China rare earth prices explode as export volumes collapse 22 Mar 2011 14:11

By Tom Miles

BEIJING, March 22 (Reuters) - China's exports of rare earth metals burst through the $100,000-per-tonne mark for the first time in February, up almost ninefold from a year before, while the volume of trade stayed far below historical averages.

China's squeeze on rare earths, which are used in a wide range of hardware including precision-guided weapons, hybrid car batteries and iPads, has forced prices up dramatically since July last year, when each tonne fetched a mere $14,405 on average.

The apparent price rises have averaged $10,000 per tonne per month but accelerated in February, galloping ahead by $34,000 per tonne, according to Reuters calculations based on data from China's Customs office.

Last month each tonne of exports was valued at $109,036, including the cost of insurance and freight, almost half as much again as the average value in January.

The explosion in export values has coincided with a collapse in volumes coming out of China, the source of almost all the world's rare earth supplies, which has cut export quotas of the 17 rare earth metals and raised tariffs on exports.

China's actions have infuriated its trading partners but lifted the shares of the few mining and prospecting companies outside China that are well-placed to capitalise on the constriction of Chinese supply.

They include U.S. miner Molycorp Inc <MCP.N>, Canada's Rare Element Resources <RES.V> and Neo Material Technologies <NEM.TO> and Australia's Arafura <ARU.AX> and Lynas <LYC.AX>.

But those firms' share prices have been under pressure this month because Japan's earthquake and tsunami are expected to temporarily slash demand from China's biggest customer. In February, 281 tonnes of Chinese exports went to Japan, valued at $38.9 million or $138,406 per tonne. [ID:nN15270138] <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

For a table of China's minor metals trade, including rare earth exports, please click [MINMTL/CN]

For a graphic of export volumes and values:

http://graphics.thomsonreuters.com/11/03/CN_RREXP0311_CC.gif

For a graphic of the discrepancy between China's old and new ways of presenting rare earth export volumes:

http://graphics.thomsonreuters.com/11/02/CN_RRERTH0311.gif ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

China exported a total of 750 tonnes in February, slightly more than the 647 tonnes shipped in January but otherwise the lowest monthly volume since February 2009, when demand was hit by the global financial crisis.

China's Customs office changed its method of presenting rare earths exports in its headline data this year, boosting the reported volume by including products made from rare earth metals in the total. [ID:nTOE728041]

By that method, exports were 2,976 tonnes in February, up by 132 percent from a year before, when the figure did not include rare earth products.

(Editing by Ken Wills)

((tom.miles@thomsonreuters.com; +86 10 6627 1200; Reuters Messaging: tom.miles.reuters.com@reuters.net))

((If you have a query or comment on this story, send an email to news.feedback.asia@thomsonreuters.com)) Keywords: CHINA RAREEARTH/

By Tom Miles

BEIJING, March 22 (Reuters) - China's exports of rare earth metals burst through the $100,000-per-tonne mark for the first time in February, up almost ninefold from a year before, while the volume of trade stayed far below historical averages.

China's squeeze on rare earths, which are used in a wide range of hardware including precision-guided weapons, hybrid car batteries and iPads, has forced prices up dramatically since July last year, when each tonne fetched a mere $14,405 on average.

The apparent price rises have averaged $10,000 per tonne per month but accelerated in February, galloping ahead by $34,000 per tonne, according to Reuters calculations based on data from China's Customs office.

Last month each tonne of exports was valued at $109,036, including the cost of insurance and freight, almost half as much again as the average value in January.

The explosion in export values has coincided with a collapse in volumes coming out of China, the source of almost all the world's rare earth supplies, which has cut export quotas of the 17 rare earth metals and raised tariffs on exports.

China's actions have infuriated its trading partners but lifted the shares of the few mining and prospecting companies outside China that are well-placed to capitalise on the constriction of Chinese supply.

They include U.S. miner Molycorp Inc <MCP.N>, Canada's Rare Element Resources <RES.V> and Neo Material Technologies <NEM.TO> and Australia's Arafura <ARU.AX> and Lynas <LYC.AX>.

But those firms' share prices have been under pressure this month because Japan's earthquake and tsunami are expected to temporarily slash demand from China's biggest customer. In February, 281 tonnes of Chinese exports went to Japan, valued at $38.9 million or $138,406 per tonne. [ID:nN15270138] <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

For a table of China's minor metals trade, including rare earth exports, please click [MINMTL/CN]

For a graphic of export volumes and values:

http://graphics.thomsonreuters.com/11/03/CN_RREXP0311_CC.gif

For a graphic of the discrepancy between China's old and new ways of presenting rare earth export volumes:

http://graphics.thomsonreuters.com/11/02/CN_RRERTH0311.gif ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

China exported a total of 750 tonnes in February, slightly more than the 647 tonnes shipped in January but otherwise the lowest monthly volume since February 2009, when demand was hit by the global financial crisis.

China's Customs office changed its method of presenting rare earths exports in its headline data this year, boosting the reported volume by including products made from rare earth metals in the total. [ID:nTOE728041]

By that method, exports were 2,976 tonnes in February, up by 132 percent from a year before, when the figure did not include rare earth products.

(Editing by Ken Wills)

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RPT-SPECIAL REPORT-Advanced economies at advantage in disaster recovery 14 Mar 2011 10:06

  (Repeats report filed late on Sunday)  
    By Alan Wheatley, Global Economics Correspondent  
    BEIJING, March 13 (Reuters) - The earthquake that devastated 
northeast Japan displaced the country's main island by 2.4 
metres and even tilted the axis of the Earth by nearly 10 
centimetres. The shock sounds awesome but it was imperceptible. 
History suggests the same will be true of the economic impact.    
    The instinctive reaction when viewing the extensive damage 
and frantic efforts to secure damaged nuclear reactors is to 
assume economic havoc will follow.  
    But researchers who have studied similar disasters in rich 
countries reach a reassuring conclusion: human resilience and 
resourcefulness, allied to an ability to draw down accumulated 
wealth, enable economies to rebound quickly from what seem at 
first to be unbearable inflictions - be it the Sept. 11, 2001, 
attacks on New York or Friday's 8.9-magnitude earthquake, the 
worst in Japan's history.  
    Japan itself provides Exhibit No. 1 in foretelling the arc 
of recovery. A 6.8-magnitude temblor struck the western city of 
Kobe on Jan. 17, 1995, killing 6,400 people and causing damage 
estimated at 10 trillion yen, or 2 percent of Japan's gross 
domestic product.   
  <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^  
    Graphic on Kobe quake http://link.reuters.com/jec58r  
    Main story on Japan quake [ID:nL3E7EC0D6]  
    Analysis on quake recovery[ID:nN12187648]    
  ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>  
    The importance of Kobe's container port, then the world's 
sixth-largest, and the city's location between Osaka and western 
Japan made it more significant for the economy than the more 
sparsely populated region where the latest quake and tsunami 
struck. Extensive disruption ensued, yet Japan's industrial 
production, after falling 2.6 percent in January 1995, rose 2.2 
percent that February and another 1.0 percent in March. GDP for 
the whole of the first quarter of 1995 rose at an annualised 
rate of 3.4 percent.  
    "Despite the scale of the disaster, it is hard to find much 
evidence in the macroeconomic data of the effects of the Kobe 
earthquake," said Richard Jerram, chief Asian economist at 
Macquarie in Singapore and a veteran Japan-watcher.  
    Indeed, Takuji Okubo, chief Japan economist at Societe 
Generale in Tokyo, noted that Japan's economy grew by 1.9 
percent in 1995 and 2.6 percent in 1996, above the country's 
trend growth rate at the time of 1.5 percent. Private 
consumption, government spending and, especially, public fixed 
investment all grew above average in 1995 and 1996, Okubo said 
in a report. By analogy, the medium-term impact on growth from 
the latest quake was also likely to be positive, he said.  
    Today's circumstances are, of course, different. Japan's 
economy has floundered in the intervening 16 years and its 
public finances have deteriorated. On paper, the country, is 
perhaps less well prepared at this stage of the economic cycle 
to pick itself up off its feet.  
    But Mark Skidmore, an economics professor at Michigan State 
University, attaches greater importance to a rich society's 
capacity to constantly adapt to the risks it faces. In the case 
of Japan, prone to regular earthquakes, this means improving its 
disaster response systems and adopting the latest techniques to 
help buildings withstand shocks.   
    Most of the damage wrought in Japan was by the ensuing 
tsunami, for which there was no time to prepare, and not by 
collapsing buildings - even though the quake was 1,000 times 
more powerful than the Kobe one.  
    "We don't know yet how devastating this is going to be 
economically, or even in terms of human casualties, but Kobe was 
able to rebound very quickly and I think there is the same 
potential here," Skidmore said in a telephone interview.  
    Skidmore and Hideki Toya from Nagoya City University in 
Japan have examined data for 151 countries over the period 
1960-2003 and found that countries with higher levels of income, 
education and financial development suffer fewer losses from a 
natural disaster. Other researchers have reached similar 
conclusions.  
    "As incomes rise in a society, you can devote more resources 
to safety. So economies that have relatively high exposure to 
earthquakes or hurricanes start taking the precautions they 
need. Japan is among the best prepared in the world because they 
have high exposure and high income," Skidmore said.  
      
