Before we delve into the reasons behind all the publicity, here’s the basic skinny on REEs: One, they are rare, at least sort of. Two, they are indispensable to modern technology. Three, the number of active, dedicated producers is tiny, with more than 90% of the world’s supply coming from China.

If you took high school chemistry, you probably remember the periodic table of the elements. But if you’re like most of us, even if you pulled a 95 on the chem final, you may not recall many of the details today. And there’s a better than even chance you never bothered to memorize the names of the REEs. It’s time to get reacquainted.

They’re generally clustered in a separate grouping at the bottom of the table, are known collectively as the lanthanoids, and these are their names, in order of atomic number (57-70): lanthanum, cerium, praseodymium, neodymium, promethium, samarium, europium, gadolinium, terbium, dysprosium, holmium, erbium, thulium, and ytterbium. Yttrium (39) and lutetium (71) are also sometimes included.

Need to Know, Point 1: Rarity

Fact is, we begin with something of a misnomer. These elements are not, strictly speaking, rare. Earth’s crust is full of them. True, they’re not as common as iron, carbon, or silicon, but are about on a par with nickel, copper, and zinc. Even the scarcest is way more abundant than gold, platinum, or palladium.

What is rare about them is that they’re widely dispersed. Very seldom are they found in economically exploitable deposits. Complicating matters further is that there are so many of them, and they clump together. They have to be separated first from the ore and then from each other.

Thus REE production comes primarily from other mines’ byproducts. The miner strips off the metal he’s really after, then sends the REE clusters to a specialty refiner.

Need to Know, Point 2: Applications

It’s safe to say that life as we know it would be very different without the REEs. The more our technological accomplishments pile atop one another, the more crucial these metals become. Because of their unique properties, there are generally no substitutes for them.

Of all the REEs, the one people may have heard of is neodymium. Alloys containing it have revolutionized permanent magnet technology, allowing miniaturization of all sorts of electronic components in appliances, A/V equipment, computers, communication systems, and military gear. Your hard drive probably has neodymium in it. So does your DVD player.

Liquid crystal displays depend on europium. Fiber-optic cables can’t function without erbium. Virtually all specialty glass products, from mirrors to precision lenses, are polished with cerium oxide. Several REEs are essential constituents of both petroleum fluid cracking catalysts and auto emissions-control catalytic converters. Half a dozen REEs go into the manufacture of the energy-efficient fluorescent bulbs that will soon be mandatory. Lanthanum-nickel-hydride rechargeable batteries are replacing older ones based on lead or cadmium. And no REEs, no electric cars. Nor next-generation wind turbines.

That’s only a partial list. But what makes REEs an increasingly sensitive topic is their role in national defense. Here are a few small items that have become dependent on them: jet fighter engines, missile guidance systems, underwater mine detectors, range finders, space-based satellite power plants, and military communications systems.

Think the Pentagon is very, very interested in maintaining a steady REE supply?

Need to Know, Point 3: Supply

95% of the world’s REE production originates in China. If you’re looking for reasons why we’re so nice to the premier Communist power left standing, this is a biggie.

We weren’t always so dependent. Not long ago, mines such as Mountain Pass in California made us nearly self-sufficient in REEs. But in the early ‘90s, China flooded the market with cheaper product, until it had driven all of its competitors out of business.

Today, Mountain Pass is being revived, but the start-up of an old mine is a lengthy and costly process. There are also some from-scratch REE development projects under way in the U.S., as well as Canada and Australia. But for the moment, China holds the hand with all of the high cards in it.

Forget your hard drive. Forget 11th-grade chemistry experiments. This is a national security issue. The American government cannot afford to lose that supply source, period. Maybe someday, but not now.

And that’s what’s behind the recent furor over these obscure elements. Because China threatened just that, a cutoff. The one thing that really gets Washington’s knickers in a twist.

In August, the story broke in the mainstream press. Sources in China leaked news of a draft copy of a report from the Ministry of Industry and Information Technology. It allegedly calls for a total export ban on five of the rare earths, with the rest restricted to a combined export quota of 35,000 metric tons a year, far below annual global consumption of 125,000 tons, and rising fast.

This doesn’t look like a move they’d follow through on, if only because of the lost trade revenues. And it’s only a recommendation; final approval rests with China’s State Council. But consider it an opening shot across our bow, if you wish. Or perhaps they’re telling us they need their REEs for the domestic economy, and we’d best go find our own supplies. Either way, the scramble is on to find alternatives.

