The Critical Metals Report: In a presentation at the China Investment Conference in December, you said that over the last 20 years the U.S. government has mismanaged its supplies of critical metals to the point where it depends almost exclusively on foreign sources. How did this happen?
Michael Berry: It’s just now starting to dawn on Washington that we don’t have a stockpile. We had a stockpile through World War I and World War II (WWII) that was necessary to our national security. The U.S. was the biggest producer of rare earth elements (REEs) in the 1970s and 1980s. But then we allowed China to undercut our prices and we shut down the Mountain Pass mine, which was one of the largest if not the largest producer of rare earths in the world. We lost not only production and access to REEs, which are critical for weapons systems, automobiles, alternative energy and a number of other applications, but we lost the processing chain that actually integrates and creates the metal, creates the alloy and magnets, and integrates it into material. China now controls these markets. There are four or five pieces of legislation pending in Washington, but it will take a decade or more to replace and rebuild these crucial supply chains.
Chris Berry: When the Soviet Union collapsed in 1991, the idea of a unipolar world came into vogue and I think the United States took its eye off the ball by selling off stockpiles of numerous metals. Security of supply was not viewed in the same light as it was during the Cold War. Labor was offshored, which minimizes costs and fattens balance sheets. But the U.S. made a strategic mistake when we offshored technology as well. Other countries around the world now have access to this intellectual property and are using it to build their own industrial and manufacturing bases. It’s going to be quite a while before the United States regains its footing, but we are seeing moves recently to rectify this situation.
TCMR: How involved should the U.S. government be in the metals supply chain?
CB: There is a lot of mistrust and antipathy toward the government getting involved in what are traditionally viewed as private-sector activities. But there is a role for the government to encourage investment with respect to critical and other metals, whether or not it centers on loan guarantees or tax breaks, for instance. Government-run and private-sector defense companies require these raw materials that we are depending on foreign countries to supply us with. However, I’m not entirely convinced as to how involved government should be. It’s a very slippery slope.
TCMR: Over the last 50 years, Japan built what is now the third largest economy. It did so by importing almost all of its raw materials and metals from foreign countries. Why is what’s good for an economy like Japan’s bad for America’s economy?
CB: The difference now is that there are more people competing today for a finite amount of resources. Today, there are 3.5 billion people in the emerging world who are striving for a higher quality of life, which is underpinned by resource demand. In this environment, a sensible natural resource policy is an absolute imperative. World War II was fought for many reasons, but one of those reasons was Japan’s dependence on natural resources to power its economy-for example, rubber. When viewed through this prism, it’s not hard to view future conflicts over resources as a given.
TCMR: Chris, what are some examples of metals that the U.S. is critically short on?
CB: Unfortunately, it’s a rather lengthy list. In 2009, the U.S. Geological Survey compiled a list of a select grouping of non-fuel minerals to demonstrate U.S. import reliance. The U.S. was 100% dependent on imports of 19 of them and at least 75% dependent on 31. Some of them are front-page news, like rare earth elements, but others are more obscure but just as important, such as manganese, vanadium, tungsten, antimony and graphite.
TCMR: What are these metals’ primary uses in the new economy over the next decade?
CB: Graphite, for example, is currently used in steel making, brake linings, lubricants and refractories. There are uses for graphite where I expect supernormal growth, however, such as in lithium ion batteries, nuclear reactors and fuel cell technology. It’s by now a well-known fact that there’s between 10 and 20 times more graphite in a lithium ion battery than there is lithium and you need large-flake, high-purity graphite. Based on what I have seen in my travels recently, I think vehicle electrification is here to stay. More graphite is going to be needed for vehicle electrification, whether it’s used in traditional automotives like the Chevy Volt or in electric bicycles, which are seeing explosive demand in countries like in China.
China produces 75% of global graphite supply (in a total market of 1.2 million tons (Mt) per year) and so as the country continues to build its own industries that require more graphite, an increase in domestic consumption must ensue, to the detriment of those companies outside of China. There is no U.S. graphite mining currently taking place and there are only two mines in Canada that are producing on a small scale. There are a couple more projects potentially coming onstream in a couple of years in Canada, so it’s a very good place to be going forward as the twin avenues of demand of industrial applications and vehicle electrification combine to increase the appetite for graphite.
TCMR: Let’s move on to vanadium. What are ways that vanadium use will grow?
CB: Vanadium today is primarily used as a strengthener of steel and an alloy with titanium. The vanadium market is an oligopoly in the sense that three countries-China, Russia and South Africa, produce nearly all of the world’s 61 Ktpa vanadium, and production is concentrated in three major companies.
One of the most exciting potential uses for vanadium is the vanadium redox battery (VRB). This dovetails nicely with the idea of increasing renewable energy capacity in the form of wind and solar throughout the world. One of the challenges with renewable energy is its intermittency. When the sun is not shining or when the wind is not blowing there is no way to store that energy effectively right now. The VRB, which was developed about 20 years ago, is already used on a small scale to store electricity generated from both renewable and traditional sources like coal. It will be used going forward to store renewable electricity as the gigawatts that are forecast to come onstream in the U.S., Europe and China do so. The VRB is one angle for vanadium that could potentially explode its usage and adoption.
TCMR: It’s ideal for that use because the properties in vanadium allow the load change to occur in those batteries as power comes in and out of those batteries. It’s used in the acid, right?
CB: Yes, in the electrolyte. What makes the VRB unique is that vanadium electrolyte is used in the anode and the cathode-a difference from most batteries. VRBs allow for greater energy storage, a faster recharge time, and a much longer life cycle. A drawback of lithium ion batteries is that they eventually lose their capacity to hold a charge. VRBs have issues with energy density, but offer more benefits than a purely lithium-based battery. There are billions of dollars going into research and development in China alone, focusing on innovations like VRBs. China’s 12th Five-Year Plan released in 2011 has been regarded by many as the greenest in China’s history. There are seven strategic foci, including efficiency in energy generation and storage. My bet is that vanadium will be one of the ultimate winners. That makes a case for finding additional sources of vanadium.
TCMR: I think most of our readers would be surprised to learn how big the manganese market is internationally. Tell us about that metal and its future uses.
CB: Manganese is a metal that is just not as sexy as lithium or vanadium, yet it’s a critical component used in the manufacturing of steel. Manganese is the fourth most-traded metal at about 30 billion pounds/year.
Manganese can also be used in the cathode of lithium ion batteries. It provides a much longer, stronger, powerful charge than almost anything else in the anode. The Chevy Volt and the Nissan LEAF use lithium-ion batteries known as lithium manganese spinel, or nickel-manganese-cobalt for short. This is where I expect to see the real growth in manganese use in the future. Global electrification is a powerful force and manganese should be a big part of this phenomenon.
TCMR: That’s pretty interesting. Thanks, Michael and Chris.
Dr. Michael Berry served as a professor of investments at the Colgate Darden Graduate School of Business Administration at the University of Virginia from 1982-1990, during which time he published a book, Managing Investments: A Case Approach. He has managed small- and mid-cap value portfolios for Heartland Advisors and Kemper Scudder. His publication, Morning Notes, analyzes emerging geopolitical, technological and economic trends. He travels the world with his son, Chris, looking for discovery opportunities for his readers.
Chris Berry, with a lifelong interest in geopolitics and the financial issues that emerge from these relationships, founded House Mountain Partners in 2010. The firm focuses on the evolving geopolitical relationship between emerging and developed economies, the commodity space and junior mining and resource stocks positioned to benefit from this phenomenon. Chris holds an MBA in finance with an international focus from Fordham University, and a BA in international studies from The Virginia Military Institute.
Article published courtesy of The Critical Metals Report – a special subsection of The Gold Report – www.theaureport.com