Aims to update investors on developments in the world of strategy metals – crucial inputs to industry, defense and technology innovation
Terence van der Hout
Jan 8 – 16, 2012 Gold&Discovery Fund
This week’s bulletin discusses the recently released Chinese REE export quotas, sees demand for REE in South Korea drying up, briefly looks at a Russo-Chinese lithium joint venture, and summarizes a PwC survey on scarce natural resources.
China quotas
In what I find to be a somewhat surprising move, China has revealed their 2012 export quotas, and for the first time since REE have become important commodities, China will not lower the amount of exports leaving the country this year compared with the previous 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 ‘basically level’ with that of 2011, with Bloomberg even calculating a slight rise from last year’s level.
The surprise to me is the fact that quotas are not down significantly, despite clear signals from 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. All these measures were, in my opinion, aimed at keeping the prices of FOB prices high allowing the Chinese to capture downstream REE technology for a more value added and permanent advantage in the sector. Perhaps the Chinese have taken the WTO allegations to heart, and have opted to concede, favouring a lower inteational profile in a year of China’s leadership changes.
Well, I believe the devil is in the details, as officials also unveiled a new system that would split the quota into light (LREE), and medium-to-heavy (MHREE) categories. The lights are more abundant, cheaper, and less rare, whilst the MHREE are more valuable, scarcer and much more critical. Under the new system, the export of 9,095 tons of light minerals is permitted 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 their exports 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 for them was satisfied, before tuing to the LREE. This is now being curtailed, in favour of a system that will attempt to keep more of the elements for which China sees looming shortages in the upcoming years, within the country. So although China’s case at the WTO appears to be saved, the new system will leave the rest of the world with less of the rare earths that are truly in demand, whilst flushing us with the type of REE that Molycorp and 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 exports from China, keeping virtually all of the valuables within the country for the further development of their industries. There will be no demand for nine-tenths of China’s REE exports. The measures must therefore be considered a further step in China’s desire to become the centre of green-tech and high-technology innovation, and not one accommodative 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 hybrid and electric vehicles, wind turbines, liquid crystal displays and other day-to-day high-tech equipment. Despite this importance, South Korea, one of the largest end-users of REE, has seen a marked reduction of REE imports from China, last month. This comes not as a consequence of lack of availability in China, nor because of any other supply constraints that we have been reading and writing about during the last year. Rather, the suppressed global economic environment has muted demand for luxury goods in general, affecting the many products containing REE. In South Korea, companies were apparently able to secure enough supplies on the price drawbacks over the summer.
Although demand for REE has shown annual growth rates averaging 8-10% over the last decade, the 2008 credit crunch caused a massive break in the uptrend. This lasted just a year, but the current lower demand is a clear indication that we are in similar straits. In fact, by November, only about half the quota had been shipped out to buyers outside of China, as demand has slumped considerably. Clearly we are delaying our purchases of new automobiles, laptops and plasma TV sets as we wait for Eurozone and US financial woes to dissipate, and the BRIC countries to retu to their growing ways.
Russia and China open largest lithium battery factory in the world
The world’s largest lithium battery manufacturing plant opened in Russia, just before Christmas. The factory is a joint venture between China and Russia, and is focused on providing batteries for urban bus (and truck) transportation in the two countries. Where subsidization of clean energy programs in both the US and Europe are being suspended because of funds redirection or austerity measures, it is the BRICs that have taken up the gauntlet of curbing their environmental degradation caused by the growing energy consumption of a wealthier population.
China is rolling out the mass production and usage of electric busses as part of their 5 year plan ending in 2015, and is aiming to build quick battery exchange stations rather than developing recharging technologies. Liotech, the producer of the batteries, claims they are capable of operating within a large range of temperatures, -45°C to +65°C which ought to suit both the Russian and Chinese weather conditions, and the range is estimated to be about 200 miles.
PwC surveys scarcity of metals
PricewaterhouseCoopers have reported results of a global survey on conces in industry about 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 to likely be hit hardest by scarcity of metals and minerals, in the next five years. The renewable energy, automotive, energy and utilities sectors are already facing supply instability, while those in the aviation, high-tech and infrastructure sectors expect increasing disruption of supply by 2016. Chemical and high-tech companies were least prepared for a supply disruption, mirroring to some extent the level of criticality (and lack of alteatives) in these industries.
There is also a geographical divide. European companies are more conceed than their Asian or American colleagues, and govements are much more aware of the issue in Europe than elsewhere. This reflects the almost complete absence of natural resources on the European continent, which, after millennia of natural resource exploitation, has become almost completely dependent on imports from other parts of the globe.
Finally, firms said the problem is currently focused upstream. Suppliers were very much conceed 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 current economic downtu, end-users are not yet feeling enough of the pain to force them to move upstream to secure supplies. Should various forms of quantitative easing retu to fashion and economic activity be subsequently revived, the supply issue may retu with a vengeance.
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Disclaimer: The author is a researcher for the Gold&Discovery Fund, and neither he nor the Gold&Discovery Fund has commercial ties to, or shares in, the companies reviewed, unless explicitly stated in the text. The information in this bulletin is 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 investment recommendation.
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