China strikes back
Tuesday, 26 November 2019
By Bernd Struben
- The price of 30 years of indifference
‘Growing global demand for critical minerals means there is huge scope for Australia to develop secure and stable supply chains to meet the growing demand for critical minerals in key economies such as the US.’
Resources Minister, Matt Canavan
China is striking back.
No, fortunately not in Hong Kong. Not yet, at least…
It remains to be seen how the Communist Party reacts to the trouncing Hong Kong voters delivered to its pro-Beijing candidates. Petulant grumbling aside.
Voters turned out in droves for the local council elections. A record 71% of registered voters participated. By the time the dust cleared, they’d handed 85% of the 452 district council seats to pro-democracy candidates.
That leaves only one of the 18 council seats in the hands of pro-mainland government candidates. Pro-democracy candidates control the other 17.
If that’s the work of interference from ‘foreign forces’, as Chinese officials claim, those forces did one heck of a job. But then the concept of individuals making personal decisions isn’t something you’d expect Party officials to understand. And certainly not appreciate.
But as we await China’s next move on Hong Kong, the nation is striking back in another key global battle ground.
The rare earths market.
More, after a look at the markets…
All the major stock indices we track here are again well into the green today. Both the Nasdaq and S&P 500 closed at new record highs.
Once more, investor sentiment has turned bullish on hopes Trump and Xi will…finally…sign off on phase one of a trade deal. That won’t end the longer term trade ructions, mind you. But it could smooth the waters as Trump begins to gear up for his 2020 re-election campaign. And Xi certainly wouldn’t mind a bit of good news to deliver back home either.
Reports of two big takeovers also drove animal spirits. France’s Louis Vuitton acquired US luxury brand Tiffany’s for US$16 billion. And Charles Schwab acquired TD Ameritrade in a US$26 billion stock-swap transaction.
And investors took note.
Overnight, the Dow Jones Industrial Average closed up 190.85 points, or 0.68%.
The S&P 500 closed up 23.35 points, or 0.75% for a new record high.
In Europe the Euro Stoxx 50 index closed up 20.36 points, or 0.55%. Meanwhile, the FTSE 100 gained 0.95% and Germany’s DAX closed up 82.57 points, or 0.63%.
In Asian markets Japan’s Nikkei 225 is up 64.63 points, or 0.28%. China’s CSI 300 is up 0.10%.
The S&P/ASX 200 is up 51.59 points, or 0.77%.
West Texas Intermediate crude oil is US$57.92 per barrel. Brent crude is US$63.65 per barrel.
Turning to gold, the yellow metal is trading for US$1,453.79 (AU$2,150.56) per troy ounce. Silver is US$16.86 (AU$24.89) per troy ounce.
And after a string of losses, bitcoin edged back overnight, up 2.5%. One bitcoin is worth US$7,218.06. (Stay atop the latest crypto action and investment advice here.)
The Aussie dollar is worth 67.74 US cents.
The price of 30 years of indifference
As you may know, rare earths consist of 17 different metals.
These metals are crucial in the manufacture of most pieces of modern equipment. That includes consumer electronics, magnets and batteries. It also comprises the full suite of high tech gear modern militaries rely on. Fighter jets, submarines, satellites, missiles…you name it.
With that in mind, you’d think major Western powers would long ago have ensured a secure supply pipeline through trusted partners. But, as you can see on the graph below, that type of strategic planning seems to have gone missing.
Click to enlarge
In 2018, China produced more than 70% of the world’s rare earths. That level of control remains China’s most powerful weapon in any disputes with other nations.
China’s supremacy in this market didn’t come about by happenstance. 30 years ago China labelled rare earths as strategic materials, banning foreign companies from mining contracts.
For decades, Western policy makers didn’t appear to notice…or care.
The Middle Kingdom’s glaring dominance only really came to light after Trump launched the trade war. China can’t match the US in tit for tat tariffs. And it can’t win a shooting war. But as Xi Jinping signalled when he visited Chinese rare earths producers earlier this year, his nation can sever the supply chain at will.
That realisation has seen the US and Australia fast track agreements to produce and process far more rare earth elements within their own borders.
As Federal Resources Minister Matt Canavan said earlier last week (quoted by The Sydney Morning Herald):
‘The US has a need for critical minerals and Australia’s abundant supplies makes us a reliable and secure international supplier of a wide range of those, including rare earth elements… This partnership has the potential to lead to the development of new rare earths mines in Western Australia and further trade between the two countries.’
This new partnership hasn’t escaped China’s notice. And they’re responding not by restricting rare earths…but by ramping up their own output.
‘China said this month it’s raising its annual mining quota for rare-earths to 132,000 tons, 10% above last year’s record high. It’s a move likely to weigh on global prices, dealing a blow to rivals including the U.S. and Australia, countries that agreed just last week to jointly accelerate new projects in a push to diversify the supply chain.’
It’s a bit like the Saudis opening the oil taps in 2015 in a bid to crush US shale producers. That move saw WTI crude fall to US$29.14 per barrel in early 2016. And it did pressure some higher cost shale producers to shut down production…until the price went back up. Then they were right back in business.
But China’s ploy to ramp up supplies and drive down prices is likely to fail for other reasons.
You could argue oil is as critical to the West’s consumers and militaries as rare earths. And for the coming decade or two, that’s largely true.
However, the West already controls a large share of global oil production. So the US could afford to let some of their oil producers go idle. But as you saw in the graph above, outside of China, the US and Australia, the rest of the world produces only 7.7% of all rare earths.
And the US and Australia combined produced less than 21% of the global supply last year.
From an economic and militarily strategic viewpoint, that’s downright mad.
Which is why I don’t believe a potential fall in rare earths prices will derail the US-Australian commitment to break China’s stranglehold on these vital metals.
As Canavan flagged last Wednesday, Aussie and US export finance agencies could employ new measure to speed up rare earths mining projects.
If China plays hardball and genuinely attempts to oversupply global markets, the US and Aussie governments might well step in with direct subsidies.
That’s not the way the free markets are intended to work.
But it does mean the outlook for up-and-coming Aussie miners currently carving out their niche in this sector looks brighter than ever.
If you prefer to stick to the bigger end of the market, you could consider the $1.6 billion Lynas Corporation Ltd [ASX:LYC]. It’s the largest rare earths miner outside of China.
Lynas share price is down 11.8% over the past 30 days. But it’s still up 46.1% year-to-date.
If you’re hunting supersized gains…and are comfortable taking on more risk…you’ll want to look at the smaller end of the spectrum.
Over at Australian Small-Cap Investigator, Sam Volkering is convinced he’s found three ASX-listed rare earths plays that are poised to shoot the lights out.