Thursday, August 25, 2011

China Winning Over Manufacturers With Rare Earths

China's strategic gamble on its rare earth metal resources is starting to pay off big time.  Foreign manufacturers are beginning to build capacity in China because they don't want to lose access to its rare earth metal stockpile.  The article's last sentence says it all; of course this is what China's government has always wanted, from as far back as Chairman Mao's days. 

China possesses about a third of the world's store of rare earth elements but ramped up its production to 95% of the world's output. The intent behind this move was to flood the market with supply that would drive smaller producers outside China out of business or make new exploration prohibitively expensive.  China would then be free to impose export controls on its metals that would force dependent manufacturers into a bind.  They could do without the metals and let their supply chains atrophy while they sought production elsewhere, or invest directly in China to manufacture stuff there.

The faster China attracts high-value manufacturers, the sooner it will have the technological capacity to become a military peer competitor to the U.S.  Asian nations need to take note and plan accordingly for tighter links with India and the U.S.  American investors need to plan accordingly for undeveloped rare earth deposits in the Anglo-West.

Full disclosure:  Long FXI with covered calls.