The macro-economic implications of the strategic metal supply

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The macro-economic implications of the strategic metal supplyChris Watling – CEO, Longview Economics

Twitter: Chris@Longview LinkedIn Group: Longview Economics – all welcome Website: www.longvieweconomics.com

204/12/23Twitter: Chris@Longview LinkedIn Group: Longview Economics – all welcome Website: www.longvieweconomics.com


204/12/23 2222

The Macro PicturePresentation to Objective Capital conference

Chris Watling, CEO, Longview Economics13th March 2012





304/12/23

Contents

1. Kondratieff Long Cycles2. Western Deleveraging – judging the unwind3. Asia & Commodities4. China & Rare Earths5. Conclusion

1. The Kondratieff Long Cycles


504/12/23

‘Super Cycles’: BONDSUS 10 year bond yields

Source: Reuters EcoWin

00 05 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 00 05 10

US

10

yea

r b

ond

yie

lds (

%)

0.0

2.5

5.0

7.5

10.0

12.5

15.0

17.5

May 1920 peak 5.58%

Trough 1941 - 49

Sept '81 peak 16.05%

8 yrs sideways move...

29 years Down trend (incl 8 yrs sideways)

32 yr uptrend

31 yrs so far

currently 1.94%

Long cycles: Bonds, Equities & Commodities


604/12/23

Secular US bond cycle

Length Equity bull Equity Bear CommodityBear

Commodity Bull

Falling yields

1920 - 1949 29 yrs 1920-29 1929-1951 1920-1932 1932-1951

Rising yields

1949-1981 32 yrs 1949-68 1968-82 1951-68 1968-80

Falling yields

1981- present

31 yrs (so far) 1982-2000 2000 - present

1980-2000 2000-present

Rising Yields

?

Table 1: Secular Long Cycles – Bonds, Equities & Commodities

Source: Longview Economics




704/12/23

Western Secular Bear Market - Ongoing

Evidence for 20 – 25 year long ‘super’ cycles exists in the history of equity markets in the Western economies

S&P500 (real terms) DJIA (Real terms)


1920 1935 1950 1965 1980 1995 2010

reb

as

ed

to 1

00

(1

94

0)

25

50

100

200

400

800

1600 Long term secular BULL & BEAR cycles

bull

bull

bull

bear

bear

bear

S&P500 & Dow Jones Industrial Average (both in real terms) 1910 - present



804/12/23

Long term ‘Super Cycles’: COMMODITIES

World, CRB, Spot Index, End of Period, USD

CRB index long term Monthly

Source: CRB, Longview Economics, Reuters EcoWin

1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

CR

B c

om

mod

ity

ind

ex (

loga

rith

mic

)

20

40

80

160

320

640

bear

bear

1920

1951

1968-71

1980

1999-2001

1932

bear

bull

bull

bull

The commodity super cycle (1910 – 2011, CRB index)

Commodity super cycles are ‘negatively’ correlated with Western Equity super cycles…

Secular De-rating Western Equities (based on Shiller PE ratio)

Table 1: Long term Secular trends – Equities & Commodities (& equity re-rating/de-rating periods)

Equity Trend

When? Commodity Trend

When? Equity valuation rerating/derating?

When? PE highs/lows Leveraging/Deleveraging*

Bear 1896 - 1920 Bull 1896 - 1920 derating 1901 - 1920 25.2x to 4.8x N/A

Bull 1920 - 1929 Bear 1920 – 1932 rerating 1920 - 1929 4.8x to 32.6 148% to 185%

Bear 1929 - 1932 or alternatively to

1949

Bull 1932 - 1951 derating 1929 - 1932 or alternatively to

1949

32.6x to 9.0x 185% to 167%**

Bull 1949 - 1968 Bear 1951 - 1968 rerating 1949 - 1965 9.0x to 23.9x **149% to 148%

Bear 1968 - 1982 Bull 1968 - 1980 derating 1965 - 1982 23.9x to 6.6x 148% to 174%

Bull 1982 - 2000 Bear 1980 - 1999/2001

rerating 1982 - 2000 6.6x to 44.2x 174% to 267%

Bear 2000 - present Bull 1999/2001 to present

derating 2000 – present 44.2x to 21.9x (current)

267% to 355%

Source: Longview Economics, Shiller, CRB commodities index – for further detailed analysis of the commodity super cycle see Longview Letter no 26 June 2008: “Commodity Super Cycle: Myth or Reality?”*Leveraging measured as total economy wide debt (excl financial debt) % of nominal GDP**NB different data sets pre 1949 & post 1949



