china rare earth quarterly - shanghai metals market

HighlightsMarket Outlook: Rare earth prices in 1Q 2013 should remain steady. End-user industries are expected to improve due to alleviating international risks, stabilizing macroeconomic situations and improving major industries. Besides, Inner Mongolia Baotou Steel Rare-Earth (Group) Hi-Tech Company has completed integration in the rare earth industry in Inner Mongolia, and consolidation will become a focus of the industry in future. But rare earth producers overseas will negatively impact domestic producers after coming online.

Market movements: Inner Mongolia Baotou Steel Rare-Earth (Group) Hi-Tech Company and China Minmetals Rare Earth bought rare earth products fi rst with high premiums in 4Q 2012, boosting market sentiment and causing rare earth prices to rise across the board. This triggered cargo holder expectations that China would build rare earth reserves. But with the waning expectations and sluggish demand, rare earth prices slid again.

Supply and demand:

Following Baotou Steel Rare-Earth, production was suspended across the industry, and cargo holders were unwilling to sell goods. This caused market supply to shrink sharply, but stockpiles remained large. Due to low orders and large raw material inventories, demand from deep-processors was sluggish, with severe supply surplus in the industry.

Macroeconomic situations: Domestic manufacturing continued to improve, and China’s GDP is expected to hit a high level, while large numbers of projects approved by the National Development & Reform Commission (NDRC) will commence. Further overseas, US fiscal cliff problem was resolved, but market is still concerned by the debt ceiling issue. European debt crisis remains unresolved. But overall macroeconomic situations in 2013 will be better than 2012.

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Table of Contents Market Outlook .......................................P1Market Movements & Analysis ..............P2Exports Analysis...................................................P6Business Conditions at

Separators and Smelters .............................P11Business Conditions at

Deep-Processors ....................................P12End-User Market ...................................P14Major Events & News ...........................P17Macroeconomic Situations &

Related Markets .....................................P20Appendix ...............................................P23

China Rare Earth QuarterlyJan. 24, 2013｜4Q Edition｜No.8｜Published by SMM｜http:// en.smm.cn｜25 Pages

NEW

China Rare Earth QuarterlyJan. 24, 4Q Edition, 2013

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Copy Right © SMM Information & Technology Co., Ltd.

Market Outlook

1. Rare Earth Product Prices Expected to Remain Steady 1Q 2013 Business conditions in the rare earth industry were severe in 2012, and it is unsure whether the industry will turn around in 2013. End-user demand for rare earth was weak due to slow global economic recovery, which hampered rare earth suppliers moving goods. Besides, given continuously sliding rare earth prices throughout 2012, many rare earth enterprises were holding goods due to high raw material costs.

Demand from end-user market shrank noticeably at the end of 2012. As a result, large rare earth producers such as Inner Mongolia Baotou Steel Rare-Earth suspended production, and SMEs also followed suit, with transactions mainly made among traders.

Demand from deep-processors has yet to improve as they replenished stocks modestly so far. The enterprises halting production will prolong suspension due to transportation interruption and the upcoming 2013 Chinese New Year holiday. Most traders exit the market due to pessimism.

As such, soft demand, cargo holders’ wait-and-see attitude and muted transactions will remain until early March 2013, during which period rare earth prices will hardly fl uctuate widely. As business conditions at domestic and oversea rare earth users will improve in March, rare earth prices will rise slightly.

2. Focuses of Markets 1) End-user market expected to improve. Demand for rare earth was extremely weak throughout 2012. That is because US fi scal cliff issue, European debt crisis and a dispute between China and Japan led to low demand for rare earth end products and caused orders at deep-processors to decrease. But as end-user market is expected to improve in response to the resolving of US fiscal cliff problem, easing European debt crisis, improving relationship between China and Japan and positive macroeconomic situations, rare earth prices should rise.

2) Rare earth industry consolidation. Inner Mongolia Baotou Steel Rare-Earth signed integration and restructuring framework contracts with 12 rare earth separators and smelters in Inner Mongolia in late December 2012. So far, Inner Mongolia Baotou Steel Rare-Earth has taken all scale-effi ciency rare earth enterprises under control. Consolidation in the rare earth industry in Inner Mongolia has made substantive strides, and will be a demonstration to rare earth consolidation in south China. Rare earth consolidation in south China had been stagnant before Inner Mongolia Baotou Steel Rare-Earth completed rare earth integration. With the completion of rare earth integration by Inner Mongolia Baotou Steel Rare-Earth, the integration will be implemented in south China. In this context, rare earth supply will decrease, and will give support to rare earth prices.

3) Rare earth supply overseas. Rare earth plants overseas have just been constructed, and output will not contribute signifi cantly to domestic supply. But some rare earth producers overseas have large capacity, and will be able to largely meet oversea markets if they produce massively this year, which will curb domestic rare earth exports. Domestic rare earth surplus will exacerbate by then, and will weigh down rare earth prices.


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Table 1: Market Prices of Main Rare Earths Products

Category Specifi cation Unit 15/Jan/13Average Price

Dec. Nov. Oct.Rare earth carbonate REO 42.0-45.0% RMB/mt 34,000 35,667 36,045 42,111

Lanthanum oxide La2O3/TREO 99.5-99.9% RMB/mt 50,500 54,071 55,932 57,861

Cerium oxide CeO2/TREO 99.5-99.9% RMB/mt 50,000 52,857 54,955 56,778

Didymium oxide (Nd2O3+Pr6O11)/TREO≥75.0% RMB/mt 295,000 335,238 341,364 296,111

Europium oxide Eu2O3/TREO 99.95-99.99% RMB/kg 6,050 6,312 5,898 5,792

Cerium Misch Metal Ce/TREM≥65.0% TREM≥98.5% RMB/mt 76,000 83,286 90,318 91,306

Praseodymium-neodymium alloy

Pr/TREM 20-25% Nd/TREM 75-80% TREM≥98.5% RMB/mt 392,500 436,071 433,864 384,583

Dysprosium-iron alloy Dy80% RMB/mt 2,150,000 2,614,286 2,721,591 2,963,889 Source: SMM

Market Movements & Analysis

Rare earth prices rose initially in early 4Q 2012, but fell back to previous levels by the year’s end.

Inner Mongolia Baotou Steel Rare-Earth announced in late October it would halt production at its bakers, smelters and separators which use its self-owned rare earth ore and Quannan Baotou Steel Jinghuan Rare Earth and Xinfeng Xinli Rare Earths which use rare earth ore from south China to push the steady and healthy development of the rare earth market and help stabilize rare earth product prices. Besides, it will suspend raw material supply to related bakers, smelters and separators. China Minmetals Rare Earth and Chalco Rare Earth also announced production suspension, and caused the industry to halt production across the board. Some independent SMEs maintained normal production, but also planned to suspend production due to continuously falling rare earth prices, weakening demand and severe business conditions.

In November, Inner Mongolia Baotou Steel Rare-Earth and China Minmetals Rare Earth announced on their websites they would buy rare earth products with high premiums, so some cargo holders depleted rare earth inventories to gain large profi ts. But those enterprises only paid half for the purchase, and will pay off the remainder after half a year. That caused cargo holder supplying interest to decrease. Rare earth purchase by Inner Mongolia Baotou Steel Rare-Earth and China Minmetals Rare Earth was implemented smoothly, and rare earth traded prices also edged up. Chalco Rare Earth and China Nonferrous Metal Rare Earth also began to purchase rare earth but goods received turned out limited. Several large enterprises all raised procurement prices, with premiums reaching 20%, but were still unable to receive favorable goods. Rare earth prices were supported that time and remained steady due to expectations that China would purchase rare earth reserves (cargo holders believed enterprises buying rare earth products with high prices signaled China would buy rare earth reserves) and rumors of rare earth reserve purchase (most cargo holders had received anonymous information that China would buy rare earth reserves).

News that China would buy rare earth reserves had not been confi rmed until late December, while it was reported that the rare earth purchase plan would be postponed due to the opposition of some experts, and this depressed market confi dence. Besides, as demand from deep-processors did not improve, and since rare earth products prices also dropped, rare earth prices began to slide due to deep-processors pulling down prices.

Deep-processors rarely purchase goods due to shrinking orders. Separators seldom sell goods due to high costs and unacceptable prices, maintaining quotes fi rm. Metal producers also maintained prices fi rm due to low availability of cheap rare earth oxides raw materials. Transactions were muted, but rare earth prices remained steady.

Rare earth carbonate transactions muted. Rare earth carbonate prices fl uctuated along with other rare earth products in 4Q. Owning to high raw material inventory prices at separators, they maintained product prices high so they were unable to move goods. Besides, with sluggish market demand, producers could not deplete product inventories or raw materials. As such, transactions of rare earth carbonate were muted as separators only purchased lower-priced rare earth carbonate to reduce costs.

By December 30, domestic rare earth carbonate price was RMB 34,000/mt, down 25.27% from RMB 45,500/mt on September 30.


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Unit: RMB 10,000/mt

33.5

44.5

55.5

66.5

77.5

8

12/01

12/04

12/07

12/10

13/01

Rare earth carbonate

Figure 1: Price Trend of Rare Earth Carbonate

Source:SMM

Unit: RMB 10,000/mt

468

10121416

12/0112/04

12/0712/10

13/01

Lanthanum oxide Cerium misch metal

Figure 2: Price Trends of Lanthanum Oxide and Cerium Misch Metal

Source:SMM

Lanthanum products prices fell. Affected by the sluggish battery industry, demand for hydrogen storage power was weak. In this context, cerium misch metal was unsellable, with prices sliding. Lanthanum oxide prices were also dragged down by cerium misch metal prices.

By December 30, mainstream traded prices of lanthanum oxide were RMB 50,500/mt, down 15.83% from RMB 60,000/mt on September 30; mainstream traded prices of cerium misch metal were RMB 77,500/mt, down 26.19% from RMB 105,000/mt on September 30.

Cerium oxide prices also dropped. Cerium oxide prices moved similarly to lanthanum product prices. Demand for cerium oxide was weak as demand for both low-end and high-end polishing powder was sluggish, with prices sliding slightly.

By December 30, mainstream traded prices of cerium oxide were RMB 50,000/mt, down 16.67% from RMB 60,000/mt on September 30.


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Unit: RMB 10,000/mt

4

6

8

10

12

14

12/0112/04

12/0712/10

13/01

Cerium oxide

Figure 3: Price Trend of Cerium Oxide

Source:SMM

Unit: RMB 10,000/mt

25303540455055606570

12/0112/04

12/0712/10

13/01

Didymium oxide Praseodymium-neodymium alloy

Figure 4: Price Trends of Didymium Oxide and Praseodymium-Neodymium Alloy

Source:SMM

Unit: RMB/kg

252025402560258025

10025120251402516025

12/0112/04

12/0712/10

13/01

Europium oxide Terbium oxide

Figure 5: Price Trends of Europium Oxide and Terbium Oxide

Source:SMM

Praseodymium-neodymium product prices fl uctuated widely. Praseodymium-neodymium produce prices rose sharply due to Inner Mongolia Baotou Steel Rare-Earth purchasing rare earth reserves, but also dropped precipitously. Prices at Nd-Fe-B producers were steady in early 4Q, but as orders contracted at the end of the quarter, prices lost support.

By December 30, mainstream traded prices of didymium were RMB 285,000/mt, down 17.39% from RMB 345,000/mt on September 30. Mainstream traded prices of praseodymium-neodymium alloy were RMB 387,500/mt, down 13.41% from RMB 447,500/mt on September 30.

Transactions of europium oxide and terbium oxide were quiet. Demand for fl uorescent powder was weak, so europium oxide and terbium oxide was extremely unpopular.

By December 30, mainstream traded prices of europium oxide were RMB 6,050/kg, down 16.55% from RMB 7,250/kg on September 30. Mainstream traded prices of terbium oxide were RMB 4,450/kg, down 13.59% from RMB 5,150/kg on September 30.


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Unit: RMB 10,000/mt

200300400500600700800

12/0112/04

12/0712/10

13/01

Dysprosium oxide Dysprosium-iron alloy

Figure 6: Price Trends of Dysprosium Oxide and Dysprosium-Iron Alloy

Source:SMM

1012141618202224

12/0112/04

12/0712/10

13/01

Unit: RMB 10,000/mt Unit: RMB 10,000/mt

30354045505560657075

Gadolinium oxide Yttrium oxidePraseodymium oxide (RHS) Erbium oxide (RHS)

Figure 7: Price Trends of Other Rare Earth Products

Source:SMM

Dysprosium product prices dropped sharply. In response to high dysprosium product prices, Nd-Fe-B producers reduced dysprosium utilization in their products, causing its prices to slip.

By December 30, mainstream traded prices of dysprosium oxide were RMB 2,450/kg, down 28.99% from RMB 3,450/kg on September 30. Mainstream traded prices of dysprosium-iron alloy were RMB 2.35 million/mt, down 35.62% from RMB 3.65 million/mt on September 30.

Prices for other products moved steadily. Gadolinium oxide price movements were similar to those of praseodymium-neodymium product prices, affected by the Nd-Fe-B industry; transactions of yttrium oxide were muted due to suffi cient supply and low demand for fl uorescent powder, with prices steady. Prices for praseodymium oxide and erbium oxide found support from glass and ceramic industry.


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Exports Analysis1. China Rare Earth Exports Shrink Slightly in 4Q 2012According to China Customs, China exported 13,014 mt of rare earth products during the fi rst eleven months of 2012, down 3.1% YoY, and accounting for 41.99% of total export quotas for the full year of 2012. China’s are earth exports in October and November were substantially lower than those in September, but down only marginally from the average level in 3Q.

Japan’s rare earth deep processing enterprises and end-users ramped up purchases of rare earth from China for fear that China’s policies regarding rare earth would change as tensions between the two countries escalated in late 3Q. Panic buying diminished as Sino-Japanese tensions eased somewhat later. However, excess purchases earlier curtailed demand from Japanese buyers at the end of 2012, causing China’s rare earth exports to shrink in 4Q.

So far, China Customs has not yet released the breakdown data of rare earth exports in December. Market feedback shows that domestic rare earth producers will suspend production in early 2013 due to the upcoming Chinese New Year and transportation problems. Therefore, overseas producers need to replenish stocks in advance in preparation for possible raw material shortage. SMM thus anticipates that China’s rare earth exports will rebound remarkably in December 2012.

2. Analysis of China Major Rare Earth Products Exports1) Rare Earth Smelting and Separation ProductsAccording to China Customs, China’s exports of rare earth smelting and separating products, rare earth permanent magnets and nickel-hydrogen batteries during January-November 2012 are shown in the table below:

Table 2: Export Statistics of Major Chinese Rare Earth Products

Product 01/Nov/12 01/Oct/12 3Q 2012 1H 2012

Quantity/mt

Value/ USD 10,000

Quantity/mt

Value/ USD 10,000

Quantity/mt

Value/ USD 10,000

Quantity/mt

Value/ USD 10,000

Rare earth metals 327 1,740 386 1,558 803 3,976 828 9,676

Single rare earth oxides 528 1,902 626 3,022 1,321 7,502 2,044 25,031

Single rare earth salts 548 854 300 530 2,387 5,326 1,490 5,488

Rare earth salts 559 932 332 709 2,409 5,420 1,521 5,746

Rare earth pyrophoric alloy 36 120 31 97 101 217 362 1,094

Rare earth permanent magnet 1,819 15,767 1,737 15,756 6,624 63,446 12,717 142,762

Nickel-hydrogen batteries(10,000 units) 5,015 4,768 5,482 4,995 17,860 16,874 34,275 32,953

Source: China Customs

Exports of rare earth metals, rare earth permanent magnets, rare earth pyrophoric alloy and nickel-hydrogen batteries all contracted during October and November of 2012. Exports of rare earth metals were little changed in October, but fell slightly in November.

Exports of rare earth salts were down a staggering 51% in October from September, but rose as much as 68% MoM in November.

As is shown in the table, prices of all rare earth products were down during October and November except prices of medium and heavy rare earth, which were relatively firm. The export price of terbium oxide dropped from USD 1,900,000/mt in October to USD 1,109,040/mt in November, down 41.63%. In contrast, the export price of europium oxide rose to USD 2,112,400/mt in November from USD 1,700,000/mt in October, an increase of 24.26%.


