DETROIT (ResourceInvestor.com) -- The current credit crisis, or indeed any credit crisis, in the financial markets of the G7 economies, the biggest individual nationally based one of which is the United States, traditionally mean trouble for the mining industry. When credit dries up the whole system goes solid, as opposed to liquid. Even the best credit risks cannot get capital easily, if at all, or at affordable cost. Traditionally, and fairly, commodity metal mining has been classed as a high risk investment, so that its cost of capital is at the high end even in times of easy credit.
The herd mentality of Wall Street's youthful market analysts, which leads them to recite the mantra "The trend is your friend" as they pour other people's money into investments based on such irrational metrics as 'eyeballs per page, clickthroughs, and subprime mortgages, and as they insured against price volatility or downturns by financial 'instruments' such as collateralized debt obligations, which in a crisis turn out to be without a mechanism to price them, and so to have no value, also causes them to reject capital intensive OEM heavy industries such as automotive, foundry, and mining, which have no short term gain potential or in the case of commodity metal mining have been subject to large price variations in short 'cycle' times.
It does not seem even to have struck the youthful, and mostly without any long term memory, Wall Street analyst crowd as paradoxical that the commodity supercycle, as they call the recent long-duration Asian demand led growth in commodity metals, is based solely on the rapid development in Asia of those same OEM heavy industries, seen in Asia as a foundation of a modern nation-state, which they, Wall Street's bankers, reject as having any future value in the US. Wall Street assumed apparently that the US would become a nation of only consumers of heavy industrial products, so that it was unnecessary to support domestic self sufficiency in the production of natural resources as raw materials for such industries. It is a mystery as to what Wall Street thought, or whether they think at all, about how a nation with only a service economy could possibly support the highest standard of living in the world for more than 300 million people. At this point I imagine that a sophisticated banker curls his upper lip, sneers, and says "globalization" or 'the free market' will resolve these imbalances.
It does not even seem to have crossed the of-the-moment minds and thinking of Wall Streeters that resource rich America could cash in and bring immense value to the dollar by simply producing those resources for the growing heavy industries of Asia and South America. Neither has anyone in the American banking system or the American political class paid any attention to the growth of environmentally clean American mining during the past fifty years. Incredibly, myopic American bankers and hypocritical political servants of environmentalist elites point to the most polluting mining in the world, in the People's Republic of China, as the 'only way' that 'they' can produce the raw materials they need. It never dawns on these genuinely ignorant individuals that the American mining industry is the most advanced in the world at producing raw materials without either short term or long term effects on the environment, and that the uncapitalized effects of the mining of natural resources in China, Russia, and much of Africa make the raw materials produced there, in the long run, the most expensive ever mined in terms of environmental damage alone!
Those who believe in global warming's existence and that it is a bad thing seem to bend over backwards to excuse China, the world's actual largest producer of global warming gases and air pollution, in general, from any responsibility moral or economic, while they criticize every move by the domestic American mining industry for what it might do to the environment in case of an accident or the total failure of layers of very expensive protective technologies, which actually meet the requirements set out by the extremely politicized EPA.
The latest worry on Wall Street about commodity metals is that a reduction in demand caused by either a slowing of the Asian economies or a linkage of the global economy to an American recession, or both, could cause the current high dollar-prices of metals to go a lot lower or, in the worst case, crash.
This isn't going to happen because the construction necessary to meet the global demand for basics such as energy, transportation, and clean water must be planned and undertaken over a very long term, and besides the massive new demand from Asia, now, and from Africa in the longer, but near, term there is the immense pent-up demand from America and Europe for maintaining their already aged infrastructures as bridges and dams fail, insufficiently supported or maintained construction and construction equipment, such as cranes, collapse, roads crumble from overuse without proper maintenance, power plants reach the end of their service lives, and power grids fail from wear and overloading.
There are two categories of metals, and one of minerals which already have a permanent and rising demand floor due to the above drivers:
- Power metals and minerals,
- Metals that bring power to the people, and
- Structural metals for infrastructure and logistics.
Power Metals and Minerals
I define "power metals" as those from which subnuclear binding energy can be extracted directly by relatively simple, though by no means inexpensive, chemically based processes in a so-called nuclear reactor. There are only two abundant power metals found in nature, uranium and thorium. There is a third power metal, man-made plutonium, but I am going to ignore and not discuss plutonium here today as I believe that no more of this metal should be produced as an end in itself due to its ease of use in making explosive fission weapons.
The nations with the highest demand growth for energy, China, India, and Brazil already have on order the majority, perhaps more than 50, of the world's new nuclear power plants for the production of electricity for civilian use. Recently Great Britain, Canada, and even the US have announced significant programs, which will result in as many as 25 reactors to be built over the next 20 years both as replacements for existing reactors and as additional nuclear based electrical generating capacity. It is likely that we are approaching a nuclear reactor building renaissance, which will see as many as 200 new and replacement reactors built over the next generation if the movement to slow the production of carbon dioxide from the burning of the power minerals, i.e. those minerals which can be burned in air to produce more energy output than was required to set off their self sustained oxidation (i.e., to set them 'alight') gains a serious foothold in the nations of the world the economies of which are demanding more electric power than can now be produced. The power minerals are coal, oil, and natural gas.
