Chart of the Day: why everyone loves shale gas

From FT story.  Simply answer:  because of its weirdly even spread.  Unassociated gas, meaning gas not associated with oil, is the future.  We always just found gas alongside oil and assumed its distro geographically was similar.  It's not.  Unassociated gas is everywhere, and this chart doesn't even include methane hydrates (unassociated gas frozen solid in sea beds).

You may think that gas is only so-so exciting compared to oil, but electricity generation is crucial, and avoiding coal is crucial to reduce pollution/CO2.  You go mostly gas on electricity to crowd out coal, and then go modular nukes to supplement that (especially where infrastructure is "hostile" in its enviro layout:  remoteness is big example), and you use the modulars to make water potable and crack it for hydrogen, and that's how you make transpo happen increasingly (hybrid electricals shifting to hydrogen, with ultralights providing a lot of the energy savings along the way).  

Oil has had its time.  Gas is the next big node going down the hydrocarbon chain.

The big hold-up/uncertainty on gas remains the enviro impact of fracking.  This is why I continue to think that methane hydrates will ultimately be more the answer.  But someone please disabuse me of that assumption.

Can we now please end the rare earths fear-fest?

The hand-wringing on this one has been so boring.  The world allows China to become the near monopolistic supplier of rare earths because nobody apparently wants to spend the money and suffer the environmental hassles of keeping their own mines open.  Then China, as it moves into higher-end production modes, starts, with its usual backward attitude, to obsess over the security of supplies.  Export controls are discussed and then implemented.  Then the West is shocked - shocked! - to discover this huge vulnerability only a couple of decades in the slo-mo making, and op-eds are cranked ad nauseum about this significant national security threat.

Predictably, Congress blows hard on the subject, and voila!  The owner of the once-booming US mine is now seeking investments for "secure" supplies.   Rest assured this is happening pretty much anywhere else in the world where not-so rare earths are actually found.   Crisis averted!  Whew!

Now, pontificating types are opining that rare earths symbolize America finally waking up to being "disemboweled" by China and India all these years and finally starting to take back those jobs!

It is all good theater, and Molycorp Minerals should clean up on their US mine, but historic turning point it is not.  It's just another example of rising demand creating temporary scarcity and clever people cleaning up on that basis, with their local congressman as front-man.  God bless them.  But spare me the larger meaning.

Rare earths: this is how we've done it

The growing brouhaha on China's "monopoly" of rare earth production!

But you have to ask yourself, Why did the US and others abandon production, because they didn't run out. 

Nasty business, rare earth mining, so best to go with a place not too fussy on environmental stuff.  China filled that void nicely, making production too cheap for the rest to keep up, hence the current "advantage."

Now, as China, with its minerals-in-the-ground mentality, considers future access, it starts exporting less and hoarding more.

Hence, the frightening future for the West:  we are denied!  China is ahead!  What are we to do?

Simplest thing, of course, is just to pony up the money for the US mine sitting dormant.  Last I heard it was half-a-billion.

Other route already covered in a WS CoreGap report:  Japan already working on electric motor that uses no rare earths.

But this FT piece points out the easiest route:  just use what you have that much more carefully.  How Amory Lovins.

So GE says they've been anticipating this moment for about a decade (What!  Our intell freaks out our defense specialists just this year and GE has been thinking this through for a decade!  Whew!), which, by my experience, is the norm.  About the time DC starts freaking, you can find industry already 7-10 years working the issue.  

This is really common right now in the US national security establishment: constantly finding new evidence of globally integrated production chains that link us to damn near anybody and then freaking out about the possibility of cut-off.  I remember this one scientist-cum-security expert at Oak Ridge going on about how we import so much of what goes into fertilizer, that it would be so easy for our enemies just to cut it off and then we'd be out of food!  Just like that!  Unfortunately (in this fantastic scenario where our entire crops fail), so would the entire cast of most likely enemies, but that was a detail he hadn't thought through.  Almost all of these scenarios read like Cleavon Little's sheriff character in "Blazing Saddles" when he's confronted by the angry mob and he pulls out he gun, puts it to his own head, and yells, "Nobody moves or the nigger gets it!" Naturally, everybody backs off, thinking the sheriff would do it--hard ass that he was!

But again, these are details only the naive types like myself bring up.

So the story on GE here is that they've been through this deal many times in the past with this or that element, and they have a protocol for making it work.  Example:

Behind the company's confident is experience with previous shortages of critical materials  In 2006, GE turned its attention to rhenium, a rare metal (but not one of the rare earths) used in engine turbine blades, after a rapid run up in prices.

Within three years GE had come up with new methods to recycle the metal grindings normally lost during manufacturing and new ways to recapture rhenium from used blades, and even developed non-rhenium alloys, that cut its usage in half.

When it comes to rare earths, GE is taking a similar approach . . . 

That's why it's GE and not some bankrupt footnote in biz history.

The rare earth fears we're watching blossom today:  expect to witness this dynamic over and over again on all sorts of materials/food/water/you name it.  And the answer will always be the same:  recycle, use more efficiently, develop slight mixed alternative or pure alternatives, etc.  And just like in "peak oil," the drivers will be the same:  a combination of rising price and emerging technologies.  Funny how that works, along with human ingenuity.

Resource war ahead! China "tightening its grip" on rare earths!

Chart found here.  It all looks so suspiciously similar huh?  Like production magically rises to meet global demand.  Pretty strange, that.  Like some invisible hand guides the process . . .

China, which controls 90 percent of production of rare earths globally right now, is believed to be stockpiling a strategic reserve (always suspicious when somebody else does it, but entirely sensible when the US does).  The US, for example, still has defense-tended stockpiles of strategic commodities from WWII!  China, as in all things, simply catches up, like creating a strategic petroleum reserve like ours.

WSJ gets it right:

Many rare-earth minerals aren't actually rare, and China doesn't have a monopoly on deposits of any particular rare-earth elements.

China has half the world reserve total, then the FSU has just under one-fifth, then the US with about 1/10th, and the rest of the world owns the remainder one-fifth.

Naturally, there are calls for the US to start similarly stockpiling rare-earths, rather than rely on potential enemy China.

Not a big trick.  Somebody's just got to spend the money to make the US mines profitable.

But it's interesting:  the more China connects to the world, the more nervous we get--and plan to protect ourselves with these various dreams of autarky.  Quite the reversal from the Cold War, huh?

Deng: Develop the place, then decide the sovereignty

Another John Milligan-Whyte & Dain Min piece, this time in China Daily.com.  They argue that China needs to stop standing on the sidelines fuming about joint US naval ops/exercises with locals and simply join them, which I think is brilliant.  If China wants to assert the normality of their naval ops in their local waters, then they need to exercise with everybody at every opportunity.  They need to make their presence a welcome, stabilizing thing, because right now, their own operations in their own waters ARE destabilizing, because they are perceived to be about establishing/claiming sovereignty in a way that trumps the diplomatic process.

The underlying logic of the piece is even smarter--right out of Deng's mouth:

What can China do about having jurisdictional disputes with its neighboring countries which have now been complicated by China and America asserting conflicting "vital national interests" in the South China Sea? How can China put jurisdictional disputes back into their normal peaceful mode? China and the nations that it has jurisdictional disputes with can form a joint development corporation called "South China Sea Joint Development Corporation" to economically develop the disputed areas peacefully. It is easier to negotiate the size of each participating nation's investments, responsibilities and share of the profits of such a corporation with multinational win-win policies. The joint development corporation approach avoids the zero sum game ownership disputes during which no nation can safely develop the economic benefits nor safe guard its national pride and interests in the disputed areas.

On February 22, 1984 Deng Xiaoping discussed what now for decades have been China's successful solutions to the Taiwan and Hong Kong sovereignty issues with the Center for Strategic and International Studies. He said, "I have also considered the possibility of resolving certain territorial disputes by having the countries concerned jointly develop the disputed areas before discussing the question of sovereignty. New approaches should be sought to solve such problems according to realities."

Smart stuff.

Make the development happen first, and then calmly divide the spoils, rather than get all huffy up front and suggest the only acceptable answer is that somebody wins and somebody must lose.  In the end, China will end up winning most of the time, NOT because of the supply of its military power, which will consistently backfire in its application, but because of the power of its domestic demand, which everyone will want to satisfy because there is good money to be made in doing so.

Quick! Spot the resource war!

I know it's in there somewhere, just waiting to break out!

China's alleged control of the rare earth materials

From John Batchelor Show

FT story on how "US is scrambling to resume production of raw materials vital for defence equipment and green technology in response to rising fears about Chinese domination of the sector."

The point to be clear on:  China dominates current production of rare earths (95-plus percent) but in no way has a dominant supply/reserve position.  The world has simply allowed China to achieve its dominant production position by abandoning their own mining efforts.  Why?  Very expensive and very environmentally damaging.

Rare earths are a collection of 17 metallic elements with similar chemical make-up.  They present unique magnetic and optical properties that make them highly useful for miniaturization, lasers and energy efficiency. There are considered strategic because of their applications in high-tech industries, to include weaponry.

No one much cared about China's domination of production, until the South China Sea dust-up with Japan led China to allegedly slow exports to Japan (not entirely clear what happen, but impressions were made).  China has also recently signaled that it will cutback on exports to make sure it has enough for its own burgeoning domestic demand.

Now, according to the article, we've got people in Congress dreaming of US self-sufficiency on this score, which will be--like most things in this globalized economy--virtually impossible to achieve.  Long ago, the US was the dominant global producer, but we abandoned the effort due to environmental and cost realities. Article says the last US mine closed in 2002 and is looking for $500m to reopen.  Those guys should send a thank-you letter to Beijing, because I'm betting they'll get their investment soon.

Obviously, if the material is considered strategic, there's good logic for mining at multiple sources.  I would consider this a reasonable space for cooperation with long-time allies so that we're not all doing this in the most expensive manner possible.

Israel plays start-up to China's big firm

Tweeted this one earlier this week, but want to post as well.

WSJ technology columnist Peter Stein noting how Israeli private equity firm is specializing in marketing intellectual property from small local high-tech companies to big Chinese manufacturing firms.

