China's Wind Power Sector Struggles with Rare Earth Price Hikes

Liu Yuanyuan, Contributor
August 17, 2011 | 8 Comments

While an increasing number of wind power equipment manufacturers in China have started to adopt direct-drive permanent magnet technology, rare earth minerals, some of the core raw materials used to produce wind turbines, are becoming a significant barrier to their development.

The recent price surges have forced many industry players to halt production or create a complete industry chain by expanding into the upstream sector. The price hikes are expected to intensify the already fierce competition in the sector, causing those who lack capital and expertise to be squeezed out altogether, according to an industry insider.

Rare Earth Price Skyrockets

China's rare earth prices have risen significantly since July 2010, exceeding 200 percent since the beginning of this year, with some categories reaching 600 to 1,000 percent.

One of the key reasons for the price explosion is the Chinese government’s introduction of a levy on rare earth resources as of April 1 of this year, said Zhou Jianxiong, Chairman of Hunan province-based Xiangtan Electric Manufacturing. In addition, on May 19^th the State Council of China released a document outlining the council’s viewpoint on the sustainability and development of the rare earth sector in a move to regulate the market.

According to a report from Guolian Securities, the price of rare earth is expected to continue the upward trend in the second half of this year.

A Bubble Emerges

Following five successive years of impressive growth, China's wind power sector saw its growth rate decline to 37 percent in 2010. With nearly 100 wind turbine manufacturers in China, total production capacity for 2011 is expected to reach 29 GW, far exceeding the actual demand of 15 to 18 GW. This trend is evidence that the rapid development of the wind power market has led to excessive competition and accelerated formation of a bubble.

Manufacturers Address the Challenge

In response to the soaring raw material costs, Xiangtan Electric Manufacturing plans to adopt advanced processes to reduce its reliance on NdFeB (neodymium magnet), said Zhou Jianxiong.

"We are currently evaluating the impact of the rare earth price increases on our company. The Chinese government has become aware of the huge pressure facing the high-tech sector, and is promising to take action to stabilize the market price. Meanwhile, our R&D team is committed to reducing process costs while improving the performance of our products," said Yao Yu, director of public relations at Xinjiang Goldwind Science & Technology.

Furthermore, gaining direct access to upstream resources is also proving to be a solution to tackle rising costs.

Privately-held Mingyang Wind Power, for example, recently signed a framework agreement with the government of Ganzhou, Jiangxi province, one of China's major rare earth producers. According to the agreement, Ganzhou’s municipal government will first provide Mingyang with rare earth resources and grant exclusive rights to develop wind farms in the city.

8 Comments

Hypernova Drive
October 26, 2011

15 years ago when we talked about wind turbine drive train, it was DFIG and gearbox. We never imagined that permanent magnet direct drive or full power frequency converter was possible. Today we see issues from gearbox and frequency converter and price surge in permanent magnet, isn't it a driving force for us to consider a new technology platform which do not need gearbox, frequency converter and permanent magnet?
People are skeptic about hydraulic transmission because of its efficiency. But now the latest generation of variable hydraulic transmission --- digital valve technology allows the drive train efficiency not too far way from conventional drive trains. Hydraulic transmission is an alternative gearless solution for future.

John Giannasca
August 22, 2011

You are right of course but there is a possibility the a drop in price will open up a larger market and create a demand that can sustain realistic pricing should China start to tinker with the price again.

Allen Gerhardt
August 21, 2011

High prices will drive more competition, but while China price gouges to cash in on a captive market bubble of their own creation, those that do invest in new mining and processing will find the bubble burst when greater supply brings prices down again, and profit margins are reduced. Those that invest will be prepared to pull out in a few years, leaving a depressed business model behind for mining operations. Financial looting of this nature damages the economy in the long run.

John Giannasca
August 21, 2011

rif...you are right to a point. I guess I was a little brief in elaborating the time lines. I was contemplating years before the new plants would come on line. China currently produces 97% of the worlds supply of rare earth minerals but has only 37% of the reserves. The price rise has changed the economics so plants in Australia, America (North and South), Africa and other places are expected to come on line. All these places produced the minerals but when China changed the price structure by increasing its exports 20 years ago, these plants were no longer economic. By constricting supply China is now doing the opposite and making these plants, and others, viable. The difference now is that there is a faster growing need for these minerals as the understanding that direct drive for wind turbines is a game changer. That will make these plants viable into the future regardless of China's desire to change the flow again.
It seems that the Chinese have made both good and bad moves in this game.

Richard .
August 21, 2011

@JohnGiannasca
The problem with your argument is that this is not burger restaurant market, where a customer with burger A can just go a bit further away and buy at burger B or he can use the substitute - just cook at home.

Currently China is sitting on a monopoly market and can pretty much dictate prices. Supply and demand only self regulate when there is not a monopoly situation.

In the case that the burger A location should be too good a market there will likely come a burger C some month later. The same thing cannot happen in mining industry. It is too specialized and too long supply chain. To get out of the current situation will take 5 to 10 years to start up mining and refinery business elsewhere.

Meanwhile China will be laughing while going to the bank. I even think they deserve it. The real problem is the short sighted economic thinking that happened on the demand side, where the buyer did not assure second source and only look for the cheapest supplier, China. Always be wary of companies with cost-cutting but big bonuses for managers, they do not think long term.

John Giannasca
August 20, 2011

This is just a delay. The great thing about economics is the principle of supply and demand. This increase in demand has increased prices for rare earth materials which in turn will accelerate the development of new mines and processing. When these mines come on stream (accelerated to try and capture the high price)the price will drop dramatically. This is expected to accelerate the adoption of direct drive technology for wind turbines which will as a result lower wind farm life cycle costing (as the elimination of the gearbox is a huge O&M benefit). So I guess in every cloud there is a silver lining.

Douglas Prince
August 18, 2011

So, Chinese products are becoming too expensive for China?

Robert Tilden
August 18, 2011

Some new Techs do not require any Rare Earth metals. One CSP system is low enough in cost that the current tax benefits more than cover the amounts required to own the system - this not only means essentially free equipment, but can actually put money in your pocket with the purchase. More info here: powertaxcredit.com

No Cost Solar Power

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Liu Yuanyuan

Nanjing Shanglong Communications Liu Yuanyuan is Director of Operations and Co-Founder of Nanjing Shanglong Communications. Liu Yuanyuan previously held the position of office manager at the London Financial Times' China translation and...