Author: Ben Debski

Fearing shortages, many nations want to ease China’s grip on production but will have to manage risks such as radioactive thorium, high energy use and a toxic cocktail of hydrochloric acid and sodium chloride used to isolate the metals.

Experts say rare earths show how the world fails to include pollution – borne by China which produces 97 percent of world’s supplies – into costs of laptops, TVs or “green” goods such as wind turbines or electric car batteries that use the metals.

“It isn’t factored in and you can make a case that almost everything is under-priced,” said Thomas Graedel, professor of industrial ecology at Yale University who was an author of a UN Environment Programme report on speciality metals recycling.

“As a planet we are using the entire periodic table of the elements and to varying degrees this requires that we spend a lot of energy,” he said. “It’s a bit of a Faustian bargain.”

Cancer
The disused Ytterby mine, on an idyllic island in the Baltic Sea near Stockholm, lent bits of its name to rare earths discovered there in the late eighteenth century such as ytterbium, yttrium, terbium and erbium.

“My chemistry teacher used to walk around the neighbourhood with a Geiger counter and it would crackle like crazy when he got close to the houses,” said Rolf Hultberg, who has lived close by the mine most of his life.

He laughed off the slight rise in radiation at his home, built with rock from the mine by the village of 2,900 people. Levels are below those considered a health threat. But experts say slightly radioactive thorium, often found in ores that also contain rare earths, are a huge environmental hurdle. When rocks are smashed in mining, thorium dust can lodge in lungs and cause cancer.

“The most critical potential environmental impact of rare earth metals is the presence of radioactive elements in most of the ores, especially thorium,” said Christian Hagelueken, of Umicore, a Belgian-based firm looking
at new products from specialty metals.

Studies including those in the Chinese Medical Journal have shown high rates of lung cancer among rare earth miners, traced to thorium. “We are looking for any rare earth deposit anywhere in the world without uranium or thorium. But we haven’t found any,” said Harald Elsner, a rare earths expert at the German geological service BGR. He also said costs of handling, storage and disposal of the slightly radioactive waste were “definitely” the main environmental problems for miners in places from Australia to Alaska considering new production.

Ray Sollychin, a thorium expert at the International Atomic Energy Agency in Vienna, said radiation levels from China’s biggest mine were “high enough to be a concern but it’s low enough be piled in the mountains”.

The waste is “in a dust form but still not very well contained”. He said he had urged Chinese officials “to spend money to turn it into an oxide with a simple chemical process so they can store it in a solid form rather than as dust.” That would decrease the risks of inhalation.

Cauldrons of acid
China has raised worries about supplies by curbing exports, notably to Japan but also to the United States and Europe, renewing interest in finding sources in other countries.

All are likely to face tougher environmental laws than China. Workers at Baotou, which calls itself the “capital of rare earths” 650km (400 miles) west of Beijing, tend cauldrons of sputtering acid and ore amid acrid fumes.

“There is no question that the costs of environmental compliance in the US are significantly higher than in China,” said Jim Sims, spokesman of Molycorp Minerals LLC, the main US producer from stockpiled
ore at Mountain Pass, California.

“That has provided the Chinese with a significant price advantage in rare earths. But that has changed,” he said. He predicted that Molycorp, planning to resume production with a new, cleaner process in 2012, could mine at a cost of $1.26 per pound (0.45 kg) averaged across all earths, against $2.54 as the firm’s best estimate for Chinese production.

“Some ores have a lot of thorium. We are blessed with a very low level… We have a protocol for handling it and it’s then shipped to a storage facility,” he said.

“The Russians and the Indians have a relatively higher percentage of thorium,” he said. Mining was halted at Mountain Pass in 2002 partly after a wastewater leak from a pipeline.

Nobel connection
The Ytterby mine, reached by a steep path through a wood, won fame after a 1794 paper by Johan Gadolin – “Study of a black heavy kind of stone from the Ytterby quarry”. The stone contained the rare earth element gadolinium.The mine shaft is blocked by a slab of concrete. Village streets are named after rare earths and Nobel prize winners often visit around the time they collect awards in Stockholm on December 10th.

Sweden is exploring two sites for possible rare earths – Norra Karr and Olserum in southern Sweden’s forests, as part of the European Union’s strategy to secure and improve supplies.

Thorium has fallen out of favour as a possible nuclear fuel, meaning no real demand from miners. Some disused mines that worked decades ago to extract thorium or uranium were now being re-branded as rare earth deposits.

Thorium has some advantages over uranium for power generation, with India most interested. But it is less stable than uranium as an ingredient for nuclear bombs.

Far from the Chinese approach, anyone wanting even to build in Ytterby has to follow special designs such as ventilation to deal with the high background radiation.

“We allow new buildings, with precautions,” said Susanne Iden, the local official in charge of granting building permits.

A burst property bubble still weighs on the Spanish banking sector, but the immediate worry is over the spring, when both the banks and the government will be in the market for a combined 50bn euro of funding.

“Problems may well arise when banks need to turn over debt at the same time as the government if confidence remains low,” said Javier Bernat, analyst at Caja Madrid. A wave of consolidation and conservative rules have supported the banks so far, but after Ireland accepted an 85bn euro aid package, investors are turning their eyes to Portugal and Spain.

In the larger economy, mid-size banks such as Banco Sabadell and Banco Pastor are seen as potentially the most vulnerable. They were frozen out of European interbank markets in 2010, and are not as diversified as global giants BBVA and Santander.

Capital requirements for Spanish banks have traditionally been more stringent than in other countries and the average core Tier 1 capital of the sector was 7.7 percent under a crisis scenario in last July’s Europe-wide stress tests.

But the bar has been raised for all banks since then, as new capital rules have been agreed, leading Spanish banks looking less well capitalised than many international rivals.

The weakest link in Spain’s banking system are regionally focused savings banks – who had an average core Tier 1 capital ratio of only 5.5 percent in the stress tests. They have already gone through a forced consolidation process that has cost the government 15bn euro in credit lines.

Shares in Santander, the euro zone’s biggest bank, sagged three percent to an 18-month low in December as worries about the sector grew. Spain’s economy is larger than those of fellow euro zone peripheral countries Ireland, Greece and Portugal combined, and if it spirals into a debt crisis despite progress cutting its budget deficit, a bailout would strain the European Union’s safety net.

With the economy stagnant and spending cuts landing, market jitters over possible bank funding problems have pushed up financing costs for Spain to euro-zone lifetime highs of about 5.4 percent for 10-year sovereign bonds.

Another source of concern is heavy exposure to Portugal, which is seen as the next euro zone trouble spot. Spanish banks had a $108bn exposure to Portugal at the end of March, according to Bank of International Settlements data.

Spain’s government faces a bond redemption at the end of April of 15.5bn euro in competition with the banks, which are also looking to refinance around 35bn euro, according to analysts at Barclays Capital.

“We are concerned that tapping the markets for more than 50bn euro in March and April represents a substantial level of execution risk,” the analysts said in a note, adding the situation would worsen in 2012. Banks also face mounting credit losses, aggravated by stubbornly high unemployment, which Barclays estimates could hit 200bn euro over the next few years.

Spain’s central bank in September required banks to put aside more reserves to protect against losses and make further write downs on real estate they hold, but investors are concerned the system hasn’t been tested severely enough.

“A stringent, Spain-specific bank stress test would allow for differentiation, accurate sizing of (savings banks) potential capital needs and would exert additional pressures towards restructuring,” Goldman Sachs analysts said. They estimated loan losses would hit 145bn euro, varying greatly between large banks like Santander and mid-sized banks such as Sabadell and the privately held savings banks. The central bank will run a second round of stress tests in the Spring.

Capital requirements
Many analysts expect another round of consolidation in the savings banks and further drawing on the government’s 90bn euro restructuring fund. Savings banks’ exposure to real estate and construction might require 56bn euro of funding, Unicredit said.

“Assuming this 56bn euro is needed in 2010 and adding on bonds maturing plus the funding of the deficit, then we calculate that Spain needs approximately 350bn euro over the next three years,” the analysts said.

Spain’s banks are heavily reliant on funding from the European Central Bank. Financing needs dropped by a third in the final quarter of 2010 from September in a sign banks are weaning themselves off the funding programme, but the banks still tapped the ECB for 71bn euro.

Banks have turned to retail depositors to fill the gap left by erratic wholesale funding, but competition for savers has developed into a pricing war, leaving banks paying interest more than double the 1.85 percent offered on 12-month Spanish Treasury bonds.

Analysts are discussing the idea that economic differences between countries may be too wide for the eurozone to survive, and that it may have to break itself up.

