The Chinese Yuan, Rare Earths And The Selection Of Critical Mining Projects — Technology Metals Research

The Chinese Yuan, Rare Earths And The Selection Of Critical Mining Projects — Technology Metals Research

If you’re reasonably well informed about global trade issues, then you know that the USA and China disagree politically on the relative value, of the Chinese renminbi in US dollars, and that the renminbi’s exchange rate with the US dollar is set by the Chinese government. This is because the world market has chosen not to make the renminbi freely convertible (exchangeable for other currencies at a rate set by a free market, not by the issuing country). This is itself because the Chinese government exclusively sets the exchange rate, and its power to do so is based on the immense size of its trading economy surplus (of export value over import cost), and on the fact that China has now built up the world’s largest (ever in history) reserves of ‘hard’ currency (convertible to US dollars), in the form of US dollars themselves.

These two factors allow the Chinese to keep their currency pegged artificially low, relative to the value that the free market would give it in terms of US dollars. The US government, for all of its bravado and the ranting of internationally powerless members of the US Senate, can do nothing to force the Chinese to strengthen the yuan (the basic unit of renminbi).

China is thus enjoying a powerful advantage in that it takes fewer dollars to buy a yuan, than it should if the global free market operated in China. This is because China has accumulated so much ability, not just potential, to affect the world trading (export/import) markets.

With that introduction I am going to issue a caution, perhaps even a warning, to all of those calling for sustained increased prices for the rare earths. Be careful what you wish for.

“China speeds up yuan’s globalization” is a headline that appeared in the International Business Times last week. It joins a flood of other stories on this topic, now filling the news prior to a meeting between the US and Chinese presidents in this coming week. My first thought was to wonder how this Chinese move will affect the rare-metals market.

The US dollar supplanted the British pound sterling between World War I (a war which essentially made the UK insolvent) and the end of World War II (which made the UK bankrupt). Note well, that the British Empire gave up a century and a half of economic gains in a 31-year (1914-45) effort to decide the mastery of Europe, which the combatants started out believing would decide the fate of most of the world. Southeast Asia was a backwater in both wars as far as the issuer of the world’s de facto reserve currency (the UK) was concerned, in 1914 and in 1939. In 1947, Imperial Britain had been replaced by a fundamentally still-isolationist United States, as the absolute center of the financial world. In 1947, the USA held for its own account or for safekeeping, half of all the gold in the world. No greater accumulation of gold had ever before been seen, nor has it been since, at least so far.

The Chinese Empire collapsed in 1912, in a series of events more noticed in Hollywood than Washington, DC. Yet no Communist revolution immediately followed the fall of the last dynasty in China, as it did in Imperial Russia six years later. China literally seethed in revolutions and dictatorships until Japan, emulating European empires in their death throes, decided to create a protectionist trade zone with a complete self-sufficiency in the supply chains for metals, minerals and energy. It called its plan the ‘Greater East Asia Co-Prosperity Sphere.’ The first move by Japan was to try to conquer China, piece by piece, to get its resources and acquire control of its population for use as labor.

The Japanese were defeated in China by the USA, which belatedly came to southeast Asia’s rescue when the Japanese miscalculated the consequences of going to war, with a far-off enemy with a larger manufacturing economy. The Chinese in all their suffering, noticed the Japanese error and resolved to never let it happen to them again. Note that the Communist revolution and ascendancy in China started during the attempted Japanese conquest, which went on for 14 years! The Communists were successful in 1949 and China became The Peoples’ Republic of China, as it is called today.

America, sitting on a massive hoard of gold in 1949 and enjoying the greatest industrial manufacturing-based consumer boom in history,ignored the devastated economy of China as too big a problem to solve in a reasonable time. It decided instead to revive Europe (and as it turned out, Japan) as a hoped-for market for American goods and services, to be paid for with cheap labor at first. Even though no- one in the McCarthy era period of anti-Communist knee-jerk political correctness would admit it, there was a feeling that the Soviet Union could and would now get bogged down for generations in China, which was seen as a basket case.

Unfortunately, many Americans of the political and economic class are basing their decisions with regard to China, as if the USA could catch up with Chinese politics and economics by simply adjusting America’s 1960s view of China. It is too late for that.

The Chinese renminbi has now begun a journey that I think ultimately will result in the yuan and the dollar both being reserve currencies and then in the yuan surpassing the dollar as the stronger reserve currency. This will occur in lock-step with the US reducing its ability to create wealth, through the production of natural resources and their conversion into finished goods in surpluses that can be exported, while the US maintains its standard of living.

This will probably not happen overnight; it could take a generation, because we are still in the period where Chinese investors are accumulating the US dollar as the reserve currency because they still fear using their own currency as a safe harbor, and because they have so much of the reserve currency that they are able to affect the political choices of the issuer of that currency.

The Chinese are well aware of the fact, conveniently forgotten by American politicians, that while the UK was the issuer and guarantor of the world’s reserve currency, it was also on the gold standard, and it was the world’s policeman, whether it liked it or not. Britain was the world’s policeman in order to protect its imperial trade routes. America did not take over this role after World War II. Instead, it immediately went to Cold War to prevent the ‘spread’ of communism. The greatest defeat in that Cold War was considered to be ‘the loss of China,’ although no-one suggested war either to prevent or redeem China’s ‘fall’, even when China as the newly minted PRC went to war with the US, by proxy, in Korea, which the US then, as now, refers to as a “police action.” In all fairness to the politicians of 1949 and the USA, we had just concluded a massive effort that destroyed China’s attempted conqueror, Japan, and the American people did not perceive the ‘loss’ of China as a near-term problem.

China is today still not a credible, conventional military threat to the USA. As in the Middle East, technology and training beat ill-equipped, ill-trained masses, every time. This means that militarily, without the direct and credible threat of mutual atomic annihilation, China cannot prevent the USA from acting anywhere in the world even as close to its own shores as Japan or Taiwan. China’s recent probing of Japanese resolve on sea floor rights to energy and minerals, has been cast as a rare-earth issue by myopic viewers of the international scene, and self-interested parties looking for drivers for investment in non-Chinese rare earth production. In fact, the confrontation was merely a skirmish in a larger war for natural resources, begun nearly a century ago by Japan, in emulation of Britain.

In the world of international trade of utilitarian commodities, metals, minerals, and energy sources, China is the demand driver overwhelmingly. Essentially all investment in new productive capacity for utilitarian commodities, is to add supply for serving Chinese demand. If this is a slight exaggeration, at least it is true that no-one would make anywhere near this level of investment, if it were not for the collateral of massive Chinese demand growth.

To put it mildly, China is in the driver’s seat (excuse the pun).

At the moment. China is the dominant player in the rare-earth space, which is where the operation of Western free-market capitalism, always seeking the lowest price, placed China. This cannot and will not change for two to three years, the least time it will take, if everything goes according to plan, for new or restarted production and refining in significant quantities of rare earths produced outside of China, refined outside of China, and incorporated in end-use products outside of China to come to the world market.

So, what is this to do with the value of the US dollar and the Chinese yuan?

If China continues to hold the price of the yuan where it is against the US dollar, then the only pressure to produce rare earths outside of China will be for strategic advantage to ensure security of supply, to maintain both civilian industry and military uses free of Chinese influence and control.
China today controls the rare-earth supply chain, because its price structure has moved that entire supply chain to China up to the point where high-purity metals and alloys are delivered to end users. Even there, at the point of end-use manufacturing, China is today the low-cost producer and so today, China is not only the monopoly producer of the rare earths, it is the dominant end-user of rare earths in the manufacturing of finished goods.

At least half or more of these rare-earth-containing finished goods are made in China for the export market. Therefore, it is in China’s economic interest to prevent the export of rare earths as raw materials. This has been the exact direction of Chinese export controls on rare earths since the beginning of this century.

If you believe, as the Chinese do, that the only remaining threat to their total control of the rare-earth supply chain is the Japanese rare-earth end-use products industry (such batteries, permanent magnets and lasers), then you will put pressure on Japan to move the last of the world’s non-Chinese, high-value-added sectors of rare-earth-based product manufacturing to China, or give the Japanese a reason to allow Chinese manufacturing competitors to compete in Japan (which today Japan does not do, in the case of magnets). Either of these moves would create jobs in China. which is always the goal of the Chinese economy, as it is the goal of the Japanese economy, and as it should be the goal of the US economy.

