Metal processing is vital to products like cars, batteries, and airplanes, and two countries, in particular, run the show: China and Russia. But in the face of enormous demographic, economic, and security challenges, the countries’ output is in jeopardy, potentially impacting Western demand. Boeing, for example, acquires roughly a third of the titanium used in the production of its aircraft from Russia.
Peter Zeihan argues that metal processing is neither complex nor time-consuming, and it might be time for the West to consider other supply sources.
Excerpted from Peter’s Feb. 3 “Zeihan on Geopolitics” newsletter:
Today we’re talking about the overlooked redheaded stepchild between mining raw materials and incorporating those into a product…processing. Essentially throwing tons of energy at the ore through several steps and facilities, converting them into usable materials like aluminum or steel.
For the vast majority of materials, this processing is carried out in 1 of 2 locations – China or Russia. This is a result of subsidies or cheap energy. However, all of that is changing thanks to the collapsing demographics of these two societies.
The reason for the redheaded stepchild analogy is that processing is about to become very annoying for the rest of the world. Not because it’s expensive or difficult to do but because the decrease in supply is culminating with an increase in demand thanks to the green movement.
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Hello from sunny Colorado, Peter Zion here. Today we’re going to talk about processing. So a lot of people are familiar with some of the issues and opportunities that come from any number of industrial materials, whether that’s iron or aluminum, or lithium or cobalt. But in between the mining and the actually incorporating the product into something that we actually use like lithium into a battery or steel into a car, there is an intermediate processing step that tends to just kind of get ignored. And that’s about to become a very large concern for any number of sectors and countries.
Once you get the energy, excuse me, once you get the raw material, the or the industrial material itself out of a mind, you then have to basically throw a lot of energy at it. Breaking down the ores to separate out the metals or the other materials that are within is an incredibly energy intensive process that usually takes place over several steps. And within those several steps, not always can the same facility do all the same processing. So for example, you can smelt
bauxite, in order to get an intermediate product that looks a lot like cocaine called alumina. But then a different facility is needed to basically electrocute the crap out of it in order to transform it into aluminum. And you’ve got processes like this for everything. Typically, for steel, your first step is to throw it into a foundry with some coal into a blast furnace. And then you get something called pig iron. And then as a rule, another facility will turn it into a type of iron and steel that we use every day. Now, the problem we’re facing is that most of the world’s materials processing is done in two specific locations. The first is in China. Now the Chinese have heavily subsidized their entire industrial base whenever they find a technology that they can master without needing input from another country. And since steel smelting was developed well over a century ago, this is something they have no problem doing. So they are by far the world’s largest producer of raw and finished steel.
Those subsidies have taken the form in many cases of financial assistance, basically, if you can get a bottomless supply of 0% loans, and you can build whatever infrastructure you want. And that’s helped drive more profit driven industries out of business around the world. The second big player is Russia. And this is largely because they have very cheap electricity, because when the Soviet system collapsed in 89, the entire industrial base basically went kaput, except for the electricity generation system. So what the Russians did was they would import raw materials, use their cheap power in their cheap coal, to do the processing, and then export a degree of value added materials. And they do this pretty heavily with aluminum. They do this with chromium, they do this with titanium materials that they don’t really mind themselves, but they will bring them in for processing. There are very few materials in the world where this is not true. And if you’ve been following me for some time, you know that these are the two major countries that are facing the biggest demographic, economic, financial and security crises of the world we’re evolving into. So we need to prepare for a system where materials that come out of these two countries intermediate and finished materials, maybe don’t go to zero, but certainly face a significant collapse in the volume that they produce. There’s nothing about this that can’t be done anywhere else, it doesn’t even take a huge amount of time. And it doesn’t even take a huge amount of money. Because a lot of this is technologies that’s you know, 50 or more years old. But that doesn’t mean it’s free. And that doesn’t mean we can do it overnight. And even if all siting and regulatory concerns vanished, you’re probably not going to put up a smelter for cobalt in the United States in anything less than a year. So not only with the way technology is evolving, do we need a lot more critical materials and not only with the reindustrialization of the United States? Do we need a lot more steel and aluminum? And not only with the green transition? Do we need a lot more graphite and chromium and nickel. We’re also looking at losing a lot of the world’s processing capacity for these things all at the same time. Something’s going to have to give and that is going to be one of the greatest economic arguments, fights and perhaps even wars of the next 10 years. Stay tuned. We’ll talk about more of this sort of thing on and off for the next several months because it’s getting to the point where it’s becoming not a hypothetical problem out in the future, but a problem in the here and now. Okay, that’s it for me. Catch you guys later.