How Will Commodities Markets React to China's Restrictions?
Guest post contributed by Elizabeth Goldman, a freelance finance writer, on behalf of Everest Forex . All views and opinions are those of the writer and do not necessarily represent Everest Forex.
China produces 95 percent of 17 rare Earth minerals including dysprosium and neodymium. These metals are used in a variety of high-tech things like wind turbines and precision-guided missiles as well as consumer goods like halogen lights and iPhones. Because rare Earth minerals are difficult to mine economically, it poses an interesting challenge to the world markets.
When one country mines substantially all of these minerals, it could create a shortage if it does not export them. That's exactly what China is proposing. It wants to impose a strict quota on the export of these minerals. EU Trade Commissioner Karel De Gucht claims this gives China an unfair competitive advantage in the marketplace.
"China’s restrictions on rare earths and other products violate international trade rules and must be removed," Mr De Gucht said. "These measures hurt our producers and consumers in the EU and across the world, including manufacturers of pioneering hi-tech and green business applications."
U.S. Trade representative Ron Kirk claims that the Obama administration wants to make a strong case against China's restrictions because:
"America's workers and manufacturers are being hurt in both established and budding industrial sectors by these policies. China continues to make its export restraints more restrictive, resulting in massive distortions and harmful disruptions in supply chains for these materials throughout the global marketplace."
China claims that the quota is so generous that it isn't really a quota at all. Last year, China only exported 49 percent of its quota. But there is an issue of whether China is legally allowed to restrict exports. Under the WTO, goods may not be subject to export restrictions. The WTO does not prohibit duties, but it is unclear whether China's 42 percent tax on exported metals qualifies as an export restriction or an export duty. If it is considered a duty, then China may not be in violation of the WTO's rules at all.
China claims that it must curb its exports due to environmental concerns. Rare Earth minerals are often associated with radioactive materials, making them somewhat difficult and expensive to mine. China is also concerned about the effect of mining on the environment. It believes that imposing restrictions will protect the environment and domestic supply of these minerals.
Finally, China is urging other countries to start mining and producing these minerals. Since China produces most of the rare Earth minerals, it has substantial influence on the marketplace. If other countries were to start producing, it would decrease dependence on China, diversify mineral sources, and introduce more competition to the marketplace thus potentially driving prices down while simultaneously increasing supply.
For its own part, China benefits by any restriction it places on exports. It can make use of its minerals domestically and expand the industrial scale of new materials made with rare Earth minerals.
How Will This Affect Markets?
Markets are highly sensitive to information. If there is a perceived scarcity, it could drive prices upwards. However, it is unlikely that any trade restrictions or duties will seriously affect markets for several reasons. First, China's imposed quota is not much different from the quota it imposed in 2011. Since it didn't meet the export quota last year, the effect this year may be the same. As long as there is not a spike in demand for rare Earth minerals, the market may not even notice anything has happened at all.
This is good news for consumers, but may not be good news for investors. A tighter supply usually means higher prices, but without a perceived scarcity in the market, there's nothing to drive up prices.
(c) 2013 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.