Analysis: Mining by Mercedes

Mining by Mercedes is not what you think. It doesn’t mean the vehicles in Australia’s mines will be flash Mercedes Benz cars. It does mean that the German car maker might soon be directly investing in Australian mining.

What’s driving Mercedes, or to be more accurate its parent company, Daimler, into direct mining investment is a sudden realisation that China is not its only worry when it comes to the future supply of raw materials, especially exotic elements such as rare earths.

Banking is the second problem which has popped up on Daimler’s radar, more specifically a concern that struggling European banks will not be able to fund the development of the new mines needed to maintain a flow of the minerals and metals which are used in making vehicles.

The China issue has been on the agenda of Daimler, BMW and other non-Chinese car makers for the past few years because of the way the Chinese Government controls the production of rare earths, such as neodymium and dysprosium, which are essential in high-strength magnets and small electric motors of the sort used to operate many of the moving parts in a modern car.

While not rushing to secure supplies from outside China there has been a steady build up of interest in potential new suppliers, which is why the share prices of ASX-listed companies, such as Lynas, Alkane and Arafura, have strengthened.

The need to ensure that the pipeline of raw materials remains full has taken on a fresh urgency as Europe’s banking crisis forces once dominant financiers of new mines, and trade finance in raw materials, out of business.

The latest example of a big European bank selling down its exposure to raw materials came last week when BNP Paribas offered to sell $US11 billion in loans to oil and gas companies because of an urgent need to shrink its over-stretched balance sheet.

Until the European financial crisis struck last year, the big banks of that region were the major funders of mining and the trade in minerals and oil. Now, they are running for cover.

That has caused big German manufacturers to hit the panic button with Daimler joining a number of other companies, including Bosch, BASF, and Bayer, in forming an alliance to locate, and secure, future raw materials.

The deputy president of the Germany industry association, Ulrich Grillo, told London’s Financial Times newspaper yesterday that the 12 partners in the new association would seek to: “build up a powerful corporation” which would invest in raw material projects in order to improve security of supply.

The Germans are not alone when it comes to worrying about the combination of Chinese competition for raw materials and European banks withdrawing from the mining and trade finance sector.

Earlier this month the chief executive of the Swiss/Belgian company, Nyrstar NV, which is the world’s biggest refiner of zinc metal, said his company was setting aside €2 billion to “buy mines” in order to ensure that it had a flow of raw materials for its smelters and refineries.

Roland Junck said Nyrstar wanted to earn half of its future profits from mining, offsetting an over-reliance on the processing phase of metal production.

For Australian explorers and miners the discovery by European consumers of raw materials that they are facing two threats to their flow of essential minerals is a silver lining on an otherwise dark cloud of potential global recession.

The German alliance and Nyrstar’s revived interest in mining means that the Europeans will be interested in mining projects at every stage of their evolution, even early-stage exploration.

Grillo said the Germans were open to all suggestions. “The alliance is aiming to take shareholdings in commodity projects to achieve a long-term improvement in the supply of raw materials to industry”.

In some cases the alliance could invest directly in a project and help fund a new mine, or they could act independently. Rare earths remain top of the investment list, but with the banking crisis showing no sign of easing other minerals will be added.