Investing in U.S. Natural Resources, Part 2: Solutions to Tungsten Shortages
By Jack Lifton
20 Dec 2006 at 04:21 PM EST
resourceinvestor.com
DETROIT (ResourceInvestor.com) -- I think that a new purchasing paradigm has begun to supplant the old one and will help to define the best American companies. The now obsolescent, but fairly recent, business model for purchasing for OEM American end users of products based on natural resources, such as tungsten, was to buy material as needed for delivery as needed. This model assumed a level playing field, a free market, where every, financially qualified buyer had the same opportunity to bid.
It was assumed that all natural resources are a form of commodity and price differentials from one supplier to another could be obtained only through differential volumes purchased, length of purchase agreement, or logistical advantages. Risk management could only be undertaken for materials for which there was a well and narrowly defined “market” composed of stockpiles, guarantors of physical delivery, and buyers of last resort, with excellent credit, such as the London Metal Exchange provides.
The new paradigm consists of a long-term strategic plan to assure supplies of critical raw materials and to hedge the risk of their price volatility by whatever means can be devised that works.
One good example of a company whose purchasing arm has, I believe, seen the light is Allegheny Technologies Inc.’s Metalworking Products business. News reports indicate that it is on its way to replacing the old paradigm with respect to assuring itself a supply of tungsten ore concentrates, because it has now taken a holistic approach to the changing market conditions for supplies of tungsten.
The same is true of the General Motors Corporation, which is the only car maker to concern itself with a long-term strategic plan to ensure that, with controlled risk, its suppliers can get the volumes of critical materials that they need to produce parts for GM.
Unless the rest of the car makers producing components in the U.S. and the American based steelmakers follow the lead of these two companies they will not survive global competition no matter how many times they turn around, restructure, or find another way forward.
The USGS, the United States Geological Survey, is the gold standard of openly available, non-proprietary, information about the domestic, American, supply of, and demand for, natural resources. The data on total supply that it publishes always is compiled from, in the agency’s judgment, the best information the USGS can find, mostly by combing official customs records but also by asking producers of metal and metal-based products for information on all of their sourcing activities.
The information on demand also takes into account the best data that the USGS has on exports, of raw materials and finished goods, in addition to data on the direct needs for industrial manufacturing for domestic use, including inventory levels, and the amount of any material obtained by the Defense National Stockpile Center, the DNSC for use as a strategic reserve.
The USGS has high ethical standards, and it typically assigns permanent specialists to survey, maintain, and update regularly its records and database for specific metals and minerals. It does not disclose individual, or even, sometimes, group, proprietary information, except with permission, from the companies that give it such information.
Any investor, large or small, who wants to research the fundamentals (supply and demand) of a metal or mineral for a long-term investment strategy must start with reviewing the USGS data, which is usually updated several times during the year.
Please take a moment at this point to go to the USGS website index page for Tungsten Statistics and Information. This page provides links for yearly and monthly summaries of tungsten fundamentals plus the best survey of how, why, and what tungsten is used for that is available, subject always, as in a computer, to the quality of the information gleaned by the USGS specialist. The information on supply and demand in the articles I write is based on USGS data.
Finally, with regard to the USGS, it, the USGS, serves an economic function not a political one. Therefore it does not make politically nuanced judgments as to why a particular foreign government is doing or not doing something with regard to the export or import of a particular substance. The USGS does, however, often point out, with regard to foreign sources of material, that a change in situation such as an increase or decrease in total exports or imports may well indicate increased (or decreased) usage in the domestic industry of the country of origin.
The USGS never speculates, for example, that a foreign government may be economically manipulating the market in a particular metal. This is not the role, nor the purpose, of the USGS. It is a data supply agency for the U.S. Federal Government created by Congress to keep it informed of the situation in the U.S. with regard to the supply and demand of natural resources.
In 2005 no American domestic mine production of tungsten was reported, according to the USGS. Yet prices for tungsten and the tungsten materials normally traded in international commerce leaped by 250% between the beginning of 2004 and the end of 2005. What is happening, will it continue to happen, and how can investors profit from this?
The easiest question to answer is: What is happening? China is the world’s largest producer, from mining, of tungsten. It now produces, as of mid-2006, more than 2/3, perhaps as much as 83%, of the world’s supply of tungsten concentrates. Until recently, though, China was not advancing technologically, and it was exporting concentrates unprocessed to countries, such as the U.S., where chemical processing, smelting, and refining turned the concentrates into products directly usable in industrial processes.
China has not been standing still with respect to developing and acquiring tungsten concentrate downstream processing technology. Neither has China been standing still in developing and acquiring industrial processes for using refined tungsten products to manufacture end use items such as ferrotungsten for making high temperature steel alloys, cemented carbides for making cutting tools for use in oil exploration drilling, industrial machining, and stamping, and high purity tungsten for chemical, pigment, and lighting applications, among others.
The crossover year for China with regard to the global tungsten market seems to have been 2004-2005. Its internal demand continued noticeably to increase rapidly. More Chinese tungsten concentrates were used in China to make end products than ever before. Chinese production of tungsten ore was increasing also, but increasingly Chinese tungsten was being used domestically to produce high value added tungsten based products. Tax rebates given to Chinese companies to encourage export of finished tungsten end products were cut back, and recently (2006) those taxes were changed so as to give an advantage to Chinese producers of tungsten finished products for the domestic market over imported materials of as much as 10%.