    OPENNESS TO TRADE  
    Countries with an openness to trade are also better able to 
cope with disasters because they create supply chains as well as 
commercial and diplomatic relationships that prove to be 
important. A well-oiled, well-financed government that can 
spring into action and limit the spillovers of the disaster is 
also crucial. This bodes well for Japan.  
    "They have the resources. They have the social and economic 
and government infrastructure to effectively utilise the 
resources that may come in from outside as well as internally. 
They can focus not just insurance but also government assistance 
to respond effectively," Skidmore said.  
    Another U.S. academic who has studied the lessons from Kobe, 
the late George Horwich of Purdue University, noted that media 
reports said it could take the city as long as a decade to 
recover. In the event, within 15 months manufacturing in Kobe 
was at 98 percent of its pre-disaster trend; imports had fully 
recovered within a year and exports were back at 85 percent 
capacity; and 79 percent of shops had reopened by July 1996.  
    "Natural disasters in large advanced economies tend not to 
significantly reduce current aggregate output or induce an 
associated rise in the general price level. In geographically 
dispersed economies, disasters are almost always localised 
events. But in any economy, it is the capital stock, not output, 
that is directly reduced by the disaster," he wrote in a paper 
published in 2000.  
    Horwich concluded that physical capital is the most visible 
contributor to economic recovery but human capital is the 
dominant economic resource. And Japan has that in spades.  
    "Destroy any amount of physical capital, but leave behind a 
critical number of knowledgeable human beings whose brains still 
house the culture and technology of a dynamic economy, and the 
physical capital will tend to reemerge almost spontaneously," he 
said.  
    The 2008 earthquake in the western Chinese province of 
Sichuan, which killed nearly 90,000 people, is in line with the 
academic finding that strong institutions and human capital are 
central to the process of recovery.   
    As a developing country, China had not made enough buildings 
earthquake-resistant. Many schools crumbled. Yet the ruling 
Communist Party mobilised vast resources for rescue, relief and 
reconstruction. As a result, according to a government think 
tank, the disaster actually added an estimated 0.3 percentage 
point to China's GDP growth in 2008. Less than three years on, 
the office charged with reconstruction has been disbanded, its 
work complete, an official said on Sunday.  
    Compare and contrast with Haiti, the most impoverished 
country in the Western Hemisphere. The 7.0 magnitude quake that 
struck on January 12, 2010, was much less powerful than that in 
Japan, but it killed at least 250,000 people, injured 300,000, 
left 1.5 million homeless and wrecked large parts of the 
capital, Port-au-Prince.  
    With weak finances and no emergency fund to tap, Haiti's 
economy slumped at least 5 percent last year, and the release of 
billions of dollars in international aid has been too slow to 
settle the homeless and get basic services running again, let 
alone spur an economic recovery. A cholera epidemic and 
political instability over contested elections reflect the 
failures of reconstruction efforts and in turn have made 
recovery even more difficult.  
    Haiti's woes confirm the findings of numerous researchers 
that poverty, high unemployment, limited access for the poor to 
basic services and a lack of strong national and local 
institutions amplify the economic blow of natural disasters.  
    "The impacts of natural disasters on society and the 
environment are substantially greater in less developed 
countries," according to a paper by Reinhard Mechler, who heads 
the research group on disasters and development at the 
International Institute for Applied Systems Analysis near 
Vienna.  
  
    INDIAN OCEAN TSUNAMI  
    Another case in point is Aceh, at the northern tip of the 
Indonesian island of Sumatra, which bore the brunt of the Indian 
Ocean tsunami of Dec. 26, 2004.   
    Of the 230,000 people killed by the speeding, towering 
waves, 167,000 were from Aceh, which suffered total damage of 
about $4.5 billion. A big relief effort was launched, but more 
than two years later a report from the Asian Development Bank 
Institute said key reconstruction targets had not been met and 
coordination among the many government agencies and 
international donors was poor.    
    With Aceh accounting for just 2 percent of Indonesia's 
economy, the catastrophe was not enough to move the needle of 
the country's GDP. But, as with Haiti, the shortcomings of the 
region's recovery stood In stark contrast to the experience in 
Kobe.  
    After the initial loss of output, disasters in advanced 
economies do not invariably result in a boost to economic 
activity.  
    Gus Faucher, director of macroeconomics at Moody's 
Economy.com, a consultancy, has cited the aftermath of Hurricane 
Katrina, which devastated New Orleans in 2005: the city did not 
experience an economic bounce because so many residents left, 
government aid was slow to arrive and insurance payments were 
low.  
    But, as a rule of thumb, reconstruction jobs and the influx 
of emergency assistance apply balm to an economy's wounds. Take 
the 6.7 magnitude Northridge quake near Los Angeles in 1994 that 
killed 57 people, injured 9,000 and resulted in about $40 
billion in property damage.  
    Daniel Blake, an economics professor at California State 
University Northridge, found a year later that the $18 billion 
in aid and insurance payments made by the federal government 
actually jump-started the area's fragile economy after four 
years of recession.  
    And after the 1989 Loma Prieta earthquake, which severely 
damaged major roads around the San Francisco Bay, an official 
estimate put the Bay Area's lost economic output at between $181 
million and $725 million, a fraction of its 1989 gross regional 
product of $174 billion. Indeed, the California Trade and 
Commerce Agency later found that the Bay Area even managed to do 
better than many parts of the state in weathering the early 
1990s recession.  
    A more recent example is that of Chile, where 500 people 
died in an 8.8 magnitude quake in February 2010 that caused an 
estimated $30 billion hit to the economy due to damaged 
infrastructure and property and lost productivity.  
   Both the government and central bank trimmed their growth 
outlooks after the quake, estimating it could shave around 0.25 
to 0.5 percentage point off annual growth. But the economy grew 
about 5.2 percent in 2010, within the original range of 
projections. With the state only halfway through its rebuilding 
programme, GDP growth this quarter is likely to accelerate to 
around 8 percent.  
    "The impact of reconstruction on growth is becoming stronger 
as time goes on," said Finance Minister Felipe Larrain, who 
financed an $8.4 billion recovery package with a mix of bond 
issues, higher royalties levied on mining companies and and 
savings from a boom in copper, Chile's principal export. 
[ID:nN12197354]   
    So what does all this mean for Japan?   
    Pete Wilson, California's governor at the time of the 
Northridge quake in 1994, says it was important to cut through 
red tape. By waiving the requirement for environmental impact 
hearings and setting incentives for building contractors, Wilson 
told Reuters he managed to reopen Interstate 10, then the 
world's busiest road, in just over two months. Some had feared 
it would take two years.  
    Chile's experience shows that a government is perfectly 
justified in resorting to deficit spending to cushion a natural 
disaster because of the shot in the arm it delivers to the 
economy, said Alfredo Coutino, Latin America director for 
Moody's Analytics.   
    "If one lesson can be learned from Chile's case, it is that 
Japan's government has to make a quick move in terms of 
implementing the reconstruction with a variety of funding 
sources:  issue debt, reallocation of public resources, and 
international aid," he said.  
    Japan's problem is that its gross public debt, equal to 
about twice GDP, is already the heaviest in the world. With an 
ageing population posing an ever-growing burden on Japan's 
public finances, rating agencies have sounded the alarm and 
warned of possible downgrades unless politicians bury the 
hatchet and come up with a plan to reduce the debt over the 
medium term.  
    "The earthquake should lead to somewhat expansionary fiscal 
policy. However, due to its already large deficit, it is 
unlikely that the Japanese government would plan a large scale 
fiscal stimulus," said Okubo, the Societe Generale economist.  
  
