Thursday, December 30, 2010

Wanted: rare earth metals

From the 03 January 2010 Greater Niagara Newspapers

By Bob Confer

The history of mankind has been filled with numerous wars, of both the military and trade sort, over elements that come from the Earth. Gold and silver have long been at the epicenter of such struggles, many a civilization driven to destruction over their greed - or other peoples’ desires - for the metals.

There are other precious elements now taking their place as resources hungered by all and they are ready to test the balance of power in global trade. Rare earth elements (REE) are a collection of 17 members of the periodic table. All of them are not as well known as metals like copper and zinc yet they are just as important. REE like yttrium (cancer treatments), lanthanum (hybrid car batteries), cerium (catalytic converters), neodymium (magnets) and gadolinium (nuclear reactors) are crucial to our modern society and, truthfully, we could not live without them.

We’re going to have to find ways to make do with less very soon. China currently mines 93% of the world’s REE and the nation’s leaders have announced that they will be cutting exports of the metals by at least 40% before the end of 2011. That cut may not even be large enough: Some manufacturing experts believe that China’s growing industrial sector will consume all of the REE it produces by 2012.

Needless to say, having all of our eggs in one basket – especially one held by China - is dangerous for national security. Just ask Japan.

Back in September Chinese officials temporarily unleashed a trade embargo that prevented shipments of REE to Japan, scaring the dickens out of Japanese manufacturers. It was believed that China did this as a bargaining chip to secure the release of a Chinese captain detained by Japanese officials.

In the whole scheme of things, a political impasse like that is nothing in comparison to the potential for conflict that exists between China and the US. China controls nearly $900 billion in US debt and we’ve had strained relations of late as China criticizes our ever-weakened dollar and our escalation of the Great Recession while we accuse them of manipulating their currency to undermine our economy. It wouldn’t take much for an agitated China to impose REE restrictions.

China has so dominated the REE marketplace because of their less-stringent environmental standards. Most of the 17 elements are not rare as the name supplies. They are widely available throughout the world (China has only 36% of global reserves), yet are rare in finished, usable form because the excavation and processing of them can be toxic to the environment if not properly controlled. Recklessness with REE development has fit perfectly with China’s unfettered assault on nature, one that has seen Beijing and other cities overcome by vast clouds of pollutants.

America has basically been out of the REE business for years, most all of our mines shuttered because of warranted environmental concerns. The environmentalists in the Department of Energy and the Environmental Protection Agency now see merit in the development of REE projects because they know that, ironically, their clean energy technologies (like wind turbines and new-age automobiles) require rare earths. It’s a catch-22: One set of resources (REE) must be capitalized at cost to the environment to prevent other resources (oil, coal) from harming the environment.

Recently a company named Molycorp was finally given the okay to tap into a vast REE reserve in the Mojave Desert after an 8-year suspension of operations by the federal government. This mine offers the single largest deposit of REE outside of China. The forward progress of this project was brought on by a public-private partnership that saw the government and the corporation working hand in hand to develop guidelines and processes necessary for a relatively clean and safe realization of the mine’s potential.

It is hoped that other projects follow suit and quickly at that. We’re probably too little too late as it is. 2012 could mark the beginning of a new national crisis, one where we will suffer in the health, energy, and defense industries until we can get back on track in REE capture.

Wednesday, December 22, 2010

The fiscal nightmares of Generation X, Y

From the 27 December 2010 Greater Niagara Newspapers


By Bob Confer

Generations X and Y will have a rough go of it. They may be the first generation of Americans to have a quality of life that is unimproved over – and probably less than - that of their parents.

Their personal finances and the job market they must survive in represent just the tip of the iceberg. They have considerable fiscal situations to address that will put even greater pressure on the advancement of their generation. Two social welfare programs will be hitting crisis mode at various points in the lives of today’s young adults.

The oldest of the programs, Social Security, is quickly nearing bad territory. By 2015 it will be in the red for the long haul (due to the Baby Boomers all hitting retirement age) and by 2037 its trust fund will be completely wiped out; that is, if the federal government ever returns the $2.5 trillion that it “borrowed” from the fund.

