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Kaiser Media Watch Blog - February 1, 2016 to February 6, 2016
Kaiser Media Watch Blog enables John Kaiser to share online content from other media he deems interesting or relevant to Kaiser Research Online audiences. He collects links to such content and writes a brief explanation. The KMW Blog gets updated during the evening KRO update. After a week or so the current KMW Blog gets archived and a new one is started. Tweets are sent with a link to the item in the KMW Blog when it is of particular interest. Right clicking the JK header allows one to share or copy a link directly to that specific blog post.
Clive Cookson of the Financial Times writes about Luxembourg's ambition to expand its space industry into asteroid mining. The target will be near earth asteroids between earth and Mars. The idea is to set up space stations within an earth orbit where material harvested from asteroids will be processed and separated into pure metallic form of which the more valuable ones such as platinum group metals will be transported back to earth while less valuable materials such as iron and nickel will become the feedstock for space manufacturing operations. The manufactured goods will not be sent back to earth but will instead be used as building blocks for further space exploration and mining. Cookson quotes several people connected with space mining fantasies as declaring that building the asteroid space mining infrastructure will cost tens of billion but be worth trillions. That assertion is a bit of a head-scratcher because in 2014 the earthly platinum and palladium production was worth $12.1 billion using average prices, dropping to $8-$9 billion in 2015 amid weaker prices. Declining prices are accompanying declining production, which is offset by a rise in recycling of catalytic converters. Other expensive metals have tiny markets such as indium whose global production was worth less than $600 million in 2014. Bringing any meaningful amount of such metals back to earth would have to displace earthly production, which of course means significantly lower prices. So what about scandium, of which only 10-15 tonnes are annually supplied? A case can be made that if a primary, scalable supply at a stable price emerged annual demand could hit 1,000 tonnes worth $2 billion as the aerospace and automotive industries adopt aluminum-scandium alloy. Could asteroid mining solve the "chicken and egg" problem the market does not seem to think the Nyngan and Syerston deposits of Scandium International Mining Corp and Clean TeQ Holdings Ltd in Australia's New South Wales will solve? It turns out that the scandium content of meteorites is in most cases less than crustal background levels, with the highest only 10% of the grades at Nyngan and Syerston. So nobody is going to bother recovering scandium from asteroid material and ship it back to earth. But scandium is quite relevant to asteroid mining because the highest cost will be lifting the initial mining infrastructure from earth into space. For that you want titanium or aluminum based alloys and the best among them in terms of properties and "workability" is aluminum-scandium alloy. Space mining is not going to be a solution to the scandium supply problem, but scandium could become the key to the profitability of space mining. Space mining infrastructure would be enormous compared to the size of current space stations, shuttles and probes which are all made from highly specialized and expensive alloys that would represent over-kill in space mining infrastructure. Aluminum-scandium alloy would be a simpler solution that could substantially reduce "lift" costs in terms of rocket fuel savings compared to much heavier steel based alloys that use niobium. But benefiting from lower lift costs is only half the story. The other half is the concept of "workability", which refers to the ease with which a material can be fabricated into the desired form and repaired. High performance alloys such as titanium and aluminum-lithium may have cheap raw material input costs, but require specialized equipment and conditions to be shaped into the desired form or repaired when damaged. Fixing mining infrastructure in space could be costly and even impractical if alloys are used which are far less workable than aluminum-scandium alloy.
Jack Farchy of the Financial Times raises the question of whether Russia's Gazprom is about to launch a a global natural gas price war to fight the arrival of US liquified natural gas shipments to Europe over the next two months. The shale oil revolution that propelled the United States into first place globally for oil production in 2014 has also yielded a bounty of natural gas that spurred the construction of LNG plants during the past couple years that are now becoming operational. The portability of LNG is seen as a solution to countries such as Japan and Germany which are reducing their reliance on nuclear energy, lack domestic sources of natural gas, and do not wish to generate power from thermal coal. In the case of Germany and the rest of Europe there is also a security of supply concern about pipeline transported gas from Russia and the Middle East created by the ISIS turmoil and Putin's increasingly bellicose attitude toward former members of the Soviet empire such as Ukraine. The threat of natural gas supply disruptions created by terrorist activity or state level manipulations, especially during winter, has made Europe nervous in the past, though this anxiety has been offset by the belief in rational behaviour by commodity export dependent nations such as Russia. Since 2014, however, the risk of supply shortages and high prices due to artificial restrictions has been replaced by a commodity price war on multiple fronts. The most dramatic example was the rare earth supply squeeze by China in 2010 that caused rare earth prices to increase tenfold in China and twentyfold for the export market in 2011 before crashing as end-users resorted to substitution and thrifting of these critical metals. Rare earth prices have since crashed to lower levels than existed at the start of 2009 as a couple non-Chinese rare earth mines came on stream and illegal Chinese production and smuggling skyrocketed. China's efforts to consolidate its rare earth industry by shutting down illegal and polluting operations have proven less than effectual, which is remarkable for a central command economy and raises suspicion that a campaign is underway to destroy emerging higher cost foreign supply and restore the world's dependency on China for its rare earth supply.
The iron sector is the focus of a similar commodity price war as the big producers Rio Tinto, BHP and Vale have used the slumping steel demand in China as a cover for ramping up their low cost production in Australia and Brazil at the expense of new developments elsewhere. Given that Australia and Brazil are stable jurisdictions and supply related decisions are in the hands of management teams working on behalf of shareholders, the iron war has no geopolitical or macro-economic implications.
Other commodity wars pose serious threats. During 2014 Saudi Arabia decided to switch from defending the oil price to defending its dominant market share which had been matched by the US shale oil boom. Not many people realized that in 2014 the United States squeaked into first place thanks to hydraulic fracking of tight shale oil deposits which ended a multi-decade need to import oil and resulted in lifting of a ban on crude oil exports. The crash in crude oil prices caused by the Saudis' refusal to cut back production has put extreme pressure on oil producing nations and has failed to generate the economic stimulus windfall that sharply lower gasoline prices are supposed to bring. In 2014 global oil production of 32.4 billion barrels had a value of about $3 trillion at an average price of $93 per barrel. At the current level of $30-$32 per barrel the oil producers have lost $2 trillion in revenes. Could it be that this lost revenue is to some degree feeding China's slowdown in terms of reduced demand for China's output, which in turn decreases China's demand for raw materials coming from other ermerging market nations? There seems to be a vicious circle at work which is grinding global trade to a halt and undermining the Federal Reserve's attempt to normalize interest rates.
Russia, the third largest oil producer in 2014 at 12.1% compared to 13.1% for the United States and 13% for Saudia Arabia, has suffered a double whammy from the oil price decline because much of its European natural gas supply contracts are linked to the price of oil. The 50% decline in the price of European natural gas, however, is making it easier for Russia to contemplate using its low cost advantage of $3.50/mm BTU compared to the $4.30/mm BTU cost of delivered US LNG to launch a price war designed to undermine the American shipments which benefit from a $2.50/mm BTU domestic price but need to add the cost of liquifying and shipping the natural gas. The extra pain of marginalizing US LNG imports is a fraction of what Russia has already had to absorb.
While a global commodity price war benefits the United States whose anti-mining lobby works hard to stymie the development of domestic mine production, the multi-pronged attack on its shale oil/gas production capacity cannot sit well with strategists. It is generally assumed that $60 oil or higher is needed to make shale oil viable. Since the start of 2015 the so-called "miining and logging jobs" employment sector which includes oil servicing jobs has lost 156,000 jobs, a drop of 17%. Unlike big offshore or remote conventional oil projects which have a heavy upfront capital cost but then produce at a fairly low operating cost for decades, shale oil development has a high up front "stimulation" cost that yields a burst of oil production with a steep production decline curve. The shale oil boom of the past five years has been funded by debt whose payback prospect was good at $90 plus oil. But as oil dropped below $60 the ability to "refinance" payback with new debt to restimulate tight oil vanished. Now the United States faces an energy debt related crisis that needs $60 plus oil to smooth away. It also faces the prospect of a return to oil import dependency. The bankruptcy of many shale oil energy companies is likely unavoidable, but the creditors will end up with title to the shale oil resources. Innovation is underway to improve the fracking technology so as to flatten the production decline curve and give the stimulation cost a longer payback period. Bring back $60 plus oil and the shale oil boom can restart on a dime, which cannot be said for the big conventional oil projects that have been suspended. The United States needs oil self-sufficiency as it spends the next decade transitioning away from gasoline as a transportation fuel.
At the same time Saudi Arabia is playing with fire as it attempts to bring other higher cost oil producing nations to their knees. It is dipping into its foreign currency reserves to pay for the welfare state that keeps its citizens from revolting. The monarchy has an alliance with the Wahhabist clergy which has been exporting an extreme, intolerant version of Islam around the world. Suspicions are growing that the rise of jihadi extremism may not be a random phenomenon among discontented young people. ISIS appears to operate with impunity in Syria and western Iraq. How secure is the Saudi monarchy from a coup that puts the Sunni clergy in charge of Saudi Arabia much in the manner that the Shiite clergy replaced the Shah of Iran in 1979? What would be the world's reaction to the ISIS caliphate expanding to include Saudi Arabia? I suspect the result will be that a lot of Saudi oil production goes off-line as an erupting civil war compromises the capacity to load Saudi oil onto oil tankers. The likelihood that Iran will muddy the waters by interfering is high. Anybody who has been reading the mainstream media will have noticed during the past six months the emergence of articles addressing the Wahhabist influence in places like Pakistan and elsewhere that jihadi extremism has started to flourish. A train wreck in Saudi Arabia solves quite a few problems afflicting countries caught by the commodity wars. The complacency about "permanently" cheap oil is mis-guided.
The myopia of Vancouver's mainstream media is astonishing given that 62.1% of 1,271 TSXV "resource" listings are headquarterd in British Columbia (read Vancouver) and spent about $900 million on "overhead" during their last reported fiscal year. What is even more shocking is that 453 BC headquartered resource listings have negative working capital totaling $960 million. It is impossible to tell how much of this is owed to BC based businesses, but, given the venture capital nature of TSXV resource listings one can with great confidence predict that these "receivables" will never be repaid in cash. It will be settled for paper at some random deemed market price, with a 4 month hold restriction. But before that the stock will be offered at half cents no bid, and by the time the debt settlement paper is free trading, management will have done a 10:1 or worse rollback that makes the stock offered at $0.05, with a rapid plunge to post-rollback half cent offered as creditors race to convert their settlement paper into cash. Once the debts have vanished the company will be available as a shell for a new venture, with most of the stock held by a core group of backers who put real money into the treasury at the minimum price. That is just the way things work in the venture capital game when things go sour.
But normally things go sour with a specific venture because for whatever reason it failed to deliver on its initial promise at new wealth creation. It is not normal for more than half of the system to go sour, and the remaining half appear to be in similar danger of going sour. This is the sign of a catastrophic collapse for the Canadian venture capital system. David Baines, the former Vancouver Sun reporter who specialized in shooting bad fish swimming in a barrel constructed by the system's gatekeepers, who for a while appeared possessed by a jihadi gene obsessed with overthrowing the dictates of Richard Dawkin's "selfish gene", must be rolling over in his retirement hammock.
The Darwinian decimation of the pollution sanctioned by the TSXV through its shell manufacturing system called "capital pools" and facilitated by the "boutique" brokerage firms now disappearing like may flies landing on the Bow River is not a bad thing. In a free market system a cyclical downturn flushes away all the poseurs, hangerons, and absolute stupidos. But the real issue is whether or not Canada has a role to play in funneling risk capital into public companies whose goal is to apply human ingenuity to capital to create new wealth. In terms of innovation Canada is not exactly a fountain of productivity, though in the arena of the resource sector it has excelled while the Americans forfeited. The failure of the Vancouver Sun to grasp that Canada's last claim to non-mediocrity is on the chopping block reflects an existential resignation that could prove useful to Donald Trump in undermining Ted Cruz's march toward the Republican presidential nomination. The Australians who are feeling the pain of the back-side of the super-cycle are chortling with delight about the self-inflicted demise of their chief competition.
The focus should be on the remaining 336 resource juniors headquartered in BC which have about $960 million working capital left as of their latest filings. Given the dearth of new equity financings, unless these juniors go into hibernation and thereby wipe out any remaining reason to care about Canadian resource juniors, the cupboard will be empty by the time 2017 rolls around. The TSXV White Paper offers a number of promising steps, but they are only baby steps which will lead nowhere unless Canada's regulatory establishment rebels against its banking establishment handlers and rejects their agenda of turning Canada into a Rocking Chair Nation.
