be out-competed by other developed countries. As such, China’s rare earth firms aren’t able to fully maximize profits because they produce relatively few high-end rare earth products.

Rare earths are a group of 17 metals crucial in the production of various electronic products powering the global economy, including electric vehicles, wind turbines, smartphones, and military equipment.

The Baotou government’s new measures (pdf, link in Chinese) are designed to address some of those weaknesses. Plenty of tax incentives and subsidies are being introduced to entice investments in the rare earth industry, including:

  • Direct cash subsidies calculated based on the size and amount invested in a project;
  • Tailor-made subsidies and specific preferential policies for major projects of at least 1 billion yuan  ($154 million) in domestic or foreign investment;
  • Millions of yuan earmarked for rare earth research centers and laboratories
  • Cash rewards, aimed at “upgrading products and extending the industrial chain [downstream],” doled out to firms with a certain amount of annual sales revenue derived from new rare earth products and applications.

China has a rare earth byproducts problem

These subsidies and incentives are aimed at addressing an urgent structural problem in China’s rare earth industry, said Thomas Krümmer, director of Ginger International Trade and Investment, a Singapore-based firm focused on rare earth supply chain management.

Basically, China has accumulated stockpiles of certain individual rare earth elements that are in low demand, and therefore sell at depressed prices. That’s because the ores that are mined for rare earths typically contain almost all 17 of the rare earth elements. But not all rare earth elements are as prized as those few that are used in making rare earth permanent magnets. So miners are left with these less valuable byproducts on their hands that bring poor returns, he explained.

“The demand for individual rare earth elements has always been disproportional to rare earth element production,” said Krümmer. “In the history of rare earths you can see which element was ‘in fashion’ in what period by looking at the price developments. You can also see the overproduced byproducts, being sold at cabbage prices,” he added, echoing a phrase that Chinese media, officials, and industry experts have used to describe dirt-cheap prices (link in Chinese).

For example, look at China’s Bayan Obo mine, located just north of Baotou, which is one of the world’s largest rare earth deposits, belonging to the state-owned Baogang Group. The composition of the deposit, however, is such that more than three-quarters of the rare earth elements are the light rare earths cerium and lanthanum, used in oil refining equipment and catalytic converters in internal combustion engine vehicles. Neodymium and praseodymium, used in permanent magnets, make up a smaller share. But the former end up being “hopelessly overproduced in order to produce enough magnetic materials,” said Krümmer, even though demand for lanthanum and cerium is expected to remain “dismal.”

In March, China’s minister of industry and information technology Xiao Yaqing admitted as much, alluding to the depressed prices of certain rare earths:“Our rare earths did not sell at the ‘rare’ price but sold at the ‘earth’ price…because of competitive bidding, which wasted the precious resource.” Earlier this month, the ministry signaled that it will speed up the roll-out of legislation that’s designed to tighten regulation of the rare earth industry while improving competitiveness (pdf, link in Chinese).

China’s energy transition to the rescue?

The byproducts problem is one that’s being urgently discussed by executives and government officials. At a conference on rare earth supply chains this April, industry experts noted (link in Chinese) that the excess production of lanthanum and cerium poses serious barriers to the overall development of China’s rare earth industry.

One driving cause for the excess byproducts, according to the experts, is that China lacks the advanced technological capacity to carry out deep processing of lanthanum and cerium in the midstream sector, to turn them into products that could fetch better prices. Meanwhile, there’s a relative lack of demand from downstream firms for the processed lanthanum and cerium. Addressing both those weaknesses will help extend the entire rare earth industry chain, and help the midstream and downstream segments reinforce one another.

“The properties and application areas of these elements [lanthanum and cerium] have not been fully explored and are bottlenecks that limit the overall effectiveness of the rare earths as a family of elements,” Cui Lingxiao, director of the Baotou Rare Earth Research Institute, said in an interview in April (link in Chinese).

China’s energy transition may also present opportunities for its rare earth industry. As the country aims to peak carbon emissions by 2030 and to be carbon neutral by 2060, hydrogen is slated to be play a larger role in the overall energy mix. That will in turn require hydrogen storage, for which China is currently developing a rare earth alloy electrode that uses lanthanum and cerium as inputs.

Whether that product will be commercially successful and use up excess rare earth byproducts at scale remains to be seen, given China has been intensively researching uses for these elements for years, Krümmer notes, yet the byproducts problem persists.

“[I]t is absolutely mission-critical to solve the problem of rare earth magnet material byproducts…by developing new high-volume applications,” Krümmer said. “If that fails, the whole new energy supply chain may be at risk of becoming a nonprofit undertaking, in need of perpetual subsidization.”