Markets themselves, however, are telling a different story. Individual financial instruments, such as sovereign bonds and bank debt in the weakest countries, have been hit hard by default fears. But movements in most markets show most investors do not think the eurozone faces the dangerous and expensive prospect of a break-up.

Indeed, correlations between markets suggest investors are not nearly as afraid of a systemic crisis in the zone as they were back in May and June, when the panic over Greece’s debt problems was as its height. Consider the euro itself. Although yields on Portuguese and Spanish 10-year debt are at record highs near seven percent and five percent, and Ireland is negotiating an international bailout, the currency has not reacted strongly.

Little correlation
The 30-day correlation between the euro/dollar exchange rate and the spread of the 10-year Greek government bond yield over German Bunds – the risk premium which investors demand to hold Greek bonds – was minus 0.65 in June but at the time of writing is minus 0.19. Minus 0.65 is a fairly strong negative correlation – heading towards the limit of minus 1.0 – and shows investors sold the euro heavily in June because of fears of a Greek debt default. By contrast, there is now very little correlation between the euro and expectations for Greek debt.

For Ireland, the correlation has moved from minus 0.61 to minus 0.29. Also, the euro remains strong historically. At around $1.32 and despite a roughly seven percent fall in December, it is still close to 13 percent stronger that it was at the depth of the Greek crisis. It is far above its lifetime average of $1.188.

According to IFR, implied volatility levels for the euro are still well below those seen in May and June. Implied one-month volatility hit a high of 18.75 percent in late May and 12-month volatility reached a peak of 15.1 percent. The equivalent figures now are near 14 percent, a level that suggests some concern but not a huge amount. In the meantime, there has been demand for euro “puts” – options which provide the right to sell the euro at a given price. This suggests expectations for further euro weakness. But the 1.65 percent premium currently demanded over “calls”, the right to buy, is much cheaper than the 3.0 percent seen in June.

Corporate strength
It is a similar story on European stock markets, where most companies are being buoyed by signs of surprisingly robust German growth and general improvement in the eurozone, as well as healthy corporate cash balances. The EuroStoxx index, a broad gauge of eurozone equities, is about nine percent higher than it was in early June despite falls in recent weeks.

Correlations between the index and bond spreads also show that while they are not insignificant, the eurozone bond crises are not overwhelming equities. The 30-day correlation with changes in bond spreads is now minus 0.38 for Greece and minus 0.36 for Ireland. In May, the Greek correlation was minus 0.86.

While the prices of bonds issued by Irish and some other banks have tumbled, the eurozone corporate debt market remains fairly healthy. The iTraxx Europe index for investment grade eurozone debt is at 111 basis points compared with 141 bps in June; a lower number implies more risk appetite. The iTraxx Crossover index of more risky corporate “junk” bonds is at 494 bps, down from 633 bps in June.

There are at least two major reasons for the easing of markets’ fears about the eurozone as a whole since June. One is that the European Union has set up a formal mechanism to handle debt crises, the 440bn euro European Financial Stability Facility (EFSF), and the Irish bailout shows the EU is willing and able to use it.

Secondly, expectations for debt defaults in a few eurozone states have grown in recent weeks as Germany has pushed a proposal to create a mechanism for orderly sovereign debt restructuring. But debt restructurings could actually reduce the risk of a systemic eurozone crisis, by helping countries return to health without a need for them to leave the zone in search of currency depreciation and lower interest rates.

Three years
The markets see the time of maximum risk for debt defaults as roughly three years from now, after the three-year terms of Greece’s bailout and the EFSF expire, at which point the EFSF will be replaced by a crisis mechanism that may be less protective of bond investors.

The curves for prices of credit default swaps, used to insure debt against the possibility of sovereign default, rise to peak at about two years for Greece and three years for Portugal and Ireland; Ireland’s curve later resumes rising to hit a fresh high five years out. But euro forwards, which are contracts to buy euros at future times, do not suggest investors see a major rise in risk for the single currency three years from now.

The euro has dropped steeply in the forwards market but the move in three-year forwards has been similar to that for shorter tenors, when taking into account interest rate expectations.

Low interest rates, high inflation, lacklustre growth, corporates’ acquisitions abroad and foreign debt repayments, a broken-down correlation with oil and rising imports are all factors pressuring the rouble – and here to stay for now.

“We still expect the rouble to weaken. The main argument for this is the problem with capital outflows. It is the factor which keeps on driving the Russian forex market,” analysts at Troika Dialog said in a research note.

