In yesterday’s Money Morning I took a look at how commodity prices performed in 2011 compared to previous years.
But this list only included major commodities. By this I mean those with markets measured in the tens, or hundreds, of billions of dollars. The oil market is worth more than $3 trillion each year. Gold is worth $135 billion.
At the other end of the spectrum there are some metals that are just as important to the economy as oil and gold. The value of the metal consumed each year may not be worth anywhere near $135 billion, but if supply stopped it could cripple an economy.
For example, the tungsten market is worth about $3 billion a year. It may be a small market but tungsten was one of the best performing commodities in 2011, gaining 35%.
Tungsten is used for hardening construction and drilling tools. It is also used in hardening bullets, and other military applications. There is no substitute.
Like rare earth elements (REE), China produces most of the world’s tungsten supply. Since China restricted sales of ammonium paratungstate (APT), which is the main form tungsten is sold in, the price has doubled. Tungsten is following the same path as REEs, but no one has noticed yet.
Tungsten is classified as a “strategic metal“.
This is defined as “integral to the national defence, aerospace or energy industry; and subject to potential supply restrictions” by Strategic Metals Investor (SMI).
Tungsten is just one of around 48 strategic metals in this category. Some of them are obscure. And some are hard to pronounce. The US National Academy of Sciences (NAS) published the following list:
Some of these metals are mined from just one part of the world. Tantalum, which is essential for mobile phones, comes almost entirely from Rwanda.
This is part of the problem. When a metal is mined predominantly in one place, it makes it more prone to supply shocks. All it takes is a change of policy from that country, and supply levels drop. This is what we saw with rare earths and are now seeing with tungsten. Or if the power supply becomes unreliable in a single country, it can affect global production rates. This is what happened in South Africa, which caused a drop in global platinum, palladium and rhodium production.
The British Geographic Society (BGS) put together a list ranking the metals in order of how prone they are to this sort of supply disruption. I’ve included the top half of the list below – click here for the full list.
I’ve highlighted some of the metals on BGS’s risk list. These are the strategic metals predominantly produced in China.
Tungsten is close to the top of the list, and in fact ranks ABOVE rare earth elements for risk of supply disruption.
The US military is talking tough against China’s military over issues like the South China Sea; but at the same time the US relies on China’s tungsten to develop its military capacity.
Other minerals on this list are essential for military applications. Antimony is an obscure mineral that is mostly used as a flame retardant. Molybdenum resists extreme temperatures and is used for armour and aircraft parts. Manganese has military applications as a steel hardener.
China has quietly positioned itself very well strategically, holding a powerful position over buyers of metals like tungsten, antimony, molybdenum, and manganese. All it would take is a quick change of policy to cease exports of these metals to weaken the US military’s capacity overnight.
Graphite may make you think of squash rackets, but it is used mostly for lithium batteries. The electric vehicle revolution depends on lithium ion batteries, which in fact contain more graphite than anything. China has a large and growing domestic market for electric vehicles. As this grows, China could restrict exports of graphite to ensure its domestic supply.
If China restricts the exports of these metals, as it did with rare earth elements, it would trigger a scramble for these commodities, and prices would soar. This would then lead to soaring prices of mining companies with deposits outside of China containing those metals.
It is just a matter of time before the market spots the opportunity with tungsten. Other metals like molybdenum and manganese are not far behind.
The hurdle these metals face is that they don’t have the charisma of gold or the acceptance of iron ore or coal. So it can be a tough to get the market to pay attention. But you could have said the same thing about rare earths a few years ago. Only a few investors knew about rare earths. Then when the price of the rare earths started soaring all of a sudden the idea hit ‘tipping point’ and leaped into mainstream awareness. The share price of every company with an ounce of rare earths suddenly went vertical.
This is the pattern I’d expect for these metals. Investors will need to be patient. But when these metals hit their own tipping point, your patience could be rewarded in spades.
There are only a few good companies on the Aussie market offering exposure to these metals. Some of them don’t get much attention. They are put in the shade by their more glamorous gold, oil or iron ore counterparts. But I think that some of them are excellent investing opportunities for investors with foresight and patience.
I’ve already recommended a tungsten stock to the readers of Diggers and Drillers. But I’ll be looking to add to this with more strategic metal opportunities soon.
Dr. Alex Cowie
Editor, Diggers & Drillers
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January 24th, 2012 at 6:15 pm
google is not your friend… ATP is adenosine tri phospate, the basis of energy production in mammalian cells.
You wanted ammonium para tungstate.
Anyway- China can play around a little with the price, but it just makes uneconomic deposits around the world suddenly become economic. Oil would be the classic example.