    YEN WILD CARD  
    The reaction of the yen in coming weeks is another wild card 
in assessing the impact on Japan's economy. The Bank of Japan, 
which meets on Monday, is widely expected to pledge as much 
money as needed to prevent the repercussions of the quake from 
destabilising financial markets and the banking system.    
    Economists also expect the central bank will signal its 
readiness to ease monetary policy further -- even though its 
policy rate is already near zero -- if the damage from the quake 
threatens Japan's fragile economic recovery.  
    That prospect would normally weaken the yen, but economists 
are keenly aware that the Japanese currency gained sharply in 
the weeks after the Kobe catastrophe. It rose from 96 per dollar 
in late February and briefly punched through 80 to an all-time 
high on April 19, 1995, before reversing course after the BOJ 
cut interest rates.  
    Trade tensions with the United States were a driving force 
in 1995 and are absent today. A rush to bring capital back to 
Japan, especially by insurers anticipating large claims, was 
also a factor post-Kobe and could be again. But Jerram, the 
Macquarie economist, doubted that history would repeat itself.  
    "Significant yen repatriation that could push the currency 
higher and, at an extreme, disrupt global markets, looks 
unlikely," he said.  
    Another "known unknown" is whether serious damage to the 
Fukushima Daiichi nuclear plant will cause countries including 
Britain, China and Italy to reappraise plans to boost investment 
in nuclear power. If they do, it would be logical to expect 
higher oil, natural gas and coal prices. (For related stories, 
click on [ID:nN11262134] [ID:nN12287930])  
    "A serious accident like that will have repercussions in all 
countries with nuclear," Bertrand Barre, scientific adviser to 
French nuclear reactor maker Areva <CEPFi.PA>, told Reuters.  
    If there are clear lessons, we will apply them. We need to 
take time to work out the consequences and act." France depends 
on nuclear power for nearly 80 percent of its electricity 
[ID:nLDE72B0FP]  
    Japan's earthquake is just the latest in a series of 
unwanted shocks for the world economy, which is still far from 
having shaken off the fallout of the 2008 global financial 
crisis. Political turmoil in North Africa has reduced oil 
supplies from Libya and raised the spectre of wider disruptions 
to deliveries from the Middle East.   
    Food prices have climbed to record highs. The euro zone debt 
crisis is far from over, with bond yields for Greece, Ireland 
and Portugal at seemingly unsustainable levels. Policy makers in 
the main economies who have slashed interest rates close to zero 
and run up huge budget deficits would appear to have little 
ammunition left to fire if consumer, business and investor 
confidence takes a dive because of Japanese quake.  
    But economists at J.P. Morgan said it was important to bear  
in mind that most, if not all of these shocks will prove to be 
temporary and are unfolding against a backdrop of very strong 
fundamental supports for growth, including booming industrial 
production, improving labour markets and a 17 percent rise in 
global share prices since September.  
    The bank has recently trimmed its forecasts for the United 
States and the euro zone but its projection for global growth in 
the first half of 2011 remains at a rate of 3.7 percent, which 
is 1 percentage point above trend.  
    "Put differently, the shocks to date would have to magnify 
considerably to push global growth below this trendline." the 
J.P. Morgan economists said in their latest Global Data Watch 
publication.  
 (Additional reporting by Braden Reddall in San Francisco, Simon 
Gardner in Santiago and Kieron Murray in Mexico City)  
 ((alan.wheatley@thomsonreuters.com; +86 1391 007 9146; 
alan.wheatley.reuters.com@reuters.net))  
 (If you have a query or comment on this story, send an email to 
news.feedback.asia@thomsonreuters.com))    
  
 
 
Keywords: JAPAN QUAKE/RECOVERY   

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China's 5 power firms eye equity market for more cash -paper 24 Feb 2011 08:57

SHANGHAI, Feb 24 (Reuters) - China's five major state-run power generation companies hope to raise more money for their new energy units either by an initial public offering or by raising equity this year, the Shanghai Securities News reported on Thursday.

Saddled with high debts and fighting high fuel prices, the power firms, including Guodian Corp, Huadian Corp, Huaneng Group, Datang Corp and China Power Invest Corp, are aiming to tap the market to fund their string of renewable energy projects, the paper said.

Guodian, parent of GD Power Development Co <600795.SS>, Guodian Changyuan Power Development Co <000966.SZ> and China Longyuan Power Group Corp <0916.HK>, is planning to list its unit Guodian Technology and Environment Group and issue yuan-denominated bonds through its Longyuan subsidiary this year.

Huadian Corp, parent of Hong Kong-listed Huadian Power International Corp Ltd <1071.HK>, hopes to speed up the public listing of its renewable resources department Fuxin New Energy Co in 2011 as well as its engineering dept by 2012, the paper said, citing Huadian's General Manager Yun Gongming.

An unidentified official at Datang Group said the firm would push for its Shanghai-listed subsidiaries, Guaguan Power <600236.SS> Huayin Power <600744.SS> to raise equity, while China Power Investment Corp was separately planning to list some unspecified units.

Huaneng Corp also plans to accelerate efforts to list its renewables division this year, after the firm abandoned its IPO of up to $1.3 billion last year due to weak market conditions. [ID:nTOE6BC069]

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Singapore-listed commodity cos set to grow-Barron's 10 Jan 2011 05:49

NEW YORK, Jan 9 (Reuters) - Three Singapore-listed commodities companies may challenge large long-established Western companies like Archer Daniels Midland Co <ADM.N>, according to Barron's.

Olam International Ltd <OLAM.SI>, Wilmar International Ltd <WLIL.SI> and Noble Group Ltd <NOBG.SI> may benefit from their Asia-based homes, where the world's largest populations are eager to secure a food supply, Barron's said.

The companies' cash flow has been growing by the upper teens, Barron's said. Noble and Olam, who moved into production from trading, have been buying plantations and other assets, Barron's said.

Olam is the world's largest supplier of cashews and sesame seeds, and is among the biggest sources of cocoa, rice, peanuts and cotton. It operates in 64 countries.

Noble is Asia's biggest supplier of raw materials. Only 22 percent of its revenue comes from agriculture, with the remainder coming from materials such as iron ore.

It has invested heavily in mines and processing.

