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A world-shaking event occurred this week in the global financial arena, and its impact will be felt for years to come. It will yank the wind straight out of the U.S. dollar’s sails and force a fundamental de-valuation of assets down to emerging-market levels.
Five leading nations — Brazil, Russia, India, China and South Africa — are starting their own financial system with a development bank funded exclusively by their nations.
They aim to establish an easy convertibility of currency (the real, ruble, rupee, renminbi and rand, respectively) and a focus on building long-term business relationships among themselves.
This isn’t just some emerging-market version of the euro zone. These up-and-coming economic leaders are opening the doors of opportunity for emerging-market companies that are positioned to challenge the global giants in their respective industries.
As an investor, you can’t afford to ignore this friendly meeting of the BRICS. (Note the fairly recent addition of the “S” with South Africa.) Here are three reasons why these countries are banking on a declining U.S. dollar and lessening U.S. influence … and why it may benefit you to do the same in the very near future!
Reason No. 1 : With this, the BRICS are set to assume pole position in global financial governance.
BRICS nations represent nearly half the world’s population. Two of them are already among the top five economies in terms of purchasing power parity. (That is, an “exchange rate” of sorts as measured by the amount of money needed to buy the same goods/services in different countries). Four are in the top 10.
The plan strengthens financial cooperation among the BRICS’ development banks. This comes as leaders from Brazil, Russia, India, China and South Africa are seeking a bigger say in running the International Monetary Fund and other multilateral bodies to match their rising economic heft.
But these are not all investment-grade countries that can issue bonds to fund a new bank. One suggested solution is to dedicate a proportion of BRICS members’ foreign reserves to a trust fund that would back-stop the borrowed capital.
In the case of the World Bank, the total paid-up capital is around 10% while the rest is AAA-rated, “callable” capital. To enhance the creditworthiness further, existing multilateral banks and other Western countries could also be given minority stakes.
If you consider that these five countries now hold over $4 trillion in foreign currency reserves, the creation of this type of bank could mean some very serious contributions of capital. And this is clearly going to make these fast-growing countries, well, grow even faster!
Already, The IMF projects 2012 economic growth at 3% in Brazil; 3.3% in Russia; 7% in India; 8.2% in China; and 2.5% in South Africa. In contrast, the U.S. growth this year will be 1.8% while the 17-nation euro area will shrink by 0.5%, according to the IMF estimates released last month.
And trading in local currencies will strike a blow at the U.S. dollar and euro as a reserve currency, increasing the role of China’s, Brazil’s India’s and even Russia’s currencies relative to the U.S. dollar and the euro. This in turn would make it even easier for these countries to sign more-favorable transactions with other parties that would have normally demanded dollars.
Reason No. 2 : This will also have real production and political effects.
Don’t assume this is just trade finance for only agricultural and natural-resource products.
Brazil will make a special effort to show that the country’s economy is more than just commodities and raw materials. Some of the businessmen traveling with the president will be from cutting-edge technology corporations.
Reuters is indicating that Brazil may be about to choose France’s Rafale fighter jet as the new aircraft for its military — at least a $4 billion deal from this emerging-market player that’s eager to become an economic superpower. If the deal goes through, it will come directly on the tails of India’s decision to buy 126 of the company’s warplanes.
Speaking of India, its relationship with the U.S. administration is better than ever before. However, there’s no guarantee that differences on some sensitive issue in the future won’t push the U.S. toward sanctions that could curtail this development or create other support issues. A conflict with Pakistan could be an example. Likewise, Brazil’s clear support for Cuba and Venezuela could at some point create similar problems if they selected the U.S. option.
More importantly, though, it’s extremely interesting that India and Brazil are discussing a military accord, since each country could complement each other in the industrial sector.
In addition to modernizing its fighter jet fleet, Brazil is seeking to obtain a transfer of software technology for the nuclear submarine that it is planning to build in partnership with France. And India officially rejoined the nuclear submarine operators’ club when the Russian manufacturers handed over to an Indian crew the Nerpa, in Russia’s Far East.
These and other proposed intra-BRICS initiatives like improving global governance will not only contribute to enhanced intra-BRICS trade and investments, but they would also facilitate growth in difficult economic times for these countries.
Reason No. 3: It’s no surprise — the winners are the top emerging-market industrial and technology companies.
These developments and the new financial arrangement will create many new investment opportunities for investors that did not exist before AND strengthen some that are already available.
Keep in mind, though, that this financial alliance won’t be the easiest thing to implement. There will be points where these countries disagree.
For example, under intense pressure from the Russian government, India may consider working out a solution to grant some relief to Sistema Shyam TeleServices Ltd. According to official sources, SSTL’s case may be treated differently from others whose licenses were ordered to be canceled because it is the sole operator based on CDMA communication technology.
If you would like to follow these stories, I encourage you to take my Emerging Market Winners newsletter service for a risk-free test drive. As a member, you can easily follow the growing list of public companies that will benefit from this tectonic shift in focus and resources among the world’s fastest-growing emerging economies.
Rudy Martin, editor of Emerging Market Winners, is widely recognized as an authority on stock and ETF investing. With more than 25 years of investing experience, Rudy started his investment career by co-managing a $2 billion private equity portfolio for Transamerica. He also served as an analyst for DeanWitter and Fidelity Investments, and research director of a quantitative research firm that is now part of TheStreet.com. Recently he has been providing his investment ideas directly to a select list of global hedge funds as Managing Director of Latin Capital Management, an institutional money management firm with more than $180 million in assets under management. For more information on Emerging Market Winners, click here.
China, having dominated the world market, slashes output and exports, and profits for mining companies stand to climb smartly.
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As China’s role in the tungsten market dims, tungsten-mining companies will be basking in the warm glow of profits.
Tungsten gained fame as the filament in incandescent light bulbs. But because it’s the second-hardest substance after diamonds, more than half of it now goes to make cutting, drilling and wear-resistant parts.
China, which accounted for around 86% of tungsten production last year, has slashed both output and exports, sending prices on a tear. They climbed about 35% over the course of 2011 and remain 27% above last year’s lows.
Because there are no futures contracts on tungsten, investors should look to the stock of mining companies like Malaga (ticker: MLG. Toronto) and North American Tungsten (NTC.Vancouver) to take advantage of the shrinking supplies and growing demand for the specialty metal.
China came to dominate the tungsten market at the start of the last decade, as its super-cheap exports drove other producers out of the market. The Chinese eventually accounted for 91% of worldwide tungsten production in 2004, according to data from the U.S. Geological Service.
But Beijing’s growing need for the metal in its own industries—and its crucial role in military weapons—has prompted China to hoard more of it. Throughout last year, China accelerated its efforts to limit both production and exports, curtailing mines and expansion of existing projects while imposing higher duties on tungsten shipped overseas.
World tungsten production slumped 21%, to 72,000 metric tons last year, from the peak of 90,800 metric tons reached in 2006, according to the USGS. The downturn comes just as robust growth in energy extraction, mining and the automotive sector whets the global appetite for machine tools that rely on the super-hard metal. “Demand has been growing at a pace of about 6% to 7% for a few years, while supply has been almost flat because China reduced their production and shut down a few mines,” says Pierre Monet, the CEO of Malaga, which produces the metal in Peru.
TUNGSTEN IS TRADED IN POWDER FORM, known as ammonium paratunstate or APT.
Miners outside China are clamoring to take advantage of the market and are ramping up plans for extraction. But opening a new mine can take three to five years, and restarting an old one can be onerous, as well. However, the companies that survived the onslaught of low-priced Chinese exports—and continued to produce tungsten—now are poised to profit. Malaga and North American Tungsten have mines in place and are gearing up production. Both are penny stocks, a variety of investment usually suitable only for the adventurous. But in this case, this is about the only way that small investors can invest in the metal. And the timing looks right.
Says Roskill: “Very few of the significant new tungsten projects are expected to deliver any substantial tonnages of tungsten in 2012, so the market will be relying on existing producers to cope with any growth in demand.”
By: TATYANA SHUMSKY
Rare earth minerals (REEs) news does not generally capture headline news of major newspapers or broadcast media. That is not to say that the 17 or so extremely rare minerals are not important. In fact, they are critical to many products, both industrial and consumer. The use of REE varies from commercial to military applications and hence the overwhelming concentration (97 per cent) of these minerals in the People’s Republic of China has prompted American policymakers to treat the subject as a matter of national security.
