EDITOR: | August 13th, 2015 | 2 Comments

One more hurdle for rare earths — China’s dramatic devaluation

| August 13, 2015 | 2 Comments
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Man jumping over the hurdle“Today China is the largest commercial consumer of commodities, just as America was in the late 1920s, and her slowing economy is putting downward pressure on commodity prices, pushing up the purchasing power of money of the other major currencies. Put another way, falling energy and commodity prices in yuan are forcing deflation upon the rest of us.”

So this week writes Alasdair Macleod, for 27 years a broker in the City of London and now running his own website on gold as money, which is widely followed and quoted. I’ll come back to how this trend will impact rare earths, in particular.

He has a point – and one that should not be lost on investors and miners involved in commodities, but particularly the technology metals with which we are concerned (rare earths, graphite, tungsten, tin, lithium – you name it, they are all to be affected by the enormous China development this week).

I am talking about the People’s Bank of China and its double-barrel barrage to force down the value of the yuan (or renminbi), pulling it down against the US dollar (and with the PBOC again on Thursday guiding down its currency). First on Tuesday, then early Wednesday the central bank lowered the peg for the yuan against the greenback. This is the biggest yuan devaluation since 1994 and already we’re seeing a cranking up of the currency wars with Vietnam allowing the dong to trade in a wider range, and Indonesia’s rupiah and Malaysia’s ringgit both at levels against the U.S. dollar not seen since the 1998 Asian financial crisis.

But back to rare earths, and the story in Tuesday’s edition of China Daily. “Rare earth miners slip into the red” was the headline; meanwhile, in the body of the report we learn that, from a speech at the 7th China Baotou Rare Earth Industry Forum, some 90% of China’s rare earth companies are making losses “as rare earth prices continue to plummet due to overcapacity and illegal mining”. This development was chronicled earlier in the week on InvestorIntel when correspondent Hongpo Shen reported that “the collapse of the China’s rare earth prices is weighing heavily on the country’s six large state-owned rare earth producers”.

Chan Zhanheng, of the Association of China Rare Earth Industry, said at the forum that many rare earth companies were facing the need to close units due to losses. Too much capacity had been opened when REE prices soared.

China Daily said production capacity in the country for neodymium iron boron permanent magnets was 8,000 tonnes in 2000 but in the subsequent 15 years had ballooned 50-fold (which would make 400,000 tonnes; no doubt it has grown substantially, but by that much?)

But back to what Macleod was saying.

Back in the period just after the 2011 rare earth bubble burst, I kept making the point that, apart from the REE fundamentals themselves (such as moves by end-users to find substitutes), the sector was also suffering in general because of the widespread retreat in 2012 of mineral commodity prices. Not many commodities can go against a significant general movement (either way).

That again is the problem now. But, on top of that, China’s devaluation adds another dimension: one of the aims of the PBOC is clearly to make Chinese exports more competitive (and imports more expensive to the Chinese consumer). This is likely to undermine REE prices even further. As for other technology metals, they will be affected because Chinese producers become more competitive and non-China mine plans become less attractive economically. (And any economic slowdown will also weigh on commodity prices as demand dries up.)

But, unfortunately, there is an even bigger problem. Much of the commentary over the past 24 hours has been along the lines of “this double devaluation must mean that the Chinese government knows something about the economy that we don’t, and is obviously very worried”. Let’s hope the commentatars’ instincts are wrong this time. But gold back over $1,120 in Asian afternoon trade on Thursday suggests that some investors are hedging their bets.

No one really knows what is going to happen over the coming weeks and months. But something almost certainly is.


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Comments

  • Billy

    Robin, the rare earths, are being consumed in China at a level of 80% of the world’s annual production

    http://investorintel.wpengine.com/technology-metals-intel/liftons-rare-earth-market-update-china-standing-still/

    such consumption levels won’t stop overnight, and hence the rare earths have to come from somewhere

    your story proposes that non viable Chinese producers (about 90%)should close down and yet also proposes that non Chinese developers will now find it more difficult to get into production

    if rare earth consumption continues in China at around 80% of the worlds annual production then something will have to give

    my guess is non-Chinese mines will eventually be developed on the back of rising rare earth prices, …. but not until after Lynas has been squeezed out of the game

    interesting times in which we live

    August 16, 2015 - 9:43 AM

  • Robin Bromby

    Billy
    Just to clarify: I am not “proposing” anything, merely making the point that lower prices will inhibit new mine development outside of China. This applies to all mining — if gold fell to $700/oz, you would see mines closing and plans put on ice. Tin is in a similar position: everyone in the industry knows that there is a shortage coming (with uranium, too) but no one is going to try and raise development money when the price is under $16,000/tonne.

    Of course, non-China mines will be able to make ago of it when REE prices improve (substantially) but that is obvious. Trying to forecast when that might happen is the tricky part.

    And what if, as I suspect, more wheels come off the Chinese economy and its domestic REE demand retreats? I don’t know — and I am pretty sure no one else does, either.

    August 16, 2015 - 9:37 PM

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