Strategic Metal Report

The Fanya Metal Exchange Scrambles to Adapt to New Regulations and Falling Prices

For years the Fanya Metal Exchange has sold itself as a medium for everyday Chinese investors to satisfy their desire for a stake in the world of physical minor metals.

Conference after conference brave staff faced questions and struggled to explain who these investors were, why - it seemed - they all took the same buy and hold strategy and how an independent audit of the exchange's incredible inventory numbers was unnecessary.

How much a year can change.

While the exchange continues to insist that it is positioning itself as a global hub for minor metal transactions, there are now few outside the organization with faith in its ability to succeed.

Since the leak of Chinese government investigations into the Fanya Metal Exchange came to light in December of 2014, the exchange's claimed purchases have effectively ended. And rumors that Fanya's business model was not as it seemed, which had circulated last year, started being openly discussed by those with direct knowledge of the company's operations.

Reports of Irregularities & Risk at the Fanya Metal Exchange All Just a "Careless Mistake"?

As originally reported here on SM Report, concern about risk associated with irregular operations at the Fanya Metal Exchange arose last week following a report published on the Chinese Securities Regulatory Department's official website.

The report was quickly deleted from the official government website and summaries of the report published by local media were subsequently edited to remove any reference to the Fanya Metal Exchange. Questions about what exactly is happening at the exchange, however, have begun to swirl.

Is the Fanya Metal Exchange, which has become a topic of debate amongst participants in the industry since it began purchasing large stocks of indium in 2013, under investigation by authorities in China?

And will the exchange be able to continue operating, as it currently claims to, by selling millions of dollars worth of minor metals to individual investors each week? (Note: Based on current market prices, Fanya's published purchases, last week alone, totalled more than US$ 50 million).  

As always seems the case with the Fanya Metal Exchange, there are more questions than answers.

While there has obviously been censorship of the original report, discussions about its contents have continued on a number of Chinese business and investment websites, forcing Fanya to respond.

Chinese Monetary Policy & Metal Prices

For the second time in less than a year, China's central bank - the People's Bank of China (PBC) - has moved to moderate the country's shadow banking sector by limiting lending to banks, leading to higher borrowing rates.

A similar effort was made in June of last year, which resulted in a sudden increase in demand for copper, as cash-strapped borrowers were able to get lower interest rates on USD loans financed using copper as credit.

This time, however, the PBC's effort to tighten liquidity was strategically coordinated with a significant depreciation in the RMB - USD exchange rate, the currency's largest depreciation against the dollar since becoming de-pegged in 2005. The depreciation was an effort to deter speculators who profited from the spike in interest rates last June.

With all this monetary action in the world's largest metals economy, SM Report has finally come back from a longer-than-planned break to look at the effects that these developments are having on the market for minor and strategic metals.

Indium Market Update - July 2013

Indium prices have shot up US$ 40-50 per kilogram over the past two weeks based on Chinese speculators heading to North America and Europe to bid on the metal.

Speculators are assuming that the Fanya Exchange (discussed last month) will continue to buy up all Chinese indium production, and by removing this material from the market international prices will increase to fall in-line with current Chinese market prices, which are a still another $30-50 per kilogram above non-Chinese prices.

If speculators are able to secure large amounts of non-Chinese indium, it can be expected that all prices will continue rising.

Indium & the Investment Industry

One topic that has repeatedly appeared in reports about the indium market over the past year is the increasing influence of investors on demand for the metal.

Since 2011, the investment industry has grown to become a significant consumer of indium. In China, two commodity exchanges allow companies and individuals to electronically trade contracts of the metal, while in Europe and the West, private asset companies offer opportunities to make investments backed by various minor metals, including indium.

The potential impact on the market comes from the fact that the inventories held by these investment companies and exchanges can be removed from the market for indefinite periods, depending on investors' goals and expectations.

One of the lead sponsors at this year's World Indium and Germanium Forum, which recently concluded in Kunming, China was the Fanya Metal Exchange, which began offering investors an opportunity to trade units of indium via their online trading platform in 2011. The investors trading on the Fanya Exchange can trade indium in units as small as 500g, while prices are quoted in 100g units.

As the Fanya Metal Exchange promoted and grew interest in the metal amongst investors, it also significantly increased its inventory holdings of indium, which caught the attention of both consumers and refiners.

Many in the industry have questioned the disconnect that seems to exist between electronic trading of indium and the physical market for the metal. This divide is highlighted by the price differential between the Fanya Metal Exchange's price, which is presently over $900/kg of 99.995% min. indium metal, and the physical market price, where equivalent material is currently available for prices around US$ 540/kg.