In many respects, the matter of REE hit world headlines when The Independent of the UK revealed in late 2010 that China could be cutting back on supply of two metals in 2012, primarily to meet its domestic demand. This has precipitated a mad rush by some of the world’s largest economies in Western Europe to look for alternative sources as far and wide as South Africa to Greenland. What makes REEs so precious is that they are used to produce many components and products we have come to take for granted. These include: Dysprosium – helps make electric motor magnets 90 per cent lighter; Terbium – makes electric lights 80 per cent more efficient; Praseodymium – used to make lasers and ceramic materials; Gadolinium – used to manufacture computer memory (RAM). Industrial minerals such as Ytterbium (used to make infrared lasers) and Erbium (essential to the manufacture of vanadium steel), whilst other metals help produce wind turbines, solar panels, hybrid car batteries and fibre-optics, all play a vital role in churning out products that are crucial to one industry or another.
According to a United States (US) Congressional report on REE published in late 2011, the global demand for REEs stood at 136,100 tons in 2010 with annual global production standing at 133,600 tons. It was estimated that by 2015, global demand could reach 210,000 tons per annum. While the Industrial Minerals Company of Australia (IMCOA) puts that demand at a more conservative 185,000 tons in the year 2015, the fact remains that China’s output is estimated at no more than 140,000 tons. What is evident from the data presented above is that the balance of 45,000 – 70,000 metric tons of REEs will have to be sourced from elsewhere to feed the world’s voracious demand. At this juncture, it remains unclear as to where such material can be found, in sufficient quantities to feed demand, especially in light of the fact that mining rare metals have proved ecologically disastrous for China. Hence, whilst it may be ‘politically’ and ‘economically’ acceptable for China to go ahead and extract these metals at whatever cost to the environment, it may be a whole different issue for countries like South Africa which have significant untapped deposits.
The adverse effects of overdependence on a single source for such vital resources are already evident in the global geopolitical scene. When the Obama administration announced in early 2010 of arms sales to Taiwan worth US$6.4 billion, an article in Shanghai Dongfang Zaobao, a pro-Chinese Communist Party paper, proposed the banning the sale of REEs to American companies as retribution. Although the threat did not ultimately materialise, it did help wake up Western capitals to the dire prospects of a potential clampdown on exports by China. Although China controls about 97 per cent of the world’s current output of REEs, it certainly does not have all the deposits. According to the United States Geological Survey (USGS), China’s share of reserves stands at 55 million metric tons out of 110 million metric tons. The US has around 13 per cent followed by South Africa and Canada. Other potential players include Australia, India, Russia, South Africa, Brazil, Malaysia, and Malawi.
Unlike China, the US has not sufficiently developed this industry. The supply chain for REEs includes mining, separation, refining, alloying and manufacturing (devices and component parts). The Achilles heel for the US is its lack of refining, alloying, and fabricating capacity to handle any type of rare earth production. The end result of this lack of investment and interest in such a crucial sector translates into the US (and indeed almost all other nations) is that it must source practically its entire need for REEs from China. This gloomy scenario has forced the Congress into action. A number of legislations have been brought forth in the 112th Congress that range from ‘H.R. 1388, the Rare Earths Supply Chain Technology and Resources Transformation Act of 2011′ which hopes to re-establish a competitive domestic rare earths supply chain with the Department of Defence’s Logistics Agency, to the ‘H.R. 1314, the Resource Assessment of Rare Earths (RARE) Act of 2011′ that directs the USGS to “examine the need for future geological research on rare earth elements and other minerals and determine the criticality and impact of a potential supply restriction or vulnerability”.
Indeed, capitals across the industrialised world have now been sufficiently alarmed and the search for new sources of REEs is on in full swing. As stated above, sources of known deposits are already known. The tricky question of extracting the rare metals under acceptable terms to the environment remains, till date, a major challenge. One can only hope that alternative sources of supply can be found so that we can move away from mono-sourcing of such metals. For a disruption in the supply chain of REEs could spell disaster for the global economy, already reeling under sustained recession that is looking more and more like the ‘great depression’ of the 21st century.
By: Syed Mansur Hashim
HONG KONG (AP) — China is poised to overtake India to become the world’s biggest gold market this year as rising incomes fuel demand for the precious metal and a weak rupee diminishes Indian purchases, an industry group said Thursday.
The amount of gold bought in China rose 20 percent in 2011 over the year before to 770 metric tons, the World Gold Council said in its annual report. That put China behind only first-place India, where 933 metric tons were bought.
Worldwide, the amount of gold purchased rose 0.4 percent to 4,0671 metric tons worth $205.5 billion.
The council said it’s “likely that China will emerge” as the world’s largest gold market for the first time in 2012.
Rising incomes in China, which is the world’s No. 2 economy, have resulted in a surge in demand for gold jewelry and other luxury goods. China became the world’s largest market for gold jewelry in the second half of 2011 as demand rose in every quarter, the report said.
Gold bars, coins and other gold-backed products are also popular because of a lack of other investment options in China.
The long-term rise in the price of gold has also made it a popular hedge against inflation — gold hit a record nominal high of $1,891.90 an ounce in August, though prices have fallen since then. Gold futures for April delivery ended trading in New York on Wednesday at $1,728.10 an ounce.
Central banks, many in developing economies, also boosted gold sales as they sought to diversify their growing piles of foreign currency reserves. They bought 439.7 metric tons of gold last year, up from 77 metric tons the year before and the highest amount since 1964, the report said.
The poor performance of China’s stock and property markets — the other two main choices for Chinese with money to invest — is boosting the popularity of gold as an investment, said Albert Cheng, a managing director at the London-based World Gold Council.
The Shanghai Composite Index is down 20 percent over the past year while house prices are starting to fall after authorities put in place curbs to cool an overheated market.
Strong Chinese demand for gold also helped sales leap 33.5 percent last year in Hong Kong, a popular destination for wealthy mainland shoppers because of lower taxes in the semiautonomous Chinese territory.
Demand for gold jewelry in India, meanwhile, fell in the second half of 2011 because of the weakening rupee, which made gold more expensive.
Indians also grappled with high inflation last year that ate away their purchasing power, so they bought smaller amounts of gold, Cheng said.
ISTANBUL, May 4 (AFP) – Finance ministers from China, Japan, South Korea and the Association of Southeast Asian Nations (ASEAN) agreed Wednesday to expand their system of bilateral currency swaps under the Chiang Mai Initiative to a more multilateral system. The ministers, meeting as the “ASEAN-plus-3″ on the sidelines of the Asian Development Bank (ADB) annual meeting in Istanbul, said this would make the Chiang Mai Initiative a “more effective and disciplined framework.” Under the currency swaps, an Asian country hit by a foreign exchange crisis like the one in 1997 could borrow borrow foreign currency — usually US dollars — from another country to bolster its reserves until the crisis had passed. An ADB analyst remarked that Wednesday’s accord was a step towards setting up an “Asian Monetary Fund,” although such an institution might never actually be created.
In a joint press conference, the 1O ASEAN and three East Asian financial ministers also called for a review of the quota of Asian countries in the International Monetary Fund (IMF) “to properly reflect the current realities and their relative positions in the world economy.” The 13 ministers said an economic surveillance system would be put into place along with the Chiang Mai Initiative framework, to detect irregularities early and apply swift remedies. They also said a collective decision-making mechanism would oversee the current system of bilateral swap arrangements “as a first step towards multilateralization.”
This would make it easier to activate the bilateral swap arrangements in case of an emergency, the ministers said in a joint statement read after their three-hour meeting. Crisis-hit countries would also be able to draw down as much as 20 percent of the money under the bilateral swap arrangements without having to go through the IMF. Under the current arrangements, countries that draw more than 10 percent under their swap arrangements must have an IMF-supported program in place. The decisions of the ASEAN-plus-3 group apparently followed recommendations made during a meeting of the Chinese, Japanese and South Korean ministers a day earlier. Previously, the initiative launched in Chiang Mai, Thailand, in May 2000 involved only bilateral swaps but the Chinese, Japanese and South Korean ministers said they would look towards expanding this into multilateral swaps involving three or four countries. Asian countries had earlier proposed the creation of an Asian Monetary Fund after the 1997 fiscal crisis but the United States and the IMF had strongly opposed this. Chinese minister Renqing Jin said his country had already agreed to “double the scale of its currency swap,” from its current level.
However, when asked if they were setting up an Asian Monetary Fund, Japanese minister Sadakazu Tanigaki replied, “only the Chiang Mai Initiative was discussed”. The ministers said the initiative had been very helpful in maintaining the financial stability of Asian countries even if there had been no repeat of the 1997 crisis. Masahiro Kawai, special adviser to the ADB president, who monitored the ASEAN-plus-3 meeting, said the ministers wanted to increase the effectiveness of the Chiang Mai Initiative which now covers 16 bilateral swap arrangements. He called it a “step towards multilateralization,” adding that a “de facto Asian Monetary Fund,” may eventually be created. He said the United States and the IMF had opposed such a fund in the past partly due to fears it would increase the risk of moral hazard. But Kawai said this was why the ministers wanted to increase the surveillance function of the Chiang Mai Initiative. He remarked that in the past, China had not joined the move to create an Asian Monetary Fund and that if it joined with the other Asian countries, they might be more successful. mm/wai
Tungsten is an essential component in many industrial applications including drilling & cutting tools, electronics and specialist steels. The European Union categorises tungsten as a “critical raw material”. China currently produces 85% of the world’s tungsten but their factories are ravenous consumers and China is a net importer. USA, Europe and Japan consume 55% of world tungsten, but produce only ~5%. It should be no surprise that tungsten prices have surged in the last year, while many other commodities have experienced price decline. Image Link: http://www.metalinvestmentnews.com/wp-content/uploads/2011/12/PLY1-Dec.jpg Tungsten is currently selling for $20 a pound. New growth markets include nickel-tungsten alloys which can substitute for gold-nickel plating.