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Table 3: Export Prices of Single Rare Earth Oxides (Part)

Product Average Price

01/Nov/12 01/Oct/12 3Q 2012 2Q 2012 1Q 2012 2011Cerium oxide 20,941 26,966 30,935 49,937 46,818 214,586

Lanthanum oxide 26,436 30,741 29,826 38,708 99,077 211,499

Neodymium oxide 91,317 96,072 105,911 138,065 210,024 491,508

Yttrium oxide 72,070 78,408 105,565 139,641 118,355 270,302

Europium oxide 2,112,400 1,700,000 2,184,492 2,687,354 4,553,858 5,681,731

Dysprosium oxide 938,036 1,105,491 1,273,376 1,796,875 2,193,511 3,111,428

Terbium oxide 1,109,040 1,900,000 1,534,558 1,618,426 2,654,669 4,061,002

Praseodymium oxide 88,414 92,337 85,578 104,368 171,725 --

Other rare earth oxides 47,456 52,335 76,171 209,721 310,627 400,742 Source:China Customs

Unit: USD/mt

2) Permanent Magnets and Nickel-Hydrogen BatteriesChina exported 3,556 mt of rare earth permanent magnets in October and November 2012, with export value at USD 315.23 million.

China exported 1,737 mt of rare earth permanent magnets in October, down 23.96% MoM, with export value at USD 157.56 million, down 27.14% MoM. The average export price was USD 90,700/mt, down 4.18% MoM. Exports of rare earth permanent magnets hit 1,819 in November, up 4.69% MoM, with export value at USD 157.67 million, basically fl at from last month. The average export prices were USD 86,700/mt, down 4.41% MoM.

China exported 104.98 million units of nickel-hydrogen batteries during October-November 2012, with export value at USD 97.63 million and the average export price at USD 0.93/unit.

Nickel-hydrogen batteries exports were 54.82 million units in October, down 16.82% MoM, with export value at USD 49.95 million, down 17.79% MoM. The average export price declined 1.16% MoM to USD 0.91/unit. Nickel-hydrogen batteries exports reached 50.15 million units in November, down 8.52% MoM, with export value at USD 47.68 million, down 4.54% MoM. The average export price was USD 0.95/unit, up 4.34% MoM.

Table 4: Exports of Rare Earth Permanent Magnets and Nickel-Hydrogen Batteries


Quantity/mt

Value/ USD 10,000

Quantity/mt

Value/ USD 10,000

Quantity/mt

Value/ USD 10,000

Quantity/mt

Value/ USD 10,000

Rare earth permanent magnets 1,819 15,767 1,737 15,756 6,624 63,446 12,717 142,762

Nickel-hydrogen batteries (10,000 units) 5,015 4,768 5,482 4,995 17,860 16,874 34,275 32,953

3) Single Rare Earth SaltsChina’s single rare earth salts exports rebounded in November following a sharp decline in October 2012, but still fell short of September levels.

China exported 299.8 mt of single rare earth salts in October, with export value hitting USD 5.3 million. Exports totaled 547.9 mt in November, with export value at USD 8.54 million.


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Table 5: Export Statistics of Single Rare Earth Salts


Quantity/mt

Value/ USD 10,000

Quantity/mt

Value/ USD 10,000

Quantity/mt

Value/ USD 10,000

Quantity/mt

Value/ USD 10,000

Lanthanum carbonate 92.1 84.2 108.0 88.2 2.0 4.0 283.2 429.1

Cerium carbonate 368.6 571.4 141.2 238.2 2,144.7 4,709.2 1,038.1 3,915.0

Neodymium carbonate -- -- 0.3 1.6 -- -- 0.2 1.0

Yttrium carbonate -- -- -- -- -- -- -- --

Cerium hydroxide 0.9 3.2 -- -- 57.0 101.4 49.0 184.7

Other cerium compounds 2.6 18.7 21.5 68.3 73.6 255.9 31.7 128.6

Lanthanum fl uoride 11.0 17.8 -- -- 14.0 31.9 8.8 20.5

Neodymium fl uoride -- -- -- -- 2.0 17.0 0.0 0.0

Dysprosium fl uoride 1.0 63.2 1.0 63.2 -- -- 6.0 538.9

Lanthanum chloride 16.8 9.3 17.0 10.2 -- -- -- --

Praseodymium chloride -- -- -- -- 0.1 0.1 -- --

Neodymium chloride -- -- -- -- 0.1 0.1 -- --

Yttrium chloride -- -- -- -- 0.1 0.1 -- --

Other lanthanum compounds 55.0 86.2 10.0 27.0 93.2 199.3 73.0 249.0

Other neodymium compounds -- -- -- -- 0.2 3.0 -- --

Other terbium compounds -- -- 0.8 33.5 -- -- -- --

Other yttrium compounds -- -- -- -- 0.1 3.8 0.5 21.2 Source: China Customs

4) Other Rare Earth SaltsChina exported 32.5 mt of other rare earth salts in October 2012, with export value at USD 1.78 million. Exports reached 10.8 mt in November, with export value at 784,000. Exports of other rare earth fl uorides surged 95.45% MoM in October.

Table 6: Export Statistics of Other Rare Earth Salts


Quantity/mt

Value/ USD 10,000

Quantity/mt

Value/ USD 10,000

Quantity/mt

Value/ USD 10,000

Quantity/mt

Value/ USD 10,000

Other rare earth fl uorides 9.5 31.8 21.5 51.1 21.0 94.1 26.9 211.8

Other rare earth chlorides -- -- 0.0 0.2 1.0 0.5 -- --

Other rare earth carbonates -- -- 0.8 9.7 -- -- 3.6 42.6

Other rare earth salts 1.3 46.5 10.2 117.4 -- -- 0.1 3.2 Source: China Customs

5) Rare Earth MetalsChina’s rare earth metals exports have been stable after picking up in September. Exports amounted to 713 mt during October and November 2012, with export value at USD 32.98 million.

China’s rare earth metals exports were essentially unchanged in October from September at 386 mt, with export value at USD 15.58 million, up 3.80% MoM. Exports slid 15.37% MoM to 327 in November, but export value climbed 11.68% MoM to USD 17.40 million.


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Table 7: Export Statistics of Rare Earth Metals


Quantity/mt

Value/ USD 10,000

Quantity/mt

Value/ USD 10,000

Quantity/mt

Value/ USD 10,000

Quantity/mt

Value/ USD 10,000

Neodymium metal 24.9 258.9 32.5 357.4 39.6 533.4 152.2 2,965.5

Dysprosium metal 2.1 245.0 0.1 9.6 2.1 349.6 14.5 2,719.6

Lanthanum metal 131.6 363.8 192.1 611.3 593.0 2,198.2 451.4 2,291.5

Cerium metal 30.9 104.8 34.0 137.4 29.5 121.7 35.0 196.7

Praseodymium metal 4.3 43.3 0.0 0.0 8.1 103.4 13.3 209.2

Terbium metal 0.5 57.7 0.1 13.0 1.1 188.0 0.5 97.0

Yttrium metal 1.8 13.2 0.4 5.0 2.6 39.2 4.1 64.2

Other rare earth metals 21.6 102.7 3.7 30.8 4.1 51.0 31.4 290.3

Battery grade misch metal 60.0 169.3 40.0 151.5 30.0 117.2 -- --

Other misch metals 49.0 381.4 83.0 242.2 92.8 274.3 125.6 841.9 Source: China Customs

6) Rare Earth FlintsChina exported 66.7 mt of rare earth fl ints during October and November 2012, with export value hitting USD 2.18 million. Exports of fi nished fl ints were 10.9 mt in October (export value at USD 111,000), with the average export price dropping 15.31% on a monthly basis. Exports of unprocessed fl ints were 20 mt in October (export value at USD 864,000), with the average export price advancing 16.09% MoM. Exports of fi nished fl ints were 12 mt in November, totaling USD 289,000 and with the average export price jumping 138.81% MoM. Exports of unprocessed fl ints hit 23.8 mt in November, with export value at USD 913,000 and average export price down 11% MoM.

Table 8: Rare Earth Flint Export Statistics


Quantity/mt

Value/ USD 10,000

Quantity/mt

Value/ USD 10,000

Quantity/mt

Value/ USD 10,000

Quantity/mt

Value/ USD 10,000

Finished fl int 12.0 28.9 10.9 11.0 55.2 59.2 175.7 495.7

Unprocessed fl int 23.8 91.3 20.0 86.4 45.8 158.0 98.6 284.1 Source: China Customs

7) Exports to JapanAmong China’s exports of rare earth products to Japan through October and November 2012, rare earth metals and rare earth permanent magnets posted declines, with the latter dropping more sharply. Exports of rare earth oxides, rare earth salts and nickel-hydrogen batteries all saw an increase, with rare earth salts increasing most noticeably.