In a few weeks in autumn, the rouble lost all its 2010 gains to hit its weakest level of 2010 of 36.42 against the euro-dollar basket. Some $21bn left Russia between January and October.

Russia’s trade surplus is shrinking; exports increased just 13.8 percent year-on-year during that period, while imports rose 27.3 percent, fanned by improving domestic demand and food purchases following a summer drought that killed one-third of the harvest. Analysts now see little room for a surge in exports unless oil prices soar towards $100 per barrel.

The trade surplus is expected to shrink by nearly a fifth in 2011 to $115bn, according to a Reuters poll. Foreign debt redemptions are another factor weighing on the rouble, with Russian banks and companies paying back more than $25.5bn in November-December.

Pressure also comes from corporate acquisitions abroad, such as TNK-BP’s $1.8bn purchase of oil and gas fields in Vietnam and Venezuela.

Small returns, weak data
Russia can offer little premium to investors as inflation accelerates, while the central bank keeps interest rates at record lows to revive lending. Nominal yields on Russian financial instruments remain at relatively high levels, but in real terms, inflation erodes returns from holding Russian debt to almost zero.

Consumer prices have rose 7.4 percent in 2010, inching close to the central bank’s 7.75 percent benchmark refinancing rate. With average yields on the most liquid corporate bonds, such as gas behemoth Gazprom and railroad monopoly RZhD, at around 7.5 percent, potential returns are limited for investors using low-yielding dollars and euros to fund carry-trade positions in Russian assets.

“Such operations have become less attractive now due to the decrease in bond yields. Moreover, short-term currency risks have increased,” said Dmitry Kharlampiev, analyst at Petrocommerce bank. The central bank
has moved to discourage short-term capital inflows, such as carry trades, allowing more flexibility in the rouble and changing the pattern of interventions. That suggests the currency will be increasingly vulnerable to external and internal shocks.

Lacklustre growth offers little help, with Russia’s economy growing 2.7 percent in the third quarter – a weak result compared to other emerging markets.

The data is “a negative development for the local equity markets and the rouble, as it calls for greater monetary support from the authorities, even despite the continued acceleration of inflation,” Vladimir Osakovsky, economist at Unicredit, said.

Out of fashion
As a result the rouble has not benefited from the increased level of global liquidity seeking a home after the Federal reserve announced the second round of quantitative easing.

“More obvious places to invest … are Turkey, Brazil, India,” said Roman Pakhomenko, chief dealer at Lanta bank. The Brazilian real has added 0.9 percent against the dollar year-to-date, while the Indian rupee has gained 1.3 percent. The rouble has lost 4.0 percent.

“The rouble was the worst performer among commodity currencies and was also lagging among BRICs, as capital flows into Russia remained negative,” said Paul Biszko at RBC Capital. The pile-up of anti-rouble factors has led to a breakdown of the correlation with oil – Russia’s major export and once a key support for the currency, the price of which has held above $80 per barrel for almost three months.

As a result, analysts and markets alike have turned more bearish on the rouble. The latest Reuters poll showed it at 35.30 versus the basket by year-end compared with late April forecast of 33.48. Implied yields of three-month non-deliverable forwards for the dollar versus the rouble rose to their highest levels in six months, 4.2 percent, in late November, up from 3.0 percent seen before the rouble’s slump started in mid-September.

 “Russia is out of fashion today,” deputy chief executive of Russia’s biggest lender Sberbank, Bella Zlatkis, said in mid-November after meeting with international investors.

A special welcome was laid on for Libyan leader Muammar Gaddafi when he arrived in Uganda in July last year for an African summit: hundreds of children lining the road wearing T-shirts with his face on them.

In fact, Gaddafi stood out right from the moment he stepped off his jet wearing sunglasses, a safari suit with silhouettes of the African continent printed on it, and accompanied by a female bodyguard in Bedouin headgear.

“It’s the usual sideshow,” a senior South African official said of the clamour surrounding Gaddafi at the summit. Gaddafi’s opulent entrances are just the most visible part of a huge and growing Libyan influence in Africa that ranges from donated tractors in Gambia to $90m dollar telecoms deals in Chad and hospitals named after the Libyan leader.

The countries that benefit, and many independent observers, say Libya is bringing real benefits for Africa. Officials in Tripoli say their objective is to promote development and allow Africa to shake off exploitation. Other countries, especially China, are seeking a bigger role in Africa. What sets Libya apart is that it approaches the continent with a very distinctive political vision. Gaddafi, author of the “Green Book” by which Libya is governed, views elected democracy as a form of dictatorship, has described working for wages as slavery and said his aim is to create a United States of Africa.

