The Wall Street Journal discovers the new old world of mining development and finance; and the natives of that new old world are smart, well financed, and decidedly unfriendly to competitors from the old new world.
Wednesday's July 21, 2010 Wall Street Journal has an article buried on page A11 entitled “Chinese Firms Snap Up Mining Assets.” The article should be on the front page, but the WSJ’s editors do not seem to realize just how important this article is for predicting the future of the American industrial economy.
I have written frequently over the last several years of the growing global dominance of China in the production of metals. The WSJ has now discovered that China “already consumes one-third of the world’s copper and 40% of its base metals, and produces half of the world’s steel.” In actuality, a little research into the facts would have shown the WSJ’s reporters and fact-finding staff the following: China now produces not only (already) half of the world’s steel but also some 53% of all of the metals produced in the world. By 2012, China will produce more than 60% of the world’s steel, an amount that in 2012, is expected to exceed 700,000,000 metric tons. That's between 7 and 8 times as much steel as the USA is expected to produce in 2012!
Does anyone need to wonder why China is ‘snapping’ up mining assets around the globe?
And does anyone still think this feverish resource acquisition is a plot to control the prices or supplies of the world’s metals and minerals for any other reason than to feed at the lowest cost the gigantic and growing appetite of the Chinese domestic economy for raw materials?
As I keep pointing out, the rare earths monopoly enjoyed by China today is a direct result of the fact that China’s monumental growth in demand for raw materials to feed its domestic economy began with those raw materials that the Chinese had in abundance. Materials such as the rare earths, iron ore, and tungsten. There is no mystery and no conspiracy to control prices; it is demand that is driving both Chinese acquisitions and its domestic growth of the production of industrial raw materials. It is the Chinese desire not to let others control the prices in China that is driving this raw material acquisition and development frenzy.
One more thing the WSJ did not notice is that the Chinese are focusing on acquiring resources in countries that can produce more natural resources than those countries can use internally. This avoids the problem of the Chinese creating their own competitors.
Rare earths are a perfect example of this. Chinese companies are investing in rare earth mining ventures in Australia, Canada, and Southern Africa. Not a single one of those places has a domestic supply chain for processing such ores or for refining them for use in high tech devices or for manufacturing those devices. The enormous cost of financing the development of a rare earth mine today makes it almost impossible for such an operation to be profitable at the ore concentrate stage- the most common stage at which a mining operation stops. Chinese investors can consolidate rare earth mines with existing Chinese ore processing and refining operations and even with rare earth metal and alloy fabricators and end users in China. This way the mining overheads can be distributed among more comprehensive operations and the total operation can be made profitable in China.
This distributed cost is the hope of the forthcoming Molycorp IPO. The intention is to create a total mine-to-magnet supply chain with the profit coming from magnet production, not from the mining. I think that the Chinese recognize that there is a good chance that Molycorp’s plan could result in a competitor. Therefore they are concentrating on investing in country’s rich in resources but with much less population and wealth then the USA so that there is no danger in those other countries of igniting competition to Chinese exports.
Those countries have neither the skills nor the domestic market that would encourage local investors to take the risk of creating an industry that would only work with massive exports to China as a goal. The Chinese clearly plan to reverse several centuries of tradition by making China the 21st century’s preeminent industrial manufacturing center. The focus is on creating a flow of raw materials from lesser economies into China and having the entire world as a well to soak up excess production. (And thus stimulate Chinese growth.) Wasn’t that the exact system that the British Empire achieved in the nineteenth and early twentieth century? Didn't that make Britain the richest and most powerful nation in the world for a while?
It looks like that system is working again, doesn’t it? Creating wealth beats consuming wealth without creating it every time.
The WSJ's reporters now know what everyone in the mining world already knows: The Chinese mining industry, in particular, and China’s natural resources sector in general, are aggressively pursuing the acquisition and development of natural resources around the world for the purpose of supplying the Chinese demand for these materials. American finance looking only for short term gain has completely ignored this and has, at this point, marginalized the U.S. as a global competitor for the resources needed by China.
The pattern I see in Chinese overseas resource development is that China seeks resources and resource development in countries that do not and could not use all of the resources domestically. Thus China can pay for the development of the resources in ways that benefit the host country in general, such as infrastructure or the supply of goods and services not available in that country. This is a compensation scheme that is not possible in the U.S., a country today with no defined purpose.
The sun already does not set on mining operations that feed the Chinese industrial economy.