The Tungsten Market Is Warning of an Upcoming War

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1:17Tracy Alloway:Bloomberg Audio Studios. Podcasts. Radio. News.

1:33Tracy Alloway:Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal. And I'm Tracy Allaway. Tracy, I'm in a mood of a little bit of heartbreak this morning. Oh, mood of a little bit of heartbreak. That sounds like a country single, doesn't it? That's right. No. You're singing. I know what you're sad about. You're singing the Tungsten Cube blues. The Tungsten Blues. I'm actually a little shook. in 2022. Remember the tungsten cube hype? Unfortunately. I bought one. And it was the only thing. I'm well aware. And it feels so good. Like a nice big block of tungsten in your hand. It feels so good.

2:07Tracy Alloway:It's so unexpectedly heavy. Probably like a little like mild autism. Like I like related, like sort of like heavy things, like weighted blankets and heavy objects. And I was going to bring it to this episode because I know you love props sometimes. I do like a good And I was like, oh, I'll bring a prop. I couldn't find it on my desk. So we did a desk move recently. And either somehow, I hope I still find it, either it got misplaced in the move or because the value of tungsten has gone up so much, maybe someone stole it. I think I know which one it is, Joe. I think I know. Let me just say. I have a messy desk, too.

2:43For listeners who were lucky enough to have missed out on the tungsten cube craze, there was a moment where for some reason it was mostly crypto bros on Twitter all seemed to go nuts for buying these tungsten cubes and then showing pictures of them on social media. And then promptly, like Joe, forgot about them. And actually, this is a really good analogy for what we're about to talk about because we're going to talk about tungsten the metal. and tungsten it turns out has gone through these cycles where for a few years it's an absolutely essential strategic asset that you need in order to declare war and then as soon as the war is over you kind of forget about it you still need it for some industrial applications or for novelty desk doors but then you find out that you need it again and so there's this like long-running

3:31Tracy Alloway:kind of boom bust cycle i'm really sad you're a demonstrative example of how everyone seems to forget about tungsten except china i'm actually yeah i'm actually really sad about this this is by the way oh wait can i say one more thing yeah please please i know where you can find some tungsten in the west in western australia uh in the bahamas oh really ftx famously oh that's right that's right yes was gonna install a giant tungsten cube at their headquarters in the bahamas and everyone seems to have forgotten this bit of the michael lewis book at the very very end of michael Lewis's book on Sam Bankman Freed.

4:06He says he found the giant tungsten cube in a storage unit in the jungle. And it's probably still there because no one would want to move it.

4:14Tracy Alloway:Yeah. So it would be so heavy. I have to say it's actually depressing me. You know, one of the reasons like I didn't buy the cube as a quote investment, unquote. But I think I've always said, you know, one of the things that people don't talk about with hard asset investing is that you actually pay a negative interest rate because A, you have to either pay for storage, constant storage, like a safe or something like that, or if you have too much - Or a storage unit in the general. Or eventually security guards, right? If you really had a lot of gold or silver or whatever. But then if you don't have that, if you don't do that, then every year there is like a non-zero percent chance that you lose your asset, you misplace it.

4:50Tracy Alloway:Yeah. Maybe you have like some keys to a crypto wallet that you lose or whatever. So that is a way of replicating, except sort of stochastically, the negative interest rate. I think I'm going to find it. I didn't totally forget about it. I had it on my desk even as recently as a few months ago, and I have some very messy drawers. So I think I actually, I'm not, I haven't actually given up hope. I'll create a bet on a prediction market about whether you'll find your tungsten cube. But anyway, setting aside desk toys, it turns out tungsten is actually, as you said, important sometimes. You know, it's not like copper or oil where it's important all the times.

5:26Tracy Alloway:It seems to be a commodity that's important sometimes. And that creates, as you said, interesting dynamics. Yeah. And it seems to be growing more important because going back to the military applications of tungsten, we've had a lot of wars recently. And tungsten apparently is in a lot of cruise missiles and drone shrapnel and things like that. And at the same time, like a lot of other, I guess, rare earth metals, it's also becoming more important to our vision of the future, to the AI build out, things like that. So it's getting more attention. And of course, again, like a lot of rare earths, there's a limited supply and it seems to be dominated by one particular country.

6:04Tracy Alloway:Yeah, it's right. This is the thing. There's a lot of it, but it's expensive and low margin in typical times. And so it's like, yeah, it's like distributed. There's some in countries that are friendly to the U.S., some that are like more seen as geostrategic rivals. But in normal times, it's just not worth the squeeze to actually spend to spend the time and environmental costs of mining it. So we should talk about the current state of tungsten in a state of heightened geopolitical tension. Let's do it. Anyway, I'm very excited to say we really do have the perfect guest, someone who we probably should have had on Odd Lots a long time ago.