“I think it (Libya’s role in Africa) is one of the great untold stories so far … very few people have paid attention to this and what it really symbolises,” said Dirk Vandewalle, a Libya scholar at Dartmouth College in the United States. “The interesting story of course is how much can he provide and what are the sub-Saharan African countries willing to give in return,” he said.

African identity
Since he came to power in a bloodless coup in 1969, Gaddafi has made Africa an important part of Libyan identity. Libyans often express pride that the African Union was founded at a summit in Gaddafi’s hometown on September 9th, 1999. The state-owned Afriqiyah Airways marks that date by painting the motif “9.9.99” on the tail of each of its jets.

Libyan handouts to its neighbours on the continent are nothing new. The change in the past few years is that the amount of Libyan cash flowing to Africa appears to have increased – along with the influence that it buys. That is in part because Libya has grown richer. Its once-stagnant economy has boomed since international sanctions were lifted in 2004. Oil revenues have allowed it to build up sovereign wealth funds worth about $65bn.

There are no official figures publicly available, but evidence on the ground points to a growing Libyan presence, especially in West Africa and the Sahel region, along the southern edge of the Sahara desert. In August, Libya announced an increase in assistance to Niger including the creation of a $100m investment fund, a big sum for a country ranked third from bottom in the United Nations human development index.

In Gambia, the anniversary of Libya’s Revolution – Gaddafi’s coming to power – is usually a low-key affair but this year Foreign Minister Momodou Tangara attended a celebration with other officials and heaped praise on Libya.  Last year Gaddafi gave Gambian President Yahya Jammeh camels as a gift, as well as providing substantial aid. Libyan business has also started to take a role. LAP Green Networks, a state-owned mobile operator, owns or controls telecoms operations in eight African countries and has paid $90m to buy assets in Chad.

Gaddafi’s vision
“Libya has in the past … played a less than constructive role in certain countries.” said Alex Vines, head of the Africa programme at Chatham House, a British-based think tank.

But he said: “There has been some fairly useful Libyan aid, and over the years I think one can say it’s improved … Libya has tried to further extend its statement of leadership on the African continent and this is part of that.” Mohammed Syala, the secretary of cooperation affairs at the Libyan foreign ministry, said Libya offered African countries an alternative to the Western model of development.

“Libyan assistance … gives them an opportunity to control their economic resources and natural resources in a better way, away from the influence of exploitation and monopoly,” Syala told Reuters in an interview.  “Certainly, there are leaderships who are convinced, while there are countries which are not convinced yet, but time will prove that the strategic vision of Gaddafi is correct,” he said.

“Buying allegiance”
That is not a view shared by some diplomats at the headquarters of the African Union, in Addis Ababa. “We’ve been dealing with Libya trying to use money to buy influence in Africa for some time,” said a senior AU official, who spoke on condition of anonymity.

“It is true that Gaddafi has upscaled it recently, yes. In the weeks before our summits, donations will be made – usually to West African countries. There will be investments and talks.”

“What is destructive for the AU sometimes is that the summits are hijacked and time is wasted dealing with him and his projects … What I hope is that poorer African countries become less and less susceptible to him buying their allegiance.” Gaddafi’s critics say there have been several cases where Libya has assembled coalitions of countries that benefit from its largesse to push its agenda, though not always successfully.

Some alleged that as holder of the AU’s rotating presidency for a year until July, he frustrated efforts to condemn African coups d’etats, giving fuel to critics who say the union only pays lip service to democracy. At the Uganda summit in July, Libya and its allies lobbied for a resolution advising member states not to arrest Sudanese President Omar Hassan al-Bashir, even though the International Criminal Court has indicted him for war crimes.

At a previous summit, Gaddafi made a failed bid to extend his chairmanship for an extra year, and to have the union’s executive granted more power. Many of Gaddafi’s initiatives have been vetoed by an opposing bloc often led by South Africa. But he seems unbowed and is likely to keep on building support for his own vision of how Africa should be governed.

“A lot of people are deferring to him politically because of the aid he’s providing,” said Libya scholar Vandewalle.

“My hunch is that particularly since Libya has a lot more money now and is able to increase the amount … we’ll see a lot more of those kinds of very strategic coalitions.”