The people of the United States do not have the backbone to overhaul Social Security. Just look at the ire faced by George W Bush when he tried. So, Generations X and Y will be forced into retiring at a later age (it’s already legally bound to be 67 by 2022) or increasing their rate of contribution (it will have to rise by 25% as we near 2037 just to keep up with promised payments).

Americans also lack the wherewithal to remodel Medicare. Its trust fund could be in the red as soon as 2017. Those who penned Health Care Reform said that legislation has pushed Medicare’s Doomsday to 2029. But, politicians will say anything to sell the citizenry on government growth. Remember, Lyndon Johnson deliberately lied about the cost of Medicare in order to get it passed.

Medicare’s woes far dwarf those of Social Security. We currently have $37.8 trillion in unfunded obligations, which is more than 2.5 times the size of the US economy. By 2050, 10 cents of every dollar spent in the country – and 50 cents of every dollar spent by the government - will be on Medicare. In order to satisfy those growing demands, its payroll tax (which is 2.9% split between employer and employee) will have to grow as well. Health Care Reform has already pegged high-income individuals for that duty starting in 2013, but, as their ranks decrease as a result of slow or stagnant growth of the economy, everyone will have to foot the bill. By 2020 one can assume that the payroll tax for all workers will rise by a third. It has to if all else remains the same.

There’s also the national debt that Generation X and Y must contend with. Washington recently voted to temporarily cut the Social Security tax for 2011. That sounds good at first, but as you dive deeper into the bill you’ll find that the $112 billion lost by the cut will be picked up through borrowing. That keeps with America’s recent methods of managing and/or hoping to excite the economy with debt. The total debt load is now $13.8 trillion, just a tad under America’s total economy of $14.3 trillion. That national debt is growing quickly (its growth has exceeded $1 trillion in each of the past 3 years) while our economy is not (it grew at a 1.8% clip over the past decade).

Imagine a company the output of which will soon be outstripped by what it owes the bank. It will die. Since, once again, Americans lack the gumption to change the way things are done in government, the only method by which the US can overcome a similar fate is by further taxing its people (which, by the way, will have the simultaneous effect of shrinking our economy, making matters worse for the long term). What will that do to the income taxes paid by Generations X and Y as various portions of the debt come due in the coming years? I shudder to think of the possibilities.

For these 3 issues alone, which do not include the numerous fiscal crises to be faced at the local and state levels, Generation X and Y will have to make some significant sacrifices to keep the country afloat. The question is: Do they have what it takes to save America? They might, but the cards are really stacked against them.

Thursday, December 16, 2010

The financial nightmare of Generations X, Y

From the 20 December 2010 Greater Niagara Newspapers


By Bob Confer

One of the more endearing aspects of the American Dream is selflessness. Each generation has been driven to give their children a better life than they had. For all of American history such efforts have paid off, the standard of living improving dramatically from generation to generation.

But, there are signs indicating that portion of the American Dream may not be realized by the Baby Boomers. Their descendants - Generations X and Y - could be making a living barely better than and, in most cases, considerably lower than that of their parents.

A 2007 study showed that Generation X was earning 12 percent less than their parents had been at the same stage of their lives (the incomes were adjusted for inflation). That drop in salaries could be attributed to any number of things, none more damning than the lack of high paying manufacturing jobs that once ruled the land. Competitive cost factors have either driven those jobs to low-cost foreign countries (the US has lost 8 million manufacturing jobs since 1980) or caused domestic manufacturers to lower their wages paid (look at Delphi where traditional rates were cut by a third to a half in recent years). Even the service and high-tech jobs that replaced them are in peril; it’s estimated that 3.5 million white-collar jobs will be shipped overseas by 2015.

Therefore, today’s workers have to be willing to work for wages well below historical standards. If they don’t, Corporate America will seek a region possessed of the lowest cost – domestically or internationally - that can produce similar output.

As an outcome of attempts to overcome that and make themselves marketable for the now rare upper-middle-class job, young adults are being held back by debt in the form of college loans, something that is, in volume, unique to their generation. Back in 1973 when many Baby Boomers were coming of age, 47 percent of high school graduates went to college. 35 years later, 70 percent of their children had gone on to some college studies. About one-half of them graduate from college and, of those who do, two-thirds have debt approaching $28,000. Nationally, the accumulated college debt (across all age groups) is a staggering $830 billion.