You read Baumol et. al's "Good Capitalism, Bad Capitalism," and you come away with the argument that the best mix is to have big go-to-market firms surrounded by a sea of small, innovative high-tech firms that feed the beasts. The authors claimed that America was basically there, in terms of that evolution, having added the high-tech small firms with the IT revolution energizing our innovation base in a number of industries.  Their addition evolved our economy past the big-firm era that marked the post-WWII decades through the difficult 1970s.  The authors also argued that big-firm China was trying to make a similar evolution happen and was succeeding somewhat.

Now with the Great Recession, we get two counter-arguments coming to the fore:  1) globalization is slowly robbing America of its industrial base through off-shoring of manufacturing and losing the proximity between innovation and manufacturing is making us less competitive; and 2) China's increasing reliance on/championing of national flagship companies signals a retreat from further marketization.

My sense is always that linear projections usually fail, so waxing and waning is the norm.  You go too fast down one path, so you pull your foot off the pedal for a period.  I think some American companies in some sectors are recognizing the need to more closely tie innovation with manufacturing.  But in others, like automotive, you don't have a whole lot of choice given the market expansion going on in Asia and Latin America.  

In general, I'm a big believer in IBM CEO Sam Palmisano's notion of a globally-integrated enterprise that sources local, R&Ds local, hires local, manufactures local and sells local--just all over the world.  It's the truly globalized or truly distributed version of the old multinational.  I think companies that do that will fare best over the long haul, understanding that, as countries "rise," they're naturally going to want to carve out space in their expanding domestic market for national flagship companies.  To me, this is China's path right now, along with a firm desire to lock-in access to raw materials around the world through their state-run extractive industries and farm land leasing/purchases.  I think that mindset is a bit 20th century (supply risk oriented versus price risk oriented), but there you have it when a single-party state remains in power.  

Now how China seeks to extend its evolution toward that big firm/small firm mix is to force foreign companies who seek entry into its expanding domestic market to turn over their technologies in joint ventures, something that's naturally going to create a lot of friction.

Less friction filled is what this Israeli private-equity firm is doing. Infinity Group is simply treating China like one giant big firm to which new technologies can be sold, with it playing matchmaker. The process reminds some of when Silicon Valley did the same for Taiwan way back when. Like Taiwan, China wants--nay, NEEDS--to move up the food chain rapidly in order to bring similar development to its better-than-a-half-billion interior rural pool that it has to-date achieved with the urbanized coastal provinces. Then there's China's demographic clock ticking, reflected in the long-term loss of 100m workers by 2050 and the piling up of 400m-plus elders by then.

To me, this is a next, natural phase for globalization, with smart small countries becoming more Israel-like and big, labor-filled developing countries emulating China's strategy, which, quite frankly, isn't unique whatsoever and really is just an updating of what Japan did (the Michael Pettis argument).  If China were to achieve the same per capita GDP growth that Japan did, it could grow rapidly for another quarter century, says Martin Wolf, but . . .

The most interestingly pessimistic view comes from Michael Pettis of Peking University’s Guanghua School of Management. The characteristic of Chinese growth is that it is “unbalanced”, as Mr Wen notes: it is highly dependent on investment as a source of demand and driver of supply (see charts). It is, in a sense, the most “capitalist” economy ever.

Thus, between 1997 and 2009, gross investment rose from 32 per cent to 46 per cent of GDP, while household consumption fell from 45 per cent of GDP to a mere 36 per cent. This must be the lowest share of consumption in any significant economy ever. In a country with hundreds of millions of poor people, it is even shocking. Meanwhile, the rising investment rate has been the main driver of growth. In the early 2000s, “total factor productivity” – increases in output per unit of input – were also important. But the contribution of higher efficiency has been waning.

This, Prof Pettis argues, is a “souped-up version” of the Asian development model we saw in Japan and South Korea in earlier decades. The characteristics of this production-oriented approach are:

• transfers from households to manufacturing, via low interest rates on savings
• repressed wages and a depressed exchange rate
• very high investment
• rapid growth of exports; and 
• high external surpluses. 

China is “Japan plus”: its investment rate is higher, trade surpluses larger, rate of consumption lower and exchange rate intervention bigger.

This has been an extraordinarily successful development model, but, notes Prof Pettis, it eventually runs into the constraints of “massive over-investment and misallocated capital”. He continues: “In every case I can think of it has been very difficult to change the growth model because too much of the economy depends on hidden subsidies.” Moreover, China’s scale will shift the price of imports, particularly raw materials, against it, so accelerating the decline in profits.

In China, a rising rate of investment is needed to maintain a given rate of economic growth. At some point, investment will stop rising and growth will slow. China will then face the Japanese challenge: how to sustain demand as the required rate of investment collapses. If, for example, the gross investment needed to sustain a 10 per cent rate of growth is 50 per cent of GDP, then the rate of investment required to sustain 6 per cent growth might be just 30 per cent of GDP. With its massive dependence on investment as a source of demand, any decline in expected growth threatens a huge recession.