1004/12/23

Long term valuations suggest: Secular Bear continues

S&P500 PE ratio calculated by the Shiller method (i.e. based on 10 year rolling historical earnings)

Long term average

Source: Shiller, Reuters EcoWin

1890 1905 1920 1935 1950 1965 1980 1995 2010

PE

ra

tio (

cycl

ica

lly a

dju

ste

d)

0

5

10

15

20

25

30

35

40

45

2000 peak

5x

6x

6.6x

currently @ 21x - above long term average levels

1982

1932

1920

1929 Peak

1965 peak

1901 peak

1937 peak

Long term valuation ratios (US equities) – Shiller PE ratio

Secular bull markets start with widespread negative sentiment towards equities, structurally low equity ownership levels and Shiller PERs of sub 10 ratios (e.g. 1920 & 1982)




1104/12/23

Contrasting Return Profiles:BEAR & BULL SUPER CYCLES

Investment approach shld be contrasted in each periodIn secular bears = important to trade on 3 – 6 month+ view

Period Bull/Bear

Returns (nominal

terms)

Returns (real terms)

Real DJIA index numbers (start to

finish)

Approx compound

annual rates

Average real GDP growth

1920 -29 BULL +429% +495% 35.5 to 210.3 +21.9% N/A

1929 – 1949/51

BEAR -56% -68% 210.3 to 67.2 -5.5% 3.9% p.a.

1949/51 – 1966

BULL +487% +426% 67.2 to 295.8 +9.1% 4.2% p.a.

1966 – 1982 BEAR -17.8% -73.1% 295.8 to 79.4 -7.9% 3.2% p.a.

1982 – 2000 BULL 1,322% +724.2% 79.4 to 654.4 +12.4% 3.7% p.a.

2000 - current

BEAR FLAT -18.4% (so far) 654.4 to present (currently 533.8)

n/k 1.6% p.a.


1204/12/23

Real Yields – negative (bubble valuation)

Constant Maturity Inflation-indexed, Breakeven Inflation

Constant Maturity Inflation-indexed, Yield

Bid, Yield

0


Feb

09

May Aug Nov

10

Feb May Aug Nov

11

Feb May Aug Nov

12

Feb

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Implied deflation

US 5 year, real, break-even & nominal yields

UK 10 year & 2016, real, break-even yields

UK 10 year index linked real yield series UK 2016 index linked real yields 0


Feb

2009

May Aug Nov

2010

Feb May Aug Nov

2011

Feb May Aug Nov

2012

Feb

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

McKinsey Country Debt totals


1304/12/23



1404/12/23

2. Western Secular Bear Market – Ongoing until:

Overarching theme: Bubbles need to be fully deflated – Excess removed/cleaned out of System – i.e. System needs to be reset, including:

1. Full deflation of Western Housing Bubbles (growth headwind)2. Government finances – back on (path) to sound footing (growth headwind)3. Households deleveraged (back to pre-bubble levels) – (growth headwind)4. Financial sector – Fixed/deleveraged/profit as % of GDP downsized – (growth

headwind)

2a. Western Housing bubbles: many still deflating



1604/12/23

2a. House Bubble DeflationAdjustment rel to trend

(% complete)

Trend to lows (i.e. overshoot downside)

Fall from peak (real terms, %)

Fall from peak (nominal terms)

Peak Source Inventory adjustment

US - FHFA 91% 17.5% (further from

trend)

24 16% 2006q4 FHFA 7 months supply (normal range 4 –

6 mos) – peak 12.4

US – Case Shiller

83.5% 17.5% (from trend)

39 32% Jun 2006 Case Shiller

As above

UK - Halifax

72.9% 44.4% (from trend)

26 20 2007 Q3 Halifax/HBOS

N/A (shortage of rental property)

UK – Nationwide

45.1% 49.1% (from trend)

18 10 2007 Q3 Nationwide N/A (as above)

Spain 72.7% 58.2% (from trend)

23 18 2007 Q3 Ministry of Housing

Ireland n/a n/a 46 45 Feb 2007 TSB/CSO



1704/12/23

US real house price index (rebased to 100 @ 1 Jan 1975)


1975 1980 1985 1990 1995 2000 2005 2010

US

re

al

hou

se p

ric

e in

dex

90

100

110

120

130

140

150

160

170

Peak '79

Trough '82Trough '75

Peak '89

Trough '95

Peak '06

+16% rise

14% fall

+16% rise

+58% rise

8% fall

Trend?

24.3% fall (real terms)

S&P composite 10 cities Case Shiller index in real terms (rebased to 100 in 1987)

Source: Case Shiller/S&P, Reuters EcoWin

86 88 90 92 94 96 98 00 02 04 06 08 10 12

Reb

ase

d to

100

I J

an 1

987 (

10 C

ities c

om

posite)

80

90

100

110

120

130

140

150

160

170

180

190

200

peak of 199.1 in '06

Currently 120.5

Current real terms fall from peak = 39.5%

Aug '89 peak

Feb 97 trough

Total fall 35% peak to trough in real terms

latest 120.5

US House price index (real terms, FHFA) US House price index (real terms, Case-Shiller)

Structural western economic growth headwinds: 2a. US Housing bubble – continues to deflate



1804/12/23

1. UK House prices – Bubble deflation

Real House prices index (using Halifax & GDP deflator, rebased to 100 1 Jan 1983)

Real House prices index (using Nationwide & GDP deflator, rebased to 100 1 Jan 1974)

Source: Reuters EcoWin, HBOS, Nationwide, Longview Economics

1975 1980 1985 1990 1995 2000 2005 2010 2015

Re

al h

ouse

pric

e in

dic

es (

Reb

ase

d to

10

0 @

1 J

an

198

3)

75

100

125

150

175

200

225

250

275

300

Trough '82

Peak '89

Trough '96

2007 peak

76% trough to peak 80s boom

38% bust

167% trough to peak boom - 1996 thro to 2007

+26% boom in 70s

Peak '79

Trough '77

15% fall

UK Real house prices London (real) house prices)

London house prices (N'wide) - inflation adjusted

London house prices (Halifax) - inflation adjusted


72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

Lond

on h

ouse

pric

es in

dex

(rea

l & r

ebas

ed t

o 10

0 19

84)

50

100

150

200

250

300

350


1904/12/23

UK House price adjustment

Source: Longview Economics, Reuters EcoWin

Annual house price falls

ZERO -3% -5%

Wage inflation (Y-o-Y

%)

1.00% 35.0 9.9 5.3

2.50% 14.3 7.1 4.6

4.00% 8.9 5.1 3.8

mean

1985 1990 1995 2000 2005 2010 2015 2020

Hou

se p

rices

to

aver

age

earn

ings

3.0

3.5

4.0

4.5

5.0

5.5

6.0

Back to 3xs earnings?

Years for UK house price/earnings ratio to return to 3xs (under various assumptions for annual house price falls and wage inflation)


UK house prices to average earnings (xs)

2a. Irish House price bubble…still deflating

National house price average (EUR) - series Discontinued

Permanent tsb, national, 2003=100, Discontinued

Residential property prices, national, houses, 2005M1=100

Residential property prices, Dublin, all residential properties, 2005M1=100


96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

Av

era

ge

pri

ce

(E

UR

) (th

ou

san

ds

)

75

100

125

150

175

200

225

250

275

300

325

Inde

x

30

40

50

60

70

80

90

100

110

120

130

140

Dublin (inflation adjusted - discontinued series)

National (inflation adjusted)

Real national hse prices

Dublin rebased (100 Jan 2007)


1996 1998 2000 2002 2004 2006 2008 2010 2012

All

reb

as

ed

to

10

0 @

Jan 2

007

20

30

40

50

60

70

80

90

100

110

Peak @ 100

Irish house prices – still declining in real terms ….and nominal terms

2a. Spanish House price bubble…still deflating/Housing still expensive


88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20

EU

R/S

qu

are

me

tre

250

500

750

1000

1250

1500

1750

2000

2250

19% off highs

????

2095 high...

latest 1701


95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

mu

ltip

le (

x)

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

Spain, House Prices, Appraised housing, totalSpain, Housing Market Indicators: Price of housing/gross household income

2b. Households deleveraging

2. Deleveraging Studies

1. “Another important driver of the cycle is the leverage of the private sector. In the decade prior to a crisis, domestic credit/GDP climbs about 38 percent and external indebtedness soars. Credit/GDP declines by an amount comparable to the surge (38 percent) after the crisis (our emphasis). However, deleveraging is often delayed and is a lengthy process lasting about seven years. The decade that preceded the onset of the 2007 crisis fits the historic pattern. If deleveraging of private debt follows the tracks of previous crises as well, credit restraint will damp employment and growth for some time to come.” Reinhart & Reinhart (R&R), August 2010 :‘After The Fall’

- R&R analysis of “fifteen severe post-World War II financial crises in advanced and emerging economies and three synchronous global contractions”.