That could backfire. REE prices and demand were already dropping last fall as the recession deepened, and China maintains a decided competitive advantage beyond control of supply: lax environmental standards (many REEs are highly toxic). Thus the new companies could spend the fortunes required to come on line, only to find themselves victims of yet another market glut engineered by the Chinese. Still, these metals are so important, it wouldn’t surprise us if the U.S. government subsidized domestic production, rather than risk a squeeze.

The Market

The market took due notice of the China story, driving the stocks of Western REE producers, and would-be producers, nearly straight up. Since late August, Avalon Rare Metals (TSE:AVL) has gained 120%, Arafura Resources is up 75%, Rare Element Resources has added 72%, and Lynas Corp. (ASX:LYC) is 50% higher (China, ever the master strategist, exploited the credit crisis to grab 25% of Arafura and more than 50% of Lynas). Lurking in the background is Molycorp, the private company redeveloping Mountain Pass. It’s planning an IPO that may well come out of the gate red hot.

With market action this frantic, the sector is on the frothy side at the moment. The heady market caps being awarded to these companies are obviously not based on fundamentals, and a savvy investor takes care not to get caught on the wrong side of a bubble.

Even though the Chinese export ban may never materialize, the ever-growing need for REEs is dead serious. And while the current bubble may pop any day, the long-term prospects for successful miners are outstanding.

Regards,
Doug Hornig

Source: Why All the Fuss Over Rare Earths?

China has used depressed commodities prices to stock up on long-term supplies of raw materials such as oil, copper, and iron.  And it’s used structural weakness in the U.S. financial system as justification for replacing the dollar as the world’s main reserve currency.

Now, the Red Dragon is looking to make headway on the highway by winning global market share in the automotive market while U.S. heavyweights spin out.

“We aren’t afraid of the financial crisis,” Zhou Fuquan, vice president of Geely Automobile Holdings Ltd. (PINK: GELYF), told Bloomberg News. “On the contrary, we hope it will penetrate even further as it has provided us with some opportunities.”

Geely is China’s biggest private automaker, but that isn’t exactly saying much. The company’s annual output is just 300,000 units, and its market share in China is a meager 3%. Still, Hangzhou- based Geely is determined to become a global player in the auto industry. It has ambitions to sell 2 million cars a year, including 1.3 million overseas – even though right now the company generates just 5% of its sales from abroad.

Of course, that’s why the financial crisis has been more of a financial opportunity for Geely. In March, Geely bought key assets from bankrupt Australian gearbox maker Drivetrain Systems International – the world’s second-largest maker of automatic transmissions.

“The economic downturn provides us with very good overseas acquisition opportunities,” Daniel Dai, vice president for international business at Geely, told China Daily. “We get the best technology with the best price.”

Geely has also set up a joint venture with Manganese Bronze Holdings PLC (MBH) to produce the TX4 London Taxi in Shanghai. MBH supplies taxis to Saudi Arabia, Turkey, and Spain as well, boosting Geely’s global presence.

For months, analysts have speculated that Geely will continue to its overseas expansion by launching a bid for Ford Motor Co.’s (NYSE: F) Volvo unit. Ford, which is the only “Big Three” auto company to not receive government aid, last December started looking to offload the Swedish car brand in an effort to pay off the debt it accrued when the company borrowed $23.5 billion in 2006.

Geely said on Sept. 9 that it might partner with a state-owned investment company to bid for Volvo. And earlier this week, the company announced that it would raise $334 million in funds from Goldman Sachs Group Inc. (NYSE: GS) through a convertible bond offering to “fund the capital expenditures of the group, potential acquisitions by the group and for general corporate purposes of the group.”

However, some analysts have pointed out that the Goldman capital falls well short of the roughly $2 billion Ford is asking for Volvo. They believe Geely instead will use the money to increase capacity and market the models it already has to buyers outside of its home market.

“The management is planning to expand its distribution channel to foreign countries,” Richard Li, research director at Celestial Asia Securities Holdings, told Forbes magazine. “This deal can provide this company enough funds so that the cash flow will be upgraded long term.”

And if nothing else, Goldman’s investment could be enough to instill investor confidence in the small Chinese carmaker.

Almost a year ago to the day Berkshire Hathaway Inc. (NYSE: BRK.A, BRK.B) subsidiary MidAmerican Energy Holdings Co. agreed to pay roughly $230 million for a 9.89% stake in Chinese car and battery producer BYD Co. Ltd. Since then, BYD’s shares have jumped more than fivefold in that time.

