Simulating producer responses to selected chinese rare earth policies

This study explores the effects of Chinese rare earth stockpiling, environmental taxation, and improvements in recovery rates on rare earth markets. It uses a Stackelberg model with a leading producer (legal Chinese producers) and two sequential followers (illegal Chinese producers and the Mount Weld mine in Australia), each producing multiple rare earths. The model is parameterized for the production and prices of separated rare earth oxides (REOs) from ore. Counterfactuals involving Chinese policies are compared to the no-policy, business-as-usual (BAU) scenario. The five counterfactuals are: (1) further Chinese State Reserve Bureau (SRB) stockpiling of neodymium, (2) further SRB stockpiling of dysprosium, (3) an environmental tax on the production of legal Chinese rare earths, (4) increased recovery rates of neodymium at legal Chinese operations, and (5) increased recovery rates of dysprosium also at legal Chinese operations. The BAU scenario and five counterfactuals are run with (a) four different levels of reference illegal Chinese production and (b) with and without the Chinese production quota, yielding 48 total outcomes (6 x 4 x 2). The first finding is that any SRB stockpile purchase increases the price of the stockpiled REO and increases legal Chinese ore production. However, given co-production, increased ore production involves more production of all REOs, and the prices of non-stockpiled REOs decrease. Thus if the stockpiled REO represents a large (small) portion of illegal Chinese and Mount Weld revenue, then illegal Chinese producers and the Mount Weld mine will increase (decrease) their production. An environmental tax decreases legal Chinese production, increases production by illegal Chinese producers and Mount Weld, and increases prices of all REOs. Increased legal Chinese recovery rates lead to increased legal Chinese production, decreased production by illegal Chinese producers and Mount Weld, and decreased REO prices. Increased levels of reference illegal Chinese production (a) exacerbate the policy-driven production increases or dampen production reductions of illegal producers and (b) conversely, for legal Chinese producers, reduce policy-driven production increases and further increase production reductions.