Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Further Clues Reveal Gold’s Weakness - 26th Nov 20
Fun Things to Do this Christmas - 26th Nov 20
Industries that Require Secure Messaging Apps - 26th Nov 20
Dow Stock Market Trend Analysis - 25th Nov 20
Amazon Black Friday Dell 32 Inch S3220DGF VA Curved Screen Gaming Monitor Bargain Deal! - 25th Nov 20
Biden the Silver Bull - 25th Nov 20
Inflation Warning to the Fed: Be Careful What You Wish For - 25th Nov 20
Financial Stocks Sector ETF Shows Unique Island Setup – What Next? - 25th Nov 20
Herd Immunity or Herd Insolvency: Which Will Affect Gold More? - 25th Nov 20
Stock Market SEASONAL TREND and ELECTION CYCLE - 24th Nov 20
Amazon Black Friday - Karcher K7 FC Pressure Washer Assembly and 1st Use - Is it Any Good? - 24th Nov 20
I Dislike Shallow People And Shallow Market Pullbacks - 24th Nov 20
Small Traders vs. Large Traders vs. Commercials: Who Is Right Most Often? - 24th Nov 20
10 Reasons You Should Trade With a Regulated Broker In UK - 24th Nov 20
Stock Market Elliott Wave Analysis - 23rd Nov 20
Evolution of the Fed - 23rd Nov 20
Gold and Silver Now and Then - A Comparison - 23rd Nov 20
Nasdaq NQ Has Stalled Above a 1.382 Fibonacci Expansion Range Three Times - 23rd Nov 20
Learn How To Trade Forex Successfully - 23rd Nov 20
Market 2020 vs 2016 and 2012 - 22nd Nov 20
Gold & Silver - Adapting Dynamic Learning Shows Possible Upside Price Rally - 22nd Nov 20
Stock Market Short-term Correction - 22nd Nov 20
Stock Market SPY/SPX Island Setups Warn Of A Potential Reversal In This Uptrend - 21st Nov 20
Why Budgies Make Great Pets for Kids - 21st Nov 20
How To Find The Best Dry Dog Food For Your Furry Best Friend?  - 21st Nov 20
The Key to a Successful LGBT Relationship is Matching by Preferences - 21st Nov 20
Stock Market Dow Long-term Trend Analysis - 20th Nov 20
Margin: How Stock Market Investors Are "Reaching for the Stars" - 20th Nov 20
World’s Largest Free-Trade Pact Inspiration for Global Economic Recovery - 20th Nov 20
Dating Sites Break all the Stereotypes About Distance - 20th Nov 20
THE STOCK MARKET BIG PICTURE - Video - 19th Nov 20
Reasons why Bitcoin is Treading at it's Highest Level Since 2017 and a Warning - 19th Nov 20
Media Celebrates after Trump’s Pro-Gold Fed Nominee Gets Blocked - 19th Nov 20
DJIA Short-term Stock Market Technical Trend Analysis - 19th Nov 20
Demoncracy Ushers in the Flu World Order How to Survive and Profit From What Is Coming - 19th Nov 20
US Bond Market: "When Investors Should Worry" - 18th Nov 20
Gold Remains the Best Pandemic Insurance - 18th Nov 20
GPU Fan Not Spinning FIX - How to Easily Extend the Life of Your Gaming PC System - 18th Nov 20
Dow Jones E-Mini Futures Tag 30k Twice – Setting Up Stock Market Double Top - 18th Nov 20
Edge Computing Is Leading the Next Great Tech Revolution - 18th Nov 20
This Chart Signals When Gold Stocks Will Explode - 17th Nov 20
Gold Price Momentous ally From 2000 Compared To SPY Stock Market and Nasdaq - 17th Nov 20
Creating Marketing Campaigns Using the Freedom of Information Act - 17th Nov 20
ILLEGITIMATE PRESIDENT - 17th Nov 20
Stock Market Uptrend in Process - 17th Nov 20
How My Friend Made $128,000 Investing in Stocks Without Knowing It - 16th Nov 20
Free-spending Biden and/or continued Fed stimulus will hike Gold prices - 16th Nov 20
Top Cheap Budgie Toys - Every Budgie Owner Should Have These Safe Bird Toys! - 16th Nov 20
Line Up For Your Jab to get your Covaids Freedom Pass and a 5% Work From Home Tax - 16th Nov 20
You May Have Overlooked These “Sleeper” Precious Metals - 16th Nov 20
Demystifying interesting facts about online Casinos - 16th Nov 20
What's Ahead for the Gold Market? - 15th Nov 20
Gold’s Momentous Rally From 2000 Compared To Stock Market SPY & QQQ - 15th Nov 20
Overclockers UK Quality of Custom Gaming System Build - OEM Windows Sticker? - 15th Nov 20
UK GCSE Exams 2021 CANCELLED! Grades Based on Mock Exams and Teacher Assessments - 15th Nov 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

The Quiet Grab for Global Natural Resources

Commodities / Resources Investing Sep 21, 2009 - 11:58 AM GMT

By: Andy_Sutton

Commodities

Best Financial Markets Analysis ArticleWhile all the hubbub here in the US has centered around abominations such as cash 4 clunkers, tax credits for buying homes, and the other machinations directed at returning the US to the blissful year of 2005, other portions of the world have taken notice and have been conducting some activities of their own. They have been locking down ever-growing stockpiles of critical basic materials needed to run their economies. These strategic moves have certainly not been done in secret, but given how we spend our intellectual energies here in America, they might as well have been. Leading the pack has been China, but there have certainly been others.


Venezuela’s $16 Billion Oil Deal

On 9/17/09, Venezuela President Hugo Chavez announced in a brief statement that his country had entered into a $16 billion oil deal with the Chinese to further develop the Orinoco project and ramp up Venezuelan production by 900,000 barrels per day. This agreement is separate from a similar deal inked in October of last year that promised an unspecified amount of Venezuelan production to the Chinese. The important thing to note is that Venezuelan state-owned PDVSA not only committed to ship oil East, but will essentially operate a joint venture with Beijing for the purposes of developing further reserves. At the time, Chavez was optimistic that his country would become China’s top oil supplier.

Of important note in the oil space is the fact that the #3 supplier of oil to the US is Mexico and its production has experienced a steady decline since 2004 and is now in a full state of export destruction. While much ado has been made of the Bakken formation in the western US, some reality must be brought to bear on all the misinformation being disbursed. The US Geological Survey has stated that the formation could contain 4 billion barrels of oil. While getting every drop is impossible, let’s assume for a moment that we can. Even in the throes of the worst economic contraction since the 1930’s the US still burns up about 19 million barrels of oil each day. Using that as a basis, the Bakken contains a whopping 210.53 days of US supply – about 7 months worth. Not really a big deal is it? For comparison, the USGS estimates Alaskan oil reserves including the North Slope to contain 90 billion barrels. Again, let’s assume we can recover every drop of it. The situation here is a bit better and we’ll get about 13 years of supply at current burn rates. Note that doesn’t account for any economic growth, which carries a proportional increase in petroleum consumption under our current transportation, power, and living systems.

Keep in mind I am being purposely US centric here to frame the issue in simple terms. The recent strategic agreements the Chinese have entered into should take on a whole new significance when looking at the information through the lens of what is actually available to us domestically. Sure, they might have a large find in Brazil. Is it really safe to assume that we’ll command it? The Dollar is already looked upon with contempt thanks to decades of abuse and there is no indication that is about to change any time soon. Unfortunately, the strategic accumulations don’t stop at oil.

China’s Rare Earth Metal Monopoly

While much of the talk in the US recently has shifted to green technology, there is a glaring oversight being made. These new technologies, while solving one complex problem, create another. Much of today’s array of battery technology, fuel cells, wind turbines and solar panels requires an available supply of rare earth metals (REMs) for production. For the past decade and a half, the Chinese have been quietly accumulating large, unrivaled stockpiles as well as a near monopoly in the production of these critical metals. So successful were they that 95% of the lanthanide (periodic table) series metals are produced in China. These metals are used in everything from iPods to hybrid cars. China’s 1987 pledge to become the Saudi Arabia of REMs has come true says Jack Lifton, a REM specialist. The Japanese government sees REMs being the turf for future trade wars, especially since the island country imports almost 100% of its supply from China.

As the above chart illustrates, China has a near complete stranglehold on the supply of REMs as a group and a healthy stockpile to boot. Even more importantly, mainland demand is now eating away at exports. And unfortunately, unlike oil, large deposits of REMs are not scattered all over the globe. The only real bit of good news that can be attained from the chart is that supply is still growing. Unfortunately there are no meaningful stockpiles to speak of outside mainland China.

We used to have some domestic sources of these critical metals, but unfortunately, many of those mining operations were scuttled during the price wars of the early 1990s and expensive overhauls would be necessary to get them back in production. Many industry analysts fear that Beijing will be able to affect a serious supply crunch before any meaningful competitive supply can be brought to market. Another shining example of how supply doesn’t automatically appear to quench demand even though the textbooks suggest otherwise. This has resulted in a frantic scramble throughout Southeast Asia as Japanese car and electronic manufacturers try to lock down alternative sources.
Meanwhile the Chinese have sought to solidify their position as the REM capitol of the world. A state-owned investment company recently purchased a 25% stake in Arafura the Australian REM miner. In August, China Minmetals Rare Earth Company made an investment of $310 Million to lock in its dominant position in an already tight industry.

The REM situation has massive implications for the United States and our desire to go green. Without these metals, many green alternatives are not possible given current technology constraints. It also has implications for our consumption of electronic consumer goods, many of which end up in landfills when they no longer work.

Some possible conclusions that can be drawn from these activities don’t paint a good picture for the continuation of activities here in the US as we’re used to. If the countries that supply us with many of our products are locking in stockpiles, it would be rather foolish for us to assume that they’ve done so in order to continue exchanging these dwindling resources for green paper tickets as they have been doing. This becomes even more evident when one considers that much of this stockpiling didn’t exist just a few years ago.

Certainly another contributing factor is that the perceptions of the dollar have grown so pessimistic that many countries are diversifying into hard assets. However, rather than creating a speculative bubble, the strategy being invoked is a longer-term accumulation strategy. They buy the dips and take delivery. This is a testament of the growing disdain of paper assets, particularly currencies. The paradigm shift, which happened not too long in the recent past, is now moving into a higher gear.

Even if this activity ends up being nothing more than a global diversification strategy, which isn’t likely, then the law of unintended consequences kicks in and America will likely face nasty resource shortages as a result sooner than most are willing to admit.

Disclosure: Long Arafura

We have bundled together the series ‘Basic Financial Analysis’ in PDF format for anyone who would like a copy. Also included in the PDF is an unpublished section on portfolio monitoring. To obtain a copy, please visit: http://www.sutton-associates.net and click the report banner.

By Andy Sutton
http://www.my2centsonline.com

Andy Sutton holds a MBA with Honors in Economics from Moravian College and is a member of Omicron Delta Epsilon International Honor Society in Economics. His firm, Sutton & Associates, LLC currently provides financial planning services to a growing book of clients using a conservative approach aimed at accumulating high quality, income producing assets while providing protection against a falling dollar. For more information visit www.suttonfinance.net

Andy Sutton Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules