Rare Earth Metals - Strategic Discovery is a Wake Up Call

The incident last week where China threatened to, and perhaps did, cut off exports of rare earth metals to Japan has implications far beyond the obvious. The implications are fairly obvious too.

This is a story about the world's new stand-alone superpower flexing its muscle. China flexing hard in response to a relative triviality. And doing so with impunity.

The "Discovery" of Rare Earth Metals

For many, the discovery here is, "gee whiz, what a great opportunity rare earth metals look like - where can I get some?"

The vast forest of this issue, beyond the few trees in front of our eyes, is the action taken by China. Their willingness to wield a strategic commodity monopoly as a hammer in a relatively minor situation is a revelation.

It shows what a disadvantage western countries put themselves in, when our business decisions are based almost entirely on the amount of short-term cash generated for the individuals controlling the decisions. Whereas China makes business decisions based almost entirely on what what gives it the greatest long-term strategic advantage.

Over the past few years, we have watched control of aluminum, nickel and other strategic commodities fall out of Canadians' hands. For what?? So a couple of directors and a handful of shareholders could cash in their chips? It is beyond me how anyone could possibly decide that the sale of Inco or Alcan was of net benefit to Canada, which is supposed to be the determining factor in foreign investment review. In any rational analysis, when consumption is expanding exponentially, you would have to be nuts to give up control over a metal resource you already control.

To take that one step farther - you would have to be pretty much brain dead to give up control of a cornerstone resource that you already control in agriculture. We are on the brink of making that mistake now with potash. Canada controls potash. But Saskatchewan-based Potash Corp. is currently the subject of a hostile takeover attempt by Australian multinational BHP group.

Potash was successful yesterday in temporarily blocking the $40 billion offer,

alleging that BHP had provided ''false and misleading statements'' in relation to its $US130-a-share offer and its intentions regarding its potash business. 

Although $130 is more than Potash Corp was trading for at the time of the original BHP offer in August, today's price on the NYSE is $145. In the summer of '08, Potash Corp was trading at over $230.

This scenario still has a long way to play out. Whether or not BHP's offer ever sees the light of day, an offer from China (or elsewhere?) could also be forthcoming. Either way, any purchase would have to pass foreign investment review. Which, if Potash Corp. were in China, would never happen. Will we allow it to happen in Canada?

Potash is not only a key strategic resource. It is also a commodity that is essential for the agricultural industry in Canada, especially in Saskatchewan, the same province that produces the potash. So, it would be a monumental error to allow this resource to be controlled elsewhere, by some foreign power that could conceivably wield it against us at the drop of a hat, as China did with rare earths against Japan last week.