Wilmar is Asia's leading agribusiness group and the world's largest integrated palm oil company. Demand is expected to grow because of demand for biofuels, which is part of the reason the company bought the sugar and renewable energy businesses from Australia's CSR <CSR.AX>. (Reporting by Ilaina Jonas; Editing by Tim Dobbyn) ((Reuters Messaging: ilaina.jonas.reuters.com@reuters.net, +1 646 223 6193)) Keywor

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RPT WRAPUP2-China's rare earths export cut raises trade concerns 29 Dec 2010 20:32

* China cuts first-half 2011 rare earths exports 35 pct * Move may hit high-tech, automakers * Sony eyes cutting reliance on Chinese supplies * Shares jump in Lynas, Australian and HK rare earth firms (Adds EU Commission comment) By James Regan SYDNEY, Dec 29 (Reuters) - China has raised fresh international trade concerns after slashing export quotas on rare earths minerals, risking action from the United States at the World Trade Organization. China, which produces about 97 percent of the global supply of rare earth minerals, cut its export quotas by 35 percent for the first half of 2011 versus a year ago, saying it wanted to preserve ample reserves, but warned against basing its total 2011 export quota on the first half figures. The U.S. Trade Representative's office was "very concerned" about China's export restraints on rare earths and had raised its concerns with China, a spokeswoman said on Tuesday.[ID:N28253944] A European Commission spokesman said the European Union "notes the latest quota figures and expects China to respect its recent assurance of a guarantee of rare earth supplies to Europe." U.S. makers of high-tech products such as Apple Inc's <AAPL.O> iPads, along with Japanese companies have been scrambling to secure reliable supplies of the minerals outside of China as Beijing steadily reduces export allocations. Japan's Sony Corp <6758.T> said China's move to cut export quotas was a hindrance to free trade and that it would work to reduce its reliance on Chinese supplies. [ID:TOE6BS02D] "At this point in time there is no direct impact on our company. But further restrictions could lead to a shortage of supply or rise in costs for related parts and materials," Sony said in an email statement in response to questions from Reuters. "We will watch the situation carefully." Sony, maker of Bravia brand flat TVs, Vaio PCs and the PlayStation 3 videogame console, will look for ways to cut its use of rare earths, including developing alternative materials, Sony spokeswoman Ayano Iguchi said. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ For a story on China's quota cuts, see: [ID:nTOE6BR02A] For a factbox on how rare earth is used: [ID:nN28256995] Five facts about rare earth elements: [ID:nN28207547] For a story on US threatening take China to the WTO see: [ID:nN23157001] For a special report on the fight for rare earths, click: http://r.reuters.com/cyc53q For an interactive graphic: http://link.reuters.com/tyk93r ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> A BOON TO SOME China's move, however, came as a shot in the arm for some companies. Lynas Corp <LYC.AX>, which owns the world's richest known non-Chinese deposit of rare earths, jumped over 10 percent even though it will be at least a year before it is capable of mining any material from a new lode in Australia. Other rare earths companies, including China Rare Earth Holding Ltd <0769.HK>, Arafura Resources <ARU.AX>, Alkane Resources <ALK.AX> and Greenland Minerals and Energy Ltd <GGG.AX> also gained between 8 percent 10 percent. "Export quotas continue to be a tool for the Chinese government to limit the export of China's strategic resource," Lynas Executive Chairman Nick Curtis said in a statement. "The growth in the Chinese domestic market coupled with a decrease in production of rare earths in China is a likely cause for the tightening of export regulations," said Curtis, whose company is aiming to start production in about a year and has already forged supply contracts with Japanese traders. World demand for rare earths at present is about 110,000 tonnes a year, with China accounting for about 75 percent of total demand with the remainder split between Japan, the United States and Europe, in descending order. Demand for rare earths is set to more than double to 250,000 tonnes by 2015, according to industry estimates. "Concerned parties should not estimate full-year quotas for rare earth minerals just by looking at the first set of quotas," China's Ministry of Commerce said. Final quotas will take into account domestic production and demand both at home and abroad, according to the ministry. DEALS FOR SUPPLY Prices have surged for these minerals, also used in making fluorescent light bulbs, since authorities in Beijing slashed their rare earth exports by 40 percent this summer, saying China needed them for its economic development. Last week, Hitachi Metals Ltd <5486.T> signed a joint venture with U.S.-based Molycorp Inc <MCP.N> to help ensure a steady supply -- an announcement that sent its shares up 15 percent in a single trading session. [ID:TOE6BK053] That followed word earlier this month that Sumitomo Corp <8053.T> agreed to invest $130 million in Molycorp to secure a seven-year supply of the materials. [ID:nN10286929] Since debuting in late July at $14, Molycorp's stock price has nearly quadrupled. Molycorp owns a rare-earth mine in Mountain Pass, California, which is scheduled to resume production next year after a 10-year hiatus. Japan's trade minister, Akihiro Ohata, told reporters on Tuesday he believed Japan would still be able to secure enough rare earth supplies in 2011 even after China's quota cuts, but said the situation would need further study. Ohata's comment was based on the assumption that the expected amount of imports in the first half of 2011 would be roughly equal to the average of imports for the first and second halves of 2010, a spokeswoman for the ministry said. Hyundai Mobis <012330.KS>, South Korea's top automotive parts maker and a major supplier to Hyundai Motor <005380.KS>, said that the quota would have an impact on the two companies, as rare earth is used in electric motors for hybrid vehicles, and as Hyundai Motor is increasing its hybrid vehicle sales. A spokesman for Hyundai Mobis added that the two companies have been preparing measures to cope with rare earth issues, including diversifying imports. (Additional reporting by Nathan Layne and Kiyoshi Takenaka in TOKYO, Tom Miles and Niu Shuping in BEIJING and Hyun Joo Jin and Ju-min Park in SEOUL, Peter Harrison in BRUSSELS; Editing by Jon Boyle; jim.regan@thomsonreuters.com; +612 9373-1814; Reuters Messaging: jim.regan.reuters.com@reuters.net) ((jim.regan@thomsonreuters.com, +612 9373-1814; Reuters Messaging: jim.regan.reuters.com@reuters.net))

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TAKE A LOOK-Key political risks to watch in 2011 22 Dec 2010 10:16

euters correspondents around the world have pulled together the key political risks for investors to watch in 2011.

Click on on the square brackets for the story on screens and on the URL for a pdf.

> Global risks [ID:nLDE6BI0DB] http://r.reuters.com/kag23r > Asia [ID:nL3E6NK0I6] http://r.reuters.com/vav23r > Western Europe [ID:nLDE6BG195] http://r.reuters.com/gag23r > Emerging Europe [ID:nLDE6BG165] http://r.reuters.com/jag23r > Africa [ID:nLDE6BG0YQ] http://r.reuters.com/hag23r > Middle East [ID:nLDE6BK172] http://r.reuters.com/gej23r > Latin America [ID:nRISKLATAM] http://r.reuters.com/vav92r > North America [ID:RISKUS] http://link.reuters.com/cyh92r ((Compiled by Peter Apps))

Keywords: POLITICS RISKS/LOOK

Wednesday, 22 December 2010 01:26:34RTRS [nRISK ] {C}ENDS

Keywords: POLITICS RISKS/LOOK

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FACTBOX-Key political risks to watch in Asia in 2011 22 Dec 2010 10:21

By Andrew Marshall and Daniel Magnowski

SINGAPORE, Dec 21 (Reuters) - Asia's economies have been crucial engines of global growth as the world crawls out of economic crisis, but the 2011 outlook is clouded by China's growing clout, the volatile situation on the Korean peninsula and corruption scandals in India.

Following is a summary of key risks to watch in 2011:

To read this as a PDF: http://r.reuters.com/vav23r

For other regions: [ID:nRISK]

HOW WILL CHINA USE ITS GEOPOLITICAL AND ECONOMIC CLOUT?

China's sharply strengthening geopolitical and economic influence brings a new set of global risks -- how will it manage its growing clout, and its relations with the rest of Asia and the United States? China is the main engine of world economic growth, which means the question of whether its economy is overheating is a global concern.

What to watch:

-- Currency tension with the United States. Tension between Beijing and Washington over the value of the yuan appears to have receded. But the publication, delayed since October, of a U.S. Treasury report into whether China manipulates its currency may set the tone for relations between the world's biggest economies. Markets will also keep a close eye on President Hu Jintao's visit to the United States in January.

