Christmas a tad late but better than never!
I must admit I was getting a bit nervous with all this talk of China cutting its exports by a significant amount for 2011 which would have been very different than my estimate of a very small drop in overall quotas. I have been saying for months that it is not in China’s interests to cut quotas given the effect we have seen from their previous cuts and how they had failed to add materially more value to China’s coffers (certainly not enough to make all the fuss foreign governments made, worth it). If China had cut significantly, it would have made me go back to redrawing my hypothesis and taking a different look at what drives their agenda. Phew! No one was more relieved than I when I saw that H1 2011’s export quota was over 14k.
Relief turned to amusement when I started to see how this was all playing out in the media. If you recall, the last quota cut the media went on a tear comparing H2 2010 to H1 2010’s number and the incredible 70% drop! This time the media compared the H1 2011 number to the H1 2010 number and said that quotas dropped yet again. If you had simply used their methodology and compared the recent quota to H2 2010, then you would have said quotas increased by 82%! Yes, an increase?! But no, no, the media gurus would frown upon such a thing that would not make headlines so they conveniently changed their methodology to reflect what they wanted to hear.
What was also interesting is that they increased the number of companies that received quotas. That is fairly significant as I see this as a sign that China was willing to hear and review comments that perhaps they had shrunk the industry too quickly and those that had quotas were making a very large windfall from the increased value so they decided to increase the number of players to increase the competition and perhaps lower the cost of quota surcharges. The effect of this remains to be seen but I will be watching it closely. I should be finished my analysis of last month’s export #’s soon so stay tuned.
I now have exited my long positions and am just starting to put on some small shorts… I will wait to see what actual rare earth prices do before I get too large but I see this as confirmation that China’s export policies are not the machinations of some crazed group looking to control the world through its policy on strategic metals. They are like the rest of us, they are looking to preserve resources, maximize revenue potential and are quite logical indeed. Could things change? Yes, definitely… they could cut export quotas in the second half of 2011 especially if they saw that demand was weak and that quotas may not all be used again, but they could also increase quotas using that same logic. If you immediately dismissed that last point, then again, you should do a gut check to see if you are looking at things in a biased manner or not. It could save you some real dough when investing.
All the best in the New Year!