A landmark climate accord that leaves ‘green tech’ and rare earths as the biggest gainers

images6RB08RY2Yesterday – after cutting tariffs on technology products – Chinese President Xi Jinping and US President Barack Obama have signed a landmark agreement to reduce greenhouse gas emissions. The agreement obliges the USA to achieve new carbon emission targets while China will commit to reduce the rate at which these are increasing by 2030. Evidently, the two countries, the world’s largest economies, accounting for some 40% of the global greenhouse gas emissions have been quietly negotiating to reach a common approach, which could serve as the impetus to reach a new global climate agreement by 2015. It was China’s objections at the 2009 Copenhagen Summit that blocked such a treaty.

The crux of the agreement between the USA and China lies in the fact that the former will cut 26-28 percent of the greenhouse gas emissions by 2025, while China will reach its peak emissions by 2030, reducing them thereafter. Whilst this may appear, at first glance, as a climate agreement, it is first and foremost is a business deal: the green economy promises to be the largest source for global growth in the coming years. Indeed, to achieve China’s targets, Xi announced that ‘clean energy’ sources, such as solar and wind power, would supply 20 percent of China’s total energy needs. In turn, the United States will double the pace of global pollution reduction from 1.2% per annum between 2005 and 2020, to 2.3 and 2.8% in the subsequent period from 2020 to 2025. Meanwhile, China’s goal is extremely ambitious, as it will start from zero percent to 20 percent of energy consumption based on non-fossil fuel sources. Nuclear power will be one of the principal tools, along with wind and solar installations, in order to develop anywhere from 800 to 1,000 gigawatts.

Together the US and China are responsible for about one third of global emissions of greenhouse gases, and hence their agreement has an effect that is at once practical, in its provisions to cut emissions, even as it encourages all relevant parties to re-engage in the so-called Kyoto Protocol. The later will be one of the main points of the UN climate summit scheduled to take place in Paris in 2015. The agreement also carries political weight as President Obama, can use it to secure some tangible results after his Democratic Party’s defeat in the midterm elections. The first step in a series of initiatives for which he can use his executive powers to exploit and save his legacy. But there are other important facts of the agreement signed in Beijing.

China faces many years growing concerns from the population over excessive pollution and its effects on health. A recent study found that only in 2012 the number of deaths connected to coal-fired plants was 670,000re 670 thousand. The Chinese government has been working for long time to invest in clean energy (including nuclear power). Of course they are also planning new coal plants – to meet the huge and ever-growing energy demand of a country with a booming economy.  In wider terms the agreement means that demand for the raw materials needed to build and fuel the new green technology, rare earths and uranium for starters, will increase significantly.

China is the world’s largest consumer of coal-by far, using 50% of the world’s total production and driving more than 70% of its energy. Coal consumption had increased annually by an average of nine percent for the past decade. Nevertheless, there is increasing pressure for change at all levels of society. Coal has fueled China’s tremendous economic growth, but if this growth is to continue, energy production must change. The Chinese government has already started to increase its nuclear energy generation capacity, expected to quadruple by 2030; sales of electric vehicles in China have also increased.  This change and the historic US-Chinese climate agreement should affect the global production and distribution of rare earths. While domestic production fell in 2012, demand for rare earths will increase to the point where China will soon start to import these minerals.

The government cannot hold back any longer on addressing environmental degradation of which air pollution is one of its most notable effects. China will have to devote more resources to innovation to address the problem because it has become a major issue of social and political concern. Chinese citizens are no longer content to be ‘mute’; they have taken quite well to protesting to express discontent and demand for changes. Many of the recent protests have addressed environmental degradation and the lack of standards. Chinese authorities have certainly become concerned by the events known as ‘the Arab Spring’ and they seem well aware that if political and democratic rights are denied, they will have to take action.

Demand for environmental protection – a phenomenon contributing in no small part to the closure of some Chinese REE production facilities in 2012 an 2013 – and higher wages can only point to the inevitability of China losing its low-cost wage advantage and the price of its export goods will increase in accordance – no doubt leading to the emergence of new cheap labor workshop countries and, more likely, a gradual increase of the prices of many consumer goods. Xi Jinping, China’s president clearly outlined that one of his government’s priorities will be to tackle environmental degradation.  The recent crackdowns to curb illegal rare earth mining has reflected this trend, sending a signal to the West that it is becoming risky for China to absorb the environmental and socio-economic risks associated with low cost industrial practices. China itself has to change and become less price competitive with the unavoidable rise of labor and regulatory costs, resulting from stricter emissions, tougher industry entry obligations or even energy consumption.

