Volume I, Quarterly Review Q1-2011 Issue

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Touchscreen Demand: Exceeding Raw Materials?

by  Irv Grossman - Managing Partner

Our interest in the touchscreen supply started when I read an article a few years ago in the IEEE Spectrum Magazine. The article describes Indium-Tin Oxide (ITO)as a transparent conductor used in flat-screen displays and even touch screens.

ITO is a mixture of Indium and Tin Oxide in a 50/50 ratio. While Tin Oxide is readily available and abundant, proven reserves of Indium are documented at only 6000 tons, of which annual production is 450 tons. At this rate, there is only a 13 year supply*.  

The supply issue is further complicated by two factors. First, the complexity of economically producing the material, and a Chinese protectionist approach to natural resources mined within its borders. ITO is produced as a byproduct of Zinc production, where the material is leached from slag and dust during the process. Without the demand and production of Zinc, there is not an economically viable method to extract the metal from its feedstock by itself.  The second issue is China’s approach to managing its resources. While the largest Indium source in the world is in Canada, China holds roughly 15% of the world’s reserves. Earlier in the decade, China decided not to produce Indium, putting a strain on the supply market which resulted in prices increasing from $92/kg to almost $1000/kg just 6 years later**.  

Rare Earth Minerals are getting a lot of press these days. They are used in a wide variety of applications in mobile phones, flat-screen televisions, automobiles, and military equipment. They are also crucial to new clean energy technologies. These mineral are typically found together in the mining process and fall in the same part of the Periodic Table (Elements 57 Lanthanum through 71 Lutetium, 21 Scandium, and 39 Yttrium).

A good historical view of the issue leads up to how China currently produces over 97% of the world’s Rare Earth Minerals. In 1997, Deng Xiaoping, then China’s Communist Party leader, observed that the Mideast may have oil, but China had rare raw materials.  

Currently a lot of debate regarding rare raw materials is underway. Most recently The New York Times also shed some light on the subject.  This includes a map to help understand source of supply and use of demand.

Although Indium is not on a list of Rare Earth Mineral, supply risks should be monitored and addressed. As Supply Chain leaders we need to understand the material risks and aggressively assess alternative supply streams. At the very least, SCM leaders should assess the risk of supply and build a plan to ensure to ensure sustainability.

*"How Long Will it Last?". New Scientist 194 (2605): 38–39. May 26, 2007. ISSN 0262-4079.

**"Mineral Commodities Summary 2007: Indium" (pdf). United States Geological Survey.

 

Protectionism & Capital Controls:  Unleashing the hounds in the 2011 global economic war

By Alan Gotthardt, CPA, CIMA

In a world of austerity and deleveraging, the twin challenge faced by sovereign nations in 2011 is first, how to maintain market share (protect your country's businesses) in a flat to slightly growing global economy and second, how to avoid the runaway inflation and capital misallocation that comes from an undervalued currency.  China of course leads the pack in the effort (and is in many ways a main driver of the problem).

Oversimplified, the problem works like this:  stronger currencies (think Canada, Japan, Brazil just now) create a headwind for a country's exporters.  So, when the yen is strong to the dollar, it makes a Toyota truck more expensive than a Ford truck.  Profits suffer at Toyota and by extension, the Japanese economy.  One partial solution is to devalue your currency by any of a number of ways.  Japan did it last year by direct intervention in the currency markets to sell yen.  Chile just announced a plan last week to do the same thing. 

A too-cheap currency, however, (and interest rates that follow) creates its own major problems: INFLATION and capital misallocation (think bridges to nowhere).  China has been using its undervalued yuan for the past decade to grow its economy tremendously.  However, inflation is starting to boil with the official statistics showing a major increase in the last quarter--and the actual numbers are likely much higher.  Also, capital flows into uneconomic and costly projects (have you seen the pictures of the ghost "spec cities" built in China) and drives price bubbles in real estate and stock markets.  China is currently trying to cool the boil in inflation, real estate, and other assets while not cooling its overall economic growth.
 
Brazil is in a similar but more complicated scenario because its currency floats freely.  Interest rates are high and are attracting huge amounts of speculative capital into the country.  More capital means more inflation and bubbles.  Efforts to damp the speculators (allowing the currency to continue to rise) would harm the local exporters.  We must therefore turn to capital controls -- creating some of the barriers to free movement of capital that already insulate a more closed economy like China.  Capital controls are implemented through any of a number of barriers to free trade, but one of the big ones is taxes.  Brazil has just increased its "financial transactions" tax to 6% in an effort to stem the tide of capital rushing in.  Turkey is considering lowering interest rates to create a less-attractive environment for speculators. 

This battle is just heating up, but expect to see a complete unleashing of the hounds as we proceed through the year.  Capital controls through direct currency intervention, new transaction taxes, etc. for the stronger currencies that don't want to stay strong.  Then protectionistic policies from the Eurozone and the U.S. - weaker currencies that want to stay that way.  As an aside, and outside the scope of this piece, the U.S. is uniquely positioned in the world to weather this sort of thing much better than the rest.  As they say, "in the land of the blind, the one-eyed man is king."  Long live the king.

Alan Gotthardt is founder and Chief Investment Officer of TriniD Capital, a private investment company. TriniD Capital focuses on a long-biased, private approach to investing capital at the intersection of business strategy and behavioral economics.  An accomplished speaker and published writer, Alan's current thoughts on business trends, investment markets, and behavioral economics are published at Capital Decisioneering.com. Formerly the President of Brightworth, Alan was part of the leadership team that built Brightworth into a nationally recognized fee-only wealth management firm, and has been recognized in Robb Report Worth magazine as one of the Nation's 100 Most Exclusive Wealth Advisors.

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