One answer would be another government-driven investment surge, however low the returns. The more attractive answer is faster growth of consumption. There is evidence of that during the past two years. But, as Prof Pettis notes, for consumption to grow consistently faster than GDP, household disposable income must also do so. Yet if this is to happen, income must be shifted from the corporate sector. That implies a squeeze on profits, through higher interest rates, higher real wages or a higher exchange rate. But that increases the risk of an investment collapse, with dire consequences for demand. As Prof Pettis argues, in China “growth is high ... because consumption is low”. Rebalancing the economy towards household consumption could undermine the ability to sustain growth itself. If so, China is on an investment treadmill.

Old story:  there ain't no such thing as a free lunch.  How China has grown makes it harder--with each passing year--to get off the investment treadmill. But that investment level, and the requirements of a trade surplus to feed it, creates it own negative feedback look, which China is just beginning to encounter.  Can it run a huge trade imbalance with the developing world like it did with the West, using renminbi this time around?  Pretty tall order considering its resource draw.  Pettis's point isn't that China can't rebalance, just that it won't be a smooth journey.

But I can't help thinking that the work of Infinity Group is a big plus on this score:  helping move China up for the production/labor wage chain by outsourcing the start-up function to a certain extent while it slowly builds that capacity at home.  Naturally, if you're already a big firm and have amassed a lot of IP, you don't want to hand it over to China as price of admission, but if you're a start-up high-tech firm who needs a go-to-market partner, I can see you being indifferent on the nationality, meaning I think we'll see this become a significant trend in the global economy.  Like Baumol et. al's preferred model, I think we'll see something similar in terms of small and large states.  In a globalized world, tech firms in small states have no choice but to go global because the domestic market is so small (why Israel is such a high-tech incubator).  

On that basis, I become even more convinced that the "clash of civilizations" will end up being a big nothing in retrospect, meaning merely a fraidy-cat capture of when globalization starting truly opening up previously-closed civilizations, triggering a totally natural uptick in cultural friction.  But you look at an Israel making this happen with China and you say to yourself, in a clash-of-civilization world, this shouldn't work--yes?  And yet it does, because Israel needs to do this and China needs to do this and that economic logic surmounts all.

Does China rebalance the world economy in its search for resources?

FT full-pager analysis definitely worth a read.

It explores the notion that China's reach for raw materials around the planet is creating such a self-sustaining bond between Asia and Latin America/Africa as to constitute a real rebalancing in the works--truly post-American consumer, so to speak.

China's outbound FDI was about $5B in 2003.  By 2013 it could be $100B, with two-thirds staying in Asia (a pattern found among all Asia states), one-sixth going to LATAM and presumable most of the rest going to Africa.  On this basis, China comes out of nowhere to become Brazil's biggest trade partner and--next year--its biggest foreign investor (filling up all those CHINAMAX mega ships with iron ore and what not).

Meanwhile, with China experimenting through Hong Kong with letting foreign companies hold and thus settle their business with China in yuan, Beijing is described--accurately I think--as rerunning the same strategy they pursued with the US over the previous three decades:  recycling the trade surplus back into the partner's financial nets so as to stimulate further demand of Chinese exports.  In effect, that means China will run up trade surpluses with a lot of poor countries just like it did with rich America.  We'll see how that works in terms of triggering a political backlash.  My guess is that it won't run three decades before China feels the friction.

And yet, is this not what we asked for?

Well, not exactly.  What we really wanted was for Asia's stubborn trade surplus with America (ably consolidated by China over the past two decades) to shift over into something far more even. This isn't happening, in large part because China seeks to have its cake (surplus with America) and eat it too (replicate it across the Gap).

The one good thing:  by slowly increasing the circulation of the yuan, Beijing progressively loses control of its exchange and interest rates, meaning it becomes harder to "cheat" through monetary means.

A Chinese naval build-up that deeply impresses me

NYT story on Chinese making substantial if beginning effort on deep-sea exploration--naturally for mineral resources.

Seabed control!

It'll be interesting to see how hard the Chinese go after this in coming years.  I would expect a pretty strong push given the volume requirements.

As for military conflicts stemming from this?  Let's just say disrupting seabed control is probably a lot easier and cheaper than you think, so let's remember which economy in this equation is becoming the most resource-dependent on the planet.

Because it ain't America.

A general on this would seem to be:  the deeper you go, the more you rely on a peaceful international security environment.

Get used to this headline, because the Chinese will

NYT story by the always impressive Simon Romero.

Gist:

In its worldwide quest for commodities, China has scoured South America for everything from Brazilian soybeans to Guyanese timber and Venezuelan oil. But long before it made any of those forays, China put down stakes in this desolate mining town in Peru’s southern desert.

The year was 1992. Chinese companies had begun to look abroad. One steelmaker, the Shougang Corporation of Beijing, set its sights on an iron ore mine here and bought it in a move that seemed particularly bold. At the time, Peru was still plagued by attacks by the Maoist guerrillas of the Shining Path.

But the hero’s welcome for Shougang soon faded. Workers at the mine, which was founded by Americans in the 1950s and nationalized by leftist generals in the 1970s, began fomenting the unexpected: a revolt that has endured to this day, marked by repeated strikes, clashes with the police and even arson attacks against their nominally Communist bosses from China.

