Friday, February 7, 2014

"Jeremy Grantham on Tesla, Fertilizer Wars" (and lessons learned from 47 years at the market)

While in the post immediately below, "In His Latest Letter Jeremy Grantham Ramps Up The CarbonBubble/Stranded Assets Argumentum", I fleshed out a part of Mr. Grantham's quarterly letter that I figured maybe a handful of people were following there is much more in his missive.
From Barron's Wall Street's Best Minds column:

GMO's famed investor also discusses peak oil and fracking. Plus, investing lessons learned over 47 years.
Fossil Fuels: Is Tesla a Tease or a Triumph?
In an earlier report, "The Race of Our Lives," I finished on the unusually optimistic point (for me) that a combination of declining fertility and eventual declining population combined with unexpectedly strong progress in renewable energy might just save our modern civilization from a slow and, no doubt, irregular descent into dystopia. More recently, while still believing we are in this critical race, I have become increasingly impressed with the potential for a revolution in energy, which will make it extremely unlikely that a lack of energy will be the issue that brings us to our knees. Even in the expected event that there are no important breakthroughs in the cost of nuclear power, the potential for alternative energy sources, mainly solar and wind power, to completely replace coal and gas for utility generation globally is, I think, certain. The question is only whether it takes 30 years or 70 years. That we will replace oil for land transportation with electricity or fuel cells derived indirectly from electricity is also certain, and there, perhaps, the timing question is whether this will take 20 or 40 years. To my eyes, the progress in these areas is accelerating rapidly and will surprise almost everybody, I hope including me....

.... Update on Metals, Fertilizers, and Food
A group of important elements – iron, aluminum, and potassium – are generously supplied in the earth's crust, 2.5% to 4% each, and at some price that is affordable at least to rich and middle income countries they will be available for a century or two at least. Many other important elements, though, are genuinely scarce so that their availability at even fairly desperate prices is not assured, at least not for their current uses. Copper, for example, may become a semi-precious metal but will certainly not be commonly used for piping in a few decades. All of these metals must be replaced eventually by organic substitutes, just as cellulosic plastics from wood have already been substituted in some uses for petrochemical plastics. Substituting for copper and other elements that have special qualities such as conducting capability or use as a catalyst will take decades – a time period far too long to attract many corporate research dollars.

As readers know, I consider phosphorus (phosphate) to be an especially important case. Phosphorus is about .07% of the earth's crust compared, say, to potash's 2.5%. This .07% had been washed down rivers for millions of years and, once in a geological while, an ocean dried up. If everything was just right, we were left with 20% or 30% phosphate concentrations, at which concentration extraction is efficient and cheap enough for the farmers of developed and most emerging countries to use in required quantities. As mentioned before, phosphorus (and potassium in potash) is necessary for the growth of all living things and, unlike very nearly everything else, cannot be substituted for or made. Currently both are mined and the mines deplete.
Particularly worrying to me is that phosphorus is not evenly divided: you either sit on a dried up ocean or you don't. Morocco and the neighbor it controls, Western Sahara, contain within their boundaries some 75% ±10% of all of the high-grade, low-cost phosphate known to exist in the world. Outside of these Moroccan deposits there is still a lot of phosphate – about enough for 50 years at 2% a year growth in demand. Even after allowing for further discoveries to add 40% to this total, it would mean that "peak non-Moroccan phosphate" would occur in some 30 years and all hell would break loose. Take out Morocco from the production side and serious people (most Scandinavians and maybe five in Congress, but which five?) would immediately worry. I'm pretty sure, though, that the U.S. military already pays suitable attention to this issue as it clearly does to problems stemming from climate change. (Who would have guessed that on several vital long-term issues the military here and in the U.K. seems to have the most sensible views of any establishment entity?)

Well, Morocco fortunately seems like a reasonable enough kingdom with an unusually reasonable king and sensible-sounding people running its phosphate operations, who seem to me to be not as short-term greedy as, say, your typical investment banker circa 2007. It seems to be settling into the role of market leader and price setter, and things could be a lot worse.

But think for a minute where Morocco is. Egypt, Syria, Libya, and Mali are not far from being failed states, and Tunisia, Algeria, Chad, etc., are not themselves models of stability. You will remember, perhaps, my thesis on North Africa and Syria. Their populations all increase rapidly, they are largely desert countries abnormally affected by climate deterioration (Syria's recent troubles were preceded by the driest six years in its long history), and wheat does their heavy calorie lifting. They cannot grow all of their own wheat and must import it on the world market at prices that vary from two to four times what they were only 10 years ago. Libya and Algeria have oil or gas to export but, critically, Egypt, which did until recently, is now an importer. The much- increased prices of wheat and oil and, to some extent, fertilizer, have helped destabilize their societies. They mostly run trade deficits that are hard to imagine being funded for long by international good will. So, what happens if this irregularly deteriorating situation spreads to Morocco, with its most important quasi-monopoly in the history of man, as I like to say? Surely the U.S. military or, say, the Chinese military will not allow Morocco to become a failed state for these reasons? Perhaps if we're lucky and not too reckless the worst will be avoided, but we should definitely try to avoid the Great Fertilizer War of 2037.

Problems in Forecasting Short-term Prices for Resources
I underestimated both the skullduggery of "miners" and the great lumpiness of their new production capabilities. New mines are surprisingly few and usually gigantic in scale. Deliberate delay in completing projects, legal or not, when shortages are intense and profits exceptional is understandable and does occur. I missed the point that when you run a copper mine at 1.2% average copper ore you start with the 1.5% stuff and end with the 0.7% dregs. And when the replacement mine comes on with a painfully lower average of, say, 0.7% it nevertheless starts mining its 1.1% ore first on its way in 30 years or so to its dregs of 0.4%. So, even as the quality of ore irretrievably declines in the long term, the quality of ore mined can increase in the short term when a new mine comes on line. And this higher quality for a short time improves the cost structure and puts temporary downward pressure on prices....MUCH MORE