Investing in Rare Earth Supply Security, Now or Never?
Deng Xiaoping put China on its modern trajectory by inverting the path chosen by his moist well known predecessor, Mao Zedong. Deng chose to advance the trek towards communism by adopting a form of capitalism, but, as he said, one “with Chinese characteristics.” From that time, the early 1980s until today (Summer 2015) capitalism advanced in China almost entirely without a stock market. At least not with one open to the retail (general public) investors and traders. Many pundits see Capitalism with Chinese characteristics becoming indistinguishable over time from American free-market capitalism. But at least in the both the major and the minor (including technology) metals industries this is decidedly not true. China’s state owned enterprises (SOEs) do not need to raise money in the stock market nor do they manage their businesses so as to ensure good quarterly results to support their share prices.
In the currently running 5 year plan (the template that the Chinese government uses to establish budgets and direct the national economy) the Government is implementing a plan to consolidate and restructure the rare earth supply chain under the control of a group of six SOEs. This project is well under way. Its intent is to regulate and control the production of rare earths and the component products utilizing them by:
- Eliminating illegal production, refining, and fabricating of REE enabled components,
- Strictly regulating production volumes to minimize pollution and optimize and stabilize prices, and
- To impose and acknowledge the true costs (i.e. capitalize them) of environmental management and productive efficiency so that environmental damage can be minimized or eliminated and REE ventures can be made profitable even with these recognized (capitalized0 costs and therefore pay their taxes while remaining profitable.
Today, August 3, 2015, it was announced in the Chinese language (and reported in brief by Reuters) that Chinalco (China Aluminum Company), an SOE, and the world’s second largest producer of alumina, which is pretty impressive for a company that has only been in existence since 2001, has decided to invest 400 million Yuan in a business it calls “China Rare Earth Co Ltd.”
Chinalco is one of the six SOEs to which the Chinese government has assigned the project of restructuring the Chinese domestic rare earth supply chain to make it efficient, profitable, and non-polluting.
The distribution of responsibility for the rare earth supply chain was to have been along geographical lines, and it mostly is, but bureaucracies are bureaucracies and turf fighting has resulted in the responsibilities for the six SOEs being not quite geographically defined.
Chinalco, among others, supervises Shenghe Resources of Shanghai of which we have heard quite a bit lately. I want to emphasize that Shenghe’s aggressive marketing of its technologies and its sourcing of raw materials outside of China is done with the approval of Chinalco, which in turn is done with the approval of the central government of China under the current 5 year plan.
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So when Chinalco announces that it will “invest” 400 million Yuan in an entity called “China Rare Earth Co Ltd” I think we need to recognize that this will be a subsidiary of Chinalco intended for the management of its, Chinalco’s, responsibilities for the supervision, control, and assistance to those Chinese rare earth ventures under its mandate from Beijing.
I will not at all be surprised to see the “new” Chinalco venture open offices, or operate from existing Chinalco offices, in places like Peru (where Chinalco is preparing to mine copper), Australia (where Chinalco has long been involved in iron, aluminum, and minor metals), and in North America and West Europe [The EU], where Chinalco’s supervisory responsibility, Shenghe Resources, is looking at not only rare earth sourcing but also at new and newly applied separation technologies for rare earths and other technology metals and materials.
While American, European, Brazilian, South African, and Australian rare earth producers and juniors squabble with each other and promote their share prices as their only hope of raising new capital in a market dominated by China’s use or pause in the use of the majority of the world’s rare earths as well as the majority of all metals, Chinalco is methodically planning to diversify its sources of raw materials and to seek out technology sales or purchases to improve its efficiencies.
When will non-Chinese rare earth and minor metals juniors and struggling producers learn to do the same? Microcaps and even mid-caps cannot compete with Global1000 vertically integrated industrial giants. China created its SOEs in natural resources precisely because it knew that lesser ventures could not compete with the world’s Global1000.
China has now brought its previously very vulnerable rare earth industry under the umbrella of its vertically integrated industry leading SOEs.
The squabbling microcaps are being defeated in detail just by the existence of the new Chinese organizations.
The Chinese realize that their advantage of low cost skilled labor and non-capitalization of environmental costs is rapidly coming to an end. The remaining question is: Will non-Chinese capital and national and regional security considerations finally go to the creation of total rare earth supply chains outside of China, or will Chinese capital and national ambitions simply re-structure the rest of the world to accommodate China?
We will have the answer surely by 2020.
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>