The point of all of this, is that it is China who will benefit most from price increases, for the rare earths as fabricated forms for industrial manufacturing end-use.

Chinese analysts predict that by 2015, China will produce just two-thirds of the world’s supply of new rare earths. Chinese analysts assume that Lynas, Molycorp, and perhaps, Toyota in Vietnam, will produce the remaining third.

The Chinese analyst community is silent about the overall percentage of the total value-add rare-earth supply chain that this one-third will represent.

I think that China will be completely self-sufficient in domestic rare-earth production for its supply chain in 2015 as it is today. I also think that higher prices for rare earths are inevitable as China cleans up the environment in general and in mining in particular. The one, the greening of rare earth mining, adds costs to rare-earth mining; the other, the greening of the Chinese economy, adds demand. Both are upward price drivers.

The real question is how much of the higher costs of rare earths can be absorbed by the Chinese supply chain, before increases in cost for value-add rise, to where a competitive supply chain can be economic in a foreign (to China) country other than Japan. Note that as rare-earth prices go up in China, they will also go up in Japan and that Japanese labor and overhead is vastly greater than that of China today. The gap will close, if it closes, only slowly even at Chinese rates of growth of costs. Those who think they will operate in the USA to add value to rare earths mined and refined in the USA, need to demonstrate that their supply chain total costs are below those of foreign competitors. Historically it is the very fact that this has not been so, which has driven the rare-earth supply chain to Japan and China in the first place.

China, in my opinion, has always wanted higher prices for rare earths, but has been prevented from getting them by fierce internal competition for supply from both legal and illegal sources. The elimination of unethical, dirty, and illegal competition is the target of the current consolidation and environmental remediation (of the rare earth mining sector) initiatives within the PRC.
Now, what about the value of the Yuan?

Chinese goods bought in China must be purchased in renminbi; that is the law. In order to buy or trade goods within China a foreign company must place a hard-currency deposit in a Chinese bank, as collateral for being allowed to purchase renminbi for use only in commercial transactions, at an exchange rate set by the Chinese Ministry of Finance.

So, if the Chinese re-value the renminbi up to reflect its strength as the US demands, then the number of dollars to buy the same number of renminbi will increase. Thus, without doing anything at all, the costs of Chinese goods to foreigners in the dollar/euro/yen economic zones (all of them are hard currencies exchangeable at market rates for one another), including rare rare earths, will rise, but the renminbi price will not rise just on that account.

If China, after imposing an increase in the value of the renminbi, then sees its internal rare-earth prices go up in renminbi, there will be a larger proportionate increase in the number of dollars it will then take to purchase the renminbi, to purchase the rare earths.

I believe that the cost of the rare-earth fabricated forms necessary to make end-use products in mass production, is only a small part of the final cost of the finished goods.

Therefore I believe that an increase in the prices of the rare earths in renminbi, without a contemporaneous increase in labor rates in China for workers who produce the finished goods, does not change China’s competitive advantage in the value chain for rare-earth-based products.
Unfortunately, such an increase will serve in the above case to make non-Chinese value chains even more uncompetitive, since other than in Japan, they will need to invest large amounts of capital to start or restart operations to refine, fabricate, and utilize rare earths in consumer products, and will at the same time have to train largely inexperienced engineers and workers to do jobs for which there is little or no domestic prior experience base to draw upon for instructors. Even if these barriers of capital and skilled labor are overcome, they will now have to play catch-up in technology and compete economically with long-established Chinese and Japanese industry, which has not been standing still waiting for them.

The best market plan for non-Chinese miners who plan to produce rare earths, is to acquire or JV with existing companies that already have the skill sets needed. These will be Chinese, Japanese, French, British, Indian, or Estonian companies. Some have already done this. Any mining venture that intends to go head-to-head with a Chinese mining venture, solely on the ability to produce ore concentrates or even separated and purified chemical compounds must, I think, fail.

There is also one more thing that all rare-earth end users must do. They must secure their supply of the total of the critical rare earths for their products or processes. This means to me, that they must secure their supplies of one or more of lanthanum, neodymium, samarium, europium, dysprosium, and terbium.