“A big name investor certainly helps boost stock prices and brand recognition,” Li Lixi, a Northeast Securities Co. analyst in Shanghai, told Bloomberg. “Goldman’s investment in Geely may repeat the impact that [Warren] Buffett had on BYD.”

Geely’s Hong Kong shares yesterday (Wednesday) surged to their highest in more than nine years on the news of Goldman’s investment.

The Race to Build a Competitive Chinese Brand

Geely isn’t the only Chinese companies looking to use the financial crisis as an opportunity to broaden its global reach either. Other Chinese companies, including Beijing Automotive Industry Holdings Co. (BAIC), SAIC Motor Corp. Ltd., and Sichuan Tengzhong Heavy Industrial Machinery Co., are determined take the lead in what has become a race to be the first world-renowned Chinese automotive company.

“It takes decades to establish a recognized, renowned brand,” Jim Hossack, an industry analyst at researcher AutoPacific Inc., told Bloomberg. “China wants to do it much faster, perhaps within as little as five years.”

BAIC on Sept. 9 joined Koenigsegg Group in its bid for GM’s Saab division. Koenigsegg – backed by U.S. and Norwegian investors – in June agreed to buy Saab from GM, but struggled with financing the deal.

SAIC group, the parent of China’s largest automaker, had also considered coming to Koenigsegg’s aid in the Saab bid. But ultimately it was BAIC that came through with the $420 billion in financing needed to close the deal.

“This is a great opportunity for us to partner up with a brand like Saab that we believe has a great future with a new business plan and new ownership,” Wang Dazong, general manager of Beijing Auto, said in a statement posted on its Web site.

Koenigsegg and BAIC will form a joint venture to market Saab cars in China, where the brand has little-to-no presence. BAIC will also gain valuable technology from the Swedish car company.

“Chinese manufacturers are hoping to buy up technology that will help them catch up to world standards on both the product and the development side more quickly than they would on their own,” Christoph Stuermer, automotive analyst at IHS Global Insight Inc., told the Financial Times.

However, not every Chinese endeavor has been greeted with success. Shanghai-based SAIC in 2004 paid $500 million for 49% of Ssangyong Motor Co. just to watch the South Korean carmaker go into receivership in February. And Sichuan Tengzhong Heavy Industrial Machinery’s attempted takeover of GM’s Hummer brand is still being stalled by China’s central government.

“It’s not in coordination with our nation’s industrial policy,” Vice Minister of Commerce Chen Jian said after sending back Sichuan’s application to acquire the Hummer brand for $100 million.

Still, Chinese auto companies won’t be satisfied until they race ahead of their Western counterparts.

“I’m fighting for what’s in overseas automakers’ rice bowls,” Geely founder Li Shufu told Bloomberg. “I want to build Geely into a global first-tier automaker.”

Source: Financial Crisis Gives Chinese Car Companies a Chance to Get Up to Speed

Workers heave great hunks of iron and steel up vast construction cables… great machine-age pulleys send building parts up storey after storey… ever closer to the sweltering sun.

Passers by gawp at the great feats of engineering that tower above… the men high up in the giant structural shafts look down from up high see them as tiny blips… one of thousands of dots in the ever expanding City.

From the edge of Brooklyn to shore of Wall Street the trend is repeated for hundreds of miles… as far as the eye can see.

But the focus is on Manhattan…

The new financial centre of the world is riding high with the race to build the earth’s tallest building.

On one side is Walter P. Chrysler, founder of the eponymous motor company and his architect, William Van Alen. On the other is Alen’s old partner, H. Craig Severance, hard at work on the 70 storey Bank of Manhattan Trust Building on Wall Street…

Construction of the Chrysler Building began on September 19 and the contest between Alen and Severance is intensely fierce.

For over a year the two buildings are neck-and-neck.

Then at the last stretch – a mere two feet in it – Severance pips Alen to the finish line to claim the title.

But Alen has an ace up his sleeve…

Unbeknownst to anyone, he secretly constructs a 185 foot long spire inside the frame of the building.

On October 23rd, 1929, to the pride of the workmen… the gasps of the awe-struck on-lookers, businessmen and journalists… the spire is hoisted onto the top of the Chrysler Building’s dome and lowered into the 66th floor of the building.

The battle is won.

Fast forward to today: The stark reality of the 21st Century

The Chrysler Building was the first man-made structure to rise above 1,000 feet.

Its grand opening epitomised America’s financial might.

Of course, in boom-time New York, that title didn’t last for very long. It was trumped by the Empire State Building the next year.

Now I’ve always found the Chrysler Building the far sexier of the two – a genuine masterpiece of Art Deco architecture.

