Rare earth minerals - economic barometer?

We've met rare earth minerals before in these pages.  Briefly, China supplies something like 90% of the world's rare earth element requirements.  They're essential components of almost every high-tech item you can think of - liquid crystal displays, cellphones, missile guidance systems, the lot.

That's why a new policy in China is worth more than passing interest.  The Telegraph reports:

China has started stockpiling rare earths for strategic reserves, a state-backed newspaper said, in a move which may raise more worries over Beijing's control of the coveted resources.

China has already started the purchase - using state funds - and storage of rare earths for strategic reserves, the China Securities Journal said, but did not say exactly when the initiative was launched.

. . .

Major trading partners last month asked the World Trade Organization (WTO) to form a panel to resolve a dispute over China's export limits on rare earths after earlier consultations through the global trade body failed.

The European Union, the US and Japan claim China is unfairly choking off exports of the commodities to benefit domestic industries.

. . .

Gao Yunhu, vice-director of the rare earths office of the Ministry of Industry and Information Technology, said its management of the industry was "in full compliance with WTO rules".

Chinese market players hope the strategic buying will help stabilise prices, which plunged in the first half of this year after companies sold stocks ahead of planned tax changes, the newspaper said.

"Rare earths prices are now at low levels, so China definitely wants to build strategic reserves at this time," a Shanghai-based metals analyst, who declined to be named, told AFP.

"The other reason is that China hopes to control rare earth prices within a reasonable range, so as to encourage the long-term, healthy development of downstream industries."

Government stockpiling could reduce the volume of China's exports of rare earths, the analyst said.

There's more at the link.

There are all sorts of interesting clues hidden in that report.  Consider:

• If world demand for rare earths was still high, prices would not have 'plunged in the first half of this year', as the Chinese source alleged.  Instead, prices would have remained steady, or even increased.
• If prices have 'plunged' this year, it can only mean that demand for rare earths has plunged as well - and that bodes very ill indeed for the high-tech manufacturing sector, which is essentially the only market for rare earths.
• If high-tech manufacturing has also 'plunged', it can only be because orders for high-tech products from First World wholesalers and retailers have declined significantly;  and that will only have happened if consumer demand for such items has declined significantly.  However, the high-tech segment of consumer demand (e.g. computers, tablets, smartphones, high-end TV's, etc.) has traditionally resisted economic decline better than most.  If this sector of the economy is now in decline, it's a harbinger of much more widespread economic difficulties.
• China may, indeed, be increasing its stockpiles of rare earths, taking advantage of lower prices.  However, the funds it's using to do so are funds it would normally have invested in bonds and other sovereign debt investments in Europe and the USA.  If it's now diverting billions of dollars to build up rare earth stockpiles instead, that means its investment in US treasuries will inevitably be less - meaning it'll be that much harder for this country to fund its ongoing debt financing of government (over)expenditure.

All that can be inferred merely from a Chinese policy change on rare earth exports.  Makes you think, doesn't it?

Peter