Pick a Technology, any Technology, Please!

DETROIT () -- Natural resource investors, whose knowledge of this market is circumscribed by youth or a lack of interest prior to the advent of the "boom" that has arisen and expanded, more or less, continuously, since the turn of the 21 century, may not be aware of the fact that such booms are not unprecedented, as I discussed on Resource Investor. Today I want to discuss what is, in fact, unprecedented about the current natural resources boom, which distinguishes it from all previous ones.

The scope of the 21 century's first natural resources demand boom both by category and volume is unprecedented. This is due to two large factors:

  1. The unprecedented Asian demand for commodity metals and energy led first by China and now joined also by India, and;
  1. The rapidly expanding use of non exchange traded-and therefore non commodity-"minor metals" driven both as a natural adjunct of the enormous rise in demand for products of which they are a small component and, also, by the fact that these minor metals are the stuff of the physical construction of the working components of the second industrial revolution brought on by the explosion of electronics and information technology.

One factor that also differentiates the current boom from all previous, more limited, ones for investors of all sizes, is the lack within most global cultures of well-educated generalists. We are swamped with overspecialized individuals in our political, financial and industrial classes. This has caused investors to confuse the statements of publicists with those of financial advisors and with those of business development planners. The results have been chaotic mainly due to the fact that causal relationships seem to be either ignored or invisible to the specialist advisors.

One good example is the endless pronouncements from the OEM automotive industry about new power train technologies, which will replace the use of gasoline or diesel fuel in internal combustion engines. These replacements, it is claimed will reduce, and ultimately, eliminate motor vehicles as sources of the gases, carbon dioxide and unburned hydrocarbons, that have been officially decreed to be important and critical "man made" sources of global warming. In addition these new power train technologies will also reduce, and, ultimately, eliminate dependency on imported hydrocarbon fuels.

It is obvious that no individual OEM automotive company, no matter how large and profitable, has infinite resources of capital or engineering or scientific skills. The American owned and operated OEM automotive industry has not even collectively made a profit for at least the last five years and has been furiously downsizing even its engineering departments with a meat axe rather than a scalpel.

That notwithstanding, let's take a look at an announcement from Toyota Motors, which very recently was anointed as the largest manufacturer of motor vehicles in the world.

Last year, Toyota apparently built more cars and trucks than General Motors, the holder of the "world's largest" title for at least 50 years. Toyota also outmanoeuvred GM beginning in 1999 when Toyota began manufacturing and selling a hybrid powered car, the Prius, using a nickel metal hydride technology battery system invented and built, at the time, either in the U.S. or in Japan under license from the original U.S. inventor/manufacturer.

GM in the same year withdrew its all electric, EV1, from the market after a five year test, because GM decided that the performance and range given to the EV1 by its nickel metal hydride batteries, from the same American manufacturer used by Toyota, would not produce a car that Americans would buy. GM either had not anticipated the demand for hybrids or chose to ignore it if they did.

For most of the last decade the Toyota Prius has been the most sold hybrid vehicle on earth. Its sales more than equal all of other non-Toyota hybrid powered vehicles made and sold put together. The Prius today still uses a nickel metal hydride battery, but this battery today is made by a Toyota subsidiary, Panasonic Electric Vehicles (PEV) of Japan. PEV is basically the only supplier of nickel metal hydride batteries used in hybrids.

Performance is still an issue. Toyota, along with all of its competitors, including those who manufacture hybrids today with a power plant licensed from, and usually purchased from, Toyota insist that although they all use a PEV nickel metal hydride battery all of them will come out with a next generation hybrid that will have much higher performance characteristics and range due to their using a higher performance lithium-ion technology battery.

Last week, Toyota's vice president in charge of power train development said that "by 2020 hybrids using lithium-ion batteries would be the standard drive train of and account for 100% of Toyota's cars as they would be no more expensive to produce than a conventional vehicle." If a natural resource investor wanted to act on this Toyota announcement what would he or she do? First the investor must do a simple calculation.

In 2006, Toyota made a record-setting 9.3 million vehicles including a little more than 300,000 Priuses. All other manufacturers together made enough hybrids so that the total produced globally was around 500,000. Last year, the world's production of new lithium for all uses was in balance with demand. If we assume that in 2020 Toyota, alone, will produce 12 million vehicles and that all of them will be powered by a hybrid system using a lithium-ion technology battery pack, and, if we assume that those battery packs each contain, for argument's sake, 20 pounds of lithium, then Toyota alone in 2020 will require around 240 million pounds of lithium annually or 120,000 tonnes per year. In addition each lithium-ion battery pack, if it were built today, would need a few pounds of cobalt. Even one pound per car or truck will require 6,000 tonnes per year just for Toyota's production in 2020.

