The following essay was written over New
Year’s weekend, 2011-12. My theme is that the rare earths supply frenzy
has exposed an irreversible shift in the demand/supply picture for all
technology materials, not just the metals, but also the energy minerals,
and the minerals necessary for agriculture. The only mining ventures
today that have the potential to be profitable on a stand-alone basis
are those that can produce at the lowest cost in the global marketplace
and the breakeven point of which is low enough to so they can maintain
production at very low levels thus holding on to their customers.
America’s
technology materials mining industry can prosper now only by vertically
integrating to supply the domestic market first. Surplus production can
be exported from several points of a total supply chain thus
reinforcing capacity flexibility and dropping the breakeven point for
the whole supply chain. This is smart globalization. Just as an aircraft
flight attendant tells you to connect your oxygen first before trying
to help anyone else I am telling you to build total supply chains for
technology materials domestically to ensure that you can help yourself
before you try to help others.
Note
that by “American” I mean North American. The North American market for
producing end use technology materials is 90% in the USA, but the
production of those materials and at least half of the requisite supply
chains can be constructed in Canada. There has never been a better
opportunity to make NAFTA into the basis for a world class technology
materials production economy.All that is really needed now is insightful
finance and much better educated legislators driven by something other
than re-election and greed. Call me a cynic, but Happy New Year.
The
unprecedented and unexpected growth in total demand for technology
materials for the production of fabricated goods, energy, and food since
the beginning of the 21st century has changed the dynamic of the global
materials market.
The response of
American and European style capitalism to this sudden rush of demand has
until now been to treat it as a problem to be resolved along
traditional lines by raising the prices of the affected “commodities”
until the “opportunity for profit” thus created resulted in additional
supplies to relieve, or at least, to limit, the upward price pressure.
“Demand will create supply” and “shortages will be ameliorated by
surpluses” were among the responses I heard from American and European
industrial procurement and planning managers. I was among those who then
raised the “security of supply” issue only to be told that it was a
non-issue due to the fact that the amounts of all materials in the
earth’s crust made the potential supply infinite.
It
was impossible at first, and it is not much easier now, to explain to
industrialists and financiers that only resources the mineral deposits
of which are concentrated enough to be recovered and purified by known
and economical technologies can be called even potential supplies. The
greed, short-sightedness, and poor general science education of our
current politicians, industrialists, and financiers has let America and
Europe sit back and not only observe but actually assist our economic
competitors to gain such an advantage over us through focused
acquisition and management of natural resources that the USA and Europe,
in order to survive economically, must now restructure our financial as
well as our remaining industrial assets in the hope of salvaging some
competitive advantage through maintaining a lead in technological
innovation.
Yet like the Mahdi’s
soldiers who wore talismans to ward off bullets our financial,
industrial, and political elites raise the banner of an outmoded form of
independent operator capitalism to ward off the advances of a
differently structured and focused Asian capitalism wedded directly to
the finances and centralized direction of an immense nation able to
drown the individual western capitalists in a tsunami of money not for
the sole purpose of acquiring more money but mainly to acquire ownership
and control of critical natural resources so as to make their home
nation(s) self-sufficient in natural resources and energy.
The
western capitalists serve the purpose of the eastern capitalists by
choosing to concentrate on short term gains while the Chinese, for
example, acquire resources for their use to create products and jobs not
for speculation.
The problem of
course arises from the fact that this growing demand for natural
resources has not been created by the USA, Europe, or Japan, but almost
solely, at this point, by a new player on the world trading stage, the
Peoples Republic of China (PRC).
I
believe that 2012 may finally see a recognition by western strategic
investors that the long term outlook for the global demand for
technology materials is one of continued high net growth and that the
present rate of supply of these materials already is at the point where
it cannot even now keep pace.
Junior
miners, which are basically exploration companies, playing the same old
game of appearing to be on the cusp of “rushes” are really just bit
players in the new world of natural resource supply. The economic cycles
and turmoil in the old capitalist societies of the west and of Japan
have taken precedence in the news over the dramatic growth of overall
demand for technology materials, but the focus on short term gain from
trading junior mining shares in a casino atmosphere is no longer viable
when looking at ensuring the security of supply of technology materials.
