To China, we are Comedy Central

I recently read the book "Power Hungry: The Myths of 'Green' Energy and the Real Fuels of the Future," by Robert Bryce. In it he discusses how China has pretty much cornered the world market on the rare earth elements that provides the raw materials for essential components of Lithium Ion (L-ion) battery cells and extremely strong magnets used in electric motors and generators.

China's approach is that these materials in the unfinished state are worth a lot less than they are as part of finished goods. Well, this makes sense. These goods are valuable as well as strategic.This is also why China is taking a proactive stance in Africa to endear themselves to various poor countries that also hold reserves of many of the materials that they need. 

(China's human rights reputation, as well as their lack of any aversion to doing "what it takes" to do business with third world kleptocrats is the subject for another blog post.)

So, yesterday in the Wall Street Journal there is an article titled "Log Exports Hammer Mills." It is a story about how lumber mills in Oregon cannot find any wood to saw because the Chinese are paying a premium price ($600 per 1000 board feet) for raw timber. The highest price that a mill owner said he could afford to pay is about $475 per 1000 board feet. What self-respecting businessperson is going to ignore a 25% premium on as much product as you can produce?

In the piece, one freighter heading to China had just loaded 30,000 logs. That is a LOT of logs and keep in mind that is just one ship. So far, as of June 2011, the Chinese had imported 204 million board feet of U.S. timber compared with 141 million for all of 2010.

Instead of exporting sawed and finished lumber, we are exporting the logs themselves. Not only are we cheating ourselves out of the value added profits from producing finished goods, we are disallowing hundreds of mill workers to go back to work.

Is this a corporate decision to sell this valuable commodity to China at the expense of neighboring American businesses? Or should the government through its foreign policy make a decision to restrict exports? If the government did it, wouldn't many (loggers, timber companies, shippers) complain that it is restricting trade? If the companies got together and decided not to sell to China, wouldn't they be accused of colluding and creating a cartel of sorts? And if we did restrict exports, couldn't China metaphorically flip us the bird and go elsewhere to purchase the wood?

These are interesting questions, aren't they?

So, in the end I ask, Hu is laughing at who?


Craig Hollins said…
We have a similar problem in Aus. We ship a lot of dirt in the form of raw materials and buy back steel. Local steel producers can't compete because of higher labour costs and emissions regulations.
If we impose higher minerals royalties we'll be more expensive than Brazil. Tax breaks to the steel producers didn't lower their costs enough. Relaxing emission rules is out of the question in this Al Gore world.
Only answer is to lower labour costs but that's not likely in a market where an unskilled labourer can earn $100k+ per year.
Our only saving grace is our dirt isn't rare - at least for us. We have enough reserves of iron ore to supply the planet for a century.
I am a bit concerned about bauxite tho - Alcoa, an American company has the majority of our mineral rights and we all know how the Americans like to play fair.

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