China exported 37.97 mt of rare earth permanent magnets to Japan in October 2012, with export value at USD 2.05 million and the average export price at USD 54,000/mt. Exports hit 25.82 mt in November, with export value at USD 2.76 million and the average export price at USD 107,000/mt, up 98.32% MoM. Besides, China also exported 315.55 mt of Nd-Fe-B strip-casting fl akes, 74.02 mt of Nd-Fe-B magnetic powders and 32.43 mt of other Nd-Fe-B alloys in October, with export value at USD 20.28 million, USD 3.46 million and USD 1.61 million, respectively. Exports of the above products reached 141.9 mt, 88.3 mt and 20.2 mt in November, with export value hitting USD 8.69 million, USD 4.26 million and USD 859,000, respectively.

Rare earth metals exports to Japan accounted for 97.77% of China’s total exports during October and November 2012. China exported all of its battery grade misch metals and over 90% of its neodymium metal, dysprosium metal, lanthanum metal, cerium metal and other mixed rare earth metals as well as more than 60% of its praseodymium metal and other rare earth metals to Japan.


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Table 9: Rare Earth Products Exports to Japan

ProductNov-12 Oct-12 3Q 12 1H 12

Quantity/mt

Value/USD

Quantity/mt

Value/USD

Quantity/mt

Value/USD

Quantity/mt

Value/USD

Rare earth metals 312.7 1,589.2 384.4 1,539.6 773.9 3,777.5 799.0 9,192.0

Rare earth oxides 325.6 1,214.3 274.8 748.5 844.3 5,086.0 424.1 7,090.2

Rare earth salts 257.3 455.4 102.7 216.1 240.3 586.2 474.2 2,146.0

Rare earth permanent magnet 313.4 2,480.4 477.0 3,892.9 2,085.5 17,397.6 3,215.7 29,220.5

Nickel-hydrogen batteries (10,000 units) 179.6 447.9 139.2 410.7 382.8 1,081.6 1,134.6 2,948.4

Source:China Customs

Rare earth metals exports to Japan hit 384.4 mt through October, accounting for 99.61% of China’s total exports, with the export price averaging USD 40,000/mt, up 3.27% MoM. Exports were 312.7 mt in November, accounting for 95.75%, with the average export price at USD 50,800/mt, up 26.89% MoM.

China exported 274.8 mt of rare earth oxides to Japan in October, with export value at USD 7.49 million. Exports to Japan rose to 325.6 mt in November, with export value at USD 12.14 million.


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1. Rare Earth Smelting and Separation Enterprises Progressively Halt ProductionEnd-user demand was stable at the beginning of 4Q 2012, but operating rate was low at deep processing enterprises. Besides, some producers purchased suffi cient raw materials earlier, causing smelting and separation enterprises to secure fewer orders. At the end of 4Q, end-user demand began to contract, resulting in a sharp decline in orders at deep processing enterprises. As such, these producers purchased less rare earth, depressing overall trading activity. Many cargo holders chose to exit the market and factories mostly suspended production, taking a wait-and-see stance.

The Ministry of Industry & Information Technology (MIIT) released the list of the 3rd batch of enterprises qualified for Entrance Requirement of Rare Earth Industry in 4Q. A total of 35 enterprises were qualifi ed, with three in Inner Mongolia, ten in Jiangxi province, four in Jiangsu province, four in Sichuan province, four in Shandong province and the remaining seven in other provinces. The list mainly involves rare earth smelting and separating enterprises as well as seven metal enterprises and two mining enterprises.

The Ministry of Land & Resources (MLR) recently set the target regarding mining volumes of rare earth in 1H 2013, totaling 46,900 mt of rare earth oxides (REO), with 8,950 mt of REO for ion-type rare earth ore and 37,950 mt of REO for rock-type light rare earth ore. Inner Mongolia and Jiangxi, major rare earth producing regions, were allowed to exploit 25,000 mt (REO) and 4,500 mt (REO), respectively.

2. BaotouInner Mongolia Baotou Steel Rare Earth Hi-Tech (Baogang Rare Earth) announced production suspension at its roasting, smelting and separation enterprises using rare earth ore in Baotou as well as its affiliated Quannan Jinghuan Science & Technology and Xinfeng County Xinli Rare Earth using ion-type rare earth ore for a month. During the period of production suspension, Baogang Rare Earth would correspondingly cut off raw material supply for the aforesaid roasting, smelting and separation enterprises. Later, the company issued a notice again to extend the period of production halts into 4Q. As a result, only a small number of enterprises other than Baogang Rare Earth and its affi liated enterprises are remaining in operating.

Baogang Rare Earth signed the Framework Agreement on Integration and Restructuring of Rare Earth Upstream Enterprises with the shareholders of twelve rare earth upstream enterprises in Inner Mongolia at the end of 2012. According to the agreement, the twelve enterprises and their shareholders agreed to transfer 51% of their shares to Baogang Rare Earth who will be responsible for planning business strategies and scope and adjust industrial structure and product portfolio at these enterprises. Baogang Rare Earth has thus obtained absolute monopoly over rare earth products and primary products in Inner Mongolia.

3. GanzhouChina Minmetals Rare Earth has asked its affiliated rare earth separation enterprises (Dingnan Dahua New Material Resources, Ganxian Hongjin Rare Earth and Guangzhou Jianfeng Minmetals Rare Earth) and smelting enterprise – Xunwu Xinzhou Rare Earth Smelting Factory to temporarily shut down production. Meanwhile, production was also halted at Ganzhou Rare Earth Mineral Industry’s affi liated mines, smelting and separation enterprises. Absent from specifi c time period for production suspension, these enterprises are expected to remain offl ine until before or after Chinese New Year.

Consolidation of rare earth industry in Ganzhou has also been put on the agenda. According to the work report of the Ganzhou government, Ganzhou will focus on building national rare metal industry bases and advanced manufacturing bases in 2013, revise planning of industrial industry development, push ahead with consolidation of rare earth industry, and establish large ion-type rare earth enterprises in China.

4. Other RegionsFollowing production suspension at Baogang Rare Earth and China Minmetals Rare Earth, NFC Southern Rare Earth (Xinfeng) declared its subsidiary (Guangdong Zhujiang Rare Earths) and cooperative enterprise (Yixing Xinwei Licheng Rare Earth) will gradually cut production until full halts. The Rare Earth Industry Association of Jiangsu Province also issued notice advising large rare earth smelting and separation enterprises in Jiangsu to gradually halt production according to their own situations from November. A wave of production suspension was reported at most smelting and separation enterprises, with only a few smaller enterprises remaining in operation.

China Minmetals Rare Earth bought all stakes at Xinghua Rare Earth New Materials, which owns the sole rare earth mining rights in Hunan province. China Minmetals Rare Earth was allowed to exploit 2,000 mt of REO each year from the ion-type rare earth mine, which contains 104,300 mt of REO. Acquisition of Xinghua Rare Earth New Materials has allowed China Minmetals Rare Earth to get access to abundant rare earth ore, helping it get rid of the unbalance between large-scale smelting and separation and limited resources.

Business Conditions at Separators and Smelters


12


Business Conditions at Deep-ProcessorsSMM conducted surveys on major rare earth processing enterprises including fl uorescent materials enterprises, rare earth magnets enterprises, rare earth polishing powder enterprises and rare earth hydrogen storage materials enterprises. The surveys on these enterprises, covering main rare earth consumers in China, reveal production conditions at rare earth downstream processing enterprises across China.

China 57%

Japan 21%

US 8%Others 3%

Europe 8%

Southeast Asia 3%

Figure 8: World Rare Earth Consumption Stucture

Source: ACREI

China Rare Earth New Materials Consumption Structure

Hydrogen storage materials 8%

Polishing materials 9%

Fluorescent materials 9%

Permanent magnet

materials 66%

Catalytic materials 8%

China Rare Earth Consumption Structure

Catalyst 9%

Rare Earth New Materials 66%

Mechanical metallugy,12%

Glass, ceramic 8%

Agriculture , light industry and textile 4%

Figure 9: China Rare Earth Consumption Structure

Source: ACREI

1. Survey of China Major Fluorescent Materials EnterprisesSMM’s survey of major domestic fl uorescent materials enterprises indicated that most fl uorescent materials enterprises were still in production halts during 4Q 2012, while a few enterprises remaining in operations also reported sharp production cuts. Operating rates at Jiangmen KanHoo Industry, Shaanxi Rainbow Fluorescent Materials, and Jiangsu Tiancai Technology Material, remained merely around 30%, a relatively high level within the industry.