2. “the UK and Spain have made less progress (than the US) and could be a decade away from reducing their private sector debt to pre-bubble levels”. McKinsey Global Institute Jan 2012 Debt & Deleveraging


2304/12/23

The Swedish Comparison

2b. Western Household Indebtedness – deleveraging has begun

US total household debt as % of GDP

Source: Federal Reserve flow of funds, Reuters EcoWin

1950 1960 1970 1980 1990 2000 2010

Tota

l US

ho

use

hold

deb

t as

% o

f G

DP

10

20

30

40

50

60

70

80

90

100

20 year sideways trend

25 year rising trend

with an acceleration

since 2000

13 year rising trend

??



2404/12/23

US Household debt as % of GDP

UK Household debt as % of GDP


94 96 98 00 02 04 06 08 10 12 14 16 18 20

H'h

old

de

bt

as

% o

f G

DP

60

65

70

75

80

85

90

95

100

105

?????


2504/12/23

2b. UK Household deleveraging


90%

92%

94%

96%

98%

100%

102%

104%

106%

2006 Q32006 Q42007 Q12007 Q22007 Q32007 Q42008 Q12008 Q22008 Q32008 Q42009 Q12009 Q22009 Q32009 Q42010 Q12010 Q22010 Q32010 Q42011 Q12011 Q22011 Q32011 Q4

Debt to nominal GDP Debt to real GDP

Peak in debt/GDP (@105%)

101%

96%

Debt repayment (annual %)

ZERO 1% 3%

GDP deflator (Y-o-Y)

2.00% 11.3 8.5 6.0

3.50% 7.8 6.5 4.8

5.00% 6.0 5.3 4.0

Years of household deleveraging (under various assumptions for inflation & debt repayment)* to achieve a 65% debt/GDP ratio

Source: Longview Economics*NB we assume real GDP growth of 1.50% p.a.

Debt to GDP ratio (%, nominal GDP vs. real GDP since Q4 2009)

2c. Financial sector - downsizing



2704/12/23

Asset growth – various Western BanksEuropean Total assets, US$bn 1998

US$bn2000

US$bn2005

US$bn2010

US$bnLatestUS$bn

when published

German Deutsche Bank

French 1 BNP PARIBAS 407 654 1,490 2,673 2,793 Q211

GB 2 HSBC 483 674 1,502 2,455 2,716 Q311

GB 3 BARCLAYS 363 473 1,591 2,324 2,396 Q211

GB 4 RBS GROUP 132 479 1,337 2,267 2,505 Q311

French 5 CREDIT AGRICOLE n/a n/a 1,386 2,315 2,530 Q311

Spanish 6 BANCO SANTANDER 301 329 958 1,629 1,673 Q311

French 7 SOCIETE GENERALE 449 429 1,004 1,514 1,669 Q311

GB 8 LLOYDS 278 326 533 1,547 1,534 Q311

Swiss 9 UBS AG 687 675 1,569 1,411 1,594 Q311

US banks

US 1 JP Morgan 366 715 1,199 2,118 2,289 Q311

US 2 BoA 618 642 1,292 2,265 2,220 Q311

US 3 Goldmans 217 290 707 911 949 Q311

US 4 Morgan Stanley 318 427 899 808 795 Q311

US 5 Wells Fargo 208 250 482 1,258 1,281 Q311

US 6 Citi 740 902 1,494 1,914 1,936 Q311

Example: RBS’s B-S….


2804/12/23

RBS’s Funded & unfunded B/S




2904/12/23

2c. Leveraged US (&UK) financial system (now deleveraging)

Source: Longview Economics, Federal Reserve flow of funds, Reuters EcoWin

1950 1960 1970 1980 1990 2000 2010

Fin

anc

ial

sec

tor

deb

t a

s %

of

GD

P

0

10

20

30

40

50

60

70

80

90

100

110

120

130

accelerating rate of financial sector indebtedness (in recent decades) in particular since the Asian crisis in 1997

122% of GDP peak q109

1997 @ 62%

1952 2.7% of GDP

1950s - heavily regulated banking & financial system - banks stuck to core intermediary business - taking in deposits and lending them onwards

Beginning of financial deregulation 1970s & early 80s

now 88%

US financial sector debt as a % of GDP


3004/12/23

2c. Rapid growth of Western financial sector rel to GDP

US commercial banks assets as a % of GDP


1975 1980 1985 1990 1995 2000 2005 2010

% o

f G

DP

50

55

60

65

70

75

80

85

90

Asian cris is - s tart of easy money & widening of US current a/c defic it

US commercial bank assets as % of GDP


97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

EZ

Ban

king

Ass

ets

as %

of

GD

P

200

225

250

275

300

325

350

deleveraging?

