Coming on the back of last week’s howler that the Albanese government might define coking coal and iron as ‘critical minerals’ for the energy transition, the government’s next shocker is its plan to double subsidies for ‘critical minerals’ mining and refining projects to $4 billion.
The low-cost loans from the government will supposedly target projects that are struggling to get financing from banks. This will create jobs and help propel the energy transition by giving America’s Inflation Reduction Act funded projects the resources they need to go green. Or something like that…
But all these government loans beg the question, why aren’t our climate change obsessed bankers backing these projects in the first place?
I mean, what is it about mining these resources that’s holding back private sector funding more generally? Why does the government need to bribe these projects into being?
Why does Lynas Rare Earths [ASX:LYC] need the US Department of Defence to contribute about US$258 million, double their initial amount too, to its Texas refinery? It’s not often you see a government subsidise a foreign company’s projects…
Surely the private sector understands that we must reach Net Zero by 2050 — it’s the law! And surely the private sector must understand that we need an impossible amount of resources to achieve this…
This implies that resource prices will skyrocket, making Australia’s mining and refining projects perfectly viable on their own two feet, not the taxpayer’s crutch.
It all looks like the business opportunity of a lifetime to me. Imagine if demand for your products for the next few decades were practically mandated by law…and you still can’t get bank funding for your business.
But it’s not just the bankers who are unwilling to put their your money where the politicians are willing to put it for you. The markets seems to have their doubts too…
The copper price is dropping, not ballooning, in response to the extraordinary amount of copper the energy transition requires. And mining investment in copper is flailing too.
The VanEck Green Metals ETF [ARCA:GMET] is mining new depths itself. As is the VanEck Global Clean Energy ETF [ASX:CLNE].
Wind and solar stocks are crashing ever faster lately as their projects are exposed as uneconomical, but governments won’t agree to price hikes.
Quite frankly, this is more than just a big hint about the future of Net Zero.
I don’t just mean that the market is discounting the chance of Net Zero ever being achieved. Although there is that…
Instead, let’s focus on something else a bit more intriguing: why did we abandon wind and hydropower in the first place, more than a hundred years ago? Why did the share of battery electric vehicles fall in the 1920s? What made the UK’s industrial revolution succeed while China’s Backyard Furnace policy during the Great Leap Forward failed miserably?
In case you didn’t know, the great central planner Chairman Mao once decreed that China should become the top steel producer in the world, ahead of Britain. The madness to his method was to establish rather a lot of furnaces in people’s backyards, literally.
We don’t know how many, but historians report that, ‘China was dipped into a sea of fire’ as a good chunk of the entire population got busy melting down the metal tools they needed to cook, farm and survive in order to meet the Party’s quotas for smelting metal.
You’ll never guess what happened next…
Hint: the very same thing that happened shortly after all of Mao’s policies…and the policies of Lenin and Stalin…and every other communist since.
For those of you who care more about the environment than famines, you can imagine what happened to the forests needed to fuel all these smelters instead.
The quality of the output from all these furnaces was of course inferior to even today’s ‘Made in China’ goods. Much of it was so useless it got buried, a bit like today’s toppling wind farms and solar panels, funnily enough.
After a few years of meeting steel quotas with unusable pig iron, the Backyard Furnaces policy was abandoned.
Oops. Oh well.
Like today’s green energy enthusiasts who tout their momentary 100% renewables supplied grids, whenever Mao visited his industrial and agricultural projects, Potemkin Villages were erected to meet and mislead him that everything was going swimmingly. But behind the scenes, it really wasn’t. Luckily, those who might’ve complained had long since starved.
But back to our real topic — how does this relate to today?
It’s the why that’s crucial.
The failure of Mao’s carefully laid plans lay in the uneconomical nature of the task. If an economic process produces something worth less than the inputs, it is not worth doing. It reduces material wealth. You’re better off keeping the inputs or using them to produce something else. In China’s case, it was the food needed to survive which was abandoned to meet smelting quotas…
But how do you know whether the output is worth more or less than the input of any given economic activity?
Profit tells you — it’s a signal that what you are doing is creating value. The output is worth more than the inputs — the costs are less than the revenues.
Of course, to Chairman Mao, nothing could be worse than a profit…Communists see profit as exploitation of workers rather than a signal of value creation.
But without profit to guide how a system’s resources are allocated to produce, there is no way of knowing what should be produced and what should not. That is why central planning fails. It is flying blind in terms of whether its economic activity is creating or destroying value. For more on that, you can look up something called the Socialist Calculation Debate…at your own risk.
Profit being a rather important consideration of the UK’s industrial revolution led the UK to specialise in what it could lead the world in. This was not planned or directed top down. It emerged, through self-interested profits. The invisible hand, and all that.
Now let’s apply all this to the energy transition. Does it resemble the freedom of the profit and loss system? Or does it resemble the centrally planned Great Leap Forward? Is the outcome leading the methodology — the cart before the horse — or is the methodology’s economic potential determining the outcome?
Is the government deciding what will be done where and how, or are costs and revenues being allowed to make those decisions?
The need for subsidies is the giveaway…
If bankers and markets are not funding projects, that is because they believe them to be unviable. They are not worth doing.
So, if our energy system — one of the fundamental building blocks of the rest of our economy — cannot stand on its own two feet financially, what does that tell you about its viability?
Is it creating or destroying value? Are the value of its inputs — the vast amounts of metals needed to build renewable energy projects and infrastructure — worth more or less than the outputs — the power they produce?
If the outputs are not worth the inputs and subsidies are needed to bridge the gap, what does this tell you about whether the whole undertaking will make us richer or poorer?
Will our energy system fuel our economy, or will we be paying to keep an energy system going?
Perhaps saving the planet is worth becoming poorer for, of course. But that’s not how it’s being sold to voters…
Heck, who did vote for this Net Zero nonsense?
Perhaps, in coming years, governments’ attempts to reach Net Zero by embracing the energy sources of the past in wind, solar and dams will become known as The Great Leap Backwards.
For investors, it may already be time to transition their portfolio to the fuel that really will get us out of this mess.
Big business already is. Funnily enough, the green energy grid’s lack of reliability and high costs is even undermining the economy’s ability to mine the resources it needs to build that green energy grid.
‘Nervous Time to Be a Big Power Consumer in Australia, BHP Says
‘Australia’s accelerating shift from coal-fired power to clean energy is stoking volatility in its power markets and raising concerns for large businesses, according to BHP Group Ltd., the country’s most valuable company.’
No wonder only the government will lend to mining projects that’ll have to operate in a Net Zero environment…
This suggests my worst fear is already playing out. Mispricing energy will lead to bigger problems than just an uneconomical energy system.
Just as resources are an input to producing energy, energy is a key input deciding what we produce in our economy. If we mislead the economy with subsidised energy, that will make our economy artificially energy intensive, eventually leading to a crisis in the economy as a whole instead of just the energy sector.
That’s what Germany did when it made its vast industries reliant on cheap Russian gas. And we know how that turned out…
Editor, The Daily Reckoning Australia Weekend