EDITOR: | September 28th, 2016 | 12 Comments

In Metals, China Domination = Criticality of Supply

| September 28, 2016 | 12 Comments
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Even ten years ago the British Geological Society was a very low profile institution and scarcely figured on the radars of mining folk, with the USGS being far better known and cited far more often. However, while the USGS was known for its annual individual metals summaries, the BGS appeared on the scene with a wallop at the end of the last decade with its broad reaching study and ranking of criticality of metals, which came to be known as the “Risk List”. The first of these to glean notice was the one that staked out Rare Earths as being the world’s most critical metal in terms of supply problems. This made the list, the favoured bedside reading of every Vancouver promoter for a fleeting moment.

Here is the latest version of the Risk List.

BGS_risk_list

Despite having fallen out of favour with investors, the Rare Earths have remained at the top of the rankings of criticality over the more than half a decade since their first flush and the debut of the “risk list”. Well they might because if one weighs up the metals that are most important (in terms of volumes and breadth of applications) and yet still the most tenuous in having an open supply source, then Rare Earths justifiably rank as those with the most critical supply outlook. Frankly reading between the lines of the BGS list the prime characteristic that gets any metal rated critical is NOT a lack of supply, but that the Chinese have any sort of dominance in a metal, and thus the ability to turn off most or all supply in a situation where countries are “fixing bayonets”.

The China Syndrome

We cannot fault the BGS’s targeting of China as the main driver of criticality. The Chinese brought this designation upon themselves when they escalated the fishing boat incident of several years ago into a full-blown ban upon Japanese companies receiving exports of REEs sourced from China. When they took that action they signaled that they could and would repeat this across the whole spectrum of strategic metals in which they have a dominance of either production and/or processing. Hence when one looks at the current list of metals ranked by criticality there is a heavy weighting at the top towards metals in which China has a dominant position like REEs or Antimony (or is perceived to have a dominant position, like Tungsten). Amongst the other top ranked metals where there is perceived to be Chinese dominance are Gallium and Germanium, both with valuable high-tech application. Nine out of the top ten metals are China dominated in the BGS’s opinion. The 10th is Cobalt where fears have stirred in recent years that the DRC’s key position is being cultivated by China as an almost exclusive offtaker. Bismuth, Antimony and Indium are infamously remembered for having been the three horseman of the apocalypse at the FANYA Exchange with Chinese retail investors piling in to real or imagined positions in real or imagined warehouse stockpiles with negative blowback for the prices of the metals in question.

Exposure

The big issue, as always is how to get exposure to these metals. Is exposure to the metal alone (through an explorer) as good as being exposed to production or potential production? In many cases though the choices of producers can be narrowed down to a finger on one hand.

Starting at the top, there are still some REE companies around. Of these only one (Lynas) is a producer while there is a chance that several of the juniors will actually move up to the front ranks. Almost all of the potential producers are represented frequently in the commentary on InvestorIntel’s pages. This reinforces the general feeling that InvestorIntel is the go-to place for this metal.

In Antimony the number of plays outside China is a sparse choice indeed. There is one US-listed company with no production of its own and some processing in Mexico. There is one TSX-listed company which has by-product Sb production in Australia.

Bismuth is largely a by-product of base metal processing, while Gallium and Germanium are almost totally Chinese sourced.

Vanadium exposure is obtainable via Largo Resources (TSX: LGO) (OTCQB: LGORF), a primary producer in Brazil but much of the rest of production is by-product in nature (including, strangely, as a result of gasoline processing). The upcoming source that a number of companies are talking of is as a byproduct of revived uranium/vanadium mines, of which there is a strong potential in the Mountain States of the US. Those are dependent upon the Uranium price coming to the party. Vanadium though has potential to become an “energy-metal” in its own right if Vanadium Radox batteries start to gain traction on a larger scale (pardon the pun).

Tungsten has been written of extensively by us in the context of Almonty Industries (TSXV: AII), the consolidator in the space. Tough pricing in recent years has thinned out the number of juniors significantly. The producer ranks have also been winnowed by the collapse of Malaga and the bankruptcy of North American Tungsten. There are a number of sizable projects still going around but these require higher prices to get funded and that is not happening for the moment. This leaves China with the whiphand and explains why end-users have anointed Almonty, and the new producer that has come on-stream in England, as their favoured suppliers.

Moly is a strange appearance so high up the rankings. Pricing has been so bad in recent years that producers have almost been giving away the product while the largest primary producer in the West, Thompson Creek shuttered its mines. The bulk of non-Chinese output is ex-Chile as a by-product of copper

The Second Decile

This group contains a heavy weighting of more accessible metals that we cover with frequency on InvestorIntel. Lithium and Graphite come in at 15th and 17th respectively. These rank as critical due to their importance in the battery applications. While the Chinese don’t have anything like the amount of Lithium that they need they have been hyperactive in securing access to supplies. Neometals (ASX: NMT) is an obvious case in point of a company that has an arrangement with them. Graphite is a mineral long dominated by Chinese output that should shortly see more diversified in its non-Chinese sources. Ironically, as mines in the West fire up the criticality will probably decline due to China’s reduced control on supply. Beryllium we speak of often is totally dominated by the US. This in itself is a restriction because, from what we hear, the US actively discourages the evolution of alternative sources of supply to maintain this dominance. As a result almost all the processing of the metal also takes places in the US with two companies dominating that converting/alloying activity.

