Part II: Factors, Impacts & Trends – Analyzing the Growing Dependence on Chinese Minor Metal Production
The minor metals industry is not the only industry to see a large share of its global production move to China over the past ten years. Yet, unlike most manufacturing industries, minor metals do not have the freedom to change locations simply to capitalize on low production costs. Natural resource extraction, it goes without saying, is inherently dependent on the local geology. Why then, has the global production of minor metals become significantly more dependent on China over the past ten years? In the first part of our serieson the effect of China’s growing production and supply of minor metals, SMI Ltd. concluded, based on the most recent USGS statistics, that China’s share of global minor metal production increased from just over 29 percent in 2000 to nearly 40 percent in 2009. In this, the second part, we will outline the main factors why this shift has occurred, before discussing its impacts on end-users and analyzing trends that may influence the industry over the coming five to ten years.
1) Natural Resource Disposition
The People’s Republic of China (PRC) is not only the fourth largest country in the world, but also has a diverse geological make-up. From the abundant iron ore and magnesite deposits in northern China and kaolin clay reserves in the South, to the vast bitumous coal and bauxite reserves in central China and lithium brines on the Qinghai plateau, China possesses a wealth of minerals. Many of which exist in ore bodies that are economical for mining. According to USGS figures, China has larger reserves than any other country for ten of the 16 minor metals included in our minor metal production index.
|Table 2: China’s Minor Metal Reserves|
Rare earths and antimony are the most outstanding examples of China’s natural geological advantages. The Baiyun Obo mine near Baotou, Inner Mongolia has an estimated 800 million metric tonnes of five percent grade rare earth element (REE) ore, equal to approximately 40 million tonnes of REE content. In contrast, it’s largest international competition, the Mt. Weld deposit in Australia and the Mountain Pass mine in California, neither of which are currently in their production stage, possess only a fraction of Baiyun Obo’s total REE content. About 200 kilometres south of Baotou, in Hunan, the Xikuangshan stibnite deposit contains approximately 70 million tonnes of three percent antimony grade ore, equaling over two million tonnes of pure antimony. No other antimony deposit can compare with Xikuangshan. By contrast, South Africa’s largest antimony mine, operated by Consolidated Murchison, contains roughly 185,000 tonnes of pure antimony, while North America’s largest antimony mine, in Beaver Brook, Newfoundland, contains less than 100,000 tonnes of antimony. Both rare earths and antimony provide the most vivid examples of how supply chains for minor metals, due to their limited demand and production, can be influenced by the geological make-up of a single location or ore body.
|Table 3: A Comparison of Global Rare Earth & Antimony Deposits1|
|Deposit||Ore (thousand tonnes)||Grade (%)||Reserves (thousand tonnes)|
|Rare Earth Deposits|
|Baiyun Obo (China)||80000||5.0%||4000|
|Mt. Weld (Australia)||12200||10.0%||1183|
|Mountain Pass (USA)||20000||9.2%||1840|
|Consolidated Murchison (South Africa)||7400||2.5%||185|
|Beaver Brook (Canada)||1940||4.32%||84|
One important note should be made here regarding the differences in geological resource recognition and resource reserve mapping between countries. Resource recognition and mapping was integral to communist China’s goal of self-sufficiency that it pursued until the late 1970s. To this day, resource exploration in China is very much a state-led exercise, which has arguably led to greater natural resource identification than in western countries. Cold War-era efforts at self-sufficiency not only resulted in the identification of minor metal resources, but in the establishment of many mines and refineries that are the backbone of Chinese production today. As such, it could also be argued that China may not possess as significant of a natural advantage in large, valuable minor metal reserves as it may appear, but only leads other countries in discovering and exploiting these resources, having established much of the necessary infrastructure in the communist-era.
2) Low Costs of Production and Strategic Government Support
The low costs of labour and production in China are inextricably linked to the myriad of government subsidies and policies supporting domestic production that weave their way throughout all Chinese industries. At the macro-economic level, China’s exchange rate policy further enhances the country’s natural production cost advantage provided by its large population and the export advantages stemming from its developed coastal infrastructure. China’s managed float of the yuan, which often resembles a peg to the US dollar, ensures that all production input costs remain below a natural market level, providing Chinese manufacturers in all industries an advantage over international competitors. In the minor metal industry, government support goes much deeper and includes energy subsidies, which are particularly attractive to energy intense industries like metal smelters and refineries, as well as valued-added tax (VAT) rebates on the export of many refined metals and metal products.