“We quickly realized that we were being exploited to help build the new China, but without seeing any of the rewards for doing so,” said Honorato Quispe, 63, a longtime union official at the mine, where workers have held three strikes this year alone, including an 11-day stoppage last month.

The long-festering conflict with Shougang over wages, environmental pollution and Shougang’s treatment of residents of this company town does not square well with China’s celebratory vision of its rising profile in Latin America, in which everyone benefits and a “win-win” is “the consensus.” Latin America, as this idea of so-called South-South cooperation goes, sells China raw materials like copper, oil or iron; in return, the region buys goods like cellphones, cars and cheap plastic toys.

The tension in Marcona, one of the most conflict-ridden towns in a country increasingly prone to conflict over mining and energy projects, suggests that China’s engagement in the region — like that of the United States, Britain and other powers that preceded it in Latin America — is not without pitfalls.

While not the dominant theme in the region’s relations with China, a wariness is crystallizing in some countries over the booming trade with China.

Reactions to this surge largely focus on cheap Chinese imports or on China’s assertive efforts to win access to energy reserves. In both Brazil and Argentina, for instance, manufacturers accused Chinese companies of unfairly dumping Chinese products in their markets, prompting new tariffs against some Chinese imports.

The backlash on China's penetration of the Gap is just beginning, and it'll be led by fellow New Core pillars ike Argentina and Brazil, who will have the guts to push back.

Having spent some time talking with China's extractive industry execs, I know that they know that their model isn't what it should be WRT to the win-win notion.  But the truth is, it'll take a build-up of experience and the accompanying backlash to force Chinese companies--and the government that stands behind them--to improve their approach.  Plenty of Western multinationals learned this the hard way, like Honda and Toyota here in the States years ago:  if you want to sell globally, you have to source and manufacturer and R&D locally too.  You become, in Sam Palmisano's terminology, a globally integrated enterprise.

This is the key evolution for Chinese national companies, and it will stress them out considerably--especially in their diverging (in terms of goals) relationship with the Chinese government/single-party state.  But the only way to get from here to there is more connectivity leading to more tension leading to more change.

So I say to Chinese business, bring [the connectivity] on!"

And I also say to the locals, "Don't give up anything without a fierce fight."

SWFs as a way to protect national resource wealth from the government

Intriguing argument from a CSM op-ed:  African nations taking cue from Arab sovereign wealth funds. Argument: better to secretively stash the cash in a SWF that is kept distant from the bureaucrats' and politicians' corrupt hands.

The key logic:

The continent’s top oil exporters, and even some of its newcomers like Ghana, are taking advice from similarly resource-endowed countries that run state revenues through SWFs, many of them in the Middle East and Asia.

Some of Africa’s oil exporters, like Nigeria, have wrestled for decades on how to safeguard resource revenue at a distance from venal bureaucrats.

Other, more nascent oil powers, like Ghana, are simply trying to get their system right from the get-go.

Middle Eastern oil giants – whose money managers often tuck away state earnings in safe, if not transparent, investments – may be an example for the continent. "The model works well because they're relatively secretive. You can't say transparency is a golden ticket," Gary Smith, head of central banks, supranational institutions and SWF business at BNP Paribas Investment Partners, recently told Reuters in an analysts of Africa's entry into the SWF market.

A $3 trillion industry

An SWF is essentially a massive, state-held investment fund – something like a 401k for the Nigerian people – that invests in a smorgasbord of assets, whether they be property, currency, sacks of gold, or Goldman Sachs shares.

The one thing they don’t do – and this is where the controversy erupts – is invest that money at home. After all, the Ghanaian cedi, the Ghanaian interest rate, the competitiveness of Ghanaian exports, and the average price of a Ghanaian home, are all wed in sickness and health to the Ghanaian economy. Piping some of that oil money toward a far-off market is a way for the country to protect its revenue far from the vagaries of its national economy.

On one hand, a sad admission of a sad state of government affairs.  On the other, whatever gets the development train moving is a good thing.

For now, judgment withheld.  Africa doesn't have a good history of secretive money stashes overseas.

China's alleged monopoly of rare-earth reserves

Wikipedia

WSJ story on how China is broaching notion of letting foreign companies enter into joint ventures on rare-earth mining/processing in Mongolia in exchange for access to technology--a well-established Chinese pattern that can backfire for foreign firms as time passes.  This is described as a shift from "technology for market" to "technology for resources."

China does control--currently--about 95% of production, but only because it's cheap prices drove other mines out of competition.

But in reality, China accounts for only 30% of the world's known reserves, and existing mines can all be restarted within a couple of years.  So China only "controls" because it keeps the price low.

China bans foreign companies from entering into the mining process itself, but allows cooperation on processing.  China also imposes export quotas, which inevitably--as even the Chinese admit--will encourage competing production around the world.

Mistaking resource dependency as strength

WSJ piece on China stepping up global mining buys.

When we’re talking acquisitions that link China to Australia, Canada and Brazil, I see only win-wins for everybody—the global demand center getting deeply in bed with extant global players.

