To start somewhere the story of nitrogen fertilizer has several points worth noting. In brief: Before the First World War, Fritz Haber invented the Haber process for fixing nitrogen to oxygen, and making it chemically accessible to plants. In the original process, osmium oxide was used at one stage as the catalyst. Now osmium is exceedingly rare, and was at the time only mined in one place. I mean really rare, making gold and platinum trivial.
Monopoly On Osmium
Carl Bosch of BASF (Badische Anilin und Soda Fabrik) saw the potential and secured a monopoly on osmium. It is a blue metal, and competes with iridium for being the densest material of all. It gives off toxic fumes and smells bad – freely translated, the name means “stinker” in Greek. But when Haber was gearing up for gross exploitation of the monopoly, there was an unpleasant surprise. Some intelligent chap had possibly looked at his periodic table and seen that iron was in the same group. So not entirely astonishing, an alternative to osmium oxide was thought of: An iron-oxygen compound – which we know as rust – that worked quite nicely instead.
The consequences of the Haber process was not only vastly cheaper fertilizer (making the traditional source of nitrate from birds droppings in Chile ridiculous) but it also made it possible to manufacture explosives in large quantities – which came in handy for Germany in the First World War. Today it is estimated (by some, no guarantee) that one-third of the world’s population is fed by industrially produced ammonium fertilizer – and it provides the crop of modern terrorists with handy explosives in large quantities. TNT is better but more expensive, and since mining engineers use fertilizer and diesel fuel, the odd truckload more or less isn’t really missed.
Many well-known hedge fund managers are also philanthropists, and many of them have their own foundations. Seth Klarman of Baupost is one of those with his own foundation, and he invested in a handful of hedge funds through his foundation. This list of Klarman's favorite hedge funds is based on the Klarman Family Foundation's 990 Read More
Monopoly In Rare Chemicals Unstable?
The point is that a monopoly in anything chemically rare is going to be highly unstable, as the monopolist is up against a horde of chemists periodically leaving the laboratory in a hurry with singed hair. They generally have a snappy and at times smelly comeback with doing things much easier and cheaper – and they don’t much like being told that things can’t be done. There is always going to be a new and better (and often cheaper) alternative.
The recurrent propaganda scares that the Chinese will take over the world due to their monopoly in rare earths and thus endanger not only the world as we know it – not to mention a greener and saintlier world without smelly motorcars – overlooks quite a few things:
- There is a fairly good alternative to neodymium magnets – iron doesn’t make very good magnets by the way, not enough unpaired electrons – samarium cobalt.
- The combustion engine has developed as well – hugely, which anyone watching the 24-hour race at Le Mans can testify to. This to such an extent that Henri Pescarolo some ten years ago said that his petrol cars even in the best of circumstances couldn’t keep up with the Audi diesels. So unfasten yourself from the timber and consider that the other side does something you don’t – think. Comes highly recommended – thinking that is – not banging your head into trees.
- Rare earths are not something you mine for; they are generally a waste product from other processes. For instance, when you make copper, at some point the ore is thrown into a bath of copper sulphate and diluted sulphuric acid – and then the local power plant is short circuited through the mixture and copper grows on the cathode leaving a rather unpleasant goo under the anode. In this slurry there is a lot of weird stuff, gold and silver springs to mind, and also a fair assortment of rare earths demanding further treatment. But you only have to remove the vast amount of uninteresting rock brought up from the mine once.
- There are truly vast resources in recyclable material. Steel is so cheap that Indian workers under appalling conditions scrap ships on beaches to make it worthwhile, so a shortage of raw materials is not around the corner any time soon. Maybe there is a reason you plunge old aircraft into the ocean to provide housing for fish.
China’s Debt In U.S. Sovereign Bonds
So what about this huge pile of debt the Chinese have in U.S. sovereign bonds? What will happen when China wants repayment? Basically nothing. Nothing because China will keep buying U.S. sovereign bonds for ever. The alternative for China is to sell off these bonds, which will make the interest rate skyrocket, and the market quotations for U.S. bonds drop like a rock – in fact ruining the Chinese. If you have a huge amount of U.S. bonds a drop in value of, say, 10 percent would make you very much poorer instantly. The Chinese are not going to do that.
What will happen, as China cannot feed itself, is that China will start buying food. Grain prices will rise – already the price of rice is double that of wheat – so a doubling of grain prices can be foreseen. That will lead to a rise in interest rates as the Chinese are liable to pay with U.S. bonds (just a small part of them). In fact the U.S. might have to put an export tax on grain to keep farmer profits within limits – but generally the higher food prices will pay off farm debt all over the world. As I recall the U.S. farmer isn’t particularly in debt, so there will have to be an export tax.
The Chinese problem will be, that they have to keep down food prices otherwise there will be really, really nasty food riots in the cities where the somewhat less than employed population cannot afford the cost of living. Over the centuries, food riots have brought down lots of rulers. May I remind you that 1788 was a particularly poor harvest year in Francecaround summer 1789 last year’s crop had been eaten. So France had a rather nasty revolution where “losing your head” gained a very concrete significance. One thing is a French renaissance population going berserk in the smelly gutter of Paris – I don’t think it’s difficult to extrapolate what will happen in China with huge cities of desperate and starving people.
So if China can’t raise food prices, it will out-compete the Chinese farmers. This is already happening as the price of chicken is swooping up at 20% p.a. this last month.
The consequence of that is that Chinese farmers will stop producing for the city population that is kept fed on imports – further increasing the need for imports. Have we seen this before? Oh, yes: The Roman population was fed by an emperor who kept the province of Egypt as his personal property. At one time during the republic the proletariat simply walked out of Rome.
Now that solution is not accessible to China, as there is nowhere to go, but into the countryside – where there are no jobs either.
At this point my crystal ball is getting increasingly opaque. But the scenarios have repeated themselves over and over again in China over the centuries and none have had a tolerable ending. Take the opium wars where China again had exported and only imported silver. This time they will take any sort of junk – including iron ore.