Have you heard the buzz? Thanks to this latest World Trade Organization (WTO) win, rare and strategic metal prices will drop like a zirconium anvil because of this news… This will solve our rare strategic metal shortage issues…
At least that is what most investment media has people believing thanks to an April 2014 decision by the WTO and a later agreement by China in August.
The truth though, is a lot different from the fear and anxiety by investors, and the relief and joy of manufactures, running through the streets. As you’ll see in in a moment, the so-called big win is much ado about nothing. And is good news for anyone who’s stockpiling, or considering stockpiling, strategic metals.
As you may have heard, the US, Japan, and European Union (EU) have been complaining to the WTO about China’s unfair export policies. For decades, China has been limiting the quantity of strategic metals available for export, and many countries haven’t been happy about it. So, they complained to the WTO, who passed a decision in April stating that the trade practices were unfair.
In August, after an appeal, the Chinese government agreed to meet the terms of the agreement, and cancel their export restrictions.
This big decision has had strategic metal investors panicking over expected price drops. On the other side, I’m sure there have been a few collective cheers in government offices and manufactures hallowed halls.
The theory goes that if the Chinese government removes their export restrictions, the supply side of the supply / demand equation will tip towards too much supply, driving down prices of strategic metals. For manufacturers and the US government this would be a big win. For anyone holding the metals for the future, this doesn’t sound like good news.
But before running into the streets proclaiming all is lost, step back and look at what’s happening in reality. As opposed to the sugar coated “triumph,” everyone is talking about. First…
Yes, the Chinese Government Agreed to Curb Export Restrictions
In April of 2014, the WTO issued separate decisions to each of the three countries who brought forward the complaint, stating they agreed China was implementing unfair trade practices. The Chinese government filed an appeal at once and did not agree with the assessment.
However, begrudgingly I’m sure, in August, they agreed they would abide by the decision, and adjust their export restrictions to meet the WTO demands.
Listen the key statement though – “to meet the demands of the WTO.” They never said they agreed with the ruling, or they wanted to do what was right.
They said they would change their policies to meet the WTO guidelines.
Here’s the thing, there’s not much most world governments are good at. In fact, they downright suck at almost everything they touch.
But if there’s one thing they’re great at, it’s twisting language in their favor. To do whatever they want – while still making it sound like they’re doing what you want. And that seems to be happening in this case. So…
Instead of Export Restrictions, Let’s Tax’Em – Bring on the Tariffs
The agreement to meet the WTO’s demand was barely dry when China’s Ministry of Commerce (MOFCOM) announced there would be export-licensing requirements. This becomes a tariff or an extra tax placed on exports of rare metals.
True, that might not be the case for all rare earths – the Chinese stockpiles are overflowing on several soft rare earths. They can’t get rid of those stockpiles fast enough, so maybe they’ll make an exception on those supplies.
But on the important strategic metals, such as dysprosium, molybdenum, and tungsten, and many others, there will be immediate tariffs or taxes placed on all companies outside China, crushing competition.
According to Jack Lifton of Seeking Alpha, in a recent interview, this new tariff is more restrictive than the original export limitations.
It’s a typical government move… Talking out one side of their mouths, saying one thing, while acting in a way that is more destructive than the original thing they were trying to fix.
If the government is good at anything, it’s spin. Next…
The Chinese Monopoly is Growing and Becoming More Powerful
Based on the above action, it’s clear the Chinese government does not intend to relinquish control over rare metals. And supplies will be limited for countries such as the EU and the US.
This forces importers in the US, Japan, and EU to pay more to receive metals they need for manufacturing and should create an upward effect on metal prices. We’re already seeing that movement even though the new tariffs haven’t started yet.
Speaking of which, it’s almost certain new tariffs will roll out quickly, while the removal of the export restrictions will move at a snail’s pace. Typically, that’s how these things pan out.
Anyway, back to the monopoly…
China has already approved six companies to form a conglomerate powerhouse that controls all the strategic metals available in China, and by extension, the rest of the world. Jack Lifton says this concentration of power is only the beginning. By 2015, all roles in the business of rare metal mining, smelting, production, and usage of rare metals will be concentrated into these six monstrous entities. Powerful monopolies like this almost guarantee price fixing and control will stay in China’s hands for the near future.
In Other Words, Nothing Will Change Because of the WTO Win
If anything, the situation is getting worse (or better if you are an investor on holding rhenium, dysprosium, and/ or other strategic metals).
As you can see, the Chinese government’s agreement to curb export restrictions is nothing more than cloudy misdirection. They’ll change their policy to match the wording in the decision made by the WTO. But they’ll still keep control of strategic metals via other means such as export licensing, tariffs, and new metals conglomerates. That doesn’t even include moves like adding metals such as rhenium and dysprosium to the FACTA Exchange.
In summary, this supposed win by the European Union, US and Japan gives greater incentives for China to place tighter controls on the supply, and drive prices even higher.
This is great news for you as an investor if you hold strategic rare metals, for example, dysprosium and rhenium. Prices are still low and we expect them to climb soon, especially once the market realizes the WTO decision will not have much of an effect.
If you have questions, or if you would like more details about the WTO decision or China’s response, you can contact a representative by clicking here.
The WTO may consider China’s agreement to cut export restrictions a “win,” but in reality, its politics as usual. For China’s controls over rare strategic metals, the decision is almost irrelevant. Supply is going down, prices are going up, and you can either profit from the rise, or watch others around you reaping the benefits.