The Next Wave: Currency Driven Commodity Mineral Price Inflation
By Jack Lifton
19 Jun 2008 at 04:22 PM GMT-04:00
resourceinvestor.com
DETROIT (ResourceInvestor.com) -- When I participate in due diligence studies, mining analysts for financial institutions inevitably ask me, as in all fairness they should, where I think the price of the minerals in question will be at the time the mine is scheduled to begin producing. Also invariably, before I can answer, the analyst will recite to me what is, for me at least, a familiar mantra:
“Is the price to be driven by the fundamentals of supply and demand, or is it to be driven by ‘technical’ factors such as speculation or hoarding or restrictions by governments practicing resource nationalism?”
I hear in this often repeated mantra the echoes of a Wharton, Harvard, Dartmouth, Stanford or Michigan lecture hall, a very recent echo for the most part.
I always answer by saying, “of course, those are major factors, but I think the overriding factor today is the value of the dollar versus the value of the currency, in U.S. dollars terms, of the country where new demand for the mining product is arising.”
Supply, demand, speculation and, more and more today, resource nationalism are critical factors in the algebra of price, but right now there is another major factor being arrogantly or ignorantly ignored by American finance, the dramatic rise of the Chinese yuan versus the U.S. dollar.
American investors, such as you and American financial institutions, seem to ignore the special relationship of metals prices in the U.S. to the value of the Chinese yuan at their extreme peril of solvency.
Why so, you ask? It is because a dramatic price shock is about to engulf the U.S. economy and in some cases, literally, close down some American OEM heavy industries.
Look at the following chart published by the United States Geological Survey (USGS), which is charged by Congress with accumulating and analyzing data on natural resources production and use as these data affect the economy of the U.S.
Courtesy of Great Western Minerals Group
Today I want to speak mainly about the effect of the last line in the above (2007) chart on the future of the U.S. domestic economy.
The American political elites and the environmental leisure class have successfully managed to ignore the advances in mining and drilling technology of the last 50 years and to impose upon the United States, the natural resources of which made it, the U.S., the richest nation in history, bar none, an agenda which is literally impoverishing the country by ending the self sufficiency in metals and energy minerals which made the U.S. wealthy in the first place. This is occurring during the greatest run up in demand for these metals and energy minerals in the history of the world as the great nations of Asia with nearly half of the world’s population race to catch up with the west in prosperity, lifestyle, and standard of living.
I want today only to point out to you the effect that the Chinese drive to improve their standard of living has had and is going to have on an America whose leaders are resource isolationists blindly ignorant of globalization and any rational view of economic life and its imperatives.
As the chart above shows, in general, since 1992, in just 16 years the United States has added to the list of commodities upon which it is 50% reliant for supplies of imported materials 22 metals and minerals. Of these 22 materials we are dependent on China for 9 of them added to the list just since 1992. Today, in 2008, we are reliant on China for all or a majority of 16 mineral commodities without which our industry and our lifestyle and standard of living would be impaired, reduced or eliminated.
I’m not going to give you a detailed list, just some of the highlights from it, and a revision of it, unfortunately upward, due to a terminology problem the USGS has overlooked.
There are 17 rare earth elements, the 15 lanthanides plus yttrium and scandium. The U.S. is today, since 1994, to be exact, 100% dependent on imports from China for all 17 of these elements; I think that the USGS has understated the total number of dependencies upon China as the leading source by 16 in the chart above. I think the total number should be 32. The USGS apparently counts the rare earth metals only once as a group rather than as 17 individually used, and differently valuable and valued, raw materials. Note that this revision will also raise the number of commodities with “net import reliance [by the U.S.] equals 100%” by 16 to a total of 33.
Also, if I’m right about the USGS definition of the Rare Earth Metals as a single commodity then the number of commodities the importation of which the U.S. now depends for more than 50% of its demand is 61. In other words, the number of commodities for which the U.S. economy is more than 50% dependent on imports is now the majority of those commodities it uses!
Notwithstanding what the historically and economically ignorant among us say and, sadly, believe, the United States is not a world bestriding imperialist power; it cannot command that commodities be preferentially shipped or even sold to us. Yet the historical strength of the U.S. economy built in a previous era of commodity self-sufficiency and continued to the present day by the strength of the American resolve to preserve its freedoms and dignity has maintained a tradition of the global pricing of commodities in American dollars.
Look now at a Bloomberg article, datelined Tokyo, June 19, 2008, entitled simply “Yuan Extends Gains to 20% Since End of Peg Before Paulson Talks.” In this chilling article for investors, like you and me, who are paying attention a JP Morgan Chase & Co. analyst in Singapore states: “The yuan may rise to 6.5 [to the U.S. dollar] by the end of 2008 and register another 20% appreciation [against the U.S. dollar] by the end of 2012.” Ladies and gentlemen, your attention please, this means that Chase is predicting that the U.S. dollar will buy 5.2 Chinese yuan in 2012.
Do you think that the People’s Republic of China will allow the U.S. to buy its commodity minerals, whichever of them and how much of them it is still willing to export in 2012, for 30% less than they are selling for now? In other words, will the Chinese accept U.S. dollars at the 2008 rate in exchange for commodity minerals in 2012? Of course, they won’t!
China will either no longer denominate the prices of the commodity minerals, the production or ownership of which China controls, in U.S. dollars, or China will raise the prices of those commodity minerals to reflect the decline in value of the U.S. dollar against the Chinese currency. The U.S. no longer is the dominant trading nation in the world based on its demand for and supplies of natural resources.
So, if the supply and demand, of those commodity minerals for which China is, in fact the U.S.’s dominant supplier were simply to hold steady, then the following prices would prevail:
I picked the above 3 out of the 61 mineral commodities of which the U.S. is more than 50% dependent on imports because they are prominent among those metals critical for a society built or building upon a base of heavy industry and high technology, and we are either at or near 100% dependency for all 3 of them from China already. In fact since Chinese demand is shortly to be joined by Indian demand I will not be surprised to see the 2012 prices for commodities of the type in the 2012 column above double, or triple, from their 2008 prices, at least in dollars, by 2012.
Also the U.S. could be self sufficient in all three if it had the economic maturity and willpower to elect legislators not beholden to luddites. The people of America have clearly woken up to producing energy from domestically available resources as a cure for dependency on imported energy minerals as the chart below shows. Of course this took the shock of $4.00 gasoline.
Source: AmericanSolutions.com
I suspect that since most mining analysts don’t know of America’s dependence on China for the majority of our critical industrial raw materials it is going to take the shock of massive price increases for durable goods due to demand, speculation, and currency revaluation, causing runaway commodity mineral price inflation in terms of U.S. dollars, to wake them up. It takes more than a short time and longer than the American national election cycle to fix these problems and the fix has not yet even begun.
I can’t wait to see the results of the above poll taken in a very few years, and beginning with the statement “Recently, the price of rare earth metals, tungsten, and indium as well as iron ore and steel hit an all time high….” Unfortunately it will only be asked after the prices of cars, refrigerators, washing machines, television sets, computers, cell phones and electricity have taken their relentless march upwards and the age of consumerism has ended.
Self-sufficiency in mineral commodities is the only way to tame inflation and to halt the progressive ruin of the middle class. |
