Jack Lifton: A Global Perspective on Critical Metals

Source: Jack Lifton for The Critical Metals Report   (7/19/11)

http://www.theaureport.com/pub/na/10287

The best investments in the critical metals space, according to Technology Metals Research Founding Principal Jack Lifton, are available in a form that small investors can buy or trade. In this Critical Metals Report exclusive, written on a plane high above Asia, Jack provides a truly global overview of the metals economy, zeroing in on the chief metals-related issues to emerge in the first decade of the 21st century.

I am beginning the writing of this article on a plane, flying from Singapore to Tokyo, Japan. I arrived in Singapore six days ago from Sydney, Australia. I fly to Madagascar and Germany in August, and then Beijing and Baotou, China in September. Between overseas trips (I live in the Detroit area), I will travel to Toronto, Montreal, Labrador, Canada and Washington, DC, New York City and various locales in Alaska, U.S.

I am not trying to impress you with my frequent-flyer status. I want to establish my credibility as an observer of and participant in the global metals economy. And I want to establish that credibility, so I can give you a truly global overview and, I hope, perspective on the metals' markets economy with an emphasis on individual metals, related groups of metals and all of their present- and future-use trends.

This undertaking, of course, will require more than one article; so, in this one, I am going to introduce the topic and discuss it in general. Here and over the next year, I will write about the detailed markets for the most critical metals in particular; but this month I want to focus on two metals-related issues that have surfaced and become prominent in the news in this first decade of the 21st century:

1.     The control of the supply of the rare earth metals (REMs), in particular.

2.     The issue and identification of Critical Metals, in general.

Although the REM-supply issue came to the public's attention first, the rare earth metals are, in fact, simply a closely (chemically) related group of metals that are the first part to surface and the far-more important metals issue of the 21st century-the critical metals supply issue.

Something can be called critical if its absence means something else cannot be accomplished in any manner.

Even informed people who are not involved in the metals mining-and-refining industry think increasing the supply of metals-any and all metals-can be accomplished simply by increasing their production or production rate from what they, the informed people, seem to think is an infinite resource called the earth's crust. This pervasive idea is both completely wrong and dangerously foolish, because it leads to the belief that the supply of any and all metals is limited only by financial considerations.

Constantly, I hear the idea being expressed that if there is a big enough demand for a metal, then its supply must increase because more money will be offered for additional production of the metal, and this money will fund the additional production. This is actually the theory that's taught in business schools as being universally applicable, and it is taught just as an example of the basic law of supply and demand. The only problem with this theory is that it is wrong. And the complacency of the financial and political worlds about its applicability to the supply of natural resources has now led us to a crisis point in the world's metals' economy.

China's voracious demand growth for metals in the 21st century has created a large and very serious problem for the global mining-and-refining industry. For the uncritical, it seems like the mining companies are in an era of embarrassing riches; they could sell everything they can produce, it seems.

Ironically, this in fact is the problem-the industry can sell everything it can produce of nearly any metal, but the rate of increase in production rate for almost all metals is limited not only by installed capacity and access to infrastructure and supplies, but also by the finite supply of accessible, mineable, ore bodies and the capital, technology, time, and skilled labor required both to maintain current production and increase the production rate.

It is becoming increasingly apparent that, apart from the production of iron ore and aluminum ore, the global metal mining-and-refining industry is finding that it cannot maintain a rate of both ore-production and refining-capacity growth high enough to keep up with the actual current and currently projected growth of Chinese demand when coupled with the existing demand of the rest of the world and the impending demand increase from the growing economies of India, South America and Indonesia (just to name the largest future demand drivers).

China is already the world's majority user of all metals. If China's total metals demand growth rate (TMDGR) continues to match either its [current] actual or currently projected rate of overall GDP growth over the remainder of this decade, within a decade China's total annual metals demand will move from today's 55% (yes, I said 55%) to more than 75% of the total world production of all metals!

Satisfying Chinese demand would bring about a true global industrial crisis, economically and politically. In the best case, there would be only enough metals left over after China's utilization to maintain the existing replacement and a marginal addition rate for the mature industrialized economies. That means there would be no possibility of industrialization of any significant kind, much less China's, occurring in India, Indonesia, the Philippines, or, for that matter, North Korea-Southeast Asia's most-populous nations after China. South Korea's and Japan's economies would face crippling shortages of raw materials as new production moved to where the materials were available.