All of this suggests that China and the USA should see a surge in internal demand for green technology solutions, leading to greater demand for rare earths, despite the lower output numbers reported by such Chinese rare earth producers as the Baotou Group (IMBREHT). The lower production of rare earths in the past year, caused by consumer reluctance and global economic uncertainty – in China as elsewhere – has already started to reverse toward a more bullish direction. About 90 percent of all currently mined rare earths come from China. With its pricing policy, the country has displaced almost all competitors from the market. The USA, Canada and Australia have been challenging this market dominance, and new mines and processing facilities are being developed. There is no risk of market saturation because when the new mines come on line, China’s experience with coal suggests that it will become a major importer of rare earths.

China used to be a major exporter – as well as user – of coal. However, with the tremendous pace of its industrialization, domestic consumption limited the amount of coal available for export, as the mineral was needed to fuel steel plants and power generation. It has not taken long for China to become one of the largest importers of coal in the world. Rare earths are staring at a similar fate – and one that is approaching at rapid pace. Domestic concerns – environmental ones in particular – will boost internal demand, limiting the amounts available for export. Ten years ago, China has consumed about 25% of domestically produced rare earths; even in the slower growth scenario of 201, China’s domestic rare earth consumption has risen to 65%. Today, 80 percent of the magnets, and 70 percent of the world’s manufactured phosphors originate from China. Domestic supplies of rare earths will not be sufficient to sustain such a rhythm of production and Chinese government agencies will have to seek other products to maintain this dominance, forcing it to seek supplies elsewhere. China’s pollution is encouraging news for the newly emerging rare earth plays.

Hong Kong’s student protests scare Beijing

umbrellaSome have described it a “Little Tiananmen” but the leaders of ‘Occupy Central’ have a clearer notion of what they want to achieve than their Chinese cousins in 1989. This is because, unlike the citizens of the People’s Republic of China, the inhabitants of Honk Kong know what freedom, democracy, and rule of Law mean. This means that they are prepared to endure any sacrifice to convince Beijing to listen to their demands. Predictably, nobody in Beijing is going to listen, much less go along with them. The protests intensified over the past weekend and they have waned somewhat on Monday; however, the movement will not be dissolved by mere the police’s tear gas. Furthermore, should the protests continue, intensify and lead to the police being forced to using arms, there is no telling what ripple effects it could have in the heart of the Chinese mainland, where social conditions and, paradoxically, the emergence of middle class in the urban areas, might well respond in tune with Hong Kong’s students. Beijing is facing a significant challenge and it will have to address it with finesse.

In 1997, Hong Kong changed status from being a British colony to a Special Administrative Region; the architects of the transformation were UK Prime Minister Margaret Thatcher and Chinese Premier Deng Xiaoping. The former colony has always lived with the idea of being special, free and independent. Hong Kong and China have always had a special relationship but the city’s streets have always feared the possibility of a sudden invasion from the mainland. Many Hong Kong residents actually fled in 1997 because they were convinced that Beijing would impose its own political customs to the island, crushing freedom and independence, including through violence if necessary. Well, looking at what’s going on in the streets of Hong Kong today, with police charging the barricades constructed by the students and their professors, one might call it a delayed reaction. The city-state cannot help but fear the worst, because the situation has the potential for exacerbating out of hand.

Hong Kong will become to all intents and purposes Chinese in 2047; however, the students have taken to the streets now because they fear that China is fully ready to take over now. They have read the signs, which include Beijing’s lifting of freedom of the press to the imposition of higher education curricula and the appointment of the gubernatorial candidates, who would be allowed to campaign to run the Island. In other words, the Communist Party will choose who can and cannot run for power in Hong Kong. The ‘democratic candidates’ will be chosen by the Executive Committee of China, effectively rendering the entire electoral process, pointless. Surely, Beijing has imposed too much too soon even if Hong Kong has lived under the illusion that it could remain “special”.

