First of all I note that on Sunday, January 4th, it is being reported that The People’s Republic of China has now officially shown its disregard for, perhaps its contempt for, the Western design for an integrated global markets’ economy.

Emulating (or identifying with) lawyers who manipulate words to the advantage of their clients the PRC has today announced that it has revised its rare earth export quota requirements into “strict export license” requirements. Thus the conservation and sequestration of China’s rare earth supply chain for the use and benefit almost entirely of China is now assured. No non-Chinese court decision can affect this now or ever. China like any other nation-state that has ever wished to survive has placed its own self-interest first and foremost.

This “should” put “paid” to the mantra of the free traders and globalists who have been telling us since the beginning of the twenty-first century that “the efficient free market” will always insure the supply of a commodity to meet demand. In the event of a shortage this quasi-religious belief holds that price increases will drive new exploration, new production, and/or lessened demand. Harmony will be restored by the market.

Capitalism with Chinese characteristics does not accept this concept of global harmony. Instead it holds that whatever is good for the Chinese state and people is good even if it ONLY holds for the Chinese state and people.

Accepting this simple premise should remove the wool from the eyes of non-Chinese procurement managers.

If it doesn’t I propose a new rule:

It shall be noted as a Law of human nature that: Rare earths, graphite, and lithium shall go to those who own or control the total supply chain for those commodities who can deliver them to end-users at the lowest cost and can contain those costs.

Corollary: The primary anchor of a supply chain is a mineral deposit that can be economically converted into a producing mine, the products from which can be processed into industrially specified forms under the control of the owner of the primary anchor.

In the global economy in general and in the G2 (The USA and China) economies in particular (which account for one-third of all global GDP and half of the world’s industrial output!) in order to support population growth with at least concurrent economic growth you have to keep technology development moving forward just to keep up with current legacy demand. Natural resource production has traditionally begun by working the most accessible highest grade deposits and then as the deposit grades decline or become exhausted they either are replaced:

By newly discovered or, known, highest remaining grade deposits, or

Processing technology advances so as to be able to recover the same amounts of resources from the declining or lower grade deposits, or

Both while in all cases keeping costs contained and therefore predictable!

Since 2008 the USA’s growth in its domestic demand for new production of natural resources for domestic consumption, other than oil, has been very slow while China’s growth in demand in the same period for all natural resources has continued to be phenomenal both in contrast to that of the US and in absolute terms. In fact this contrast in demand growth between the USA and China was unprecedented during this period. But most of China’s growth in its demand for technology metals and materials has been up until now to feed a burgeoning export manufacturing industry dedicated to low cost mass production of consumer goods.

In fact the consumer goods export manufacturing industry was transferred to China, voluntarily, mainly from the USA and less so from Japan beginning in the last quarter of the twentieth century SO AS TO CONTAIN THE COSTS OF SUCH GOODS SOLD OUTSIDE OF CHINA in particular those goods re-imported into the very countries in which they were previously manufactured!

Serendipity gave China not only high grade “deposits” of the light rare earths but also the lowest cost to develop very large deposits of the light rare earths as well as the most easily (in terms of access) developed (and the only economically feasible) sources of the heavy rare earths. Note that the explosive growth of the iron ore mining industry within China to feed its industrialization and urbanization had the unintended consequence of sharply driving down its costs of producing the light rare earths.

The advent of the miniaturization of consumer electronics leading to an explosive growth for rare earth enabled components coupled with lowest cost production of the rare earths was the serendipitous trigger for China’s rapid growth to dominance in both the production of rare earths and in the mass production of rare earth enabled consumer electrical and electronic devices.

The attempt to revive (carefully called “re-start”) the former American dominance in the production of the light rare earths in 2007 can be seen from our 2015 vantage point as mistaken if we assume that the goal of this “re-start” was to actually become the low cost provider of light rare earth raw materials. It was essentially building the keel or the hull of a ship without providing for engines, superstructure, or controls. It was the anchor of a supply chain, to continue the metaphor, without rest of the ship to go with it. On the other hand if the goal of the Molycorp venture was to create wealth for the original investors it was and remains as the most successful of the stock market “plays” of the same “rare earth bubble” that Molycorp anchored.

During the time of the rise of the recent so-called commodity super cycle of which the rare earth boom was a small part, the BRICS (the so-called “emerging” economies of Brazil, Russia, India, China, and South Africa) had booming currencies and growing economies but this was only because China was a huge importer of the raw materials underlying the economies of the other BRICS while it, China, continued to be the world’s low cost emporium for mass produced consumer goods for export.

China is now faced with the question of how to run without maintaining strong manufacturing export growth, and the rest of the BRICS are teetering with full bladders of basic commodity raw materials with no place in which to relieve themselves. This is because China seems to have decided to re-invent its economy as one that is consumption driven in which the Chinese people will be encouraged to buy Chinese brands of the goods formerly imported such as automobiles while major manufacturers produce in China for Chinese use and consumption not only toasters and washing machines but high speed trains, commercial jet-liners, cruise ships, and a Chinese equipped state-of-the-art Army and Navy. Did I mention that China already has a permanent manned space station under construction and has a plan to colonize the moon before 2030!

The US economy at the same time is reviving and with the unexpected major success of fracking has probably tipped the oil producing cartels into recession or worse and the economies that depend on oil production and export (Saudi Arabia, Russia, Venezuela, Nigeria) into a down spiral highlighted by currency value collapse and dangerous political instability.

