EDITOR: | July 13th, 2015 | 23 Comments

China’s Metal Markets Fear is Everybody’s Worry

| July 13, 2015 | 23 Comments
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The Lynas and ECB Bombshells hit the MarketsWhat 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:

  1. 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;
  2. 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;
  3. The fact that China is the world’s largest user of the core technology metal, copper; and
  4. 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

Editor:

Jack Lifton is the Sr. Editor for InvestorIntel Corp. and is the CEO for Jack Lifton, LLC. He is also a consultant, author, and lecturer ... <Read more about Jack Lifton>


Copyright © 2016 InvestorIntel Corp. All rights reserved. More & Disclaimer »


Comments

  • Pennie

    First he says you can’t sell ice to the arctic, now he says you must sell ice to the arctic if you want to succeed. Wow.

    July 13, 2015 - 9:43 AM

  • Jack Lifton

    Wow is right, Pennie. if you think that the rare earths’ markets are all about the light rare earths that China has in abundance. I call this the Molycorp perspective, and your snark is proof that this low information contagion is still prevalent.

    July 13, 2015 - 9:46 AM

  • Billy

    Jack always says it as he sees it at the time of writing. I don’t see anyone else with Jacks’ knowledge and experience putting themselves out there every day of the week. So whilst I often don’t agree with some of Jacks views, I am grateful for the sharing of his knowledge. He’s providing regular updates / information which simply cannot be found elsewhere on the “net”, and we have the opportunity to debate (express our own views) the issues. It doesn’t get any better than that.

    July 13, 2015 - 11:31 AM

  • jjbeswick

    Jack you seem obsessed with your Light BAD /Heavy GOOD mantra.
    Frankly this division is outdated and misleading.
    For now the demand for MAGNET REE absolutely dominates the RE scene.
    Yes, some light RE are in oversupply and virtually valueless; Ce and La specifically.
    But I think we’d all agree that the LREE Nd and Pr are essential core ingredients to the magnet industry. IMO it’s unclear if they are in over- or under-supply but I suspect the latter.
    It’s worth noting that in the case of Lynas, these 2 represent over 3/4 of their REE income despite being only 25% of production by weight.
    It seems to me that magnets also underpin any value there remains in the HREE market; Dy and Tb remain important minority components that improve temperature stability in Nd-Pr based magnets. This importance is diminishing steadily as grain-boundary and other tech reduce the amount of Dy and Tb required to produce stable high intensity magnets.
    Other applications of HREE? Primarily phosphors. Here we need to acknowledge 2 new realities.
    First, the overall demand for phosphors is dropping steadily, as LED technology uses a small % of the flouro tech’s usage. Demand for Dy and Tb as phosphor components has crashed.
    Second we need to acknowledge Y as the Cerium of the HREE space. It represents the biggest component of most HREE deposits. It’s in massive oversupply and worth bugger all just like Ce and La.
    So really Jack; do you want to simply continue to chant LREE bad/ HREE good as some kind of mantra or would you like to actually justify the claim?

    July 13, 2015 - 11:53 AM

  • Tony

    jjbeswick, it appears to me you’re the one obsessed with LREE and HREE. Jacks been calling the magnet metals critical rare earth for a long time now.

    July 13, 2015 - 12:12 PM

  • jjbeswick

    In that case Tony why are there still comments such as “The non-Chinese heavy rare earths production projects are the best bet for investors” in the current article.
    A gross and inaccurate oversimplification IMO. Totally consistent with Jack’s other articles too.

    July 13, 2015 - 12:21 PM

  • asrms

    Might it be that Lynas’ survival to the present has been because it has not focused supply to china, but rather has been underpinned by Japanese money (for years despite all the company set backs) and almost exclusively aimed at supplying Japanese LREEs. I think that Mr. Lifton has infact talked about this nationalist/industrial support that I think has ‘saved’ Lynas to the present and caught many watchers by surprise. Just my take.

    July 13, 2015 - 1:14 PM

  • Tony

    jjbeswick you appear upset because Jack has not recommended the likes of Lynas, get over it. The world hasn’t changed, it’s still a matter economics, is the project viable at current rare earth prices or not. It’s really that simple.

    July 13, 2015 - 4:37 PM

  • Pennie

    Jack, for your information, Lynas does sell into China, as it does into Europe. It does have a priority to sell NdPr into Japan as part of its relationship with its backers. Sell to the markets that demand the product – what a novel idea.
    You write about Lynas it as if it has already met its demise. You were way off before, when you suggested production would grind to a halt as the Malaysian workers had left because they did not like working for a female boss. Well, I think you will soon be proved wrong again.

