Part one: Critically endangered metals

Thursday, 29 September 2022 — Albert Park

[12 min read]

Dear Reader,

EVs, 3D-printed houses, automated homes, and ultra-efficient renewable energy power generators are just some of the future innovations leading us to a better, cleaner world.

And with the stroke of a pen, governments across the globe have started this carbon-free, pollution-free, automated utopia we all want.

Yet, there is one KEY factor that environmentalists, leaders, CEOs, and celebrities have left out...

How do we get the raw materials to build this multitrillion-dollar dreamland?

A transition nightmare awaits as we move from carbon to renewable energy

Knowing whether the world can actually supply the critical metals needed to fuel the ‘green revolution’ would be a logical first step before going about an ambitious carbon reduction policy.

Can we actually get enough stuff out of the ground to build the replacement technology?

This is not a question on the radar of politicians, climate scientists, or advocates pushing change.

Commodity experts were not invited to the Paris or Glasgow climate summits.

It was a decision reserved for governments and climate scientists.

Yet the main limiting factor for all this policy-driven change is the availability of raw materials.

The minerals needed to build wind farms, solar panels, batteries, EVs.

Policymakers have made BIG assumptions that resources will be available.

They’re relying on old economic rules of supply and demand.

Create demand for critical metals and the supply will invariably arrive.

Basic economic theory to them.

However, by pushing this market philosophy onto a finite resource like critical minerals, the demand side of the equation starts to levitate precariously upward.

Supply of critical metals is not a straightforward process of increasing production as it would be for iron ore mining.

To meet spectacular demand for critical metals requires vast global investment to drive exploration.

Then, assuming exploration is successful…

It would require enormous global capital to build sophisticated processing facilities to extract critical metals from ore.

Again, this process requires far more infrastructure and technology than the relatively straightforward method of iron ore processing.

What does all this mean for commodity investors?

Well, while ‘Ass-umptions make an Ass’ out of our leaders, they’ve unknowingly gifted you a once-in-a-generation investment opportunity.

Remember, it takes at least six years to bring an ore body from discovery to production.

That’s assuming an economically viable source of critical metals can be discovered in the first place.

It all boils down to a massive repricing of mining companies that ALREADY own the exceedingly difficult to find critical metal deposits.

But first, what makes a metal so ‘critical’ in the first place?

The ‘Great Green Energy Transition’ isn’t the only sector that will need critical metals in the future.

It includes ALL segments of the economy.

A tidal wave of changing technologies means an enormous shift in the types of raw materials needed.

From healthcare to defence to manufacturing, the commercial need for these metals is diverse.

Critical minerals include those traditional elements like copper, nickel,and aluminium.

It also includes lithium, cobalt, and the Rare Earth Elements (REEs).

But thanks to the birth of highly specialised technologies, obscure-sounding metals also sit at the forefront in determining how we live into the future.

Without trying to make this sound like a Year 10 Science class, we only need to take a peek at some of the bizarre-sounding metals now shaping future investment in mining.

There’s promethium — a healer and a weapon.

This element is a critical component for making pacemakers, but it’s also used for building self-guided missiles in defence.

Or niobium, scientists have capitalised on its unique ‘superconducting’ properties allowing them to develop new kinds of superfast, highly energy efficient large-scale computing without the need for semiconductors.

Or there’s zirconium, a key metal used for cladding nuclear reactor fuel cells.

The potential for critical metals is endless, the only limitation is SUPPLY

It’s no wonder resource companies have started eagerly sifting through old drill core in the hope of finding a strike in critical metals.

It’s an inexpensive strategy that could gift a company an instant windfall.

Finding a mineable body of one of these modern-day gems would be an immediate game changer for the company.

But these small wins won’t be enough to supply the breathtaking level of demand that’s coming…

For example, a mineral known as natural graphite, used in cathodes of lithium-ion batteries, needs a mere 600% increase in its current production to meet future demand!

That’s the outlook published by Benchmark Mineral Intelligence.

Take a look for yourself, projected demand for critical metals is colossal when you compare it with current 2022 production levels:

Are these metals really that rare?

The answer to this question has been muddied by those unwilling to accept supply issues.

Some pundits have argued the so-called ‘critical metals’ are not, in fact, rare at all.

While this may be true in some instances, it’s a distraction from reality regarding how it affects supply.

Critical metals must be found in high enough concentration to allow economic extraction.