Since nature does not provide any one rare-earth deposit with commercial quantities of all of the rare earths, or all of the above critical rare earths, it is necessary always to choose one from ‘Column A’, a producer of the light rare earths, and one from’ Column B’, a producer of heavy rare earths. This is even true for the contemporary Chinese rare-earth-containing finished-goods industry.

The most critical of the current rare earths are dysprosium and terbium, two of the heavy rare earths, today produced only in China and historically produced only in the former Soviet Union and in China.

There are only a small number of rare-earth projects outside of China capable of producing commercial quantities of dysprosium and terbium. Some or all of these MUST be brought into production as soon as possible, because it is said by the Chinese themselves, that their heavy-rare-earth production has less than 25 years remaining at present levels, and much less if demand increases. China, like the rest of the rare-earth-using countries, is therefore also seeking out heavy-rare-earth production.

I believe that for heavy rare earths, and only heavy rare earths, strategic need will overcome simple economics, or at least the capitalization of strategic need will create the necessary economics to bring heavy-rare-earth-themed mines into production.

There will be no non-Chinese, rare-earth-based, mass-produced devices utilizing rare-earth permanent magnets, until a reliable steady supply of dysprosium can be secured. The lighting industry outside of China will founder ,without a secure supply of the heavy rare earth terbium.
Therefore, if there is to be a non-Chinese, rare-earth-utilizing manufacturing industry, one or more of the heavy-rare-earth deposits that are technically feasible, must be brought into production even if it is not economically sensible on a freestanding basis as a business.

You need to look at the TMR Advanced Rare-Earth Projects Index, produced and maintained by my colleague Gareth, as a metric to decide which rare-earth mines are going to be critical to Chinese and non-Chinese rare-earth supply chains. I am going to make my own selections in a separate article, so that I can explain to you why I chose some over others.
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About Jack Lifton

Jack Lifton is today's leading authority on the sourcing and end use trends of rare & strategic metals. He is a Founding Principal of Technology Metals Research, LLC and President of Jack Lifton, LLC, consulting for institutional investors doing due diligence on metal-related opportunities. When not trotting around the globe, Jack calls the suburbs of Detroit, Michigan home. Check out Jack's full bio for more details.

WorldBank: Financing Energy Efficiency: Lessons from Brazil, China, India, and Beyond

The World Bank has recently published a book, “Financing Energy Efficiency: Lessons from Brazil, China, India, and Beyond”. According to the book, Brazil, China and India will more than double their energy use and greenhouse gas emissions within a single generation if they fail to implement successful energy efficiency efforts.

Alarming figures
China, India and Brazil are three of the world’s top 10 energy consumers. Together these countries are expected to represent 40% of the world’s population and be responsible for well over 50% of all energy demand by developing countries. By 2030, they are expected to account for 42% of growth in energy demand worldwide.

Bob Taylor, a World Bank energy economist, explains his and the other authors’ approach in writing this book, “We dissected the energy efficiency terrain through this study to find out why it’s so hard to get the right incentives in place so that more investment can happen. What we found is enormous untapped potential – especially in Brazil, China and India – but plenty of good solutions that can work as long as the financing and investment environment is in place and there’s plenty of commitment from policy makers.”

Need for action
According to the authors, energy efficiency is critical in these countries “for reasons of energy supply security, economic competitiveness, improvement in livelihoods, and environmental sustainability.” While they see gradual improvement in the three countries, “when you think about the sort of energy demand of even one of these countries in the next decade, the need for action and much faster progress is very clear,” says Taylor.

The authors conclude that implementing energy efficiency projects could - to a certain extent - be cheaper than providing new supplies. However, the development and financing of energy efficiency projects would be impeded by weak economic institutions in these developing and transitional economies. The authors analyze these difficulties, suggest a 3-part model for planning and financing energy efficiency retrofits and present thirteen case studies to illustrate the issues and principles involved.

The Book
Robert P. Taylor , Chandrasekar Govindarajalu , Jeremy Levin , Anke S. Meyer , William A. Ward, “Financing Energy Efficiency: Lessons from Brazil, China, India, and Beyond”; The World Bank (February 2008).

The book is available for a free download or as a hard copy through the World Bank’s Infoshop.