    July 13, 2015 - 9:13 PM

  • Jeff Thompson

    Jack,
    I know trying to predict commodity price timing is akin to playing darts in a dark room, but do you see prices for the market critical rare earths (let’s say Pr, Nd, Tb, Dy, and Y) recovering any time soon as China slowly transitions to a consumer economy and demand resolidifies, or do you see prices staying in an extended lull, perhaps due to inventory buildup or the slowing rate of economic growth in China (which though decreasing is still quite strong in a relative sense to other large countries)?
    Appreciate any insight/speculation you can provide.
    Regards,
    Jeff Thompson

    July 13, 2015 - 11:16 PM

  • jjbeswick

    Actually Tony, it is “really that oversimplified”.
    My comments weren’t about the viability or otherwise of Lynas but Jack’s seeming obsession with his “Heavy Good/Light Bad” mantra.
    The point I made was that the KEY REE, Nd and Pr, are both light REEs.
    Either get over it yourself or debate the point I actually made.

    July 14, 2015 - 2:20 AM

  • chris

    Mr Lifton
    Are you able to provide any substance to your claim that China is already “short” of HRE materials.
    Reliable sources of information, that are available in the public domain, contradict what you are claiming.

    July 14, 2015 - 3:46 AM

  • Tim Ainsworth

    “Sell to the markets that demand the product – what a novel idea.”

    Absolutely spot on Pennie, basic tenet of mktg, the supply side argument is looking weaker by the minute.

    July 14, 2015 - 5:39 AM

  • Jack Lifton

    Chris,

    I was an invited speaker at the 2013 Ganzhou meeting of the Chinese Society of Rare Earths (CSRE) and the Association of Chinese Rare Earth Industries (ACREI). My topic was “The North American Rare Earth Markets.” Many of the Chinese rare earth industry speakers from Ganzhou, a center of heavy rare earth processing and magnet making, spoke about the shortage of dysprosium and the concomitant need for recycling. In fact the Chairman of GQD, one of China’s largest mine to magnet operations said that it was recycling already underway that had then so far staved off a “real” crisis. I met with him after the conference and I met with the management of a magnet manufacturer who told me that their 3000 ton per annum output was “mostly from scrap feeds!”
    The commenters here on IIR seem to place more faith in the self-serving comments of sector analysts who get their information from Roskill or Metal-Pages (Argus) than from the Chinese themselves. Those of you who do not notice the Chinese rare earth industry’s current movement towards foreign sourcing and in making foreign direct investments to achieve that will also probably not notice that the Chinese market is not moving to rescue either Molycorp or Lynas even though Chinese costs for producing even light rare earths are climbing rapidly. Why? Because the future of supply belongs to the lowest all-in cost producers of ANYTHING! Right now for light rare earths that is China. For heavy rare earths I think the future is non-Chinese hard-rock as well as ionic clay deposits, which will be developed either by non-Chinese or by Chinese capital; they, the Chinese, can’t wait any longer, so the pressure is on.

    July 14, 2015 - 8:06 AM

  • Alex

    Interesting information about Chinese scrap rececling. At Conference Las Vegas Dadly Kingsnorth report that to his opinion magnet total production at 2013 – 80 000 tones, so 30 000 tones Nd-Pr oxide needs. But in 105 000 tones Rare-earth contents only 22 000 tones, so he decided that illegal mining is around 10 000 tones Nd-Pr oxides that needs 40 000 tones of LREE Concentrate. And at discussions he refuse possibility that Chinese get this additional quantaty from scrap rececling.
    But European rececling scrap, japanese also , I guess and Chinese rececling – so those additional quantaties are mostly from scrap rececling than from illegal mining.

    July 14, 2015 - 9:37 AM

  • Jack Lifton

    Alex,

    All of the “data” on illegal mining begins with an offhand comment by Dr Chen Zhengheng, the deputy chair of the CSRE. I first heard it from him in late 2011 when he and I were on a team assembled by a major miner to evaluate the rare earth industry outside of China. He said at that meeting that 40% of rare earth production was “illegal” and unreported. This is the source of all of the pontification by the so-called experts. At the meeting in Ganzhou referenced above in an earlier comment by me Dr Chen was my host, and he repeated that figure for a Chinese audience. Nonetheless as I also mentioned above two Chinese industrial CEOs, one from Baotou and another from Ganzhou, while not refutling Dr Chen, pointed out that the majority of the deficit was being made up by recycling.
    I am voting for recycling as the domestic resource that is keeping the Chinese REPM and REPh industries in balance.
    I cannot help but note that when I questioned the above statement one of my Chinese listeners said, “You, Americans, waste all of the precious resources we struggle to provide, so why should we worry about you?” He meant that we don’t recycle so that why shouldn’t they? He was right.

    July 14, 2015 - 10:36 AM

  • Tim Ainsworth

    Jack, are you suggesting current pricing of Dy, Tb, Eu & Y is all a Chinese mirage?

    Along with numerous reports of production being withdrawn from market at these price levels? A charade?

    No investigation/research should rely ANY single source, and rare earths certainly prove up that point, but why would China be manipulating HRE prices to this level? To hide a shortage of HRE, when they are trying to give it away at these price levels?

    Phosphors are VERY clearly yesterday’s news and if we cross reference two sources, Kingsnorth’s DyO demand estimate 800/850t 2016 with Asian Metal report (link available on request) of 700t in current inventory we’d have to wonder if 85% of annual demand wasn’t sitting in warehouses??? Particularly with 2014 exports making the grand total of 21t.

    I totally agree with Pennie above, this issue is market demand driven, not supply side, and certainly not for a few hundred tons of Dy/Tb annually, where ROW demand ran 32t 2014. Particularly where ROMEO, Ames and numerous ROW end users are reporting significant success in Dy reduction/elimination.

    By far the largest end user of RE is the auto sector, particularly passenger vehicles, and this is a sector forecast to be dominated by US & EU manufacturers thru 2025, particularly mid to upper range models. In fact a recently identified trend could well extend that, the rapid emergence of a Chinese second hand car market. Lynas is very focussed on reaching these ROW end users either directly or thru intermediates, with the qualification that China can function as an intermediate also.

    Have you forgotten Lynas foundation contracts to autocat & FCC, then NiMH amongst others? Obviously slipped your mind that the Japanese came to Lynas with the funding & 70% offtake for Ph2, pity they didn’t to do take or pay, but suggestions are things are back on track there with 80% of product sold there last year. And as confirmed in 2014 AR Lynas has been into China selling NdPr with a European flavour, understand there is more of that going down right now. Appears you don’t weight supply security as the Japanese & Europeans apparently do. BTW, with Mt Pass demise I wonder if WR Grace will return exclusively to China for their FCC feed after their 2007 experience.

    Rather bold to lump Lynas in the “dire straits” bin right beside Moly just a few days before their QR, given a full quarter’s production might finally provide some indication of their competitiveness vs China, particularly in light of their ROW mktg advantage.

    July 14, 2015 - 10:44 AM

  • Jack Lifton

    Tim,

    Why don’t you write a regular column on all of this? My opinions are formed by my direct knowledge of the markets and the companies and my view of the managements of not only the producers but also the end-users and their supply chain. I am always open to finding out new information that may serve to change the situation and my opinions. I do not own stock in any of the companies being discussed. I sincerely believe that it is the market that is manipulating RE prices and that their volatility is do more to macro-economics than micro-. I follow RE and other technology metals and materials juniors in as much detail as I can find not to invest in their shares but to make a judgment call on when and/or if they will go into production.
    I do not see a bright future for either Molycorp or Lynas, but you may view them differently.
    BTW The market is always demand driven, so I don’t know what lesson you want me to learn.
    Jack

    July 14, 2015 - 11:18 AM

  • Chris

    Mr Lifton
    The NdFeB scrap recycling must have really taken off in China then. Surely their must be a price threshold for raw material that would render recycling uneconomical?

    As Tim has pointed out above, current Chinese stockpiles of DyO is approximately 700t. So how can this be when their is an apparent shortage crisis of DyO in China?
    And why are DyO prices at such low levels, and dropping, if DyO supply is at such a critical level?

    July 14, 2015 - 6:14 PM

  • charles.1

    A thought provoking article Jack, and one that certainly makes me concerned for most Western REE juniors. To me, the idea of mining in the US/Australia (for example) with high wages and high (and appropriate) environmental costs to sell to China is a fast road to bankruptcy, be it light or heavy REE’s. The US and Australia uses an insignificant amount of REE’s as raw materials, so the “value of security” angle falls apart immediately.

    There is no transparency, there is Chinese Government influence in pricing, the customer holds pricing power, Chinese competition will always remain in place.

    Traditionally, minor metals have been produced as by-products. The happy endings I see are for Western consumers to demand and be prepared to pay for lower impact supply chains; or a legitimate REE-as-byproduct story, where the lead product isn’t uranium. There are a couple of these projects around – no quick fixes but the possibly for a robust business, and a Western REE price setter to emerge.

    July 14, 2015 - 7:06 PM

  • Billy

    it appears Jack has been proven correct once again

    July 15, 2015 - 11:58 AM

  • Hannibal

    Investors and potential future investors in RE juniors are indebted to both Jack Lifton and Tracy for their tireless efforts to provide the public with up to date knowledge and information regarding the RE mining sector. Let us not forget how much of their time they contribute and how we all benefit from their expertise. Mr. Lifton’s valuable interviews, articles and comments in each related “forum” are greatly appreciated . Let’s try and keep that in mind when making comments and offering criticisms and opinions. After all we don’t want to reward altruism with ingratitude.

    July 15, 2015 - 12:46 PM

  • Billy

    Hannibal I was being serious when I posted the above, at the time of my post Northern Minerals had just announced that Jien Mining intend to proceed with their investment in Northern to AUD$50M – subject to regulatory approvals being received.

    In this market it’s a significant announcement in my opinion

    Like I said Jack called it correctly is how I interpret this news.

    July 16, 2015 - 3:08 AM

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