China's appetite for commodities shows no signs of ceasing. 1.
A US$13.2 to US$14.5 billion offer by China National Petroleum
(SNP) for 75% of the Argentine unit of Spanish oil company Repsol YPF
(REP) this week.2.
On July 3, China Investment Corporation
(CIC) made a C$1.7 billion investment for 17.2% share of Canada's largest base-metal miner, Teck Resources
On June 24, Sinopec
(SHI) purchased Swiss oil explorer Addax
(ADXTF) for US$7.2 billion. Addax had recently announced some amazing results from their TT-10 well in Kurdistan where several zones flowed rates of 10-20,000 barrels/day. Addax also has a significant presence in West Africa.4.
On a smaller scale, China National Nuclear Corporation
(CNNC) recently took over small Canadian-listed Western Prospector Group for C$31 million in order to control their uranium assets in Mongolia.5.
What will happen when the rest of the world wakes up to the fact that China has tied up significant supplies of strategic metals? The most extreme situation occurs in an obscure family of difficult to pronounce elements known as the "rare earths" (dysprosium, anyone?), in which China has a lock on nearly 100% of the world's supply. Rare earths are critical to green power, hybrid-vehicle, and defense applications.
There have been many other significant Chinese strategic investments in companies with iron ore, rare-earths, and zinc assets. While one could argue that China has done an admirable job of supplying the world with rare earths, that situation may not persist. Advanced rare-earth mines and refineries in Malaysia, Australia, and Brazil have all seen significant Chinese investment. Investments in rare-earth opportunities outside of the Chinese cartel are vulnerable to predatory pricing, which may render them uneconomic over private investors' time horizons.
If a global shortage of rare earths materializes, we will see increased government interest to secure adequate supplies and an IUM bull market.
On June 23, 2009, the US and EU filed a World Trade Organization (WTO) case against China for its export restraints on raw materials including bauxite, coke, fluorspar, magnesium, manganese, silicon metal, silicon carbide, yellow phosphorus, and zinc.
It should be clear to any casual observer that China's going to great lengths to secure commodity supplies. Indeed, the global scale of China's coordinated commodity investments (at prices not seen since 2003) could be viewed as one of the largest strategic investments in history.
No positions in stocks mentioned.
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