Western Companies Scramble to Break Chinese Stranglehold

Written by Gerardo Del Real
Posted March 20, 2017 at 8:12PM

Last month I explained the domination of the rare earths market by China and as a result the vulnerable position the rest of the world finds itself in.

Not only because it forces Europe, Japan, and the U.S. to secure most of their rare earths from China but because it forces the rest of the world to turn over sensitive intellectual property — some with national security implications — to China at a time when China continues to flex its economic and geopolitical muscle.

Here’s a brief excerpt from that article that provides a summary:

Rare earth elements (REE) and other specialty metals are critically needed by many major industries, especially in the U.S. defense sector.

Although used in small amounts, they give irreplaceable function to many weapons and defense systems used by our armed forces.  REE supply has never been more firmly in the hands of China than it is today, with all legal Chinese production controlled by state-owned enterprises.

Neodymium, dysprosium, praseodymium, and terbium within high-strength permanent magnets are ubiquitously employed in all vehicle and airborne platforms — improving efficiency and lowering operational weight and size. 
The guidance systems employed by missiles and smart bombs rely on the florescent properties imparted by terbium, europium, and yttrium oxides.

Display systems, optical systems, and night vision all rely on glass containing or prepared with REEs such as cerium and lanthanum. High-tensile-strength ceramics and next-generation armor plating apply to the properties of the REE’s yttrium, ytterbium, and scandium.

China’s attempt to consolidate its REE sector into six consolidated producers reignited fears of increased influence. Influence that makes America dependent on China for even America’s most advanced weaponry and defense systems.

There have been several important developments since then.

On March 7, 2017 Nordic Business Insider reported that Peter Carlsson, former VP of Tesla’s Supply Chain, has announced his plans to launch his own "gigafactory" in Sweden, in order to provide cheap, high-quality batteries.

The announcement isn't a new one, as Mr. Carlsson had made his intentions known last year.

What is new are the details. And the details are important.

The project is called Northvolt. The estimated price tag for the factory: 40 billion Swedish krona (~$4.5 billion).

The article quotes Carlsson and outlines the vision:

”It may sound like a hefty sum, but you need to remember that it will be spread out over several years, until 2023,” Carlsson Dagens Industri in conjunction with the project launch in Stockholm yesterday.

Another reason for the sizable sum is Northvolt's plan to take control of the whole supply chain.

“The problem today is that batteries are very expensive. By scaling up the battery production and taking control of the entire [value] chain, from raw material extraction to the finished product, we think we achieve a competitive business model,” said Paolo Cerruti, COO at Northvolt, formerly Carlsson’s colleague at Tesla, to Di.

Carlsson’s aims to employ 2,600 people in his humongous factory, and in total some 10,000 when counting the suppliers. Northvolt's parent company, SGF Energy, is already hiring for more than a dozen key jobs.

“When fully built, we think our factory building will be bigger than the entire Old Town in Stockholm,” he says.

Here’s the most important part of the article.

The factory’s location hasn’t yet been decided. According to Cerruti, the Swedish location brings the benefits of clean energy to the very energy-intensive process of producting batteries. Most of today’s major battery factories today are in Asia, where energy is both expensive and dirty.

Moreover, according to Cerruti, up to 60 percent of battery production costs come from raw material; and Northvolt is going to extract its share mostly in Europe, including Finland and Sweden (emphasis mine).  

So far, Carlsson has attracted around 120 million SEK ($13m) investment, from Vattenfall, Vinnova, Stena, EU and the Swedish Energy Agency. 

Moreover, the Swedish financier Harald Mix has recently bought a major stake in Northvolt through his investment company Vargas, according to Breakit. 

Northvolt aims to take control of the entire supply chain.

The plan comes after recent announcements that a Republican member of the U.S. House of Representatives, Duncan Hunter, introduced legislation to require the U.S. military to obtain rare earth elements (“REEs“) that are produced in the U.S., even if it means subsidizing those industries.

That announcement last month was followed by an article from Bloomberg about lenders, including Investec Plc, Mitsubishi UFJ Financial Group Inc., and Prudential Financial Inc., that are looking to finance large-scale energy storage projects from California to Germany.

The article went on to highlight that battery costs have declined 40% since 2014 and regulators are mandating storage technology be added to the grid.

That’s encouraging utilities to offer longer contracts and developers are expected to build $2.5 billion in systems globally this year.

battery boom

Ralph Cho, Investec’s co-head of power for North America in New York, said in an interview, “We see an opportunity in the space, we’re attempting to be a first mover.”

It is clear that only a few companies will be able to actually deliver the important metals that go into these energy storage systems.

Copper, lithium, rare earths, graphite, and cobalt to name a few. There’s even fewer companies that will be in position to provide a combination of these critical metals.

Those that are will see their market shares grow by multiples. I believe I’ve identified the single best play in the space.

In fact, that pick is up triple digits despite the fact that it is still very early stage with the most compelling value-adding catalysts still to come.

The time to start buying companies that'll supply the metals of the future is now.

To your wealth,

gerardo-sig

Gerardo Del Real
Editor, Junior Mining Monthly and Junior Mining Trader.

For the past decade, Gerardo Del Real has worked behind-the-scenes providing research, due diligence and advice to large institutional players, fund managers, newsletter writers and some of the most active high net worth investors in the resource space. Now, he is bringing his extensive experience to the public through Outsider Club, Junior Mining Monthly, and Junior Mining Trader. For more about Gerardo, check out his editor page.

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