Energy-saving fl uorescent powder was losing competitiveness as rare earth prices surged, with its market share squeezed by the rising halogen powder. Besides, the levy of export tariff on high-end fl uorescent powder discouraged most domestic fl uorescent material enterprises, further eroding profi t margins for SMEs. These all concerned domestic rare earth fl uorescent powder producers.

2. Survey of Major Rare Earth Magnetic Materials EnterprisesA recent SMM survey of ten major rare earth magnetic materials enterprises with capacity totaling 35,100 mt/yr reveals the average operating rate at the surveyed enterprises remained at 58% during 4Q 2012.


13


Table 10: Survey on Rare Earth Permanent Magnet Materials Producers

CompanyCapacity

/mt

Output/mt Operating Rate

in 4Q %Dec. Nov. Oct. 4Q 2012

Beijing Zhong Ke San Huan High-Tech Co., Ltd. 13,500 730 730 730 2,190 65

Ningbo Zhaobao Magnet Co., Ltd. 1,300 100 85 85 270 83

Sino Magnetics Technology Co., Ltd. 6,000 260 260 260 780 52

Shanxi Jinshan Megnetic Material Co., Ltd. 550 24 26 27 77 56

Beijing Sanjili Rare Earth Co., Ltd. 4,000 185 235 235 655 66

Beijing Jingci Megnet Co., Ltd. 2,000 60 125 125 310 62

Beijing Sheng Magnetic Science & Technology Co., Ltd. 800 44 44 44 132 66

Yantai Shougang Magnetic Materials Inc. 3,500 200 200 200 600 69

Baotou Showa Rare Earth High-Tech New Material Co., Ltd. 950 0 0 0 0 0

Ganzhou Huajing Rare Earth New Material Co., Ltd. 2,500 17 20 65 102 16

Total 35,100 1,620 1,725 1,771 5,116 58 Source: SMM

Output at these ten rare earth magnetic materials enterprises was 5,116 mt while the average operating rate was 58% in 4Q. Demand for magnetic materials was stable through 4Q 2012 and only staged a decline in December. According to Nd-Fe-B magnetic materials producers, orders for high-quality Nd-Fe-B magnetic materials remained stable in 4Q, helping these producers keep their operating rates around 70%, but mid-tech Nd-Fe-B magnetic materials producers reflected a slight decrease in orders, with their operating rates at 50%. Orders for low-end products staged signifi cant contraction, dragging operating rates at low-end Nd-Fe-B magnetic materials producers to merely 30%, and several of them even reported lower operating rates.

3. Survey of Major Rare Earth Hydrogen Storage Materials EnterprisesThe latest SMM survey indicates that China’s hydrogen storage alloy powder market saw recovery during 4Q 2012, but capacity utilization at large hydrogen storage material producers remained low. China’s hydrogen storage material output through 2012 was 12,000 mt. Several producers planned to cut production this year.

The shift of Japan’s hydrogen storage material capacity into China stuck in its track, leaving uncertainty about the prospect of hydrogen storage material market. Hydrogen storage material producers may continue to experience tough situation this year.

4. Survey of Major Polishing Powder EnterprisesSMM survey shows that operational conditions at domestic major polishing powder enterprises were starting to polarize during 4Q 2012. Low-end polishing powder producers still used iron oxide and zirconium oxide instead of rare earth for production. Mid-tech polishing powder market witnessed slight improvements while high-end polishing powder market held steady.

Baotou Rhodia Rare Earth, little affected by the weakness across the sector, still reported satisfactory performance. Operations at Baotou Tianjiao Seimi Rare Earth Polishing Powder and Shanghai Huaming Gona Rare Earth New Materials also remained normal despite the infl uence of depressed market.


14


End-User Market

1. New Energy AutomobileData from the China Association of Automobile Manufacturers show that China’s 4Q automobile output was 5.21 million vehicles, rising 15.91% QoQ and 6.91% YoY.

China produced 1.59 million vehicles of automobile in October, down 4.48% from September, but up 1.07% from a year ago. Automobile sales in October were 1.61 million vehicles, edging down 0.73% MoM, but up 5.32% YoY. Automobile output and sales from January through October were 15.72 million and 15.70 million vehicles, up 4.56% and 3.56% YoY.

Automobile output in November was 1.76 million vehicles, up 11% MoM and 3.9% from a year ago. Automobile sales in November were 1.79 million vehicles, up 11.5% MoM and 8.2% YoY. Output and sales during the fi rst 11 months were 17.48 million and 17.49 million vehicles, up 4.51% and 4.03% YoY.

Automobile output in December was 1.785 million vehicles, increasing 1.34% MoM and up 5.49% YoY, while sales during the month were 1.81 million vehicles, up 1.05% MoM and 7.12% YoY. Automobile output and sales through 2012 amounted to 19.27 million and 19.31 million vehicles, up 4.63% and 4.33% from 2011.

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Unit: 10,000 Vehicles

2009 2010 2011 2012

Figure 10: China Automobile Sales Volume

Source: CAAM

In 2013, demand for school bus may stage a spike with the industry chain from production to application progressing smoothly. Besides, government support to medium and large bus enterprises will be strengthened given the efforts in constructing urban public transportation system. Subsidies for automobile sales in rural areas and new-energy automobile sales will also be reinforced, while focus of the energy conservation and emission reduction program will be shifted to replacement of scrap automobile.

In addition, purchase limits may still be imposed in some large cities suffering huge traffic and pollution pressures, and congestion charges will probably be collected in pilot areas.

New-energy automobiles will continue to be promoted in the long run, and electric automobiles should still be widely applied in urban public service sectors, and private use of electric automobiles will need incentives from the government.

2. Air-ConditionerChina’s output of air-conditioner was 12.557 million units in October and November 2012. The air-conditioners sold domestically during the two months were 7.54 million units, while 4.56 million units were exported, making the total sales to 12.106 million units.

China’s air-conditioner output in October was 6.16 million units, up 0.2% YoY, improving from the 4.4% decline recorded in September. Sales of air-conditioner maintained a slight increase by rising 2.0% YoY to 6.05 million units, with the sales/output ratio at 98.20%. Of them, 2.19 million units were exported, up 12.1% YoY, and 3.86 million were sold at home, down 3.0% from a year earlier, and lower than expectations. The inventories of air-conditioner fell 32.8% YoY to 6.89 million units, up 2.0% MoM, marking the end of destocking process in air conditioner sector. The inventory/sales ratio was 1.1, up from 1.0 in September.


15


0200400600800

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Output YoY

Figure 11: China Air-Conditioner Output

Source: ChinaIOL

0500

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Unit: RMB/kg

05000100001500020000250003000035000

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Rare earth fluorescent powder Europium oxide

Figure 12: China Rare Earth Fluorescent Powder Price

Source:SMM

Air-conditioner output in November rose 4.3% YoY to 6.398 million units, compared with a 0.2% growth in October. Sales increased 11% YoY to 6.058 million units, with the sales/output ratio at 94.69%. Of them, 2.37 million units were exported, up 19.8% YoY, and 3.68 million were sold in domestic market, up 6.2% from a year earlier. The fi gure was in line with expectations. The inventories of air-conditioner climbed 4.9% MoM to 7.23 million units, but down 33.9% YoY. The inventory/sales ratio hit 1.2.

China’s commercial air-conditioner market was divided by US and European brands, brands of Japanese and South Korea, as well as domestic brands, with US and European brands taking the lead but domestic brands gaining increasing popularity. Both domestic and oversea market for air-conditioners saw depression during 2012, but many domestic producers took the chance to ramp up upgrading. Gree and Midea stepped up their efforts to develop commercial air-conditioner market. Given the continuous actions by major brands, commercial air-conditioner market will face some drastic adjustments.

According to industry insiders, market conditions are expected to further deteriorate, and it will take several years for the sector to get rid of the depression. Thus, air-conditioner market may take a brand new look after the adjustment of major brands.

3. Energy-Effi cient LampRare earth energy-effi cient lamp market remained unimproved during 4Q 2012, and prices for three primary colors fl uorescent powder also presented fallbacks. However, prices of europium oxide, raw material for fl uorescent powder, remained fi rm, keeping fl uorescent powder prices steady.