Those obligations will ultimately affect more than 65 million members of Generations X and Y, delaying or preventing them from assuming other forms of debt (specifically mortgages), investing, and purchasing discretionary and durable goods because they’ll have spent most of their first decade in the workplace paying off student loans while, at the same time, addressing traditional financial burdens like car payments and their first years out on their own.

Once they finally want to pursue a home or bigger purchases, their ability to do so will be somewhat constricted as they come of child bearing age (at least by today’s standards). Due to college, lower incomes and the accompanying need for dual-income households, more and more first-time parents are taking on that task in their 30s and the number of first-time mothers over the age of 35 has grown eightfold since 1970.

In essence, Generations X and Y are a decade behind their predecessors when it comes to the fulfillment of their American Dream; a decade behind in their ability to spend, raise a family and invest in their future. It’s a lost decade they’ll never be able to overcome later in life, forcing them to be a decade behind in retirement, too: Today’s younger generations can plan on working well into their 70s. Then, thanks to lower earning potential, their nest eggs will be smaller and, therefore, the quality of life in their golden years will be nothing like that experienced by current retirees.

This is all a little disconcerting. It makes one wonder if America’s expansion has finally hit a wall and we’re settling into a long period of slow growth, if not stagnancy. Generations X and Y will have to figure that out and hopefully turn things around. But, as you’ll read next week, other factors are in play that will place significant obstacles in their path.

Thursday, December 9, 2010

Outsourcing to Africa: Part Two

From the 13 December 2010 Greater Niagara Newspapers


By Bob Confer

Over the next two decades it will be increasingly difficult to keep the store shelves stocked at price levels frugal shoppers appreciate. As mentioned in last week’s column, the cost of doing business is quickly rising in China and India and by 2030 they won’t be as attractive for outsourcing as they have been since the push for offshore manufacturing really hit its stride in the late-1970s.

That doesn’t mean the jobs are coming back. The reality of today’s world is that, globalization is and will be the way to do business. As much as Americans savor the thought of goods being produced on US soil, the chances of that happening in appreciable volume again are slim to none. Many consumers demand cheaply-priced (if not cheaply-made) goods and corporations are more than happy to oblige. Companies truly committed to domestic manufacturing (like Confer Plastics) are now rarities when once they were a dime a dozen.

Most of the world, from agricultural South America to the industrial Far East, has already been pressured by traders from the richest nations to meet their demands and in many cases the well is dry from a potential price savings standpoint. The African continent, on the other hand, has remained relatively unmolested by Westerners since the days of the slave trade. But now, Africans are primed to join the ranks of the modern slave, the “sweatshop” laborer, so common in the Far East, who earns a few dollars a day (or week).

As bad as that sounds, it’s better than what they have now. Africans are still enslaved, but by Mother Nature, despotic political regimes, and even Western charity. The continent’s population recently topped 1 billion, but a quarter of them are undernourished. 250 million people are basically starving. To put that number into perspective, the entire US population is 307 million. In the short-term (the next 3 decades), globalization will help Africa rise from a poverty that, truthfully, makes America’s impoverished look like kings. Following the quality of life trends that we saw in industrial Europe, US, and Japan, the long-term future (by 2100) is economically bright and socially responsible for Africans.

Naysayers might comment on the lack of political morality and infrastructure on the continent that would prevent development. That was the case for China. Look what’s become.

Americans are more than happy to either overlook or work in conjunction with one of the most horrid communist systems in the world, one that still - even 21 years after Tiananmen Square massacre - squashes freedom and criticism. Many African leaders are just as oppressive. But whereas China’s political system is old and deeply entrenched, most African nations have fragile systems, so newly employed Africans who will have something that only the few possess now (money) will ultimately become a financially and politically empowered people who can turn away decades of evil rule.