Another consideration is the support for (and structure of) Chinese producers of primary metals, from which minor metals are extracted as by-products. Whether we examine China Tin Group’s extraction of indium from tin ore, vanadium resulting from Hebei Iron and Steel Group Company Limited’s production of iron slag or bismuth ore resulting from Hunan Shizhuyuan Non-ferrous Metal’s tungsten production, these producers have one thing in common; they are all state-owned enterprises (SOEs). In China, SOEs first and foremost responsibility is to provide stable jobs for Chinese. As such, resource extraction levels are, to some degree, buffered from price fluctuations in the market, meaning that production continues regardless of the economic conditions. Uninterrupted production of tin, iron and tungsten, in the case of these three SOEs, for example, results in the extraction of indium concentrate, vanadium slag and bismuth ore.
Contrary to China’s SOEs, the primary concern of most western metal producers is profitability. And, consequently, western companies are much more sensitive to market price fluctuations than their Chinese counterparts. An example of such was the impact of the 2008 economic downturn on North American Tungsten, a producer of tungsten concentrate located in northern Canada. Following months of low tungsten concentrate prices, North American Tungsten was forced to suspend production in October of 2009. With the reliable support of local government, it is probably safe to assume that Hunan Shizhuyuan’s tungsten operations have suffered comparatively little despite low tungsten prices. Fortunately for the Canadian miner, concentrate prices have recently rebounded and they may be able to restart production soon. However, without extremely economical ore deposits, western minor metal producers have found it very difficult to compete with Chinese SOEs.
3) Domestic Market Growth
Not all the economic factors pulling minor metal production to China are directly due to government policies and influences. As noted, China has a natural labour cost advantage and strong export infrastructure, two critical factors in attracting international manufacturers to set-up production in China. According to analysis done by IHS Global Insight, global manufacturing has also seen a profound shift in recent years, resulting in expectations that China will overtake the US as the world’s leading manufacturer within the next seven years.2 As well as looking for labour cost advantages, factories and manufacturers opening shop in China require access to high quality and competitively priced raw materials. The minor metal extraction and refining industries have thrived in China, in part, due to their proximity to the world’s fastest growing manufacturing base. The primary end-uses for many minor metals, whether indium (ITO glass), cadmium (NiCd batteries), manganese (stainless steel) or rare earths (high strength magnets), are now predominantly manufactured in China. Reflecting this growth in manufacturing is the fact that China is now a net importer of antimony, cobalt,chromium, manganese, molybdenum, niobium, tantalum, titanium and vanadium.3
4) Environmental Regulations
Significant differences in the level and application of environmental protection regulations between China and most western countries has often been identified as a decisive factor in explaining the movement of industrial production and manufacturing facilities to China. Particularly in reference to the extractive resource and metal refining industries, this factor has become less influential over the past ten years, due to the current Chinese leadership’s recognition of the importance of environmental protection to long-term economic stability and improving quality of life for its people. Although large discrepancies still exist between national policies and local enforcement, there has been significant improvement over this period. The antimony industry has only been the latest of many effected by ramped up enforcement of environmental policies. As Chart 5 shows, refinery closures in Hunan, following the crackdown in March, led to sudden antimony price increases, following concerns about inventories and future availability.
Impacts of a Growing Dependency on Chinese Minor Metal Production
The foremost impact of an increasing global share of primary minor metal production coming from China is the consequent uncertainty regarding supplies of minor metal materials. This uncertainty stems from a number of factors, including concerns that there may be protectionist government involvement in the minor metal supply market, problems caused by a lack of transparency regarding available resources and fears of abrupt policy changes.
