Chromium: Are Chinese Off-Takes About to Take Off? – by Jack Lifton (May 11, 2006)

This article was posted on www.ResourceInvestor.com, a free service for the global community of individual and institutional investors, financial and mining professionals, and other stakeholders who can use the website for important research on natural resources investment strategy, on May 11, 2006.

Jack Lifton is the Co-founder and Director of Technology Metals Research since June 2010. Mr. Lifton is also an Independent consultant, focusing on the sourcing of nonferrous strategic metals. His work includes exploration and mining, and the recovery of metal values by the recycling of not only metals and their alloys but also of metal-based chemicals used as raw materials for component manufacturing. Jack Lifton’s Blog: http://www.techmetalsresearch.com/

Chromium is necessary for the production of stainless steels, heat resisting steels and
superalloys  in that order, descending, of use in the world. Chromium has no substitute
in stainless steel or in superalloys. Jack Lifton, May 2006)

DETROIT (ResourceInvestor.com) — The Peoples Republic of China does not have the same economic system as the United States, although you would never know that by reading the American mainstream press.

The Chinese government, officially in the socialist phase of the path to true communism, practices what has become known as command and control economics. The current Chinese version of that system allows for (free) market economics to be practiced, to a degree, in the civilian products (consumer products we call it here in America) sector.

The command and control sector of the Chinese government has always been in charge of domestic natural resources production and of the sourcing of strategic raw materials by importation. The control mechanism is simplicity itself. You cannot export a natural resource from China nor import one without a national-government-issued license to do so. A further license is needed to receive foreign currency, and you must account for every bit of it, or to “buy” foreign currency from the (State controlled, even if not in some cases any longer directly owned) commercial bank to pay for your imported goods.

There is one more seemingly innocuous requirement: The transaction involving natural resources or strategic materials must be in the best interests of the Chinese people. “Best interests” is defined as being in total agreement with the policies set forth in the (latest) five-year plan developed and approved by the Central Committee of the Communist Party of China, the ruling bureaucracy and approved and enforced by the supreme executive authorities of the Chinese Communist Party.

So, when we read an Associated Press ‘business story’ headlined “China to Set Up Strategic Mineral Reserves,” we are really reading a political story. The bureaucrats in Beijing have determined that the strategic resource utilizing (free) market segment of China’s economy needs some reigning in and must be brought under further control. This is the opposite of what happens in a much less regulated but also somewhat mixed economy such as the United States.

In the U.S. the businessmen would be lobbying the government to stockpile resources while giving them, the businessmen unregulated access to the resources when ever they, the businessmen, desire to have access. In the meantime it would be the businessmen selling into the government stockpiles at the highest prices they could get and lobbying for subsidized lower prices when they want to buy from the stockpile. Chromium containing materials from the U.S. Government Stockpile are a good example of American strategic stockpiling. Many key items are out of inventory and at the current rate of “disposal” all will be exhausted in the next 15 years!

There is no secret as to why the Chinese government has decided to implement a strategic mineral reserves program immediately. This year China had two cost increases for strategic materials that were not predicted or in line with the expectations of the current five year plan: First of all, after a 71% increase last year, the global iron ore suppliers, negotiating in concert, came to the largest Chinese customers with a “demand” for a 20% increase. The Chinese government intervened in the negotiations saying that their role was purely “advisory.” The result was finally that a 10% price increase was “allowed.”

Second, a rogue copper trader working for the Chinese government’s “National Control Center” got carried away and sold 130,000 tonnes of copper short. When the market didn’t go the trader’s “way” an embarrassed Chinese government was forced to “cover” the trade by delivering 130,000 tonnes of copper from the national stockpile to a customer who had paid less than world market for it. The trader has been reassigned … probably to get first hand experience at working in a mine.

To the existing plan to immediately stockpile crude oil, natural gas and coal, the Chinese government has now added uranium, iron ore, copper, aluminium, manganese, chromium and potassium. The stated purposes are to stabilize supplies needed for booming industries, to improve controls over strategically important commodities and to adjust the market while guaranteeing the security of resource supplies – perfectly reasonable goals for a command and control economy.

Having noted the above facts I now want to briefly examine how the Chinese approach the above problems with regard to the indispensable strategic material chromium.

Take a minute to think about gold. Gold is industrially practically a useless metal, which means if the price of gold gets too high then end user manufacturers, other than jewellery manufacturers, will either stop using-and stop buying-it or will substitute a cheaper material. There are today no longer any industrial uses for gold in which it is indispensable.

The same cannot be said about chromium. Its usefulness is at the opposite end of the spectrum from that of gold. Chromium is necessary for the production of stainless steels, heat resisting steels and superalloys in that order, descending, of use in the world. Chromium has no substitute in stainless steel or in superalloys.

In 2005, the U.S. alone consumed 11% of the world’s new chromite ore production. No chromite ore was mined in the U.S. 95% of the world’s chromium resources are in South Africa and in Kazakhstan.

Today the Chinese import chromite principally from South Africa and covert the ore to ferrochrome in which state it is used as an additive by steel mills producing stainless steel and superalloys. China has political issues with Kazakhstan over the treatment of ethnic Chinese Moslem minorities in territory bordering Kazakhstan that have until now interfered with the chromite trade.

In northern China, the government has for years subsidized coal mining in order to give employment in poor regions. To use the coal the Chinese government has built coal-fired power plants in the region to produce electricity for local consumption. Some of this electric power is used to produce ferrochrome from imported South African ore.

Although subsidized coal, subsidized power and imported chromite have made Chinese ferrochrome expensive to produce the high world price for chromium has enabled the Chinese to export ferrochrome as a commodity to the world market. Domestic Chinese stainless steel production is still below domestic demand, so all of the ferrochrome produced in China has a ready market either domestically or globally.

The Chinese government has invested heavily in Zimbabwe in southern Africa particularly in the mining of platinum group metals, nickel and chromite. The Chinese are also assisting with both equipment and Chinese workers in the maintenance of and building of new logistics infrastructure in Zimbabwe in order to make, among other things, the production and transport of ores to embarkation points on the Indian Ocean more efficient.

For the rest of this article, please go to the Resource Investor website: http://www.resourceinvestor.com/News/2006/5/Pages/Chromium–Are-Chinese-Off-Takes-About-to-Take-Off-.aspx

 

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