EDITOR: | July 22nd, 2015 | 5 Comments

China disrupts rare earths, minor metals (again) — and where does it stand on gold attack?

| July 22, 2015 | 5 Comments
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mysteryChina is at the epicentre of two events in the past week. Neither of them is pretty to watch – and both have serious repercussions for several metals, particularly rare earths, technology metals and gold.

Incident No. 1 (Minor metals and REE): Two years ago, there was founded in Kunming, Yunnan province, the Fanya Metal Exchange. It was a method for Chinese investors to take a bet on minor and rare metals, and rare earths: there were contracts for antimony, indium, germanium, selenium, cobalt, tungsten, silver, vanadium, tellurium, bismuth, rhodium and dysprosium and terbium oxides. For example, the exchange had contracts for $1.2 billion worth of indium. The problem was that the exchange, on behalf of the investors, raised loans using the metals as collateral.

As we all know, prices for many of these have fallen – so the Fanya exchange was caught by reduced values for its metal collateral. The end result is that some $6.5 billion has been withheld from investors since April. The only way out, it would seem, is for metal stocks – presumably including dysprosium and terbium – to be liquidated. If so, this is likely to put downward pressure on all the REE (rare earth elements) and minor metals involved.

The irony is that China is, in many cases, the main producer and, consequently, one of the victims. This incident will take some time to unwind, and it is not known whether the Fanya exchange will survive in its present form. But the other victims are those Western companies trying to get into production of metals such as antimony, tungsten and vanadium. This is not going to help.

China has form when it comes to spiking the guns of non-China mining companies. We all know about the flooding of the market in the late 1980s and early 1990s of a range of commodities, forcing mine closures for non-Chinese producers of rare earths, tungsten, graphite, among others. Now Chinese policy has disrupted the global tin industry. China is at present importing 98% of its tin concentrate from Myanmar at undisclosed prices. This has punctured the traded tin price to the extent that no new tin mine development can go ahead at this level of prices. At the London Metal Exchange on Monday, tin closed at $15,550/tonne, well below the price at which any company would commit to developing a new tin mine.

Incident No. 2 (Gold): On late Sunday night, when trading is normally quiet, someone dumped sell contracts totaling 24 tonnes of gold on the Globex exchange in New York. At almost exactly the same time (but Monday morning in China), another large quantity of gold contracts was dumped on the Shanghai Gold Exchange. It had the predictable consequence of sending the gold price plummeting to $1080/oz.

China has an enormous stake in gold. It is the world’s No. 1 miner, it is the world’s No. 1 importer. Chinese investors have spent billions in recent years acquiring more gold. One way or the other, China is affected by this week’s attack on the yellow metal. Chinese investors have already taken a hiding through big falls on their share markets. How will they be feeling with their gold worth a lot less?

We all remember when New York gold trading opened on April 12, 2013, and 3.4 million ounces (or 110 tonnes) of June futures contracts were dumped on the market, sending the gold price plummeting. Two hours later, another 10 million ounces (300 tonnes) hit the trading screens. This had all the hallmarks of a concerted effort to break the back of gold.

Back then, suspicions focused on the leading Western central banks. After all, it was thought, the Federal Reserve and other banks wanted to break apart the credibility of gold as a safe haven, and thus ensure that fiat money ruled supreme.

But why would the Fed and its allies want to hit gold now? The metal has been under pressure from the rising US dollar, and the expectation is that it would suffer further punishment once the Fed moved, as expected, to raise interest rates within the next few months.

But it is interesting that the gold dumping this week followed the announcement on Friday that China’s official gold reserves now stood at 1,658 tonnes, a 604 tonne increase on the 2009 figure, the last time the People’s Bank of China updated its gold holdings. This was far less than expected: London broker Sharps Pixley believes the PBOC holds closer to 4,000 tonnes; Bloomberg estimates it at 3,510 tonnes. Few believed the figure announced on Friday, but it certainly had the effect of sending the metal’s price much lower.

Then we had the Sunday/Monday attack.

Who wants a much lower gold price at this particular point in time?

Moreover, who wants to put out of business many existing gold mining companies who will be feeling the pinch even at just over $1,100/oz (as the metal is in Tuesday Asia trade)? At sub-$1,000, mines would be closing in many of the high cost operations.

Who, and why?


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Comments

  • Jack Lifton

    Robin,
    I hope everyone interested in “discovering” rare earths “prices” reads your analysis carefully. I am particularly struck by the sentence “The irony is that China is, in many cases, the main producer and, consequently, one of the victims.” China conspiracy theorists will see this as just deserts served up by unintended but foreseeable outcomes. Realists may see this as the inevitability of the chaos at the beginning of the imposition of the regulatory mechanisms for free(?) markets.
    But no matter which theory you choose the outcome in this particular case is an “artificial” downward pressure on terbium and dysprosium as exchange stocks are liquidated in a disorderly fashion.
    Couple this with the muddled picture of the future growth of the Chinese consumption economy and we have Chinese manufacturers going slow on building inventory. The result is a decline in the prices in China for raw materials such as neodymium, praseodymium, terbium, and dysprosium, the “magnet metals.” The result of that is no investment, layoffs, and bankruptcies by Chinese miners, refiners, fabricators, and end use product manufacturers. With these immediate problems does anyone really think that the Chinese government has any time to think about or any interest in thinking about such irrelevancies as Molycorp, Lynas, or non-producing rare earth ventures outside of China?
    I note that the European Union is rapidly moving to make itself independent of Chinese market chaos by re-building/maintaining a domestic (European) supply chain for rare earth end-use products. In the USA, which, unlike Europe, is blessed with sufficient rare earth resources and engineering skills to re-construct what was the world’s original total rare earth supply chain we just talk about it and hope that foreign markets will recognize our right to buy from them at prices we dictate.
    Low information voters gave the USA a clueless governing class. If this class continues in power the same idiots will give the leadership of the global economy to a China that is not yet ready for such a role.

    Jack

    July 21, 2015 - 9:00 AM

  • Tim Ainsworth

    Robin,

    C&P from Fanya’s website:

    “At this critical moment of rare earth industry, a “redemption” crisis exploded among the industrial enterprises which participated in Fanya on July 15, which was “adding insult to injury”. The Fanya Metal Exchange is the biggest minor metals and rare earth spot exchange in the world. It has listed two rare earth commodities-dysprosium and terbium. According to Fanya, there are 149.15 tons of dysprosium oxide and 4.05 tons of terbium oxide stored on its warehouse. If the entrusted funds keep being redeemed intensively, price may keep falling.”

    In addition to the State stockpile there are reports of 700t of Dy in current inventory, no doubt Fanya’s 150t is but a part of that. Doubt the 4t of Tb will keep anyone awake at night, and certainly from the RE POV any impacts would be largely contained to Dy pricing:

    “BEIJING Asian Metal 21 Jul 15 – Chinese dysprosium oxide price slid by around RMB50kg USD8.1kg from those of one week ago to current RMB1,330-1,350kg USD216-220kg by cash payment. A few suppliers, who are in a hurry to get cash flow and are pessimistic about the market in the near term, are selling the material at RMB1,300kg USD211kg by cash payment.”

    Net positive there is any hints of re-emerging ROW NdFeB supply chains, even via the Arctic, won’t be intimidated by price/supply of whatever Dy they require.

    July 21, 2015 - 10:10 AM

  • Chris

    Tim
    Looks like their is actually a surplus of Dy in China contrary to the comments being made by some around here.

    July 21, 2015 - 11:12 AM

  • charles.1

    Critical metals is by far the most interesting resource space I’ve been involved with. The interaction between supply/demand/politics/major corporations in fascinating. My early gains were all sadly given back, but I remain optimistic there is a bottom to be had.

    With current REE prices being so low plus this new Fanya black swan, I think we can assume timelines for new Western REE, W, Sn… production is out the window. Any company investing hard at present is probably squandering shareholder funds. If any company that tells me they are drilling an REE project at present I would sell out in a heart beat.

    Supply and demand will re-set Dy, Tb, W prices at a higher level. We just need to watch and wait for 3 (?) years.

    July 21, 2015 - 9:48 PM

  • Investor

    Is Hongpo alive?

    August 3, 2015 - 1:46 AM

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