But the mature US consumer goods economy really doesn’t need a rush of raw base or technology materials, because it predominantly only needs replacement goods and the raw materials for these are more and more coming and will come from recycling. For example almost all of the metallic lead used in the USA already does. This situation cannot supply any new demand for commodity materials from the struggling BRICS. Of course China’s still substantial growth and its position as the world’s second largest economy will still provide a production floor for commodity producers, but this new floor is far below existing (over)capacity.

I think that the international game of musical chairs in commodities, the frenzy of development of new sources and the financialization of their shares that didn’t even stop to take a breather over the last decade and the deposits of which could be located anywhere, has stopped dead in its tracks.

This I think is for the reason that the smartest of the procurement managers of the Global1000 manufacturing corporations were surprised by the rapid attempt to financialize the related group of key technology metals known collectively as the rare earths, and so they just watched with dismay the market being manipulated so that by 2011 prices had nothing to do with known demand or credible supply and were being driven probably entirely by speculation. I personally have not found a single end-user of rare earth raw materials who actually could not get material at any time in the last 8 years providing that they were willing to pay a premium to guarantee on-time delivery.

A number of so-called commodity “exchanges” were attempted for rare earths in Canada, the UK, and Switzerland but they were so poorly financed and so transparently not able to meet or even know the requirements of industrial end-users that they simply collapsed. They were promoted as trading companies when in fact the market needed true exchanges. China today has organized one or two such exchanges, the Fanya and the Shanghai come to mind, but Chinese exchanges are in the world’s most sophisticated markets for rare earth supply and demand and, on top of that, the Chinese government has I suspect become a buyer of last resort type of player by setting up, funding, and filling a national inventory of rare earths with the stated purpose of underpinning long term security of supply for domestic (Chinese) manufacturing. If that is true then no Chinese manufacturer may ever have an excess of supply to sell overseas! Time will tell.

Speculators in commodities drive short term pricing, but it is end users that create and maintain actual demand.

If there is to be a technology devices mass production industry outside of China it has now become NECESSARY for non-Chinese production of both the light rare earths and in particular of the heavy rare earths to begin as soon as possible.

The principal costs of developing a rare earth deposit into a profitable rare earth product producing venture is for the construction of the mine. But today many of the existing non-Chinese ventures have adopted the [philosophy of building a right sized mine. This is simply a mine with enough production capacity so that when matched with downstream refining and fabricating facilities it can produce customer specified rare earth products in sufficient volume and at a high enough margin so that the venture can repay the costs of its development and earn a profit.

2015 is going to have to be, I believe, based on what I know, a transformative year for the supply picture for the technology metals. I think that the investing community does not yet realize that sudden changes based on disruptive innovation are not how long term change occurs. Instead change occurs by marginal transformations of existing technologies until cost containment becomes impossible. Then and only then, when costs increase faster than prices, do new technologies, which are already in development or have been developed and used in parallel metal recovery systems undergo seemingly rapid development. But in fact there is no possibility of a leap directly from the laboratory bench to full scale production.

The current demand for the rare earths, lithium, and graphite can be and is met by current processing technology and capacity. If there is growth and indeed if there is to be growth then the issue now is whether or not the current supply chain system can be ramped up while maintaining current costs.

Deposits processed the old way must be added to or replaced by deposits processed in new ways in order that budget planners can give the go ahead to the increased production of Technology Metals enabled devices with confidence in their budgeting/security of supply at predictable cost!

Also, there must be recognition by procurement managers that highly integrated cross border market systems are fragile and that the rare earths and graphite markets are stressed by political considerations to the breaking point.

I think that a combination of all of the supply factors above and a consideration of their impact on future demand has caused Global1000 corporations to finally look at junior miners that either have adopted business plans that incorporate downstream supply chain components and recognize that the choice of separation technology is no longer limited to traditional SX or that have made arrangements for toll refining by traditional methods.

If you survey the most recent PEAs you see that the projected prices for the critical rare earths are based on a steady progression of those prices based on nominal global GDP based on an average of the first 10 years of the 21st century.

If you look at the most recent announcements of business models you will see that these same juniors are each looking to add downstream capabilities to their products and to allow the market to choose the form and specification of the products they offer.

Finally, if you look carefully, at the announcements by the juniors you will see that traditional separation is too expensive to build and operate if costs are to be contained so that future prices can be competitive.

I no longer believe that consortia of Global1000 corporations such as Germany’s Rohstuff Alliance can have much impact on the future development of the supply of technology metals as raw materials, because such groups inherently are risk averse especially with regard to industries such as metal mining and refining in which they have no competency.

It is individual large corporations that have specific core competencies that will now take the lead in developing nationally owned, sited, or controlled supply chains for the technology metals and materials.

The best of the rare earth junior ventures are now on the radar of the most progressing integrated defense contractors, energy producers, metal producers and fabricators, and even some few electrical/electronic Global1000 corporations.

Expect announcements to be coming soon from the best of the rare earth juniors that they are teaming up or in play with well-known Global1000 corporations.

It will be the same for the best lithium juniors and certainly for the best graphite juniors shortly after that.

Forget globalization and I think even regionalization. Look for national interests to prevail and for closely held and/or in-house vertical integration to become the norm everywhere in the production of technology metals and materials as it is today within China.