EDITOR: | April 30th, 2021 | 8 Comments

The real “Critical” in the Critical Materials’ Supply Chain is — Vertical Integration.

| April 30, 2021 | 8 Comments
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A great many promotional “announcements” by junior miners contain descriptive business models, of the development of mineral deposits into producing mines, which imply that the product of the mine will be a finished consumer product that is far along down the commercial product supply and value chains from the actual product of the mine. This is at best foolish and at worst purposely misleading.

It is almost always the development of a new advanced use for a natural resource that creates an increased demand for that resource not the development of a supply that pushes a search for new uses.

Thus, for example, a need for the miniaturization of electric motors and generators was followed by the discovery of the magnetic properties of rare earth alloys and this then initiated a rapid growth of rare earth mining for, in particular, the elements, neodymium and praseodymium. In an analogous manner, the invention and deployment of the lithium cobalt-based rechargeable storage battery led ultimately to a need for and thus a search for new sources of both lithium and cobalt, relatively rarely produced metals before the last decade. I note that the original rare earth permanent magnets used in OEM automotive were of the samarium cobalt type and that this use ended when two British brothers cornered the cobalt market in 1980 driving its price too high for OEM automotive use in the non-recyclable miniature electric motors whose widespread use it has enabled. Neodymium iron boron alloy magnets then replaced samarium cobalt mainly from an economic perspective.

This agenda, demand begets (a search for) supply, is widely misunderstood. It is assumed by the economic press in particular that an efficient market will not only price a resource “correctly” but will also, when shortages occur, mandate its supply expansion. This is nonsensical but nonetheless is gospel today among institutional investor analysts. In every case, increased supply can only occur when accessible deposits, technical feasibility and price acceptance of the new production concur.

In fact, this is today’s challenge with technology metals. There are not enough accessible deposits, which are technically and economically mineable, to supply everyone with either alternate sources (to fossil fuels) of energy or consumer products dependent upon miniaturized electronics (phones, computers, television, etc.) The only solution is rationing, by which I mean that rich nations will go “green” while poorer ones will stay black or brown, i.e. will rely on fossil fuels mainly.

Junior miners, who seek investment only from rich nations know that even retail investors will be quickly bored by being told that the actual product of the mine seeking finance has, per se, little use other than as a feedstock for the next step in the total supply chain that eventually produces the product that they believe that they (the investors) understand, such as an electric car drive motor or the motorized actuator on a jet fighter plane, both of which are referred to only as if the total consumer/military mechanism ( a motor vehicle or an aircraft)  depended critically for its existence upon the chemical element(s) being mined rather than on the complex components containing them in metal, alloy, or fine chemical forms produced by much more complex technologies far downstream of a mine.

There is no point in developing a supply of a chemical elements unless there is a total supply chain with the capacity and economics to utilize that volume to make the end user products.

Technology is the engineering of science. Mining engineering is itself today as much an art as a science. I have never met a miner who was a skilled high temperature metallurgist specializing in manufacturing specialty alloys, yet one greenfield deposit in the USA advertises itself as a “superalloy mine.” Another, actually in production only of ore concentrates, advertises its business model as “mine to magnet.” Both descriptions are promotional nonsense.

The tragedy for us is that capitalism does not allow us to create fully staffed and equipped superalloy foundries or magnet making operations without feedstock that is guaranteed of delivery at an agreed price, on time, and to specification. In addition, such manufactories must have customers willing to pay the Cost of Goods Sold plus a profit high enough to allow debt retirement and continuing investment in capital equipment and R&D.

This is where China’s “capitalism with Chinese characteristics,” aka as Industrial Policy supported by the State Bank, has the rest of the world over a barrel. Chinese heavy industry started with a blank slate just a generation ago. It had no legacy of sunk costs. Chinese consumer demand was designed to follow the construction of a national industrial infrastructure.

In fact, there are Chinese companies with thousands of employees that are totally vertically integrated from the mine to the magnet, in the case of rare earths, and from cobalt production and processing to superalloy production. Mostly though these total supply chains are created from competition among scores of companies with the appropriate skills.

We no longer have such companies in the USA that are or can assemble a vertically integrated group of operations to produce rare earth permanent magnets or lithium-ion batteries at a scale necessary for electric transportation.

The re-creation of these total supply chains is the real “critical” problem. Not just developing deposits of critical materials. Mines alone are not the answer.


Editor:

Jack Lifton is the CEO of Jack Lifton, LLC and is a consultant, author, and lecturer on the market fundamentals of technology metals. “Technology metals” ... <Read more about Jack Lifton>


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Comments

  • Nick Pingitore

    Materion perhaps is a US example of the Chinese approach.

    April 30, 2021 - 3:55 PM

  • Jack Lifton

    I agree. Materion has benefitted from the Pentagon’s Industrial Policy. When the company couldn’t get private equity to finance a new beryllium alloy factory the DoD stepped in and basically funded the operation, which was necessary for its strategic nuclear weapons program among others. That the civilian economy benefitted, even if it benefitted, was a side effect of little interest to the DoD. Materion benefitted on a case-by-case basis. There is no basic industrial policy of the US Government.

    April 30, 2021 - 4:18 PM

  • Alexander Nosovskiy

    Do you think why there are 150 or more Works in China producing rare earth instead of 5-10 big Works ?
    Every Big Company with vertical integration need their own specification of impurities
    so each Chinese Works has main Buyer of main product

    April 30, 2021 - 9:59 PM

  • Jack Lifton

    The “150” are managed in geographically determined groups by one of six SOEs, such as China Mineral. Each of the six receives a quota of the state mandated yearly production, and it is responsible for seeing that it is distributed throughout a vertically integrated supply chain, which is audited for quota compliance.The days of the wild west approach are over.

    April 30, 2021 - 11:46 PM

    • Alexander Nosovskiy

      It is not correct . This 6 Companies has quota for export and you can buy part and export rare earth from exact Works. And if Works buy rare earth row by import it can be exported without quota.

      May 2, 2021 - 9:18 AM

  • anonymous

    Another excellent article Jack. No doubt there has been a brain drain in the western world, which has resulted in the “critical” problem you so clearly site in this article. As I understand the time line for this brain drain, starts in the ’80’s and goes through the ’90’s and onward to this day. I have no problem with the Government regulation’s they are good for all! It is well known, not all countries play with the same book. In the ’80’s Western Industry started to move off shore with EPA regulation regarding industrial effluent. Once this issue was controlled, the EPA Bureaucrats realized to keep growing the Western industrial regulation and the Bureaucracy (make things bigger), in the ’90’s, EPA tried to regulate NORM below 500ppm. This caused a big fight between NRC and EPA. The result of this fight (NORM is still an issue regarding both public perception as well as disposal) was more industries moved off shore. In fact, to me, this is the real reason Rhone Polunce sold their RE separations plant to China. This is in addition to MP sutting down their mining operations. Of course the brain drain followed. So here we are looking at ourselves wondering how we got to this place.

    May 1, 2021 - 8:49 AM

  • Rare Earths Investor

    “There is no point in developing a supply…”
    “We no longer have such companies in the USA that are or can..”

    Totally agree with the above. Watched these lamentations for the last decade as a RE investor. Question is, what will the US do now after COVID has smacked it in the face re., the realities of both Chinese chain dominance and naked political and economic intent?

    It is the US that will have to do this, the rest don’t have the sheer clout and determination to take on China head on, without US economic leadership. You heard Biden’s promises in his recent congress address. Critical metal chains are vital to his moving the US to a new energy infrastructure with all those cited EVs and charging stations, and bringing more battery and car manufacture onshore.
    Failure to demonstrate actionable moves in these areas in the next 4 years (particularly with huge job numbers, especially if he is seen hammering oil and fracking employment, which has already occurred), probably determines any reelection chances. Hence, with critical metals now clearly seeing economics and politics combined, guess which one will drive politicians to action? As usual just MHO.

    May 1, 2021 - 11:35 AM

  • profitpirate

    i think it all boils down to this,who has what and where,and that my friends is only one place ,that i can tell.why do you think trump said he wanted to buy greenland?

    May 4, 2021 - 8:37 AM

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