By the time you finish wading thru all the contradictory comments, jawboning and visits to Fantasy Island, your head has a very good chance of suffering mental whiplash, if not actual severe hernia of the mind. Let’s see if there’s any way to make sense of the mess.

June 1, 2009, General Motors finally drank the hemlock and filed for bankruptcy at the behest, encouragement, dictation or coercion (pick one; your choice) of President Obama and the U.S. Government.  GM’s bankruptcy filing is one of only two things that has been consistently reported or agreed upon.  The second?  Insistence that bankruptcy court will allow GM to emerge within a short period of time as “a leaner, meaner and smaller company that will be able to respond quickly to market forces, producing cars that Americans want and that are also environmentally responsible.”  What “environmentally responsible” means I don’t know, other than you will likely see a parade of petite cars you pull on like a pair of jeans.

From this point on, you pays your money and takes your chances.  Some things are obvious, such as President Obama saying there will be additional pain, more dealerships will close and some parts suppliers will go out of business.  That’s a masterpiece of understatement, particularly when you consider another statement appearing on MSNBC.  David Cole—who just happens to be the Chairman of the Center For Automotive Research in Ann Arbor, Michigan—essentially said that critical suppliers were on the edge of failure.  If they go down, they could trigger a cascading failure, causing the collapse of the entire automotive industry, then moving on to affect the rest of the economy.

Even the number of plants to be closed is a moving target.  According to the bankruptcy filing, nine plants will be closed and three idled.  Other reports have indicated sixteen, still others claiming either more or fewer.  You feel like you’re in the middle of a shell game, trying to figure out which shell has the correct number of plant closings under it.  Regardless, 21,000 will be fired, but 1200 “new jobs” will be “created.”

From the perspective of the loyal, dedicated worker who suddenly finds himself (or herself) out in the cold, it doesn’t matter if a plant is closed or idled.  They still don’t have a job all of a sudden, which means they have to go find one…assuming they even know how to go about the process.  Keep in mind that many of them have never worked anywhere except for GM and they don’t have a clue how to start a job search or create a resume.

When an idled plant is finally restarted, if it ever is, a new problem rears its head.  Where do you find the skilled workers to get the assembly lines rolling again?  The ones who knew how are no longer around.  Either they’ve found new jobs in the area, moved to another state or taken forced retirement.

In spite of his “cascading failure” comment, David Cole does a 180-degree pirouette with his statement that a more focused product offering from GM could generate a profit of around $10 Billion dollars.  Taking it a step farther, he claims that the auto industry is on the threshold of a dramatic increase in profitability.  Of course, that does assume a rebounding economy and the creation of one million new households per year, resulting in growing demand.

The demand may be growing, particularly as cars wear out and a family or individual either replaces them or does without, instead falling back on public transportation and shank’s mare, but there is the little problem of being able to qualify for a loan.  Granted, money is available for those with good credit, but the number of Americans with good credit is definitely going down.  Beyond that, how many of us want to be saddled with a five to seven year car loan when many don’t know if they’ll even have a job five to seven months from now?

Cascading failure or rebounding economy: does anyone know for sure which it will be?  Even those of us who are charter members of the Doom & Gloom Society don’t know for sure which direction it will finally go or how bad it will truly be if things do go south. Especially way south.  Still, there seems to be no dearth of analysts, positive thinkers or Pollyannas who insist that we’re just having a difficult period at the moment, but things will soon return to business as usual.

Another positive thinker, as reported on the June 1 MSNBC, is George Magliano.  Mr. Magliano is Director of automotive industry research for the Americas at the consulting firm IHS Global Insight.  He is projecting sales of 9.5 – 11 million vehicles annually for the next couple of years, gradually returning to 15 million per year after that.  He also said that we’re beginning to feel pretty good about the economy, but the recovery will be anemic.  If that ain’t an oxymoron, what is?  Correct me if I’m wrong, but an anemic recovery darn sure doesn’t qualify as a recovery from where I’m sitting.  Nor would it make me feel pretty good about the economy.  But this is what you get when you make a habit of wearing either rose-colored glasses or blinders.

Another comment that has been made…sorry, I can’t remember where.  The reports, comments, contradictions and information floating around is coming so fast and furious that it doesn’t take long to begin suffering from sensory or informational overload.

Some experts suggest that GM will become a publicly traded company again by the middle of next year, at which time the Government will begin to slowly sell its stake in the company.  Depending on your perspective, reaction to that statement will range all the way from stunned silence to hysterical laughter.  Few people believe it will happen and a local conservative talk show host stated that when the government gets into something, they never get out of it.  The chances of Government Motors ever becoming General Motors again are somewhere between slim and none…and slim just left town.

Let’s take a quick look at the kinds of cars you won’t have versus the ones they (meaning the government) think you want.  All I can say is read it and weep.

So-called muscle and emotional cars, meaning the Corvette, Camaro, anything with a large V-8, comfortable and sufficiently large enough to provide decent protection in a crash, are either going to vanish or become few and far between.  Makes you wonder what’s going to happen to large SUVs and full-size pick’emup trucks, doesn’t it?

What will take their place?  Trot on over to Chevrolet’s Future Vehicles page and take a look.

There are four vehicles listed and none of them are as large as the current Chevy Impala. The Cruze is the largest of the bunch, but you can’t get a sense of its size because it’s described as having comfortable seating for five, ample interior space and surprising cargo capacity.  Then there’s the Volt, a plug-in electric car with a 40-mile range without a drop of gas being used.  A perfect commute car, it says?  No way, I say.  Especially in Texas.  You can easily rack up more than 40 miles by the time you make a single combined run to the grocery store, office supply, Radio Shack and the mall before coming home.

But the real jewel is the Chevy Spark, which will be imported from…where else but… China.  It’s a true 4-4-4, meaning it has a 4-banger engine, 4 doors and 4 seats.  This thing is so small that it can be parked in the back of my ’93 Buick Roadmaster Station Wagon with room to spare!  Forty years ago, I saw a 1967 Ford Mustang Hardtop tooling down the road with a Great Dane in the back seat.  Poor dog had to stand on the seat with his head out one window and his tail out the other.

The Spark appears to be even smaller, which means that even if I could shoehorn myself behind the wheel …which I doubt since I have trouble squeezing into a Dodge Stratus, even though I’m only six-foot-one and weigh about 185 pounds… my dog, Magnum, would be emulating that Great Dane.  And Magnum is a Dudley Yellow Lab weighing a mere 65 pounds.

The bankruptcy of General Motors, its transformation into Government Motors and the myriad questions swirling around the entire episode, leaves one with the feeling that we are occupying a real live episode of Perils of Pauline, with no assurance that there will be a hero coming to her rescue.

Would I buy another General Motors car right now?  Maybe.  Would I buy a future minicar, electric car or any other car produced by Government Motors?  Not a chance.

If a substantial percentage of car buyers reach the same conclusion, the anemic economic recovery they’re obsessed with spending into existence may very well turn into a robust depression.

Regards,
Richard Marmo

June 10, 2009

Round and Round GM Goes was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

For some industries, such as airlines, finding a more fuel-efficient way to do business is a matter of survival. According to a recent Financial Times article, it’s “triggered a massive jump in the price of obscure and scarce metals that are used to improve the fuel economy of jet engines.”

The quest for fuel-efficiency goes beyond just the airlines, of course. It extends to rail cars and automobiles, to power plants and high-speed drilling. Vanadium’s primary use: to strengthen steel. Combine it with titanium and you get the best strength-to-weight ratio of any engineered material. That makes it practically irreplaceable in aerospace and other industries. Companies also use vanadium to produce sulfuric acid, and in nuclear power plants. Vanadium also promises new advances in battery technology. Giant vanadium batteries power wind farms and solar power plants.

In the great infrastructure boom, vanadium takes its place at the table of other rare and obscure metals that are growing much more important. The price of vanadium, as with many of these metals, is way up. For most of last year, vanadium cost $40 per kilogram. In February, it hit $90 per kilogram. It has since come back some, but it rallied to over $80 again recently.

