Gary’s Note:
You really ought to care about America’s access to rare earths. The life to
which you’ve become accustomed depends on it. Byron King explains.
|
Rare Earths and Other Critical Metals |
By Byron King
October 30, 2009
Pittsburgh, Pennsylvania, U.S.A.
All the vital
technologies in your life rely on an incredibly small number of specialty
metals.
Electronics,
aerospace, military defense, automotive, clean-tech, renewable energy: none
of these would exist without these “technology metals”…and there’s shortage
looming just down the road.
That’s what some
of the key players in government and the metals industry came together about
last week in Washington, D.C. There are simply no substitutes for these
technology metals. Supply chains are only as strong as their weakest link,
and in this case, our weakest link is pretty darned weak.
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United
States of Windmills
Some so-called
“technologies of the future” are destined to fail due to lack of critical
metals with which to effect buildout. Take the rare earth, neodymium, for
example. It’s a component of strong permanent magnets — which are made out
of a mixture of neodymium, iron and boron.
Strong permanent
magnets are critical to gaining efficiency in rotating power-generation
units like, say, windmills. Y’know... we’re going to replace burning fossil
fuels with windmills, right? Isn’t that the idea? We’re going to live in the
United States of Windmills, right?
Except one fact
of physics is that without strong permanent magnets, you can’t generate
nearly as much power with each turn of the large blades. So neodymium — in
the magnets — is critical to our windmill future. There’s NO substitute for
neodymium, and believe me, people have tried to figure a way around it.
But with
neodymium, as with a host of other relatively obscure substances from the
periodic table, the global supply is precarious. In some cases, the supply
chain is at great risk because there are but a few sources. For some of
those sources, we see things like a major mine playing out due to depletion
(Baotou, China, for rare earths) or shut down due to environmental issues
(Mountain Pass, Calif., again for rare earths). With other metals, many
mines are effectively off-limits due to political problems (in the Congo,
for instance).
Looking Ahead with Critical Metals
Most of the
strategic and critical metals are just plain “different” than other major
industrial metals, like copper, aluminum, lead and even gold and silver.
From the
standpoint of nuclear physics, for example, rare earths are not like the
other elements. They are brilliant, stubborn and complex, and at the same
chemically similar and uniquely individual. You take each rare earth atom
the way it was formed in a nuclear reaction within some long-gone, exploded
sun, billions of years past.
Another more
mundane aspect of the critical metals is that few are exchange traded. For
the most part, there’s no futures market, other public market or
well-defined transparent price discovery mechanism. There has never been
sufficient volume to build up a worldwide market for futures in these
obscure elements. So most of the critical metals that get used in world
commerce are sold under one-on-one, long-term contracts.
Lacking a
forward market, industrial users can’t lock in future prices or deliveries
through traditional hedging. They have to sign a contract and agree to pay
for future product. It sounds straightforward, but the reality is different.
The firms that use many specialty metals live in the worst of both worlds.
There’s no futures market, but they are still vulnerable to supply
interruptions, spot shortages and price squeezes in the market.
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Dealing with Risk, and Virtual Hedging
One technique
for users — as well as strategic-minded governments — is simply to pay
upfront and stockpile material. This leads to issues with the costs of
storage, ensuring physical security, the cost of money and the usual
problems with inventory accounting and taxes. Also, with some metals, there
are insurmountable storage problems with the rapid deterioration of product
due to oxidation or other chemical deterioration.
In other words,
in a world where supplies of critical metals are spotty, the traditional
tools of costing and forecasting are unreliable. There’s just more risk in
the critical metals biz, in some cases rising to “bet the company” levels.
The newest trend
in the industry is what’s called “virtual hedging.” This is a term to
describe a menu of techniques for developing forward prices and assured
deliveries of critical raw materials. Firms use virtual hedging where a
futures market does not traditionally exist.
One tool of
virtual hedging is to make a direct investment in a mine and get payback via
guaranteed metal deliveries (also called off-take agreements). Other kinds
of virtual hedging are wide ranging, from stockpiling (for oneself or
others), synthetic and/or over-the-counter hedges, material leasing,
strategic reserves (i.e., get the government to do it for you) and
closed-loop recycling.
Meanwhile, users
are hard at work trying to work around issues of physical supply. There are
aggressive efforts going on with traditional programs like critical material
“thrifting” (use less and see what happens), material substitution, pricing
index selection (gear the amount of input to the cost), flexible transfer
pricing (charge the customer a surcharge for the extra costs of critical
inputs) and in-house waste stream recoveries. The idea is to develop an
overall strategy and methodology to mitigate price and supply risk of
critical raw materials.
Similarly,
producers and industrial processors may also employ these tools as a way to
assure adequate income streams for debt retirement, more assured
profitability and funding for future expansion and production. Virtual
hedging truly has the ability to be the elusive win-win formula that most
Western businessmen publicly promote, but are rarely able to employ.
Living
Off Past Stockpiles
With one
particular element — which I’ll decline to name just now — there’s already a
severe supply crunch. This is an element that’s used in a wide variety of
electronic products. The supply chain could run dry soon.
Thus, the
industry that uses this item is “living off past stockpiles,” according to
one inside player. Last year, the general estimate was that there’s enough
product in the supply chain to last for two years. So the pipeline will be
dry by 2012.
What happened?
The problems originated with an unprecedented spike in the spot market price
in 2000. In this thinly traded resource, supply fears caused many nervous
dealers to sign long-term contracts and lock themselves into high market
prices. Then when prices crashed for product off contract, across the user
community, there were significant inventory write-downs, both current and
future.
By 2006 and
2007, the industry returned to some semblance of normality. But with the
crash of 2008, everything fell off a cliff as the economic meltdown jammed
the brakes on consumer demand.
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Meanwhile, the
few companies that mine the substance suspended production. So now there’s a
situation in which primary production of ore is all but shut down. There are
stockpiles, and just a very limited amount of material coming out of a very
small number of mines in faraway jurisdictions.
Thus, with this
product, as with most other of the critical technology metals, the question
to ask is what does the downstream industry fear more? High prices for an
essential, irreplaceable input? Or lack of physical supply from the mine and
mill and widespread unavailability of any product at any price?
It’s a problem
within the industry. And it’s just this kind of situation that gives smart
investors an entree into an opportunity for profit.
Until we meet
again,
Byron King
P.S.:
Subscribers to my Energy and Scarcity newsletter already have a
fine list of small-cap junior miners, along with the best way to play rare
earths. These guys have projects around the world, from Canada to South
America to Africa. But next on my list is a set of “technology metal”
miners. Some of the resources and ores that I’m about to reveal are so
obscure that I won’t even tip my hand by naming the elements that these
projects are digging. But suffice to say that all are important to world
industry today and will grow in importance over the years to come.
Click here to learn more.
 |
Oh, easy day,
Shooters. I can phone this one in ‘cause you’ve done all the work!
Learning form
the history of others, how Argentina slid. Instructive.
Another history
worth looking at is that of Italy between 1920 and 1940. Mussolini kept
promising better future for everyone, but never could find the money. So
he would tax, or nationalize one sector after another. Spread the wealth
around and bankrupt another sector of the economy, and prop up the failed
state-owned business for ever. The state wound up owning huge sectors of
everything and all the people were broke. Then he went to loot Ethiopia
and joined up with Germany. That did not go well.
The United
States is on the same route. General Motors gets propped up, the casino
banks get propped up. Medicine still actually makes money, so bankrupt it
to please the masses. How will the government plan do it?
If the public
option goes through, every weak business and large numbers of uninsured
poor will buy in. The insurance company the government runs will not be
efficient. The plan will lose money from the start. Rather than admit
defeat, the Federal Government will now take at least a three-pronged
approach. They will “learn” from the private sector, they’ll and raise
revenue, cut costs, and grow. This will make great speech material, lots
of good sound bites there.
They will cut
costs the same way they have with Medicaid, we’ve seen it already. Reduce
pay out to providers. Medicaid pays out at $12 per office visit and no
procedures. Liability for that Medicaid patient is as big as it ever
was. The doctors will run for the exits as fast as an underwater
homeowner heads for mom’s basement. Family practice medicine is not
exactly easy money even now.
They will raise
revenue by getting more people to sign on. They’ll do this the same way
they always have, with a little friendly arm-twisting. It has been done
before; it will be done again. You take government contracts, insure on
the government health plan. That’s what they did with the universities,
take federal grant money, follow federal guidelines. The companies can
still buy extra coverage, like AFLAC. So pay for a service you cannot use
and have no intention of ever using, thank you very much, that’s tax. Or
protection money.