But yesterday, something happened that brings home a stark reality of the 21st Century… a century where America is no longer the financial King of all nations.

The New York Post broke the news that this American icon – one the great symbols of the West’s financial might – is likely to be sold to cash-rich Gulf investors…

The Arabs move in

The Abu Dhabi Investment Council – the Gulf Emirate’s smaller Sovereign Wealth Fund – is ready to pay $800 million for a 90% stake in the landmark building.

It’s a tiny amount for such a striking building. But it’s what this news represents that is huge.

The Arabs are moving in.

Only two weeks ago the Kuwait Investment Authority and the Qatar Investment Authority plunked-down $3.95 billion on four prize properties in New York – including the old GM Building.

Record oil prices gut America

Chrysler moved out of their iconic building years ago.

The company itself is an absolute mess…

The gas-guzzlers it specialised in fell out of favour in the mid-70s as oil prices skyrocketed… America’s motor industry declined.

And the Japanese with their smaller, fuel-efficient cars seized the initiative. By 1979, the Chrysler Corporation had to petition the United States government for $1.5 billion in loan guarantees to avoid bankruptcy…

Chrysler sold itself to the German auto giant Daimler in 1998 – officially a “merger of equals”.

Grafting Chrysler’s sub-prime onto their high-end brand was probably the dumbest move the Germans ever made. In 2007 they off-loaded it onto US private equity firm, Cerberus Capital Management, for $7.4 billion.

Good luck to them. Personally, I think the Arab’s purchase of the Chrysler Building is going to prove a far smarter investment than Chrysler itself.

I see surging oil prices wreaking havoc on what’s left of America’s manufacturing economy, just as they did in the 1970’s.

The latest figures from the US Commerce Department show the America’s trade deficit continues to soar. That’s almost entirely down to imports of crude oil and petroleum products. In April, crude-oil imports rose by $4.2 billion to $29.3 billion – a new record.

There’s plenty more to come. Because even those scary figures are only the result of oil at an average price of $96.81 a barrel.

That’s a long, long way below the close to $140 levels we’ve seen this month.

One way to get your cut of this phenomenal shift of wealth

All of this brings home an important point we at Profit Hunter use as our fundamental strategy towards our investments…

The balance of financial power is inexorably shifting eastwards… to the oil-exporters… and to Asian manufacturers.

America is being bled dry by higher oil prices. And the masters of this new petrodollar-dominated financial universe are picking the choicest bits of its carcass.

But we don’t lament this fact. Instead, we line up to get our cut.

Our Gulf merchant bank investment has a long track record of snapping-up undervalued U.S. icons. And right now they’re as undervalued as ever!

In the 1980’s it bought luxury retailers like Tiffany and Saks Fifth Avenue. It continues to build a top-drawer portfolio of American properties.

It bought the high-end 280 Park Avenue office complex last November, just a short walk away from the Chrysler Building itself.

You can bet that as America’s economy reels under the credit crunch and falling property prices; continues to haemorrhage dollars into the Gulf to pay for the oil it desperately needs… this one company is going to find plenty of new opportunities to add to its holdings.

If you’d like to review our higher tier “special situations” investing service, go here for more details, and I’ll send you details of our entire open positions immediately.

Regards,

Manraaj Singh
Editor
Profit Hunter

Source: Cash Rich Arabs Takeover New York

You can see why… it’s the fastest growing nation in the world. Its building rate is mind blowing. And it’s set to continue – at ALL costs.

Over the next few years it plans to build the equivalent of ten New York Cities!

And since the recent earthquake the Chinese government has promised to rebuild all the damaged cities in Sichuan and the surrounding areas. This will accelerate demand for these products even further.

But China has a problem… and it’s a big fat expensive one.

You see, to make steel you need iron – and China doesn’t have enough high-grade iron ore within its borders…

It means they are at the mercy of the world’s big exporters – BHP Billiton, Rio Tinto and Vale.

These miners charge what rates they like to ship the stuff over… and the cost is phenomenal. China has NO CHOICE but cough up.

But one firm newly placed just outside its borders could be about to save their bacon… and it kicks off as early as next month!

An iron ore miner with an edge over all its competitors – including the Big Boys!

At first glance there’s nothing unique about this company. It’s a miner… it gigs for iron ore… its reserves are sound.

But they have one thing that gives their business the edge over all their competitors: Its location.

Consider this… the current freight rate from Australia (BHP and Rio’s ore) to China is around $50 per tonne. Rates from Brazil (Vale’s ore) to China standing at around $100 per tonne.

