Strategic metals can offer an intriguing alternative to traditional investments like bullion. Helen Clague, Managing Director of Schweizerische Metallhandelsgesellschaft (UK), explains:
All things considered, it isn’t very surprising that gold is still being tipped in many quarters as a solid investment in these troubled times. Throughout recorded history – and indeed, prehistory before that – the yellow metal has been prized as a ‘safe haven’ asset that will endure and perhaps appreciate when all else is falling apart. It’s estimated that around 95% of all the gold ever mined is still in existence today.
Increasingly, though, sophisticated investors are now turning to rare and so-called strategic metal assets, which provide a new opportunity for wealth protection and perhaps a solid prospect of capital gain.
What do we mean by rare and strategic metals? We’re talking about elements such as bismuth, chromium, cobalt, gallium, hafnium, indium, molybdenum, tantalum, tellurium, tungsten and zirconium – all of which are becoming basic necessities for the world’s more modern industries. From high-tech aircraft electronics, aerospace industry, storage media, medical diagnostic imaging techniques to less obvious applications in paint and pharmaceuticals, these metals are everywhere in modern everyday life.
They originate in high concentrations in the earth’s crust, with pockets occurring only in certain parts of the world. But they are difficult and costly to extract. Like silver, which is also used extensively in various industries, the great majority of these metals are consumed rather than being stored like gold. That’s a critical difference, because demand is constantly renewing itself.
What Drives the Prices of Strategic Metals?
Like all natural resources these days, rare strategic and industrial metals are in diminishing supply. Growth in the world’s developing and newly industrialised economies means that demand is high, causing metal prices to increase. Countries such as Brazil, Russia, India and China are consuming massive amounts of rare industrial and technical metals – with the consequence that their value is rising. And developed industrial powerhouses like the USA, Japan, Germany, and Korea also need ever-increasing amounts of these scarce minerals.. Many of the metals are mined exclusively in China, whose rare and strategic industrial metal exports are not meeting current global demand.
Where does the demand come from? Let’s consider the example of the mobile phone, something we all take for granted. A single device contains around 14 different metal elements. There are currently 5.9 billion mobile subscribers worldwide – and that’s 87% of the world population, by the way, and a 490% increase from the 1 billion subscribers recorded in 2002). Not surprisingly, mobile growth is led by China and India, which now account for over 30% of world subscribers (Source – Mobithinking.com)
Touch screen technologies such as iPads, iPods, iPhones or satellite navigation systems all require indium; indeed, they may soon need more of it. A recent breakthrough in monitor technology involves the use of indium gallium zinc oxide (IGZO) to prime larger monitors for even higher resolutions. IGZO allows smaller transistors and circuit elements, thus allowing more light through to give a thinner, more power efficient display.
Every modern computer chip needs hafnium – to the extent that Silicon Valley, a term coined in the 1970s is now becoming known as Hafnium Valley. Intel, the world’s leading chip manufacturer, uses hafnium in its chips because it allows the transistors to be even thinner. The transistor walls are stronger and leak less electricity thus making them smaller more energy-efficient, so computers ccan become faster. These new chips use transistors so small that 30 million will fit on the head of a pin. Smart phones will soon be using these hafnium chips to support our ‘Internet On The Go’ culture. And gallium, another rare metal, is essential to the power supplies of satellites.
In short, no future technology is conceivable without these sought-after strategic metals, which are often irretrievably integrated into consumer goods and high tech products and therefore cannot be recycled. That’s an important point. As the Federal Institute for Geosciences and Natural Resources recent;y commented: “As the trend toward miniaturisation continues so the need for rare metals increases to hundreds of tons per year.“
The China Syndrome
As technology becomes more integrated into our daily lives, demand for these resources inevitably continues to increase. But this is creating a geopolitical supply squeeze which delivers a whole new dynamic to the price factor.
The global market requirement for strategic metals is currently expected to reach 200,000 tons (Helen, are these imperial tons or metric tonnes?) by 2014, but China’s own requirements are forecast to exceed supply by 2012. The issue here is that more than 95% of the global supply of rare earth metals is produced by China itself. We are already seeing the consequences: export quotas are being slashed to meet the country’s own industrial needs. The total quota of rare earth exports granted by the Chinese Ministry of Commerce in 2010 (??? Helen, please check, this originally said 2011???) was 30,184 tons – but equivalent volumes in the first three quarters of 2011 came to only 12,000 tons, a 65 % year-on-year drop.
Why does China dominate strategic metal mining? The answer is largely due to its lax environmental policies. Mining inevitably causes pollution and environmental concerns which, in western countries, would make mining these resources a very much more costly proposition even if the deposits existed. There are alternatives, certainly: Japanese researchers and explorers have recently found a huge deposit of rare earth reserves in the muddy floor of the Pacific Ocean, but sadly the technology to exploit these deposits has yet to be developed. The Wall Street Journal recently quoted an official from a Japanese rare-metal trading house as saying that commercialisation could take up to 20 years. Substitutes are inferior or unknown.
As you’d expect, new mining operations around the world are rushing to try and contribute to the global supply of rare strategic and technical metals. But even so, if and when start-up mines ever do come on line, it is likely that they will unable to meet an exponentially growing demand. This supply and demand scenario will ensure that the metals will continue to increase in value.
The Green Issue
Rare and strategic metals are ‘enablers’ of sustainable energy initiatives, with wind turbines and solar energy products being key users of strategic metal resources. The creation of permanent magnets, a key component in so many green technologies, is a vital contributor to making the new generation of wind turbines more efficient and reliable. Andmany of the new hybrid and electric car batteries contain rare earth metals, using up to 25 pounds of these precious metals in their advanced electric motors in order to increase efficiency.
Strategic metals are environmentally friendly, reducing CO2 levels. And, as governments support renewable energy initiatives and impose further energy efficiency measures, renewable energy will be a major driver of new demand.
The Advantage of Physical Metal Assets
Investing into mining stocks has always been risky, especially where reserve quantities are uncertain or where mining production has not yet begun. Political issues, disputes and rough behaviour from speculators have always clouded the prospects. But direct investment into strategic metals has not been available to the retail market before, because the minimum quantity available was a metric tonne, a dauntingly large investment.
However, an alternative is available. Physical ownership of strategic metals is now available in the retail space and is one of the best ways to preserve wealth and provide offshore asset protection from inflation and currency devaluation.
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