The REE London Report: China's Export Decision, A Game Changer.

"Small opportunities are often the beginning of great enterprises."


London — Yesterday we pointed out that China’s decision in early July to cutback the amount of rare metals and earths it exports is a game changer. It signifies the start of a major new bull market commencing in these metals, as significant as when in 1968 the US began the process of unfixing the price of gold from $35 an ounce. First to $42 dollars an ounce, and then, after abandoning the dollar convertibility link to gold in August 1971, to today’s price of roughly $1,200 dollars an ounce.

Of course the price moved up and down along the way but the big picture was always one of an ever expanding money supply chasing a limited supply of existing gold and limited supply of newly mined gold and recycled gold adding to the existing inventory. Yet gold’s supply demand fundamentals are nothing in comparison to the next decade in rare metals.

Unlike gold, there is no giant existing global inventory of REEs and HREs, although many experts think that Japan has accumulated a small strategic reserve of some, over the past 6 months or so. In the other major users, the US, the EU, Korea, Taiwan, Russia, China’s past policy of supplying these materials as needed and at relatively low cost, meant that there was little in the way of new investment into finding and developing alternative supply. The world came to depend on China for 95% to 97% of these materials, and at time when China and the former Soviet Union block were rejoining the wider world of capitalism. But it was also a time of ever expanding technologic advance. The last two decades have irrevocably altered our quality of life and the way that we lead it. The mobile phone is now a vital necessity of modern life, whereas in 1990 it was largely a status accessory of stock brokers and assorted wheeler dealers.

Sadly or happily depending on point of view, just about every technological advance of the last 20 years has increased our demand for, and dependence on, rare earth elements and heavy rare earths. It’s a demand growth that though it might slow, is unlikely to slow by much, even if the G-7 slips back into a double dip recession next year. I can make a very good case for it not slowing at all, at least until well into the 2020s. In China, they also see this demand growth, not least lead by their own rapidly rising demand. They recognise that they very soon will need all of their own supply to meet their own existing demand. Happily they have given us all plenty of time to adapt. Last year they served notice to the west that they were going to cut back on supply at some point ahead. End users, somewhat surprisingly, mostly chose to ignore the warning, although many experts think that Japan quietly began to build a strategic reserve. Now this month China has announced new quotas and plans to alter the way the world trades in most of these rare metals.

Though complete details have yet to be issued and in all probability finalised, For the second half of 2010, China intends to reduce exports by about 40% compared to the same period of 2009. That in itself was quite a shock to end user manufacturers, who were expecting a reduction of about 5% to 10%. As importantly though, China intends to alter the terms of trade in rare metals. As monopoly supplier to the world, China intends to follow the lead of the iron ore and copper olgopolies and establish a unified pricing mechanism, setting prices and publishing them monthly. To accomplish this, China has announced plans, though not details, to consolidate all the producers into 3 to 5 large producing entities, and to impose a resource tax, to be used in prt to start to repair the environmental damage that the last decade’s mining free for all generated. Though it won’t all happen overnight, and there will probably teething problems along the way, the old way we traded rare metals and earths is ending. REEs and HREs are about to undergo massive change, much in the way the oil market underwent change in 1973, when the oil market went from paying what the giant “seven sisters” of the oil industry dictated on price, roughly $1.50 a barrel, to paying what OPEC dictated on price, which unsurprisingly was a whole lot more.

Of course oil held a much more important place in global trade, and a good part of OPEC was also restricting supply to the US and Holland as a pressure tool in the 1973 Arab-Israeli war. Odd/even day rationing began in some places, and there were lines of cars outside many gas stations all waiting to fill up, and displayed on the nightly news. Thankfully with this new development in rare metals pricing, we won’t see large lines of buyers all desperately awaiting access to flat screen TVs and I-pads, nor awaiting their allocation of Priuses and Volts. But as with any major terms of trade change, there’s an opportunity around for those willing to take it, an opportunity that wasn’t yet there at the peak of the last boom. Though finding the next Apple or Microsoft isn’t easy, that’s the opportunity that’s just opened up with China’s announcement in the first week of July. Happily, there are many experts on this blog who will help us as we begin our search.

"A man who misses his opportunity, and monkey who misses his branch, cannot be saved." —  Hindu Proverb

More tomorrow or the day after.