Finally, the survey sort of undermines its credibility with Silver ranked in the top 20 of metals by criticality. Frankly even a silver-nut would not argue that this metal is in short supply. There is not only substantial supply from mines, but there are also large passive investment holdings and there is a vast stock of jewelry that holders would release if the price rises. The spike to $50 several years ago (and the Hunt Brothers corner decades ago) shows that high prices produce a tsunami of supply from householders at the right moment.

If we have any criticisms beyond that we would say that Tantalum (a conflict mineral) and Tin (with declining alluvial production and Indonesia restricting concentrate exports) are far more near the edge of a supply crisis than many of the metals ranked as having a higher risk. Both should definitely be in the second decile. Scandium does not even feature on the list, but as applications expand it could be a prominent feature in five years from now.

Conclusion 

I thought it might be an interesting exercise to run the BGS Risk List as a filter over the universe of InvestorIntel companies at the current moment. Here is how it turns out.

bgs_ii

Understandably with the first decile so dominated by obscure metals under Chinese domination the representation suffers a big gap between the Rare Earths companies and the Vanadium players. Not surprisingly the Lithium and Gold spaces are the most densely populated due to them being the most favoured by markets in recent times.

The task for companies and promoters (and dare I say, governments) is to encourage companies to go forth and fill up the gaps in the strategic and critical metals matrix. The Chinese don’t dominate Gallium, Germanium and Antimony because they are the only country that has these metals. It is only because of a conscious policy on the part of the Chinese government and an unconscious acquiescence on the part of West that has allowed this situation to evolve. A goal for 2020 (dare we call it a Five Year Plan) should be to break the Chinese dominance in the top ten metals on this BGS list.


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Comments

  • Jack Lifton

    Christopher,

    A superb bit of analysis and reporting. I am amazed that governments that spend billions to prepare for preparing for an increase of global temperature spend nothing on natural resource self-sufficiency as resource nationalism puts paid to globalization.

    Jack

    September 28, 2016 - 1:53 PM

  • Alex

    It is interesting to read but it will be more usefull if you give us real supplyers company in each metal instead of InvesterIntel list of projects which probably never became real supplyers.

    September 29, 2016 - 3:22 AM

  • Nicolas Tremblay

    Hello,

    There is a typo in the name of our company as it is on the second list. Please correct it as it should be Nouveau Monde.

    Thank you

    September 29, 2016 - 7:26 AM

  • Jack Lifton

    NdPrTbDy

    Shenghe, the parent company, is a vertically integrated rare earth permanent magnet producer anchored on producing mines. It is now part of the Chinese rare earth consolidation system as a subsidiary of Chinalco (China Aluminum and SOE giant). I do not know anything specific or more than you do about the relationship of Shenghe’s trading arm and Kvanefield, but I do know that Shenghe has retained experienced western rare earth mining and processing experts (not me) to advise it. I was well aware of Shenghe’s serious interest in non North America deposits in development 3 years ago when I was still associated with Tantalus AG (I have no relationship with that group at this time). Today I am aware that Shenghe is an investor, not a piggy bank. Even a promising “development” must undergo a due diligence to assess the probability of its PROFITABLE development. It is not at all unusual for an investor doing due diligence to pay for the privilege. This “fee” is often mis-interpreted as an “investment.” Quite frankly Shenghe is 100 times more qualified to assess a “deposit” of rare earths’ probability of going into production than any Western institutional investor I have ever met. You can’t go far wrong watching to see if Shenghe perfects its “investment” in Kvanefield.
    Jack

    September 29, 2016 - 8:59 AM

  • Christopher Ecclestone

    To reinforce my point about Tin, I would note that, for the first time since early 2015, tin again neared the $20,000 per ton mark. The International Tin Research Institute (ITRI) expects global tin demand this year to grow by up to 1% to around 350,000 tons, basing its assessment on a survey of tin consumers that was conducted in recent months. It expects a major contribution to the increased demand to be made by the Chinese soldering industry, which has apparently picked up noticeably of late. Commerz Bank’s Commodity Daily yesterday noted that the reduction of tin stocks on the LME, that has been observed for months now, also points to solid demand for tin. LME tin stocks have dropped by half since the beginning of June, and at 3,650 tons currently find themselves at their lowest level since November 2008. It was above all the supply side that has helped drive up the tin price in recent months, however.

    Although Indonesia, the world’s largest tin exporter, had exported somewhat more tin again recently, its average exports this year have been below 5,000 tons per month. To balance the world market, Indonesia would need to export up to 8,000 tons of tin per month.

    September 29, 2016 - 9:25 AM

  • Christopher Ecclestone

    In response to Alex’s comments I would note that the two Lithium projects most imminently coming into production are Neometals and Galaxy (which is returning to production). Largo actually is producing Vanadium and has been for several years, while it is difficult to think of any companies aside from the ones in the II universe that are so advanced in Rare Earths. Lynas is the ONLY non-Chinese primary producer. Almonty now has three producing Tungsten mines which is more than anyone else.

    Who are these mystery names you would have me propose? US Antimony (which has no mine)? Orocobre (which I regard as a Short)? The latter has a larger market cap than Talison had when it was taken over and is plainly overvalued.

    Clearly one of your favorite stocks is not on the list but that is not a reason for me to tout the virtues of a mystery stock you will not share with us.

    September 29, 2016 - 9:32 AM

  • Tim Ainsworth

    Interestingly, with Asian Metal currently reporting: “China’s PrNd oxide producers’ average operating rate slides by 6.69% MOM to 46.81% in August 2016 [09-27]” we learn from Lynas’s FY Fins: “Revenues by geographical location, based on invoicing as a percentage of total revenues, comprise: Japan 39%, China 47%, Vietnam 8%, France 5% and other 1%”.

    China the major 2016 FY customer by revenue @ 47%, up from 23% 2015, and all the more remarkable given sales volume growth 7.9kt to 12.5kt, considering: “It has been estimated by industry bodies that at current prices 90% of Chinese producers are unprofitable”.

    That’s a hell of a lot of “ice to the Arctic”, particularly while the Dragon is struggling.

    September 29, 2016 - 9:46 AM

  • Jack Lifton

    Tim,

    It must be about “selling price” then. Chinese producers losing money can perhaps lose less money if they buy at cheaper prices fthan they can achive from outside. Of course what this says for Lynas’ operating margins…

    Your thoughts?

    Jack

    September 29, 2016 - 10:07 AM

  • JJ Beswick

    I very much doubt it’s Chinese RE producers importing the Lynas REO into China.
    It looks from the $ breakdown that it’s mostly Nd/Pr oxides, probably going to magnet makers. Demonstrates IMO that Lynas, given its quality and cost of production, can out-compete most Chinese production: Baotou being the likely exception.
    Finally I think the BGS survey is fatally simplistic in its REE analysis. After all, REE comprise 15% of the elements in the periodic table. There are at least 3 or 4 distinct REE markets with very different dynamics. Anyone putting Ce/La at the top of a criticality list is plain ignorant. They are well supplied commodities, however important. The phosphors are, sadly, fading badly as LEDs replace flouros. So much for Eu and Y. Dy and Tb’s other main application- magnets- have found ways to eliminate or drastically reduce their usage; so much for them. Others such as Gd have emerging niche applications such as magnetic refrigeration but they’re minor for now.
    The real game in the RE space is magnets and Nd Pr; they are the elements that deserve that number 1 ranking.

    September 29, 2016 - 11:12 AM

  • Tim Ainsworth

    Jack, I’d suggest it says far more about Lynas relative CoP than margins ATM, but a host of factors at play.

    What is interesting is to compare the Lynas 2016 FY market place by value, 94% China & Japan (presuming Vietnam Japanese customers), balance ROW just 6%, with Chinese export volumes by destination, particularly given +55% YTD, on target circa 45kt which would the biggest volume year since 2007 and represent +40% of China’s production quota.

    Potentially 40% of China’s official production volume going ROW, half of Lynas sales value just gone into China, the other half effectively Japan.

    At the same time: “2016 January to August, total exports of Chinese rare earth permanent magnet was 17,560 tons, an increase of 14.3%” while “China’s PrNd oxide producers’ average operating rate slides by 6.69% MOM to 46.81% in August 2016”.

    Go figure, though locating 60GW Wind Gen in the wrong spot might help account the later.

    September 29, 2016 - 12:03 PM

  • Christopher Ecclestone

    Point well made, JJ, on Cerium/Lanthanum and their lack of “risk”to supply. However, as I noted the BGS are arguing that anything (bottletops or plastic buckets) that are dominated by the Chinese are potentially at risk no matter whether they are worthless or not. Its pretty much an existential statement that you cannot trust the Chinese as far as you can throw them.

    The West may well come to rue its needy relationship with China. The long-term Australian PM, Sir Robert Menzies was known to his dying day (and beyond) as “Pig-Iron Bob” because he exported the product to Japan during the 1930s and then had it come flying back as bombs and torpedoes less than ten years later.

    September 29, 2016 - 12:41 PM

  • Jack Lifton

    Christopher,

    In that case it seems appropriate to label Obama as PU Obama (Pu being plutonium, which if produced with our money and raw materials and returned to us will be the end of even the Kardashians.)

    I suspect that the Iranians are going thre easier route of the U-235 gun type bomb, so perhaps it will be more accurate to call him Obama the Bomb.

    Jack

    September 29, 2016 - 1:14 PM

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