The Phoney War Gets Real?
In the latter months of 1939 into early 1940 the British referred to the quiescence in the period after the declaration of war against the Axis Powers as the Phoney War. As it turned out it was not exactly so “phoney” but managed to lull some of the combatants into a state that made them more vulnerable when the bullets actually started flying.
Love him or hate him, Donald Trump has certainly fired the first shots from the side of the “Good Guys” in what has been a long undeclared war over global commodities and economic dominance. The “foe” in this battle is clearly China. That the Chinese have used dirty tricks is undoubted, that the West has been feeble, accommodating and downright appeasing is also undoubted.
The WTO was supposed to be umpire in the new global trade game, however it has long been clear that the WTO is a weapon that is only sharpened on one side. If China had never joined the WTO (a League of Nations for our times) then those countries that play by the rules would have been a lot less blinkered in the response to the gradual Chinese “mission creep” that they have been subject to in a whole swathe of industries whether they be steel, textiles or plastics.
For those of us in the mining industry the blatant manipulation of export quotas, import quotas, taxes and duties thereon have been perennial bugbears, with the Rare Earth space being the poster boy for blatant manipulation. Other areas (e.g. the “FANYA metals”) have been also victims of price ramping, metals hoarding, criminality, misinformation and disinformation. Traders in metals have long regarded the Shanghai warehouses as little more than an oversized shell game used to control the prices of commodities at a global scale.
In this “war” it has been the private sector that has been picked off. Governments on the other hand have glad-handed with the enemy seeing deluges of “cheap stuff” as a good way of pushing down inflation and keeping the wages of domestic “riffraff” under control through job exporting to enemy territory. The main two pushbacks against this were the Brexit vote in the UK and the Trump election but other signs have been there, for those that want to see them, such as the upsets in the German, Austrian and Italian elections over the last year.
Tungsten is a microcosm of the issue. China has distorted the Tungsten market much as it has distorted so many others. China has brutally manipulated the price of this metal for decades and almost managed to wipe out the Western producers (much as it did with Antimony) with the policy goal being to overrun the machine tool sector through its Tungsten dominance. This put Western manufacturers of this equipment (chiefly the Germans and Swedes) on notice that they needed guaranteed non-Chinese supplies to evade predatory Chinese manouevres. That machine tools are a key component in many defence industries goes without saying.
To deal with this one of the major European machine tool players decided to “sponsor” Almonty’s survival and expansion by paying over the market price for APT to ensure that Almonty survived and prospered as an alternative to the inevitable Chinese near-monopoly if it had gone under.
Western machine tool makers are particularly vulnerable to supply disruptions as, we might tactfully say, it would be to the benefit of Chinese toolmakers to have foreign competitors experience supply problems from the Chinese tungsten mines. If any investors doubt that that might happen then they would be naive indeed.
This defensive action by a Western end-user was a rare one though. The predatory actions of China have gone largely unchecked. The purchase for an over-the-top price of the newly opened Beaverbrook Antimony mine in Newfoundland was quickly followed by its closure with the highly expectant local workforce finding themselves on the dole and Canada finding its entrance into the Antimony space forestalled. Peru was left bemused when the Galeno copper/gold/moly property of Northern Peru Copper was bought by the Chinese for CAD$455mn in 2007 and then put in the freezer. Then we have even dirtier games like the seizure (from Trimetals Mining) of the Malku Kota silver/indium project in Bolivia, which effectively blocked the Korean flatscreen manufacturers from getting access to 25% of the world’s Indium. We expect this to eventually make its way into Chinese hands when no-one is looking. Other manouevres in Bolivia involve positioning themselves in the massive lithium Salar de Uyuni.
In a recent note entitled America’s Metals, Minerals, and Materials Misery, Mickey Fulp a well-known commentator on the metal’s space noted “China is our primary, secondary or tertiary source for 31 commodities, mainly specialty metals and industrial minerals with small markets” and then goes on to say “Of the 31 for which we are dependent on China as the first, second, or third largest supplier, seven are stockpiled: cobalt, germanium, lithium, quartz crystals, titanium, tungsten, and yttrium”.
Quite clearly China has a key grip on the US (and the West’s) supply of critical metals and that the stockpiles are inadequate or non-existent to counter this. This leaves the West extraordinarily vulnerable to Chinese machinations.
So what are the manifestations of this undeclared war:
- Accumulation of metals both above and below ground in a broad geographical spread of jurisdictions
- In-country stocks of metals that are revealed and unrevealed at will effecting prices in the global market
- Substantial control of supply of a number of strategic metals
- Strategy to force the value-added and upgrading of metals within the “mothership”
- A large émigré population inserted into Western economies in strategic positions in commerce and educational/research institutions
We could go on but we feel that the rise of China bears all the hallmarks of something more than just the rise of a new economic power. One could draw parallels to the period 1900-14 when the rising Germany seemed set to topple the long-dominant Britain off its economic throne. A key difference now is that in that tussle Britain was strongly resourced in minerals both onshore and offshore while Germany was disadvantaged in not having the same reach. If Germany had tried the same tactics then, as China is trying now, the First World War would not have been postponed to as late as 1914.
One might remember Pig-Iron Bob. This was the Australian PM, later Sir Robert Menzies, who was chastised in the 1930s for selling Australian pig iron to the Japanese. Come 1941, he found the Japanese were returning the pig-iron in the form of bombs, just as the critics had foretold.
We have a situation where the West in now in a type of thrall best compared to that of the small insect being eyed up by the Preying Mantis. The victim does not know it’s in peril until its head is bitten off. In many ways the mining industry has been ground zero for observing the territorial landgrab which has not, so far, involved armies on the move.
Politicians (and the public) need to seize back the initiative from corporates who have seen China as their lunch ticket providing cheap goods and on-going downward pressure on ornery industrial workers. Their self-interest has sold everyone else down the river. The Faustian deal of selling one’s soul to China for some brass farthings is already being seen in some quarters for what it is. It’s time for the West to get smart and defend its interests (and mineral assets) before it is too late.