China, by systematically garnering possession or control of as much as it can of the world's metals, will be able more and more to dictate where and how they are used. First and foremost, among those uses, without question, will be to maintain employment and the growth of China's economy. This is not a theoretical discussion; this process is well underway as the current situation with Chinese control of rare earth metals production and its already-achieved and growing dominance in their use in industrial manufacturing shows.

China's mastery of the total rare earth supply chain insures that if it has or just produces enough rare earths to meet its total domestic demand, and a measured export, it will then continue to dominate and control the bulk of the added value to be obtained from rare earth metals.

New rare earth production outside of China, in the absence of a total rare earth supply chain outside of it, ultimately will be limited by economics to those additional rare earths China needs to import, if any, or to only the raw materials to be processed inside the country-for manufacturing components within China for export from China. Even Japan, with a nearly complete rare earth supply chain in the country, will continue to produce only if it can obtain non-Chinese rare earths of the right mix to be a player in the rare earth end-use component and device game, and then only until its manufacturing costs exceed those of its Chinese competitors.

China has established a successful model for solving its economic problems by learning how to maximize the value added in China to manufactured components and devices made for export from China. That model is to monopolize the base (the production and refining of the ores) of the supply chain of the critical metals needed for the chosen manufactured components and devices. In the case of the rare earths antimony and tungsten, so far the entire supply chains for products based on those materials have moved to China.

Thirty years ago, it became apparent that China had the largest geographic concentration of the rare earth metals of any country. China does not have the majority of the world's workable rare earth deposits, but it has an immense concentration of rare earth deposits within the Bayan Obo region of Inner Mongolia, a Chinese province, that are themselves situated within China's largest iron ore-mining region.

The huge infrastructure of the Inner Mongolian iron ore-mining industry allows the rare earths to be recovered with low-cost Chinese labor and with all other necessary overheads and infrastructure absorbed by the Chinese iron ore-mining industry. China's second-largest steelmaker, BaoSteel, produces tens of millions of tons of iron ore per year in the Bayan Obo region. At the same time, one of its subsidiaries produces 55,000 tons of rare earths per year.

This annual production of 55,000 metric tons of predominantly light rare earth elements (LREEs) is not only the largest production of rare earths in the world, but also the largest annual production in the history of rare earth production from one region. BaoSteel's rare earth mining subsidiaries and licensed refiners in the Bayan Obo region number in dozens of locations. There are estimated to be 5,000 workers in the Inner Mongolian rare earth supply chain out of a total of 100,000 employed there in the mining-and-refining industry.

The massive Chinese rare earth production-and-refining industry in Inner Mongolia was not created simply as a make-work scheme like the ones developed in the U.S. in the 1930s. It is true in China's case that there was a need for jobs in the Inner Mongolian region and that that need was filled by iron mining. But why did China embark on building such a massive rare earth mining industry 33 years ago, and then follow it with a refining industry?

Outside of China, mired in the past technologically, permanent magnets, storage batteries, phosphors and lasers were all invented and developed primarily in the U.S. and by original equipment manufacturer (OEM) automotive suppliers, in particular in the late 1970s and early 1980s. In order to understand how China became the dominant player in the rare earths industry, one need only observe the political/economic crisis brought on by Mao Tse Dong's cultural revolution between 1968 and 1978. Mao literally tried to wipe the Chinese slate clear of any modernity, and he nearly destroyed China's economy in attempting to cleanse China of its past and its character.

China was rescued from this madness by Mao's pre-eminent successor, Deng Tsao-Ping, who created communism with Chinese characteristics, which has fostered a capitalist approach in order to force the development of a Chinese economy that can lift the country out of abject poverty and out of what was, at best, a 19th century industrial economy in just two generations. The first generation of communism with Chinese characteristics from 1978-2003 was a fantastic success and set the stage for the generation we are now observing to take the lead in both metals production and utilization.

China, it is agreed by all, will be the world's largest economy perhaps as soon as 2020. Per capita, the average Chinese citizen will be between one-tenth and one-fifth as wealthy as the average American even then; but China's centrally planned economy is now, and will remain, the engine of the world's metals economy as China produces and uses 10x as much metal per-capita as an average American even now! China will reach parity in metal produced per citizen with the U.S. before 2040-and one must keep in mind that this happen be with a population 4x as large as that of the U.S. and nearly twice as large as the U.S. and EU combined.

I will now define the critical metals for the next generation of global non-Chinese growth: The metals that China needs to fulfill Deng's plan to modernize and enrich the country in two generations or less. The global economy has resolved itself into two competing factions-China and everyone else.

The rare earths are the tip of the global critical metals' iceberg, and five of them are critical. The details of this statement will be available shortly as a definitive article entitled, Critical Rare Earths by my colleague, Gareth Hatchwhich will appear on www.techmetalsresearch.com.

There's plenty of iron ore and aluminum ore such that, as long as energy and water are available, China can continue to build its basic infrastructure from those two metals just as the developed nations have done during the last century. China, however, will reach, as I point out above, structural metals-utilization, per-capita parity with the U.S. by 2040 at the latest.

The metals critical for the growth of China's technological society are those necessary to electrify the country, control the flow of electricity, as well as to mass manufacture the health and safety, communications, information access and transportation devices so China's standard of living matches, or exceeds, that of anyone else on the planet.

Interestingly enough, two of the six most-important metals for China's lightning speed entry into the world of mass-produced high technology are the rare earth elements neodymium and dysprosium, which are used to make the highest-coercivity rare earth permanent magnets. Both metals already are in short supply in the global marketplace. However, dysprosium is in such short supply-even in China-that Chinese refiners are scouring the world looking for sources of dysprosium to supplement the rapidly becoming exhausted (as the Chinese say) ionic clay deposits in southern China, which, up until now, were considered unique. Recent exploration has identified potential ionic clay deposits of the same type as those in China, in places as diverse as Quebec and Madagascar. In addition, small tonnages of more traditional mineralogies with high heavy to rare earth ratios of more well-known minerals, such as monazite and xenotine are under intense development in Alaska, U.S.; South Africa; Canada and Australia.

Market research by myself and Technology Metals' Research LLC (TMR) business partner, Gareth Hatch, brings us to the conclusion that through the end of 2016, the supply of what TMR deems and identifies as the 'critical rare earth elements' (CREEs)-neodymium, europium, terbium, dysprosium and yttrium-will be only slowly improved, and only then if the projections of all of the juniors, such as Molycorp Minerals (NYSE:MCP), Lynas Corporation (ASX:LYC), Rare Element Resources Ltd. (TSX:RES; NYSE.A:REE), Avalon Rare Metals Inc. (TSX:AVL; NYSE.A:AVL; OTCQX:AVARF) and Ucore Rare Metals Inc. (TSX.V:UCU; OTCQX:UURAF), plus all or some of the TMR list of 20 NI 43-101 resources are accurate.

The worst-case scenario is that China's production stagnates (as is planned today) and no non-Chinese material comes to the market. In that case, China will continue to dominate the supply of the CREEs. More importantly, shortages of the CREEs everywhere, most likely including China, will cause more of the world's rare earth supply chain to move to China.

Note that earlier this year, the U.S. Department of Energy (DOE) named dysprosium the most-important material for sustainable energy for the next 15 years, which is as far as it has projected. This is true for not only the U.S. and every other developed nation, but also for China.

For the purposes of this article, let's now look at the most critical of the non-rare earth metals in the context of the Chinese economic juggernaut.

Any list of those major metals critical for China's ambitions begins with copper. Copper is absolutely essential for the most maintenance-free wiring of a nation and production of the devices that utilize electricity to move people and freight, in the form of the internal windings of the electric motors and generators that literally motivate our 21st century society.

Today, copper is produced as newly refined from ore at a rate of some 16 million tons (Mt.) per annum. In 2010, China already was utilizing 6 Mt. copper per annum-an increase of 500% since 2000. China, however, produced only 1 Mt. copper domestically from Chinese ore in 2010. It, thus, needed to import the equivalent of South America's entire output to satisfy its current demand.

The International Copper Study Group estimates the rate of growth for global copper production is now 4.3% per year (see the following chart). If indeed this is the growth rate, then if (as is almost certain), the growth rate of China's copper demand is so much larger than this that (China's GDP is a measure of the rate of increase of its copper demand), China would use the entire world's newly produced annual copper production by the early 2020s.

Of course, this can't happen. But the consequences of it not happening (i.e., China's growth slowing) are perhaps even more dire for all of us-and there is no other solution to the copper-demand crisis. This is one issue to watch carefully. From now on, copper pricing will of course be volatile but the baseline will be moving up inevitably in each pricing cycle.

China will be the world's largest producer of iron ore by 2020, according to Rio Tinto (NYSE:RIO; ASX:RIO), but will remain a relatively small player in the production of copper ore domestically, as the press release by International Copper Study Group shows.

The emphasis on the critical nature of the rare technology metals like the CREEs, up until now, has obscured the real issue, which is the limitations of the rate of growth in production of not only the rare, but also the common base and even some of the rare precious metals critical to the continued growth of the global economy. And these are particularly important to the continuation of the Chinese economic juggernaut and the implementation of a similar industrial/technological revolution in India, Indonesia and, to a lesser extent, Brazil.

Following are some charts for you to contemplate, which show the metals that are critical, by industry, to create and maintain a 21st century industrial- and postindustrial-technological society. Note well the commonality of some critical metals, such as copper, for all of the industries.

Critical Rare Metals for Hybrid and Electric Vehicles

 
Neodymium 
Dysprosium 
Platinum 
Palladium 
Rhodium 
  

Critical Metals by Industry

 

Automotive

Aerospace
SteelAluminum
AluminumSteel
CopperCopper
TungstenNickel
CobaltCobalt
MolybdenumRhenium
VanadiumScandium
ChromiumNeodymium
ManganeseSamarium
PlatinumDysprosium
Palladium 
Rhodium 
Neodymium 
Dysprosium 
  

Display Electronics

Photovoltaic Thin Film

TinCopper
IndiumIndium
EuropiumGallium
TerbiumSelenium
 Cadmium
 Tellurium
  
Wind Turbine Electricity

Energy Storage

SteelLead
AluminumAntimony
CopperGraphite
NeodymiumLithium
DysprosiumCobalt
 Vanadium
 Manganese
  

Nuclear Electricity Generation

Fossil Fuel Electricity Generation

SteelSteel
AluminumMolybdenum
CopperTungsten
UraniumCesium
ThoriumLanthanum
ZirconiumCerium
HafniumPlatinum
MolybdenumPalladium
Nickel 
Cobalt

To summarize, I believe that the only metals critical to technological-society building that are, and will be, available in sufficient quantity with an adequate supply of energy and water are steel (iron) and aluminum.

I urge you to invest only in commodities that are sold and traded transparently. This is not yet the case for rare earths or most of the rare technology metals.

The best investments possible in the critical metals named above are available in a form that the small investor can buy or trade because their demand can only increase across the board from today's levels.

Jack Lifton is a founding principal of Technology Metals Research, LLC, as well as an independent consultant and commentator, focusing on market fundamentals and future end-use trends of the rare metals. He specializes in sourcing nonferrous strategic metals and due diligence studies of businesses in that space. Jack's work includes exploration, mining and the recovery of metal values by the recycling of not only metals and their alloys but also metal-based chemicals used as raw materials for component manufacturing.

Jack has more than 47 years of experience in the global OEM automotive, heavy equipment, electrical, electronic, mining, smelting and refining industries. His background includes sourcing, manufacturing and sales of platinum group metal products, rare earth compounds and ceramic specialties used to make catalytic converters, oxygen sensors, batteries and fuel cells. Jack is knowledgeable in locating and analyzing new and recycled supplies of 'minor metals,' including tellurium, selenium, indium, gallium, silicon, germanium, molybdenum, tungsten, manganese, chromium and the rare earth metals.

Jack is a Senior Fellow of the Institute for the Analysis of Global Security.

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