Ownership
of ore bodies and other such natural resources are only of long term
value when they are developed to the stage where they contribute
directly to Increases in the rate of production of technology materials.
This requires years of planning and continual development. This cannot
be achieved just by issuing shares to raise capital. The share market
for technology materials’ producers is rapidly becoming a sideshow.
China seems today to be the only nation-state with both an existing
industrial policy and the capital and command organization to carry it
out. Like the Soviet Union before it the PRC plans its economy in
five-year tranches. Also, like the Soviet Union before it the PRC sets
higher production targets for goods and services with each successive
five-year “plan.” But the PRC also measures the success of a five year
plan by the increase in employment and improvement in the standard of
living it brings about. The Soviet Union pretended that it was always at
full employment. The planners of the PRC do not seem to follow this
tradition.
The key to future wealth
is the ownership and control of total supply chains for the production
of technology materials. There are no short cuts.
In
the western markets tumbling share prices and suspension of IPOs on
news of temporary declines in demand or temporary oversupply are simply
casino gambling, and if that is the best that the so-called free market
can do then China will be the clear long term winner in the technology
materials’ self-sufficiency stakes. In order to be a competitive economy
it is necessary for a nation to have access to the natural resources it
needs so that its economy can grow. The development of such resources
can no longer be left to short term planning. It is necessary to commit
both capital and intellectual capital to the long term development of
adequate and sustainable production rates of natural resources. Base
lines must be established for nations and the development of the
resources necessary to maintain those baselines and allow for growth
must be a priority of the nation’s markets.
This
didn’t come about overnight. This situation has been building since the
making of money for the sake of having more money eclipsed the making
of money from increasing productive commerce
The
economic cause of the transfer the world’s trading and manufacturing
center from America to China has been American capitalism, which seeks
the lowest cost for all resources, goods, and services in a system of as
much global free trade as is compatible with minimizing national and
international taxation, i.e. maximizing profit. American style free
market capitalism does not believe in natural resource exhaustion except
as a scare tactic to drive share or commodity prices. In fact it is the
maximization of the rates of production of natural resources that is
the problem from the point of view of the long term allocation of
capital for most, non-energy, extractive industries.
Increasing
the rate of production of extractive resources is capital intensive and
time consuming, which means, of course, that it must be a low profit
endeavor when ranked against speculation.
Twenty-five
years ago when the transfer of labor intensive repetitive operations to
low labor cost countries was begun in earnest the main driver for
American industrialists was cost control as a method for the retention
of market share in a very competitive market place then just beginning
to feel downward price pressure from Asian, predominantly Japanese,
imports. A second, no less important, driver at the time was the
maintenance of the industrial company’s share price. This was in the era
of blue-chip stocks, which were defined as those of the largest
producers of raw materials, energy, or finished goods in an era when
banks were service industries. Money was to be made through profit
margins on goods and services. Banks were providers of the service of
lending money to blue chips mainly for cash flow or working capital
purposes. Investment “banks” took new ventures public and the partners
in those banks had their own money at risk first of all.
The
until now unnoticed political driver that allowed the transfer of low
cost manufacturing to China, in particular, was the desire of the ruling
communist party of the People’s Republic of China to use the situation
(the desire of the capitalists for low cost labor) to literally
force-start and then accelerate China’s development into a modern
military-technological-industrial state. As Deng Xiaoping had put it
succinctly the idea was to make China “strong and rich.” A version of
capitalism was to be allowed albeit one with Chinese characteristics so
that the nation could be put onto a path that would lead it to being
able to provide its average citizen with the safety, health, and
material well-being already achieved by the nations of the west of which
the paragon is the USA. Of course this would come after or at the same
time as China grew in strength to “resume” its natural place among
nations.
On Friday, December 30, 2011
the Chinese government announced that China would put men on permanent
duty in an orbital space station before 2020. Such an announcement in
2000 would have been considered “crackpot” at best. What a difference a
decade of GDP growth at 10% per annum makes!
I
have thought, and I have been trying to point out for many years now
that apocalyptic theories of supply shortages and of subsequent rampant
price inflation supposedly due to peak natural resources, i.e., the
exhaustion of natural resources, are based on the type of reasoning that
confuses the disease with the symptom. The disease is the
financialization of capital, which means that the majority of
investments made in the west today are completely detached from any
relation to the production of commerce at all. Money is being used
primarily for pure speculation. The purpose of such types of investments
is solely to make more money. The confusion between wealth creation
(jobs, goods, and services )for productive purposes and the simple
making of money, for no other reason than to make more money, by the
press, the politicians, and the ordinary citizen has masked this
societally suicidal frenzy until it has now resulted in the downgrade of
the American standard of living for the vast majority, and the placing
on the path to extinction not only the contemporary middle-class but
also the pathways to entering and remaining in that class.
The
American governing classes have purposefully joined the financial
elites and insulated themselves from this downgrade, which has now moved
beyond their understanding. They have assigned the solution of the
financialization crisis to those whose lack of interest in the well
being of the nation is manifest, the bankers, who in fact brought on the
American abandonment of wealth creation for productive purposes as a
status game enshrined in the corrupted phrase, “Him who has the gold
makes the rules.”
American industry
literally taught the world how to build and equip workshops to
economically mass produce consumer goods. The industry was financed by a
capitalism, which counted success as the marketing of mass produced
products made at the lowest cost that could be sold at a profit.
America’industrialists
never worked under a national industrial policy, so that when the
opportunity arose to lower costs simply by exchanging the American for a
lower cost labor workforce there was no ethical barrier. The short term
goal of maximizing profit was paramount. No one was concerned with the
long term consequences of such a move to the workforce much less to the
country as a whole.
Keep in mind that
financiers backed the moving of millions of jobs to low cost labor
countries while politicians never even gave a thought to the effect on
the economy of the ensuing unemployed masses. As I recall we were told
that “service” jobs here would replace those lost to low labor cost
countries. It was never clear exactly what the economic pundits were
defining as service jobs. We now realize that was because they didn’t
know what they would be either.
So
why should investors in natural resources care about the sad history of
American corruption, greed, and sheer stupidity. It’s because one of the
totally unforeseen long term consequences was the shift to Asia of the
demand for not only the final assembly and the manufacturing of the
parts necessary for such assembly, but ultimately of the TOTAL SUPPLY
CHAIN BEGINNING WITH AND INCLUDING THE MINING AND REFINING OF THE
MINERALS. This shift has meant the loss of not only the physical plant
for total supply chains but the withering away by the attrition of
non-use of the intellectual basis of such industrial processes.
The
rare supply earth situation, which has been highlighted in the USA for
the last few years, is just the tip of the iceberg the body of which is
the loss or collapse of the capability to build or operate a total
supply chain for a given critical material when the first steps of that
supply chain have been moved off-shore.
Clueless
and engineering-ignorant American environmentalists for whom mining and
refining are simply evil incarnate have managed over the last
generation to force re-election-only driven legislators to favor the
closing of sites producing natural resources for energy and
manufacturing and the imposing of regulations that make such production
simply too time consuming as well as adding enormous costs .
The
dwindling proportion of capital targeted to increasing productive
capacity remaining in a system being squeezed dry of such capital by
pure financial speculators seeking short term gain has now made it more
productive to move entire supply chains off-shore to where the raw
materials CAN being mined and refined rather than to waste capital on
endless regulations and battles with the ignorant and suicidal (or
ignorant and rich). The result has been at best to increase the cost of
re-starting a supply chain and at worst to make it intellectually
impossible if only domestic resources are to be utilized.
I
note in passing that America’s most important remaining engine of
wealth creation is its innovative high-tech industries. These
industries, such as electronics and healthcare, have been responsible
for more improvement in the standards of living and lifestyle of the
peoples of the world than any other intellectual force in history. The
American electronics, aerospace, and nuclear industries have held out
off-shoring their research and development, but sadly they have only
managed to do that by enticing the best of the Asian students to come
and work in the USA.
For a generation
this worked well, because such individuals for the most part preferred
to stay in the USA to utilize their American honed and learned skills to
enjoy a better life style than they could at “home.” And to have the
opportunity to create their own businesses. Today that situation has
changed as places like China and India have improved enough in
opportunity-availability to entice their brightest and best to stay home
or even to come home. The American mining and refining industry has
also had its share of bringing skilled Asian workers and engineers to
the USA from China and India and like the high tech manufacturing
industries it has now seen the outflow of these same people with their
American honed skills and technological improvements back to their
“home” countries.” Asian engineers who specialize in mining and refining
engineering are very unlikely to remain in an America that blocks them
from opportunity at every step.
America’s greatest inherent advantage in the production of natural resources is based on
- The variety of items in which North America can be self-sufficient,
- The safety of American natural resource production, and
- The productivity of North American mining technology and personnel.
The
hypocrisy and sheer stupidity of those who want to stop producing
natural resources in North America, so that we can get them from places
where civil liberties are frequently nonexistent, productivity is low,
safety is poor, women are treated worse than domestic animals, and the
standards of living are appalling is simply beyond understanding.
I
think that January 1, 2012 is as good a date as any to focus on the
fact that maintaining a steady flow of affordable raw materials for
energy production, food production, and manufacturing all at prices we
can afford, which will let our economy GROW without lowering our
standard of living is now the imperative.
The
problem is that while we are trying to maintain production levels and
costs the BRICS are trying to increase the production of the same
materials at a rate never before seen in history. It is unlikely that
America can ever again be a major supplier of extractive resources to an
export led domestic manufacturing industry. We have waited too long and
have simply lost the will and the capability to restore that capacity.
We
can however conserve capital and reduce debt by becoming
self-sufficient in energy and by again being entirely self-sufficient in
metals and minerals for our domestic needs. The demand for technology
materials of all kinds is ultimately now and in the future to be driven
by the BRICS as all of them struggle to build
military-technology-industrial complexes. The USA cannot hope to supply
the BRICS with structural metal ores or fabricated products, because we
waited too long to get into the game. Our structural metal industries
cannot now, and have been unable to, compete with those of China or
India on price since at least the middle of the last decade. The move to
financialization destroyed any hope of American financiers creating
truly global metals and minerals giants such as Rio Tinto or BHP.
However there is still time remaining for the USA to become a technology
materials powerhouse for ourselves and for the world.
The
USA and North America are rich in the extractive resources of the
metals and minerals that are critical to mass producing high tech
devices for all uses civilian and military. The USA and Canada combined
currently also lead the world in mining and refining engineering as well
as technological innovation. The USA, however, is entering upon the
last decade during which it has a chance to return to self-sufficiency
and innovative leadership in technology. Once these opportunities are
gone the world will have passed us by, and the result will be the slow
erosion of our standard of living and of any further opportunities for
growth. Canada has been a patient partner, our largest supplier of
natural resources, but Canada’s population cannot support the creation
of enough capital to move North America into the position of the world’s
premier and central supplier of technology materials.
Small
investors need to take note that the first decade of the 21st century
saw more change in both the movement and the composition of the world’s
metals markets than any other comparable period in history. The changes
are permanent and their cause is an irreversible and fundamental change
in the geography of the global raw materials trade. The driving center
of the trade is no longer in the west; it is today in east Asia.
I
believe that you can safely relegate the bulk of twentieth century
punditry and scholarship on the cycles of the production and prices of
metals in peacetime to the scrap heap. There they join such ideas and
common wisdom as “the end of history” and descriptions of China as a
third-world or developing country. In 2011 as in the prior decade, China
and the other “developing” countries of southeast Asia continued to
grow their GDPs at a rate of at least 3, and as much as 4, times the
pace of the US or Europe. And since their common target, not their
target in common, is to develop technology-military-industrial economies
with a per capita GDP at least equal to that of the pre-2008 USA the
rapidly growing economies of the nations of south and east Asia, and
soon, if not already, of Brazil are consuming, in an unprecedented
accelerated timeframe, the same volumes of base metals, mainly for fixed
infrastructure and for transportation, that the USA and Europe produced
and consumed in the from the beginning of the age of steel, 1867, until
now!
The strain this acceleration of
and growth of demand has put on the world’s productive capacity for the
ores of the base metals has now highlighted the differences among the
base metals themselves by resolving them, by use, into the structural
metals and the enabling structural metals. China alone today, in 2011,
already uses 60% of all of the iron ore mined globally and 33% of the
aluminum ore. Huge investments of capital in the ores of both of these
base structural metals have been made outside of China solely for the
purpose of supplying just China. Investors should note that unless the
demand for base structural metals grows in the other BRICS-the resource
rich and/or resource mega-demanding nations of Brazil, Russia, India,
China and South Africa- China could create chaos in the world iron-ore
market simply by increasing its domestic output to self-sufficiency,
which is in fact possible, although not today economical. This game
changing event, Chinese self-sufficiency in iron ore, which is actually
predicted by Rio Tinto to take place by 2020, would, without a buildup
in demand outside of China, throw global iron ore production into a vast
oversupply status thus collapsing prices. By simply, albeit
expensively, moving forward towards self-sufficiency China puts downward
pressure on global iron ore prices. Strategic investors should now look
for the most efficient low cost producers and fabricators of steel and
aluminum outside of China, because the creation of a massive non-Chinese
demand is absolutely necessary for the non-Chinese owned iron ore
industry.
The ores of iron and
aluminum are available in proven accessible deposits in great abundance.
The proven resources of these ores are sufficient even at present
global demand to sustain the global steel and aluminum industries for
centuries. As long as energy is plentiful and relatively cheap the
global production of steel and aluminum will continue, but continue to
grow only through demand from the “developing” countries. Strategically I
think that Russia is far from any meaningful development. I am looking
at India and Brazil as demand drivers for iron and aluminum. Both are
today self-sufficient in iron ore and both are world class exporters.
Note well though that should either’s economy ever require the importing
of iron or aluminum ore while at the same time Chinese demand were
stable at today’s rate, or continued growing, there would then be a
run-up in iron ore prices that would dwarf those of the last 10 years.
In that case Australia would be the big winner. Australia’s demand for
steel can never require more than a small fraction of its capacity to
supply of iron ore. The unknown factor in all of this, in the long run,
is China, which could become an exporter of iron ore in the 2020s.
Whatever
commodity scenario one plots for the long term it is now always Asian
demand that is critical. America’s future is tied to sophisticated
supply chain developments for natural resources.
I
personally do not believe that China will become an exporter anytime
soon of iron ore, as a raw material, unless such action becomes
necessary to maintain employment in the Chinese mining industry and then
only after domestic demand is satisfied.
Additionally
it should be noted by strategic investors that a China,
self-sufficient, or in an ownership situation globally of resources to
make itself self-sufficient, in iron ore, coking coal, limestone,
bauxite, and cryolite could easily come to dominate the global supply of
steel and aluminum.
It is ironic
that monopoly capitalism with Chinese characteristics is the true threat
to so-called free market capitalism, which considers monopoly
capitalism to be counter-productive to the fair distribution of wealth
because it concentrates wealth in too few hands and hands pricing power
solely to the monopolist. Yet the Chinese have chosen state monopolized
capitalism to ensure the distribution of the wealth created to the
largest number of Chinese people. The Chinese system is as much a threat
to western economic philosophy as it is a threat to western lifestyles
and standards of living. The biggest problem is that even as production
rate investments consume more and more western capital it is not at all
clear that the prices for the materials so produced will be set by a
free market. Thus such investments are high risk-in fact this is exactly
the problem in the current rare earths production buildup. There has
been almost no change in the geographic center of rare earth demand,
China. This means that Chinese moves to regulate its environment,
improve worker health, safety, and compensation, and to direct its
economy away from being export led to being domestic consumer demand
driven will be the drivers for rare earth pricing. When one takes into
consideration Chinese moves into global finance are targeted so as to
keep Chinese manufacturing competitive this means ultimately a
convertible currency in which raw materials such as the rare earths are
denominated.
So long as America is
dominated by a Wall Street and Washington elite that believes that a
man’s worth is measured by the capital he accumulates whether or not it
is used productively to make products and create jobs there is no
contest. China is winning