Rare earth energy-efficient lamp market is expected to remain weak in the long-term period. As the ban on European fi lament lamps took effect on January 1, 2013, traditional lamps will fade into history, sparing larger market for new lamps. Nevertheless, as LED which generates smaller demand for rare earth fl uorescent powder will be the most favored lighting product in the future, rare earth fl uorescent powder demand from lamp market should shrink.


16


05

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Notebook PC/Million Units MoM Growth

Figure 13: Notebook PC LED Panel Shippments

Source: WitView

60.0070.0080.0090.00

100.00110.00120.00

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Battery climate index

Figure 14: China Battery Climate Index

Source: China National Light Industry Information Center

4. ElectronicsWitsView data showed that the growth of notebook panel supply through 2012 is estimated at 8%, beating market expectation, while the supply of notebook were up 2.2% YoY, indicating a potential oversupply for notebook panel.

The NDRC announced January 4, 2013 to impose a fine to six large international LCD producers, including Samsung, LG, Chimei, AUO, Chunghwa Picture Tubes, and Hannstar, involving a RMB 172 million refund for extra payments, the return of RMB 36.75 million illegal gains, as well a fi ne for RMB 144 million, with the total amount hitting RMB 353 million. Of them, Samsung and LG are fi ned as much as RMB 101 million and RMB 118 million.

The move by the NDRC will help promote fair competition in notebook panel market and should benefi t domestic producers in the long run. This will also help enhance domestic producers’ position in international markets. Domestic color-TV producers have been in a disadvantaged position in panel negations due to a lack of support from related sectors in domestic market and the concentration of foreign enterprises in the market, causing price fi xing by foreign panel producers. Domestic panel producers are bound to have more say over the industry with the supplies of domestic products in international market increasing.

5. BatteriesThe Battery Industry Climate Index for light battery continued to show a severe contraction September and October 2012, but the indicator recovered slightly in October, signifying a turnaround in battery industry. As the industry continued to improve in November and December, the contraction in the industry is expected to ease.

Besides, as lithium battery is losing its market share due to security concerns, NI-MH Battery producers attempted to regain some of their market share, but in vain.


17


Major Events & News

Ganzhou Rare Earth Group Signs M&As Agreement with Xunwu South Rare Earth and Dingnan South Rare EarthGanzhou Rare Earth Group signed a M&As agreement with Xunwu South Rare Earth and Dingnan South Rare Earth on October 31st, 2012.

The Ganzhou Rare Earth Group has already completed M&As with Wanbao Rare Earth Separation Company, and will have M&As plan for Longnan Kaisheng Nonferrous Metal, which will bring the Group’s rare earth separation capacity to 8,000 mt/yr. Once the Group completes M&As for Xunwu South Rare Earth and Dingnan South Rare Earth, the Group’s rare earth separation capacity will increase further, which will greatly improve rare earth industry concentration ratio and reinforce the Group’s leading place in south market.

NDRC Approves 1.4 Million kw Wind Power Project in Damao BaotouThe NDRC has approved No. 1-7 Bayin 1.4 million kw wind power project in Damao, Baotou, which is the largest project of its kind approved by the NDRC.

Damao Bayin wind power station is the first wind power project with capacity exceeding 1 million kw in China. The Development and Reform Commission of Baotou Municipal divides the wind power station into 7 districts.

The construction of the 7 districts will be undertaken by China Huadian Corporation Inner Mongolia Company, China Guodian New Energy Inner Mongolia, Huaneng Baotou Wind Power, Longyuan Damao Wind Power, Damao Xiehe Wind Power, Beijing Jingneng New Energy, and China Powre Investment Shanxi Zhangze Power. The related power transmission project will be constructed by Inner Mongolia Power Group.

Installed gross capacity at the 7 districts totaled 1.4 million kw, with investment at RMB 13.59 billion and capital fund of 2.72 billion. The project will start construction soon and is expected to be completed in late 2013. Power generation of the project will begin in 2014.

Association of China Rare Earth Industry Meeting Held in Changshu The Association of China Rare Earth Industry Meeting was held on October 22nd in Changshu, Jiangsu province. The meeting analyzed the existing conditions in rare earth industry and had a discussion on problems confronting rare earth industry. 33 representatives from 8 provinces participated the meeting, and some leaders from Economic and Information Committee Economic and Information Committee of Jiangsu province also attend the meeting.

The meeting emphasized that the Association should provide beset services for its member companies and governments, voice the real demand from the industry, reinforce industry self-regulation, increase technical innovation, avoid redundancy construction, promote product and industry upgrading and improve competitiveness of China rare earth industry in international market. Meanwhile, the association should also make suggestions to local government to promote healthy and sustainable development of rare earth industry.

Inner Mongolia Baotou Steel Rare-Earth (Group) Hi-Tech to Purchase Baotou Steel Group’s Rare Earth Ore with RMB 800 Million The Inner Mongolia Baotou Steel Rare-Earth (Group) Hi-Tech announced on December 4th that the company plans to purchase 6 million mt of rare earth ore at Bayan Obo main and east mine from Baotou Steel Group at RMB 805.14 million and 100,000 mt of rare earth ore at Bayan Obo west mine from Baosteel Barun Mining at RMB 2 million.

According to announcement, the average grade of the 14.89 million mt ore mined at Bayan Obo main and east mine is 6.65%, with total rare earth content of 990,300 mt and price at RMB 134.19/mt. The average grade of rare earth ore mined at Bayan Obo west mine is 1.56%, with total rare earth content of 56,300 mt.

Inner Mongolia Baotou Steel Rare-Earth (Group) Hi-Tech said that the inner-group transactions will be helpful for better unitization of rare earth resource at Bayan Obo, and will be helpful for sustainable operation of the company.

Inner Mongolia Baotou Steel Rare-Earth (Group) Hi-Tech Signs Integration Framework Agreement with 12 Upstream Rare Earth Companies


18


Inner Mongolia Baotou Steel Rare-Earth (Group) Hi-Tech revealed on December 27th that, the company, together with 12 upstream rare earth producers, signed Rare Earth Upstream Company Consolidation and Restructuring Framework Agreement.

The 12 upstream companies include Baotou Jinmeng Rare Earth, Baotou Xijun Rare Earth, Baotou Xinyuan Rare Earth New Hi-tech Materials, Baotou Hongtianyu Rare Earth Magnet Material, Baotou Xinye New Material, Inner Mongolia Aerospace Jinxia Chemical Industry, Baotou Sanlong Rare Metal Material, Baotou Shengyou Rare Earth, Baotou Damao Rare Earth, Baotou Feida Rare Earth, Wuyuan Runze Rare Earth, and Inner Mongolia Shengyilun Rare Earth Material.

Guangdong Rare Earth Standardization Technical Committee Established Guangdong Rare Earth Standardization Technical Committee was established at Jiangmen on December 27th. According to sources, the Guangdong Rare Earth Standardization Technical Committee is approved by Guangdong Quality Supervision Bureau, and is responsible for technical standardization in rare earth sector. The committee consists of 23 people, including 1 director and 2 vice directors, which will lend technical support for rare earth industry, standardize local technical system, increase negotiation power of domestic producers when making national and international standards, and promote the implementation of technical standards in Guangdong province. The secretariat of Guangdong Rare Earth Standardization Technical Committee is at Jiangmen Kanhoo Industry Company which is the largest rare earth luminescent material producer in China and get listed in 2012. It was reported that the Jiangmen Kanhoo Industry has already issued many national and industrial standards for rare earth phosphor used for lamp making.

MLR Releases First Batch of Mining Quotas for Tungsten, Antimony and Rare Earth Ore 2013The Ministry of Land and Resources (MLR) released the fi rst batch of mining quotas for tungsten, antimony and rare earth ore in 2013 on January 5th, 2013.

The fi rst batch of mining quotas in 2013 for tungsten, antimony and rare earth ore is 50% of those in 2012.Mining quotas for tungsten concentrate (tungsten trioxide 65%) are 43,500 mt, including 34,700 mt of main mining quotas and 8,800 mt comprehensive utilization quotas, and 37,680 mt for antimony ore (Sb content) and 46,900 mt for REO, including 8,950 mt of ionic ore quotas and 37,950 mt of rock ore quotas.

Total mining quotas for the whole year of 2013 will be released in 2Q 2013.

