1. (56)
T c v d Ho J 8 – 16, 2012
Gold&Discovery Fund
Aims to update investors on developments in the world of strategy metals – crucial inputs
to industry, defense and technology innovation
This week’s bulletin discusses the recently released Chinese REE export quotas, sees
demand for REE in South Korea drying up, briefly looks at a Russo-Chinese lithium joint
venture, and summarizes a PwC survey on scarce natural resources.
China quotas
In what I find to be a somewhat surprising move, China has revealed their 2012 export
quotas, and for the first time since REE have become important commodities, China will
not lower the amount of exports leaving the country this year compared with the
previous one.
For the number cruncher amongst us, the H1 quota has been set at 10,546 tonnes
(somewhat lower than this time last year), but the full year quota is cited to be ‘basically
level’ with that of 2011, with Bloomberg even calculating a slight rise from last year’s
level.
The surprise to me is the fact that quotas are not down significantly, despite clear signals
from China in the form of production stops, limited export licenses, a new invoice system,
additional taxes and a broadening of the goods subject to the export quota regime. All
these measures were, in my opinion, aimed at keeping the prices of FOB prices high
allowing the Chinese to capture downstream REE technology for a more value added and
permanent advantage in the sector. Perhaps the Chinese have taken the WTO allegations
to heart, and have opted to concede, favouring a lower international profile in a year of
China’s leadership changes.
Well, I believe the devil is in the details, as officials also unveiled a new system that would
split the quota into light (LREE), and medium-to-heavy (MHREE) categories. The lights are
more abundant, cheaper, and less rare, whilst the MHREE are more valuable, scarcer and
much more critical. Under the new system, the export of 9,095 tons of light minerals is
permitted in 2012, leaving a mere 1,451 tons for the medium-to-heavy category.
Until now, the absence of this segregation has meant that Chinese traders weighted their
exports towards the HREE, solely because their vastly higher prices meant more revenues.
This meant that traders would seek to first offload all of their HREE, until demand for
them was satisfied, before turning to the LREE. This is now being curtailed, in favour of a
system that will attempt to keep more of the elements for which China sees looming
shortages in the upcoming years, within the country. So although China’s case at the WTO
appears to be saved, the new system will leave the rest of the world with less of the rare
earths that are truly in demand, whilst flushing us with the type of REE that Molycorp and
1
Terence van der Hout Strategy Metals Bulletin; Jan 8 – 16, 2012
If you wish to receive this bulletin, please email me at: tvanderhout@zonnet.nl

2. Lynas have said they will be producing 26,000 additional tons of this year (satisfying two-
thirds of global demand currently supplied by China).
In all, these changes in quota policies will eventually lead to a mere trickle of REE exports
from China, keeping virtually all of the valuables within the country for the further
development of their industries. There will be no demand for nine-tenths of China’s REE
exports. The measures must therefore be considered a further step in China’s desire to
become the centre of green-tech and high-technology innovation, and not one
accommodative to the true demand of everyone else.
South Korea’s REE imports from China drop 48.3%
As we know, rare earth elements are important and often irreplaceable inputs to hybrid
and electric vehicles, wind turbines, liquid crystal displays and other day-to-day high-tech
equipment. Despite this importance, South Korea, one of the largest end-users of REE, has
seen a marked reduction of REE imports from China, last month. This comes not as a
consequence of lack of availability in China, nor because of any other supply constraints
that we have been reading and writing about during the last year. Rather, the suppressed
global economic environment has muted demand for luxury goods in general, affecting
the many products containing REE. In South Korea, companies were apparently able to
secure enough supplies on the price drawbacks over the summer.
Although demand for REE has shown annual growth rates averaging 8-10% over the last
decade, the 2008 credit crunch caused a massive break in the uptrend. This lasted just a
year, but the current lower demand is a clear indication that we are in similar straits. In
fact, by November, only about half the quota had been shipped out to buyers outside of
China, as demand has slumped considerably. Clearly we are delaying our purchases of
new automobiles, laptops and plasma TV sets as we wait for Eurozone and US financial
woes to dissipate, and the BRIC countries to return to their growing ways.
Russia and China open largest lithium battery factory in the world
The world’s largest lithium battery manufacturing plant opened in Russia, just before
Christmas. The factory is a joint venture between China and Russia, and is focused on
providing batteries for urban bus (and truck) transportation in the two countries. Where
subsidization of clean energy programs in both the US and Europe are being suspended
because of funds redirection or austerity measures, it is the BRICs that have taken up the
gauntlet of curbing their environmental degradation caused by the growing energy
consumption of a wealthier population.
China is rolling out the mass production and usage of electric busses as part of their 5 year
plan ending in 2015, and is aiming to build quick battery exchange stations rather than
developing recharging technologies. Liotech, the producer of the batteries, claims they
are capable of operating within a large range of temperatures, -45°C to +65°C which ought
to suit both the Russian and Chinese weather conditions, and the range is estimated to be
about 200 miles.
2
Terence van der Hout Strategy Metals Bulletin; Jan 8 – 16, 2012
If you wish to receive this bulletin, please email me at: tvanderhout@zonnet.nl

3. PwC surveys scarcity of metals
PricewaterhouseCoopers have reported results of a global survey on concerns in industry
about shortages in supplies of natural resources. Scarcity is a very real and current issue,
and is caused by the growing demand for materials, and political issues.
Executives in the automotive, chemicals and energy industries perceive themselves to
likely be hit hardest by scarcity of metals and minerals, in the next five years. The
renewable energy, automotive, energy and utilities sectors are already facing supply
instability, while those in the aviation, high-tech and infrastructure sectors expect
increasing disruption of supply by 2016. Chemical and high-tech companies were least
prepared for a supply disruption, mirroring to some extent the level of criticality (and lack
of alternatives) in these industries.
There is also a geographical divide. European companies are more concerned than their
Asian or American colleagues, and governments are much more aware of the issue in
Europe than elsewhere. This reflects the almost complete absence of natural resources on
the European continent, which, after millennia of natural resource exploitation, has
become almost completely dependent on imports from other parts of the globe.
Finally, firms said the problem is currently focused upstream. Suppliers were very much
concerned about scarcity of inputs, whilst customers generally saw much less of an issue.
This is exactly the crux of the problem for the rare earths. Clearly, with the current
economic downturn, end-users are not yet feeling enough of the pain to force them to
move upstream to secure supplies. Should various forms of quantitative easing return to
fashion and economic activity be subsequently revived, the supply issue may return with a
vengeance.
Twitter: @GoldDiscFund
www.gdfund.com
Disclaimer: The author is a researcher for the Gold&Discovery Fund, and neither he nor the Gold&Discovery Fund has
commercial ties to, or shares in, the companies reviewed, unless explicitly stated in the text. The information in this bulletin
is the author’s independent opinion of developments in markets and at companies, and hence may contain factual errors,
and may not reflect the opinions of the Gold&Discovery Fund. The content of this bulletin is not intended as an investment
recommendation.
Copyright: The information in this bulletin can be forwarded, cited or used otherwise, but only within the context as
intended by the author, and with complete reference to the source.
3
Terence van der Hout Strategy Metals Bulletin; Jan 8 – 16, 2012
If you wish to receive this bulletin, please email me at: tvanderhout@zonnet.nl