Wednesday, October 27, 2010

Michael Komesaroff on China and Global Minerals Markets

Michael Komesaroff, one of the most astute observers of China's natural resource policies and practices and its effects on global markets recently reported the following:

The consequences of a recent collision between a Chinese fishing boat and a Japanese coast guard vessel in the East China where Beijing is alleged to have suspended shipments of rare earths to Japanese companies, has, once again, drawn attention to the world's dependence on China for its supply of rare earths. The reality and consequences of this dependence were highlighted in a presentation I gave earlier this month to a UBS sustainable development conference in London.  Entitled Resource Scarcity? - A Case Study in Geological and Political Realities can be found here.

With much of the developed world in a period of prolonged recession, China is now clearly the driver for global demand of minerals and metals.  In Can China Sustain the New Normal, a presentation I gave in August to the Australian clients of Investec Bank (Australia) Ltd, I canvass China's ability to continue devouring the world's minerals and metals.  The presentation can be found here.

My September contribution to the China Economic Quarterly discussed the implications for China of the Australian government's proposed mineral resource rent tax.  The article, A taxing relationship, can be found here.

For the past several years, China has wisely chosen to focus on a coordinated approach to minerals markets.  It has integrated its programs of targeted foreign direct investments abroad with coordination of foreign investment within China.  The object is twofold--first to maximize the profit potential inherent in key mineral resources for manufacturing of products with global impact.  The second is to ensure that other manufacturing states will be dependent on Chinese control of key minerals.  This later objective can ensure that Chinese manufactures can undercut other in pricing and also that in the event of shortages, the Chinese state can better control the distribution of these minerals to keep its own production up (while extracting a premium for exports abroad or from Chinese owned producers).  All of this is to be effected carefully, to avoid triggering market protective reactions from competitors. 

Two recent stories suggest the importance of this strategy, and its perils.  The first:
Rare-earth metal prices have surged this year, with neodymium prices up 13% this month and cerium prices up almost sixfold from last year, the Nikkei business daily reported Thursday, citing trading house officials. Prices for rare-earth metals have spiked as imports from China have dropped, according to the report. Rare-earth metals are used to produce automobile and home appliances although they account for a small amount of production costs, the report said. Rare-earth metal prices seen surging, Market Watch, Oct. 27, 2010.
The second:
US trade officials say they are looking into a New York Times report that China is blocking shipments of rare earths to the US and Europe.
China mines 97% of the specialist metals crucial to green technology.
The report, citing anonymous industry sources, said Chinese customs officials had broadened export restrictions.
Meanwhile China's commerce ministry has denied a report by the official China Daily that it will cut quotas by 30% next year to stop overmining.
"The report is completely false," the ministry said in a statement.
"China will continue to supply rare earths to the world, and at the same time, to protect usable resources and sustainable development, China will also continue to impose restrictive measures on exploration, production and import and export of rare earths."US inquiry into China rare earth shipments, BBC News Online, Oct. 20, 2010.
In the emerging economic-political order, in which governments project power in private markets through corporations and corporations assert public power in weak governance zones, economic globalization has produced a zone beyond traditional state control.  But states have not thereby left the field strictly to private activity.  Rather, states continue to develop new approaches to the projection of power.  In a new world order of markets beyond direct state regulatory control, the transformation of states into corporations (projecting power through private market activities), and of corporations in state like entities (projecting regulatory power through contractual arrangements down their respective supply chains), will mark the transformation of states and corporations as governance actors.   As Jianjun Tu recently noted in a similar vein
The ascendance of the Chinese RE supply chain is the outgrowth of Beijing’s long-term planning, the invisible hand of the free market and, as this paper has shown, strategic miscalculation made by the U.S. government. Though sizable RE production capacity may be developed outside China, Beijing is expected to remain the leading producer with the formidable power to squeeze out any new competitor, thus China is able to continuously reserve the right to use REs as a political bargaining chip in the years to come—in spite of what its leaders claim.  (Jianjun Tu, An Economic Assessment of China’s Rare Earth Policy, China Brief Volume: 10(22), November 5, 2010).

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