Ganzhou to Build Large Rare Earth Group in South China It is known from Ganzhou government report that main business income from rare earth, tungsten and other new material industries posted RMB 68 billion in Ganzhou in 2012, up 20% YoY.

In 2013, Ganzhou government will make efforts for better development of rare earth industry in the following aspects. First, government will make plan to build Ganzhou into China’s rare earth metal production base and advanced manufacture base. Second, government will launch crackdown on rare earth industry by punishing illegal mine operators. Third, government will promote industry integration by establishing leading rare earth Group with the foundation of Ganzhou Rare Earth Group. Fourth, the government will promote rare metal futures and spot transaction centre. Meanwhile, the government will set up ionic rare earth strategic reserve center in south China. Finally, the government will also set up national rare earth resource development and utilization technical research centre and tungsten technical research centre, and other technical innovation platforms.

Nissan Newly-Produced Motor Lowers Dysprosium Consumption by 40%Nissan has produced a new type of motor recently. Compared to traditional motor, the new motor can reduce consumption of Dysprosium by 40%. The environmental friendly motor has already applied to upgraded version of Nissan Leaf on November 20th.

The new motor developed by Nissan and its suppliers uses grain boundary diffusion technology, which improves heat resistant of neodymium magnet and guarantees high performance of output. Besides, the new motor also reduces consumption of dysprosium by 40%.

Australian Lynas Malaysian Rare Earth Refi ning Plant to Come into Operation Soon Australian Lynas Malaysian Rare Earth Refi ning Plant has announced recently that its Malaysia-based rare earth refi ning plant will be put into operation in the coming few weeks. The separation plant mainly produces light rare earth oxide, with


19


capacity around 10,000 mt/yr, and it will be a potential competitor of Inner Mongolia Baotou Steel Rare-Earth (Group) Hi-Tech.

The operation of the plant trigged strong dissatisfaction from local residents previously due to radiation and heavy pollution of the plant, and the most recent protest by local residents was reported around 2013 New Year. Despite protests, Lynas still made an announcement to put the refi ning plant in to operation. After the announcement, the company’s stock prices surged by 8%. Domestic rare earth producers should pay close attention on prices of rare earth produced by Lynas as well as the attitude of its Japanese partners. If overseas consumers want to expand raw material supply channels by accepting higher prices from Lynas, China’s rare earth products will begin to feel competition pressure from international market.


20


Macroeconomic Situations & Related Markets

1. China GDP Growth to Accelerate in 4Q The NBS has yet to announce GDP growth data for 4Q 2012 as of this report period. According to the NBS, China’s YoY GDP growth rate declined gradually each quarter during 2012, coming at 8.1%, 7.6% and 7.4%, respectively, in the fi rst three quarters. As a spate of favorable macroeconomic indicators in 4Q indicates a strong momentum in economic rally, markets expect that the Chinese economic growth should quicken to 7.9% in 4Q.

China has sped up the execution of fi scal plan, and local investment projects coming on line have also played a signifi cant role in fueling economic growth. The NDRC has approved a large number of infrastructure projects since May, and it generally needs 3-6 months to commence construction following approvals. This means that a lot of new projects will come on stream gradually in the next few months, which can not only buoy China’s economy but also indicate that the destocking process in China’s manufacturing sector will come to an end. On account of this, China’s GDP growth is set to rebound in 4Q.

Service Sector: Accumulative Value

Unit: RMB 100 Million %

Industry Sector: Accumulative Value Agriculture Sector: Accumulative Value YoY Quarterly GDP % (Right)

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Figure 15: China GDP

Source: NBS

2. China Manufacturing Industry Rises Stably Data jointly released by the NBS and China Federation of Logistics & Purchasing (CFLP) revealed that China’s manufacturing PMI, a major macroeconomic indicator, was 50.6% in December 2012, flat with the previous month and remaining above the boom-bust line for a third consecutive month. China’s manufacturing output index was 52.0% in December, also above the 50 mark, but down 0.5 percentage point from November. This indicates the manufacturing sector continued rising, but the growth rate slowed. New export order index was 50% in December, down 0.2 percentage point from the prior month following an increase of three straight months, refl ecting pessimistic export situations. China’s economy is likely to remain stable at the beginning of 2013 and expands at a rate between 7.5%-8% in the fi rst quarter.

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Figure 16: China Manufacturing PMI

Sources: CFLP, HSBC, Markit


21


GDP at a Quarterly Rate in UK %GDP at a Quarterly Rate in Euro zone %

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Figure 17: GDP of Major Developed Countries and Economies

Sources: US Commerce Department, Markit

3. US and European Economic Situations Alleviate But Still Have Risks According to the US Commerce Department, the US economy grew by 2.8% in 4Q 2011, the highest level seen in 18 months, and up 1.8% QoQ. However, extraordinarily anemic demand signals that the US economic growth may slow in the next few months.

The US President Obama signed the “fi scal cliff” bill on January 2 following approval by the Congress, which will raise the tax rate for the rich and extend the tax reduction policy for the middle class. This bill allowed the US to avert the USD 600 billion worth of automatic tax hikes and spending cuts and can bring temporary relief to the economy.

The US debt ceiling is USD 16.39 trillion for the time being, but the nation has reported a level higher than that. Although the US Finance Department can pay government bills by other means, it can only manage till mid-February. If the department can not borrow more funds, it will not be able to have enough cash to pay government bills in the near future.

European leaders made great efforts in resolving the European debt crisis during 2012, including the establishment of European Stability Mechanism and outright monetary transaction, both providing strong support for reducing risks. Nevertheless, there have been signs now indicating that the EU has more stringent conditions for bailout fund for Europe’s debt crisis. This is defi nitely a bad news for the region.

In the face of the European debt crisis, institutional defects have been exposed thoroughly. The ECB does have the right of deciding monetary policies, which, however, is the result of negotiating with Eurozone countries. Due to long negotiation period and low effi ciency, the effects of these policies are usually reduced greatly, weakening the ECB’s ability in tackling the European debt crisis.

From current situation, once the EU takes a tough stance on requirements for bailout fund to indebted European countries, uncertainty in European risks will increase. This is very likely that Europe will remain the biggest threat to global economy in 2013.

4. Manufacturing Sector Remains Sluggish in Euro Zone According to Markit survey, the manufacturing PMI in the euro zone edged down to 46.1 in December from November’s 46.2, well below the 50 mark, and a sign that manufacturing activity contracted sharply. The preliminary PMI reading for the region was 46.3 in November. The PMI data further proved that the Eurozone economy fell in 4Q and will continue weak at least in early 2013. The data also demonstrated that Ireland, Italy, and other most vulnerable Eurozone members have tided over the hardest time as rising momentum in core economies abates. Progress in Italy and Ireland has brightened the Eurozone economic prospects to some extent. The European debt crisis has now spread to Greece and Portugal, imposing threats to Italy and other countries. The drop in Greek manufacturing sector expanded on a monthly basis, staging the worst performance in this bloc. Greek manufacturing PMI dropped to 41.4 in December, down from November’s 41.8. Manufacturing industry in both Germany and France, the region’s two largest economies, has also slowed further, raising market concerns about their ability in warding off economic sluggishness.


22


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Figure 18: PMI in Major Developed Countries

Source: Markit

5. Base Metals Probably to Rebound Market worries have eased following the last-minute fi scal cliff deal, and since the most diffi cult time of the Eurozone debt crisis has passed. While the Fed continues implementing QE4 measures, the Japanese government has decided to promote the 20.2 trillion yen worth of economic stimulus package. China’s NDRC formulated a plan recently showing that it will drive RMB 40 trillion of investment in the next 10 years, while the euro zone also tends to adopt easing measures. Despite a drag from the US debt ceiling issue, ample global credit should help push base metals higher for the foreseeable future.