The rocketing vanadium price is no mystery. Demand is strong, while supplies are constrained. A big part of the supply constraint lies in South Africa. That’s because a massive electricity shortage is preventing many mines from operating at full capacity. As the CEO of Windimurra Vanadium, an Australian mining company, put it: “The market is very sensitive to power supply issues. Large South African miners are facing up to 15 percent restrictions to their power supply… The supply of vanadium will remain tight, and that’s factoring in a best scenario for South African producers, which is no guarantee.” In March, Xstrata, which produces about 12 percent of the world’s vanadium, said it would cut its deliveries by 10-15 percent in the second quarter. And Highveld, the world’s biggest producer of vanadium, said in February that power outages posed a “considerable threat” to future output.

The vanadium market also has some interesting quirks. For example, 98 percent of the world’s vanadium comes from only three countries — China, Russia and South Africa. South Africa, we know, has power issues. China’s Sichuan province, devastated by earthquake, was also a rich vanadium producer. Moreover, China is becoming as much a consumer of vanadium as a producer. So vanadium exports from China are dropping. Last year, China ended its export credits for vanadium because it needed the metal more at home. This year, China went further and put an export tariff in place.

China’s vanadium use per quantity of steel is still well behind the curve compared with the U.S.’ If China were to use as much vanadium as U.S. steel producers, the vanadium market would face a one-third increase in demand. That’s a pretty nice long-term tail wind for vanadium.

Russia’s Evraz Group is the world’s largest producer of vanadium, with about 27 percent of supply. I think it’s safe to say that Russia has been an uneven producer of certain commodities. And as the Russians like to change the rules of the game as it suits them, I would not rely too heavily on Russian supply. And finally, there are no stockpiles of vanadium or substitutes of equal quality.

So where are the opportunities?

It’s tough to find a good pure play that is easy to buy. Most of the producers are in China or South Africa or Australia. And these producers make lots of other metals. You wouldn’t buy Xstrata just because you like vanadium. You’d also have to understand a host of other metals that contribute much more to Xstrata’s bottom line than vanadium. One interesting company is Denison Mines. Vanadium could represent up to a third of Denison Mines’ revenues in 2008. The problem with Denison is that it is mainly a uranium play. To invest in Denison, you have to like uranium; you get the vanadium exposure as a bonus. Denison is probably cheap, although I haven’t looked at it in great detail.

Some of the best ideas are just in the prospecting stage or emerging as producers. There are a few in Australia, including Windimurra Vanadium and Reed Resources. Both have big vanadium resources and could each eventually represent 6-8 percent of global production.

One of my favorite vanadium ideas I’m keeping an eye on is Largo Resources (LGO.V: CDNX). Largo has the world’s highest-grade vanadium mine, in Brazil. It’s close to infrastructure and located in a mining-friendly state. The company should have a completed feasibility study in July. Production should start in 2010. It’s highly speculative, but promising.

The company also has a molybdenum and tungsten project in the Yukon, called Northern Dance. These metals are also important in infrastructure.

Scarcity is a great thing when you are an investor. Finding companies that own something scarce — with good long-term demand behind it — is a winning formula for finding good ideas.

Regards,
Chris Mayer
July 15, 2008

P.S.: Finding an interesting and scarce metal to invest in like vanadium is certainly an idea worth looking into. But that isn’t where the resource profits you could be making end. Recently, an amazing resource breakthrough occurred that some people are already calling a miracle. This breakthrough has come from the use of two new technologies that have made possible what was once thought to be impossible.

Investing in Vanadium was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Thinking about Basic Materials and Energy

Today the automobile business is vast. It is a global industry that has evolved by leaps and bounds in the 100 years since Henry Ford made his famous remark in 1908 about building “a car for the great multitude.” The worldwide customer base includes at least a billion people — spread over six continents — who have income sufficient to buy a car or small truck. According to figures assembled at the MIT Sloan Automotive Laboratory, there are about 700 million automobiles and light trucks in the world. About 30 percent of those vehicles are in North America.

Every car requires steel, aluminum, copper and lead. Each car requires rubber, plastic, and myriad of other petroleum and natural gas by-products. And there is much else in the long industrial ladder of automobile production. Just think in terms of the energy that goes into processing materials, fabricating parts, building components, assembling a finished product, and all the transportation along the way. In addition to the basic energy and material resources that go into manufacturing an automobile, the sheer number of vehicles reflects a lot of fuel tanks to fill with gasoline and diesel. And this does not even touch on the energy and resources that go into building road systems.

