-- Posted Monday, 20 July 2009 | | Source: GoldSeek.com
BY MIKE HOY
In the last three weeks a very important event took place that has been overlooked and misunderstood in the financial sector.
The United States and the European Union have filed complaints against China at the World Trade Organization (WTO) on June 23 accusing Beijing of placing export restrictions on raw materials and partially processed raw materials critical to many industries. The nine materials cited by the United States are bauxite, coke, fluorspar, magnesium, manganese, silicon carbide, silicon metal, yellow phosphorus and zinc. The complaint accuses China of restricting exports, thus creating an unfair advantage by contributing to disparities in prices of these precursor materials inside and outside China. The European Union also complained that the restrictions could undercut some 4 per cent of European industrial production if the resources are no longer easily accessible from Chinese suppliers.
For years China has taken a long term approach in the planning, design and procurement of natural resources which will propel their Country into the 21st Century. All bought and paid for with hyper-inflated dollars courtesy of the Western World. China knows the dollars’ days are numbered and they must liquidate the once preferred reserve asset before it eventually collapses leaving them with nothing but worthless paper.
For decades the US has taken advantage of third world countries by consuming their natural resources in lieu of developing their own domestic supply. The US has had a “free ride” in the plunder of resources from around the world. It became too easy to substitute the purchase of cheap foreign resources in lieu of developing a dependable supply at home. The higher costs and environmental red tape associated with the domestic development of these resources made foreign development a no brainier since costs were dirt cheap and red tape did not exist.
The US is soon coming face to face with the reality that just because they “used” to be the single largest demand for foreign natural resources does not mean they are entitled to those natural resources as their own. It is easy to see why certain people in the US feel they are “entitled” to certain privileges and a way of life they have not earned; they had a good teacher in Uncle Sam.
Never underestimate the thinking of the Chinese. While the rest of the world has been licking its financial wounds China has been out acquiring inventories of the natural resources and rare earth minerals they need at fire sale prices today.
Imagine the demand for resources from an awakening country with a population of 1.3+ billion people. Do not forget about the needs of India and others who also want to share in the way of life you and I once took for granted.
It seems to me the US and the European Union may be missing the point. They think they are being overcharged for foreign resources whose future supply was taken for granted as a “given.” The reality is they may be facing a situation where access to this once ample supply of natural resources is threatened by the growing domestic needs of the producer or someone willing to pay a higher price. What would happen in the US if the supply of these natural resources were cut off? It seems to me that the US has a lot more to be concerned about than what they think is a protectionist price gouging attitude in China. What do you think the price of these resources will climb to in the event supplies are threatened?
THE STAGE IS SET!
Everyday I hear pundits on TV take both sides of the Commodities question; too much, too little, rebound, recovery, depression; etc, etc the debate goes on and on. What these pundits overlook are three very important facts;
1) There are strategic commodities consumed in the US where virtually 100% of the supply is produced outside the US. Much of this supply is produced from Countries whose loyalties to the US are questionable at best. A classic example of this is manganese; every ton of steel uses 10-20 lbs of manganese per ton. In 2008 the US produced 91mmtons of steel which was 6.85% of the world’s total steel production. From this number one can estimate a usage of 900,000,000-1,800,000,000 lbs mn/yr. There is zero manganese production in the US today. If the supply of manganese were disrupted the US steel industry and defense sector could come to a screeching halt.
2) Even though the purchase price of commodities has been clobbered; the current purchase price of selected commodities offers the potential for handsome profits from US production even at these depressed prices. Many analysts become enamored with topics such as “grade” when comparing the logistics of one investment versus another. What these analysts should be using is the cost per lb versus the selling price per lb. If they were to concentrate on profit per lb then the investment would stand on its own merit rather than being compared to another option where it is an “apples to oranges” comparison.
3) Ready market making offtake agreements unnecessary. If a domestic supply of these imported metals and minerals is developed at a competitive cost I find it hard to believe that domestic end users would not be lined up to lock in a domestic supply versus being at risk in the event of a foreign supply disruption. When one totals the costs associated with a 20% export tax from China, exorbitant overseas energy costs and overseas transportation costs domestic end users will find the outright acquisition of these domestic resources a BARGAIN.
Unfortunately, the people who should be paying close attention to this “ticking time bomb” have a lot in common with those who were in charge of regulating the financial sector; “THEY CAN’T SEE THE FOREST FOR THE TREES!”
Corporate America and its leaders must recognize the lead time necessary to prove up an economic resource in conjunction with the time it takes to put that resource into production. From a grass roots pure exploration stage that timeframe can be 7-10 years. Some companies are well beyond the grass roots stage and their timeframe would be much less.
I believe the possibility exists that if America takes measures and steps necessary to develop these resources now the timing associated with bringing production online could be ideal with an economic upturn. Not only will jobs be created but funds can be repaid from production profits unlike most taxpayer funds being thrown away in the financial sector never to be seen again.
With China gobbling up everything they can get their hands on, I believe the future holds some very unpleasant surprises when it comes to the supply of these metals and minerals.
For those who understand the long term ramifications of these three points I think the opportunity for big time profits await “THOSE WHO CAN SEE THE FOREST FOR THE TREES!”
FUNDING WHICH WILL FURTHER INCREASE WORLDWIDE DEMAND!
Econ 101 teaches us the simple lesson that the more of anything you have the less value it carries. With the reckless creation of debt the dollar is doomed. Any countries stuck in possession of those dollars when the music stops playing will find the value of their reserves have something in common with the financial system of the world.
China is fully aware of the impending doom of the dollar and they know they must dispose of their vast accumulation of dollars without creating a panic in the financial markets. Precious metal purchases are a given coupled with the purchase of natural resource inventories and resource companies.
China has announced a $600 billion infrastructure development program. Additional huge quantities of metals and minerals will be needed and consumed in the construction of this infrastructure. The US may feel that China is simply jacking the exported price of these metals and minerals to make foreign industry less competitive but again they may be missing the point.
I think China has adopted an attitude with a win-win outcome for them. If they sell to foreign countries they will make an extra 20% due to the export tax; if they don’t sell they have those metals and minerals for their own consumption.
China also recognizes that holding natural resources as a form of financial reserves is a better option for them than holding unwanted dollars. You must remember that China can only swap a limited amount of dollars into precious metals without having a major upward move in the price of those metals. Therefore, the purchase of natural resources to meet the growing internal demand is an obvious and necessary step in reducing the risk of holding dollars.
It does not take much in the way of intelligence to know that trading overvalued dollars for undervalued resources is one way to dispose of the unwanted dollar inventory while planning for the future.
The irony to this whole story is the fact that China has no competition in acquiring these natural resources. While the developed world struggles to unwind their derivatives mess; China steals the world’s treasures for pennies on the unwanted dollar.
China is in the unique position of being able to sell the “dogs” of their portfolio at premium prices while being able to build positions in much needed assets at bargain basement prices.
US DEMAND INCREASED THROUGH INFRASTRUCTURE AND ENERGY DEPENDENCY PROGRAMS!
The US has created trillions of dollars in hopes of putting “Humpty Dumpty” back together again. As trillions of dollars are being created by the US and other countries it is absolutely imperative that much of this money be spent building and replacing obsolete US infrastructure in conjunction with making the US dependent upon its own sources of energy. This will create jobs and infrastructure that will propel those, who hope to pay the bill into the future, with something positive to show for the money that was spent.
I think the development of these natural resources should be a foregone conclusion in this Country; unfortunately politicians would rather concentrate on how to get themselves re-elected. This is the main factor that separates the US from China when creating long term policy.
China knows that now is the time to guarantee future supplies of natural resources and they are taking the steps necessary to do so. The US on the other hand is playing politics as usual with politicians attempting to give their constituents everything they desire without any consideration for the long term good of this Country.
CONCLUSION:
In a world consumed with war and unrest now is not the time to risk losing our steel and defense industries simply because those who have led this Country have not had the foresight to build a domestic supply of these resources. Building a supply of these resources would guarantee the Country has the ability to defend itself, power itself and replace much needed infrastructure. Without the development of these resources the days of the US being a super power, just like the standard of living its citizens have taken for granted for decades, are gone forever!
As the rest of the investment world begins to recognize the necessity to develop assets within these sectors, selective Junior Mining Companies concentrating on filling the void created by zero US production will do very well in my opinion. Even those who feel commodities are overdone must recognize the opportunity offered by selective domestic Junior Mining Companies.
Investors who happen to agree with my way of thinking have the opportunity to get in on the ground floor of what I feel will be some very good times going forward. There is one company in my portfolio that has spent three years acquiring and developing projects that may help fill the void. Those on my free e-mail list will be receiving an update on this company. Anyone who is not on my free e-mail list can be placed on the list to receive this update simply by responding to the e-mail address listed below.
As always folks, these are my own opinions. It is up to each of you to do your own due diligence as in the end your opinion may differ from mine. Anyone with questions can reach me at the phone number listed below.
mhoy@neb.rr.com
402-483-4484 8:00 AM- 8:00PM CST
Mike Hoy
-- Posted Monday, 20 July 2009 | Digg This Article
| Source: GoldSeek.com
