China and India Vie for the World's Natural Resources, Part 1: China in Australia

China's hunt for natural resources to feed its already substantial heavy industrial base and its growing consumer products industry is fueled by the huge reserves of capital accumulated by the Chinese state and driven by the single-minded goal of full employment for China. America's weak and increasingly isolated response to this drive by China for natural resources is to ignore it and assume that America and the Western world will be allowed by China to continue to follow the American model of myopic free market capitalism in which natural resources will always be miraculously made available to the highest bidder. American bankers like to say that the golden rule is that "Them thats got the gold makes the rules." They're wrong. The rule is "Them thats got the rare resources makes the rules." Its already the last few minutes of the first half of the new "Great Game," and it's not looking good for the home team.

China has no hidden agenda in its quest for natural resources. It recognizes that the world's natural resources are finite, and it recognizes its own strengths and weaknesses. China also recognizes that the best use of the capital it accumulated and the technologies it got in exchange for exporting cheap labor is the acquiring control of as much of the world's natural resources as possible.

For example, China is rapidly expanding its use of its domestic iron ore resources and reserves in Inner Mongolia and is using the current recession to buy into the Australian part of Rio Tinto (RTP), one of the big three of world iron ore production. China, if successful, hopes to break the monopoly on the pricing of iron ore today held by Australia's BHP (BHP), Brazil's Vale (RIO), and AngloAustralian Rio Tinto. As the world's largest producer of steel, China in 2008 produced 1/3 of the world total, China has nothing to lose and everything to gain by spending whatever it takes to acquire as much of the non-Chinese iron ore of the world that it can.

A Chinese company is also buying Australia's OZ Minerals, the world's third largest zinc producer. China will thus get new supplies of the less common metals that are byproducts of zinc production, cadmium, germanium, and indium, which are the critical metals for electronics and thin film photovoltaic solar cell production.

China is today the monopoly producer of rare earth metals; it mines between 90 and 95% of the annual global total. That monopoly would have been threatened had either Australia's Arafura or Lynas gone into production; Lynas is also building what was to be the world's largest rare earth refinery in Malaysia. Two Chinese mining companies have now put an end to that threat permanently. Arafura now has a 25% Chinese partner, which is also the majority owner of a new joint venture with Arafura to explore for and develop iron ore resources in Australia.

At the same time CNMC, China Nonferrous Mining company, has made an offer to buy 51% of Lynas and to put up the money to guarantee the construction of Lynas' rare earth refinery in Malaysia. It's not much of a stretch to imagine that in return for the money for the refinery CNMC will get an offtake of the refinery's output from Lynas, and, I would imagine, Arafura, for many years to come.

Chinese company's thus will control shortly an output of Australian rare earth mines that has been projected to reach a total of 40,000 mt a year by 2015. Coincidentally this is the exact amount of the shortfall predicted in Chinese domestic rare earth supply, in order to satisfy Chinese domestic demand, by 2015.

Unless North American mining financiers put MolyCorp's Mountain Pass rare earth mine back into operation, develop Thorium Energy's Lemhi Pass rare earth deposits, and finance the production of rare earths at Canada's Hoidas and Thor Lakes, owned respectively by Great Western Mineral Group and Avalon Rare Metals, then the electrification of vehicles, wind power development, fluid cracking catalysts, and personal and military electronics will all depend on the kindness of the People's Republic of China towards North American industry and its military from now on.

Chinese companies will of course make promises to keep western customers supplied. But China's companies have the same priorities as the Chinese state, so if a demand crunch occurs expect it to be non Chinese customers for rare earths who take the brunt of it.

The next Chinese five-year plan, which the above moves are intended to reinforce, may set China up for a very long time.

Let the rare earth games begin, and be aware that time is running out for the USA as a major industrial power.

Comments

[AJB7]

Thanks for a very informed article that confirms information from other sources. I do happen to be long various resource commodities already, but leaving personal investments aside, what is worrying is the geodynamic squeeze on the US now that it is financially handicapped by trying to rectify past economic blunders.

2009 May 06 08:56 PM

[feipar]

So...what's india doing?

2009 May 06 09:59 PM

[one eye]

Try looking at an automaker in India, thats right, Cars.

Tata Motors, TTM, can't build them fast enough.

2009 May 07 02:54 AM

[Eamon Keane]

According to the USGS China produced 120,000 tons REE last year and apparently they have 27,000,000 tons reserves or enough for 225 years at current production levels.

Is China's current production capacity 120,000 tons? What are the constraints (time and practicality) on them ramping up production should they choose to? I think I read somewhere that they might have a stockpile, is that correct?

Is the world relatively well explored for REEs, or is there a potential for finding new REEs? Thanks.

2009 May 07 01:45 PM

[RiskReturnOptimizer]

Long FXI and FXA. China and Australia will be great strategic partners for the long term.

US -- not much it can do right now with all the domestic problems; maybe get friendlier with Venezuela???

2009 May 08 07:05 PM

[prudentinvestor]

While we are busy subsidizing our incompetent bankers and McMansions; China and India are accumulating resources for their next move up the economic ladder.

2009 May 09 09:03 PM

[Living4Dividends]

PrudentInvestor - I 100% agree with that statement.


On May 09 09:03 PM prudentinvestor wrote:

> While we are busy subsidizing our incompetent bankers and McMansions;
> China and India are accumulating resources for their next move up
> the economic ladder.

2009 May 10 08:32 AM

[Dark Night]

As resources are getting more scarce its important to buy a company like this. Vale is engaged in potash,iron ore, nickel ,oil cobalt ,cooper etc.

Vale has a ok dividend yield of 3.5%. Sooner or later commodity stocks will rebound. Vale will be one of those. Vale under the name Rio hit $40 last year and no doubt in the future Vale will return that trading range when this recession ends.

One should read Jim Rodgers book on commodities .

2009 May 28 01:20 PM

[renim]

jack,
a current bright spot on the aussie market is a company called Galaxy Resources, they want to build a lithium mine in WA (hard rock, like greenbushes), the processing will be in China.

2009 Aug 09 11:51 PM