BWorld 212, Commodities competition and the mining debate

* This is my article in BusinessWorld on May 15, 2018. The chart is added here as it was not accommodated in the column due to space constraints that day.

Commodities competition as defined in this piece refers to companies that are producing certain commodities and are competing for investors. Thus, energy companies are those that plan to attract more investors and expand operations when world energy prices are high as compared to those companies producing agricultural, industrial, and other commodities.

This is a continuation of a series of pieces about competition.

Last week we discussed overall competition and the role of the Philippine Competition Commission (PCC), electricity competition and the role of Philippine Electricity Market Corp. (PEMC), innovation and the role of IPR protection.

Endless competition also leads to endless innovation and this results in disruption in global economic balance or imbalance, which, among others, would be discussed in BusinessWorld’s Economic Forum 2018 that carries the theme: “Disruptor or Disrupted? The Philippines at the Crossroads.”

Currently, energy prices especially oil are rising again as the supply from OPEC-Russia remains constricted and US shale oil production expands but insufficient to cope with high world demand. But this rise in energy prices do not represent disruption in the global energy balance yet.

I visited the Commodities section of Trading Economics, https://tradingeconomics.com/commodities, and checked which of the many commodities have “disrupting”prices over the last five years.

The commodities are divided into five groups: (1) Energy (crude oil, natural gas, naptha, propane, uranium, etc.), (2) Metals (gold, silver, manganese, palladium, rhodium, etc.), (3) Agricultural (rice, corn, coffee, cheese, lumber, sugar, soybeans, wheat, etc.), (4) Livestock (poultry, cattle, hogs, beef), and (5) Industrial (coal, copper, cobalt, steel, nickel, lead, aluminum, etc.). There are about 50 commodities in total.

What is surprising is the eminence of certain metallic products.

Four commodities have incurred disruptive price hikes — cobalt, rhodium, palladium, and lumber. Zinc and lithium also have rising price trends but not as steep as these four. The rest of the commodities have up-down-up cycles, or declining prices like uranium.

Cobalt is mainly used to produce high performance alloys and rechargeable batteries. Thus, companies producing batteries for mobile phones, electric cars, motorcycles and buses would be scrambling for limited cobalt supply in the world as Congo is the dominant supplier but politically unstable. Cobalt is found in copper and nickel ores and the Philippines is a major nickel producer in the world and an average copper producer.

Rhodium is a silver-white metallic element that is highly resistant to corrosion. Thus, it is mainly used in automobiles as a catalytic converter, changing harmful unburned hydrocarbons, carbon monoxide, and nitrogen oxide exhaust emissions into less noxious gases. It is found in platinum or nickel ores and other metals, and again, the Philippines is a major player in global nickel production and exports.

Palladium is used in catalytic converters, also in jewelry, dentistry and surgical instruments, watch making, aircraft spark plugs, ceramic capacitors, among others.

High lumber demand is experienced as there is a new trend in building construction using treated wood instead of cement and steel. Innovations in wood treatment allow them to be fire-resistant. Demand for “eco-friendly” packing materials and related products also experience rising demand.

And this brings us to the endless mining debate in the Philippines.

The trend is there — rising if not disruptive price hikes in many metallic products — so why make mining production highly politicized and bureaucratic? Why is that DENR circular that suspended or closed several mining companies issued by a former secretary who believes she can fly still not lifted until now?

Not content with bureaucratic licensing and monitoring of mining companies, mining excise tax has been doubled in the TRAIN 1 law of 2017 and there are moves to further raise this tax in TRAIN 2 bill now in Congress.

A better alternative for Congress would be to ban “small-scale” mining as almost all such mining actually use heavy equipment such as backhoes, bulldozers, and huge trucks. They should then be encouraged to pool their resources to become medium- to large mining corporations registered with SEC and subject to mandatory community projects as provided in the Mining Act of 1995.

Australia and Canada, among the biggest mining powerhouses in the world despite having major environmental NGOs, do not have “small-scale” mines that are harder and more time-consuming to monitor.

The Philippine government should be a partner and not a hindrance to more modern and responsible mining and allow us to take advantage of this upward trend in global metal prices.

The government should be an enabler of disruption, not a disruptor, in the clear potentials of metallic mining.

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See also:
BWorld 204, Mining attractiveness index and the Philippines, April 30, 2018

BWorld 209, Is the PCC a facilitator or a hindrance to business competition? May 15, 2018 

BWorld 210, Electricity competition, EPIRA, and WESM, May 16, 2018 

BWorld 211, Intellectual property, innovation, and prosperity, May 20, 2018

BWorld 192, Cobalt mining and TRAIN

* This is my article in BusinessWorld last March 01, 2018.

Many people are enamored — and rightly so — with consumer electronics and gadgets like smartphones, iPads, laptops, and so on. Then, there is new and huge global demand for electric cars and bikes, even electric buses and trucks.

All these products and equipment need batteries, which, in turn, require large volumes of cobalt, considered by some analysts as the “new oil.”

This is good news for the Philippines.

First, cobalt prices seem to be skyrocketing. Second, the Philippines has the 4th largest cobalt reserves (#1 is Congo) and the projected reserves/production (R/P) ratio is 70, meaning at 2017 estimated production level, it will take 70 years for our cobalt reserves to be depleted.

Another good news for the Philippines is in nickel. First, world prices are also rising high though not as fast as cobalt prices. Second, we have the 5th largest nickel reserves (#1 is Australia) although our R/P ratio for nickel is only 21 years (see table).

Why have cobalt prices risen too fast recently?

According to Darton Commodities projections as cited in a Bloomberg report, cobalt use in electric vehicles and other lithium-ion battery applications was around 55,000 tons in 2017 and this is projected to rise to around 160,000 tons in 2025 and 330,000 tons in 2030.

Mining exploration and drilling technology keeps improving so new reserves for cobalt, nickel, gold, copper, and other metals that the Philippines has will be discovered soon and this will raise the R/P ratio for these commodities.

During the BusinessWorld Stockmarket Roundtable last Feb. 20, at Shangri-La Hotel, about two or three of the four speakers that afternoon (Gus Cosio of First Metro, April Tan of COL Financial, Jun Calaycay of Philstocks Financial, and Mike Gerard Enriquez of Sunlife Financial) mentioned the short- and medium-term potentials of the Philippines mining sector. These finance guys see the trend in global commodity supply and demand and hence, their global prices.

BMI Research also showed optimistic outlook for the sector: metallic mining output 6% growth to $3.98 billion in 2018, 5% growth to $4.18 billion in 2019, $4.34 billion in 2020, $4.47 billion in 2021 and $4.56 billion in 2022.

As of end-2016, estimated Philippines reserves are: 1.854 billion MT of gold, 1.696 billion MT of silver, 1.761 billion MT of copper, 116.136 million MT of nickel, 116.001 million MT of iron and 47.264 million MT of chromite.

Various uncertainties in the sector should be relaxed if not ended soon. The good potentials are there in terms of corporate income, jobs generation, mandatory community development projects, and government (national and local) tax and nontax revenues.

These uncertainties range from (a) resource nationalism (“keep out foreign capital in mining” or “export only processed minerals, not raw ores”), (b) more regulations (“ban open pit mining,” “suspend or close more metallic mining”), and of course, (c) more mining taxes (“raise the mining excise tax from 2% to 4%, 6%…,” “raise mining royalties…”).

The recent Tax law RA 10963 known as Tax Reform for Acceleration and Inclusion (TRAIN) has, out of nowhere, raised the mining excise tax from 2% to 4%. It seems that this was not contained in the original House and Senate versions prior to the Bicameral Committee meetings but were just inserted along the way, along with the coal tax hike and tobacco tax hikes.

Now TRAIN 2 is in Congress and there are moves to further raise the mining excise tax on a per-commodity basis, but without reducing or removing other taxes, royalties and mandatory community expenditures.

There should be a limit to the politics of envy via high and rising taxation. When companies create lots of direct and indirect jobs, give lots of social and economic services to their personnel and community residents who are not even company employees, pay lots of taxes, regulatory fees and royalties to the government, the itch of tax-tax-tax should be tempered.

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See also:

BWorld 185, Lower taxes via more mineral exports, February 06, 2018 

BWorld 189, Distortions in TRAIN 1 should be corrected by TRAIN 2, March 14, 2018 

BWorld 190, TRAIN, inflation and the stock market, March 15, 2018 

BWorld 191, Solar insecurity, energy stability and affordability, March 15, 2018

Mining 53, Cobalt mining for electric cars

The Democratic Republic of Congo (DRC) is among the poorest countries in Africa and the world. But it  "is the world’s biggest (cobalt) producer, with 60 per cent of the planet’s reserves. The cobalt is mined by unregulated labour and transported to Asia where battery manufacturers use it to make their products lighter, longer-lasting and rechargeable.

The planned switch to clean energy vehicles has led to an extraordinary surge in demand. While a smartphone battery uses no more than 10 grams of refined cobalt, an electric car needs 15kg (33lb)."

http://www.dailymail.co.uk/news/article-4764208/Child-miners-aged-four-living-hell-Earth.html

I am reposting in quotes other stories from other sources:

"The worldwide rush to bring millions of electric vehicles on to our roads has handed a big advantage to those giant car-makers which saw this bonanza coming and invested in developing battery-powered vehicles, among them General Motors, Renault-Nissan, Tesla, BMW and Fiat-Chrysler."

https://wattsupwiththat.com/2017/08/07/child-miners-aged-four-living-a-hell-on-earth-so-you-can-drive-an-electric-car-awful-human-cost-in-squalid-congo-cobalt-mine-that-michael-gove-didnt-consider-in-his-clean-energy/

"Assuming electric car ownership becomes widespread, the amount of cobalt used in car batteries (which typically weigh 100s of kilograms) will utterly dwarf the amount of cobalt used in laptop and mobile batteries. A surge in demand for electric cars would create tremendous financial incentives DRC mining companies to increase production."

https://wattsupwiththat.com/2016/02/10/amnesty-report-green-battery-technology-built-on-a-foundation-of-child-abuse/

"This report is the first comprehensive account of how cobalt enters the supply chain of many of the world’s leading brands."

 -- From WHAT WE DIE FOR: HUMAN RIGHTS ABUSES IN THE DEMOCRATIC REPUBLIC OF THE CONGO POWER THE GLOBAL TRADE IN COBALT", Amnesty Intl report, January 2016, https://www.amnesty.org/en/documents/afr62/3183/2016/en/

"When too much cobalt is taken into your body, however, harmful health effects can occur. Workers who breathed air containing 0.038 mg cobalt/m3 (about 100,000 times the concentration normally found in ambient air) for 6 hours had trouble breathing. Serious effects on the lungs, including asthma, pneumonia, and wheezing, have been found in people exposed to 0.005 mg cobalt/m3 while working with hard metal, a cobalt-tungsten carbide alloy. People exposed to 0.007 mg cobalt/m3 at work have also developed allergies to cobalt that resulted in asthma and skin rashes."

-- TOXICOLOGICAL PROFILE FOR COBALT,

by the U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES, April 2004, 486 pages long,

http://www.atsdr.cdc.gov/toxprofiles/tp33.pdf

"Problems can creep in when these batteries are disposed of. Scientists, in a new study in ACS’ journal Chemistry of Materials, are reporting that compounds increasingly used in lithium-ion batteries are toxic to a type of soil-dwelling bacteria that plays an important environmental role.

An estimated 20 million electric vehicles are expected to be on the road by 2020, according to an International Energy Agency report. Each one of these will likely contain more than 83 pounds of nanoscale cathode materials, potentially including a class of compounds called lithium nickel manganese cobalt oxides (NMCs)." -- American Chemical Society, February 2016,

https://wattsupwiththat.com/2016/02/10/amnesty-report-green-battery-technology-built-on-a-foundation-of-child-abuse/

When I posted those news links in my fb wall, a friend who is a fan and owner of an e-car in the US quickly attacked the Koch Brothers for funding these news reports. I reminded him to stick to the issue -- huge need for cobalt mining worldwide, cheaper cobalt batteries so that their expensive and fanciful e-cars can become more "affordable." Without mentioning the Koch brothers, Trump, Spiderman or any other personalities they dislike, they should stick to the issue. Prove that large-scale cobalt mining especially from DRC is good to help "save the planet." Even Amnesty Intl., among the believers of "save the planet" mantra has already spoken about the evils of large-scale cobalt mining in Congo.

About Tesla e-cars. On average they get $7,500/car subsidy from US taxpayers, to make expensive e-cars become "affordable". The cheapest Tesla car I think costs about $34k (about P1.7M), already "discounted" with US taxpayers' subsidy.

Governments should step out picking winners and pampering them with lavish subsidies at the expense of taxpayers. Anti-mining "planet saviour" groups and individuals will likely remain silent about this anomaly; worse, they may even defend such type of mining because it conforms with their political and environmental biases.

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See also: 

Mining 50, Canada mining taxation, April 21, 2017 

Mining 51, Gina Lopez, Roy Cimatu and rule of law, May 14, 2017

Mining 52, Regulations and bureaucracies, the mining communities, June 07, 2017 Z

BWorld 140, Mineral rent and taxation, June 23, 2017