Playfair’s tungsten properties contain an estimated 100 million pounds of 43-101 compliant tungsten, and significant additional historical resources. These resources have potential for expansion.
Tungsten is a low profile commodity. There is no tungsten ETF, and few pure plays. Outside of China only two publicly traded companies currently produce tungsten: Malaga (MLG-TSX) and North American Tungsten (NTC-TSX). With four high-grade Tungsten deposits, Playfair Mining (PLY-TSX) is highly leveraged to rising prices and looming tungsten shortages. Image Link: http://www.metalinvestmentnews.com/wp-content/uploads/2011/12/PLY2-Dec.jpg
“We feel very fortunate to have 4 high grade tungsten deposits at a time when the price of tungsten has started to move sharply higher,” states Don Moore, Playfair CEO, “We acquired these projects when tungsten prices were depressed. China has an ironclad grip on the market. It’s not surprising that we are starting to see some serious interest from large tungsten end-users who need to get stable supply from outside of China.” Image Link: http://www.metalinvestmentnews.com/wp-content/uploads/2011/12/PLY3-Dec.jpg Tungsten is an essential industrial product but typically insignificant on a cost basis. Like the salt in a bag of potato chips – the price of salt could triple and the bag of chips would only increase a penny. But you can’t sell chips without salt. So with China slurping up most of the global supply – tungsten could see dramatic price increases with little demand destruction. Playfair’s veteran team of Donald G. Moore, Neil Briggs is augmented by Director James Robertson who was a principal in Primary Metals, a tungsten producer taken out by Japanese giant, Sojitz Inc.Judging from public statements by Playfair’s management, the strategy may well be to partner with a tungsten end user to help finance the project into production.
In addition to the compliant resources at Grey River (16.2m lbs) and Risby (89.4m lbs), Playfair has historical resources of 18.5m lbs at Lened and 5.3m lbs at Clea. Four high grade Canadian deposits: Grey River representing near term production potential, Risby offering massive size potential and all offering room for exploration upside.
Grey River, located on the south coast of Newfoundland, consists of nine mineral claims covering 1,750 hectares. The Grey River tungsten veins are typical fluorite-rich wolframite-quartz greisen vein deposits. A 1984 GSC Economic Geology Report lists the Grey River deposits as “one of the largest typical wolframite deposits in Canada” and states “It would be remarkable if there were not many more tungsten occurrences’ [on the property].” The Grey River deposit sits at tidewater in an ice free, deep water Atlantic port that offers year round shipping.
Risby is an advanced stage deposit in the Yukon accessible by a 25 km tractor road from an all-weather highway. The property is located approximately 55 kilometres west of Ross River and is comprised of 38 quartz mineral claims, all 100% owned by Playfair Mining.
The property was worked on from 1968 to 1982 by the Caltor Syndicate and Hudson Bay Exploration and Development Co. Ltd. Together their exploration efforts include 48 diamond drill holes (7,057 metres), geological mapping, trenching, stream sediment sampling and ground geophysics (magnetometer and EM surveys). Recent work by Playfair includes diamond drilling, resource expansion and a NI 43-101 compliant inferred resource calculation of 8,537,000 tonnes of 0.475% WO3 at a 0.2% cut-off.
Despite surging tungsten prices, Playfair has been hit hard by tax loss selling is currently trading close to all-time lows at $.07. It has a market cap of $5.4 million. The British Geological Survey (BGS) has tungsten #4 on its “Risk List” stating that it is critically vulnerable to supply disruption. With 122 million fully diluted shares and 100 million pounds of 43-101 compliant tungsten on the books – worth about $2 billion at current prices – Playfair is definitely worth a closer look.
Source: Metal Investment News