"Smart" Energy Management for China's Transmission Grid

Via Renewable Energy World:

November 13, 2008

by Lou Schwartz and Ryan Hodum

Beijing, China [RenewableEnergyWorld.com]

On November 9th the Chinese government approved a US $586 billion stimulus plan focused on large-scale investment in low-income housing, water, rural infrastructure and electricity in China. Though the primary purpose of this initiative is to spur economic growth at a time when exports are falling, as the Chinese stock market is in the doldrums and GDP growth is flagging, a secondary effect of this stimulus plan may be increased investment in renewable energy and energy efficiency in China.

This effort would include accelerating efforts to achieve the goal of reducing China's energy consumption per unit of GDP by a cumulative 20% by 2010. One very promising approach for China to build energy conservation into its infrastructure is the construction of a "smart grid."

The "smart grid" is the merging of electricity infrastructure with information technology. The purpose is to add monitoring, analysis, control and communication capabilities to any national electrical delivery system to maximize efficiency while reducing energy consumption. Creating a unified power grid and upgrading aging power systems will increase productivity, reduce carbon dioxide emissions and increase national security.

The Need for a "Smart Grid" in China

In 2002, China established five independent electricity generating companies and several transmission companies. The five generators have an equal share of the assets — China Huaneng, China Datang, China Huadian, Guodian Power, China Power Investment — and compete to sell electricity.

The State Grid Corporation of China (SGCC), the Southern Power Grid Corporation and the Eastern China Grid Corporation are among China's transmission companies. The largest utility in the world, SGCC serves 26 provinces and 1.08 billion people with a peak load of 343 gigawatts (GW) and total investment in grid construction valued at US $31.8 billion in 2007. China's second largest utility, China Southern Power Grid, is ranked 226th in Fortune Magazine's Global 500 listing with revenues exceeding US $30 billion.

Throughout China, the existing regional grids have weak interconnections between provinces and largely non-existent interconnections between grids. In order to solve this deficiency, the Chinese government has plans to create a unified national power grid network by 2020.

The plans include what is known as the "West-East Electricity Transfer Project," which requires the construction of three major west-east transmission corridors: North, Central and South. The transmission capacity of each corridor is expected to reach 20 GW by 2020. While planning for such major infrastructure investments, the government would be well-positioned to lay the foundation for "smart grid" capacity across the country.

The Eastern China Grid Corporation initiated a feasibility study of "smart grid" technology in October 2007. Shi Junqing, the General Manager of Eastern China Grid Corp. described the findings earlier this year. In terms of the large load on its grid, the assets that it has built into its system, the necessity of continuing to build out the network and the increasing environmental, safety, reliability and efficiency pressures that it faces, Eastern China Grid Corp. believes that the conditions are now ripe for it to put in place a smart grid system; to that end the company has established a goal of gradually putting in place the elements of a "smart grid" over the coming years.

International Collaboration on "Smart Grid"

Efforts to develop and deploy "smart grid" technology are underway across the globe, supported by industry coalitions such as the Energy Future Coalition and the GridWise Alliance in the United States, Smart Grid Europe, and Smart Grid Australia.

In the United States, for example, although the transmission grid is 99.97% reliable, brief power interruptions have cost the country nearly US $100 billion each year; apart from enhanced reliability, smart grids promise to increase efficiency of power distribution and usage, with corresponding savings in power and power consumption.

With respect to China, international cooperation that focuses on energy efficiency includes the efforts of the philanthropic arm of Google, which has awarded a grant of US $250,000 to the U.S. National Academies and the Chinese Academies of Sciences and Engineering to develop recommendations for U.S.-Chinese cooperation on renewable electricity - central to which is a focus on grid connectivity and energy storage.

The Joint US-China Cooperation on Clean Energy (JUCCCE), a non-profit organization that brings together international experts to accelerate the use of clean and efficient energy in China, has been selected by the Clinton Global Initiative to organize The China Smart Grid Cooperative. JUCCCE is positioned to raise US $770,000 to run this initiative in 2009 and has plans to partner with international companies such as Duke Energy and GridPoint to accelerate "smart grid" development in China.

This week (Nov. 10-11), JUCCCE is convening the JUCCCE Energy Forum in cooperation with the Energy Foundation and the National Development and Reform Commission. The JUCCCE Energy Forum will include a presentation on smart grids by IBM and will surely afford the opportunity to further the efforts of JUCCCE to engage the leadership in Beijing to urge the development of a plan to develop a smart grid in China.