-- How China uses its regional influence. Fallout from a territorial dispute with Japan in September was mainly political rather than economic, though China's apparent freeze on rare earth exports was a key factor in Tokyo's eventual capitulation. Other countries with maritime territorial disputes with Beijing viewed that confrontation with alarm, fearing China's hawkish stance heralds a higher risk of further standoffs that could damage trade and regional economies. [ID:nTOE6B0024]

-- Inflation and interest rates. China will set an inflation target in 2011 of 4 percent, higher than this year's 3 percent, an indication that the government will hold back from aggressive monetary tightening even as price pressures mount. But if inflation looks like it will significantly exceed the target, policymakers may raise interest rates sharply. [ID:nTOE6BD02D]

WILL NORTH KOREA UNLEASH WAR -- OR IMPLODE?

Tensions on the Korean peninsula are at their highest in years following the sinking of a South Korean naval vessel in March with the loss of 46 lives and an exchange of artillery fire in November that killed four on a disputed island. With major powers at odds over how to handle the crisis, and secretive North Korea entering a potentially lengthy period of leadership transition, the risks of war on the peninsula or the sudden implosion of the Pyongyang regime are key uncertainties.

What to watch:

-- The small but serious risk of war. Analysts believe serious conflict to be unlikely. North Korea's ill-equipped armed forces face quick and near-certain defeat if they wage full-scale war, and Pyongyang is well aware of its limitations. But North Korea does have the ability to unleash thousands of artillery shells on Seoul in the early stages of any conflict, devastating South Korean industry, and any conflict would send regional markets into a nosedive. The biggest risk is that a mistake or miscalculation by the North or South during a game of brinkmanship results in an unintended escalation into a war that nobody wants. [ID:nTOE6B902R]

-- The leadership succession in the North. The appointment of Kim Jong-un, youngest son of the leader, to key positions confirms he is the chosen successor. Rising with him are Kim Jong-il's sister and her husband, forming a powerful triumvirate ready to take over the family dynasty that has ruled North Korea since its founding after World War Two. But given the parlous economic condition of the country, the ruling elites have an ever-shrinking share of the spoils to divide between them, and there is always the chance of an internal challenge to the regime, particularly from within the military.

-- Signs the Pyongyang regime is imploding. Most analysts regard the chaotic collapse of the regime and the sudden reunification of the Korean peninsula as the most serious risk for markets. Unlike war, which is unlikely, regime change is inevitable sooner or later. The only question is when. Most estimates say it could cost Seoul more than $1 trillion to absorb its impoverished neighbour. Besides the enormous fiscal costs, South Korea would have to deal with the possible influx of millions of refugees and the social upheaval that this would cause. Tensions with China could spike as Beijing tries to protect its interests and influence the future of North Korea which it has used as a buffer against pro-Western states.

IS INDIAN ECONOMIC REFORM FURTHER AWAY THAN EVER?

A series of corruption scandals which broke in 2010, chief among them an alleged scam in the telecoms sector that a government auditor said may have cost India up to $39 billion, look set to dominate Indian business and politics in 2011. Corruption may be a fact of doing business in India, and one factored into investors' calculations, but its impact on government could become deeply damaging for Indian markets. Major risks for investors are twofold: that the corruption issue may continue to paralyse parliament with an emboldened opposition blocking proceedings, or that the scandals result in a less business-friendly policy environment. [ID:nSGE6AT09J]

What to watch:

-- Economic reforms stalled. The opposition has shown it can halt the progress of bills through parliament, shouting down debate and forcing the chamber to shut for weeks while it demanded a joint probe into the telecoms scandal. It has vowed to intensify its campaign against the Congress party-led coalition when parliament reopens in 2011, meaning large-scale financial reforms that investors want could well be delayed. Key changes that markets, and especially foreign businesses with an eye on expanding into India, are looking for include recasting the complex tax code to a more investor-friendly goods and services tax, and laws to liberalise the retail sector, keenly anticipated by firms such as Wal-Mart <WMT.N>.

-- Confrontation between government and business. Prime Minister Manmohan Singh's credibility has taken a big blow from the allegations. In December he attacked corporate India for its "ethical deficit" and the worry is this could mark another step on a path towards confrontation between government and business. India's environment ministry has already shown itself unafraid of clashing with corporate interests as it takes an increasingly aggressive stance in trying to enforce green laws. Investments worth tens of billions of dollars, including a proposed $12 billion steel project by South Korea's POSCO <005490.KS>, are up for review, and other firms who have either agreed deals to build factories and industrial plants, or are planning investments, will be wary of the ministry's scrutiny.

WILL POLITICAL RISK BEDEVIL ASIA'S DEVELOPED ECONOMIES?

Uncertainties in two of Asia's two developed economies, Japan and Australia, share a similar root: policy is complicated by their governments' precarious grip on power.

Japanese Prime Minister Naoto Kan's approval rating is around 20 percent and opposition parties can block the passage of laws through parliament. In Australia, Prime Minister Julia Gillard's minority government relies on the support of Green and independent MPs to pass legislation.

In both countries, the chief risk for markets is that administrations become so bogged down in trying to garner day-to-day support, and their leaders preoccupied fighting off internal and external attacks, that they lack the authority or political capital to effectively conduct the business of government, including passing sometimes-unpopular laws. What to watch:

-- Next year's budget in Japan. Government action is needed to deal with deep-rooted problems, most pressingly the burden of huge public debt twice the size of the $5 trillion economy. The ruling Democratic Party of Japan (DPJ) has for months been firefighting rather than taking the tough steps economists say are needed to boost growth. A key test will be passing the budget for the fiscal year 2011/2012, which starts in April.

-- Snap election in Japan. If the government, which has already had to reach out to a smaller party in order to get laws through parliament, finds deadlock so great that it cannot pass the budget, Kan may feel compelled to call a snap election. In any case, voters will get the chance to express discontent with the DPJ in April municipal elections. Even if the party performs worse than expected, Kan is unlikely to resign, not least because there are few if any obvious replacements, and yet another new leader -- Kan is the country's fifth since 2006 -- would not solve its problems. [ID:nTOE6BF01L]

-- Can Japan enact economic reforms? Experts say raising the 5 percent sales tax is key -- a radical idea in a country where the tax has not been increased for years, but one the DPJ has openly broached. Still, with his popularity low and parliamentary power sapped, Kan is unlikely to try to force the issue. In December, the government ordered a 5 percentage point cut in the corporate tax rate starting from April 2011, but analysts doubt the move will boost either Japanese corporate spending or the popularity of the DPJ. [ID:nTOE6BF00L]

-- Australia's mining tax. The government's centrepiece policy is a proposed new tax regime for the resources firms that have long been the backbone of the Australian economy. After taking office in August, Gillard made a deal with miners Rio Tinto <RIO.AX><RIO.L>, BHP Billiton <BHP.AX> <BLT.L> and Xstrata <XTA.L> to cut the headline rate of the new tax to 30 percent from 40 percent, but the matter is far from settled. Final details of the tax are under discussion between the government and mining firms. Smaller miners are unhappy with the plan, and a dispute over royalty payments could scuttle the deal. The government is expected to present the tax law to parliament in May, and it will be voted upon after June, when it will depend on Green support in both houses of parliament. [ID:nSGE6AL03M]

-- Resistance to Singapore's $7.9 billion takeover bid for the Australian bourse (ASX), a deal which cannot go through without Australian political backing. No single owner is allowed to hold more than 15 percent of ASX, a rule which would have to be lifted by parliament. Indications are that the independents and Greens oppose the takeover, and may block it. If the buyout does go ahead, firms will be concerned that it may mean changes to listing rules and higher compliance costs. [ID:nL3E6NE1YB]

WILL SOUTHEAST ASIA'S SURGING MARKETS RUN OUT OF STEAM?

Southeast Asia's financial markets were among the world's best performers in 2010. Indonesia led the pack on growing expectations that it will be awarded an investment grade sovereign rating, but the Philippines and Malaysia also posted impressive gains, and even Thailand staged spectacular stock market and currency rallies despite the worst political violence in its modern history in April and May.

The risk is that these gains unravel in 2011 and that the plug is pulled on the flood of hot money that has buoyed the region's markets. Monetary authorities will probably have to play catch up with other Asian central banks that are further into a tightening cycle, food prices could easily get out of hand, foreign participation in the region's markets is already relatively high and rising U.S. Treasury yields could pull money out of places like Indonesia and the Philippines.

Foreign investors have largely turned a blind eye to Southeast Asian political risk in their hunt for high-yield assets. If enthusiasm begins to wane, a more glass-half-empty view of regional politics could spark a significant reversal.

What to watch:

-- The biggest political risks are in Thailand, where an intractable political conflict remains far from resolution. New general elections must be held by the end of 2011, and given the country's divisions there is a significant risk of unrest during campaigning. If the Puea Thai party backed by fugitive former Prime Minister Thaksin Shinawatra wins enough electoral support to form a government, a coup or judicial intervention to overturn the result is almost inevitable -- Thailand's elites remain bitterly opposed to Thaksin and terrified of political reprisals if a party loyal to him wins power. If the Democrat Party of the current prime minister, Abhisit Vejjajiva, manages to win enough seats to form another coalition, the "red shirt" movement demanding change may resort once more to mass street protests. The risks are heightened by the poor health of 83-year-old King Bhumibol Adulyadej. Secret U.S. embassy cables released by WikiLeaks have underlined concerns the succession to Crown Prince Maha Vajiralongkorn will be a tense time with high potential for unrest and upheaval. [ID:nSGE6BG01R]

-- In Indonesia, President Susilo Bambang Yudhoyono has disappointed many with his failure to decisively promote economic reforms and crack down firmly on corruption. For now, investors see Indonesia's bullish domestic growth story as too good to miss despite the political risk. But a change in sentiment could hit Jakarta markets hard. [ID:nL3E6NG09T]

-- In Malaysia, the opposition is losing ground and that may embolden Prime Minister Najib Razak to hold early elections in 2011. But a verdict in the sodomy trial of opposition leader Anwar Ibrahim may widen divisions. [ID:nSGE6AE0TW]

-- Early optimism sparked by the election of Philippine President Benigno Aquino is fading. He has yet to show he can challenge entrenched vested interests and crack down on corruption to tackle the fiscal deficit. [ID:nSGE6AF0GD]

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BAY STREET-Rare earth plays may not be passing fad 19 Dec 2010 23:30

* Demand for rare earths set to more than double by 2015

* Exploration sector has upside potential in 2011

* Shares could spike when China releases 2011 quotas

* First non-Chinese production expected in late 2011

By Julie Gordon

TORONTO, Dec 17 (Reuters) - Once an obscure corner of the mining industry, rare earth exploration burst on to the front pages this year, sending shares of a group of junior Canadian miners soaring.

The remarkable rally was triggered by a diplomatic dispute that led China to halt exports of the 17 rare earth oxides, many of which are crucial to making iPods, electric cars and other high-tech equipment.

Since China controls about 97 percent of the world's supply of these oxides, which are the processed forms of rare earth elements, shares of Canadian-listed explorers soared, with some stocks jumping as much as 250 percent between September and October.

But with Beijing having resumed shipments, and shares of companies such as Rare Element Resources <RES.V>, Tasman Metals <TSM.V> and Avalon Rare Metals <AVL.TO> having already risen as much as 450 percent in the last 12 months, the question that arises is whether there still an upside for investors.

"If the flow of capital in 2011 is anywhere close to what we had this year," said Van Eck metals analyst Charl Malan. "You can get substantial upside again."

There are three factors likely to keep that capital flowing: China's 2011 export quotas, rapid growth in demand, and the timing of the arrival on the market of output from mines being developed by Molycorp <MCP.N> and Lynas <LYC.AX>, the first non-Chinese producers.

With China set to issue 2011 quotas sometime before the Lunar New Year in February, there is a potential for a spike in rare earth equities in the coming month, analysts said.

Regardless of the quotas, however, there will still be an underlying supply and demand imbalance as the first non-Chinese producers are still in the development stage.

"It wouldn't matter if the Chinese had no quota - it would still be difficult to find some of the materials," said Byron Capital Market analyst Jon Hykawy. "And that's just going to become more obvious in 2011."

Demand for rare earths is set to more than double in less than five years, from 120,000 to 250,000 tonnes by 2015.

Driving this demand are companies like General Electric <GE.N>, which uses rare earths in wind turbines, Toyota <7203.T> and Nissan <7201.T> for their hybrid and electric cars, and Research In Motion <RIM.TO> and Apple <AAPL.O> for their increasing array of smartphones and tablets.

Particularly in demand are oxides like dysprosium, terbium and neodymium, which are used in permanent magnets.

This is a market gap that mines like Molycorp's Mountain Pass in California and Lynas's Mount Weld in Australia will try to fill. But even if they make it to market in the next 12 to 18 months, Molycorp and Lynas's deposits are skewed to "light rare earths" such as cerium and lanthanum, meaning major holes in the supply chain will still remain.

"We still need more dysprosium likely than we'll be able to produce, we still need more terbium than we'll be able to produce, and we still need more europium," Hykawy said.

These so-called "heavy rare earths" are where Canada's explorers have the advantage. Great Western Minerals <GWG.V>, Avalon and Stans Energy <RUU.V> are all clamoring to bring their heavy projects to market, with production projected for 2013 and beyond.

But while the demand is there, analysts say that staffing and technology will likely hold up some projects indefinitely.

ROCKY ROAD TO PRODUCTION

"I think you're going to see massive delays for these guys," said Dahlman Rose analyst Anthony Young. "They're in competition with the biggest companies in the world for talent and for construction expertise."

Mining, milling and processing rare earths is a very complex and labor intensive business, which often involves acids and extreme heat.

"Outside the Mountain Pass mine and some assets in China, there aren't that many people who have been involved in the rare element space," Young said. Staffing "could be a real bottleneck for some of these development stage companies."

It's an issue that is already causing worry for Robert MacKay, chief executive of Stans Energy.

His company is looking to bring the past-producing Kutessay II mine in Kyrgyzstan back online, and has struggled to find qualified staff.

"It's an art and a science. It's not just turning a switch and thinking that rare earths are going to come out the back end of the plant," MacKay said.

Although analysts warn investors to be careful about where they put their money, for those willing to invest in a highly speculative sector that may see only minimal production in 2011, the payouts from rare earths could prove impressive

"I still think it's very early days in the rare earth element space," Young said. "I think there still is a lot of opportunity." (Reporting by Julie Gordon; Editing by Frank McGurty and Peter Galloway) ((julie.gordon@thomsonreuters.com; +1 416 941 8136; Reuters Messaging: julie.gordon.reuters.com@reuters.net))

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Billionaire-controlled Sateri shares flat on HK debut 08 Dec 2010 13:17

HONG KONG, Dec 8 (Reuters) - Shares of Sateri Holdings Ltd <1768.HK>, a maker of specialty cellulose used in everything from sunglasses to ice cream, traded flat on the company's Hong Kong market debut on Wednesday, amid unsettled market sentiment in recent weeks.

Sateri, controlled by Indonesian billionaire Sukanto Tanoto and his family, priced its stock at HK$6.60, the low end of the indicative range, selling 505 million shares to raise $430 million.

By the midday trading break, the shares stood just below their IPO price at HK$6.58.

Shanghai-based Sateri is one of the largest specialty cellulose producers in the world, producing dissolving wood pulp and viscose staple fibers at its mills in Brazil and China. The material is used in a broad range of consumer products.

The IPO came at a time when uncertainty about the euro zone debt crisis, among other factors, had unsettled trade in the Hong Kong stock market. It is particularly shaky for IPOs, with equity capital markets bankers worried in recent weeks that clients and investors may be too cautious to back offerings.

News reports about Sateri's original IPO plans put the offering at around $1 billion.

Forbes lists Sukanto as one of Indonesia's richest people, worth $1.9 billion.

Incorporated in the Cayman Islands, Sateri grows eucalyptus trees and produces specialty cellulose in Brazil and operates a cellulosic fiber mill in China's Jiangxi province.

Credit Suisse Group AG <CSGN.VX> and Morgan Stanley <MS.N> were joint global coordinators and joint sponsors for the offering.

Married with four children, Sukanto renamed his conglomerate RGE (Royal Golden Eagle). The group, which has $10 billion in assets, owns papermaker April and palm oil producer Asian Agri, according to Forbes. Sukanto, the eldest of seven boys, dropped out of school at 17 to help support his family, Forbes says, adding that he taught himself English by translating Readers' Digest, Life magazine and Newsweek.

Sateri describes itself as the largest supplier of dissolving wood pulp by volume to global demand leader China. (Reporting by Michael Flaherty; Editing by Chris Lewis) ((michael.flaherty@reuters.com; +852 2843 6540))

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Jim Rickards - Treasury Bills: The New Opium

Jim Rickards continues to illustrate that he is one of the truly brilliant and original thinkers in today’s financial world.  Rickards uncovers Treasury Bills for what they really are, and has laid out his case in convincing fashion.  The following is Jim’s piece exclusively for the King World News blog that discusses the fact that Treasury debt has become the “new opium” and it is a must read:

September 7, 2010

Treasury Bills: The New Opium

By James G. Rickards

September 7 (King World News) - One of the turning points in the history of world trade was the failed mission in 1793 of Lord George Macartney, representing King George III of England, to the Imperial Court of Qianlong, Fifth Emperor of the Manchu Dynasty of China.  Beginning in the late 18th century, England had increased its imports of goods from China including tea, silks, spices, porcelain and other manufactured goods.  England paid for these imports with silver, and later with exports of opium, which it obtained from its Imperial provinces in Central Asia.  Lord Macartney attempted to persuade Emperor Qianlong to open up China to trade with England so that England’s trade deficit could be balanced with exports from England of cotton and woolen textiles, new mechanical devices such as clocks, weapons and other manufactured goods.  Macartney famously offended Qianlong by refusing to perform the kowtow, an elaborate ritual of bowing and prostration, and in the end Qianlong rejected Macartney’s offer on grounds of China’s “celestial supremacy” summarized in his remark that there was nothing in the world which China lacked, therefore trade was unnecessary.

Left with only silver and opium with which to balance their trade deficit, England quickly decided that they preferred to keep their silver at home and would thereafter balance their trade with massive opium exports to China.  Opium exports to China grew enormously between the 1790’s and 1830’s until addiction reached crisis proportions and the Manchu Dynasty took steps to seize imported opium and to shut down the opium trade.  England responded with military force to open the ports and suppress the Manchu officials responsible in a series of Opium Wars which stretched from 1839 to 1856 and which ended in the humiliation of the Manchu and the subordination of the Chinese economy to the mercantile interests of England, France, Russia, Germany, Japan and the U.S.  Conveniently, England was able to continue to settle its trade deficits with China using opium, which it grew cheaply and in vast quantities.

Plus ça change…. Today the U.S. faces massive, continual trade deficits with China and has for decades.  We take DVD players, flat screen TV’s and iPods instead of tea and silks but the fundamental dynamic of world trade has not changed in 300 years; the U.S. still needs to find a way to pay for its deficit.  From 1944 to 1971 under the Bretton Woods international financial system, the U.S. would settle its deficits in gold, much as England had paid in silver in the 1790’s.  But in the Bretton Woods period, the U.S. saw its gold reserves dwindle from about 20,000 metric tonnes in 1950 to about 9,000 metric tonnes in 1970.  As a result, President Nixon suspended redemption of dollar reserves held by trading partners for gold.  Thereafter, trading partners with surpluses and dollar reserves could only invest in dollar denominated assets, principally U.S. Treasury obligations, or dump their dollars for some other currency.

Today the Chinese are even more circumscribed.  There are both genuine national security and xenophobic constraints on Chinese direct foreign investment in the United States.  They cannot buy large stakes in some of our most choice assets such as technology, telecommunications or natural resources companies or infrastructure plays.  And there would be a nationalist backlash if they tried to buy trophy properties as the Japanese learned in the 1980’s.  It is impossible to dump the quantity of dollars held by China without causing massive losses on their own positions and radically increasing U.S. interest rates probably to the detriment of Chinese exports to the U.S.  The Chinese can buy some Boeing aircraft and IBM servers but not enough to offset their surplus with the U.S. In a strange echo of the Emperor Qianlong, we don’t seem to have enough of what China wants or needs.

As a result, Treasury debt has become the new opium; the cheap, easy-to-produce, commoditized stuff that we ship to China in bulk in exchange for all the stuff we really want.  And it’s not clear that China’s addiction to Treasury debt and our willingness to provide it is any less deleterious that the original opium shipments.  The Treasury’s preferred model for addressing this problem is for China to “rebalance” to a more consumer driven economy while the U.S. “rebalances” to a more export-led economy thereby reducing the trade deficit and solving the problem of what to do with China’s surpluses.  But savings and consumption patterns do not turn on a dime; one need only look at Japan and Germany over the last 50 years to see how difficult, if not impossible, it is to convert an export-led model into something else.  China is an even more difficult case because of its demographic pressures, social instability and need to create jobs at almost any cost.

But there is another way to rebalance the world economy.  Simply return the dollar to the gold standard and let the Chinese trade their maturing Treasury obligations for U.S. gold, if they wish, as was done under the Bretton Woods system.  Critics will quickly point out that this would represent a bargain basement sale of America’s most valuable financial asset; and they would be right.  But this is not because the idea is flawed but because the price of gold is kept artificially low by central banks operating through their fiscal agents at the BIS and the London Bullion Market Association.  So, let’s do a thought experiment on what the market-clearing price of gold should be given global trade imbalances.

China’s GDP is about 27% of the combined China+U.S. GDP.  The U.S. has 8,133 metric tonnes of gold and China has 1,054 metric tonnes; giving both countries a combined total of 9,187 metric tonnes.  In order to equilibrate gold in the same ratio as GDP, China would need to receive 1,426 metric tonnes from the U.S. which would leave the U.S. with 6,707 metric tonnes and give China a new total of 2,480 metric tonnes, thus getting to the 27% ratio of combined China+U.S. output.  China holds about $2 Trillion of U.S. government securities to theoretically pay for this gold transfer.  Simply dividing the quantity of gold to be transferred by the face value of the Treasuries yields a gold price of $39,844 per ounce.

Therein lies the crux of the dilemma of international finance today.  If gold is worth $1,250 per ounce, then China’s gold transfer of 1,426 metric tonnes described above, would only absorb about $63 billion of Treasuries in exchange, versus $2 trillion of actual government securities held by China, implying that Treasures are only worth 3% of face value in a full gold exchange standard.  Of course, there are many other ways to think about this calculation of the hypothetical price of gold.  There is no magic in using the GDP ratio versus other metrics.  And the calculation above only considers one bilateral relationship; it is clearly more complicated on a global basis.  Comparing U.S. gold to U.S. money supply yields prices in the $7,000 per ounce range depending on the definition of money supply.  And the Chinese could certainly do better than $39,000 per ounce on the open market – at least for a while or until their ambitions became fully revealed at which point the market might simply run away from their plans and reach these stratospheric levels.