But lots of Chinese investment on this score see it moving into Africa, a trend we tend to assume plays only to China’s advantage—like taking a lot of responsibility for African stability will only be a good thing for China when it was never the case for the West in the past.  Yes, by bringing in Western firms, China spreads the risk a tad bit, but eventually, when things go bad in certain places, it’s unrealistic to think the West will pony up the requisite security to save China’s bacon just because Western firms are involved.

So go easy on the widespread assumption that China merely gains influence and no responsibility on this path, because that is strategic naïveté of the worst order.

Take out the oil, bring in the jobs

Nigerian delta rebels pic found here

FT story on oil & gas in Africa.  

Laments the troika of security forces, politicians and criminal gangs that engage in so much theft of crude oil in the Nigerian delta.  The broken promise that seems to link them all:  militants complain the government hasn't come through with the projected jobs.

So "the motivation for young men to take up arms is simple":

"There are no jobs, nothing for us, says Paul, 22, a fighter in Bayelsa state.

Worse:

Crude spills have poisoned long stretches of the creeks where locals fish, wash and workship.

Corruption is to blame:

The delta is not poor for a lack of money.  The oil-producing states receive a bigger slice of federal revenues than the rest of the country. Corruption diverts much of it, however.

What the oil companies have learned:  better to spread some wealth in offset projects (clinics, schools, etc.) to as wide a swath as possible than concentrate it in local communities.  Otherwise jealously sets in, followed by instability.

Africa: the stronger hand this time around?

FT special report on African oil & gas.  The somewhat optimistic but seemingly justified vibe:  this time around Africans hold a stronger hand:

African countries with oil and gas reserves have grown accustomed to hearing how exciting they are. Less explored and than the Middle East, possessed of sweeter crude than Latin America and in no position to imitate Russia’s strongarm tactics, they are, energy experts keep telling them, the future.

Explorers have opened up new swathes of the continent, from Lake Albert in the east to the 1,100km offshore frontier discovered in the Gulf of Guinea. Ghana and Niger are due to pump their first barrels in the coming months.

Billions of dollars have poured into deepwater and natural gas developments in Nigeria and Angola, the industry’s linchpins.

“In the past 10 years, African oil producers have become the beautiful brides,” says Charles Ukeje, an international relations specialist at Nigeria’s Obafemi Awolowo University. “We are witnessing a new scramble.”

But crude is trading at roughly three times the average of the previous two decades and African governments have begun to respond to the surge of interest by asking with increasing vehemence: “What’s in it for us?”

Their hand is certainly strengthening. US dependence on African crude is projected to hit 25 per cent by 2015. Late last year, Nigeria surpassed Saudi Arabia as the third biggest supplier of crude to the US.

In April, China imported more oil from  Angola than anywhere else. Europe is hoping a gas pipeline across the Sahara will reduce its dependence on Russian oil – and was rattled when Gazprom tried to muscle in on the project. 

But the days when international institutions exhorted African countries to offer incentives to lure investment at all costs are gone.

“African states are entitled to receive a fair deal for the exploitation of their natural resources,” said the authors of a survey of the continent’s economies last month by the African Development Bank (AfDB) and the Organisation for Economic Co-operation and Development.

Oil investors’ ability to strike workable bargains in Africa will go some way to deciding whether what are believed to be the world’s biggest untapped hydrocarbon stocks will remain in the ground or whether the region will shoulder a greater share of global production.

Nigeria, home to 60 per cent of sub-Saharan Africa’s proven oil reserves and 70 per cent of its gas, although hampered by graft and mismanagement, has been the most abrasive battleground for this renewed reckoning.

While I will still maintain our Africom has nothing to do with this: the big oil producers for the US are in West Africa, whereas all the AQ activity is to the north and east.  Plus, quite frankly, the oil flows out of Angola and Nigeria no matter the level of violence--sad fact (although the truth is that Angola, after all those years of violence, is amazingly stable right now).

More to the point: the bulk of the new suitors are Asian--not American.

The difference this time for Africa?  In the past, the Western interest was always defined by boom-and-bust mechanics, whereas the Asian demand this time around will be substantial and sustained.  America's long efforts to encourage marketization and integration in Asia have helped create this historic opportunity. That's why Africom's primary focus, in my opinion, should be in enabling this "scramble" by improving local capacity for security provision (yes, target the baddies, such as they appear, but focus most on making this good happen in a sustainable fashion).

There is no question that social tensions will be created, and that governments in Africa will respond sub-optimally, but this is a huge opportunity not to be screwed up, and a perfect locale for Sino-American strategic partnership to emerge.

Mining co's: Exploitation of Afghan mineral resources years off

NYT's James Risen's second piece on the "miracle" find.  As the map (quickly Googled) above and left [click to enlarge] demonstrates, the notion of Afghanistan's mineral deposits not exactly a bolt from the blue.  Lack of security held up serious exploration in the past, and mining co's say the same is true today--go figure.

Given the high-risk, frontier environment, the most risk-tolerant explore first:

 A few high-risk investors are sufficiently intrigued by the country’s potential to take an early look. JP Morgan, for instance, has just sent a team of mining experts to Afghanistan to examine possible projects to develop.

