Potential US China Trade War Could Support Rare Earth Prices

(NEW YORK)--A negative ruling late Friday in the WTO against Chinese steel pipe imports, and unanimous approval in the ITC for tariffs on Chinese coated paper, could be the begin of a potential tit-for-tat trade skirmish between two of the worlds largest economic superpowers.

On Friday, Oct. 22, the WTO ruled in favor of the US to impose duties on Chinese imports of steel pipes that are being dumped or subsidized into the US market. The specific duties that China had challenged involved circular welded pipe, light-walled rectangular pipe and tube, off-road tires and laminated woven sacks.

In addition to the action taking by the WTO, the U.S. International Trade Commission (ITC) also approved late Friday in a 6-0 vote to impose punitive duties on China exports of specialty paper to the United States. China has called the duties protectionist, while US lawmakers and makers of steel, paper and textiles say they are crucial to countering what they call unfair trade practices. The panel’s decision sets the stage for the tariff rates to take effect within days.

These actions come on the heels of a US probe of China subsidies for their clean energy market, which in turn drew a sharp rebuke from the Chinese government. China’s top energy official, Zhang Guobao, said the probe was misguided and based on a desire by politicians to garner votes. “I was very much astonished at it, wondering what the United States wants,” he said last Sunday, according to state-run media.

In retaliation, reports emerged this week that China has been delaying or blocking shipments of rare earth elements to Western nations in the US, Japan, and EU. Rare earth elements are used in the production for a wide-range of tech products, such as hybrid cars, mobile phones, flat-screen televisions, fiber-optic cables, and latest-generation wind turbines.

"Rare earths are a commodity. Each country has the right to decide how much it exports or imports. This is normal economic behavior," the People's Daily said.

Tom Bustamante, the Managing Director of Ludlow Capital commented, "Although a full trade war is very unlikely between both countries, the recent developments over the past week have now increased the possibility of China striking back with their own trade tariffs and restrictions on US, and Western goods. This is turn now increases the potential that the rumored delays and halts of 'rare earth. materials are surely going to be put in place after these events."

"China is flexing their new found economic muscle, and the pressure for them to appreciate their currency will also box China into a corner where they may push back. The ruling from the WTO late Friday may also encourage some other US industries to go forward with their own petitions as this recent WTO ruling clarifies the law and reduces the potential cost of litigation. It's a bit worrisome, as protectionism was one of the main causes for the prolonged effect of the Great Depression, but we're also seeing a growth of what you could call economic nationalization, not just of industries, but resources as well. This in turn could provide additional price support for rare earth commodities. Hopefully cooler heads will prevail, because a trade war now would be in no ones best interest."

Price for Chinese rare earth producers have run-up strongly recently due to these developments, but in an opinion letter to their members the company saw an better entry point into this sector after a nearly 30% pullback from recent highs, and the potential for retaliatory actions from China to provide support for these commodities.

Chinese Rare Earth Plays

Some of the biggest performers within the sector are China Shen Zhou Mining & Resources, Inc. (SHZ), China Direct Industries (CDII), Qiao Xing Universal Resources, Inc (XING), and China Gengsheng Minerals (CHGS). These stocks have been performing spectacularly over the past few trading sessions, but now they may be getting ahead of themselves on a valuation bases.

http://www.wallstreetnewscast.com/news/2010/october/chinaearth.html