Automobiles and Energy

The oil shocks of the 1970s — in both price and availability — spurred improvements in auto energy efficiency within the U.S. as well as worldwide. In the U.S., the increase in fuel efficiency was related to rising costs for gasoline, as well as government mandates for higher fuel efficiency dating from the late 1970s. On average over the past 25 years, the typical power train of gasoline-fueled automobiles in the U.S. has improved in efficiency by about one percent per year according to data gathered by MIT. While discrete, one percent improvements may not appear to be much, the compound improvement in the typical U.S. automotive engine over 25 years has been about 30 percent.

There has been even more progress in the fuel efficiency of diesel engines over the past 25 years. Diesel power trains are no longer the sooty, “knock-knock” devices that they were back in the days of disco. Most cars sold today in the European Union (EU), for example, are powered with clean-burning, fuel efficient, smoothly running diesel engines. In fact, the demand for diesel fuel in Europe is such that EU refineries routinely ship surplus gasoline to sell into the North American market. And in North America the relatively low prices for gasoline throughout the 1980s and 1990s discouraged the use of diesel engines.

So there have been significant improvements in automobile power train efficiencies over the past couple of decades. But have these improvements translated into any overall reduction in demand for fuel? No. In 2007 motor fuel consumption in the U.S. was high as it has ever been. (Although according to the American Petroleum Institute, demand for motor fuel may be at a plateau due to price increases at the pump in 2006 and 2007.) In the past 25 years we’ve seen more people driving more cars for more miles. But compounding the fuel issue, the cars that people are buying and driving tend to weigh more and offer higher performance.

The Future of the Automobile

As I’ve said over and over again in Whiskey and Gunpowder, we live in a world of peaking oil output, and of energy and resource scarcity. So the trend lines for fuel usage by automobiles simply cannot continue for much longer. The first, most obvious sign is the rising price for oil and by extension for fuel at the pump. Something has got to give, and the energy markets are sending signals of long-term high prices for motor fuel. Where do we go from here?

Well first, people and policy makers have to realize that there is an energy problem. Everyone has to realize that this is something permanent, going forward. “Peak Oil” will not pass if we ignore it long enough. And no one can solve the problem just by bellyaching about the rising price for gasoline.

It helps to view the age of the automobile — and its future — as a systemic whole. And some social critics are out in front of the broad discussion, with a sharp focus on the automobile and what it has brought us as a society. James Kunstler, for example, author of highly regarded books such as The Geography of Nowhere and The Long Emergency, believes that the car-dependent suburban build-out of the U.S. may be “the greatest misallocation of resources in all of human history.” That is, in an era of expensive energy and scarce resources, a car-dependent culture has no real future and is in fact a hindrance to progress in other directions. That is quite a viewpoint, well-presented by Kunstler in his writing. It’s depressing, but it sure gets your attention.

And criticism of the automobile culture is not confined just to social commentators like Kunstler. Another remarkable indictment comes from no less an automotive insider than Prof. John Heywood, the director of the MIT Sloan Automotive Laboratory. He has stated that “cars may prove to be the worst commodity of all.” According to Prof. Heywood, cars are “responsible for a steady degradation of the ecosystem, from greenhouse emissions to biodiversity loss. What’s worse, even if we improve vehicle efficiency, turn to fuel hybrids or make rapid advances in hydrogen-based fuel technologies, the scale for slowing down the degradation may run to the decades. Turning the curve won’t be easy.”

You can agree or disagree with the broad themes of Jim Kunstler or John Heywood. But there’s no argument with one of Prof. Heywood’s points. Wherever we are going, it will not be easy to “turn the curve.” Looking forward, the oil just is not there to fuel cars in the future in the way that we did it in the past. So a lot of people are going to have to do things differently.

Worldwide, the automobile industry has seen the handwriting on the wall. Fuel is expensive, and is getting more so with each passing year. So the industry has invested tens of billions of dollars in improving engine and power train efficiency. In addition, auto designers are coming up with new ways to eliminate weight and drag. (At higher speeds, up to 70 percent of the energy used to turn the wheels on a car goes just to push the air out of the way of the chassis.) The auto industry is looking towards different sorts of fuels, and moving towards what is called fuel-flexibility.

Hopefully this will lead us to a great new investment in the car of the future.

Until we meet again,
Byron W. King
April 15, 2008

Cars and Energy was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.