“Afghanistan could be one of the leading producers of copper, gold, lithium and iron ore in the world,” said Ian Hannam, a London-based banker and mining expert with JP Morgan. “I believe this has the potential to be transforming for Afghanistan.”

But as for main-line efforts .  . . 

But executives with international mining firms said in interviews that while they believed that Afghanistan’s mineral deposits held great potential, their businesses were not planning to move into the country until the war was over and the country more stable.

“There are huge deposits there,” said David Beatty, chief executive of Rio-Novo Gold, a mining company based in Toronto. “But as chief executive, would I send a team to Kandahar?  And then call a guy's wife after he gets shot?  No."

After all the hype triggered by his original piece, which was obviously spoon-fed by the Administration's team for maximum effect, this Risen piece seems decidedly designed to reduce expectations and present a more realistic appraisal.  I do like the goofily Biblical "covet" in the headline, though.

It has long been known that Afghanistan had significant deposits of gemstones, copper and other minerals, but United States officials say they have discovered and documented major, previously unknown deposits, including copper, iron, gold and industrial metals like lithium.

A Pentagon team, working with geologists and other experts, has shared its data with the Afghan government, and is working with the Afghan Ministry of Mines to prepare information for potential investors in hopes of placing some mineral exploration rights up for auction within the next six months. On Thursday, Afghan officials said they believed that the American estimates of the value of the mineral deposits — nearly $1 trillion — were too conservative, and that they could be worth as much as $3 trillion . . .

At a news conference in Kabul, Wahidullah Shahrani, the mines minister, pledged to make the bidding and contracting of mining rights as transparent as possible to reduce the possibility of corruption. He said the ministry would post contracts on its Web site.

Mr. Shahrani and his advisers cautioned against overly high expectations, underscoring that development would take years and that there were many obstacles to overcome, not least of all the lack of security in some of the areas with the most minerals and the lack of a transportation infrastructure.

International mining officials and independent experts echoed that view. Jim Yeager, a Colorado-based geologist and former consultant to the Afghan mines ministry, said that poorly written mining regulations could also hamper future development.

Remember that NorKo has about $6T in minerals--for comparison's sake.

Afghanistan's minerals deposits now super-sized by U.S. geologists

Beneath the sheep be lithium

NYT story via Michael Smith and David Damast and HuskerInLA.

I know the temptation for crowing here is intense, but I would suggest going very easy on the cascading assumptions.  There are a lot of reasons why this news has remained unknown this deep into globalization's expansion.

The "shocker" here is that U.S. geologists have confirmed what has been long suspected: Afghanistan's mineral riches are significant. Just like with Iraq, once outside experts got some free range, a lot more reserves were found.  Frankly, that'd be true for any Gap nation that's remained largely cut-off from the outside world for reasons of too much dictatorship or not enough law. Hell, it was true for Russia on oil.

This is being presented as a game-changer, but I think the overselling is premature.

First off, understand that the mining world doesn't exactly get turned upside down on this basis.  This is great news and potentially game-changing for Afghanistan if a lot of things go right--for a long time, but it will not alter any larger realities in the global marketplace (where China is the demand center of the global mining industry), except to end this nonsense notion that somehow Bolivia controls the bulk of the world's lithium (Whew! Dodged that would-be superpower!).  There is lithium being found in plenty of places, trust me.  The same discounting can now be applied to China's alleged cornering of the entire rare earth market--also a vastly oversold fear.

Mineral riches in the range of $1T certainly shove Afghanistan into the big-boy category (past estimates said Afghanistan was Syria-sized in oil and had just enough minerals to qualify as resource-cursed--a line I've used to very ho-hum effect in the brief for two years now, suggesting that no American audience I've ever come across would suddenly jump and say, "Yeah baby, this changes everything!") , but the primary reason why the place has never been sufficiently checked out before now has been the security situation/lack of governance, and that doesn't exactly change overnight on the basis of this information. Nor will it change--I suspect--the Obama administration's unwillingness to sign up for a significant combat presence that drags into the next election at anywhere near the level to maintain enough security to get balls seriously rolling.  "Blood for lithium" doesn't exactly ring the average American citizen's bell.  It also won't likely make the Taliban any less fierce in their fighting--anything but.  If you don't believe me, then please remember that the Naxalite Maoists in India do best in areas where mining deals strikes the local as inequitable.

Most importantly (and this is what Enterra learned in our Development-in-a-Box work in Kurdish Iraq), the discovery doesn't change but only reveals the lack of counterparty capacity in Afghanistan--as in, plenty of outside parties willing to engage in the transaction, but Afghanistan's government is nowhere near capable of playing the counterparty.  And yeah, it takes two to tango.  Remember the first thing Jed Clampett did after he moved to Beverly Hills:  he got himself a Mr. Drysdale.  There will be a lot of entities vying for that role in Afghanistan, and in many ways, it would be better if that role wasn't hogged by the Americans.

