Strategy Metals Bulletin #56


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Strategy Metals Bulletin #56

  1. 1. (56)T c v d Ho J 8 – 16, 2012Gold&Discovery FundAims to update investors on developments in the world of strategy metals – crucial inputs to industry, defense and technology innovationThis week’s bulletin discusses the recently released Chinese REE export quotas, seesdemand for REE in South Korea drying up, briefly looks at a Russo-Chinese lithium jointventure, and summarizes a PwC survey on scarce natural resources.China quotasIn what I find to be a somewhat surprising move, China has revealed their 2012 exportquotas, and for the first time since REE have become important commodities, China willnot lower the amount of exports leaving the country this year compared with theprevious one.For the number cruncher amongst us, the H1 quota has been set at 10,546 tonnes(somewhat lower than this time last year), but the full year quota is cited to be ‘basicallylevel’ with that of 2011, with Bloomberg even calculating a slight rise from last year’slevel.The surprise to me is the fact that quotas are not down significantly, despite clear signalsfrom China in the form of production stops, limited export licenses, a new invoice system,additional taxes and a broadening of the goods subject to the export quota regime. Allthese measures were, in my opinion, aimed at keeping the prices of FOB prices highallowing the Chinese to capture downstream REE technology for a more value added andpermanent advantage in the sector. Perhaps the Chinese have taken the WTO allegationsto heart, and have opted to concede, favouring a lower international profile in a year ofChina’s leadership changes.Well, I believe the devil is in the details, as officials also unveiled a new system that wouldsplit the quota into light (LREE), and medium-to-heavy (MHREE) categories. The lights aremore abundant, cheaper, and less rare, whilst the MHREE are more valuable, scarcer andmuch more critical. Under the new system, the export of 9,095 tons of light minerals ispermitted in 2012, leaving a mere 1,451 tons for the medium-to-heavy category.Until now, the absence of this segregation has meant that Chinese traders weighted theirexports towards the HREE, solely because their vastly higher prices meant more revenues.This meant that traders would seek to first offload all of their HREE, until demand forthem was satisfied, before turning to the LREE. This is now being curtailed, in favour of asystem that will attempt to keep more of the elements for which China sees loomingshortages in the upcoming years, within the country. So although China’s case at the WTOappears to be saved, the new system will leave the rest of the world with less of the rareearths that are truly in demand, whilst flushing us with the type of REE that Molycorp and 1Terence van der Hout Strategy Metals Bulletin; Jan 8 – 16, 2012If you wish to receive this bulletin, please email me at:
  2. 2. Lynas have said they will be producing 26,000 additional tons of this year (satisfying two-thirds of global demand currently supplied by China).In all, these changes in quota policies will eventually lead to a mere trickle of REE exportsfrom China, keeping virtually all of the valuables within the country for the furtherdevelopment of their industries. There will be no demand for nine-tenths of China’s REEexports. The measures must therefore be considered a further step in China’s desire tobecome the centre of green-tech and high-technology innovation, and not oneaccommodative to the true demand of everyone else.South Korea’s REE imports from China drop 48.3%As we know, rare earth elements are important and often irreplaceable inputs to hybridand electric vehicles, wind turbines, liquid crystal displays and other day-to-day high-techequipment. Despite this importance, South Korea, one of the largest end-users of REE, hasseen a marked reduction of REE imports from China, last month. This comes not as aconsequence of lack of availability in China, nor because of any other supply constraintsthat we have been reading and writing about during the last year. Rather, the suppressedglobal economic environment has muted demand for luxury goods in general, affectingthe many products containing REE. In South Korea, companies were apparently able tosecure enough supplies on the price drawbacks over the summer.Although demand for REE has shown annual growth rates averaging 8-10% over the lastdecade, the 2008 credit crunch caused a massive break in the uptrend. This lasted just ayear, but the current lower demand is a clear indication that we are in similar straits. Infact, by November, only about half the quota had been shipped out to buyers outside ofChina, as demand has slumped considerably. Clearly we are delaying our purchases ofnew automobiles, laptops and plasma TV sets as we wait for Eurozone and US financialwoes to dissipate, and the BRIC countries to return to their growing ways.Russia and China open largest lithium battery factory in the worldThe world’s largest lithium battery manufacturing plant opened in Russia, just beforeChristmas. The factory is a joint venture between China and Russia, and is focused onproviding batteries for urban bus (and truck) transportation in the two countries. Wheresubsidization of clean energy programs in both the US and Europe are being suspendedbecause of funds redirection or austerity measures, it is the BRICs that have taken up thegauntlet of curbing their environmental degradation caused by the growing energyconsumption of a wealthier population.China is rolling out the mass production and usage of electric busses as part of their 5 yearplan ending in 2015, and is aiming to build quick battery exchange stations rather thandeveloping recharging technologies. Liotech, the producer of the batteries, claims theyare capable of operating within a large range of temperatures, -45°C to +65°C which oughtto suit both the Russian and Chinese weather conditions, and the range is estimated to beabout 200 miles. 2Terence van der Hout Strategy Metals Bulletin; Jan 8 – 16, 2012If you wish to receive this bulletin, please email me at:
  3. 3. PwC surveys scarcity of metalsPricewaterhouseCoopers have reported results of a global survey on concerns in industryabout shortages in supplies of natural resources. Scarcity is a very real and current issue,and is caused by the growing demand for materials, and political issues.Executives in the automotive, chemicals and energy industries perceive themselves tolikely be hit hardest by scarcity of metals and minerals, in the next five years. Therenewable energy, automotive, energy and utilities sectors are already facing supplyinstability, while those in the aviation, high-tech and infrastructure sectors expectincreasing disruption of supply by 2016. Chemical and high-tech companies were leastprepared for a supply disruption, mirroring to some extent the level of criticality (and lackof alternatives) in these industries.There is also a geographical divide. European companies are more concerned than theirAsian or American colleagues, and governments are much more aware of the issue inEurope than elsewhere. This reflects the almost complete absence of natural resources onthe European continent, which, after millennia of natural resource exploitation, hasbecome almost completely dependent on imports from other parts of the globe.Finally, firms said the problem is currently focused upstream. Suppliers were very muchconcerned about scarcity of inputs, whilst customers generally saw much less of an issue.This is exactly the crux of the problem for the rare earths. Clearly, with the currenteconomic downturn, end-users are not yet feeling enough of the pain to force them tomove upstream to secure supplies. Should various forms of quantitative easing return tofashion and economic activity be subsequently revived, the supply issue may return with avengeance.Twitter: @GoldDiscFundwww.gdfund.comDisclaimer: The author is a researcher for the Gold&Discovery Fund, and neither he nor the Gold&Discovery Fund hascommercial ties to, or shares in, the companies reviewed, unless explicitly stated in the text. The information in this bulletinis the author’s independent opinion of developments in markets and at companies, and hence may contain factual errors,and may not reflect the opinions of the Gold&Discovery Fund. The content of this bulletin is not intended as an investmentrecommendation.Copyright: The information in this bulletin can be forwarded, cited or used otherwise, but only within the context asintended by the author, and with complete reference to the source. 3Terence van der Hout Strategy Metals Bulletin; Jan 8 – 16, 2012If you wish to receive this bulletin, please email me at: