'Rare Earths Summit 2010' Emphasizes Opportunity for Non-Chinese Suppliers

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Includes: AVL, GWMGF, LYSCF
by: Jack Lifton

I'm in Beijing, China, where I spoke at the Asian Metal Pages "Rare Earth Metals 2010" conference. I sort of stumbled through my presentation, because I was absolutely distracted by the candor of the speakers from the Chinese rare earth mining, refining, and end-user industries. Considering the volume of nonsense being broadcast outside of China by stock promoters, the conference was an amazing breath of fresh air in a city not well known for its air quality (although i must say that Beijing weather and its air are first class right now).

For those of you who would like to read my own presentation it will be posted tonight on The Jack Lifton Report. I warn you that it's not for the complacent. You're going to find out some facts about the Chinese metals industry, particularly about its size and growth rate, that will make you think very hard about the position that America's foolish concentration on not producing natural resources has put us into.

I heard a fascinating talks by Dr. Zhu Baoliang, Chief Economist of the Economic Forecasting Department of the China State Information Center and Professor Zhao Yumin, Director of the Chinese Academy of International Trade and Economic Cooperation. Both of these speakers emphasized that China welcomes non-Chinese production of the rare earths into the world market, because China's domestic economic growth rate means that it, China, needs more and more of its own domestic resources of all metals for its own use. Therefore since China does not want to impede the growth of the world economy of which it considers itself a part. It must hope, both speakers said, that its best customer and biggest competitor, Japan, will be able to find resources of metals such as the rare earths from other than China.

After my talk Dr. Zhao asked me my opinion. I told him that i believe that China wants Australian, and/or American, and Canadian and/or South African rare earth mines to come into production so that not only can china dedicate more of its own resources to its domestic economy but also that China has the option to buy rare earth materials from non-Chinese suppliers should the time come when Chinese demand outstrips Chinese domestic supply.

A key issue for the Chinese economy and the Chinese mining industry is a preoccupation with preventing commodity price inflation and preventing the Chinese currency from appreciating so fast that Chinese exports become non-competitive. These pre-occupations are keeping the prices of all commodities produced in China from rising. In the opinion of the Chinese speakers the low prices of the rare earth metals are a result of economic forces far beyond the industry's ability to control.

An old China "hand" (as we used to call men like him) who was at the conference told me that the Northern rare earth mines operate at best with a 20% gross margin. The Southern ones, the so-called ionic clays from which the higher atomic numbered rare earths, europium, dysprosium, and terbium are produced, can run so that they have a 30% gross margin. These margins are too low for the amount of environmental remediation necessary to meet WTO and new stringent Chinese domestic standards for safety and health. At the same time that the Chinese rare earth industry is facing environmental challenges it must also restructure to improve efficiency and to eliminate so-called artisanal mining entirely.

The end result is that China's mining industry as a whole, and rare earth mining industry in particular, will be producing less material in the near term than was originally planned. The Chinese high tech manufacturing industry-- especially the alternate energy and other green industries--are swamped with business, and they don't care about the problems of the mining industry. Just as would happen anywhere in the world.

This in my opinion is a fantastic opportunity for those rare earth ventures outside of China that can be brought into production as soon as possible, there will be a sorting out later in the decade when the Chinese low atomic numbered rare earths mining industry has remediated its environmental and productivity issues, but until then there will be strong markets in both Japan and China for rare earths.

Stay tuned and hold on to your money until we know a little more.

Disclosure: I do not own any shares in any of the companies mentioned or alluded to in this article