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The Chinese Government's Approach to the Real Crisis Involved in the Production in China of the Rare Earths

The Chinese rare earth mining industry has angered the Chinese government's officials in charge of meeting the environmental requirements in the current five-year plan. Of this we can be certain from the number of breathless stories now proliferating on the web.

I only urge those of you who are still rational to note that the issue for the rare earth industry, as with every other "smokestack" industry in the Peoples Republic of China is to operate in such a way as to ensure that energy intensity-the amount of energy used per unit of production-goes down, not up, as it has been doing lately in the reversal of a long term trend. The lessening of efficiency and productivity indicated by the rise in energy intensity has embarrassed the Chinese government, which pledged to reduce carbon emissions, the source of 87% of China’s energy is coal, per capita through raising energy use efficiency and thus lowering energy intensity by the end of the 2006-2010 five year plan to a level at or below those in 2005.

This "embarrassment" is the driver for the State Council's fury at the rare earth mining industry, which allowed western reporters to see the devastation from environmental disregard and rogue (illegal) mining and smuggling of goods.

NOTE: The Chinese government can only insure that it gets reliable data on such topics as energy intensity from closely monitored large state owned and run operations. So figure out for yourself why this might cause a "restructuring" of a notoriously opaque industry.

The so-called emphasis on the Sichuan rare earth production from the "ionic clays" is a direct result of China's governmental worries about pollution impacting efficiency, health, and safety.

NOTE: You haven't seen many photos of Sichuan located rare earth "mining operations" that were taken in the last 20 years or so. GUESS WHY: These operations were of the open above ground acid leach type and are said to have had devastating effects on the local ecology and ruined actual or potential farmland in a country where agriculture is a critical industry.

Remember that China imported grain from the USA as recently as last month (May) due to the drought and "other conditions" in China.

Rare earths are nowhere near as important to the China State Council as they are to western stock promoters trying their P.T. Barnum Best to get us alarmed over a non-existent direct threat from a battered industry in a country trying to raise its standard of living and meet stated national economic goals.

China is not the USA. China's central government is embarrassed when its planned economic advances are not on track; it doesn't seem to blame its shortfalls on a US conspiracy to deprive China of domestic economic progress.

China, like the USA today, apparently, believes in strong central government ensuring the health, safety, and well being of its citizens. The difference is that China's one party rule allows decisions to be made for any and all industry, which "private" or public must follow the rules and attain the goals set by the State Council. China's state councilors are notably better educated and informed than their American counterparts and clearly do not seem to simply follow industry advice given at lavish dinners and on expensive fact finding missions to beautiful beaches to discuss mining issues.

I wonder if any of the punditry on rare earths can even imagine a western government that asks reasonable questions of a natural resource industry and then having gotten answers makes decisions on the allowable operations of that industry based on a pre-determined set of national economic and political goals.

This bulls*** about the threat from China or the sinister machinations of the China State Council is of the same type as the commentary by those who read defense contingency plans and write headlines shouting "US has Plan to Attack Canada!"

It is clear that China is trying to minimize environmental damage where it can without disrupting the general economy.

The Chinese rare earth industry is part of a larger supply chain that ends, in China, in a large number of end use technology products for both domestic use and export. Thus the production of rare earths cannot be slowed down, much less stopped, without negatively impacting the general economy.

It is because of its, the rare earth production industries’ critical spot in the supply chain for so many goods that China is regulating it rather than just shutting it down for environmental remediation.

China's government believes in direct central control of the economy; that is in fact its central philosophy of the correct path to the betterment of mankind.

Therefore the Chinese government will do whatever it can to minimize a negative effect on the central economy by a rogue or misguided industry.

This is accomplished by putting direct control of that industry into the hands of state corporations reporting to officials in Beijing who are directly responsible for meeting goals and who, in Beijing, have the power and authority to shut down state industries or change managers.

Any capitalist would agree that this is the best way to manage a business-by setting goals and judging managers by performance to objective. It is also obviously a test of the goals themselves, but that is a political not wholly an economic issue.

As for prices: I have said before, and I will say it again. "Private" industry in China has been keeping the prices of the rare earths low by fierce competition without regard for environmental or efficiency standards. The central government has two fears:

1. INFLATION of commodity prices,

2. CURRENCY APPRECIATION without government sanction

The rare earths are clearly due for a price correction.

Competition is the life blood of free market capitalism I am told by Larry Kudlow and lesser lights in the firmament of punditry on that topic.

So I recommend to all of the institutional investors reading this that they take a hard look at the non-Chinese rare earth mining opportunities and to use whatever fantasy price increases come out of learned reports and surveys in the near term to assess their risk of making/losing money by investing in a rare earth mining venture.

Then they need to take a hard look with a laser up the you-know-what of the management of their choices from the above to weed out the grossly incompetent from the just plain incompetent. Then the institutional investors can place financial MANAGEMENT SUPERINTENDING PERSONNEL WHEREVER THEY INVEST.

Then they need to GO TO China and Japan to round up end use customers for the short term as well as the long term.

Then they can securitize the off-takes from the chosen mines and sell them to the end use customers, or speculators, or stockpile agents, everywhere to distribute the risk of non-performance.

Then the world can go on to the next rare metals supply crisis.



Disclosure: I have no financial interest in the rare earths production industry