The London REE Report: Getting in Early

Last Monday I began my posting pointing out how China’s announcement on July 8th restricting rare metals exports was a game changer. I ended on Thursday suggesting that China is acting in a logical and highly rational way in seeking to get the rest of the world off dependency on Chinese rare metals exports, especially if it also forces the relocation of downstream processing jobs and ultimately manufacturing jobs in the new high tech sectors, out of Japan and Korea and into China.

It may not be quite in the spirit of the World Trade Organisation but there’s nothing in the rules about being forced to export a product you produce to others, especially when your own industries need the product for their own manufacture. China is probably aiming at a complete export ban coming in somewhere about mid decade. That makes for a very tight timetable for the rest of the world to react to explore for, find, get permits for, and then develop into production, new rare metals resources. A process of anywhere from 3 to 10 years.

Nor is the process cheap. Molycorp Minerals LLC is going to spend the best part of half a billion dollars to bring back on-stream their Mountain Pass mine in California, including building new recycling plants for water and hydrochloric acid. Starting with a known previously worked and previously licensed deposit, if all goes to plan and the current timetable holds, a relatively simple project in the world’s leading developed country will have taken about 3 years to increase mining and processing operations from about 2,000 tons per year to 20,000 tons per year. That’s a whole lot of money, effort and management skill expended, just to get the chance to earn the money back plus more, over the next couple of decades. Outside of well developed U.S.A., projects are likely to come in far slower, and although some countries might have lower standards regarding waste recycling and trace radioactive issues, lowering costs somewhat, the initial investment process is never going to be cheap. Not that any countries nowadays are going to allow any natural resource company to seriously pollute. The examples of BP in the Gulf of Mexico and Trafigura in the Ivory Coast will ensure that.

Given the lag time and China’s timetable, there will likely be a new “gold rush” shortly ahead, to buy up all the low hanging fruit of known or inferred rare metals deposits, starting with those easiest to permit and easiest to work. For now though, when it comes to investing and investment plays, very few large pools of money think rare metals. However, I suspect that all this might be about to change in the year ahead. Two things might well result in China advancing the date of an almost total export ban, and both of them lie in the action of the west. First there is the rising call for building up a strategic stockpile in the west, particularly in America, although any bad idea started in America is sure to be copied in the EU as well.

As I wrote last week, I just don’t think China will export the product to allow us, America or Europe, to build up strategic stockpiles even if the funding was there. In an already testy US – China relationship over US arms sales to Taiwan, announced in January this year, it would probably be asking too much to expect China’s strategic planners simply to look the other way and let rare metals exports continue as before while America and Europe build up stockpiles. The best I can see happening is for some quiet defence industry stockpiling probably via third party dealers located around the world. But events at the weekend make me think that even this will be of limited duration. The US and China seem set to clash again, and seriously.

This weekend in Hanoi, the 10 members of the Association of Southeast Asian Nations (ASEAN) held a regional forum with 17 other nations including the USA. As expected the US v North Korea nuclear dispute made the summit testy to say the least, as did the joint sabre rattling, US-South Korean naval exercises now going on in the Sea of Japan off South Korea, moved there after China objected to them being held much closer to China in the Yellow Sea. As bad for comfortable relations as all that is, Mrs Clinton, the US Secretary of State introduced a plan to establish a formal binding legal process to resolve disputes between Asian nations over claims in the South China Sea. This is a red rag to China which favours bilateral settlement of such disputes. In reality China claims much of the disputed region alongside competing claims from Vietnam, Malaysia, and the Philippines but has now the implied muscle to back up its claims. As the regional superpower now going on international super power, this represents a direct US attempt to thwart China’s ambitions in the region, in effect China’s back yard. Think China meddling in the Gulf of Mexico. As a rising power, China most definitely doesn’t want the South China Sea dispute internationalised, allowing America a role in settling disputes. I think this coming clash is likely to refocus China’s strategic outlook on their exporting of rare metals. I suspect that the rare metals “gold rush” isn’t going to be about being ready by 2015. China’s 2015 target can easily become 2011 or 2012. Getting in early (and getting out early after a big market advance,) has always been sound trading advice. Get in before the herd and out before the market passes its peak. While the peak is a long way off, in my opinion, in rare metals, never has getting in early been a more apt market truism. I suspect that the low hanging fruit won’t be around for very long.

Graeme Irvine. London.