The Chinese Wizards Seek Out Technology Metals In The Land Of Oz

China has recently become very active in seeking out what at first impression, look to be resources of just “base metals” in developed countries such as Australia and Canada, and by aggressively buying into or enlarging existing positions in one of the world’s largest mining conglomerates, London- and Melbourne-based Rio Tinto.

I have been trying to sound an alarm for years about the critically short supply of technology metals, almost all of which are byproducts of base metal mining, or the mining of relatively abundant metals; even if some of them, such as titanium, are not as easily produced as the classical base metals.

China is benefitting in two very important ways by the recent and ongoing acquisitions and substantial investments undertaken by several of her largest state-owned companies.

First of all, China gets supplies of base metals, including iron ore, copper, lead, zinc and aluminum, the structural metals of our civilization. China’s appetite for those metals for its own domestic consumption is voracious. The current global recession just gives cash-rich China breathing space and a once-in-a-lifetime opportunity to acquire, at bargain prices, the resources necessary for its infrastructure. As I have written here before, it would take the Chinese steel industry, at its present output of 450,000,000 metric tons (t) per year, more than 20 years to catch up with the per capita amount of steel enjoyed by today’s American population in the form of infrastructure, such as bridges, buildings, reinforced concrete, appliances, railroad tracks and rolling stock, ships and private vehicles.

To see the second, and I think, “intended consequence” of China’s current bargain shopping look at the following table of byproduct critical technology metals, the first version of which appeared in an earlier article of mine.

The word “critical” above denotes the fact that there are no practical substitutes for the metals in their uses. In fact, typically the use itself would not be possible without the specific technology metal, or substituting it would so seriously degrade the performance of the technology as to make it impractical.

The most important thing to remember about byproduct minor metals, is that the tail doesn’t wag the dog. Unless the primary metal is produced in large volume, there is no production of the byproduct. So for gallium, for example, which up until now is only known as a trace (5 parts per million on average) in bauxite, the primary ore of aluminum, its production is limited to around 200 t per year at this point, simply because that is the amount that can be recovered from 39 million t of aluminum, last year’s production (2008).

Chinese bargain hunters have a covert agenda. They are accumulating ownership of not only base-metal mines and mining conglomerates, but also by default the sources of critical technology metals, many of which are already a Chinese production monopoly through primary production and recycling.

China has discovered to its dismay, that buying minerals in the ground in places like infrastructure-less central Africa, requires a very long, very expensive infrastructure investment, before any real value can be recovered. Chinese businessmen have now discovered why Western businessmen avoided these capital-intensive projects. They had no reasonable expectation of a return on investment, in any period during which metals and minerals prices might be stable or rising.

Nonetheless, China has continued investing in Africa, because China takes a very long-term view and is willing to accept the risks of political instability, especially where it has a good chance of influencing the form of a future government.

China, however, needs metals and minerals now, as well as in the future, so it has turned its attention to the developed economies and in particular to the struggling mining companies that have been hit by the financial crisis and poor metal prices.

China gets an additional value from these Western-based struggling mining companies, that its African acquisitions don’t have. Such acquisitions include access to the latest mining and refining technologies developed by centuries of European, American and Australian mining engineers and metallurgists. In addition, these working mines come with their resources and reserves already proven, their infrastructure and utilities constructed and their workforces trained and professional.

All the Chinese companies need to do is finance operations, then ship concentrates or even refined metals to a nearby modern port and load them on cheap Chinese-flagged transport to China. It’s the greatest deal in human history. China gets to trade the hard currencies it was paid for its cheap labor, in return for all the natural resources and technologies through which it can bypass between one and four generations, to become the world’s premier producer of high-tech items, within the first 25 years of the 21st century.

Note for example that in just the last few months:

• Chinalco, China’s state-owned aluminum company, has made an offer to increase its 9 % holding in the London- and Melbourne-based Rio Tinto Group, to 18 %, through a mix of outright purchase of certain mining assets and convertible debentures, giving it the right to shares rather than money repayment. The Rio Tinto assets that most interest Chinalco, are its deposits of the ores of iron, copper and aluminum and their associated byproducts.

• China Minmetals, a state-owned mining, metallurgical, construction and investment (in mining related industries) company, has made a well received and almost certain to be accepted bid to buy Australia’s struggling Oz Minerals. Oz is the world’s second largest zinc producer, and also produces copper and lead through an expensive merger it made just last year, which because of the world commodity recession literally destroyed the company’s ability to finance continuing operations. Minmetals will also get all of the byproduct technology metals associated with the zinc, lead and copper produced.

In summary, please note that in return for cash provided from the nation’s reserves by the central bank, as part of a long-range strategic plan to become self sufficient in metals and minerals, including all of the technology metals, state-owned companies in the mining sector in China are getting for bargain prices:

• Structural metal ore sources and refined metals including iron, copper, aluminum, lead, and zinc, and are getting for free
• The latest and best mining and refining technology the west has to offer, and
• A supply of the technology metals as well as their extraction and refining technologies.

As the Wizard of Oz said to Dorothy when his masquerade was exposed: In Oz everything isn’t as it seems to be. In Chinese mining outsourcing, as in Oz (minerals), everything isn’t as it seems to be. The real bargain that the Chinese are getting is a chance at mastery of the global economy through outright gifts of priceless resources.