International Gold

International Silver

US Dollar Index

Dow Jones Average

Crude oil in New York

LME 3-month Copper Contract

CRB

-0.16%

8.86%

-2.30%

-9.23%

-0.45%

0.60%

2.37%

-0.57%

-2.91%

-5.48%

-12.03%

-2.48%

-1.59%

-3.33%

-4.42%

7.05%

-0.61%

7.26%

-6.80%

5.12%

-1.49%

-15.00% -10.00% -5.00% 0.00% 5.00% 10.00%

3-month Performance 1-year Performance 1-month Performance

Figure 19: Market Movement

Sources: WIND, SMM


23


Appendix

Appendix 1: SMM Main Rare Earth Prices

Product Grade Unit 2013/1/15Average Price

Dec. Nov. Oct.Rare earth carbonate REO 42.0-45.0% RMB/mt 34,000 35,667 36,045 42,111

Lanthanum oxide La2O3/TREO 99.5-99.9% RMB/mt 50,500 54,071 55,932 57,861

Cerium oxide CeO2/TREO 99.5-99.9% RMB/mt 50,000 52,857 54,955 56,778

Praseodymium oxide Pr6O11/TREO 99.0-99.9% RMB/mt 385,000 410,000 387,727 367,778

Neodymium oxide Nd2O3/TREO 99.0-99.9% RMB/mt 375,000 421,429 395,909 380,833

Samarium oxide Sm2O3/TREO 99.5-99.9% RMB/mt 52,500 52,500 50,795 57,167

Europium oxide Eu2O3/TREO 99.95-99.99% RMB/kg 6,050 6,312 5,898 5,792

Gadolinium oxide Gd2O3/TREO 99.5-99.9% RMB/mt 122,500 149,762 150,455 149,167

Terbium oxide Tb4O7/TREO 99.95-99.99% RMB/kg 3,900 4,643 4,725 4,908

Dysprosium oxide Dy2O3/TREO 99.5-99.9% RMB/kg 2,150 2,583 2,722 2,881

Erbium oxide Er2O3/TREO 99.5-99.9% RMB/mt 355,000 369,762 375,000 393,889

Yttrium oxide Y2O3/TREO 99.995-99.999% RMB/mt 120,000 123,571 127,500 131,222

Neodymium oxide (Nd2O3+Pr6O11)/TREO≥75.0% RMB/mt 295,000 335,238 341,364 296,111

Lanthanum metal La/TREM≥99.0% RMB/mt 86,000 95,571 98,182 99,444

Cerium metal Ce/TREM≥99.0% RMB/mt 135,000 144,000 142,364 136,333

Praseodymium metal Pr/TREM 96.0-99.0% RMB/mt 445,000 461,667 473,182 482,500

Neodymium metal Nd/TREM 99.0-99.9% RMB/mt 455,000 466,905 462,955 466,833

Terbium metal Tb/TREM≥99.9% RMB/kg 7,850 7,850 7,850 7,867

Dysprosium metal Dy/TREM≥99% RMB/kg 4,050 4,240 4,450 4,517

Yttrium metal Y/TREM 99.9-99.95% RMB/kg 400 400 400 400

Cerium misch metal Ce/TREM≥65.0% TREM≥98.5% RMB/mt 76,000 83,286 90,318 91,306

Praseodymium-neodymium alloy

Pr/TREM 20-25% Nd/TREM 75-80% TREM≥98.5% RMB/mt 392,500 436,071 433,864 384,583

Praseodymium-neodymium-dysprosium alloy TREM≥99.0% RMB/mt 345,000 376,667 366,591 347,917

Battery class misch metal TREM≥99.0% Nd/TREM≥15% RMB/mt 165,000 175,000 175,000 183,889

Dysprosium-iron alloy Dy80% RMB/mt 2,150,000 2,614,286 2,721,591 2,963,889 Note: SMM rare earth prices refer to mainstream average traded prices in major domestic markets which are settled on the basis of various price levels in markets, producers and traders.


24


Attachment 2: Major Chinese Laws and Regulations on Rare Earth Industry in Recent YearsIssue Date

Laws and Regulations on Rare Earth IndustryContent

Jan-13 The Ministry of Land and Resources issued Notice on the First Batch of Mining Quotas for Tungsten Ore and Rare Earth Ore in 2013

Dec-12 The Ministry of Commerce announced list of rare earths exporters in 2013 and released a notice on the fi rst batch of export quotas in 2013

Dec-12 Name list of rare earth exporters in 2013 published on website of the Ministry of Commerce.

Dec-12 The Ministry of Industry and Information Technology published third batch name list of producers meeting "Entrance Requirement of Rare Earth Industry".

Nov-12 The Ministry of Industry and Information Technology published second batch name list of producers meeting "Entrance Requirement of Rare Earth Industry".

Nov-12 The Ministry of Industry and Information Technology published batch name list of producers meeting "Entrance Requirement of Rare Earth Industry".

Oct-12 The Ministry of Industry and Information Technology issues "Notice on Checking and Crackdown on Illegal Activities in Rare Earth Industry"

Sep-12 The Ministry of Land and Resources publishes "List of Rare Earth Exploration Rights" and "Rare Earth Mining Rights"

Aug-12 The Ministry of Commerce announced the second batch of rare earth export quotas in 2012

Aug-12 The Ministry of Industry and Information Technology issued "Entrance Requirement of Rare Earth Industry"

Jul-12 The Ministry of Environmental Protection published "Notice on Environmental Protection Audit of the Third Batch of Qualifi ed Rare Earth Producers"

Jun-12 The Ministry of Industry and Information Technology issued "Notice on Rare Earth Mandatory Production Plan Management Interim Measures

Jun-12 The Information Offi ce of the State Council published a white paper on ""Situations and Policies of China's Rare Earth Industry

May-12 The State Administration of Taxation issued "Notice on Including Invoices Drawn by Rare Earth Enterprises in Value-Added Tax Anti-Counterfeiting Tax System"

Apr-12 The Ministry of Environmental Protection published the second batch of qualifi ed rare earths producers

Feb-12 The Goods & Labor Tax Division of State Administration of Taxation issued "Notice on Preparation to Include Rare Earth Products in Anti-Counterfeiting Tax System"

Feb-12 The Ministry of Industry & Information Technology published "Development Plan for the New Materials Industry During 12th Five-Year Plan Period"

Dec-11 The Ministry of Commerce announced list of rare earths exporters in 2012 and released a notice on the fi rst batch of export quotas

Dec-11 The Tariff Rule Committee under the State Council published a notice on tariff execution plan in 2012

Nov-11 The Ministry of Environmental Protection published the fi rst batch of qualifi ed rare earths producers

Nov-11 The Ministry of Commerce announced rare earths export quota applying requirements in 2012

Nov-11 The Ministry of Industry of Information and Technology, Ministry of Land and Resources, Ministry of Environment Protection and General

Sep-11 The State Council's decision to revise "Interim Provisions on Resources Tax of PRC"

Aug-11 The Ministry of Environmental Protection issued "Environmental Protection Audit Guidance for Rare Earths Enterprises"

Aug-11 The Ministry of Land and Resources issued "State Council Suggestions for Healthy and Sustainable Development of the Rare Earths Industry"

Jul-11 Notice to Conduct National Special Rare Earth Production Order Management

Jul-11 Second batch of rare earth export quotas totaling 15,738/mt published on website of the Ministry of Commerce

May-11 The Ministry of Commerce and General Administration of Customs published "Announcement to Include Rare Earth Iron Alloy in Rare Earth Export Quota License Management System"

May-11 The State Council published "Several Suggestions for Sustainable and Healthy Development of the Rare Earth Industry"

Apr-11 The Ministry of Industry & Information Technology published mandatory production plan for rare metals in 2011, mining quota of rare earth is 93.8 kt.

Apr-11 The Ministry of Environmental Protection issued "Notice for Inspecting Environmental Protection at Rare Earth Enterprises"

Mar-11 The Ministry of Land and Resources released to control mining of tungsten ore, antimony ore and rare earth ore in 2011

Mar-11 The Ministry of Finance and the State Administration of Taxation decided to adjust tax standard for rare earth ore resources since April 1st.

Feb-11 The Environmental Protection Department published discharge standard of rare earth industrial pollutants valid from October 1st 2011.

Sources: SMM, Ministry of Land and Resources, Ministry of Commerce , Ministry of Industry and Information Technology, Ministry of Environmental Protection , the State Council , State Administration of Taxation , China Customs , Ministry of Finance

This report is an original work and/or a compilation by SMM, which holds the copyright thereto and is entitled to copyright protection under the Copyright Law of the People’s Republic of China and applicable international treaties. Without the prior written permission of SMM, neither this report nor its contents, in part or in whole, may be reproduced, revised, sold, transferred, displayed, translated, compiled, or otherwise disseminated.

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The views expressed in this report are based on a comprehensive assessment of available market information by SMM Research as of the date of publication. This report is provided for reference only. Reliance on the contents hereof is as your own risk.

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