Morning Call: China cuts rare earth export quotas

0 CommentsThursday • January 12, 2012 • by alwaters

January 12, 2012

Global Markets

After drifting along in negative territory all day yesterday, US stocks staged a modest comeback late in the session. Traders are having a hard time maintaining any momentum, after the Dow reached its highest level about five months on Monday. The Dow finished just 13 points lower, while the S&P and NASDAQ managed to finish in positive territory.

Fitch Ratings warned of worsening conditions if the European Central Bank did not take more action to support the Euro and by buying troubled euro zone debt. Slow but sure, however, Wall Street has managed to decouple itself from the situation in Europe, as traders try to focus on positive corporate earnings and economic data here in the US.

New reports suggest that Europe’s banks are just sitting on the ECB’s €489 billion ($625 billion) cash injection into the banking system. The central bank had hoped to improve credit availability, but a cautious tone in the financial system has led the banks to hoard the cash instead.

On the economic front, it looks as though Germany’s GDP contracted about 0.25% in the fourth quarter, but will still hold on to a strong 3% growth for the year.

A bond auction in Germany saw incredible demand yesterday. The Bundesbank had set a maximum target of about €4 billion in five-year notes but received bids for €8.97 billion.

Gold & Precious Metals

Gold finished modestly higher in a choppy trading session yesterday. Gold has shown resilience over the past few days; maintaining some upward momentum, despite a stronger Dollar in a mixed day for stocks.

A new report showing strong physical buying in China also boosted sentiment in the gold markets. China reportedly imported a record 103 tons from Hong Kong in November, a 19% increase from the prior month and a jump of 483% from the prior year.

For technical traders, the significance of the current rally is that gold has moved above its 200 day moving average. Gold had only recently fallen below that average for the first time in a long while and this will and confidence to the rally.

Energy and Commodities

A strong Dollar and a bit of uncertainty in the marketplace led commodities lower yesterday. Base and precious metals to hold up rather well, but most other groups declined.

Crude oil fell early in the session yesterday and essentially never recovered; finishing more than 1% to the downside. Although Middle East tensions continue to add support in the energy markets, sentiment was impacted by a disappointing inventory reports this week. The EIA data yesterday showed that US crude inventories had climbed by 2.21 million barrels last week, which shows some continuing weakness on the demand side. Gasoline stockpiles, on the other hand, jumped by 2.48 million barrels last week.

Uranium Investing

Uranium market prices continue to hold steady at around $52, where they have been stuck for quite a while. The entire energy market has been faced with many opposing factors over the past several months. Generally speaking, energy is driven by a balance of supply and demand and, with economic forecasts vague at best, traders in various energy commodities have had a hard time developing any momentum.

China’s Ministry of Environmental Protection has put together a draft of new safety rules for its nuclear industry. Once approved by the government, China may be ready to move ahead with new nuclear projects. No details of the draft have been released, but the ministry says that the new safety rules are “tougher” than earlier regulations.

One change is supposed to be a limit on the number of reactors built along the coast, as a result of concerns tsunami-related disaster in Japan. China currently is operating 15 nuclear reactors with 26 under construction. A total of 171 additional reactors are either in the planned or proposed stage.

Rare Earth Investing

In an effort to support softening rare earth prices in the marketplace, China has announced another cut in its rare earth export quotas. The Commerce Ministry announced a 27% reduction in exports for the first half of 2012. It should be noted, however, that China actually fell short of its quota last year, as weakening global economic conditions also reduced demand.

A new Energy Department report, however, suggested that several critical rare earth elements would remain in short supply in till at least 2015. The report highlighted dysprosium, terbium, europium, neodymium and yttrium as the key elements to watch.

China’s Ganzhou Qiandong Rare Earth Group has signed a joint venture agreement with Great Western Minerals Group to develop a rare earth separation plant in South Africa.

Germany is also getting into the game. German miner Deutsche Rohstoff has said it will develop an estimated deposit of 38,000 tons in eastern Germany. The subsidiary set up for the rare Earth project received €2.2 million from German investors and plans a public offering later this year. Exploratory drilling is planned in the Spring.

Molycorp recently announced that about 78% of its Phase 1 rare-earth production at its Mountain Pass, California manufacturing facility has been committed. Having a product sold before it’s reduced is certainly a positive development for any company. One thing that remains in question for Molycorp is whether they will be able to process the critical heavy rare earths that are likely to be in the greatest demand.

The future of rare earth profits will lie largely in the heavy rare earths. This does pose a problem for some would-be manufacturers, as the refining process is complex and expensive and, as such, prohibitive to many junior miners. Molycorp, for one, has solid potential in this arena but does not, as yet, possess the capability to process the “heavies.” It could pose a $500-$600 Million problem that has not been discussed openly.

Public Finance and Fixed Income

US 10-year Treasuries fell to record lows, below 2%, yesterday. 30 year bond yields also fell below 3%, in what was a big day for bonds. The Treasury saw record demand at an auction of $32 billion of three-year notes, where the bid-to-cover ratio was 3.73. The U.S. Treasury will auction a total of about $66 billion in new securities this week.

The bond market was strong despite a relatively flat day for equities. Many believe this is a matter of investors putting their money back to work, after sitting on the sidelines over the past few months.

A bond auction in Germany also saw incredible demand yesterday. The Bundesbank had set a maximum target of about €4 billion in five-year notes but received bids for €8.97 billion.

Spain and Italy are scheduled to auction about €17 billion ($22 billion) in debt today, which will be closely watched by the investing community.

International Currencies

Global currencies continue to fluctuate on a daily basis, as the Dollar bill strength throughout the day yesterday; gaining more than 0.5% on the Euro and more than 1% on the British Pound.

Many traders are still on the sidelines waiting for today’s meeting of the European Central Bank. Investors hope to get a glimpse of the ECB’s plan to support banks and the Euro.

Fitch ratings agency upheld France’s AAA credit rating, but also said that the European Central Bank should be doing more to resolve the debt crisis. The comments have soured sentiment toward the Euro yesterday.

Most activity in the currency markets over the next several weeks will be largely driven by sentiment toward Europe, which remains fragile. German Chancellor Angela Merkel and French President Nicolas Sarkozy stepped up their rhetoric toward Greece this week, insisting a solution must include a haircut for private bondholders and a deal for write-downs from banks that hold Greek debt. European leaders continue to meet regularly around the convent ahead of the next European Union summit meeting in Brussels on Jan. 30.

Economic News & Corporate Earnings

Economic Data:

• Initial Jobless Claims
• Retail Sales
• Business Inventories
• Fed Balance Sheet
Earnings Calendar:

• Materials Sciences
• Washington Federal
• Schmitt Industries

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Forward Looking Statements:
Information in the Morning Call will contain “forward looking statements” as defined under Section 27A of the Securities Act of 1933 and Section 21B of the Securities Exchange Act of 1934. All readers are advised to conduct their own independent research into individual stocks before making a purchase decision. In addition, investors are advised that past stock performance or portfolio performance is no guarantee of future price appreciation or performance