Simultaneously in the U.S. tungsten value added processors have been drawing down stocks held by the U.S. government and increasing domestic recycling of tungsten from scrap. The USGS calculated that “U.S. apparent consumption of all tungsten materials, as calculated from net imports, primary and secondary production, and changes in government and industry stock levels was 11,600 tons in 2005, which was 7% lower than the 2004 apparent consumption of 12,600 tons. In 2005, total imports, scrap consumption, and NDS [National Defense Stockpile] shipments were greater than those of. 2004. The apparent decrease in consumption was primarily because of higher exports in 2005 than those in 2004 [my emphasis].”
Interestingly enough America, which produces no tungsten concentrates, has now become a principal supplier to European countries and even to the Republic of South Africa, of the most widely used tungsten product, tungsten carbide powder, used to make oil well cutting tools and industrial cutting tools for all types of machining. Between 2004 and 2005 the average volume of exports by American producers to European countries of tungsten carbide powders increased 50%. To the Republic of South Africa the increase was 400%! Simultaneously exports from U.S. producers to Southeast Asian countries such as India, Korea, and Singapore remained small and static or actually, in the case of Korea, dropped by 75%. This was due to those countries beginning to take supply from China.
Why is this happening? Even the politically neutral USGS noted in its 2005 Minerals yearbook that (in early 2005) “inadequate supplies of tungsten concentrates within China, combined with increased demand for tungsten materials in China and elsewhere and a reduction in Chinese export tax rebates, resulted in steep increases in the world prices [of tungsten products]… reasons cited for the tight supply of Chinese concentrates ranged from an actual shortage to market manipulation [my emphasis].”
The usage numbers for the U.S. domestic tungsten market for 2006 are similar to those for 2005. Prices are still going higher, even so. The Chinese are increasing their production of concentrates, but using more of them and processing more of them domestically. Also the Chinese are clearly trying to tilt the playing field away from American and European producers of oil field equipment and precision machining by lowering the cost of tooling to their domestic manufacturers of this type of critical equipment through manipulation of supply of tungsten. The Chinese view is that this helps offset for China the labour oversupply lowering the price, inside of China, of disposable tooling thus creating jobs.
China also has a history of allocating export licenses for materials such as tungsten to favour foreign customers who buy only from China. This has been a main factor recently in the decision of some American producers to not consider non Chinese sources of tungsten. But this strategy by American producers has begun to unravel as China is beginning to exert its influence regionally by assuring supplies to the industries of its neighbouring countries while not increasing its export allocations. This can only mean less material for the west as well as tougher competition for high temperature steels, tooling, and oil field equipment from Southeast Asian manufacturers assured of Chinese supplies.
This type of manipulation may well have been the key factor, for example, in the bankruptcy of Canada’s largest domestic tungsten miner, North American Tungsten Corp. [TSXv:NTC], Chinese competition in the early 2000s kept tungsten concentrate prices so low that NAT was forced to close its Cantung Mine and Concentrator and go into receivership. But now increasing global demand, including a 10% or more a year growth in Chinese domestic demand, and the Chinese physical squeeze of exports through quotas and taxes have stabilized a much higher price.
NAT came out of bankruptcy and resumed production at Cantung in late 2005. It has now improved its concentrator process so that it produces only one grade tungsten product with an average 65% tungsten trioxide. If Cantung continues even at the level at which it was producing in the last quarter of 2005 then NAT could produce as much as 1/3 of the total yearly consumption of the U.S. and Canada. If this were to occur, and it were all sold into the U.S., then NAT would be America’s largest source of tungsten (as trioxide) concentrate surpassing Portugal and Bolivia.
In a related move Osram-Sylvania in Towanda, Pennsylvania was buying wolframite concentrates from South America to supplant until a few years ago. Then it got a proposal from a supplier. If it would take only the concentrates from that supplier then the supplier would guarantee all of its needs. Osram-Sylvania agreed, and changed suppliers, its South American supplier coincidentally stopped its own production.
Today that South American supplier is about to re-enter the business. A major American customer has agreed to review and restructure its processes-for making tungsten products from concentrates to use the South American miner’s ore, which is of higher tungsten content than Cantung’s. Previously the steel maker had said that they were not interested in the supply from South America, because it wasn’t the type of ore they “normally” processed.
The parties are discussing an off-take agreement. One indexed to the global market and to an inventory arrangement. This will allow the American company to reduce the risk of non-supply and of price essentially creating a hedge in a metal not today so covered. The mine will be able to finance its operations on the credit of its off-take partner/customer.
Finally there are companies in the U.S. doing data mining for tungsten, which is commonly found in the American west and southwest as a by-product of gold mining. If you go here, for example and use tungsten as a search term on a mine list page for a southern California county, such as Kern or San Bernardino, you will find a lot of abandoned gold mines in which tungsten, usually as Scheelite, a calcium tungstate, has been proven.
I think that the fact that China is the world’s leading producer of tungsten along with the fact that Chinese domestic demand for tungsten is growing at about 10% per year will cause the major U.S. processors of tungsten materials, identified by the USGS, Allegheny Technologies Metalworking Products, Buffalo Tungsten, General Electric Company, Kennametal Inc., and Osram Sylvania to look hard and long at their purchasing paradigm in 2007.
I believe that the new model purchasing paradigm based on a holistic approach and creative thinking about risk management for the long term will make 2007 a turning point for the domestic American and the western hemisphere tungsten mining industry.
Tungsten is just one example of a metal where domestic mining of which was killed by a short-sighted approach to globalization and too many politicians unwilling to confront environmental extremists.
Those American heavy industries that adopt the new purchasing paradigm to ensure long-term supplies and price stability, or at least price predictability, for critical raw materials will survive. The rest will not.
Tungsten, by the way, is a critical metal for military use in armour plate and ammunition. Why do you think it’s stockpiled by the Defense Department? |
