Rare earths and government policy

Subsidies, stimulus, incentives, disincentives and limitations created by government policies can have a short-term effect. Once in place, these policies become sacred policy mantra to their original perpetrators and are very difficult to remove regardless of their detrimental effect

In the past month all of the central banks around the world have been trying to outdo each other in a massive attempt to manipulate the markets. It seems, especially to many markets, that with their impressive monetary firepower at their disposal, they can easily get away with it. But can they? Governments are constantly seduced by the prospect that they can introduce policies designed to bend the markets to their will in an effort to help their countries often at the expense of everyone else. But do these policies actually work? The Chinese experience with rare earths provides a cautionary tale.


China may not have been blessed with an abundance of natural resources, but it does have an abundance of rare earth metals. Rare earth metal is the generic name for 17 elements with exotic names like thulium and lutetium. They are essential for many high-tech uses including wind turbines, car batteries and many sophisticated defence applications. China has been blessed with 57% of the world reserves, but that leaves 43% outside of China including substantial reserves in the United States, India and Australia.


Despite its dominance of the resource, China was not able to reap great rewards from it. They produced so much of these materials that from 1979 to 2009 the price increased only 20% while the demand tripled. What the Chinese were able to do over that period was to put all of the other miners out of business, so by 2009, the Chinese controlled 95% of the world supply.


With that sort of market dominance, flexing its economic muscle was irresistible for the Chinese government. They did so both domestically and internationally. The government ordered the state-owned Inner Mongolia Baotou Steel Rare-Earth Hi-Tech Co, a subsidiary of the imposing state-owned Baotou Iron and Steel Group, to create a monopoly on rare earths production by taking over most of the other 129 legally registered rare earths mines and closing down many of the illegal mines. Besides consolidation it also restricted exports. From 2006 it lowered the amount of exports by 5% to 10% per year. In 2010 they cut it by 40% and in September of 2010 they cut exports to Japan for two months.


Like the more recent manipulation, China’s attempt to control the rare earth market was temporarily successful. Prices for a basket of rare earth minerals went from $10/kg in 2009 to over $147/kg in 2011. So China apparently attained its goals in consolidating the industry in state hands, limiting exports and increasing the price. Speculators began to bid up any producer of rare earths. In the US Molycorp, the owner of the sole American mine, had an IPO in 2010 at 13 and its price increased over 500% to 74 by 2011. But then other countries and the market took over.


Over the past year the Japanese government began a program costing nearly $1.3 billion to fund alternative sources for rare earths. The government and Japanese companies are also spending about $652 million to find substitutes for rare earth minerals in a variety of products. The US also considered similar subsidies.


The subsidies are supposed to help find other sources and there are plenty of those. An Australian company, Lynas Corp, is spending $200 million to open a processing plant in Malaysia to process rare earths mined at Mt Weld in Australia. Molycorp reopened the US mine at Mountain Pass California. This mine, closed because of Chinese competition in 2002, renewed operation is in August. Another victim of Chinese competition, the state-owned Indian Rare Earths, is renewing operations that were closed in 2004. Not to be outdone the Brazilian mining giant Vale has also been doing preliminary investigations for mining in Brazil.


The results of all of this activity are predictable. Exports of rare earths from China have fallen sharply. Although China increased its export quota in 2012 for the first time since 2005, exports from China are down 37%. Prices have fallen as well. From their high in 2011, prices are down to $50/kg. They have halved in 2012 alone. The stock of Molycorp fell along with the prices. From a high of 74, Molycorp’s shares have fallen back to its IPO price of 13.


The problem with intervention, as the Chinese story shows, is that the ecology of the market in a globalized economy is far more complex than government policymakers originally can predict. Every action intended to have a limited beneficial local effect, will spur unintended consequences somewhere else. Subsidies, stimulus, incentives, disincentives and limitations created by government policies can have a short-term effect, but in the longer run they can flip the food chain. Once in place, these policies become sacred policy mantra to their original perpetrators and are very difficult to remove regardless of their detrimental effect.


(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and has spoken four languages. Mr Gamble can be contacted at [email protected] or [email protected].)


Rajiv Gandhi Equity Savings Scheme: Can tax incentive alone lure investors into stock market?

The need of the hour is to prepare an environment for growth of stock market. This should start from investor education and strict regulatory controls in capital market. Tax benefits can follow all this

The cat is finally out of the bag. The government has approved much awaited “Rajiv Gandhi Equity Savings Scheme” (RGESS) setting aside all speculations related to the features of the scheme. Two things which come out prominently from the features of the scheme are: 1) it is a scheme intended to provide tax benefit to investors investing directly in equity, mutual funds and exchange traded funds; and 2) it is an attempt to lure investors into stock market and broaden investor base in stocks.

The scheme offers tax benefits to investors whose income is up to Rs10 lakh. This means that the scheme is open for investors paying income tax in two tax brackets—10% and 20%. For an investment up to Rs50,000, 50% of investment will qualify for tax benefit. For an investor in 10% bracket, the total tax benefit offered by the scheme will be Rs2,500( 50% of Rs50,000 is Rs25,000 and 10% tax benefit on this amount is Rs2,500), while for an investor in 20% tax bracket this benefit will be Rs5,000 which can be availed only once. The tax benefits as such do not sound very attractive but in a country like India where investments are done on the basis of tax considerations, this amount is good enough to catch attention of an investor.

While the objectives of the scheme might sound noble, there are some questions which the scheme opens up for debate. Tax benefits on stock investments are not new to the investors in India. Equity Linked Savings Scheme (ELSS)—a tax benefit product—has been in existence for quite some time now but has failed to lure investors to the extent desired. When Compared to ELSS in terms of tax benefits, RGESS looks like an old wine in the new bottle to some extent. However, RGESS is different from ELSS in the sense that tax benefit offered under RGESS is available to first time investors alone and hence the most important question that RGESS raises is, “Can tax incentives alone lure new investors to the stock market and broaden investor base in the country?”

This question needs some investigation and hence requires analysis of some basic facts. As per existing tax provisions in India, investment in stocks is extremely attractive in terms of taxation of returns. There are no long-term capital gains taxes in the country for an investor if he purchases stocks which are traded on recognized stock exchanges and Securities Transaction Tax (STT) is paid on these stocks. Contrary to this, bank deposits and fixed deposits in particular are subject to taxation as per the tax slab in which income of an individual falls. Another attraction of investment in stocks is that it allows an investor to set off capital loss against capital gains subject to some conditions. But in bank deposits there are no such provisions.

In spite of there being very attractive tax structure for investment in stocks, investors in India prefer bank deposits to stock investment. RBI (Reserve Bank of India) data on change in financial assets (see table below) shows that banks deposits have shown consistence increase in deposits year on year basis. Even insurance as a product has shown similar trend. However, total change in stock investments during last ten years is less than a single year change in the bank deposits. In fact during last five years, due to global recession and bad performance of stcok market, total change in the investment in stocks has been marginal.

Looking at the data and trends in investments in financial assets in India, can a marginal tax incentive really lure investors in stock market?  For a moment even if we believe that investors are indeed attracted to this scheme, will they remain invested beyond the lock-in period? The answer seems to be an emphatic no at this stage. The failure of ELSS as a product is an example of it.

The government it seems has failed to read the pulse of investor’s requirement once again as far as equity market is concerned. Investors have been avoiding equity market because of certain obvious factors and tax incentives are not right medicine to mitigate fear arising from these factors. Some of the factors which have driven investors out of equity market and are dissuading new investors to join the market are undesirable speculation in the market. Fast changing dynamics of the market and losses arising from the changes have kept investors away from the market. The regulator has failed to educate investors on this front. It is pertinent to note that one of the objectives with which market regulator Securities and Exchange Board of India (SEBI) was formed was education of investors. The common investor today feels that volatility in India equity market is too much and often words like , ‘Casino’, ‘Lottery’ and ‘Matka’ are used with respect to investment in equity.

The need of the hour is to prepare an environment for growth of equity market. This should start from investor education and strict regulatory controls in capital market. Investors need to be given confidence that equity market creates wealth in long term and vagaries of return can be overcome by long term investments. Presence of cumbersome processes needs to be simplified. For instance, one KYC should be good enough for all investments including mutual fund, equity and other equity related investments. Corporate governance practices need to be implemented strictly so that investors can believe companies and their operations. In brief, growth of equity culture needs to be an all encompassing exercise. Tax benefits can follow all this.





4 years ago

Those people who have not invested in equities in the last five years (From Jan 2008 till date) have no business to consider investing in stocks now. It simply means that they do not possess the required temperament for investing in equities. How can they be expected to buy low and sell high?
The other category of people ( millions of folios in equity MFs alone) would be those who have sold off in panic or discontinued their systematic investment plans during the past 5 years when it would have been most advantageous for them to have bought more at lower prices or at least stayed put.
Spreading of equity cult is nearly impossible – with human nature being what it is, it just cannot be done. Most people are not emotionally wired to gain from investing in the stock markets. As the legendary investor Warren Buffett says “Investing is simple, but not easy.”
Investing in equity is like running a business operation. It calls for courage of conviction. It needs independent thinking and doing things that are unpopular – The fact is not many people like to think independently ( as Bertrand Russell said “ People would rather die than think, many do), they are ever eager to validate their actions based on how the majority of people think and act.
The RGESS would have worked better if it had been a 15 years product like PPF with similar liquidity / partial early redemptions as offered by the PPF; with an asset allocation of debt / equity at 25/75 or 50/50 or 75/25 depending on the age of the person. Only then most participants would have hoped for some reasonable wealth creation. But then, who cares to think?

Noise pollution: Does your hearing get affected due to festivals?

We cannot stop hearing at any time of the day. Naturally our auditory system experiences fatigue because of noise pollution. There are many known ill effects, such as insomnia, irritability, lack of concentration and poor attention span. We all have right to be human beings with good quality of life.

There has been enough discussion about noise pollution. There are people who want to abide by rules and provide quality of life to all. And there are others who have single motto, “It’s my choice to play the music at whatever level I want”. The war is between them and us.


People forget that one cannot confine the noise levels to a certain area. Noise travels in all directions, and hearing is also not a voluntary act. We cannot stop hearing at any time of the day. Our process of hearing is active for 24x7. Whether you like it or not, one needs to hear all kinds of sounds because it’s around us. Naturally our auditory system experiences fatigue. There are many known ill effects of it, such as insomnia, irritability, lack of concentration and poor attention span. We all are not aspiring to be great thinkers, philosophers, or scientists but we all have right to be human beings with good quality of life.


Frequency parameter of sound: All the rules have been talking about the loudness of sound i.e. the output in decibels (dB) and the prescribed levels by the noise pollution rules of the year 2000. We need to understand another major component of sound i.e. frequency. For any given sound there exists frequency and intensity. We cannot have only intensity i.e. loudness and no frequency.


Whenever a sound is generated it implies that an object vibrates and certain frequencies are generated, and amount of force applied to the source will define the intensity. So when I clap there will be some frequency and at some intensity. If I clap forcefully intensity will increase but frequency will be same.  In another situation; you tap on the plain surface depending on the material you will hear different types of sound, that tonal percept is indicating different frequencies. It suggests that different frequencies are generated from different types of material.  Human ear can hear in a frequency range of 20Hz to 20,000Hz, and we hear all these frequencies in the range of 0 decibel (dB) to 120 decibel (dB). Unfortunately, our focus has been on this decibel but not on frequencies.


Frequencies are injurious to health: We need to understand that certain frequencies are injurious to health. This has become obvious because of current discussion of traditional instruments used in this Ganesh festival. These are considered as substitute for loud speakers.  It is certainly a strange assumption and it’s hard to understand on what grounds Police Department has given a nod to this option. These instruments certainly generate significantly louder sound, and these instruments will cross the prescribed noise level stated in the noise pollution rules.  Here we need to understand the frequency spectrum. Traditional instruments ‘Dhol’ and ‘Tasha’ may be more injurious to health.


Dhol generates low frequencies, and low frequencies always give a volume, though on intensity scale the level may not be very high, but psychological percept of this sound will be very loud. Low frequencies are actually transmitted into human body more easily, and would create more harm to the human body. The person who plays this instrument ties the Dhol on his/her waist. Naturally maximum sound energy will be transmitted to a human body. And others who are passing by this dhol player also get affected. People often feel vibrations in the chest, which implies that our lungs vibrate with these external sound sources. Vibrations of organs and soft tissues in the body are certainly injurious to the human body. There is adequate research available on the topic called as Human body Vibration. Let us try to understand this concept.


Human Vibration: Human vibration is defined as the effect of mechanical vibration on the human body. During our normal daily lives we are exposed to vibrations of one or other sort e.g. in buses, trains and cars. Many people are also exposed to other vibrations during their working day, e.g. vibrations produced by hand-tools, machinery, or heavy vehicles, etc.


Just as sound can be either music to the ear or irritating noise, human vibrations can either be pleasant or unpleasant. We enjoy, and even create pleasant vibrations when we run, dance, but we try to avoid exposing ourselves to unpleasant vibrations such as travelling on a bumpy road or operating hand-held power tools.


A good deal of research has been done in studying the effect of exposure to vibration on man, especially in his working environment. Some of the early research involved a study of people such as aircraft pilots, operators of heavy work vehicles and hand-tool operators. Their ability to perform complex tasks under adverse vibrational conditions formed part of the first investigations. Nowadays, human vibration research is also carried out in working environments and the results used to establish international standards, which allow human exposure to vibration to be evaluated.


Types of vibrations: There are two main types of human vibration: whole-body vibration and hand-arm vibration. Whole-body vibration is transmitted to the body as a whole, generally through the supporting surface (that is, feet, buttocks, back, etc.). A person driving a vehicle, for example, is subjected to the whole-body vibration through the buttocks, and if there is back support, through the back as well. Hand-arm vibration is transmitted to the hands and arms. Operators of hand-held power tools mainly experience it. Individuals who are playing dhol will have whole body vibrations transmitted through chest, lower waist, legs, and hand-arm vibrations as well.


 Exposure to whole-body vibration can either cause permanent physical damage, or disturb the nervous system. Daily exposure to whole-body vibration over a number of years can result in serious physical damage, e.g. ischemic lumbago, which is defined as a pain in the lower back and buttocks caused by vascular insufficiency. This is a condition affecting the lower spinal region. Exposure can also affect the exposed person's circulatory and/or urological systems. People suffering from the effect of long-term exposure to whole-body vibration have usually been exposed to this damaging vibration in association with some particular task at work. During Ganesh festival season, enthusiastic people have been practicing these traditional instruments for hours together, and for weeks. Naturally their bodies will be subjected to these unnatural vibrations. The younger generation may not take note of the damage happening to their body and internal organs. But these whole body vibrations are certainly silent killers.


Exposure to the whole-body vibration can disturb the central nervous system. Symptoms of this disturbance usually appear during, or shortly after exposure in the form of fatigue, insomnia, headache and ‘shakiness’. Many people have experienced these nervous symptoms after they have completed a long car trip or boat trip. However, the symptoms usually disappear after a period of rest. But recurrent exposure of whole-body vibration will lead to permanent damage of tissues.


Daily exposure to hand-arm vibration over a number of years can cause permanent physical damage usually resulting in what is commonly known as “white-finger syndrome”, or it can damage the joints and muscles of the wrist and/or elbow.


White-finger syndrome, in its advanced stages, is characterized by a blanching of the extremities of the fingers, which is caused by damage to the arteries and nerves in the soft tissue of the hand. The syndrome usually affects one finger first but will affect the other fingers also if exposure to hand-arm vibration continues. In the most severe cases both hands are affected. In the early stages of “white finger syndrome” the symptoms are tingling, numbness, and loss of feeling and control in those fingers which are affected. These symptoms are serious as they affect not only working activities but also leisure activities and they are, to a large extent, irreversible.


Loss of feeling and control of the fingers, even for short periods of time, can present a direct and immediate danger. E.g. when periods of exposure (use of vibrating hand tools) are alternated with precision handwork. This job situation is often found e.g. in abattoirs, where butchers use both circular saws and sharp knives. Same will be true for drum and tahshe beating for hours.  Damage to the wrist or elbow joints is often caused by long-term exposure to the vibrations produced by low blow rate percussive tools (e.g. asphalt hammers and rock drills). This damage causes pain in the joints and muscles of the forearm and is accompanied by reduction of control and muscular strength in the forearm.


Frequency response of the human body

Mechanical vibration of a machine is caused by the moving components of the machine. Every moving component has a certain frequency associated with its movement so, the overall vibration transmitted to a human body in contact with the machine is made up of different frequencies of vibration occurring simultaneously. This is an important fact to take into consideration when measuring human vibration because the human body is not equally sensitive to all frequencies of vibration.


To understand why human beings are more sensitive to some frequencies than to others it is useful to consider the human body as a mechanical system. This system is complicated by the fact that: (a) each part of the body has its greatest sensitivity in different frequency ranges; (b) the human body is not symmetrical, and (c) no two people respond to vibration in exactly the same way


In human vibration measurements vibrations occurring in the frequency range from 0.1 Hz-1500 Hz is of greatest interest. Those vibrations occurring between 1 Hz-80 Hz are of particular interest when measuring exposure to whole-body vibration, and those occurring between 5 Hz-1500 Hz are of special interest when measuring exposure to hand-arm vibration.


Whole-body vibrations should be measured in the directions of an orthogonal co-ordinate system having its origin at the location of the heart .The longitudinal direction (head-to-toe), the body is most sensitive to vibrations in the frequency range from 4 Hz-8 Hz. Human response to vibrations in the front-to-back direction and side-to-side do not differ and, in this lateral (transverse) plane, human response is greatest in the frequency range from 1 Hz to 2 Hz.


Vibrations in the frequency range 0.1 Hz-0.63Hz are considered to be responsible for causing discomfort or acute distress (commonly known as motion sickness), in people who are exposed to them. Individual human reactions to vibrations in this frequency range vary widely and are dependent not only on the vibration (motion) itself, but on factors such as vision, odour and age, which makes a study of this type of human vibration particularly complicated.


For the hand-arm system, the frequency response to vibration is the same in all directions.  It has maximum frequency sensitivity in the range from 12 Hz-16 Hz.


For all the traditional instruments used in this festive time have significant hand-arm vibrations, which would be injurious to health. For tasha there is another factor of high frequency exposure, since thasha generates high frequencies from 1500Hz and above which would be responsible for tinnitus (ringing in the ears). If our auditory system is exposed to high intensity sound like 110dB, some more changes occur in the nerve cell mechanism.



Nerve cells that carry electrical signals from the ears to the brain have a coating called the myelin sheath, which helps the electrical signals travel along the cell. Exposure to loud noises—i.e. noise over 110 decibels—can strip the cells of this coating, disrupting the electrical signals. This means the nerves can no longer efficiently transmit information from the ears to the brain.


This myelin sheath cannot be regenerated over and over again. That means people will develop hearing loss in their early life, which would be permanent type.  It is true for tinnitus as well. In early stage tinnitus can be temporary type, but over exposure to loud high frequency sound will lead to permanent type of tinnitus. Once tinnitus (constant ringing in the ear) is developed, it would lead to insomnia, irritability and difficulty in focusing.


Now it’s the call, what do you want? Short time fun and long time illness? Or healthy life for years to come.


(Courtesy: Awaaz Foundation)


(Dr Kalyani Mandke is specialist in Audiology and Speech Therapy. She is a Member of International Committee, American Academy of Audiology and has been instrumental in reviving the functioning Indian Speech and Hearing Association (ISHA).


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