But the calculation does at least reveal how the U.S. is getting away cheaply by pushing Treasuries on the Chinese much as the British pushed opium 200 years ago.  And China’s addiction seems just as hard to break.  But China’s military strength is growing today compared to the 19th century when it was in steep decline.  As China awakens from its new opium slumber, as it clearly is, the consequences are likely to be far more detrimental for the U.S. than they were for our British predecessors.

James G. Rickards is a writer, economist, lawyer and investment advisor living in Darien, CT.  His specialty is the intersection of global capital markets and geopolitics.

Follow Jim Rickards on Twitter at twitter.com/JamesGRickards

To hear the recent in-depth interviews with Jim Rickards: Parts I & II on King World News CLICK HERE.

KingWorldNews.com

To return to BLOG click here.

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UPDATE 2-AIG raises $17.9 bln, prices AIA IPO at top-sources 22 Oct 2010 08:37

* AIA IPO poised to be world's third-biggest IPO

* Upsize option exercised, thanks to strong demand

(Adds analyst quote, valuation, data)

By Denny Thomas and Kennix Chim

HONG KONG, Oct 22 (Reuters) - AIA, the Asian life insurance arm of American International Group Inc. <AIG.N>, raised $17.9 billion by pricing its Hong Kong IPO at the top of an indicated range, sources said, due to heavy demand for one of Asia's best known industry brands.

The pricing of the IPO, set to be the world's third biggest, puts an end to AIG's long-running effort to sell AIA, a process that began roughly two years ago. British insurer Prudential plc <PRU.L> tried and failed to purchase AIA earlier this year.

AIG will use the IPO proceeds to pay back part of the bail out it received from the U.S. government during the 2008 financial crisis--a rescue package that ballooned to a whopping $182.3 billion.

The IPO will value AIA at $30.5 billion at the top end and AIG will continue to hold 41.6 percent.

AIG's stake will drop to 33 percent if it exercises the green-shoe option in full. AIA's offering is on course to be Hong Kong's largest ever, and the third largest ever globally.

AIA sold 5.86 billion secondary shares at HK$19.68 each compared with a range of HK$18.38 to HK$19.68, sources with direct knowledge of the matter told Reuters.

The sources declined to be identified as AIG was yet to make the decision public. An AIA spokeswoman was not available for an immediate comment.

AIA also exercised the upsize option to sell an additional 1.17 billion secondary shares, due to strong demand from investors.

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For BREAKINGVIEWS on AIA valuation [ID:nLDE6930KI]

Factbox on world's biggest stock offerings [ID:nN17141638]

Insider clip on IPOs: http://link.reuters.com/dar67m

Graphic on global IPOs http://link.reuters.com/kum57p

For a story of AIA IPO fees [ID:nTOE69E01U]

Graphic on AIA in Asia http://link.reuters.com/xed59p ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

AIA's unique position as the only listed life insurer with a wide foot print in the rapidly growing Asia-Pacific region is a big draw for investors, fund managers said.

It operates in 15 markets in Asia. Unlike many other foreign insurers, AIA has 100 percent ownership of its entities in China, Indonesia, Malaysia, Thailand and Vietnam. AIA has more than 300,000 agents in Asia.

"This is a cost effective way for IPO investors to ride China's growth," said Francis Gaskins, president of IPOdesktop.com in Marina del Rey, California.

Gaskins said the upsizing of the deal could temper its first day performance, but said the debut could still see a healthy jump because its valuation was below that of its peers.

AIA's trading debut is set for Oct. 29, under the symbol "1299" <1299.HK>.

AIA will be valued at 1.32 times price to embedded value, far lower than some of the Chinese insurers such as China Life <2628.HK> and Ping An Insurance Co <2318.HK>.

Embedded value is a measure commonly used to gauge the value of insurance companies and includes the present value of future profit from long-term insurance contracts.

By comparison, China Life Insurance <2628.HK> <601628.SS> <LFC.N>, Chinas No.1 life insurer traded at 2.38 times forecast 2010 embedded value, while No. 2 life insurer Ping An Insurance <2318.HK> <601318.SS> traded at 2.6 times forecast 2010 embedded value, according to a BofA Merrill Lynch research report.

Others Asian insurers, include Japan's Dai-ichi Mutual Life Insurance <8750.JP> and Korea's Samsung Life Insurance <032830.KS> trade at 0.37 times and 1.11 times 2010 forecast 2010 embedded value, respectively.

A Reuters poll released last week forecast AIG to sell shares at HK$19.14 each.

Citigroup Inc. <C.N>, Deutsche Bank AG <DBKGn.DE>, Goldman Sachs Group Inc <GS.N> and Morgan Stanley <MS.N> are joint global coordinators for the IPO.

Other banks involved in the offering include Bank of America Merrill Lynch <BAC.N>, Barclays, Credit Suisse <CSGN.VX>, JP Morgan <JPM.N>, UBS <UBSN.VX>, ICBC International and CIMB. (Additional reporting by Phil Wahba in NEW YORK; Editing by Michael Flaherty and Dhara Ranasinghe) ((denny.thomas@reuters.com; +852 28436 358; Reuters Messaging: denny.thomas.reuters.com@reuters.net)) ((If you have a query or comment on this story, send an email to news.feedback.asia@thomsonreuters.com))

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FACTBOX-Winners & losers from China rare-earths controversy 20 Oct 2010 15:26

(For a related story, click [nTOE69J03D]

Oct 20 (Reuters) - China has curtailed exports of rare earths, causing offshore consumers to consider alternative supply sources for the minerals which are used in everything from TV screens and computers to mobile phones and toys. [ID:nTOE69J03D]

China supplies about 95 percent of the world's rare earths.

Following is a list of winners and losers if China's rare earths exports dry up:

LOSERS

MANUFACTURERS

* Industrial manufacturers in Japan and Korea, which consumed a fifth of the world's rare earths last year, would be hardest hit by reduced Chinese exports. Sectors that would bear the brunt of restricted supplies would be makers of metal alloys, magnets, catalytic converters and polishing compounds.

* In the United States, manufacturers of catalytic converters would suffer the most, followed by the metal alloying and ceramic-making sectors.

* European Union consumers would face shortages mainly in manufacturing of catalytic converters, given the high concentration of auto-making in the region.

WINNERS

MINERS

* Some new and mothballed rare earths producers would likely get the green light to proceed if China's exports dried up. Many of these projects did not make economic sense while China completely dominated the market. The major projects are:

* Mountain Pass, located in the United States and owned by Molycorp Minerals <MCP.AX>: once the world's largest producer of rare earths, the mine ceased removing ore from its open pit in 2002. Molycorp has continued some production from existing stocks and plans to restart mining an annual rate of 18,000 tonnes in 2012.

* Hoidas Lake (Canada, Great Western Minerals Group <GWG.V>): the project is at an advanced exploration stage with start-up tentatively scheduled for post-2014 at an annual rate of 3,000-5000 tonnes a year.

* Nechalacho (Canada, Avalon Ventures Inc <AVL.TO>): early exploration and costing work is underway to develop a project in about five years producing 3,000-5,000 tonnes a year.

* Mt Weld (Australia, Lynas Corp <LYC.AX>): due to start up in 2011, initially producing about 10,500 tonnes, rising to 21,000 tonnes annually in 2013.

* Dubbo Zirconia (Australia, Alkane Resources <ALK.AX>): could be activated as early as 2013 at an annual rate of 2,500 tonnes.

* Nolans (Australia, Arafura Resources <ARU.AX>): tentatively scheduled to be in production in 2014 and operating at an annual rate of 20,000 tonnes.

* Kvanefjeld (Greenland, Greenland Minerals & Energy <GGG.AX>): the mine is being designed to produce 20,000 tonnes of rare earths as a co-product to uranium. No start date has been disclosed.

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