Business Opportunities for Foreign Companies

Opportunities exist for foreign corporations to benefit from "smart grid" investments in China. In March, American-owned Composite Technology Corporation announced an order valued at approximately US $3.1 million for high efficiency conductors. In June, ABB Ltd., a Swiss-owned manufacturer of power-generation equipment, won a US $70 million order for power equipment from the State Grid Corporation for a high voltage DC (HVDC) transmission link in northeastern China to transmit 3,000 megawatts (MW) from Inner Mongolia to Liaoning Province.

Siemens recently announced an order from China Southern Power Grid Corporation to build the first 800-kV ultra high voltage DC system able to transfer 5000 MW of power to load centers on the southeast coast. In addition, IBM has developed products to implement smart grids that it is promoting throughout the world, including in China.

"Smart Grid" Accommodates Breakthrough Technology

The State Grid Corporation of China (SGCC) has plans to create a nation-wide electric-vehicle charging network with charging stations currently installed in Shanghai, Beijing, and Tianjin to name a few. It was recently announced that General Motors is collaborating with the SGCC to meet Chinese market demand for the Chevy Volt.

However, without aggressive investment in "smart grid" technology, this initiative may stumble as it attempts to expand across the country. The plug-in electric vehicle will depend on network improvements as much as today's car depends on petrol stations, which will require sophisticated appliances to communicate oscillations in energy supply and demand.

Exporting Smart Grid Technology to Other Asian Countries

In addition to creating a "smart grid" infrastructure, China also has the opportunity to export "smart grid" best practices. Recently it was reported that the State Grid Corporation of China won a US $3.95 billion bid for a 25-year contract to manage the Philippines' electricity grid (arguably the largest privatization deal in Philippines' history). A significant opportunity exists for China to collaborate with the rest of the world on investing in the grid of the future.

China is in a unique position to develop the world's most advanced power distribution network by adopting smart grid technologies as it further develops and enhances its power grid. The question is whether China is willing to take the lead and be at the forefront of the "smart grid" revolution that is surely the future of worldwide power distribution.

Lou Schwartz is president of China Strategies LLC, and publisher of the China Renewable Energy and Sustainable Development Report and the China Aluminum Industry Report. He has degrees in East Asian Studies from the University of Michigan and Harvard University where he studied Chinese language and literature, economics and law, among other disciplines. Lou also earned a J.D. from George Washington University Law School.

Ryan Hodum is an environmental and renewable energy professional who recently earned a Master of Arts in Global Environmental Policy from American University in Washington, D.C. with a focus on renewable energy utilization in China. He now works for David Gardiner & Associates LLC, a strategic consulting firm focused on climate and energy solutions. Ryan spearheaded the development of China Strategies' China Renewable Energy Interactive Map and the China Solar Map, which can be found on China Strategies' website.

China's GM ambition raises biosafety concerns

Source: Nature

6 November 2008

China's recent roll-out of a a US$3.7 billion research programme to develop genetically modified (GM) crops, particularly rice, has been hailed by supporters as the means to feed the country's swelling population.

But opposition remains strong due to concerns ranging from the health and environmental risks to regulation loopholes, writes Jane Qiu in Nature.

GM rice developers have shown that introducing Bt (Bacillus thuringiensis) or other anti-insect genes can cut pesticide use, labour costs and yield losses caused by pests.

But ecologists such as David Andow, an entomologist at the University of Minnesota, say other pests have overtaken those targeted by Bt, and gene outflow through cross-pollination might be unavoidable.

Others warn that GM technology safeguards could be undermined by the monoculture of rice and lack of adjacent refuges, which would encourage resistant pests; the absence of effective labelling of GM seeds; and the illegal release of GM varieties from laboratories.

Worryingly, many stakeholders are being excluded from the agriculture ministry's biosafety evaluation process.

However, the International Assessment of Agricultural Knowledge, Science and Technology for Development warned in April that a narrow focus developing GM crops is misguided. "Without a concerted global effort to restore soil fertility, genetic modification would be futile," its president, Hans Herren, says.

Link to full article in Nature