The fact that a command economy supplies nearly 40 percent of the world’s minor metals, including a significant amount of strategic metals, naturally leads many observers to fear the Chinese government’s ability to enact protectionist measures and restrict western access to these products. Declining numbers of export quotas for molybdenum, tungsten and rare earth elements, and recently implemented quotas for antimony, silicon and indium, support these concerns and give the appearance that China is placing importance on ensuring domestic availability and possibly positioning itself to stifle global supply. Chart 6 compares the decline of molybdenum, tungsten and rare earth export quotas between 2004 and 2009.
Analysts and end-users also find it difficult to ascertain accurate figures for production, production capacity and inventories of minor metals produced in China. As discussed, many Chinese minor metal primary producers are SOEs and, as such, have no requirement or incentive to make their exact capacity and production statistics available. The spring of 2010 has already seen widespread speculation regarding Chinese indium inventories partly due to lack of knowledge about primary production statistics, which has resulted in prices fluctuating between US$ 450 and US$ 650 per kilogram. Finally, end-users of minor metals produced in China are concerned with sudden or restrictive policy changes that would impact supplies and prices. The Chinese economy very much remains driven (and restricted) by government policies and regulations, and the global minor metal industry is fast realizing that domestic Chinese policies can have far-reaching impacts. Just weeks ago, in early April, the manganese industry was reminded of this fact when a mining accident in south China led to the temporary closure of a number of nearby producers, leading to an immediate price increase.
The growing uncertainty regarding Chinese minor metal supplies due to fears about the Communist Party’s industrial development policies and a general lack of transparency leads to supply speculation and price volatility, as witnessed by the recent indium prices. Increasing dependence on Chinese supplies of minor metals equates with decreasing supply diversification, which creates greater threats of supply disruptions and shortages, as the recent manganese and antimony situations have shown. As we will discuss in part-three of this series, price volatility and threats to supply have led end-users to pursue a variety of different methods in order to ensure material availability. One solution to price volatility is the transparency regarding inventory and supplies provided by futures markets, which the London Metal Exchange now provides cobalt and molybdenum. However, most minor metals are a long way away from being traded on any futures exchange. For the present, minor metal end-users whose raw materials increasingly originate in China should expect greater price volatility.
Policy Trends & Production Dependency Outlook
As noted in our discussion of the factors influencing the world’s growing dependence on Chinese production of minor metals, Chinese industrial and development policies have played a major role in encouraging greater domestic production. Put simply, the driving motivation behind China’s development policies can be summed up in two words: job creation. The national employment rate is the key economic indicator for the Communist Party, and is seen as a measure of social (and, therefore, political) stability. It is with this in mind that one must analyze Chinese economic policy decisions and make forecasts regarding future policy decisions.
There are two policy trends that we believe are prime indicators of what the future may bring for Chinese minor and strategic metal production. The first is the evolution of the zhuada fangxiao (抓大放小) policy, which was first developed in the mid-1990s in order to prepare China for global competition following entry to the World Trade Organization (WTO). Often translated as ‘grasp the big, release the small’, the zhuada fangxiao policy outlines China’s goal of creating large, internationally competitive companies in many key industries, including mining, energy and banking, with the help of supportive government policies. It is due to this policy that companies such as Baosteel, Sinopec and China Non-Ferrous Metals came to possess resources throughout China and have quickly become amongst the world’s largest companies in their respective industries. Moreover, it is on the basis of the zhuada fangxiao policy that many domestic policies supporting minor metal producers, particularly the SOEs discussed earlier, have developed. Continuing support of this policy can be seen today in the application of minor metal export quotas. Although much focus is paid on the decreasing quantities of export quotas, the number of companies permitted to export regulated products from China has also steadily decreased each year. The result being greater concentration of Chinese production and supply, as large producers have acquired smaller companies to increase resources and smaller companies have pursued joint ventures and other co-operative arrangements with larger producers in order to retain access to export quotas and the international market.
The second trend to consider is the changing support for natural resource imports and exports through the use of export quotas, taxes and tariffs. Let us first consider those resources for which China is rich in, such as antimony, bismuth, molybdenum, rare earths, siliconand tungsten. Three stages in China’s strategic and minor metal trade policy are evident from analyzing the policies regulating these metals. The first is encouragement of domestic extraction and production through the supportive policies and economic environment outlined above in our section discussing factors influencing the shift to China. Second, once China accounts for a large percentage of global production, China’s Ministry of Commerce begins limiting export of refined materials by decreasing VAT rebates on exports, increasing export duties and introducing export quotas. Finally, the number of export quotas begins to decrease and export taxes increase, forcing end-users to decide whether to move production to China or pursue other methods to ensure a stable supply. Chart 8 shows the inter-relation between China’s share of global tungsten production and the increase in Chinese tungsten export restrictions over the past ten years.
The left side Y-axis of the chart refers to the bar graph, which represents Chinese tungsten production in comparison to rest of world production, whereas the right side Y-axis refers to the bar graph representing changes in export restrictions. Each type of increase in export restrictions for tungsten was simply coded as +1 on an annual basis. Although there were none in the period analyzed, decreases were to be coded as -1. Changes in export restrictions included increases (decreases) to the VAT on exports, increases (decreases) in export quotas and increases (decreases) in export taxes.4
As we see, there has been a notable growth in the export restrictions placed upon tungsten since 2004. If we similiarly analyze restrictions on all the minor metals in our index and contrast this with the growth of China’s share of global production, the trend become quite evident.
For those minor metals that China possesses no natural geological advantages in producing, there has been an effort to bring the second stage of production – refinery production – to China. For example, although China is not a significant primary producer of chromite or cobalt ore, it is now the world’s second largest producer of ferrochromium and largest producer of refined cobalt products.
In sum, the goal of these trade policy trends has been to attract foreign investment and manufacturing to China. And they have been successful. In an interview with HardAssetsInvestor.com last year, Mark Smith, CEO of Molycorp LLC, effectively summarized this issue by explaining how China brought the high-strength magnet manufacturing industry to China.5
Looking forward, the success that Chinese policies have had in ensuring domestic availability of minor and strategic metals, and more importantly, supporting Chinese manufacturing and job growth leads us to confidently expect policies to continue along this path. Combined with demand from China’s growing manufacturing sector and the strengthening domestic market for minor metal products, we are likely to see global dependence on Chinese minor metal production increase over the following five years. What will be of interest are the reactions to, and outcome of, international responses to China’s protectionist policies. We will be closely following the outcome of the WTO dispute settlement panel, requested by the US, EU and Mexico, to evaluate China’s export restrictions on raw materials, including silicon metal and manganese, due out later this year. Another issue to follow in the coming years will be changes to China’s share of global minor metal refining capacity. Recognizing that domestic metal resources are finite, there has already been a significant rise in imports of metal ores to feed its refineries over the past decade. We expect to see steady growth in refinery capacity for most of the minor metals. Consequently, we also expect to see greater overseas investment by Chinese companies looking to secure minor metal raw materials and ores.
In the final part of this series on the effect of China’s growing production and supply of minor metals, we will return to the impact of this change on end-users by looking at examples from a number of different industries to evaluate how end-users are trying to manage supply risk and price volatility.
Click here to read Part III: Responses by International End-Users
1Statistics derived from: Mindat.org: http://www.mindat.org/loc-720.html (Baiyun Obo). Kingsworth, Dudley (2010). Rare Earths: Facing New Challenges in the New Decade. IMCOA Presentation and Canadian Mining Journal (March 3, 2004) (Mt. Weld and Mountain Pass). Consolidated Merchants: <www.metorexgroup.com>. “ANTIMONY EXPLORATION NEWS – Beaver Brook Mine Changes Hands” (2004). <http://www.canadianminingjournal.com/issues/story.aspx?aid=1000013137> (Beaver Brook).
2 Measured in value-added, nominal terms. See: http://www.ihsglobalinsight.com/Perspective/PerspectiveDetail13718.htm
3Ministry of Land and Resources PRC (2010). China Land & Resources Statistical Yearbook 2009.
4Changes in export restrictions derived from: Korinek, Jane and Jeonghoi Kim (2009). OECD. Export Restrictions on Strategic Raw Materials and their Impact on Trade and Global Supply. 2009 Workshop on Raw Materials.