Finally, don't assume any of this is a big surprise to the Chinese, whose overly-generous 30-year deal on the Anyak copper mine now looks like the start of a beautiful and logically far larger relationship.  China, after all, has a border with Afghanistan (76 clicks long); we don't.  The basic pattern long cited here of Americans doing the Leviathan heavy-lifting while the Chinese reap the SysAdmin winnings isn't exactly snapped by this news--anything but.

So as before, I think the key remains getting a whole lot more rising great powers deeply--and I mean DEEPLY--interested in helping secure Afghanistan for the long haul.  Mining isn't a slam-dunk but years upon years upon years of stability required for the riches to flow, and then they have to flow with some transparency and positive popular impact, otherwise you can find yourself in an endemic conflict situation that's just Afghanistan-the-failed-state-as-we've-known-it now supercharged by a fungible source of funding for any side willing to kill enough to control its resulting wealth.

Before anybody gets the idea that somehow the West is the winner here, understand that we're not the big draw on most of these minerals--that would be Asia and China in particular.  What no one should expect is that the discovery suddenly makes it imperative that NATO do whatever it takes to stay and win and somehow control the mineral outcomes, because--again--that's now how it works in most Gap situations like Africa.  We can talk all we want about China not "dominating" the situation, but their demand will drive the process either directly or indirectly.  There is no one in the world of mining that's looking to make an enemy out of China over this, and one way or another, most of this stuff ends up going East--not West.

If anything, this news should be used to leverage more of a security contribution out of regional great powers--to include China.  So less of a game changer than perhaps a very welcome game accelerator--as in, China is a lot better positioned to reap the mineral rewards that is Afghanistan, with the question being, "How long does it take for China to step up security-wise and stop low-balling its effort there?"  Certainly, the notion that we turn Afghanistan and all its minerals over to Karzai's cronies, Pakistan's ISI and the Taliban strikes me as truly cracked, but the truth remains:  we and our Western allies aren't enough to make the security situation happen on our own--not for the long timelines required.  If it were that easy, these discoveries would have been made decades ago.

I'm not trying to diminish the importance of the findings here (although, again, whenever an isolated place like this finally gets checked over, the "stunning" surprise is the same--as in, there's lots more than anybody knew previously); I'm just saying the macro dynamics aren't all that altered.

So again, less a game-changer than potentially a tremendous game-accelerator.  China is now that much more incentivized to accelerate its penetration, and it would be nice to see that happen on a timetable that helps us while effectively drawing Beijing into more explicit partnership.

Or we can pretend this is going to remain a NATO-dominated show that somehow achieves Afghanistan's potential as a long-term supplier of important minerals to the global economy.

If I've said once in the brief, I've said it a thousand times (literally!):  Americans cannot integrate a nation-state on the other side of the planet into the global economy all on our own.  Our Leviathan can rule any battlespace, but the SysAdmin's victory is necessarily a multilateral one.

Here's the simplest reality test I can offer you:  if we're just at the initial discovery phase now, we're talking upwards of a decade before there will be mature mines.  Fast-forward a decade in your mind and try to imagine the US having a bigger presence in Afghanistan than China.  I myself cannot.

Start with that realization and move backward, because exploring any other pathway will likely expose you to a whole lotta hype.

Another big Chinese investment in African minerals

Pic here, along with stunning accurate 2008 prediction of this investment

FT story on China investing $877m into South African mining industry--the second largest Chinese investment in Africa outside of oil and the first time China takes a direct stake in Africa's platinum reserves.

South Africa holds an 80% share in global platinum production, so it wasn't a tough prediction to make.

Asia's demand triggers frontier integration in Africa via mining co's

FT story.

The basics:

Six of the world’s biggest mining and steel companies have converged on an unprecedented scale on a mineral-rich corner of west Africa beset until recently by civil war. 

The companies plan to spend billions of dollars in Guinea, Liberia and Sierra Leone, where some of the world’s richest deposits of iron ore, the raw ingredient of steel, are found. 

The groups are Vale, the Brazilian iron ore miner, Rio Tinto and BHP Billiton, the Anglo-Australian mining houses, ArcelorMittal, the UK steel company, Russia’s Severstal, and Chinalco, the state-owned Chinese mining company.

Buoyant demand for steel has lifted iron ore prices, intensifying global competition for Africa’s hitherto little exploited deposits, and pushing companies into increasingly risky territory.

Liberia and Sierra Leone emerged only recently from civil wars, while Guinea has been teetering on the brink of conflict since the death of dictator Lansana Conte prompted a military coup in 2008.

As yet there is little infrastructure to facilitate mineral exports from any of these countries, whose governments want to use the multinational corporations to fund the ports, roads, and railways needed to lift their struggling economies.

Last month, Vale agreed to spend between $5bn-$8bn on building mines, ports, and railways in Guinea and Liberia by 2020. By comparison, the gross domestic product of Liberia is under $1bn (€800m, £700m).

Done well, this can be a big boost to local economic development.  The hoped-for key difference with the past is the sustained, boom-like demand from Asia, which constitutes a socio-economic revolution all its own for Africa.

Takeaway:  compared to our tiny Africom effort, this is SysAdmin work on a grand scale.

The good news:  America's role in shrinking the Gap shrinks by the day.  The bad news?   TBD.