Agora Financial’s Rude Awakening

Jump to Comments

Laguna Beach, California

• Global hunger and the “unsustainable, subsidized food burning” phenomenon,
• Why the ethanol blunder is costing millions their basic food,
• Hunting “rare earth” and economic superiority in China and more…

Eric Fry, who burns more ethanol than he drinks, reports…

One year ago, most Americans heralded corn-based ethanol as a national “energy solution.” Today, most inhabitants of planet Earth condemn corn-based ethanol as an agricultural disaster.

In a front-page story in yesterday’s Wall Street Journal, India’s finance minister complained, “When millions of people are going hungry, it’s a crime against humanity that food should be diverted to biofuels.” Turkey’s finance minister agreed, calling the use of food for biofuels “appalling.”

These vitriolic indictments of ethanol would seem “fringey,” except for one simple fact:

“Corn that is used to manufacture ethanol will not be available for other things, like eating.”

This observation came to us fourteen months ago, courtesy of Byron King, editor of Energy and Scarcity. “[U.S. ethanol production] raises a kernel of concern with me,” he remarked in the February 1, 2007 edition of the Rude Awakening. “Ethanol-destined corn [will not] be used to feed other animals, or turned into other foodstuffs…And of course, the price of corn will rise.”

Byron’s scathing assessment of ethanol appeared in a two-part edition of the Rude Awakening entitled, “A Corny Idea.” To introduce this eye-opening critique of ethanol, your Rude Awakening editors provided the following background:

“‘Unsustainable subsidized food-burning.’

‘That’s how David Pimental, a researcher at Cornell University, characterizes corn-based ethanol production. ‘Ethanol does not provide energy security for the future,’ he says. ‘It is not a renewable energy source, is costly in terms of production and subsidies, and its production causes serious environmental degradation.’

“According to Pimental’s research, ethanol production actually CONSUMES energy. ‘The total energy input to produce one gallon of ethanol is 129,600 BTU,’ Pimental asserted in a 1998 research paper.

“‘However, one gallon of ethanol has an energy value of only 76,000 BTU. Thus, a net energy loss of 53,600 BTU occurs for each gallon of ethanol produced. Put another way, about 71% more energy is required to produce a gallon of ethanol than the energy that is contained in a gallon of ethanol.’

“Over on the pro-ethanol side of this debate, a variety of industry experts dismiss Pimental’s findings, while insisting that ethanol production does yield a net positive quantity of energy, albeit a modest one.

“Even in the best of circumstances, however, corn-based ethanol production contains significant drawbacks. It does, in fact, consume food to produce fuel; but it does not, in fact, yield a tremendous amount of energy relative to the energy it consumes.”

Following this introduction, Byron asked a very simple and pointed question:”Is ethanol a good investment?

“For a corn farmer, yes. For an ethanol producer, maybe. For a national energy policy, probably not. For a long-term investor, unlikely.”

Obviously, Byron’s critique of ethanol was well ahead of the curve…as recent events have demonstrated.

Byron does not possess perfect clairvoyance, of course. But he does posses the sort of intellectual honesty that tends to produce timely insights. He possesses the sort of intellectual honesty that connects dots and follows them wherever they may lead – or, in the case of ethanol – wherever they may dead-end.

[For those readers who may have missed Byron's observations the first time around, click on the following links. A Corny Idea, Part I and A Corny Idea, Part II.

Ethanol fanatics might also enjoy a glance at two ancient editions of Whiskey and Gunpowder in which Byron responds to "letters to the editor" about ehanol: Whiskey Letters, Part I and Part II.]

In today’s edition of the Rude Awakening, Byron connects a few dots and follows them to the “rare earth” deposits of China…

—- Energy & Scarcity Investor: $500 Discount Closes Today —–

Introducing the “Oil Vacuum”:

The Best Way to Tap an American Oil Reserve 3 Times the Size of Saudi Arabia’s

Time named the “Oil Vacuum” one of the Best Inventions of 2007. 

And the U.S. Department of Energy says the only company that has it could be key to unlocking an 800 billion barrel oil deposit in the Rocky Mountains.

It could make you $65,500 inside of a year. But time is short. This “Oil Vacuum” will produce oil by May 31, 2008…and you only have until MIDNIGHT TONIGHT to sign up at the discounted rate. Read On Here for the Full Report

——————————————–

Meet the Lanthanides
By Byron King

“There is oil in the Middle East; there is rare earth in China.” Deng Xiaoping, then-leader of China, observed in 1992. Deng’s remark did not seem to mean much of anything in 1992, but it may mean a lot in 2008…or 2009.

What was Premier Deng saying when he referred to “rare earth in China” and compared it to Middle East oil? Deng was referring to a Chinese policy to exploit its rare earth deposits at an iron ore mining region in Inner Mongolia. Some observers call the Mongolian mineral district the “mother lode” of rare earths.

A few years later, in 1999, Chinese President Jiang Zemin visited the “rare earth”-rich region and urged his countrymen to “improve the development and applications of rare earth, and change the resource advantage into economic superiority.”

So what are these “rare earths” and why do the Chinese care so much about them? Rare earths are some of the most valuable, critical metals on the planet. Demand for these metals is soaring, and supply is not.

In formal scientific nomenclature, the 15 rare earth elements of the Periodic Table are called the lanthanides. None of these elements are famous like gold or sliver. None gets shipped in giant ore freighters, like iron, aluminum or copper. You sure don’t learn much about these 15 elements in high-school chemistry class, unless maybe it’s the school that feeds lots of kids into MIT or Caltech.

In fact, the only people who really study these elements are master’s- and Ph.D.-level chemists and solid-state physicists. Oh, and national leaders in places like China. But without these elements, much of the modern economy would just plain shut down.

These elements are critical to the modern economy, and that is not hyperbole. We are addicted to rare earths as much as we are addicted to oil, except most people don’t know about the rare earth addiction.

The rare earths play a critical role in petrochemicals, environmental protection, “clean” technology, electronics, automotive applications, optics, telecommunications, computing and defense. Really, without these 15 elements, you could say goodbye to much of modernity. There would be no more television screens and computer hard drives, fiber-optic cables, digital cameras and most medical imaging devices.

You could say farewell to space launches and the satellites that do everything from show you the weather to offer global positioning down to a few inches. And the world’s system for refining petroleum would break down, too. That’s pretty serious.

These 15 elements are called “rare earths” because they are, in fact, rare. They are scattered here and there in the Earth’s crust. But you won’t exactly trip over them as you stroll along the beach. It is quite unusual to find these elements in deposits that are economic to mine. So that is the investment lure.

Rare earths are usually found in rock bodies called carbonatites - for the most part non-geologists have never heard of them. And for our purposes today all we need to really know is that Carbonatites are rare.

Once you find a deposit of rare earth elements in a carbonatite, it is still very difficult to mine and mill the rocks and minerals. The processing chain is long and complex. So we are dealing with rare earths in rare rock bodies that are difficult to mine, mill and process.

But the Chinese have been devoting themselves to these difficult-to-access minerals for several years. In fact, you could say that Beijing has pursued a comprehensive strategy to control the rare earth market. The Chinese have opened numerous mining operations, built out extensive processing facilities and trained 1,000-2,000 dedicated rare earth scientists.

But that’s not all. The Chinese have also put the squeeze on competitors. For a time, the Chinese lowered their rare earth prices to cost - if not below - thus driving other world rare earth operations out of business. So in the past 15 years or so, China has established itself as the world’s leading low-cost producer of rare earth elements. In fact, China currently produces nearly 95% of the world’s supply of rare earths. That’s not a typo - 95%.

China’s dominance of rare earth output gives that nation an overwhelming advantage in developing many forms of technology, both now and in the future.

The Chinese clearly understand the strategic value of rare earths, and they have begun to take advantage of the situation. Within the past couple of years, the Chinese have dramatically increased their own consumption of rare earths and have begun to cut exports. One very unsubtle national policy is that if manufacturers want to obtain Chinese rare earths, they must set up facilities in China.

Thus, for the moment, China can do what it wishes with its rare earth output, including forcing the rest of the world to beg for supply.

The rare earths market - just the raw materials, not the value-adding chain - is not terribly large. It is slightly over $1 billion per year. This is utterly dwarfed by the global trade in bulk commodities like iron ore. But control over the supply of these strategic rare earth elements gives China a significant strategic advantage as it builds up its high-tech industries.

According to Zhang Hongjiang, director of Baotou Research Institute for Rare Earths Information Center in Mongolia, “The rare earth industry is quite small scale, but the contribution to the national economy is huge… [China] regards rare earths as a strategic resource because they are widely used in high technology and new materials.”

And one way or another, the world is addicted to rare earths. Demand is exploding. Global demand for rare earths was about 110,000 tons in 2007.

Demand is projected to grow to 200,000 tons by 2010. Global demand for rare earth by 2012 could be 600,000 tons, including 350,000 tons used in electric and/or hybrid vehicles. And global demand for rare earths in 2020-2025 could reach 2 million tons, including over 1.5 million tons applied in electric and hybrid vehicles.

China has about 200,000 tons per year of rare earth capacity, which is more than enough to dominate current world markets. But this capacity is not enough to meet future forecasted world demand. Within about two years, the world will face physical shortages of rare earths.

Yet despite the future supply-demand imbalance, China has almost no viable competitor with any history of mining rare earths…Almost. The Australians also possess viable rare earth deposits.

Although 95% of the world’s supply of rare earths comes from China, most of the rest come from Australia, which is where I’m prospecting for investment ideas in this little-known sector. I’ve already ferreted out one very compelling idea for the subscribers of my Energy & Scarcity investment service. But I’m still on the hunt for others…You should be too.

[Joel's Note: As his aforementioned insight into the ethanol debacle clearly illustrates, Byron is no stranger to being way ahead of the curve. By identifying the ethanol boondoggle as a farce long before most other investors did, Byron was able to hunt out fresh, viable, reliable investments in the energy field.

In fact, Byron has identified a “oil vacuum” play…one that is set to start production as early as May 31. In order to help you get in on the ground floor, our publishers have slashed $500 off the price of Byron’s Energy & Scarcity Investor…but only until midnight tonight. All the information you need to get started is right here, but you’ll have to be quick as spots are likely to fill fast as the doors close. 

—- Investing in the Era of “Peak Everything” —-

Oil hit a new record high… Gas could soon be $4 a gallon… silver, wheat, corn, you name it — all the “resources” of daily life are soaring in price!

Yet there’s a way to protect yourself and profit in the days ahead…

Join Us in Vancouver in July for an Exclusive Look at… 

A View From The Peak: Seeking Profits in a Time of Risk and Scarcity . 

——————————————–

[Joel's Note: If any of my fellow Aussies have a “rare earth” play they would like to share with the Rude populace, please send them along to the address below. There’s a great big land down there…and lots and lots of riches.

Until tomorrow…

Cheers,

Joel Bowman
Rude Awakening