Evil mining firms? Please. Obeying profit motive is KINDER to the environment
Iron Age ends... and a point is proven
Worstall @ the Weekend Goldman Sachs has released a note to investors shouting that this is the end of the iron age. But it's not talking about how pointy bits on spears are now replaced by lead in bullets: rather, that the age when owning a mountain of iron ore was a route to easy billions is over.
We don't need your
I wouldn't normally bring such a thing to your attention but the implications of this allow me to explain further why all that "Limits to Growth stuff" is still bollocks, as we discussed last week.
The iron ore price, by the way, has been plunging for years and still has has further to fall, say analysts.
It seems the environmentalists have added a second string to their bow. After we mineral extraction types pointed out that there's no actual shortage of ore we can dig up and make stuff out of, they go on to talk about costs and expenses and energy requirements. Their point is that obviously, human beings being intelligent, we've dug up all the easy stuff first and thus those future reserves and/or resources are going to take ever more energy and effort to get anything useful out of. Those of us who have followed the Peak Oil argument over the years will recognise this tactic. What the little story about iron ore allows us to do is to test that theory.
It's bollocks by the way, just to alleviate any tension you might be feeling about the result. But let's dig into why this is so.
Why the price slash?
Goldman is pointing out that China's startling growth is slowing a bit, lots of iron ore mines have been developed in recent years, so there's more supply and while demand might not be quite falling, or not much, we are not seeing the previous growth in demand.
So, we see the market moving into oversupply at current prices and thus prices fall. Which they have done: $140 a tonne wasn't unusual a year or two back for spot loads (ie, a ship just being there full of ore. “Contract” is when a steel mill makes a long term deal with a mine for so many ships a year.) In fact, $80 is looking a great deal more likely these days.
So, obviously, some of those iron ore mines are going to close (more technically, go on “care and maintenance”, possibly to reopen if the price recovers). All of this is obvious with even 10 seconds' thought. But it's the next bit that is interesting.
If the environmentalists are right, in that new mines will inevitably be more expensive to develop than the old mines with the easy stuff in it, then when mines close because of falling prices it must be the new mines that close, right? Because, by their definition, the new mines are the more marginal, thus the more expensive, prospects. So, is this actually true?
Here's the Sydney Morning Herald on the issue:
It's "the end of the Iron Age," according to Goldman Sachs. With miners battling iron ore prices at five-year lows, up to 235 million tonnes of iron ore capacity is expected be taken out of the market in the next 18 months. Oversupply coupled with a slowdown in the rate of growth in China has seen the steel making ingredient fall 38 per cent this calendar year to $US83.20 per tonne.
OK, so we have the oversupply, the falling prices and the closing of mine capacity.
Fortescue Metals is the best placed pure play iron ore miner at the current price level, Mr Wilkins said. It is the only pure play iron ore miner that generates cash with the current iron ore price, Mr Wilkins said.
Greenies – you're just plain wrong
So Fortescue Metals will stay open then. The group just happens to be one of the newest iron ore mining companies in the world. It only started shipping in 2008. It's the older mines in places like China that are going to close. It's the almost entirely new mines in the Pilbara region of Australia – Fortescue's and those of BHP and Rio Tinto – that are going to stay open. This isn't logically compatible with that environmentalist insistence that new deposits we exploit must be less rich and thus more expensive to exploit.
So even at first pass we can reject their idea. The reason for their being wrong is that technology changes. In the case of iron ore, those Oz deposits are so rich that anyone who can drive a bulldozer can produce iron ore. But that's not enough, as all of us who took O Level Geography recall: the Industrial Revolution started because of that happy circumstance that Northern England had iron ore, coal and limestone all in close proximity to each other. There's nothing close about the proximity of Chinese steel mills and Western Oz though: what has changed is the technology of transportation.
Mining iron ore is really about whether you can build a railway line and a port these days. Because transport is so much cheaper, we don't have to go digging up marginal deposits near where the blast furnace is: instead we can ship in that ore from richer deposits elsewhere. And thus, as above, we find that the newer deposits being exploited are not, as the environmentalists would insist, of lower grade or higher expense to exploit, they are of higher grade and lower expense.