In summarising the scarcity of REEs, Geoscience Australia explains (emphasis added):

‘Although these elements [Rare Earths Elements] are referred to as rare they are not particularly rare in the earth’s crust. Cerium is the 25th most abundant crustal element and lutetium, the scarcest REE, is about the 60th most abundant. However, it is not common for them to occur in concentrations sufficient to support commercial mining operations.’

This is the key point.

Some critical minerals occur in the Earth’s crust at elevated levels, but this doesn’t equate to a ready supply.

The issue of scarcity is based on the ability to support commercial mining operations.

For REEs and many other critical metals, finding ACTUAL mineable ore bodies is what makes these particular metals RARE.

You also need to consider this…

Organisation tasked with calculating global mineral supply

One of the key authorities in determining the supply of economic minerals is the United States Geological Survey (USGS).

As well as having a critical role in monitoring the potential for natural disasters across the US, the organisation has been tasked with calculating the world’s entire supply of raw materials.

From this, the agency drills down to find which metals are ‘critical’.

Not an easy task!

This is not a ‘for fun’ project undertaken by a friendly team of geologists; it’s a US Government directive to establish the metals needed for economic survival.

This is serious stuff. The USGS sends geologists across the world to define major reserves, even the war-torn corners of Afghanistan and Syria are visited to ensure reserves are measured correctly.

This is what the USGS has to say about critical metals (emphasis added):

‘A material essential to the economic or national security of the U.S.and which has a supply chain vulnerable to disruption. Critical minerals are also characterized as serving an essential function in the manufacturing of a product, the absence of which would have significant consequences for the economy or national security.’

In February 2022, the organisation released a detailed list of no less than 50 minerals deemed as ‘critical’.

Interestingly, the most recent addition was nickel, added just prior to the Russian invasion of Ukraine.

With Russia being a major exporter of nickel, did the USGS know what was coming or was it just a coincidence?

Who knows…

But something you can be certain of, the USGS is a well-connected outfit playing a critical role in analysing economic security.

While many OPEC countries publish their version of the critical metals list, it’s the USGS that I pay attention to.

When it comes to national security the US does not tread lightly.

With the full backing of the federal government and close relationships with the CIA, the organisation can pierce the deepest corners of the planet and assess impending supply issues for raw materials.

The USGS gives you direct scientific evidence for future supply constraints.

It is free of investor ‘spruiking’ or self-interest downplaying supply issues.

Another crucial tool in the arsenal of commodity investors trying to uncover the facts.

We’ll delve more into critical metals in our next issue.

But for now, what does this all mean?

A looming supply crunch for critical metals is coming.

Regards,

James Cooper,
Editor, The Daily Reckoning Australia

Dear Reader,

Since Queensland’s Treasurer Cameron Dick moved to close one of the loopholes many property investors use to dodge hefty land tax bills — that is, using the land tax thresholds in each state and territory to keep assessments low — he’s received a torrent of abuse.

Numerous real estate analysts, mainstream news channels, and well-known economists have come out to bash the move.

Headlines such as ‘Queensland’s new land tax a renters tax’, ‘Messy Queensland Rule to Hit Landlords Hard’...and so forth, have hit the press daily.

NSW Premier Dominic Perrottet is reportedly seeking to block information sharing between the two states to ‘protect’ NSW property investors being levied a higher tax rate on their Queensland investments!

Still, it’s to no avail.

Dick recently said the government has ‘no intention’ of backing down on the new measures that were legislated months ago.

As any economist will readily admit, a consequence of higher taxation on land influences both price and demand.

The more tax levied, the less an investor will be prepared to pay for real estate.

The calculation will reduce an investor’s budget and, therefore, borrowing power.

The result is lower land prices with potentially more supply on the market as investors hit hardest, will sell.

Is that a bad thing?

If you believe the headlines — then apparently it is.

After all, despite pundits screaming on an annual basis that real estate prices are too high and ‘we need to do something about it’ — it seems no one really wants affordable property.

At least, not if it means land prices going backwards.

It doesn’t sit well in an economy that is bent toward speculation.

Interstate investors seeking to maximise capital gains will be less inclined to put their dollars into Queensland’s real estate market.

They’ll divert investment elsewhere.

And I already know quite a few that are selling up due to what will be a marked increase in their annual land tax bill.

That’s generated a few more scary headlines such as this one from the Australian Financial Review: ‘Residential rental listings plunge as landlords sell up!’.

