India's race to capture rare earths, nipped in the bud?
India shelves plans for a Sovereign Wealth Fund, ostensibly to buy rare earths. Country prefers to invest in US treasury bills and in gold.
Posted: Friday , 13 Aug 2010
Whether it is $25 billion or just $5 billion, the Indian government has decided against setting up a Sovereign Wealth Fund for financing overseas acquisitions by Indian corporates, notably those dealing in rare earths. The reasoning - India has a number of avenues for funding overseas acquisitions. More importantly, money has never been a primary constraint for Indian companies.
For long, the Indian government has been debating the institution of a Sovereign Wealth Fund (SWF) that would allow the country's forex reserves to be used for investment in mineral and oil assets. The country's most recent SWF proposal, (the earlier one that was nixed was to the tune of $25 billion) was a joint effort by the ministry of petroleum and the ministry of external affairs, and involved the conception of a fund to buy strategic mineral assets. Though most expected the SWF to buy oil for the country, the target this time appeared to be rare earth deposits.
India has three rare earth producers, including Mumbai-headquartered Indian Rare Earth and Kerala Minerals and Metals. All are government-owned.
Spelling out the government's reasons to drop SWF, minister of state for finance, Namo Narain Meena told the Indian Parliament: ``Indian firms have enough money for foreign takeovers''. The idea to set up the fund was pursued when foreign currency inflows were large and the government was planning to increase its earnings. The minister added that India's foreign exchange reserve was in excess of $280 billion at the end of July 2010, and that the country preferred to invest in safe, yet low-interest yielding US treasury bills, IMF's special drawing rights and in gold.
Globally, there are over 50 SWFs, managing about $3 trillion worth of assets. The concept of a SWF also germinated from the fact that India should emulate China. Take a look at what China did last year, with reserves of $2.4 trillion. China has the support of China Investment Corporation and the State Investment of Foreign Exchange Investment Company, which together account for an SWF corpus of $636 billion. Chinese companies reportedly spent $32 billion buying oil, coal and metal assets abroad.
As for what India did last year in the case of oil - State-owned Oil and Natural Gas Corporation (ONGC) invested $2.1 billion to buy Imperial Energy.
China might have outpaced India in the quest for resources to feed its economy, but the minister's reasoning was: India has not accumulated its foreign exchange reserves through export surplus like China, and does not need to go down that path.
Moreover, reports indicated that China is considering blocking the exports of rare earth minerals. It has already curbed exports of the mineral since 2005, through quotas and duties.
Rare earths are used in the making of hybrid cars, wind turbines, catalysts in cars and oil refineries, mobile phone batteries and in weapons.
Statistics reveal that in 2009, China's rare earth ore output hit 129,400 tonnes and refined and separated rare earth product output stood at 127,300 tons, catering to 95% of global demand. Though China continues to have the upper hand in the supply of global rare earth minerals, (it reportedly mined 120,000 tonnes in 2008), India comes next, with a production of 2,700 tonnes during 2008.
With regards to the biggest mines under development, India reportedly has 30,000 tonnes as reserves, which constitute 3.1% of global reserves. China, on the other hand, has 36,000,000 tonnes, which comprises 36.5% as reserves.
However, Indian industry officials maintain there is no clarity on China's future plans. China has ensured that mining rights for 17 rare earth metals would be restricted to state-controlled mining companies under a draft proposal that was submitted to China's cabinet. The country has also imposed a moratorium on new mining licenses until next summer.
Incidentally, on August 8, 2010, twenty-two enterprises have signed agreements with the Baotou National Rare Earth Hi-Tech Industrial Development Zone and plan to invest in rare earth deep processing projects in the zone, according to the China Business News. A total of six foreign enterprises have plans to establish rare earth fluorescent powder enterprises in China this year.
While this is encouraging, there is a flip side. Reports indicated that China is allegedly forcing foreign companies to part with their valuable technological know-how to Chinese companies while investing in the country.
Instead of exporting rare earth minerals, China has adopted a strategy of forcing overseas companies to put up their manufacturing plants in China in order to gain access to the mineral. More so over the past two years. Analysts aver that this has been done since the country consumes up to 60% of global rare earth supply. The move will also ensure that the Asian major will continue to have the upper hand in the global rare earth market for some more time.
Moreover, two Chinese mining giants have decided to align their rare earths prices in a move that will give China more influence over international markets. Last month, the Chinese media reported that the government planned to fix monthly prices and impose export controls, prompting long-term supply concerns.
Industry estimates reveal that the worldwide demand for rare earth is expected to exceed supply by some 30,000 to 50,000 tons by 2012, unless major new production sources are developed. China reportedly replied to this demand scarcity by saying it would cut export quotas for rare earths in 2010 by around 40%.
Incidentally, an official of the Economic Advisory Council to the Indian Prime Minister has been quoted by newswires as saying: ``The idea that India should emulate China strikes me as particularly dubious and risky, even as the Chinese presence undoubtedly complicates life for our private sector.''
Another point is, if seasoned SWFs such as the Abu Dhabi Investment Corporation have badly burnt their fingers, why should India not learn from experience? Why go where the angels fear to tread?