To show that this isn't a fluke, the same is true of tin – as I alluded to in the comments last week. We English always associate tin mining with Cornwall, but continentals are more likely to think of where I now work, on the German/Czech border (the Erzgebirge, or Krusny Hory, “Ore Mountains” in English). Both areas have been intensively mined since at least 1400 and in Cornwall at least we've evidence of small scale production from 1,000 BC and before.
All those mines are now closed: but not because they're exhausted at all. I can look out of my office window and see the hill that has Europe's largest tin deposit underneath it. They're closed because they would be unprofitable for production.
Given that we do still have tin production in the world, this must mean that tin production elsewhere is more efficient than this European stuff. The main centre is the Indonesian islands of Bangka and Belitung. And yes, those mines are more modern than those European ones. Which means, again according to the theory we're debunking, that they should be less efficient, not more. But they ain't.
And why is that tin deposits (and this is largely true of tungsten, tantalum and so on, as well) tend to be encapsulated in granite rock (they form when lava bubbles up through a volcano for instance, the metals concentrate in the boundaries between the new rock and the old). To get it out you've got to crush the rock to the “liberation point” of the ore you're after. If your cassiterite (tin oxide) is 1mm pieces on average (not a real number) then you must crush the rock to 1mm pieces so you can separate the tin ore from the other gubbins. You'd certainly go mining a 1 per cent deposit: you might even go mining a 0.1 per cent Sn deposit.
How free market forces are kinder to the environment
So just imagine you're going to crush a lot of rock in order to make tin whistles. This is now mechanised but used to be done with wonderful things called stamping mills. Take a stream flowing down a hillside. Set up lots of little hammers with something like a fish tail at the other end on a little axle. Get the water to flow over the fish tail, the hammer head rises, the water is no longer pushing on the tail, hammer head falls again. Stick your rock under the hammer repeatedly. Noisy as hell they were, but they did work. Bright people, our forefathers.
This is, when added to the cost of actually going underground to cut out the ore-bearing rock, an expensive undertaking. I actually own 60,000 tonnes of tin-bearing rock, just sitting on a hillside, and the electricity cost of extracting it is higher than the value of the tin.
So what is it that makes those Indonesian mines cheaper? Think back a bit to when sea levels were lower: that whole area between Malaysia and Oz was, around and about, above sea level. Vast great rivers (think of an extension of the Mekong as an example) once wound their ways over the plains. Erosion wore down the granite mountains that contained the tin and the rivers sorted the various grains by weight as they twisted and turned – so much so that you can actually go to beaches in the area now, or dive to the shallow sea bed, and see a darker line of tin ore running through the lighter sand.
It's entirely possible, and it's being done, to lift and separate that ore, that cassiterite, with something like a Mr Henry vacuum cleaner (although having it plugged into the mains at sea might not be a good idea). And I do really mean a commercial grade vacuum cleaner that can handle water. You'll not be surprised to hear that this is quite a cheap method of mining.
The environmentalist case fails. For we're not going off and mining more expensive, less rich, harder to exploit, mineral deposits. We've actually closed down the older, less efficient mines, and gone off to other parts of the world to exploit richer deposits, the ones that cost us less in energy and effort to get something useful out of.
All of which is just the way that markets work, by the way. Those Cornish mines all started falling over as those alluvial tin deposits of the Far East came online. Not because they were exhausted, but because they weren't price-competitive with the richer deposits and easier workings. The Czech and East German mines survived into the 1990s because the commies didn't have any real money and so couldn't buy the cheap stuff and had to use the helotry of the socialist proletariat to produce. The moment rational economics took over, they all closed as well.
It's not just that we're not running out of minerals, it's that, as both iron and tin show us, we're not even running out of easy deposits of ore. Far from it, we're still moving from low grade deposits to high grade as the implications of transport having become cheaper work through the system. ®