This means transport costs to China are many times of the cost of mining the ore.

Wouldn’t it be better for Chinese steel mills if they could get their iron sourced more locally so transport costs were slashed?

Of course it would. If you could offer the mills iron ore or pig iron on these terms the Chinese would snap your hand off…

Well this company is scheduled to produce its first ore for sale THIS MONTH.

I will be recommending this company in the next issue of Smart Commodities UK, which drops on Saturday 22 June. To get all the exclusive details on this as soon as they’re published click here.

You have no obligation to continue subscribing. You have three whole months to see if it’s for you. And even if you decide it isn’t, everything you get is yours to keep no matter what.

Why one broker thinks these shares are 100% undervalued

By 2012, the company plans to produce up to 10.7m tonnes of iron ore concentrate. From that up to 5 million tonnes of pig iron will be produced.

It also recently announced the acquisition of two mining licenses that could DOUBLE the iron resources of the company.

Broker Cannacord Adams recently reviewed all of the company’s projects and came up with a net asset per share valuation that is double the current share price.

With the outlook for ore prices, I reckon this valuation looks pretty conservative, because iron ore prices remain on the up.

Iron ore prices will continue rise China’s voracious demand has caused iron prices to rise significantly. Recently, Rio Tinto managed to secure a hike of 95% for supplies of iron ore to a few small Chinese firms after intense negotiations.

Renaissance Capital estimated that there was a 30m-tonne gap in expected iron ore shipments and actual deliveries in 2007. There have been problems with weather as well, with many mines flooding in Northern Australia and in Vale’s operations Brazil.

Citigroup is also bullish on the iron ore price. In a note to clients last week, the broker said: “The iron ore market remains under-supplied and only a sharp deceleration in Chinese steel production will change this. We expect iron ore to rise by 30% in 2009… but this may be conservative.”

I am very excited about the prospect for this share. I like the location of its mines, the quality of its management and the pricing outlook for its main source of revenues.

The valuation is attractive and the fact production is set to start imminently should secure good news flow in the months to come – but you’ll have to wait a couple of weeks to find out exactly which company it is as I complete my research.

So sign up here to be sure you’re ready!

Regards,

Garry White
Editor
Smart Commodities UK

Please note: Forecasts are not a reliable indicator of future results.

Source: New Iron Ore Discovery to Save China’s Multibillion Pound Building Spree

My feet hit the floor at almost the same instant alarms starting clanging in the famed Mogambo Bunker Of Iron And Steel (MBOIAS), which is a stupid name, I know, but it sounds so manly: “iron and steel”!

Think of Tennessee Ernie Ford singing, “One fist of iron and the other of steel, if the right one don’t get you, then the left one will. I loaded sixteen tons, and what do you get? Another day older and deeper in debt”, which seems so, so apropos to the workaholic, debt-crippled, debt-addled, debt-besotted idiocy of America, thanks to the loathsome entity called the Federal Reserve, which is directly responsible for the roaring inflation and the crippling debt, because the Fed created all the money that made it possible!

And at interest rates so low that they were less than the rate of inflation, which made the attraction of debt to finance mindless consumption so overwhelming that people could not stop themselves! Hahahaha!

I smile that famous Mogambo Enigmatic Smile (MES) that bespeaks volumes, mostly signaling an upset stomach, diarrhea or a resigned acceptance of, “We’re freaking doomed!”; and we are, truly, doomed because we are idiots who believed the stupidity that crushing ourselves under a mountain of debt to finance gluttonous final consumption and a welfare state produces national and personal wealth! Hahahaha!

But without looking at the alarm system, I knew what was causing the problem; Total Fed Credit shot up again, which is the source of all that excess money and credit. Inflation in prices is higher than it has been for decades, thanks to unremitting creation of money and credit by the Federal Reserve, and here they are making it worse!

Stumbling to turn off the damned blaring alarms that were painfully reminding me that I had a killer hangover, I looked at TFC and saw, with horror, that I was right; it was up $6.8 billion last week, which is made clearly alarming when you realize that in the last 12 months, TFC was only up $24 billion. In a year! And now, suddenly, it is up $6.8 billion last week! Up by more than a quarter! Almost a third! Yow!

But that was not the only thing that was causing mayhem with the Mogambo Economic Alarm System (MEAS), as the Federal Reserve itself sold off another $11 billion of its government debt last week! Yikes! And foreign central banks bought up a whopping $16 billion of government and agency debt through their accounts at the Fed!

