Commodities Update: China's Rare Earth Element Reserves to Last Less Than 20 Years

by: Proactive Investor

Commodities are seeing rather mixed and somewhat lackluster trade today, with some mild gains in the dollar weighing on the energy, precious and base metals complexes. Risk aversion is generally dominating sentiment in the commodity arena as a knock-on effect form the equity markets, following some disappointing results from Apple (NASDAQ:AAPL) and IBM (NYSE:IBM) after the bell yesterday. Rare earth elements ((NYSEMKT:REE)) on the other hand, all be it a very illiquid market, is seeing a lot of attention today after China signalled that their REE reserves will only last 15 to 20 years.

The Chinese Ministry of Commerce said that at current production rates, their known reserves would only last 15 to 20 years, and signalled it may even be necessary to begin importing rare earth’s in a few years time. This signals a significant shift for the country and the market as a whole, with the Asian giant by far the largest REE producer in the world, at around 90% of global REE production. That said, the ministry did state that for 2009, the country only had 20 million tonnes of REE reserves. Although the extent to which this will impact the markets in the short term is yet to be seen, it is fair to say the statement comes as much form a political angel as t does a commodity one.

The move could be perceived as sabre rattling, amid the ongoing disagreements between the US and China. Rare earths particularly, have been the point of much contention in recent years between the two nations, with the US currently preparing a law suit in front of the World Trade Organization (WTO), after China dramatically decreased their export quota on REE’s for H2 this year. Japan has also been seeing a similar dispute with China in recent weeks because of this quota move. REE’s, vital to technological production as well as military applications, are seen as a strategic resource, and as such the US has been actively pursuing stronger, more stable supply lines, for some time, particularly in the domestic and Canadian markets.

Moving away from REE’s, WTI Nymex crude has pushed back below the $83/bbl mark in electronic trade today on the back of the firmer greenback and risk aversion, with the front contract seeing further pressure as traders roll their positions to the Dec10 contract, ahead of the Nov 10 expiry tomorrow. Traders are also noting the ongoing strikes in French ports and refineries are continuing to see attention in the markets on both sides of the pond today, with the French government now beginning to tap its strategic fuel reserves in order to bridge the gap.

Although not yet a factor that is pushing US traded energy futures higher, it is at least managing to limit the losses, particularly for products. It is worth noting however that depending on how long these strikes continue, it may eventually bring about weakness in the crude market itself, with French refineries shut down and therefore not demanding crude, a surplus may build in crude while the supply of products continues to get squeezed. Although this will no doubt have a greater impact on European energy products, it is still likely to filter through to a lesser extent to US contracts.

The precious complex is once again seeing its strong correlation with moves in the greenback today, with gold and palladium both underperforming. The world’s largest gold exchange traded fund (ETF), SPDR Gold Shares (NYSEARCA:GLD), reported a net liquidation of around one tonne yesterday, while the world’s largest silver ETF, iShares Silver Trust (NYSEARCA:SLV), saw a net inflow of the grey metal totalling 61 tonnes.

On the daily charts, spot gold is still holding well within both its medium and long term uptrends, with any sell pressure expected to meet support from the 21-day moving average, today around $1,331/oz. interestingly, the parabolic SAR is showing the second consecutive day of sell signals, which although at this stage it too early to assume a trend reversal, could at least indicate some short-term consolidation is on the cards.

That said, a similar pattern was seen last month, which switched back to bid on the third day and resulted in the continuing push towards record highs. It is therefore, well worth looking out for tomorrow, to gauge some indication of the current strength of the trend.

The US Department of Agriculture (USDA) has reported that US harvest activity has already reached 41% of cotton, 66% of corn and 83% of soybeans, a significant increase on last year as well as the longer-term averages, and offers some indication to the quality of this year’s crop. They also reported that 80% of this year’s ‘winter wheat’ has already been sowed, some of which are already beginning to sprout.

The late sugarcane harvest in India, due to the monsoon, is now well underway, and looks to be on progress for a record year.

Disclosure: No positions