China’s Metal Markets Fear is Everybody’s Worry
What drivers of supply and demand do the rare earths, lithium, graphite, antimony, tungsten, and indeed all of the global markets for technology metals and materials have in common?
Among the most comprehensive answers to this question that are important for small investors as well as institutional investors, industrial procurement managers, and governments are:
- The undeniable fact that China, the world’s most populous nation and the world’s second largest economy has become and is now the largest end-user (demand-site) of technology metals and materials for the manufacturing of consumer goods in the world;
- The additional fact that China also has become the world’s largest end-user of the structural metals, iron, steel, and aluminum that make up more than 95% of the world’s metals’ production and recycling;
- The fact that China is the world’s largest user of the core technology metal, copper; and
- That the data show conclusively that China today uses (demands) more than 60% of all of the new ores and metals produced in the world.
The above facts show unequivocally that China’s economy is the de facto driver of the world’s metal economy, so that any change in China’s economy, good or bad, has an immediate effect on the global mining, refining, and metals and materials fabricating industries.
The CCP, the Chinese Communist Party, in its so-far brief existence (by Chinese standards) as the sole arbiter of political power and influence in the contemporary Chinese state has carried out two major experiments in planned economics in its 66 years in power. First under the creator of the contemporary Chinese Communist state, Mao Tse Dong, China attempted a “re-set.” Mao simply decided to start the Chinese economy all over again from its hypothesized (naïve communist) beginnings as a classless agrarian society. Accordingly all of those in non-agrarian occupations were considered virtual or actual parasites and were sent to work on the land for re-education. Economic disaster, supply chain collapse, and starvation were the results of this “cultural revolution” just as they had been the results from “collectivization,” Stalin’s attempt at a re-set for the early Soviet agricultural economy. Disruption was in both cases nearly fatal to the polity and damaged the economies affected severely.
Einstein is supposed to have said that the definition of insanity is doing the same thing over again and expecting a different result each time. Mao apparently hadn’t read the classic comic of psychoanalysis.
Deng Xiaoping, an early comrade of Mao going back to the Long March, who nonetheless himself was selected by Mao to be “re-educated” in the cultural revolution was then reinstated after Mao’s death by a frightened and demoralized CCP in the late 1970s to try to right the ship of state. He succeeded brilliantly through his deep understanding of the Chinese character and of practical economics and politics learned not only in China but also as a young world traveler in post WWI France. He devised for China and Chinese Communism the basis of an economic model which has come to be known in China as “capitalism with Chinese characteristics,” which we’ll call CCC. Less than one and a half generations later sometime in 2014 China became not only the world’s second largest (after the USA) economy but also caught up with the USA in purchasing power parity. Nothing like this had been seen in global economic history except when the US roared past Great Britain in the late nineteenth century to become the world’s largest economy after it, the US, economy had grown at an average rate of 4% for the first 75 years of the nineteenth century. China’s economic growth is now slowing from its torrid double digit rate during most of the 21st century to 7% or less per annum. But even if the Chinese economy can maintain “just” 4% growth it should sometime perhaps as early as in the next generation become equal to the US economy of today on a per capita basis.
While China frets about its “slowing” economic growth the western world is experiencing no and even negative growth! It seems to have turned out that Mao’s re-set gave Deng’s CCC a clean slate from which to start unencumbered until now with once technologically first mover based industries and resource production. China however has now reached the stage in the development of its industrial economy where the “new” technologies of 35 years ago are beginning to show their age in terms of declining profits and productivity.
The growth of the global technology metals’ and materials economy is a measured by the increase in the demand for energy and for consumer goods. Both of these key economic sectors are “mature” in the industrialized western economies.. Therefore the only hope for growth in the technology metals and materials sector will come from the expansion of the consumer economies in the BRICS. China’s just “elected” new president has in fact announced that the conversion of the Chinese economy from one that is export led and encourages savings to one that is driven by consumption is the new goal of CCC. Accordingly China’s resources industries are now being officially encouraged to look outside of China for opportunities to develop and acquire in the production of key natural resources. The opportunities of particular interest in natural resources will be those demonstrating superior operational economics from new or newly applied processing technologies.
I think that what is confusing American China “experts” and natural resource analysts and “pundits” is the relatively sudden shift of gears in China’s attitude towards making foreign direct investment in other countries.
Nowhere is this confusion more apparent than in the non-Chinese rare earth sector. It is being widely said that there has been a purposeful Chinese conspiracy of government and industry to control the supply of the rare earths so as to keep the prices low and drive the new non-Chinese light rare earth suppliers out of business. This is nonsense on stilts. The non-Chinese light rare earth projects that did any production at all, Lynas and Molycorp, are in dire straits due to a complete lack of understanding both the growth patterns of the global rare earth markets and in the case of Molycorp of gross technological malfeasance and dependence on obsolescent process technologies.
Both Lynas and Molycorp failed to model their businesses as primarily suppliers to China, and neither understood either the complexity or the ability to rapidly re-make itself of the Chinese industrial manufacturing market. Both Molycorp and Lynas depended for their success on the re-creation of supply chains outside of China that had ceased to function by the beginning of the 21st century, and neither understood enough about the details and mechanics of those supply chains to even attempt to help them back into operation.
China’s new economic model for consumption led growth is a last chance for non-Chinese natural resource producers to get back in the game as suppliers to China or as joint venture partners of China overseas.
The non-Chinese heavy rare earths production projects are the best bet for investors, since not only is China itself already short of these materials but neither can there be a rare earth enabled consumer products industry anywhere without the heavy rare earths.
Next week we’ll take a hard look at the Chinese dominated (by demand) global graphite market. The future of this market for investors is in the production of graphene.
After that we’ll look at lithium markets where, as in the rare earths and graphite new technologies for extracting; (separating) purifying; and fabricating are threatening to displace the markets today dominated by technological first movers of the past.
The common thread in this series is the potential for demand growth for technology metals and materials for mass produced consumer goods and the production and storage of energy. This has given rise to a host of new processing technologies for these metals and materials. The processing revolution is upon us, and we need to identify the winners. Winners are unlikely to be found in markets without total supply chains.
Jack Lifton is the CEO of Jack Lifton, LLC and is a consultant, author, and lecturer on the market fundamentals of technology metals. “Technology metals” ... <Read more about Jack Lifton>