Universal history has taught that when the dialogue degenerates into struggle, it is difficult to keep the situation under control and under reason. The fear is that, with neither side willing to give in, this very difficult confrontation could escalate and do so suddenly. China, however, is acting rationally because it worries that the democratic wind from Hong Kong could easily reach the island of Macao – just a few dozen kilometers away – and then hit the Mainland, threatening the power of the Communist Party itself. The students, for their part, have excellent timing. President Obama and western nations have spoken about democracy and freedom at length throughout the duration of the UN General Assembly over the past week and throughout the Ukrainian crisis that has intensified since last January. Beijing clearly fears the inevitable moral support for the protesters in Hong Kong from the British, the former colonial rulers, and from Washington. The Chinese government has, in fact warned the United States and other foreign nations, not to interfere in Hong Kong’s internal affairs of Hong Kong, stressing that it is a Chinese internal matter. Ignoring the appeals of the Hong Kong and Chinese Government, thousands of people have stayed in the streets to protest. Braving the risk of bursts of tear gas and batons, thousands of protesters continued their protests over the weekend.

The protesters have chosen the umbrella as their symbol, given its ability to protect from the scorching sun and from tear gas such that in social media, the Hong Kong protest has already earned the title of the umbrella revolution”. The student protesters also remind observers of ‘Occupy Wall Street’, the protest movement that began in the United States on September 17, 2011 in an effort to block New York’s financial centre. In fact, the students have blocked the financial center of Hong Kong.  ‘Occupy Central’, the name of the Hong Kong protest, has a founder, Benny Tai Yiu-ting, Associate Professor of Law at the University of Hong Kong, who started the civil disobedience movement in January of 2013. Tai Yiu-ting has been careful to keep the protest focused on Hong Kong rather than try to appeal to the West and its regional allies; however, Taiwan has already expressed its support to the people of Hong Kong. Some Taiwanese students have exhibited signs that read “Today, Hong Kong, Taiwan tomorrow”, expressing the hope, therefore, that the island of Formosa can finally get rid of Beijing.

The protests in Hong Kong come at a time of tension in the East China Sea with Japan and the South China Sea with Vietnam and other regional powers. However, the repercussions will be more economic than geopolitical at first. Hong Kong serves as the financial link between China and the world. Should the protests turn into a sustained political movement the resulting turmoil will have deep economic repercussions. While the students have expressed concern over freedom, democracy and human rights, Hong Kong’s business leaders, care more about stability and their wealth. They have accused the students of damaging Hong Kong, threatening its wealth. The financial markets have reacted in tune with the business leaders’ concerns, as shares took a bearish turn. Ironically, Beijing, which has celebrated China’s ‘conquest’ of Wall Street as Alibaba (NYSE: BABA), amid concerns of lower economic growth, scored the largest ever IPO, will side with the business elite rather than the idealistic students. Karl Marx is surely rolling in the grave. The students can leverage the economic concerns on both sides because a compromise may be the only solution that would ensure business stability and China’s long term full absorption of Hong Kong, averting a wider national and international crisis – and its inevitable economic effects.

Nuclear energy plans in Japan and China to boost uranium prices in 2014

imagesQB508INNUranium prices should improve considerably in 2014; certainly, there are all the prerequisites for a U3O8 ‘renaissance’. New reactors are being planned for construction and old ones slated for improvements.  The uranium market has welcomed this week’s announcement from the Japanese government that nuclear will continue to be included as an essential component of the country’s energy mix. Since the Fukushima disaster, the price of uranium has experienced a severe ‘correction’.

The spot market price for U308 has fallen to the USD$ 35/lb. range, losing more than half its value over the past three years. In the medium and long term, Japan’s return to the market is certainly reassuring for the future of uranium demand, even if Japanese energy companies are unlikely to rush to purchase beyond that they have already contracted or stockpiled. This suggests that the real demand boost will occur later rather than earlier in the decade. Nevertheless, China’s uranium appetite is increasing rapidly. Japan plans to restart 17 reactors and almost half of those may resume activity in 2014 alone, as inspections clear them for safe usage. Meanwhile, China and Japan will inject by themselves, considerable demand into the uranium market. The United States, it may surprise some, also needs uranium imports because domestic supply is about one tenth of its current consumption and because the 1993 US-Russian ‘Megatons to Megawatts Program’, allowing the US to purchase surplus Russian enriched uranium from military stockpiles ended last year.