Before I could get off another comment like, “What in the hell is going on in this brain-damaged country?”, I was stunned to note that non-borrowed reserves in the banks are still a negative $111 billion, while total reserves are still only $42 billion, which is so bizarre a concept that I cannot even begin to comprehend it, as it sounds like money goes backward to anti-money in an inter-dimensional time-warp or something.

Anyway, I get dizzy when I try to think it through, and then I fall off the bar stool and the bartender says, “That’s enough for you, you Drunken Mogambo Bastard (DMB)!” and I tell him, “No, I am not that drunk yet! I just get dizzy from trying to understand how $42 billion in reserves in the banks is possible with non-borrowed reserves being a negative $111 billion! What does it mean?”

He says, snatching my glass away, “It means you’ve had enough, you weirdo!”

Well, you can imagine that my mood was suddenly soured, not made any better by noting that there seems to be a lot of this “mood souring” going around, as MarketWatch.com reports that “U.S. consumer sentiment dropped in May to the lowest level in 28 years as worries about inflation grew, according to the University of Michigan/Reuters consumer sentiment index. The UMich index fell to 59.8 in May from 62.6 in April, the lowest since June 1980.”

And what happened in 1980? Hahaha! Volcker had to jack interest rates to 15%, and more, to eliminate the raging 14% inflation in prices, like we are having right now, that was caused by massive government spending, like we are having right now, which brings us to the point that the Treasury reported that the federal deficit (spending higher than income) hit a new high of $311 billion for the first half of the government’s fiscal year! Yikes!

And the reason? Falling corporate profits and the tax revenues, as “Taxes on corporate income decreased $36.9 billion in the first quarter, compared with a decrease of $15.0 billion in the fourth”, which is to be expected when “Profits before tax decreased $133.3 billion in the first quarter, in contrast to an increase of $0.2 billion in the fourth.” Wow!

This brings up the other point that makes me Grind My Teeth In Anguish (GMTIA), which is that the federal government is borrowing and spending us to an early grave, as the increase in the Gross Public Debt (the national debt) in the last 12 months is reported as $571 billion, taking the government’s total official indebtedness to $9.39 trillion, which is $93,900 per non-government worker in the country, and at 4% interest, is $3,756 per non-government worker per year just to pay the interest!

And now we are looking at $622 billion more debt this year? Gaaaahhh! We’re freaking doomed!

P.S. To get The Daily Reckoning sent directly to your inbox, sign up for our free email newsletter, or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.

Source: Sounding the Government Debt Alarm

Nickel sank steadily through most of the day, closing at $10.2315/lb., down almost 47 cents. Zinc hit the skids, just coming off its lows in the late morning to end at $0.9475/lb., down nearly a penny and three-quarters. Aluminum also halved its losses, winding up at $1.3221/lb., down more than a penny and three-quarters, while lead was down modestly, dropping a half-penny to $0.907/lb.

Copper slid following announcement of a steep rise in stockpiles, taken as a potential signal that demand may be waning. Inventories monitored by the LME were up by 1,400 metric tons yesterday, to 125,800 tons. That marked the highest level since March 13.

But are we entering a full-bore correction?

Metals analyst William Adams, of Basemetals.com, isn’t quick to jump to that conclusion. “In the absence of fresh supply disruptions in the base metals, the path of least resistance seems to have been to the downside recently, however dips have remained well supported as bargain hunters have stepped in to take advantage of these lower price levels,” he said.

In the short term, however, “There is nothing out there to be really bullish about,” said Adam Rowley of Macquarie Bank. “Nickel was looking like it might tighten up a bit, but the stainless steel production cuts that have been announced in China have really put a lid on that,” Rowley added.

And Mining Journal Online reported that, “Low refined nickel prices and stricter government enforcement of environmental standards have cut into profits for Chinese nickel pig iron producers, forcing some to suspend production.”

In company news, the day after Rio Tinto announced it was suing the Indonesian government over the issuance of mining permits to local firms, Rio said that the Sulawesi project at the center of its efforts in the country is a tier-one opportunity.

Rio Tinto Copper CEO Bret Clayton called the 162-million tonne Sulawesi nickel deposit “a substantial resource” that will provide an attractive entry for Rio Tinto into a new metal. Clayton added that “in ten years’ time, Rio Tinto could rank among the top ten nickel producers globally.”

Source: Base Metals Beaten Down Some More

Nickel succumbed to selling after Friday’s rally, but came off its early lows to close at $10.7002/lb., down a bit more than 30 cents. Zinc was in a downtrend most of the day, ending at $0.9654/lb., down more than a penny. Aluminum was up in the pre-dawn hours but gave it all back, shedding a half-cent, to end at $1.3408/lb., while lead bucked the trend, tacking on nearly a penny, to $0.912/lb.

Copper more or less held its ground on falling stockpiles. Inventories monitored by the LME lost 975 metric tons yesterday, to 124,400 tons.

The others were mostly off, leading BaseMetals.com analyst William Adams to comment that, “After the weakness seen last week, the metals are well positioned to see some bargain hunting, but much will depend on how confident the market is.”

Well, isn’t that always the case?

Meanwhile, nickel took the biggest hit in the group. “Nickel prices are likely to continue to trade heavily over the medium to long term,” said JP Morgan analyst Michael Jansen. “This reflects two major price drivers — ongoing substitution towards nickel in pig iron in China (at the expense of cathode) and an acceleration in western world mine supply.”

With a host of new mines expected to come on line in the next few years, the increase in nickel supply from 2010 onwards could be “quite spectacular,” Jansen said.

“We now anticipate that the nickel supply/demand balance will be a significant surplus for 2008 into 2010 at least, and quite possibly for a year or two afterwards,” he concluded.

In company news, the Indonesian unit of Rio Tinto has sued a regional government in Central Sulawesi for issuing a mining permit to local firms while it is still negotiating with the government over the area.

Rio is in negotiation with central and regional governments to obtain a permit to exploit the La Sampala nickel deposit in Central Sulawesi.

And Nautilus Minerals has started a new collaborative exploration program in association with the Australian National University and Teck Cominco, to search for new seafloor massive sulphide systems in the waters off Tonga.

Source: Base Metals Still Floundering

So, this morning, we write to you in a puddle of our own regret. We lacked foresight, and water-proof pants. We’ll try to exhibit a bit more of it as we map out where the money is today (foresight, not water-proof pants).

Foresight, of course, is a quality everybody wants and nobody has. Who couldn’t do with a little more of it? It’s one of those constants that you always need to constantly invest well…foresight, hard work, patience, a bit of luck here, some good timing there.

Meanwhile, the only news that matters in Australia today seems to be takeover-related…

Western Juniors Could Create 4th Biggest Iron Player in Australia

Here’s some foresight. Investors who jumped on the iron ore train are getting their dividends. Yesterday Murchison Metals (ASX:MMX) gave iron cousin Midwest (ASX:MIS) an all-share merger offer worth . The market loved it. Midwest leapt 12.3%. Murchison flew 8.3%.

Everybody won, except Sinosteel. The Chinese giant was closing the net around its prey, Midwest. The nerve of another prey to go and outdo it.

Together, the two iron diggers would have a market cap of AU$3.2 billion. That’s bigger than Portman (ASX:PMM), Mount Gibson (ASX:MGX) or the other second-tier contenders. It’d leapfrog the companies up to fourth place in the industry, behind Fortescue (ASX:FMG).

The structure of the deal, though, tells you a little more about the whole matter.

Sinosteel already has 19.9% of Midwest. That’s the maximum you can own without bidding.

In a direct response to the stake, Murchison has proposed a reverse-takeover. It has offered itself up as a sacrifice to the deity of iron ore. Under Australian corporations law, a reverse-takeover means the deal only needs 50% acceptance from Midwest shareholders to go through. Otherwise, a standard takeover would’ve meant a minimum of 75%.

Ergo…the two do not want to be bought. Not by China. Not at any price near what Sinosteel is offering. The Australian iron sector is combatting external consolidation with internal consolidation. Both mean share prices are going up. Here the five top juniors’ performance this year. They’ve made gains of between 21% and 65%.

Midwest’s management has recommended that shareholders accept the deal. You’ll find out in the next three months what they think of it.

You’ll also find out exactly how desperate China is to get its paws on our iron. The ball’s in your court, Sinosteel. The company will most likely withdraw, and reassess. Perhaps it’s content to pay huge spot and contract prices for iron in Asia. Or perhaps it’d like to own the next best producer after Fortescue.

St George Accepts Westpac Bid…Almost

A much bigger takeover is slowly plodding towards the finishing line. St George (ASX:SGB) signed a scheme of agreement with Westpac yesterday. It had prudence enough, though, to add some fine print to the contract. We’ll do a deal you, Westpac. As long as your shares stop dropping

So far, Westpac’s bid is 10% smaller than when it came into the world. The stock is at a year-low. If the fall that began last week in the All Ordinaries accelerates, Westpac’s shares may continue to erode. Maybe the finishing line is a little further away than we thought.

Two takeovers are evolving parallel to each other. There’s the iron story in the hard-asset market, and the banking story in the financial sector. Both are mergers, involving shares only. No cash. Analysts tell us that the prices are good. Yet the parties involved have reacted entirely differently.

Midwest said “Yes” and left it that. St George said “Maybe. Just don’t let your share price fall.”

Sadly, Westpac doesn’t have a lot of control over that. And those two reactions might reflect the underlying businesses, we reckon. Iron ore miners are willing to jump on the front foot. They’re merging to create more scale in a growing industry. Banks are on the back foot. They’re merging as a defense against falling earnings margins.

Westpac’s interest margin has fallen from 2.6% in 2003 to 2.25% last year. It won’t have improved since the last report, filed in November. Bankers aren’t making as much as they used to. That’s the bottom line. There are better companies to invest in.

Al Robinson
The Daily Reckoning Australia

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Source: The Fourth Biggest Iron Player in Australia

It’s an acronym for the emerging economies of Brazil, Russia, India, and China. Goldman rightly believes these populous nations will be far more prosperous and powerful in 2050 than they are today.

A long-term commodity bull might say, “Forget the BRICs… Give me the ABCs.”

The ABCs in this case are the ultimate destinations for resource investors… Australia, Brazil, and Canada. Each is blessed with awesome energy, metals, and agricultural wealth… and each ABC currency is soaring right now. Our chart of the week is the “A” currency of the group, the Aussie dollar.

Due to the soaring prices of coal, gold, copper, uranium, oil, iron ore, and natural gas, the Aussie dollar has climbed 50% since 2002. This is a huge move for the currency of a stable nation… and another sign the age of the ABCs is here.

Source: Forget the BRICs, It´s the Age of the ABCs

Of course, financial companies have assets. But they’re not tangible things. You can throw a rock at your neighbour’s window, and it’ll shatter. If you threaten to throw a mortgage-backed asset at your neighbour’s window, he’ll probably run shrieking out his own front door all the same. But the window won’t break. Securitised assets can’t be thrown, no matter how much misery they’ve caused.

Real tangible assets are in a bull market at the moment. A non-imaginary one. The values of commodities can be identified in real markets. There are real people buying these things, and transporting them to real countries in real ships. They crush them and cook them with real machinery, then sell the refined product to a real end-use.

We may very well see a bubble develop in the commodities boom soon. Anywhere where there’s a good opportunity, greed and opportunism follow. But the real nature of this boom is what sets it apart from booms in technological speculation or financial earnings.

Now here’s the important part…what happens now that the mining sector is the undisputed leader of the market?

Could this be a symptom of the much-maligned “decoupling” theory?

Commentators slaughtered the idea last year. The Aussie market fell just as fast as the US. Indeed, global equity markets fell in unison. But that was when the Aussie market had finance as its lifeblood.

Since then, trade with other countries has increased. Our five top exports are all resource offerings. Iron…two types of coal…oil…and wheat. There are no securitised assets or government debt on that list. Just useful things.

A true decoupling can’t happen yet. That would, among other items, require a major overhaul of the international currency system. But a-mini decoupling of sorts is already happening in the Aussie economy. Every time we export more iron to China, we have a little less to do with the US economy.

Chinese Wheat Production Hit by Disease

China’s National Bureau of Statistics says the country’s largest wheat-producing province won’t be breaking any records this year. Henan Province is facing disease, not to mention rising costs from oil and fertiliser booms.

Woe, woe, woe…

It’s a disconcerting fact that agricultural production today is an oil-based business. We turn natural resources into food. Petrol fuels the massive machinery that mass-production farming requires. Phosphate, potassium and nitrogen make up the chemical fertiliser that stimulates extra returns on crops.

Rising prices wouldn’t so much of a problem if Chinese farmers could make up the difference with a good year. But pests are making the situation harder. ‘Sharp eyeshot disease’ is expected to take its toll on Chinese wheat fields this year.

As we said earlier, wheat is one of Australia’s top exports. If China can’t get enough wheat, it’ll look to us. Now that AWB (ASX:AWB) has lost its grip on the exporting trade, a few second-tier wheat players may be worth a look…

Gold in a Good Place for Buying

If money’s moving out of stocks, where will it go?

It might be time to take another look at the ultimate alternative, gold. It hasn’t made a major move since it came back from US$1000. Gold costs US$920 this morning. Our hunch is that that’ll change in the next month or so.

Al Robinson
The Daily Reckoning Australia

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Source: Chinese Wheat Production Hit by Disease