This Small Country Could Hold the U.S. Steel Industry Hostage
Iron is the most notable ingredient for making steel, but it isn't the only ingredient, and it may not even be the most important. For example, beef is the main ingredient in a McDonald's Big Mac, but it's the special sauce that differentiates the Big Mac from just a burger. With steel, the special sauce is manganese. While blessed with vast natural resource overall, the United States wasn't endowed with a large supply of this vital element.
How big an issue is it?
For starters, the U.S. Geological Survey (USGS) explains: "Although the amount of manganese used to make a ton of steel is small, it is just as essential as iron to produce this fundamental building block of modern industrial societies. Put in simplest terms -- you can't make steel without manganese." Yeah, that about sums up how important manganese is in making steel and, oh, modern society!
In the United States manganese can be found mostly in Maine and Minnesota. However, according to the USGS, the quality of these deposits are are so poor that "they are presently uneconomic to mine." As a result, the United States imports all of the manganese it uses. According to the USGS, the "net import reliance as a percentage of apparent consumption" is 100%. It's been 100% since 1991, the oldest data available from the USGS's website.
That's a long time and shows just how reliant we are on other countries to sell us this vital material. The largest manganese producers are South Africa, Australia, China, and Gabon (a relatively small country on the west coast of Africa, the continent). Those four nations accounted for 70% of the world's production. The countries we buy from, meanwhile, are Gabon (61% of U.S. supply from 2008 to 2011), Australia (21%), South Africa (7%), and Brazil (5%).
Those supply stats are a little bit frightening because just cutting Gabon out of the equation would quickly push the United States into a deep manganese shortage. That said, there's no reason to expect such a problem and other countries could make up for such a shortfall, since there is plenty of manganese in the world (it's the 12th most abundant element). But it wouldn't be easy and other suppliers may not be as willing to sell to us as we hope.
For example, China has to supply it's own steel industry with the vital metal. Australia's mining industry, meanwhile, is focused around serving the Asian market. Increasing shipments to the United States could mean trimming shipments to Asia over the near term. That would probably be undesirable from a customer relationship standpoint. That leaves current U.S. suppliers like South Africa, which is home to roughly 70% of the world's known manganese reserves, and Brazil. While both could step in to help, current supply relationships with other nations might be problematic over the near term if we were looking to offset a huge shortfall.
And while we have domestic deposits, the cost and time to develop what would end up being inferior manganese mines would still leave us reliant on others for years. In fact, the biggest issue we would face in replacing a large supplier would likely be time. The USGS estimated that if a country like Africa were taken out of the manganese supply, other countries would have to increase production by a factor of 1.25. Not an easy or quick task. In other words, there would be near-term pain on the pricing front if a big supplier disappeared as demand outstripped supply, but supply would eventually catch up and bring prices back down.
Nothing to worry about
Luckily, there doesn't appear to be any reason to worry about a big supplier dropping out of the manganese market. So you don't have to start looking for ways to hoard the metal or try to find an investment that will benefit from the remote possibility of a sudden supply shock. In fact, there are no easy ways to invest in the metal's production, since it's usually just a side act for big miners like Vale where it accounted for just 0.6% of revenues last quarter.
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The article This Small Country Could Hold the U.S. Steel Industry Hostage originally appeared on Fool.com.Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends McDonald's. The Motley Fool owns shares of Companhia Vale Ads. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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