347% GDP peak 2010q2

Euro zone bank assets as % of GDP

Twitter: Chris@LongviewLinkedIn Group: Longview Economics – all welcome Website: www.longvieweconomics.com

3104/12/23

3. Why BUY Commodities?- The Demand drivers

12/04/2332www.longvieweconomics.com

12/04/23

Demand Drivers:Developing (& industrialising) Asia: A 3 billion elephant

Asia (Population rank in size relative to RoW)

GDP ($bn 2008)

GDP per capita (US$2010)

population(bn; % of ASIAN total)

Long term Real growth rates

Asia (23) (a) $7,239bn 4,070 3.60 (100.0%)

China (1st) $3,206bn 3,999 1.33 (36.9%) 9.1% (1997-2007)

India (2nd) $1,200bn 1,124 1.13 (31.4%) 9.7% (1997-2007)

Indonesia (4th) $433bn 2,858 0.23 (6.4%) 5.9% (2001-2010)

Pakistan (6th) $143bn 1,067 0.164 (4.6%) 4.8% (2000-2009)

Bangladesh (7th) $68.4bn 624 0.147(4.1%) 7.4 % (1997-2007)

Vietnam (12th) $68.6bn 1,168 0.086 (2.4%) 10.0% (1997-2007)

a: excludes HK, Japan, Singapore, South Korea & Taiwan

NB USA = 3rd 304mn pop; Brazil =5th 191mn; Russia = 8th 142mn; Nigeria = 9th 137mn; Japan = 10th 128mn; Mexico = 11th 110mn

Largest non developed Asian economies

Emerging Markets & Say’s Law(i.e. supply creates its own demand)


3304/12/23

y = 0.2398x - 0.5613

R2 = 0.6148

0

2

4

6

8

10

12

0 10 20 30 40 50

Investment Rate of GDP (2000-2011)

Re

al

GD

P g

row

th (

20

00

-20

11

)

China

S Korea in 80s

VietnamIndia

Mexico

Russia

Turkey

A cross section of 24 Asian, Latam & Middle Eastern emerging market economies shows a clear relationship between higher investment rates of GDP & higher trend GDP growth.

Investment rates (i.e. as % of GDP) vs. Real average GDP growth rates (2000-2011)

Source: Longview Economics, IMF

Funding higher Investment rates


3404/12/23

Gross national savings Investment


80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16

Inve

stm

ent &

sav

ings

rate

as

% o

f GD

P

15

20

25

30

35

40

45

India – Investment and Savings rate (as % of GDP)

Both India’s saving and investment rates have accelerated upwards since 2001 – reflecting the accumulated reform momentum (beginning with Manmohan Singh’s reform budget of 1991)


3504/12/23Twitter: Chris@LongviewLinkedIn Group: Longview Economics – all welcome Website: www.longvieweconomics.com

04/12/23

China’s Coming Car growth

0100200300400500600700800900

- 10,000 20,000 30,000 40,000 50,000

Real GDP per head

Motor

vehic

les pe

r 100

0 peo

ple

JapanChinaFranceSpainUSMexicoSouth KoreaItalyNorwayChileGermanyNetherlandsUKCanadaRussiaBrazilIndia

Industrialisation & vehicles per 1000 people


The number of vehicles per 1,000 people in China is relatively low (32) - NB India (15), Brazil (198), Canada (597) & US (820)

If China industrialises with the same vehicle intensity of GDP growth as other emerging markets the number of vehicles per 1,000 people in 2030 should still be at low levels (at 170 vehicles)



3604/12/23

China’s share of world energy reserves

1.2 1.0

6.3

0.52.4

1.30.2 0.6

3.6

13.9

0.9

19.0

7.1

23.4

28.9

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

China Brazil Russia India USA

% o

f wor

ld to

tal p

rove

n re

serv

es

Oil Gas Coal

Energy resources: Share of proven world reserves (%) – key countries



3704/12/23

China’s Strategic Overseas Investments (2005 – 2011)

