The rare earth industry in China has undergone a remarkable transformation: From partly uncontrolled mining of raw materials and countless participants to a highly regulated and manageable industry. This market consolidation was planned for decades.
China's dominance in the production of rare earths is undisputed. The country has the largest known reserves of these crucial raw materials and almost completely controls their extraction and processing. The Bayan Obo mine in Baotou, Inner Mongolia Autonomous Region, is often referred to as the epicentre of the rare earth industry. This status is the result of long-term strategic planning and targeted political measures.
China's nuclear programme and the domestic commodities market
The key to China's current dominance in rare earths lies in the country's nuclear programme: Back in the 1950s, important technological foundations were laid for the process developed around 20 years later to separate the raw materials. The new method marked a change in the global division of labour - until then, China had exported its raw materials to other countries for further processing, but now the relationship gradually began to reverse. In the mid-1980s, China replaced the USA as the world's largest producer of rare earths. Exports increased, while at the same time prices for rare earths were depressed due to overcapacity. As a result, many other suppliers were no longer able to compete with China's rare earth supply and price between 2002 and 2005, which led to the closure of several mines, including the formerly important Mountain Pass mine in the USA.
However, this increasingly dynamic growth in production had created a fragmented industry in China with thousands of mines, some of which were illegal, competing fiercely with each other and often circumventing environmental and safety regulations. To deal with this situation, which was having a negative impact on prices, the government decided on a far-reaching plan to clean up the market and give it more clout.
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Market consolidation: a solution for many challenges
The State Council of the People's Republic saw the solution in consolidation and gave the green light for the corresponding plans in 2002. In addition to the raw material group of rare earths, a reduction of market participants was also initiated for 14 other resources at the same time: Antimony, bauxite, lead, iron ore, gold, potassium, coal, copper, manganese, molybdenum, phosphorus, tungsten, zinc and tin.
In the rare earth sector, the reasons for the project were complex. Above all, the Chinese government wanted more control over pricing. Due to the fragmented market, Beijing's influence on this was limited, although the country already had a quasi-monopoly position internationally in the extraction and processing of critical raw materials. Individual companies sometimes undercut each other. The Chinese Minister of Industry and Information Technology, Xiao Yaqing, was still complaining in 2021 that China was selling rare earths at the price of earths and not of something rare. Beijing also hoped that consolidation would simplify decision-making and enforcement processes in the sector. Growing environmental concerns and a high number of illegally operating mining companies in connection with smuggling activities were cited as additional reasons to be addressed by consolidation. Another factor in favour of market concentration was the aim of upgrading the quality of the industry. Consolidation would give the government even more influence over the further development and modernisation of the industry.
Start-up difficulties in the south, faster success in the north
The project, which has been running since 2002, envisaged only two large rare earth companies in the long term. One in the north and one in the south. This was due to natural conditions and the different histories of mining in the individual regions: While in the north, ores containing predominantly light rare earths are extracted in open-cast mining, in the south it is ionic adsorption clays from which heavy rare earths are extracted. These clays are formed wherever strong weather conditions prevail. They are currently only of economic importance in southern China and the neighbouring country of Myanmar.
Light rare earths: Scandium, lanthanum, cerium, praseodymium, neodymium, promethium, samarium, europium
Heavy rare earths: Yttrium, gadolinium, terbium, dysprosium, holmium, erbium, thulium, ytterbium, lutetium
This also results in a diversification of the downstream industry for processing and further processing. In the north, it is the city of Baotou where these companies have settled, only around 150 kilometres away from the world's most important rare earth deposit, Bayan Obo.
The south was also characterised by the large number of players fighting for dominance in the market; due to the large number of companies, the plans for consolidation were unsurprisingly met with resistance here. This also came from the provincial governments, as taxes that locally operating companies had to cede to them would flow to Beijing in the case of centrally managed companies. In the north, consolidation progressed far better, mainly because the mining industry there had already been far more homogeneous for decades and was in the hands of individual large companies.
Assessment of the situation by Jan Giese, Senior Manager Minor Metals and Rare Earth Elements at TRADIUM:
"China has long been striving to position itself successfully in all downstream phases of the value chain, moving away from its simple role as the "workbench of the world" to ..."
Consolidation continues: Significantly fewer licences, export prices explode
On the surface, consolidation progressed slowly, but in reality the government continued to restrict the number of mining licences issued. By 2012, the number of licences issued had fallen from 113 to 67, with 90 per cent of these rights ending up with companies that later became part of the so-called Big Six, China's six largest rare earth companies. Exports were also concentrated during this time, with the government authorising only 22 companies to export rare earths in 2011. In 2006 there were still 47.
Parallel to the measures on the domestic market, China also endeavoured to exert more control over exports. In 2006, the People's Republic successfully introduced export quotas that limited the export quantities of rare earths. China gradually tightened these quotas. In 2010, the Chinese customs authority even temporarily restricted the export of rare earths to Japan completely as a result of a smouldering trade dispute, although this was never officially confirmed. Fears of a nationwide supply freeze caused prices for rare earths on the international market to rise to a level that has not yet been reached.
In 2012, the USA, together with the European Union and Japan, filed a complaint with the World Trade Organisation (WTO) against a further tightening of export quotas, arguing that China was violating applicable law by denying access to critical raw materials. In 2014, the WTO ruled against the People's Republic, which dropped the export quotas in protest.
An important stage: one large rare earth company in the north, five in the south
In 2012, the rare earth industry in the autonomous region of Inner Mongolia came under the complete control of a subsidiary of the iron and steel group Baotou Iron and Steel, which has been operating under the name China Northern Rare Earth Group since 2014. By consolidating 35 producers, the entire rare earth industry in China's north has since been controlled by one company.
Consolidation also made slow progress in the south, but it took until 2016 for the first sustainable centralisation to be completed. By consolidating hundreds of companies into five - Xiamen Tungsten, Minmetals Rare Earth, Guangdong Rare Earth, the rare earth division of Chinalco (Aluminium Corporation of China) and China Southern Rare Earth - the industry in the south was now also streamlined in organisational terms. Together with the China Northern Rare Earth Group in the north, China's entire rare earth sector was in the hands of six large companies, the so-called Big Six, in 2016.
The second rare earth giant is being built in the south
The next step on the way to creating two market-dominating groups took place in 2021, when three of the Big Six merged under the name China Rare Earth Group (CREG): the rare earth division Chinalcos, Minmetals Rare Earth and China Southern Rare Earth. The three companies each held a 20 per cent stake in CREG. In addition, the Chinese government held a direct 30 per cent stake in CREG in the form of the State-owned Assets Supervision and Administration Commission. The remaining ten per cent was distributed among smaller research companies.
The takeover of Guangdong Rare Earth in 2024 was the last official step for the time being in the process of streamlining China's rare earth industry. This left Xiamen Tungsten as the only independent company. However, Xiamen Tungsten and CREG had already been cooperating since 2023 under a joint venture, in which CREG held more than 50 per cent, with the aim of pooling production quotas. The days of Xiamen Tungsten's independence were therefore already numbered.
Beijing published new production quotas in February 2024. Only two companies are still listed: the China Northern Rare Earth Group in the north, which is only authorised to mine light rare earths, and the China Rare Earth Group in the south, which is also permitted to mine heavy rare earths. From the fact that Xiamen Tungsten is no longer listed, but the quotas are combined with CREG, it can be deduced that the consolidation plans have now been implemented.
This marks the end of a project that began over two decades ago.
Assessment of the situation by Jan Giese, Senior Manager Minor Metals and Rare Earth Elements at TRADIUM
"China has long strived to position itself successfully in all downstream stages of the value chain, moving away from a simple role as the "workbench of the world" to a driving force in the technology sector. From the outset, Beijing has recognised that access to and control of critical raw materials will be crucial to success in many high-tech industries for modern life. This applies to wind turbines, electric motors and consumer electronics.
The advanced consolidation of the rare earth industry enables China to merge economic and political goals. One example of these combined advantages can be seen in the current price trend. The consistent increase in production quotas has caused prices for rare earths in China to fall sharply in recent months. Although this often leads to losses for manufacturing companies at present, the downstream processes in the Chinese value chain are benefiting from the low prices. This is another reason why they can offer low-cost products such as electric cars. At the same time, prices have levelled off at a level that makes production outside of China simply unprofitable. China takes a long-term and strategic view of these markets: short-term losses in raw material production are therefore accepted, as they strengthen competitiveness and dominance in the entire value chain in the long term."
