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BEIJING May 23 (Reuters) – China’s exports of rare earths fell by more than half in April from a year previously, detailed Customs data showed on Monday, despite headline official data that indicated a rise of 46 percent.
China exported 1,819 tonnes of rare earths in April, figures supplied to Reuters by China’s General Administration of Customs showed, a 53 percent decline from April 2010 and a 12.6 percent slip from the volume exported in March.
The exports were valued at $221.8 million free on board, giving an average of $121,933 per tonne according to a Reuters calculation.
That is almost a tenfold rise from the average export value a year previously, although it shows the first sign of export values levelling off since they began to soar last August, with a mere 2.4 percent month-on-month increase in the average value per tonne since March.
Previously the value per tonne had jumped by an average of more than $13,000 per month for eight months in a row, as China choked off exports of the minor metals, which are used in a wide range of high-tech applications, from aerospace to wind turbines to Apple’s i-Phone.
China, which controls about 97 percent of rare earth output, has angered customers in Japan, the United States and Europe by clamping down on production and sale of the 17 rare earth elements, citing a need to clean up highly polluting production processes and to stop illegal exports.
The crackdown, which cut exports by 62 percent in the first four months of 2011 compared to a year earlier, has been a windfall for rare earth miners and prospectors outside China, such as U.S. firm Molycorp Inc .
China’s Customs office has changed its treatment of rare earths exports in its standard “headline” data release to include products made from rare earths, making for a total of 5,675 tonnes in April and 18,614 tonnes in the first four months of the year.
But the year-on-year comparisons provided by Customs are based on last year’s exports of rare earths alone, resulting in an apparent 46 percent rise in exports and lower values per tonne.
The Reuters figures and value per tonne calculations are based on exports of rare earths excluding products. (Reporting by Tom Miles, editing by Chris Buckley)
By Tom Miles
BEIJING | Mon May 23, 2011 8:03am EDT
In 1976 I was managing an American subsidiary of a successful large US Company in Mexico. It had been a financial turnaround for our team. Cash flow had accumulated in our bank in Mexico and corporate didn’t want the money repatriated to the US. Although we had already paid a 35% income tax to the Mexican government, we would have to pay an additional 30% exit tax to repatriate the money. In addition, we would have to pay high fees for the peso/dollar exchange, in order to make the transfer. The company wanted to expand our successful business and so we decided to keep the money in Mexican pesos to be used for further expansion.
One morning, as my wife and I were on a trip driving on the highway, we heard a national message from the President of Mexico, Luis Echevarria, one of the most corrupt presidents in Mexican history. “It is a lie that we are going to devaluate the peso,” he said. I stopped at the nearest motel to make a collect call to the US headquarters and I asked my boss, the head of the International Division, to allow me to immediately open a new US dollar account in Mexico. I wanted to convert the pesos into dollars for deposit. My boss, laughing, asked me why I wanted to do that and I responded that the peso was going to devalue. He asked me how I knew this and I told him that the President of Mexico had gone on the radio and announced that rumors of a devaluation of the peso were false, which meant they were true. He continued to laugh but allowed me to do it.
I then called my CFO and directed him to go to the bank and get everything ready for me to sign leaving only the necessary funds to continue to operate. We immediately returned to Mexico City in time before the bank closed. Everything was ready for my signature, but the bank manager was rather bewildered and probably thought I might be overreacting.
One week later the peso was devalued from 12.50 pesos to $1 USD, where it had been for decades, to 26.00 pesos to $1 USD. A few days later it improved to 24.50 pesos to $1 USD. The reason for the devaluation of the peso was simply that it had been pegged to the USD for too long and they rose and fell in unison. Because of better economic conditions in the US, the dollar continued to go up in value and the peso increased in value artificially. Mexican goods were too expensive to trade with other countries and hence the devaluation, which allowed exports to increase. For the first time in decades the peso was allowed to float and since then it has been allowed to freely rise and fall against the dollar. The decision to devaluate the peso was made by the president, which made him unpopular, as well as his economic advisors, which included the Secretary of the Treasury and Chief of the Central Bank of Mexico.
Everyone in the country was in shock. People’s net worth had devalued more than 53% overnight. The value in savings accounts dropped in half and neither merchants nor consumers knew how to react because they had never been through something like it before. Luckily for me, I had also exchanged my money and my salary had been set in US Dollars when I signed my contract with the company to work in Mexico. For me, it was like getting a 100% raise, since for a long while; my house rent remained the same as well as utilities, clothing etc. I remember that on my boss’s next trip, he bought himself a couple of nice suits at a nice discount.
Businesses were unable to immediately raise their prices. They had to do it slowly, and through many sacrifices. The positive side was that the company had a loan in Mexican pesos for an expensive property and was able pay it off with the new dollars at, practically a 50% discount. Before the devaluation, we had been leasing other properties, some of which had expired and had been on a month to month basis. Thankfully, immediately before the devaluation, I renegotiated and signed some of the leases with modest increases for a term of 5 years. After the devaluation occurred, the landlords wanted to renegotiate these leases, but because of the terms, we enjoyed low rents for that period. Later, as we leased new properties, the owners introduced clauses tying the annual increases to the value of the US dollar, which appreciated every year until the recent fall of the dollar in the exchange rate.
Our attorney in his 50s, of German descent, who spoke English and Spanish with a German accent didn’t take my advice on the oncoming devaluation. After the devaluation, he was so desperate that he came into my office one day, accompanied by another attorney that worked for him, carrying an old-fashioned suitcase, which he placed on my conference table. He opened the suitcase, which was completely filled with high denomination peso bills. I had never seen that much cash in my life and I was completely surprised. He pleaded with me to accept the money right then and allow him to purchase shares in our company. I told him that this was not the proper procedure, but he asked me to consult with corporate headquarters and insisted I put the money in our safe. As I expected, corporate said no and much to his distress, I returned the money to him.
People were so desperate to exchange their pesos into dollars that the supply of dollars dried up and some, who had them, sold them at a premium in the black market. The situation was so dire that a presidential order was passed banning the banks from allowing customers to open US dollar bank accounts. A few years later, when the peso stabilized, this practice was reversed.
Of course, on my next trip to corporate headquarters, I was received like a conquering Roman hero. My boss kept asking me to tell other executives why I decided that the peso was going to be devalued. My answer was simply that I didn’t trust politicians and had decided that the president was telling a lie in his address to the nation. This, of course, was very funny to them after seeing the results.
Today, Mexico’s financial situation is very much improved and the peso has been appreciating against the USD. Mexico holds more than $120 billion in USD reserves.
As I am writing this, the USD index is at 75.71. This means the USD is already devalued 24.29% and most people don’t know what this means. At the latest G7 and G20 meetings, countries have been arguing that the USD must be dropped as the international currency because its decline in value is making the price of all commodities too expensive.
Commodities are priced in dollars worldwide and this doesn’t fare well for other countries where there is a growing unrest amongst the population. The world governments blame this on the US government for passing laws allowing the Federal Reserve to print trillions of dollars out of thin air. This money has been used to bail out the banks and to purchase US bonds that countries like China, Japan, Russia, etc. are refusing to continue to buy. The money received by the federal government is spent in the expanded military wars and countless pork barrel programs. The government is unable to control the budget deficits by cutting expenditures because of poor presidential leadership and irresponsible and politicized congress.
The US has agreed that something needs to be done. One of the most favored proposals at these meetings is to use a basket of currencies which is to include the USD and backed partly with gold to serve as a new world currency. This proposal would mean a devaluation of the USD of 50% for the US to be able to participate in the program. It is not clear if it is 50% off the current value or if it will be 100% of face value.
As long as we don’t repay our national debt, cut government spending, increase interest rates or stop the Federal Reserve from printing more dollars out of thin air, the plan to change the dollar from being the international currency will become a reality. Some countries are already using their currencies to trade with each other, especially in oil purchases, to bypassing the present purchase of US dollars to make the payments. Several countries are buying gold and silver to replace some of the dollar reserves and hedge the value of their dollar reserves. Mexico recently purchased nearly 100 tons of gold to replace some of their dollar reserves. We still don’t know how much American gold is in Fort Knox as no audits have been completed since the 1950′s. The rumors are that there are no gold reserves remaining. We know that the US mint is purchasing gold blanks from Australia to make American gold coins. Either way, this is bad news for the US dollar and also for any of us living in the US.
My experience with the peso devaluation makes it necessary for me to move my investments away from paper into physical gold and silver. I am doing this more as a defense mechanism to ensure my net worth is not devalued. Economic think tanks are already undergoing feasibility studies to predict the ramifications of the devaluation both domestically and internationally.
It is going to be a very tough time for the US and I anticipate the Mexican devaluation will pale in comparison to our dollar devaluation, not only to this country, but worldwide. What is the answer for Americans? Many feel that owning physical silver and gold in coins and bullion will serve as an increasing source of value with which to barter. In Mexico, the US Dollar was the logical answer since it was stable and had appreciating value at the time.
May 19, 2011
by Lone Ranger Silver
The silver market has been even more spectacular on the way down as it was on the way up. Since I claimed that silver was in a blowoff top on April 25, silver has lost 25% of its value. However, due to long-term fundamentals as well as shorter-term technical considerations, we believe it is time to begin scaling back into silver long positions.
Note how open interest swells and peaks during silver rallies, and bottoms during the bottom of corrections. The reason for this is that the open interest on silver futures rises or falls with the amount of speculators in the market. For example, the recent sharp dropoff in open interest indicates that many long speculators were liquidating their positions, causing a sharp fall in the number of open contracts.
However, silver’s rally on Friday brought a renewed uptick in open interest, which we believe may mean a return of Managed Money to silver. As denoted by the white dotted line, the aggregate open interest in silver futures appears to be in a long-term uptrend, albeit with a bumpy ride along the way. We have been waiting for Managed Money to return to their previous high of net length, but the recent silver rally was fueled almost entirely by retail ETF and physical buyers. Managed Money’s prescience in staying away from the silver rally after September 2010 was uncanny, but we believe the long-term fundamentals of the silver market will eventually draw them back in.
Ironically, while commodity markets sold off this week, bullish fundamentals for commodities actually strengthened. Jean-Claude Trichet’s dovish statements indicating that further rate increases were unlikely is further affirmation that developed economies have extremely limited ability to raise interest rates. The fact that even Trichet, the most hawkish developed economy central banker, is unwilling to raise rates more than nominally indicates the growth dilemma that the world’s major economies face: either maintain low interest rates, fuel speculative asset bubbles and fan inflation, or raise interest rates and risk renewed recession.
The US dollar’s recent weakness against the euro provided much of the last legs of the upward surge in commodities, but the unexpected US dollar rally on Thursday was too much for commodities to bear. The euro falling by 2% against the dollar unleashed the floodgates on selling by weak longs. However, going forward I firmly believe that both commodities as well as the dollar index will rally. While the dollar will continue to lose value against commodity and emerging currencies such as the Australian dollar, Canadian dollar, and Brazilian real, the dollar should do well against the euro, pound and yen due to the superior economic position of the US. In such a manner, the dollar as measured by the dollar index can rally along with strengthening commodity prices.
If further dollar index rallying causes more short-term pain for commodities, I would advocate being a heavy buyer of commodities, as fundamentals are only getting more bullish. As the market realizes that long-term fundamentals of commodities are unrelated to the dollar index, both can rally in tandem.
We would recommend scaling into a long futures position in silver, as well as the sale of put options. However, due to the extreme volatility inherent in an ongoing correction, investors should not take out their full position at once, but instead be ready to buy more in case of further correction. We view $30/ounce as a hard floor on the price of silver, and the purchase of silver futures anywhere between 30-35 as an attractive long-term entry point.
As a trade, an investor could buy the July silver futures contract for 36.145 and sell the June 40 call for $1. The net effect of the trade would be an entry price on silver of $35.145. The $30 strike price puts should be sold on silver during corrections, going out as far as the December 2011 expiration. The purchase of bull call spreads can also be explored by traders who wish to gain greater upside leverage to silver prices.
We continue to favor investment in SLW as the premier silver equity. Due to the high implied volatility of SLW and recent massive underperformance of SLW compared with silver, we view the sale of put options against SLW as a highly attractive trade. The January 2012 $35 put options could be sold for $6.25, giving an investor the effective entry price of $28.75 for SLW stock. On a long-term basis, $28.75 is an excellent entry point for SLW stock, and the investor will profit handsomely if SLW is above $35 upon expiration.
May 11th, 2011
By Anathan Thangavel