Why Is China Using Its Horde Of Dollars To Buy Natural Resources?

by Jack Lifton on May 5, 2009

in China, Rare Earths

Bookmark and Share Print

China is currently buying natural resources at bargain prices. There are two reasons for this:

  • China needs to have access to as great a volume of energy and the less common metals used in high technologies possible, and
  • China’s horde of dollar-denominated paper will never again have as much value as it does today, nor is much more of it it likely to long remain available to China, at anywhere near the value it has today.

As soon as you recognize that China is buying, not investing in, natural resources it becomes obvious what China is doing.

The next Chinese five year plan (5YP), literally the setting by the state of the production goals of the Chinese economy, is due to be promulgated within a year and a half.

Like all previous five year plans, it will set higher production goals than the last one; it will also choose some industries and services for accelerated growth.

There is no doubt that among those chosen industries will be civilian OEM automotive, civilian electronics, including personal computers and entertainment devices, home appliances, building materials, energy production including nuclear power, infrastructure equipment and supplies, and the naval and air arms of the People’s Liberation Army.

This ambitious program will have one limitation that is already well recognized as a problem by the Chinese; it is that in order to accomplish the goals of the five year plan, China will need a yearly influx of raw materials greater than ever before in its history.

The problem arises from the fact that 2008 was a banner year in the history of the production of natural resources. It was, in fact, the year of the greatest production of natural resources and energy in human history.

China, unlike the soporific and business school-numbed West, recognizes that new production of technology metals can only consist of marginal increases over 2008 production levels. Natural resource production and use is not quite a zero sum game taken as a whole, but the production of technology metals may be. This means, for example, that if China is to have enough of the rare earths, of which today China is the majority producer, to accomplish the goals of the next five year plan, the West may not have enough, or not have any at all, by the end of the plan.

This fact has been driven home in the last few months, by China’s seemingly sudden acquisition of essentially all of the Australian rare earth mining industry just as it, the Australian industry, was about to go into production as a competitor to China’s monopoly of the globe’s rare earth production. This move solves China’s rare earth shortfall problem, which was predicted to be 40,000 metric tons (t) per year by 2014. In fact it may just solve the shortfall almost exactly. This will leave nothing at all in rare earth production available outside of Chinese production or control.

China is not buying the Australian rare earth resources for investment, although it will be glad to treat the Australian companies as investments until the formerly-to-be Australian- and now-to-be Chinese-owned rare earth refinery in Malaysia is ready to process Australian ores in two years. My guess is that at that time, China will offer to buy out both the remainder of the Australian mines’ shares and the refinery and place an offtake order with both for their output indefinitely. This will save China from having to build additional rare earth refining capacity for non-Chinese ores in China.

Chinese companies, all owned or controlled by the state, have been and are buying resources of iron ore, copper ore, and other base metals in Australia as well as less common and rare metals in Africa. All of these purchases are to ensure that the next five year plan and the one after it can be accomplished. This is a ten-year window through which China is looking.

By contrast, Western end-users of natural resources, with no central planner (yet!) giving them marching orders are doing the exact opposite of what China is doing. Western business theory teaches that those who will pay the most will get the resources, and that demand for resources will cause new supplies to be developed.

The problem for the West, and for America in particular, is that new resources of high grade natural resources are no longer present in sufficient quantity, to allow Western heavy industry ever to be rebuilt, once the current sources of raw materials become the property of China.

Even in a world without animosity between China and the West, there will be still be a priority for the Chinese to supply their domestic economy first and then, if any resources are left over and surplus, only then to sell them to the West.

But the days of Chinese surplus natural resources are far in the future, and with the creation of wealth through manufacturing ending in the West, and with the bias against mining, oil production, and nuclear generation of electricity in the West, it is only a matter of time before American currency declines in value against the natural resource-producing and heavy industrial economies. China is hurrying to get the maximum value out of its reserves of American currency and treasury paper.

China is indeed investing, but only for its own future, not America’s.

Bookmark and Share Print

Comments on this entry are closed.

Previous post:

Next post: