Excerpt from the May Edition of The Morgan Report
Many think that all we cover in our reports are silver and silver related companies, how wrong they are, but unless you are a paid member you would have no way of knowing this fact. In light of that information, here is some news on Strategic Metals again from our most recently issue.
Strategic Metals Outlook
As gold and silver continue their seemingly inexorable rise, another “class” of metals, if you will, has also emerged in importance and means more for future economic growth and energy security in the United States than ever before. If gold and silver are thought of as proxies of “fear” or gauges of economic health, these metals are proxies for innovation and development of next-generation technologies.
I’m referring to strategic metals, such as lithium, manganese, vanadium, graphite, and rare earth elements (to name a few), which are necessities for current-day infrastructure (such as the manufacture of steel) and in future applications (such as lithium-ion batteries for the nascent electric vehicle revolution).
What makes these metals unique isn’t just their chemical properties. Instead, the real issue surrounding these metals is import dependence. Today the U.S. is at least 80% dependent for imports of 27 metals and 100% dependent on a total of 19 metals. While the United States has had a strategic stockpile of a number of these metals historically, these stockpiles have been sold down over time as the end of the Cold War fostered an aura of relative security.
Though many would have a different definition for what qualifies as a “strategic” metal, we define it as any metal necessary for infrastructure, national defense, or nascent next-generation technologies. A metal like copper could certainly be included here, but the real differentiator is the fact that many of these critical metals are in short supply, making them “strategic” in nature as well. What is perhaps most galling is the fact that the U.S. was independent of imports, generally speaking, for many of these metals until the twin phenomena of off-shoring due to cheaper labor in Asia and inexorable fiat currency devaluation reared their ugly heads over the past 30 or 40 years.
This has left the U.S. in the unenviable position of having to import an ever-increasing percentage of metals, not only for day-to-day usage and national defense, but also for innovation into tomorrow’s technologies. In early 2011 when Secretary of Defense Robert Gates visited China, he was surprised by China’s test flight of their first stealth fighter. The Chinese contingent with him claimed to be unaware that a test flight would be taking place. However, this was another sign of China’s rise—a rise built on the back of natural resources, including strategic metals.
As China continues to build her military capabilities, more of these strategic metals listed above will be in demand. The U.S. import dependence on them has a direct effect on our own military capabilities in the U.S.—something hopefully not lost on planners in the Pentagon or on Capitol Hill.
A good case study involves manganese—a metal absolutely critical for the manufacture of steel. The U.S. is 100% dependent on imports and as the infrastructure build-out in the emerging world continues unabated, you can be sure that this import dependence will continue. The U.S. had a strategic stockpile of manganese, which actually served as a resource during the Second World War. It has since been sold down, to the point where there is no such stockpile in the U.S. and no domestic production in the U.S. today.
Rare Earth Elements (REEs) are another notable example of U.S. import dependence. In the early 1980s, Chinese Premier Deng Xiao Ping declared, “The Middle East has oil, we have rare earths.” Anyone at all involved in resource investing of rare earth plays knows the rest of the story. The Chinese set about developing their own rare earth supply chain (mine to market) by undercutting western prices and environmental standards, and today they supply the world with 97% of its rare earth needs. With REEs essential for a host of applications, like cell phones, laptops, anti-missile systems, optics, and magnets used in motors, it’s more than dangerous to rely on a single country for supply. China’s recent behavior in curtailing export quotas and outright halting of REE exports to Japan are examples of what can happen when you outsource a supply chain and all of the associated intellectual property. The end result is at least a five- to ten-year process involved with re-establishing the industry.
What is most urgent here is the idea that entire industries can be built around these metals—again—if you can ensure a steady (preferably) domestic supply. As an example, look at the budding electric vehicle revolution. Despite the state of the North American auto industry, electric vehicles can serve to reignite production and in doing so, create sustainable jobs, something the U.S. desperately needs. Essentially every major auto manufacturer on the planet is working to develop an electric vehicle (“EV”) and by some estimates, there are dozens of auto manufacturers in China ALONE that have joined this quest.
What is absolutely crucial, though, is procuring the raw materials to make sure adequate research and development take place and, ultimately, mass production of automobiles can ensue unabated. The Chevy Volt, one of a handful of commercially available EVs today, uses 12 pounds of lithium, 7 pounds of REEs, and a substantial amount of graphite, amongst other metals. Lithium is arguably the most critical of all elements in an EV as the light weight and energy storage capacity of the metal make it indispensable. The U.S. is 100% dependent on both REEs and graphite, while being a net importer of lithium, despite some domestic production. How is General Motors realistically supposed to build a supply chain and a sustainable business in EVs when they are dependent to this degree on foreign sources of raw materials? The rising quality-of-life phenomenon emanating out of Asia dictates that demand for these metals will continue, making a domestic supply chain here an imperative.
Fortunately there is hope. It appears that the recent run up in REE prices and subsequent wake-up call have spurred our elected representatives in Washington, DC, into action. Last year, the Rare Earths and Critical Materials Revitalization Act of 2010 was passed, and Senator Murkowski, Representative Markey, and Representative Johnson have legislation pending in Congress that would kick-start a rare earth industry in the U.S. The crucial issue here is that this legislation will take time to get through Congress and it will take longer than anyone realizes to construct a “mine to market” industry. Keep in mind that we’re only talking about REEs; other metals like the ones mentioned above need attention as well, to curtail the import dependence the U.S. is facing.
When you’ve dug yourself into a hole, the best thing to do is stop digging. Years of a lack of exploration for these critical metals has led to a lack of domestic discovery, which has eroded our supply chain infrastructure, and impaired U.S. strategic capabilities. Establishing such a supply chain will take years, but is clearly in the U.S. long-term strategic national interest. The end result is job creation, domestic supply chains, and ultimately, ownership of associated intellectual property—the key to the sustained rising standard of living that we’ve enjoyed in this country.
Note: We have covered a manganese company in the past in these pages but reserve that for our membership. This article was contributed by Chris Berry whom I met at the Chicago Resource Expo where I was the keynote speaker.
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