EDITOR: | August 3rd, 2015 | 13 Comments

Investing in Rare Earth Supply Security, Now or Never?

| August 03, 2015 | 13 Comments
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Deng XiaopingDeng 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:

  1. Eliminating illegal production, refining, and fabricating of REE enabled components,
  2. Strictly regulating production volumes to minimize pollution and optimize and stabilize prices, and
  3. 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.

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

Editor:

Jack Lifton is the CEO for Jack Lifton, LLC and is a consultant, author, and lecturer on the market fundamentals of technology metals. Technology metals ... <Read more about Jack Lifton>


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Comments

  • Tracy Weslosky

    Love the question at the end…

    The 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?

    August 3, 2015 - 3:40 PM

  • Jeff Thompson

    Will the Chinese possibly make bids for the North American juniors to lock up more of the available high-quality deposits under their control, or do their interests lie only in consolidating their own domestic supply without an eye to securing North American sources?

    August 3, 2015 - 10:04 PM

  • Jack Lifton

    Jeff,

    Those are good questions. I think we may soon see just what the Chinese think of our surviving North American juniors. If they make an offer to buy a company it will only be when they think the deposit can be developed at the lowest cost and the concentrates can be sent to China and processed there with the all-in costs cheaper than the same could be done in China. Of course this would prove that those deposits are the best we have. The next 6 years, the duration of the current 5 year plan and the next one, will determine the future direction of the global rare earth industry.

    August 3, 2015 - 11:28 PM

  • whaleblubber@hotmail.com

    Jeff: When it comes to HREE/CREO China has no choice but to source from outside China. My bet is the chance for obtaining at least an infusion of Chinese money lies with the large deposits having the highest grade HREE/CREO and geologically right ores. Primarily based on this thinking, I have been adding shares in just such companies while they literally are dirt cheap. It is up to each investor/gambler to determine which junior miners meet those criteria. The Chinese are long-term thinkers and I am convinced they already have been doing just that for a long time as part of the ongoing and carefully orchestrated strategy now unfolding. Meanwhile, the not-so-bright and short-sighted West just sits around bitching, slobbering and with its thumb stuck up where it doesn’t belong. In stark contrast to the West in terms of time frame, when Deng instituted his “Opening Up” program in 1979, he wanted it to be tried for a century or so! If the country doesn’t implode owing to “social stability” (as it so often has in its long history), it will make this the Chinese Century. It is for just such reasons, irrespective of the current burps on the Shanghai Exchange, that the writing already is on the (Great) wall and in Chinese characters.

    August 3, 2015 - 11:51 PM

  • James Backus

    Ms. Weslosky, to your question about integrated supply chains, I believe that Lynas Corporation currently has achieved this with its Mt.Weld mine feeding stock to the LAMP for processing into finished products. Also, it appears that Alkane may be coming up to speed over the next there to five years and may have a similar situation at that time.

    August 4, 2015 - 8:57 AM

  • Tracy Weslosky

    Thank you James for your comment. Both Jack and I have been in communication with Ian Chalmers of ALKANE this week as he celebrates his 30 years in the rare earth industry this last week. The point is that we have been following ALKANE on our site since 2009, and now that ALKANE is neck and neck with LYNAS to be the #1 market cap in the world for rare earths — everyone will be hearing more about them! The Australian did an amazing article on ALKANE 2 days ago, and we are interviewing Ian next week — so stay tuned. It is highly probable that Ian will have read your comment….thanks again.

    August 4, 2015 - 9:15 AM

  • asrms

    TOKYO, July 30, 2015 – (JCN Newswire) – Showa Denko (SDK) (TOKYO:4004) announces that it has decided to dissolve its consolidated subsidiary Baotou Showa Rare Earth High-Tech New Material Co., Ltd. (BSR), located in Baotou, Inner Mongolia, China.

    1. Reasons for dissolution

    The Showa Denko Group has two bases in China to produce rare earth magnetic alloy, namely, BSR and Ganzhou Zhaori Rare Earth New Materials Co., Ltd. (GSR), in Ganzhou, Jiangxi Province. Till now, BSR has been procuring rare earth materials from mines in China, producing magnetic alloy and selling that to Japanese and Chinese markets since its establishment. However, since 2012, when the Chinese government terminated export duty exemption for rare earth magnetic alloy, BSR’s sales to customers in Japan have been significantly reduced. Thus, BSR’s business environment is much harsher than before.

    Does the BSR drop in magnetic material supply to Japan, correspond with Lynas’ jump in NdPr product sales to Japan between Q1 and Q2 2015 (90% + jump and now 60% + market share)? Maybe the Japanese and Lynas are beginning (in a small way) to provide direction to Mr. Liftons question re., using Chinese product or not.

    August 4, 2015 - 10:23 AM

  • Terry

    It is a shame that only companies that pay their subscription to Investor Intel get mentioned in articles. It is a shame that certain commentators only discuss there exclusive commitments to certain companies. Saying that,
    Quest Rare Minerals, who has a very strong team, and a vast HREE’s and CREE’s (to be open pit mined) have the backing of the Canadian Government. Gets no mention from your commentators, or Investor Intel.
    I some times wonder if the full picture of potential Rare Earths producers in CANADA/USA are being overlooked.
    Surely regardless of who pays for a subscription, the whole news is better than a skewed/bias news. Hmmm

    August 4, 2015 - 2:08 PM

  • Terry

    Further to my above article,
    Sustainable Development Technology Canada funded by the Canadian Government. Have grant Quest Rare Mineral, see recent article from Market Wired
    http://www.marketwired.com/press-release/quest-awarded-5m-grant-from-sustainable-development-technology-canada-sdtc-tsx-qrm-2044219.htm

    The point I am making that this is very important news and I feel when commentating on the Rare Earths the whole news is better that a biased news.

    August 4, 2015 - 2:18 PM

  • whaleblubber

    Terry: Don’t you think the capex and geography alone make this a very difficult project? But do agree re. the selective coverage. Perhaps no greater example than now dead Great Western. For me, that aspect always has lessened the value of the publication and many of its articles. There is an obvious advertisement component that might not be clear to the occasional reader.

    August 4, 2015 - 7:47 PM

  • Where is Hongpo

    Great comments and news on investorintell as always. However we are all guessing here what is really going on in China.

    I am not clear as the prices are on a continuous downward trend especially HRE.
    A view from a Chinese perspective will help.

    August 5, 2015 - 3:00 AM

  • Terry

    Pierre Lortie who was President and COO of Bombardier 2000-2003
    and now is President/CEO of Quest, has been looking at quest’s capex with a magnifying glass and is very confident of reducing same.
    His outlook for quest is for the long haul as CREE’s/HREE’s will be in short supply 2020 >.
    Personally I agree.
    Further more I am a small investor in this company.

    August 5, 2015 - 8:20 AM

  • Tim Ainsworth

    Interesting asrms, particularly “sales to customers in Japan have been significantly reduced” when you link to a 20 month old news release:
    http://www.sdk.co.jp/english/news/13382/13817.html

    August 7, 2015 - 4:34 AM

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