The above claim is based on a poll by PIPA (Property Investment Professionals of Australia) showing that that nearly one in five of the investors they asked, are ‘planning to sell a property or more in the next 12 months, with many doing so to avoid Queensland’s new land tax rule’.

Still, it’s not just Queensland investors selling up.

According to CoreLogic there’s been a jump in the number of residential ex-rental listings Australia wide. Jumping by 34.1% to 12,131 — accounting for a 31.2% annual increase.

Some of this is undoubtedly spurred by fear over higher interest rates and the potential for median market prices to diminish further.

For some, it’s better to cash in rather than ride it out.

Thing is…

Land tax, in itself, is not a bad tax.

On the contrary, it’s the only tax that carries no deadweight cost to the economy.

Unlike taxes on income and productivity that discourage work, investment, and supply — land tax encourages land into use.

A consequence is potentially higher building activity with eventual lower rents and prices with an increase to supply.

Reason is there’s little gain in holding land vacant if a larger proportion of the capital gains are going to be taxed away.

But let’s not forget that the tax doesn’t affect QLD property investors.

And it still stands that most ‘mum and dad’ investors prefer to invest in their own backyard — where they can keep an eye on their property holdings and the management thereof.

For these investors I’d imagine, lower property prices, more stock on market — in an atmosphere of sharply rising rents is a prime opportunity to step in.

Not to mention the benefit to first homebuyers.

Although notably, the number of first home buyers is at its lowest level since 2019. Buyer demand from all cohorts generally drops in a downturn.

Seems no one wants to buy into a market with the prospect of falling property prices.

Bottom line here is that the tax system has rewarded large land holders for decades.

Allowing them to pocket the larger proportion of capital gains from their investments and offset high-income taxes with negative gearing and depreciation benefits.

Consequently, we levy most taxation from labour and productivity — discriminating against workers that don’t own real estate.

It’s not great for the economy.

This is why Henry George’s 1897 magnum opus was called Progress and Poverty: An Inquiry into the Cause of Industrial Depressions and of Increase of Want with Increase of Wealth.

No matter how much progress we have, whilst the owners of land are allowed to reap the gains, poverty will always exist, he reasoned.

Still…

Land tax is the most hated tax

You can’t avoid it, hide from it, write it off, or ship it overseas.

As such, lobbying will continue on the QLD Government until they either backflip — or are voted out.

If they don’t succeed in their plans — no other state will follow suit.

Still, in my opinion, any market consequence will be short-lived.

If the government see any significant drop in property prices, likely they’ll push through a home buyer grant or two to rev up the market again.

Property prices are never allowed to suffer for long in our speculative economy.

Not forgetting, the Olympics in 2032 is going to require a huge investment in infrastructure from the state government.

Never forget surrounding landowners benefit most from the gains of infrastructure investment.

It’s not over for Quotelands’ speculative property cycle.

Not yet…

Best wishes,

Catherine Cashmore,
Editor, The Daily Reckoning Australia

Dear Reader,

As predicted last week, stocks began trading yesterday with the Dow at less than 30,000. Next target: 20,000.

One headline at Bloomberg tells us that both ‘Goldman and BlackRock sour on stocks’.

Another tells us there are ‘98% Recession Odds’.

Meanwhile, the Dow ‘officially’ fell into a bear market…and is headed lower.

Do we know that the Dow will trade at less than 20,000? No, of course not.

But what we think we know is that the Fed will surprise investors twice. First, on the way down. Second, on the way up.

Many investors are already surprised by the Powell Fed’s steadfast pursuit of lower inflation levels. CNBC caught up with Wharton Professor Jeremy Siegel, who thinks the Fed as ‘gone too far’:

‘“The Fed's tightening and their talk of super-tightening has just pushed markets way too extreme," the top economist said in an interview with CNBC on Monday. "[It's] so extreme I think the risk of recession is so much higher than waffling on inflation.”

‘The central bank has shown no sign of easing its rate hike campaign since inflation reached 9.1% this summer, with Fed Chair Powell vowing to keep hiking rates until the "job is done".’

‘Gone too far’, was what analysts said after the Fed’s rate hike in July. ‘Gone too far’, was repeated after last week’s 0.75% Fed funds increase. And ‘gone too far’ will be the refrain for the next one too.

But today, we take the other side: we explain why the Fed won’t go far enough.

Crushing optimism

For the moment, the Fed has no choice. It is way behind the curve…behind the eight-ball…and behind the times. It has to make a Volcker-like gesture — bold, resolute — to regain its credibility.

Like a torturer, the Fed must administer enough pain so the victim knows it can get a lot worse. But the Fed has no intention of killing the stock market. Instead, it is merely waterboarding it…

…and yes, investors will cough and sputter; they will think they are dying. Elizabeth Warren and other feeble-minded opportunists will complain that the Fed is murdering ‘America’s hardworking families’.

But it won’t matter. The Fed has a job to do. Mr Powell says he aims to ‘keep at it’ until the job is done.

Will that be at 25,000 on the Dow? Or 20,000? We don’t know. It’s obvious that it can’t go on forever. The first surprise will be how far it goes on before it comes to an end.

In that regard, every bounce in the stock market…and every ‘buy the dip’ forecast…calls for another dunk. The Fed has to crush optimism…it has to convince investors that their only hope is to ‘give up’, and cut their losses. Sell everything — the stocks, the houses, the kids…everything.

That is when the second surprise comes.

Going all the way

The Fed will never really ‘get the job done’. For that would mean going all the way — squeezing out the excess debt…getting inflation down to 2%...and bringing stock prices down to more normal levels. Warren Buffett calculates that the stock market is historically worth from 70–80% of GDP.

Currently, it is about two times that much…which implies a 50% haircut still to come…or a Dow of about 15,000 and a loss to investors of about US$20 trillion — from the stock market alone.

Additional sell-offs in the bond and real estate markets would mean staggering losses for the asset-owning class, totalling as much as US$50 trillion.

And thanks to the Fed’s zany zero interest rate policy the nation has about US$47 trillion in debt it wouldn’t otherwise have. Just as there is a longstanding relationship between the stock market and GDP, so is there a time-tested connection between debt and output. From 1870–2011 — 141 years — the average was about 180% — debt/GDP.

Now, the ratio is off the charts at 375% — more than twice as high. That puts excess debt at about US$47 trillion. The feds were counting on the ‘inflation tax’ to get rid of it.

Colleague Dan Denning sent over this chart as we were going to press the other morning. It shows ‘all sectors debt’, that is, households, businesses, and governments (state/local/federal):

‘Makes you wonder’, mused Dan. ‘We didn’t really get any GDP bang for all those debt bucks. What did we get? A huge bond bubble, a huge stock market bubble, and a huge real estate bubble. Massive distortion in the business cycle and capital formation. More wars and bombs. And a massive wealth transfer from the poor and the Middle Class to the bi-partisan Nomenklatura.’

And yet, Jerome Powell has barely started. If he raises the key rate by more than 4% in December, as advertised, it will still be only half of the inflation rate. And his quantitative tightening program has so far gone nowhere. Fed holdings are still up for the year.

But if he keeps at it, the pain and fear will intensify. Stocks will crash, along with corporate and household-sector bonds. Businesses and households will go broke. Real estate prices will sink.

Homeowners will be turned out into the cold, unable to refinance their mortgages…or they’ll lose their jobs in the general depression. The federal government will have to make dramatic cuts — approximately equal to its entire military budget — to avoid defaulting on its debt. And ‘the people’ will rise, begging for handouts from their penniless rulers…and threatening revolution.

The ‘pivot’ can’t come too soon, but it mustn’t come too late. Then, the Fed will react to the ‘emergency’ — it will switch from saving the nation from inflation to saving it from deflation!

Pride before fall

What a great and glorious day that will be. Chairman Powell will be the hero of the day; he will have vanquished inflation. He will have ‘kept at it’ until the pips squeaked, and the deciders howled.

Then, his moment of glory come…an entire nation will be at his feet…eternally grateful…dipping their fingers in holy water so they might press them to his lips.

Inflation will be on the decline. But it won’t be beaten; it won’t be dead. For that would mean suffering much too great for Powell…or for the elite. They own most of the US’s financial assets. And were the Fed to insist on going all the way — and unwinding the huge ball of debt, delusion, and delinquency that it created — it would be the elite who paid most of the price. It would also mean an end to their unbridled power. Inflation has been a policy choice of the federal government for many years; it is what permits the feds to spend so much money.

And some time in the months ahead…all of them — the great and the good…economists and lobbyists…Wall Street, academia and the defence industry…Republican and Democrat — will come together to thank Powell for his victory over inflation…and insist that he stop fighting tout de suite.

Inflation on the run, it will be time to face the new threat — the collapse of the US economy. How?

With more money printing, of course.

Regards,

Bill Bonner,
For The Daily Reckoning Australia