For both producers and consumers of indium, the concern is that increasing speculation and hoarding of the metal will cause a spike in prices, which would stifle development of new downstream markets for indium products.

One does not have to look any further than the impact that investors and speculators had on the rare earth (RE) industry in 2009 and 2010 in order to understand how much price volatility can have on demand.

By-Product Metals: The Aluminum-Gallium Relationship Pt. I

Save for few exceptions, minor metals are produced as by-products during the process of extracting primary, often base, metals. But it is this dynamic between primary and by-product metals, which is at the core of understanding most minor metals markets, that still confounds many analysts, resulting in inaccurate assumptions and misguided conclusions.

In this two-part study, SM Report takes a look at the sometimes complex relationship between primary (or source) metals and by-product (or minor) metals in order to better understand the production and supply of such metals.

As by-products, the supply of most minor metals is heavily dependent on the extraction of source metals and, as a result, the market for the source metal heavily influences the availability of by-product metal. That is because the market for the source metal guides business decisions regarding extraction rates.

But what does this mean? The relationship between gallium and aluminum provides a good example.

The US, EU and Japan Take China's REE Export Policies to the WTO

In the first WTO case to be filed jointly by the US, EU and Japan, the three industrial powers will argue that China's REE export restrictions are not in accordance with the coutries obligations under its accession to the WTO. 

Following the WTO Dispute Settlement Panel's decision last year regarding Chinese restrictions on numerous other raw materials, including  bauxite, fluorspar, silicon carbide, coke and zinc, which found Chinese export and licensing systems not in compliance with their WTO requirements, many were expecting a complaint regarding REEs to follow.

For more on the WTO and China's raw material export regulations, click here.

For more coverage on the REE WTO complaint:

• BBC News: US, EU and Japan challenge China on rare earths at WTO
• Reuters.com: U.S., EU, Japan take on China at WTO over rare earths
• Bloomberg Editorial: Obama’s Rare-Earths Case With WTO Won’t Ensure Security

The WTO and China's Raw Material Export Restrictions: What's Next?

As those following the rare earth element saga are now aware, the WTO Dispute Settlement Panel (DSP) made recommendations on July 7 regarding US and EU complaints about China's use of export restrictions on a number of raw materials. Although the list of raw materials submitted by the complainant countries did not include any REEs, many have equated the DSP's conclusions with a judgment on China's REE export restrictions.

The DSP found China's application of export duties and quotas on various raw materials inconsistent with both the country's obligations under its accession to the WTO as well as with Article XI of the General Agreement on Tariffs and Trade (GATT). However, details of the DSP decision highlight the fact that export restrictions are not entirely precluded by the WTO, only that China's methods of application were not in accordance with the country's WTO obligations. The DSP's recommendations - along with China's response - may be the best indicator of what export policies are to come, not only for REEs, but also for many other strategic and minor metals, including antimony, indium, tungsten and germanium.

Minor Metal Market Outlook 2011

It is probably appropriate that 2010 comes to an end with rare earth back in the headlines, as it was the year of REEs. Severe export quota decreases drew headlines around the world and institutional investors into the market, resulting in exponential price increases and encouraging what seemed like every junior mining exploration and development company to add REEs in their taglines. As companies outside of China raced to get their hands on as much rare earth as possible, investors’ eyes lit up at the projected growth figures for hybrid car sales and wind turbine energy production by 2020 and beyond.

But what about 2011? Will REEs continue to be the headline-makers, or will demand for flatscreen TVs and continued growth of CIGS solar technology push indium into the spotlight? Will antimony prices remain at record levels? And what impact will rising production costs in China have on minor metal prices?

After looking into our crystal ball, we have come up with five projections on what minor metal markets should expect in 2011. Enjoy, let us know what you think, and – most importantly – Happy New Year!

Theories on Rare Earth Diplomacy

I was surprised to see rare earth splashed across the front page of the China Daily when I picked up the paper this morning, with the headline claiming that “Rare earths ‘will not be (a) bargaining instrument’”. A reference to statements made yesterday by Zhu Hongren, spokesman for the Ministry of Industry and Information Technology. Most readers of the daily may have been confused about what rare earths are and why they were Friday’s headline story, while those in the know were left scratching their heads, trying to figure out the Rubik’s cube of recent statements by Chinese officials regarding rare earth.

There have been countless attempts by media to try to make sense of China’s export embargo against Japan and consequent statements by various government officials and ‘unnamed sources’, as well as the current availability of export quotas. Well, now it’s my turn: