A Melman Minute — January 4, 2010

What a strange world this has become for the mining industry! Just when mining executives perhaps got the idea that it was safe to come out of their environmental bunkers, yet another episode has occurred which hands the environmental community a public relations bonanza. The latest event which will enable them to make capital from the supposed hazards of mining took place in the British Columbia interior area known as the "Kootenay Pass" region when a snowmobiler drove his vehicle directly into an unguarded ancient mine shaft and fell more than 100 feet (33 meters), breaking several bones and suffering bruising in the process.

Clearly, we can expect a hue and cry demanding that the present-day mining industry, whose current participants had nothing to do with creating the problem, should expend substantial amounts of time and sums of money to make the entire back-country area safe.

It will be interesting to follow both the public's demands and the industry's response relating to this issue in coming weeks and months.

We continue to believe that visible price inflation - as opposed to less evident 'monetary inflation' which has been ongoing for some time - will gradually become one of the most important story-lines during the coming year and evidence is already pouring in regarding raw material price gains.

One of the more interesting charts we follow is the "CRB Continuous Commodity Index" which follows an index relating to the average price for a basket of commodity items. The 10-year chart of that index presents a particularly clear picture of economic forces during the years since the turn of the century. As the economy appeared to gain economic strength following the stock market debacle of 2000-1, prices began to rise steadily, culminating in a spike top close to 630 in mid-2008.

The index then plunged dramatically, in harmony with the economic contraction which set in at that time, eventually falling to a low of about 325 in late 2008. However, since that time, materials demands have been recovering and, as of this morning, the CCI Index is right back near its highest levels of the century.

As we have noted during the past few days, raw material price increases are occurring across the board, from precious and base metals to foodstuffs to lumber and even 'mundane' items like cotton. Now, we find the new year of 2011 is opening with a parade of strong improvements along the grain front with wheat, corn and soybeans all advancing in this morning's commodity trading.

It is also worth noting that perhaps the most important commodity of all in relation to visible price inflation, crude oil, has just broken out to a two-year high near $92.50 per barrel and forecasts of a move to and above $100 per barrel are widespread.

On the same general subject, it would appear rational that when inflation becomes a threat, if governments intervene in the economy at all, it should be in the direction of increasing supply relative to demand and thereby reducing price pressures. Somehow, the American Congress does not seem to have received that message and we cite two actions in recent years as evidence. We also add the observation that many times such actions create more problems than they resolve.

In the first case, Congress passed a law in 2005 which limited the importation of magnesium from Russia and China into America by imposing heavy 'anti-dumping' tariffs. Presumably, the law was put into place to protect about 400 jobs at U.S. Magnesium of Utah, America's primary domestic supplier.

In an entirely predictable fashion, once the limitations of new supply were imposed, the price of magnesium in the USA shot up and industries which produced magnesium-based goods suddenly found themselves in a position of being unable to compete with the rest of the world. According to a Wall Street Journal opinion piece, the price of magnesium rose to about $2.30 per pound in America where the anti-dumpling laws were imposed but remained near $1.50 per pound or lower for manufacturers in Canada, Mexico, Europe and China.

As a result, American manufacturers lost business and ultimately jobs. The North American Die Casters Association reported an estimate of 1,875 direct jobs and 8,000 supporting jobs lost as a direct result of this legislation.

In the second case, despite President Obama's assurance that the Gulf Coast would once again be open for off-shore petroleum drilling activities, not one single drilling permit has been issued since the official ban was lifted and industry analysts now state that it appears unlikely any new permits will be issued until mid-2011 at the earliest and perhaps as far into the future as 2012.

Again, the American government is taking action to stifle new supplies, thereby exacerbating a developing price crisis which, as noted above, has sent the price of crude soaring to its second most decisive price rally in history, exceeded only by the move during 2008 to over $140 per barrel. By some estimates, the total output of Gulf oil will fall by a huge 13% this year alone.

As with the magnesium situation, this government action is likewise having the effect of stifling economic development and increasing unemployment. The entire Gulf Coast region is already reeling from a lack of tourism and can ill afford the loss of drilling and other primary jobs, yet that is presently the case.

Please allow us to offer one general observation. It appears to be a worthwhile policy to judge any important announcement from the point of view of the self-interest of the person or group issuing the statement. The world of politics offers us an excellent example.

Those who remain in office and have held their offices for some time seem to couch their announcements in the form of why we should be thankful for their past efforts and why we should count on their abilities to promote good results. Therefore, it is not unusual to hear about improvements in the economy and how much better is the future outlook.

However, one can count on the fact that a newly-elected politician will offer statements detailing how matters actually turned out to be much worse than they he or she had suspected during the prior campaign and, therefore, it might take much longer than expected to produce any positive results. As financial writers James Hagerty and Ben Casselman wrote in a recently-published opinion piece, "...New governors in 26 U.S. states are starting to take office with somber warnings to constituents of more tough times amid revenue shortfalls and a weak job market."

We can only wonder if there is some sort of mysterious politicians' code book which is kept hidden from the general public, because we cannot help but note that many politicians follow the same general path with remarkable consistency.

General stock markets seem to be pleased with prospects for 2011 as the Dow Industrials are ahead by about 120 points as of 9:00 AM PST while the Canadian securities markets are closed for the some holiday or other. (It is difficult to keep track of all of them!) Metals markets are relatively quiet with gold holding near $1,420 and silver at $31.00 per ounce while base metals continue to improve on balance with copper making a new historic high at $4.46 while major mining indexes are little changed this morning. The February contract for Crude Oil has reached a peak of $92.57 so far today, long term interest rates are headed higher and the U.S. Dollar is slightly firmer in currency trading.

All quotes US$ unless otherwise noted.

Next Melman Minute scheduled for Wednesday, January 5, 2011.

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