Another Chinese Resource Grab

The stakes just got higher in the 3-D chess game China’s playing for natural resources. On one dimension, the Middle Kingdom is on the offensive. But on another, it’s playing strictly defense…

Beijing is ordering state-owned businesses to explore a bid for PotashCorp (POT), the Canadian fertilizer giant that’s already fending off a hostile bid from BHP Billiton, the Anglo-Australian mining giant.

Just a quick reminder of the significance here: You can’t run a modern farm without fertilizer. And you can’t have fertilizer without three main ingredients…

Potash (POT is the world’s No. 1 producer)
Phosphate (POT is the world’s No. 3 producer)
Nitrogen (POT is the world’s No. 3 producer).

Still, this is not another thread to the “China buys the world” story line. This is a defensive move. China fears BHP gaining “too much” pricing power in the world potash market. Already, BHP is on track to generate 15% of world potash production by 2020. Add POT and the number would be more like 35%.

Thus, the Chinese state-owned firm Sinochem has hired HSBC for advice on how to proceed with a bid for POT. And according to Reuters, Beijing is quietly pushing a Canadian pension fund to submit its own bid.

That latter move would undoubtedly go over better in Ottawa. The Canadian government has no qualms about letting China buy into the Alberta oil sands (Sinopec is buying a 9% stake in the region’s biggest deposit). But POT is a bridge too far for the Canadians. It’s liable to generate the same kind of static China got from Washington in 2005 by bidding for Unocal.

But on another resource front, China is pressing its advantage. The mainstream is finally catching up to something we’ve been writing about for years…

“China’s monopoly on elements used in computer disc drives, electric cars, military weapons and other key products could mean a crisis for the West,” says a UPI article this week.

“Behind the rise of resource-poor countries like Japan, South Korea and China into industrial giants,” reports The Economist, “has been the readiness of other countries to sell them critical commodities, albeit sometimes at excruciating cost. An unfolding collision around a group of elements known as ‘rare earths’ is seen by some as a test of China’s willingness to reciprocate.”

“China defended its controls on exports of rare earth,” Bloomberg reported last week, “after Japanese officials raised concerns about supplies of the raw materials used in the manufacture of products from cell phones to radar.”

If you’re new to all this, here’s the skinny: “Rare earths” comprise 17 elements used in everything from iPods to guided missiles. Depending on whose estimate you see, China controls 93-97% of world production.

“The rare earths issue is more than just an investment story,” says Energy and Scarcity Investor’s Byron King, who first alerted us to rare earths in early 2008, “although I believe that smart investors can make a serious killing over the next couple of years.

“Rare earths also embody something about the national cultures of China, versus the US and other Western nations – Canada, Australia, Japan, members of the European Union. My view is that competency in the rare earths space is an indication of where any nation plans to go in the next 50 or 100 years.

“Yes, rare earths are THAT critical to the next generations of technology, in things like energy, metallurgy, materials and environmental control. If a nation ‘does’ rare earths, that nation will prosper in the coming decades. If a nation neglects rare earths, that nation is making the collective decision to decline into the backwaters of the future global economy. It’s a nation in decline. Rare earths embody the Chinese concept of a ‘sunrise’ nation, versus a ‘sunset’ nation.”

Addison Wiggin
for The Daily Reckoning