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Throwing stones in a glass Dacha: The West’s metal vulnerabilities

Christopher Ecclestone of Hallgarten & Company addresses supply issues the West faces with Russia as adversary.

Some have accused the EU and U.S. of soft-pedaling on the Crimea/Ukraine issue. But might these economic powers think twice before stirring up too much of a ruckus? The EU is particularly vulnerable to Russia cutting off natural gas exports and the U.S. has to play nice with Russia to keep getting cheap uranium supplies.

According to the US Energy Administration, in 2011 the United States mined nine percent of the uranium consumed by its nuclear power plants. The remainder was imported, principally from Russia (50%), Canada, and Australia. As uranium bulls will ceaselessly inform you the supply situation is tight and if it wasn’t for those pesky Russians the price would be a lot higher. We usually do not make common cause with the tin-foil-hatted but would beg to agree with the uranium bulls. It is a truism that the unwinding of the Soviet stockpiles have beggared the global uranium mining industry and that the great day will be when an end to this attrition is seen.

The current events might bring this around sooner rather than later. Just as the recent House of Cards series highlighted the somewhat mystical (and downright incorrect) applications of samarium in nuclear energy, it is really with the far better known, and far less prosaic, uranium that the Russians have the U.S. dancing on some rather short marionette strings. Basically if Russia decides to sit on its stockpiles, slow down supplies, cite inventory errors or whatever, then we would have a Cold War in a hot metal. Frankly, with Putin being a far better Machiavellian than any of his adversaries, it does not require us to tell him that this is the obvious play.

The stockpile selling game was coming to a close anyway and it would be a good moment for him to bring it to a foreshortened end. There is no swing producer and there is no appreciable stockpile (beyond what the uranium ETF, Uranium Participation Corp has stashed away). The price could spike to over $120 per lb in the spot market easily if Russia let its intentions to play this card be known.

Cuisses de grenouille à la U.S.

The Crimean crisis is one of those mind-focusing events that comes along every once in a while. Asian economies have been a ‘war-footing’ in a sotto voce way for a number of years now. The Japanese, Koreans and Taiwanese have become increasingly concerned at the ability of the Chinese to potentially hold them hostage. It’s interesting then the country most likely to generate disruptions to global metals market is Russia at this time through its actions in the Ukrainian crisis. This does not make China any less of the threat in the longer term but it does focus the mind that problems can come out of left-field and that the West has left itself vulnerable to disruptions. At least actions taken by the Chinese have spurred these countries to source alternative supplies and they are engaged in a reconversion of their supply sources and rethinking the wisdom of planting industrial facilities on the Chinese mainland.

The U.S. though is truly the frog in the boiling water. Despite the alarm bells going off on rare earths a good four years ago now, and then being followed by concerns across a swathe of other metals, the move by the U.S. to return to strategic stockpiling has been de minimis and NO prioritization of ensuring supplies of the most vital metals exist in the Western hemisphere has taken place. A few visionaries in the legislature have pushed for the Rare Earth issue, but any mention of the swathe of other metals (two good examples of this being tin and antimony) of which the U.S. has NO stockpile, or no Western Hemisphere supply source, causes Congressmen to glaze over. It was interesting recently to read that when the Second World War started the U.S. had no tin production and the only deposits it had in Alaska were inadequate for its needs, so it was dependent on Bolivia. We might note that relations with Bolivia these days are not as rosy as they were in 1942 and that the South American nation is barely a shadow now of what it was in the tin production stakes back then. This is but a microcosm of the same problem repeated across the broad array of minerals. In the 1930s the US was largely autarkic in its base metal needs and supply (particularly if Canada was added into the equation). This situation continued right up until the 1960s. The same could not be said now.

The U.S. is not only vulnerable to a hot war (submarines harassing ships, blockades or trade route disruptions) but is at risk from colder war scenarios, such as boycotts and trade restrictions that work both ways. The EU and Europe can bring in sanctions on Russia, but what if the Russians decided to keep their metals and minerals (and oil & gas) and restrict supply to the West for six months. The West exports almost no commodities to Russia so its hold over Russia is much less than the other way around. Russia need not even suffer by not selling oil to the West as it can filter that out the backdoor to China.

The West could get on a high horse and wield sanctions much more effectively if it wasn’t in such a vulnerable position, with either whole or significant dependency on products sourced out of Russia. I think we have shown here that are some products the U.S. is particularly vulnerable to supply constriction. Beyond that the West is in danger of price spikes in some key products if the swing production the Russians provide is temporarily withdrawn (or blocked). The “just-in-time” strategies of Detroit’s auto-makers go out the window if they cannot get platinum for their auto catalysts. A dramatic run-up in prices would be the only way to achieve market balance, with a pleasing outcome for those non-Russian suppliers of metals seeing temporary (we hope) disruptions.

Adapted with permission from Hallgarten and Company‘s latest research report by Christopher Ecclestone. Previously Ecclestone wrote about the Canada’s upstart exchange and its chances for success.

(Image Credit: DonkeyHotey)

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