The system will
continue to lose money. The government will have to build and staff a
large insurance company, which will get larger all the time. They will
offer less pay than the “bloated” private sector, so they will get their
employees from the bottom, not the top. They will also take over the weak
insurance companies that can’t be allowed to fail; we don’t fire anybody
here. American medicine will look like American public education.
There aren’t
enough rich people to pay for all of this.
Socialism works
just fine, thank you very much…till the producers can’t foot the bill
anymore.
Gary, I am a
Baltimore native, Poly A course 1972 and JHU school of Hygiene 1979, and
the Libertarian congressional candidate here in San Francisco. vs. Ms.
Pelosi. I lived in the ghetto one block from Mr. Bonner in the early
eighties.
Bulldozing the
ghetto only clears the symptoms, not the disease. The disease is the
combined effects of Bretton Woods (chronic overvaluation of the dollar,
unions (chronic overpricing of blue collar and low skilled labor),
fractional reserve banking (undercapitalization of sustainable industry,
overbuilding in the suburbs), over regulation, anti business litigation,
including ex post facto asbestos liability killing old industry, the drug
war, the prison complex, the welfare system, the lead laws that destroy
the incentive to maintain or own rental property, the equal housing laws,
that make it impossible to be a discriminating landlord, even if that
discrimination has nothing to do with race, minimum wage laws that prevent
poor folks from getting experience, teacher unions that destroyed
accountability for education and prevented well qualified folks who did
not want to waste years getting teaching certificates from teaching,
openly corrupt banking, i.e. old court savings and loan, fractional
reserve leveraging of the few decent private assets, best example: Harbor
Place operating under General Growth’s bankruptcy, and especially the
dollar store in the Legg Mason Mall across the street, not to-mention the
food court with a McDonald’s and bad Chinese food, openly corrupt city
government, especially in the Schmoke administration. What it all comes
down to is that the cancer is the government—state, Local, Federal—and its
creature, the Banks. But what the hey—we got a great fish tank!
The great
majority of totally decent black folks in Baltimore have the victims of
all the madness that the politicians have brought down on them. I remember
when the greatest majority of black folks lived solid decent lives. It
wasn’t that long ago, in the late fifties. So before we bulldoze the
miles of once sturdy row houses, let’s bulldoze City Hall, Annapolis and
Capitol Hill, and while your out it, how about Barbara Mikulski’s
apartment on Charles Street, and somewhere out there has to be Sandy
Rosenberg’s house, my favorite destroyer of all that is good with free
people.
Oo! Testify!
I would actually
leave the grand structures like City Hall standing. Just throw the bums out
and convert the building to a nobler use than politics…maybe a brothel.
And while I hate
to see sturdy rowhomes go, I’m still with friend James Howard Kunstler on
this one; cities are going to have to downscale and re-arrange themselves
around more compact cores. The modern hundred-square-mile megalopolitan
monsters are built over what used to be smaller cities, towns and their
arable hinterlands, after all…
Gary, I too
believe that you underestimated the power of nature in regards to the
transformation of urban concrete and asphalt back to fertile farmland. If
you look at a map of the United States, you will find that most cities are
located near water, as is Detroit. The reason for this fact, in many
instances, is that our forefathers settled in these areas because the land
was fertile, due to the deposition of topsoil removed from higher
elevations by the creeks and rivers during heavy rains and floods. The
success of the farms in these areas led to infrastructure “improvements”
to support the commerce generated by the farms. The success of the
commerce that evolved in these areas resulted in the land becoming more
valuable for commercial use than agricultural use. Farmers sold the land
to developers, resulting in some of our most fertile land lying dormant
beneath urban areas. Remove the asphalt, add seeds, sun, water (no
petroleum-based fertilizer needed) and good honest labor and enjoy the
fruits.
*******
You’re asking if
it can work. Suggest you Google “Urban Farming in Detroit.”
One step ahead
this time, good bar patron…
I did a little
research.
Click here to see what I found.
Roving
Whiskey Sam Buker is helping me host a small gathering of local Agora
Financial folks this Halloween at the Whiskey Bunker. I’m sure
hilarity will ensue. You’ll hear all about it on Monday. There may even be
pics of your editor in costume…but I’m not promising anything.
Regards,
Gary Gibson
Managing Editor,
Whiskey & Gunpowder