It should be noted by investors that nuclear reactors for civilian use were originally designed to utilize thorium, but that military requirements and planning caused a shift
to all uranium 'burning' plants to insure a supply of weapons grade materials.
The tide is now turning back to thorium, which is more plentiful than uranium, and the use of which for civilian reactors is now being actively pursued by Norway, India, Russia, Canada, and the USA. It is believed that the ordering of one or more thorium reactors is imminent in Norway and India. The US probably has the largest reserves of thorium, and may well become the center of the thorium nuclear fuel design, manufacturing, and reprocessing industry.
Metals that bring power to the people
Oil, gas, and coal field exploration and development have very long lead times and require specialty oil drills and, in the case of oil and gas, piping. The cutting heads of the drills for hard rock drilling require large quantities of either tungsten or molybdenum both as the carbide, and this material is 'cemented' to its tool steel holder with an alloy of cobalt. The piping for recovery and the transportation of oil and gas to scrubbers and refineries is known as oil field tubular goods, OFTG, and requires for its manufacturing alloys which are resistant to corrosion, cracking, and creep (losing shape under pressure). These properties are created by special alloys critically dependent for best operation on molybdenum, and/or nickel, and/or chromium and/or manganese.
Once the coal, oil, or gas has been delivered to the fossil fuel burning electricity generating plant, it must be burned to heat boilers made from corrosion resistant high temperature stabile steel and the steam generated in the process must be delivered in corrosion resistant high temperature stabile and strong piping to where it can be impinged on the high strength high operating temperature blades of a turbine which rotates a massive copper conductor through an electromagnetic field to generate a steady flow of electric current. The steel alloys throughout the steam generation and electricity generating components of the fossil fuel burning plants must be made from the best materials available. Today those alloys are made from steel containing molybdenum, nickel, and chrome. The turbine components subjected to high temperatures and/or direct superheated steam may contain additional alloying elements, such as rhenium to inhibit stress cracking under those extreme conditions.
Finally, all cooling system piping in an electricity generating power plant must be made from steel alloys that give the longest service life without cracking, creep, or corrosion all of which can cause leaks, which can cause the cooling system to collapse catastrophically destroying the generating plant. Today the alloy of choice for both new and retrofitted cooling systems in power plants is a high molybdenum one.
In order to distribute the electricity produced by power plants to customers a grid must be established to send out the electricity. This is done by 'stepping up the voltage' of the electricity with transformers utilizing, among other iron based components, large tonnages of copper windings. The high voltage electricity is first sent out over networks of aluminum overhead and underground 'cables' to local connections called substations where the voltage is 'stepped down' in another type of transformer using large copper windings, so that it can be safely sent down copper wires to the points where it is used at relatively low voltages (it enters a home system in the US at 110-120 volts) and higher amperages than could be sustained by the larger systems without a resistance heating meltdown.
No matter what type of localized, off-grid, power supply is built. It could for example be solar, wind, or battery power the overwhelming majority of power production and distribution built will always depend on the metals highlighted in boldface above.
Structural metals for infrastructure and logistics to utilize power
Metallurgy has come a long way since much of the twentieth century's infrastructure was designed and built. Stainless steel, for example, was first patented in 1919. Significant advances which cannot be ignored have occurred since World War II, so that maintenance and replacement of existing infrastructure as well as the construction of new infrastructure, even though for the most part the modern seems lighter, requires far more 'minor metals' than anyone could have foreseen.
Logistics vehicles, such as trucks (and cars), railroad cars, ocean going vessels, and aircraft have undergone perhaps the greatest evolution in the materials of their construction and of their power trains. Just the storage batteries now in use on vehicles for starting, lighting, and ignition, SLI, utilize the largest proportion of lead which is mined every year and this use is growing dramatically as demand for logistics just to and within Asia is exploding. New types of batteries for power train rather than SLI use are taking a significant portion of the world's nickel and nearly 50 percent of all of the rare earth metal, lanthanum, produced. If the hype is to be believed then soon power train batteries may use large quantities of lithium and manganese or cobalt.
Larger and larger capacity and more numerous vehicles and vessels to take raw materials from where they are to where they are needed must be made from high strength alloys which maintain there strength under conditions of contact with corrosive materials, high temperature variations, and high load variations. This requires high strength steels made with various proportions of nickel, cobalt, molybdenum, tungsten, chromium, vanadium, and manganese.
It is my belief that the metals highlighted above are so critical to the long range future of power generation and distribution that they have either reached a floor price or are still climbing towards it.
I have no doubt that institutional investors will still follow their short term thinking based herd instincts and ignore long term demands for power and infrastructure when a short term or localized surplus of any of the above metals occurs. I also do not doubt that they still have not learned how interconnected some of the production of the above metals is, so that they will be amazed that molybdenum prices climb when copper production declines having failed to learn that you cannot continue to produce a byproduct such as molybdenum if the primary metal with which it is associated, copper, in this case, goes down in production.
Metal prices are on an escalator; they may move from side to side, or take a step backwards occasionally, but the long term direction is always going to be up to the next floor and then beyond for metals critical to the generation or distribution of electric power or for logistics infrastructure to carry goods and raw materials from where they are produced to where they are used..