China’s Rare Earth Exchange Begins Trading Following WTO Ruling

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SHANGHAI – China’s first rare earth exchange, Baotou Rare Earth Products Exchange, announced in a statement last month the commencement of trading in three rare earth metals – europium oxide, praseodymium-neodymium oxide and cerium oxide.

Following an adverse ruling by the World Trade Organization (WTO) regarding China’s export regulations on rare earth metals, China’s Baotou Exchange is expected to regulate the country’s rare earth market while improving price formation and promoting industry development.

Based in Baotou City in the Inner Mongolia Autonomous Region, the exchange will feature price bidding, listed trading and real-time trading online for more than 10 items when it is fully operational. RMB-based daily price movements are limited to a 6 percent range.

Baotou Steel Rare Earth Hi-Tech Co., China’s leading rare earth producer, and 11 other firms and institutions with a total registered capital of RMB120 million (US$19.32 million) will participate in the exchange.

Rare earth metals are 17 chemically similar elements used in the production of automotive, high-tech and electronic products. Extracting them is a dirty process, however, and often results in significant environmental damage and lasting pollution.

Accounting for more than 90 percent of the world’s total market supply of rare earth metals, China controls roughly 50 percent (55 million metric tons) of known global reserves. After China, the second largest rare earth deposits lie in the Commonwealth of Independent States (former Soviet Republics) followed by Australia, the U.S. and India.

In 2007, China justified the introduction of production and export quotas as necessary to reduce pollution and conserve deposits. On March 26, however, a dispute-settlement panel at the WTO sided with the U.S., Japan and EU in their complaint that China’s quotas did not reflect domestic trading restrictions, and instead sought to fulfill industrial objectives.

In light of the ruling, the Association of China Rare Earth Industry is now studying the WTO report to help determine whether there will be an appeal, which must be filed within 60 days of the March 26 ruling.

“Many Western countries stopped the extraction to protect their environment, turning to other countries for purchases. China has been supplying 90 percent of cheap rare earths to the whole world,” criticized an overseas edition of the state-run People’s Daily.

“Once the industry is cleaned up and regulated, prices of exports will reach a reasonable level…it will no longer be possible for the U.S., EU and Japan to import our rare earth resources at dirt cheap prices,” added the Beijing News.

In light of the WTO ruling, many investors are unsure how the market value of rare earth elements will react. In 2010 and 2011 prices spiked and then tumbled, rising from an average price of US$5,589 in 2010 to US$158,389 in 2011 before falling nearly 70 percent shortly thereafter.

If foreign competitors begin to threaten China’s rare earth element industry, some analysts fear Chinese firms may respond with a price war in order to undercut U.S. and Australian producers.

As China mulls an appeal to the WTO ruling, investors will undoubtedly keep a close eye on the newly christened Baotou Rare Earth Products Exchange for signs as to how a possible price war over these critical elements will play out.

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WTO Finds China Rare Earth Metal Trade in Breach of Global Rules

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