Make money from the metals China really wants

“EU pledge on Greece fails to calm fears,” is the FT’s headline today.

No wonder. They didn’t do anything. I noted yesterday that I’d be fascinated to see how the eurozone’s politicians worked their way out of this Greek dilemma. The answer was simple. They didn’t.

Instead, they agreed that they’d all help Greece if it needed help. But it hadn’t asked for help yet, so meanwhile they’d just expect it to stick to measures to slash its deficit.

Nothing’s changed in other words. Plan A remains for Greece to repay its debts. Plan B would involve some sort of bail-out, which the markets had already expected. But there’s no more detail on what form such a bail-out would take.

And that’s probably the smartest thing they could have done…

Why the best bet for now is to keep the markets guessing

There’s an awful lot to be said for political inactivity. There are no good choices to be made on the Greek situation. We’ve run through the options already but in short, each leads to further questions and takes you one step closer to financial disaster. If you say you’ll bail out Greece, investors will ask: “But what about Portugal? And what about Italy?” And if you chuck Greece out, then you throw the rest of the weak links to the lions too.

As for Germany leaving the euro, it’s probably the smartest option (see Merryn Somerset Webb on our blog for more on this: Why Germany should dump the euro). But no one’s ready for a step as drastic as that yet.

So that’s why the best bet for now is to keep the markets guessing. For one thing, it maintains the crumb of hope that Greece can save itself, whereas agreeing a bail-out deal would have effectively squashed that. And the situation is not urgent yet. Greece doesn’t have to roll-over any of its debts (i.e. borrow more money) until the April-May period, as the FT points out.

Of course, every twitch and wink emanating from the southern Mediterranean is now going to be fair game for sparking rallies and slumps in the markets. And how happily the Greeks will take to increased supervision by the EU and the IMF is yet to be seen. But volatility was always going to be a feature of 2010.

By the way, for an insight into Greece’s real problems and why it really needs to sort itself out, you should check out this interesting little anecdotal piece on the BBC website. Endemic tax dodging and public sector corruption do not make for a productive, happy society, because it makes honest, productive citizens feel like mugs. A bail-out would merely be a licence to continue down this route. Why should German or potentially even British taxpayers shell out to effectively fund Greece’s underground economy?

Why tighter Chinese lending threatens commodity prices

Anyway, enough on Greece for now. A few weeks ago, it wasn’t Greece but China that was giving investors the jitters. Concerns that China would tighten monetary policy and cut off the recovery were widespread.

Probably the most interesting thing about China and the eastern half of the world in general is that while we’re still fretting about the dangers of deflation, the big issue over there for now is most definitely inflation.

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Mining giants are right now in annual iron ore negotiations with steelmakers in China and Japan. They are reportedly trying to get a price for the ore above the record $90 a tonne set in 2008/09. After all, the spot price is currently at $120 a tonne. “Why on earth should we agree to anything different but spot prices?” said one FT source.

The negotiations are particularly complicated this year. That’s partly because miners feel they got shafted during the economic crisis by steelmakers, who apparently broke with their annual commitments and started buying on the spot market when spot prices plunged below the annual rate agreed. So miners want to make clear that this cuts both ways.

That’s all very interesting. After all, high iron ore prices mean high steel prices, which makes it more expensive to build everything from cars to white goods to buildings. That’s very inflationary. But where is all this demand coming from? And more importantly – can it continue? China’s iron ore imports jumped by 40% during 2009. But that was partly to stockpile supplies while the price was low. And with Western demand for both goods and construction still well below the pre-credit crunch era, you have to ask whether high iron ore prices could survive a slowdown if China decides to tighten up on lending, which would in turn put a dent in domestic construction projects.

China’s grip on rare earth metals spells opportunity

This is a topic we’ll return to in future. But what’s perhaps more interesting for investors is that China seems to be trying to tighten its grip on the global supply of ‘rare earth metals’. The country currently supplies about 95% of the global market for these metals, which are used in most modern gadgets and also play a vital role in ‘green’ technology. But China has been steadily cutting export quotas, and now wants to build a ‘strategic reserve’ to make sure it has enough rare earths to meet its own needs.

Now, there are other sources of rare earths in the world. The main issue is that other countries have run down their productive capacity because they could get it cheaper from China. But if China decides it needs more rare earths for itself, then projects elsewhere could get going – and investors in those projects could profit handsomely. My colleague Eoin Gleeson wrote about the potential boom in minor metals back in September – you can read the background and his tips here.

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