Applegater Summer 2009 7
TRENDS AND OBSERVATIONS
No resources bubble
BY RAUNO PERTTU
I was recently told that someone
who reads my column wanted to know if
we are in a resources price bubble. I froze
at, “Someone who reads my column?”
After the shock wore off, I considered
the question. It’s a complex issue, but
the short answer is “No.” If anything,
we’re likely in a resources dip before
another rise, at least in U.S. dollars, if
not in some other currencies. This may
not sound like an interesting topic, but
the resources question is tied into bigger
issues that will affect even us Applegaters,
so I’ll try to summarize some of the key
elements at play. Much of the following
is probably old information to you, but
the summary is important to explain my
answer.
For many years, metals, industrial
minerals and, to some extent, energy
were in a price slump. This slump was
partly the result of third world countries,
particularly China, selling their mineral
resources at any price to North America
and Europe to obtain money to fund
their internal industrial development.
Another contributor to the minerals glut
was the collapse of communism and the
opening of vast new areas for exploration
and development. The former state-
run minerals companies had been very
ineffective and inefficient at minerals
discovery and development. With the
collapse, western companies swarmed
into newly open countries with exotic
names and made new discoveries that
were fast-tracked to production.
By 2002, the resources market was
beginning to change. China’s internal
industrialization was consuming more
and more of its own raw resources that
it had been selling to other nations. It
replaced exporting of raw minerals and
metals with a growing flood of exported
manufactured products. To feed its
new factories, China was soon a major
importer of raw resources from other
countries. Industrialization in India
and smaller Asian countries followed
China’s. Asia soon became a major
resource consumer for the new factories
that produced all the Costco and Wal-
Mart goods they started selling to us at
bargain prices.
China and its neighbors were soon
awash in our money because, while they
were replacing U.S. jobs with Asian jobs
and selling us an exploding share of our
When the worldwide economic
nosedive happened last year
and foreign sales of its goods
slowed, China began to create
its own internal markets, in a
move to hasten its economic
expansion that will eventually
surpass our economy.
purchased goods, we had much less to sell
them in return. To put all those dollars
to use, China surpassed Japan’s earlier
example and bought large quantities of
our government securities, effectively
buying our debt. Today, China is the
largest foreign holder of U.S. securities.
When the worldwide economic
nosedive happened last year and foreign
sales of its goods slowed, China began
to create its own internal markets, in a
move to hasten its economic expansion
that will eventually surpass our economy.
China worries about the value of all
those US securities it still holds. Several
Chinese officials have expressed concern
that our announced major new spending
for job creation and for new social
programs could lead to devaluation of the
dollar. Many analysts worldwide share
that concern.
Outside of printing far more
money or dramatically raising taxes,
our ability to finance all of the newly
announced programs is dependent on
our ability to convince others to buy all
the securities that will cover the cost of
those programs. These are effectively
IOU’s on a grand scale. If people
and countries are reluctant to buy the
IOU’s, the interest on the newly offered
securities will have to be raised until
willing buyers are found—resulting in
inflation and devaluation of the dollar.
In turn, the devaluing dollar becomes a
less attractive investment, and even more
incentives are needed to attract securities
buyers, creating a potential devaluation
spiral.
We are looking at China to buy
many of these new IOU’s. However,
rather than expanding new purchases
of our securities, China appears to be
looking for safer ways to maintain the
value represented in the securities it
already owns.
One way it appears to be hedging
its bets is by using those securities to buy
mineral and energy resources, including
both unmined deposits and refined
metal, which China appears to believe
will maintain higher value than the dollar.
These resource inventories will serve
the additional benefit of guaranteeing
continuing supplies for China’s factories.
India is pursuing a similar strategy.
China continues on an international
resource buying spree that has helped to
support and even to increase the prices
of various commodities in the middle
of the worldwide economic downturn.
Other intertwined factors that
will also continue to strengthen resource
prices are the depletion of higher profit
margin ore deposits and increasing
demand from growing populations and
economies.
To be clear, we are in no near-term
danger of “running out” of resources.
The concerns that we will soon run out
of this or that commodity are based
on misconceptions. Most minerals are
currently produced from ore bodies. An
ore body is a concentration of metals or
minerals at a high enough recoverable
grade and volume to be economically
bodies are mined, mineral concentrations
that were previously too small or low
grade become economically minable.
Remember that the earth is mostly
a closed system, and mined materials
are generally not destroyed, only
redistributed into products. Because
our garbage dumps re-concentrate those
resources, today’s dumps will become ore
bodies tomorrow.
The rate at which resources can be
produced to meet demand is critical to
price. As the world economy begins to
recover, and demand again accelerates,
resource prices will again begin to rise.
I’ll mention one additional
factor in resource prices—government
regulation. Part of the cost of mining
must be the cost of reclamation and
environmental protection. As mines
become bigger and lower grade, and as
regulations get more stringent, mining
mitigation costs are rapidly increasing.
These costs have to be passed on to the
cost of the sold minerals. Additionally,
the number and size of areas that are
closed to mining are increasing, limiting
new development. Further, in the past
few years, a number of countries in
search of additional revenue have passed
new tax structures and regulations that
would make mining economically
difficult, resulting in an unintentional
mining freeze in those countries, further
limiting new areas for production and
development.
The factors I discussed above are
some of the reasons why I believe that
resource prices are actually in a dip on an
Remember that the earth is
overall up-slope, rather than in a bubble.
mostly a closed system, and
mined materials are generally As the world economy recovers, probably
in conjunction with a devaluing dollar,
not destroyed, only
we can expect price inflation that will
redistributed into products.
in turn slow the economic recovery. In
Because our garbage dumps
a worst case scenario (to which I don’t
re-concentrate those
subscribe), we could revisit the high
resources, today’s dumps will
interest rates and high unemployment
become ore bodies tomorrow.
that we older coots saw in the late 1970’s
and early 1980’s—or worse. As for my
extractable. Advancing technology keeps reader who asked the question—Thank
allowing new methods of economic you! Reading these may be a lonely job,
extraction, and increasing commodity but I’m glad you’re willing to tackle it.
Rauno Perttu • 541-899-8036
demand and prices redefine new ore
jrperttu@charter.net
bodies. As the currently richest ore
Ellee Celler
Owner/Broker
541.899.2035
541.899.2034 (fax)
email:jacrealest@gmail.com
www.the-jacksonville-realestate.com
Direct: 301.7893