Australia has plenty of: resources. Of course you knew that already. But what you may not have known is that Australia's government is devising plans on how to protect Australia's natural resources from a hostile takeover. Presumably from countries like... China. And we're not talking about share market action.
The strategic value of natural resources in the geopolitical game takes on more urgency with the death of crazy Elvis/Alien impersonator Kim Jong-il. The North Korean cult figure that has starved his country into submission since taking power from his father in 1994 died over the weekend.
And Christopher Hitchens said there isn't a God.
But we will let the dead bury the dead. Let's move on to living matters. Like how will Australia protect its offshore oil and gas from military occupation in the next 25 years by a nameless northern horde. We're referring, of course, to the Australian Defence Posture Review, announced by Defence Minister Steven Smith in June of this year.
In Monday's Australian Financial Review, in the article "Resources ripe for plunder", Geoffrey Barker asks whether Australia will be able to sell its resources in the Asian century. Or, whether a weaker America and a more aggressive...northern... power might simply decide to take them. And then establish its own 21st century version of a Greater East Asia Co-Prosperity Sphere. Barker writes (emphasis added is ours)...
Much of Australia's great minerals bonanza lies along an arc that rises from Gladstone in Southern Queensland, sweeps over the continent and descends to the Dampier region in Western Australia....Close to 100 expanding minerals, energy, and infrastructure projects, worth hundreds of billions of dollars, lie along this arc spanning the most exposed, underpopulated, vulnerable regions of northern Australia...These huge economic assets could be of serious interest to expansionist foreign powers hungry for energy and mineral resources to feed their future growth...The fact is that regimes change; amiable economic relations can sour over time with changing national needs and ambitions of rising powers. It would hardly be surprising if some foreign powers did not eventually come to desire Australia's vast mineral riches - especially when demand is high and rising and when those riches are lying vulnerable and tempting.
Barker only mentions China once in the article. And he does so while mentioning India and Indonesia in the same sentence, all in a vaguely positive way. It's an example of passive/aggressive journalism. Surely China is the foreign power Australia is most worried about. Although no one can officially say so without angering China, which is also Australia's indispensible economic partner.
The June media release by the Defence Minister avoids naming China as a threat, as well. Instead, it uses neutral language to discuss the issues covered by the review. Those issues include:
- the rise of the Asia-Pacific as a region of global strategic significance
- the rise of the Indian Ocean rim as a region of global strategic significance
- the growth of military power projection capabilities of countries in the Asia-Pacific
- the growing need for the provision of humanitarian assistance and disaster relief following
extreme events in the Asia-Pacific region
- energy security and security issues associated with expanding offshore resource exploitation in our North West and Northern approaches.
Yes, that last bullet point is the real cracker. You can see just what it refers to on the map below. The big green shape in the middle is Australia. The red dots are offshore oil and gas fields. The blue stuff is water. And the green stuff in the upper left corner is the Indonesian archipelago. You'll note the red stuff is on top of the blue stuff and in between the two green stuffs.
Click here to enlarge
China Looking to Add to its Resources Wish List
Now, don't go thinking we take all government/military industrial complex propaganda/strategic planning at face value. It is just much easier (right now) for China to buy what it wants from Australia rather than, say, laying the ground work for a long-term proxy war by arming and supporting radical Islamists in Indonesia.
Just take a look at today's papers. "Chinese bid to create $8bn local coal giant" reports the AFR. "China is attempting to create Australia's largest independent coal producer through a proposed $8 billion merger between Yancoal Australia and Gloucester coal," report Nabila Ahmed and James Chessell.
There you have it. While Australia's defence establishment is cooking up scenarios whereby Australian resources are confiscated in order to give China more economic lebensraum, China is busy doing things the Western way, through good old-fashioned commerce. Well, mostly.
China’s Domination of Rare Earths Resources
In mid-October of this year, Chinese rare-earths producer Baotou Steel Rare Earth announced it would suspend rare earths production for one month, "in order to balance the supply and demand of rare earths." Baotou was reacting to a price crash in rare earth oxides in the third quarter, which incidentally also hammered local rare earth hopeful Lynas. Britain's Telegraph described the Chinese domination of rare earths as a "ticking time bomb".
What we're getting at is that China may be managing its rare earths industry to maximise its strategic stranglehold on the resources, and not simply for economic gain through open and free trade. China would hardly be alone in conducting its affairs this way. What's so important about the story, then?
Early this week, China's Ministry of Commerce completely banned Baotou from exporting rare earths for "environmental reasons". Perhaps that is true. After all, bureaucrats are busybodies everywhere. Perhaps China's regulators are shutting down Baotou because the company is destroying the environment - an issue which the Chinese people are not taking lightly anymore.
But according to an industry insider quoted in the Shanghai Securities News, "Baotou is the world's largest producer and has the highest quota for export and production... It is unimaginable for the industry if it loses its quota because of environmental concerns". Unimaginable maybe, but apparently real.
Let's suppose China is using its rare earths industry dominance as a strategic weapon, withholding vital exports to competitor industries and stockpiling materials used in the construction of high-tech weapons. So what? What does that mean to Australia, now, or in the future?
Well, it doesn't mean anything at all unless it's connected to the attitude of Chinese leaders toward acquiring resources. And it doesn't mean anything at all unless you put it in the context of what's happening in China right now. Let's get some quick context then.
China’s Credit Bubble and What it Could Mean for the Future of Australia’s Natural Resources
What's happening right now is that one small city in Southern China is in open revolt and the property bubble is bursting. The 13,000 villagers in Wukan in Guangdong province have physically driven the police and the communist party out of the city. The underlying issue seems to be that Party officials were stealing villagers' land in order to sell it into China's massive property bubble.
This is surely one of those unintended consequences of the global credit bubble. Local governments in China have made lots of money selling land to developers. They also use local land as collateral for loans to finance massive infrastructure projects. That whole phenomenon is now coming into conflict with at least 13,000 angry Chinese villagers. What next?
Well if this article in Foreign Affairs is right and new Beijing home prices fell by 35% in November, then 13,000 angry villagers could turn into a lot more angry property speculators learning about credit bubbles the hard way. If crashing property prices in China generate domestic instability, how will the communists in Beijing handle it?
It's possible the old guard will simply give up and quietly flee the mess, retiring to their high-rise apartments in Singapore, Melbourne, and Sydney. Or, you could see a harsher police/military reaction to crush dissent before it gets widespread. And then there is always the foreign enemy card.
Any regime in charge of a Nation State knows that the best way to distract unhappy people who have no jobs or have just suffered a loss to the wealth is to find a foreign enemy and big him up. Direct anger and aggression outward, somewhere across the South China Sea, either directly east or maybe toward points south. And start ratcheting up the rhetoric about shared resources.
After all, isn't it only fair that Australia share its wealth with those who need it? This is essentially what the Gillard government has been telling the miners. How can it reasonably object if China makes the same argument to Australia?
What Lies Ahead for Australia, China and the Control Over Natural Resources ?
Of course we're exaggerating. Australia belongs to Australians. Its relationship with China and with the US is the topic of the conference we have scheduled for next March in Sydney. By the way, if you want to be notified with more information about that conference when it becomes available, you can put your name down here.
At the very least we know this: geopolitics - the contest between nation states for control over real and scarce resources - is starting to become a factor in resource prices. Commodity investors need to understand it. It's a subject you'll read more about in 2012.
In the meantime, we had promised to tell you the solution to all of the world's banking problems today. But it is so simple and so underwhelming that we're going to leave it for tomorrow. It's also connected to China's resource nationalism and Australia's increasingly defensive military posture. Stay tuned.
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- China’s “Rare Earths” Exports Collapse, World Prices Soar
- Stealth Symbolism, and a Rare Earths Update
- A Rare Earth Bonanza
- Handicapping the Rare Earths Stampede
- How China Will Defeat the US
About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005 Melbourne. He’s the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing.