With attention focused on Greece and the brinksmanship on display, it was refreshing last week to focus on another topic and participate in a roundtable discussion on the development path for China and its minor metals business over the next five years. The seminar, held in New York and hosted by TREM and MMTA (two important think tanks focused on the strategic metals space), hosted numerous individuals across metals value chains, from traders, to strategists, to trade lawyers to investment professionals. I participated as a panelist with a group emceed by Clint Cox, founder of The Anchor House, an exceptional think tank on rare earth element matters.
What We Found Out
The seminar was more macro in substance and was a refreshing change from the typical conference where youre pitched by a litany of REE juniors all trying to prove their worth. The conference centered on the methods Chinas leaders are employing to build sustainable domestic supply chains and evolve Chinas manufacturing base. Chinese President Xi Jinping has spent much of his tenure rooting out corruption and consolidating power while at the same time transitioning an economy drowning in debt from investment-led growth to consumption-led growth. Whether or not this is possible was a subject of much debate at the TREM conference with no clear answer. The one point many agreed upon was that Chinas model of growth must evolve.
This has perhaps been addressed with the introduction of Made in China 2025, a blueprint for the next generation of manufacturing in the country. The blueprints fundamental idea is to enhance and upgrade Chinese manufacturing processes from a focus on quantity to a focus on quality regardless of the industry size. In fact, it appears that the blueprint is geared more towards small and medium size enterprises, companies instrumental in job growth a fundamental underpinning of a stable Chinese society. The blueprint is focused on ten sectors: new advanced information technology, automated machine tools and robotics, aerospace and aeronautical equipment, maritime equipment and high-tech shipping, modern rail transport, new energy vehicles, power equipment, agricultural equipment, new materials, and biopharmaceuticals and advanced medical products. One conference participant remarked that this is a qualitative industrial revolution in the making.
The goals of the Made in China blueprint are designed to enhance manufacturing which in turn shines a very important light on reliable raw material access. If this plan highlights anything, it is that its more than just those of us in the West that are concerned about security of supply of metals and materials. China plans on sourcing 40% of manufacturing components domestically by 2020 and 70% by 2025. While it is true that trade flows are global in nature, publicly stated goals such as these make it clear that domestic Chinese industry has its own ideas on how to evolve and enhance self sufficiency. Technological independence is presumably also an unstated goal.
At last weeks seminar, this idea of self sufficiency was discussed in other areas of the economy as well. The founding of the Asian Infrastructure Investment Bank (AIIB) by China, a $100 billion fund which now boasts close to 60 members (not including the US!) is one example as is the construction of a new Silk Road designed to more closely integrate Chinese economic interests with a majority of the worlds population.
These goals are not only designed to further Chinas status as a global economic superpower, but also add hundreds of billions of dollars in purchasing power might to its economy.
The goal of the Chinese Renminbi (RMB) becoming a global reserve currency parallels Chinas enhancement of its economic might on the global stage. While much needs to happen to make this a reality, conference attendees agreed that the foundations are being put in place. One step in bringing this to fruition is having the RMB included in the IMFs Special Drawing Rights (SDRs), a basket of currencies which are currently comprised of USD, EUR, JPY, and GBP. An opening of Chinas capital account and making the RMB freely usable are keys to accomplishing this. With President Xis plan to increase foreign direct investment to $1.25 trillion in the next ten years up from $870 billion in 2014, the aim of the Chinese leadership is clear. Its also notable that Chinas appetite for gold remains intact.
The conference last week was incredibly valuable because of the willingness of participants to acknowledge the many challenges China faces in its bid to reshape global trade flows and its economy. Pollution which cannot be ignored anymore, a debt to GDP ratio of 282% according to McKinsey, slowing economic growth (measured a host of different ways), rampant stock market speculation, and cyber espionage were all issues discussed. Chinese leadership must reckon with these challenges. While some of these issues can be dealt with through currency manipulation, a key takeaway was that devaluation was not the answer deleveraging was. This is likely Chinas greatest challenge. There are no easy answers as deleveraging is painful and any moves here wont just affect China, but will also affect an increasingly integrated global economy.
To borrow a phrase from my friend Dan McGroarty, minor metals are taking on major implications. This was obvious at the conference. The country which builds supply chains around these materials can be a leader in shaping significant geopolitical and economic issues in the future. Based on Chinas recent moves, it appears this fact isnt lost on the countrys leadership and over the next ten years, the Middle Kingdom is intent on achieving this important goal.
One of my fellow panelists said that China appears intent on speaking like Deng, and hitting like Mao. Is the rest of the world up for the challenge?
President of House Mountain Partners LLC and Co-Editor of Disruptive Discoveries Journal
Chris Berry is a well-known writer, speaker, and analyst. He focuses much of his time on Energy Metals those metals or minerals used in the generation or storage of energy. He is a student of the theory of Convergence emanating from the Emerging World and believes it will have profound effects across the globe in the coming years. Active on the speaking circuit throughout the world and frequently quoted in the press, Chris spent 15 years working across various roles in sales and brokerage on Wall Street before shifting focus and taking control of his financial destiny.He is also a Senior Editor at Investor Intel. He holds an MBA in Finance with an international focus from Fordham University, and a BA in International Studies from The Virginia Military Institute. Please visit www.discoveryinvesting.com and www.house-mountain.com for more information and registration for free newsletter as well as his disclaimer.
Our Thinking and What We Do
We are believers in the theory of Convergence. As the quality of life between East and West slowly merges due to advances in technology, continued urbanization, and changing demographics, opportunities across numerous industries will arise which we can take advantage of. We aim to point out the strategic opportunities in the commodity space which arise from these themes.
Throughout history, no society has sustained a higher quality of life without access to cheap commodities or materials. As global population increases, putting stresses on resource availability, efficiency and technology must come to the fore to continue to provide for a higher quality of life. The looming convergence of lifestyles between the emerging world and the developed world is a fact we must all understand and accept in order to chart a sustainable path forward for humanity.
The Disruptive Discoveries Journal is a free weekly newsletter we write focused uncovering and interpreting both the opportunities and challenges in the natural resources, nanotech, and clean tech sectors resulting from the belief mentioned above.
The material herein is for informational purposes only and is not intended to and does not constitute the rendering of investment advice or the solicitation of an offer to buy securities. The foregoing discussion contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (The Act). In particular when used in the preceding discussion the words plan, confident that, believe, scheduled, expect, or intend to, and similar conditional expressions are intended to identify forward-looking statements subject to the safe harbor created by the ACT. Such statements are subject to certain risks and uncertainties and actual results could differ materially from those expressed in any of the forward looking statements. Such risks and uncertainties include, but are not limited to future events and financial performance of the company which are inherently uncertain and actual events and / or results may differ materially. In addition we may review investments that are not registered in the U.S. We cannot attest to nor certify the correctness of any information in this note. Please consult your financial advisor and perform your own due diligence before considering any companies mentioned in this informational bulletin.
The information in this note is provided solely for users general knowledge and is provided as is. We at the Disruptive Discoveries Journal make no warranties, expressed or implied, and disclaim and negate all other warranties, including without limitation, implied warranties or conditions of merchantability, fitness for a particular purpose or non-infringement of intellectual property or other violation of rights. Further, we do not warrant or make any representations concerning the use, validity, accuracy, completeness, likely results or reliability of any claims, statements or information in this note or otherwise relating to such materials or on any websites linked to this note. We own no shares in any companies mentioned in this note and have no financial relationship with any company mentioned.
The content in this note is not intended to be a comprehensive review of all matters and developments, and we assume no responsibility as to its completeness or accuracy. Furthermore, the information in no way should be construed or interpreted as or as part of an offering or solicitation of securities. No securities commission or other regulatory authority has in any way passed upon this information and no representation or warranty is made by us to that effect. For a more detailed disclaimer, please click here.