As of January 2014, Chinese uranium concentrate imports rose 22 % compared to the average monthly purchases in 2013. Importantly, in 2013, Chinese uranium imports reached a record of 18,968 tons of concentrate, exceeding the current needs of existing nuclear power plants, whose annual consumption is estimated at between 6,500 and 7,500 tonnes. Evidently, China is keen on accumulating uranium stocks and this should come as no surprise to observers of the energy sector. The Chinese government aims to install 50 GW of nuclear capacity by 2017; it now stands at 16.6 GW. Uranium production in China is still undermined by the poor quality of the available ore its slow development activity. Yet, the current price of uranium is too low and Chinese buyers have been exploiting the opportunity to buy and accumulate it at such low prices.

In 2013, Chinese – and others – U3O8 buyers, were able to pay less than USD$ 50/lb for the first time since 2006. Since that time, it is estimated that China has accumulated close to 60,000 tons of uranium, which is about the same amount as is mined in a year (overall) and enough to fuel eight years of energy generation at today’s rates. It is important, therefore, as also noted by such as analysts as Stefan Ljubisavjevic at the Macquarie Group, that spot uranium prices start rising in order to halt the uranium stockpiling at bargain basement prices before the Chinese government decides that they have enough stockpile. In other words, the analysts suggest that uranium producers slow production rates in order to raise prices. Nevertheless, there are more reassuring statistics for uranium investors, which suggest that slowing down production may be a little drastic.

More than three-quarters of the primary energy consumed on earth still comes from fossil fuels (coal, oil and gas). Due to a sharp drop in prices and rising worldwide energy demand, coal consumption has burst, reaching 6 billion tons per year; the International Energy Agency (IEA) has even predicted that coal will be the world’s most consumed fuel for energy in the world – even more so than petroleum. For those of you, in the northeastern and Midwestern USA and eastern Canada, still concerned about ‘global warming’ – hit by the coldest winter in years – coal is blamed for producing nearly half of global CO2 energy related emissions, while oil generates 30 % and gas 20%. How many CO2 emissions does nuclear energy produce? A negligible amount. So, rather than browbeat us with warning of cataclysmic events, flooding apocalypses and the end of skiing as we know it, governments should start to consider uranium as the true and effective energy source for the future.

Driven by global economic development, world energy consumption will only grow while renewable energy sources, which now account for just over 15% of world consumption, will be useful but will fulfill a complementary role because they are still a long way from being able to address the ever-increasing and unprecedented thirst for energy fueling economic growth in areas of the world with huge populations that have yet to even tap into the energy grid.

Energy generation will have to double at least over the next few decades 40 years. If you care about CO2 emissions, this increase will ensue only by using sources that do not produce it such as U3O8. For those who care about plain old soot and dirty air, smog, which lead to actual ailments, sickness and limit breathing, simply consider the current Chinese scenario. This past week, about 15% of China’s territory, including the capital, Beijing was suffocating under record levels of pollution exacerbated by increased winter time use of coal. In Beijing, a thick layer of air pollution covered the city last week, prompting taunts and concerns on social networks and one citizen to actually sue the government. The U.S. Embassy in Beijing observed that, the density of soot particles to be 2.5 microns in diameter at a density of 400 micrograms per cubic meter in the capital, which is sixteen times higher than the limit of 25 micrograms recommended by the World Health Organization (WHO) in a twenty-four hours exposure. And note:  this is while China is experiencing a supposed slow economic growth period 6-7%, not the 11-12% of past seasons. Not surprisingly, the International Energy Agency suggests that up to 350 new nuclear reactors should be built worldwide by 2030 to address energy demand.

Experiments combining nuclear reactors with particle accelerators, as performed in Belgium, may lead to a process to incinerate radioactive waste in the long term, making nuclear energy even more ‘palatable’. The scientists say that such a process will be operational in a decade, achieving a rapid neutron transmutation of elements contained in radioactive nuclear waste, reducing by a factor of 1000 for the period that these elements remain highly radioactive. This should remove one of the major obstacles is the source of opposition to a growing proportion of the public in the operation of this form of energy.

Last Wednesday, when the Japanese government formally announced its plans to continue using nuclear energy, shares of some of the main uranium producers did, in fact witnessed a welcome increase, including Denison Mines (TSX: DML) +10.8%, Cameco Corp (TSX: CCO) +4% and Energy Fuels (TSX: EFR) +4.6%. France’s Areva (PA: AREVA), one of the largest uranium miners and reactor producers, suffered a bit but recovered on Friday, gaining 1.19%. The reason for the lower gains is unrelated to the uranium market and more closely tied to its risks in Niger and Mali.