19/05/2011 - 00:00

Rare earths move to become more common

19/05/2011 - 00:00

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Export embargoes on all manner of goods could change the way the trade world works.

‘IF you’ve got it, flaunt it’, is advice frequently practiced by the rich and beautiful; but in the wider world of global economics there is a variation emerging that is best described as ‘if you’ve got it, keep it for yourself’.

China’s decision to slap export embargoes on rare earths, a family of metals essential in a vast array of high-tech industries, is an early example of a country opting to husband its resources, creating an artificial boom in the price of materials such as dysprosium and neodymium.

Almost unpronounceable, and produced by the thimbleful, rare earths are essential in the high-strength magnets used in small electric motors, and the operating systems of modern armaments.

The Chinese-induced shortage of rare earths has driven the share prices of ASX-listed stocks such as Lynas, Alkane and Arafura sharply higher; and while the commodity group in question might be rare, the market response to scarcity is straight from Economics 101 – the less of a product or service, the higher the price.

Last week, Russia and China joined this curious game of ‘beggar thy neighbour’ by whacking huge export taxes on petrol in the name of ensuring a plentiful supply for home consumption.

In the case of Russia, the tax amounted to a 44 per cent duty payable to the government on any petrol exported, with the objective being to keep fuel inside Russia’s borders.

China reciprocated with its own crackdown on petrol exports, demonstrating that it too could play a game of ‘keepings off’.

If rare earths and petrol were isolated examples of countries withdrawing important products from free-trading world markets, it would not be such an important event.

Unfortunately they are not isolated examples, with embargoes, export duties, and blanket bans on specific goods shaping as a trend with the potential to significantly change the way the world works.

Food embargoes (especially for food that can be converted into fuel, such as corn and wheat) have also become important weapons in the changing trade world.

Russia and the US have been players in the food game, though in different ways. Two years ago, Russia simply banned wheat exports after a drought, and has kept the ban in place to ensure a plentiful supply of bread for its people, and shortages for its neighbours.

The US has caused similar problems by encouraging the production of bio-diesel, and other food-based fuels, for its transport sector, which led to “tortilla” riots in food-short Mexico when corn exports dried up.

What’s next in this new game of beggar thy neighbour?

Possibilities include more of the minor metals, such as tin and tungsten, because China dominates production and is showing signs of tightening export embargoes to ensure a plentiful local supply for its all-important, job-creating, factories.

Fuel and food shortages will become increasingly critical issues as the global population grows and productivity gains become harder to achieve. Water will also become a flashpoint in relations between neighbouring countries, with one country’s dam threatening the flow of a river into the next country.

For Australia, with its miniscule population of 22 million, and major mineral and food export industries, this sounds like a terrific way to make money, especially when a rival slaps a trade embargo on something we produce, which leads to higher export prices.

But, in time, the new game of keeping it for yourself will threaten the free flow of traded goods, and trigger nasty disputes between those with resources and those without – raising questions about the real strength of the next phase of the mining boom, which is so important to the Australian government balancing its books.

Voyage of discovery

OPTIMISM about ‘The Boom, Mark 2’ might also be somewhat overdone for everyone in the business of mining thanks to another phenomena from the book of old sayings – ‘all the low-hanging fruit has been picked’.

In this case the issue is one that government never understands – the difficulty of discovery, and the cost of development.

Exploration is the key to discovery, but in Australia’s case, Boom Mark 1 has meant that almost every square kilometre of the country has been pegged by prospectors of all sizes, from loners in LandCruisers, to the world’s mega-miners such as BHP Billiton.

The absence of land to stake a claim is the first hurdle. Finding something under it is an even bigger challenge, because so little of the Australian outback actually outcrops, meaning that modern (and expensive) science is critical to discovery – and even then the minerals might be too deep to be of economic value until metal prices go even higher.

For companies that own orebodies and are in production, or close to it, The Boom Mark 2 will be a fabulous time. For explorers it will be tougher, and for investors it will be a time to watch out for rising risk as the search goes deeper.

Skype hype

MICROSOFT’S $US8.5 billion purchase of the internet telephone business, Skype, has produced plenty of headlines but not, yet, the ‘sell’ notes that must soon be coming from stockbrokers on conventional telephone companies such as Telstra.

The issue is one of cost, or more specifically the ability of technologies such as Skype to undercut conventional telephony, providing almost free phone calls and email connections.

Until recently, this appeal of using the internet for telephones has been muted by a sometimes erratic connection and poor sound quality. Those problems are being fixed, and will be fixed even faster now that Microsoft has placed its $US8.5 billion bet on internet telephony.

Brockman raid

KNOW your shareholders. That’s a sign that every managing director of every ASX-listed company should have on his desk after the raid by Chinese investors on Brockman Resources.

Dubious in the extreme, a team of faceless men appears to have shanghaied Brockman, making fools of Australia’s corporate regulators, and exposing Brockman’s management team to a charge of not knowing who they’re working for.

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“Life is too important to be taken seriously.”

Oscar Wilde

 

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