Summary by Sector

Outward Chinese Investment

Sector Total Invested (2005 - 2011) Share of total (%)

US$bn

Agriculture 7.0 2.7%

Energy 114.6 43.6%

Finance 34.3 13.1%

Industry 5.1 2.0%

Metals 69.4 26.4%

Power 8.1 3.1%

Real Estate 11.2 4.2%

Technology 4.5 1.7%

Transport 8.4 3.2%

Total 262.7Source: Heritage Foundation, China Global Investment Tracker



04/12/23

China - Expanding Trade RelationshipsChina’s global reach has expanded significantly in the last decade

Share of selected countries'/regions' trade (imports plus exports) with China

2000 2009last 12

months* 2000 2009last 12

months* 2000 2009last 12

months*G20 Other Significant trading partners Other Significant trading partnersSouth Korea 9% 20% 23% Mongolia 33% 48% 61% Africa 3% 12% 14%Australia 7% 20% 21% Kyrgyz Republic 8% 64% 57% Ghana 3% 13% 14%Japan 10% 20% 21% North Korea 17% 42% 46% Bangladesh 5% 10% 13%United States 6% 14% 15% Sudan 27% 39% 45% Iraq 5% 8% 13%Brazil 2% 13% 14% Angola 18% 30% 37% Thailand 5% 12% 12%South Africa 3% 14% 14% Tajikistan 1% 19% 33% Zimbabwe 2% 7% 11%Indonesia 5% 12% 13% Myanmar 13% 24% 29% Middle East 4% 10% 11%Saudi Arabia 3% 12% 13% Congo 5% 20% 25% Singapore 5% 10% 11%India 2% 9% 11% Kazakhstan 6% 21% 24% Sri Lanka 2% 10% 10%Argentina 4% 9% 11% Uzbekistan 1% 15% 18% CIS and Mongolia 4% 10% 10%Russia 5% 9% 9% Nepal 5% 12% 18% Venezuela 0% 7% 8%Canada 2% 7% 7% Malaysia 3% 13% 17% Syrian Arab Republic 2% 7% 7%Turkey 2% 6% 7% Iran 5% 15% 17% Nigeria 1% 7% 7%UK 2% 6% 6% Zambia 1% 8% 17% Somalia 0% 5% 5%Germany 2% 6% 6% Philippines 2% 8% 15% Spain 2% 4% 4%Italy 2% 4% 5% Turkmenistan 1% 11% 15% Qatar 3% 3% 4%EU-25 2% 4% 5% Pakistan 4% 10% 15% Azerbaijan 1% 3% 3%Mexico 1% 8% 5% APEC 7% 14% 14% Afghanistan 4% 3% 2%France 2% 3% 4% * from Dec 2009 to Nov 2010. Calculated as each country's total exports to China + total imports from China / the country's total exports + total imports

Source: Longview Economics, Reuters Ecowin



3904/12/23

China’s Tentacles (EurAsia, Africa & beyond)


4004/12/2304/12/23

China – Geopolitics & rare earths as a political tool

Global trade chokepoints/bottlenecks

China & Rare Earths

1. Rare earth deposits approx 35% of world total2. China = 90% of global output of 17 rare earth metals3. Miao Wei (minister for industray and IT) – China to retain

limits on rare earth export quotas (2012 = 2011)4. Miao: Domestic industry value: $6.4bn5. Japan – providing ¥5bn in subsidies for R-E projects (Feb

statement MITI)6. Chinese Industry Rare Earth Association expected soon


4104/12/23




4204/12/23

Conclusion – Overview (Long term)

• Western Equities – in secular bear market– Driven by:a) Ongoing housing bubble deflationb) Financial system deleveragingc) Fiscal austerity

• Emerging equities – in secular bull market– Driven by:a) Industrialisationb) Income catch-up/rapid productivituy developmentc) Economic Liberalisation/Opening up of/deregulation of economiesd) Financial liberalisation (after decades of financial respression)e) Commodity wealth

• Commodities – in secular super bull cycle – but facing some near term cyclical challenges – related primarily to China’s housing market– Long term supply shortages – with emergence of China & India (amongst others)

• Western equities – rally possible through into Q2 2012 – based on excess pessimism @ lows…(indicators) – dependent on nr term EURO sol’n/patch (which is now in place)

• Key Long Term issue: Inflation or Deflation• UK Dire Decade – adjustment approx half way through




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The macro-economic implications of the strategic metal supply

Economy & Finance

Transcript of The macro-economic implications of the strategic metal supply