The world's largest producer of lithium today is Chile's SQM [NYSE:SQM]. Also there's MetallGesellschaft's (MG) American subsidiary Foote Mineral (or Cyprus-Foote Mineral) in Nevada.

Today's entire world production used primarily for chemical use, not batteries, would only be fraction, perhaps as large as third, of just Toyota's needs under their announcement for 2020. There is no way that the world's other car companies could allow Toyota to be the sole producer of high performance hybrid vehicles, so we should multiply the needs of the global OEM automotive industry in 2020, under this scenario, by around 8.

That means if all of the world's OEM automotive manufacturers were to begin now and to, as Toyota has announced, ramp up their changeover from pure internal combustion engine power trains to hybrids by 2020 the world would need an additional amount of lithium each year beginning around 2012 of as much as is being today produced annually! Under this scenario the world would run out of known reserves in 2020. We would have used up all of the world's recoverable lithium!

By now you're saying that I'm just being ridiculous. Clearly this is an impossible scenario. But clearly this announcement was made by an educated, worldly, experienced high ranking manufacturing executive of one of the world's largest and most profitable companies. Before you sit down to write a comment please understand that lithium is chemically the ideal cathode material for the high capacity battery that is required in such a power train if the vehicle is to have reasonable performance characteristics and range.

Okay. What about the nickel metal hydride battery? It works, but the performance and range of the Prius are now as good as they are going to get with the car's size. By the way, the world's nickel supply, used mainly in high performance steels is already short of demand. I do not wish to get into a discussion of lithium's price, because it is a minor metal and its price could be manipulated, as I wrote last week, by hedge funds, for example.

Nickel has already risen in price since 2000 by at least a factor of four. If the global OEM automotive industry were to decide to go with a hybrid based on nickel metal hydride battery technology it would have to find not only a new supply of nickel annually, by 2020, exceeding a million tonnes a year but also a source, using present technology, of 500,000 tons of rare earth metals, annually, more than have been before produced in total in all of history.

Metal sourcing such as suggested by Toyota's announcement would take decades to accomplish even if it weren't going to completely delete the earth's resources of the metals. If there were a measurable chance that this scenario was viable new metal and material sourcing would be the world's biggest industry, and it would already be underway. You might have also realized that just the copper or aluminium windings for the electric motors needed for the 2020 production would far exceed or equal the entire global production of copper or aluminium in 2007.

How about not hybrids but pure battery powered cars? This would make the problem worse. It would require, at best, even more "minor" metals.

What about fuel cell power trains? Well folks today's fuel cells use between one and three ounces of platinum each to produce the equivalent range and performance of a 4-cylinder internal combustion engine powered car. Using the Toyota projection we would need between 100 million and 300 million ounces of platinum each year after 2020.

Today's global production of new platinum annually is around 6 million ounces. If we add the global production of palladium we get a grand total of 12 million ounces per year. This means that the production of an exclusively fuel cell powered global fleet of OEM cars and trucks in 2020 would use more than the known world reserves of platinum group metals.

Ethanol? It would be eat or drive. You guess which one would be more popular. Biofuels? Is there that much garbage and waste?

I don't know what the solution is going to be if it turns out to be critical that we must stop emitting carbon dioxide from cars alone to save the planet, but I do know that none of the above solutions is practical or feasible on just a materials availability basis.

Hydrogen might work, not for powering fuel cells-unless a breakthrough non-platinum group metal catalyst comes along right now-but for powering internal combustion engines. We will need nuclear electricity to break the water down into hydrogen and oxygen though. Oil fired, coal fired or LNG fuelled electric power plants defeat their own purpose in the hydrogen economy. Of course we will need the largest piece of global logistical engineering ever done, a system for not only producing hydrogen but distributing it.

Don't listen to the corporate vice presidents, the publicists - i.e., spokespeople - or the financial advisors. Just use your common sense. The car industry must in the end be driven, excuse the pun, by what is logically doable in the real world of natural resources by proven and reliable technology. It's as simple as that.

American politicians don't seem to care what happens to the American-owned OEM automotive industry. The industry committed suicide when it traded a centuries worth of technological development to China for some momentarily cheaper parts. The politicians, ignorant of the true cause of the loss of competitive technological advantage are now pushing the industry to squander its remaining innovative skills by mandating engineering changes that the OEM American owned industry cannot avoid but also cannot afford to do. The politicians listening to special interest groups, farmers in particular, are destroying the remaining innovation in the industry.

None of these specialists seems to have even yet realized that we gave away, primarily, to China the accumulated wealth of more than a century of technological development and superiority for a few cheap components. Who got the better bargain?

About the Author
Jack Lifton

Jack Lifton is a leading authority on the sourcing and end use trends of rare and strategic metals. He is a founding principal of Technology Metals Research LLC and president of Jack Lifton LLC, consulting for institutional investors doing due diligence on metal- and material-related opportunities.

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