China was a backwards nation until only recently (by historical standards) in regard to infrastructure. Now they have quality roads galore, impressive electrical generation and vast cities that seem to pop up overnight. Whereas that’s been a public-private venture to bring them into the 21st century, Africa’s nations are lacking in wealth so it will be an entirely private investment led by Western firms. But, as capitalism goes, if the need (and reward) is there for electricity, water, ports, and roads, the necessary investments will be made. 1 billion potential workers is a very attractive number for capitalists, especially for as cheaply as they can be had at this time.

Even Sir Richard Branson, one of the richest and brightest men on the planet, acknowledges that Africa will see significant gains in the coming years. In a recent appearance on CNN he addressed America’s need to embrace the global economy as a way to overcome our recent woes. Listing some of our largest trade partners and those we should do business with, he slyly slipped in the comment, “Africa is about to boom”.

I promise you, they are. By 2025 many of the “Made in China” labels you see on items now will be replaced by “Made in” labels from far-flung locales like Kenya, Tanzania, and Mali.

It’s a wild, ever-changing – and ever-shrinking - world we live in.

Thursday, December 2, 2010

Outsourcing to Africa: Part One

From the 06 December 2010 Greater Niagara Newspapers


By Bob Confer

Remember when many Americans perceived Japan’s manufacturing economy as a threat? Just a few decades ago we worried about that nation taking all of our production jobs through their (and our) efforts to make goods cheaply to satisfy our insatiable consumers. They did take some of our jobs, mostly in the electronics department. For a while they manufactured a good number of our cars, but oddly enough, Japan-branded cars are now being manufactured in the United States.

The reason the automotive jobs came back and Japan never really destroyed our economy is that they became one of us. Manufacturing created opportunity in Japan, spawning a huge middle class that, through the same economic progression that America had in the late-1800s and early-1900’s, created higher wages and more discretionary income that allowed it to purchase – and demand more of – the very goods it produced. Japan became the second largest economy in the world behind the United States and according to the World Bank it possesses a gross domestic product per capita of $39,727, not too far behind our $46,436.

Because of that, it gradually became too expensive to further develop outsourcing in Japan, so America looked elsewhere, mainly the most-populous country in the world, China. It has become our business partner of choice. In 2000, China’s annual exports to the United States were $100 billion. By the end of 2009 that number had grown to $296.4 billion.

That can’t keep up forever. China will become another Japan relatively soon. There is a push by Chinese officials and business leaders to bring 40% of the Chinese population into the middle class by 2020; that’s about 550 million people who will have newfound access to capital to buy durable and discretionary goods, creating a substantial domestic economy out of China’s export economy.

At the same time that occurs, our temperamental trade relations with the Asian giant will become even more so. Chinese officials are vocal, and justifiably so, about the poor choices of Corporate America and our debt-averse citizens that led to the global recession. They are even more critical of what the American government is and will be doing to right the ship. You can’t blame them, they hold just under $900 billion in US debt. As our dollar continues to tank in value so does their investment.

Our elected officials insist on adding insult to injury by continuously calling-out China for manipulation of its currency, saying the value of the Yuan is tied directly to the American dollar, which keeps Chinese goods artificially low-priced. That’s the pot calling the kettle black: Through the private-public partnership that is the Federal Reserve, America has been manipulating the value of its currency since 1913. Our dollar is dying on the vine because the Reserve and Washington are so intent on addressing the latter’s problems through the issuance of fiat currency. Every time a dollar is created all other dollars in the marketplace lose their value. It’s simple economics.

We have the perfect storm brewing. China’s growing middle class will drive up the cost of doing business at the same time it will take more of our devalued dollars to buy the same basket of goods. Add to that the chance that the Chinese Yuan will have to be strengthened and you’re guaranteed that Chinese exports will become dramatically pricier over the next decade.

American consumers won’t be able to stomach the increased costs at the grocery and department stores. We always want cheaper. Based on how tenuous our economy has become (and how tenuous it will be with upcoming crises in Social Security and Medicare) we will need cheaper.

American businesses overseeing outsourcing activities will have to look elsewhere. India is certainly not at the top of the list. They, too, show very limited long-term potential as their middle class has tripled in size over the past 20 years and it is projected that half of their population will be a part of that category before 2030.

Then where does outsourcing next occur? There’s only one place left on this planet that will be able to satisfy the needs of consumers in America, Europe, and ultimately China and India….the African continent.