6:39Tracy Alloway:One of our colleagues coming to us from Sydney, we're going to be speaking, of course, to Bloomberg opinion columnist David Fickling, who has just done a big reported piece about a tungsten mine in Australia and what this tells us about all the things that we're talking about. David, thank you so much for joining us. How are you doing? Great to see you. Thank you so much for staying up late to chat with us. Why, when we talk about war, geopolitical uncertainty, all this stuff, what is it about tungsten that suddenly becomes important? Yeah, I mean, tungsten, you can look at it as a bit like a sort of century old missing prediction market for war, basically.

7:17And I didn't realize this until I started looking at tungsten. But actually, if you go back right to the turn of the 20th century, it has operated like a prediction market in the sense that people making real investments, once they get a sense that war is a real possibility, they put real money behind tungsten. And you can see the sort of process with that. If you're operating a tungsten mine, then you're in touch with tungsten traders and the tungsten traders are in touch with military, you know, materiel companies who get the first big orders when there's a real prospect of war. And this mine I visited has this extraordinary history where it first opened in 1917 during World War I.

7:56It closed at the end of the war because then the war ended. No one needed the tungsten anymore. And the European government sold it for their tungsten stockpiles. Opens up again 1938 before World War II starts. It goes through a bit of a struggle after World War II, but then it's more or less like rescued by the Korean War. It closes down almost altogether, round about when Sputnik is launched and people start rethinking what wars are going to be like. But then it sort of keeps going through the Vietnam War and finally closes down the Cold War. And it's been closed. This mine, it's on a it's on a beach in an island just off the coast of Tasmania.

8:30It's a pretty isolated windswept spot in the roaring 40s. In 1990, it closed down, the mine flooded and it was basically been ignored for most of the last three decades. And it's now finally starting up again at this very moment when war is looking more likely.

8:47Tracy Alloway:So this is extraordinary. But just to be clear, what is it about the properties of tungsten such that it is important for materiel? I mean, it's the same thing with the tungsten cube on your desk. It's incredibly dense. I think one of the things that attracted the crypto bros to tungsten is it's not just incredibly dense. It's about the same density as gold. but it also has this ridiculously high melting point more than 3 000 degrees celsius so sort of three times hotter than lava tungsten will still be solid and that means that if you're trying to make projectiles with it for instance if you're trying to make an armor piercing projectile to to get through the armor plating of a tank it's going to hold its shape most materials are going to sort of turn into a mushroom and dissipate their force this is going to go straight through to the inside of the tank so it'll be very effective or also a thing that's more current at the moment.

9:36Say you're having a sort of cluster munition, a sort of a warhead that explodes into a sort of distributed charge so that you can take out a command post or a drone. With tungsten, you can have a bunch of very tiny tungsten pellets and they will make a sort of metal rain that will smash anything in the vicinity. And because it's so dense, it's going to be much more effective than steel. So for all these reasons, it's just very useful for military purposes. And of course, if war is pending, people will pay any price for those sorts of physical properties. Getting hit in the head by a tungsten cube would certainly be painful and damaging.

10:09Talk to us about the non-military applications, because it's possible, you know, you wrote about this new mine that's restarting. Maybe, well, we should get into what the investors actually say, the reasons behind them opening up this mine. Maybe it's because they're predicting more tungsten demand because of additional military conflict. Maybe they just think there's going to be more demand for like, I don't know, carbide tooling or something like that. What else is tungsten used for? And then also what does, we should also talk about how colorful some of these characters are. But what is your merry band of tungsten investors say about their reasons for opening it?

10:46You've done your research, Tracy, haven't you? I mean, this carbide tooling, I could tell that was the, I mean, the key reason you will use tungsten is, again, because it's very hard it's basically drill bits if you're in an auto shop then you'll use the drill bit for working metal if you're in a mine it will be on the end of a drill bit there or in an oil well anywhere where you need to drill something very hard tungsten carbide it's a mixture of tungsten and carbon as the name suggests and it's the best value way to get incredibly incredibly sort of powerful sort of drilling power and that's actually essentially in all sorts of ways that I think we don't often anticipate.

11:25I was in the course of working on this article, I was reading something about during World War Two, when Nazi Germany, when we can talk about this later, was very concerned about its supplies of tungsten, and they were running short of supplies of tungsten. And one of the things they did is to conserve it for the weapons industry, they stopped using it in tooling. And you hear these reports of Allied soldiers capturing German tanks late in World War II and just going, this equipment's terrible because they didn't have the tungsten carbide for the tooling. So the machinery wasn't working very well.

11:57The gears were all out of whack and nothing was working very well. And so most tungsten now, 80 % of it is just tungsten carbide. It's tools. And you can buy it in your local tool shop. You'll find it everywhere. And it's a fairly boring humdrum element. The other things, there are a few other uses for it. Like Like almost every critical mineral, it gets used in some weird processes in oil refineries. If you're as into critical mineral design, there's always like 5 % is always used as some weird catalyst in an oil refinery. And that's the case here. Another one that's actually quite interesting, again, because of these sort of high temperature, high strength properties, if you're making turbine blades, it's very important for turbine blades, a lot of, you know, in a jet turbine, but also in a gas turbine, which gets used lot of powering data centers and things in LNG compressors, about up to 10 % of that alloy might be tungsten as well.

12:49So there's a certain amount of demand for that. And there is even supposedly a use in some AI chips for tungsten as well. But the quantities there will be absolutely tiny, because of course, anything involved in chip making, the raw materials is just infinitesimal because the chips themselves are so small. So the investors in this mine that's reopening, the dolphin mine you know i called them a colorful bunch earlier and it really does i think you make this point in your piece but it really does sound like a cast of characters from like a heist movie it's like a red bull air and like some distressed debt guys and then some retired miners doing one last one last job but when they talk to you about their reasons for reopening this mine what did they say well the main one i was speaking to was actually the the chief executive of uh or the executive chairman of the mine himself.

13:37He was actually, he was brought in by one of these investors. As I say, if you look at the shareholder register of this company, it's like nothing I've ever seen of a shareholder register, certainly of a company of sort of global importance. Like you say, I think the reason Red Bull are involved is that there's a sort of long Central European Germanic interest in tungsten and Red Bull are based in Austria. A couple of them are people The Austrian urge to acquire tungsten. I'm well aware. Yes, absolutely. The Peabody Energy, the American coal mining company bought a coal mine off a couple of Australian investors about 20 years ago, and they used the payout from that to invest in this mine.

14:17They were some of the first people who were involved. There's a Caterpillar dealer who actually worked at the mine in the 1960s. He's one of the shareholders. The state government of Tasmania is one of the shareholders because they were bailing it out. And even some of the companies that were leasing cranes and mining equipment, they basically took equity in lieu of unpaid bills. There's really hardly anything in the way of bank finance in this company at all. Its equity is about 7 million Australian dollars. And the total cash some invested since it started up, really tried to get back into operations 20 years ago.

14:52There's been a lot of reports and environmental studies and things over that period. Total is about 77 million dollars. what Amazon spends in about four hours. So it's really very little money. I would say their ambition, they weren't betting for 20 years on war, but their ambition was that China produces 80 % of the world's tungsten. And by 2010, you were seeing China threatening Japan, for instance, over its rare earth supplies. And you could see this was a potential risk even back then. And people around the world, there was one tiny tungsten mine, but the US's last tungsten mine was actually just east of Los Angeles.

15:35It was a sort of retired Vietnam veteran who would go up to the mountains and like dig out a few tons of tungsten every summer. And that went on until he went on mining until about 2013, I think. he was talking back then in the process of writing this article i dug out a letter that he'd sent to congress complaining about reducing tariffs on chinese tungsten because he was concerned back in 2012 that china controlled too much of this and was a strategic competitor back then people weren't worried about it very much now it's everything everyone worries about

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17:41Tracy Alloway:So I definitely want to talk more about the sort of economics and significance of this mine. But can you just talk a little bit more? You mentioned China producing 80 % of the world's tungsten. Can you just give us a little bit more color on what the peacetime tungsten market looks like in terms of how big we're talking about? the sort of the, I guess I would say, why there hasn't been so much investment, like, what are the economics such that generally during peacetime, it does not make sense to do a new project, given either the size of the market, and maybe presumably, the cost competitiveness and the efficiency of the Chinese miners?

18:22I mean, I think the biggest thing, and I think this gets underestimated a bit because China does try to lock down a lot of the supply chain and a lot of critical resources. But in the case of tungsten, and I think it's actually similar in the case of rare earths, it has just happened to get the best geological resource of this by far. And that's a thing that happens in mining. South Africa and Botswana have the best geological resources of diamonds. And Russia and South Africa have the best resources for platinum group metals. And Australia and Brazil have the best iron ore. That just happens.

18:51These resources are unevenly distributed around the world. And it's hard if you don't have resources as good as that to get a look in. China, going back to the turn of the 20th century, dominated global tungsten supply. And the only time that that's really changed was during a period in the Cold War when tungsten was basically closed off from the rest of the world. As soon as Chinese tungsten was able to get into the world market, their mines are the highest grade mines. And there is just more of it there. Now, some investors outside China in tungsten, alongside the geopolitical argument, they would probably say, look, these mines have been mined for a century.

19:27One of the reasons China at this moment has export controls on tungsten, I think it's probably mostly geopolitics, but the defence of that that the Chinese government might have is that these mines are very old and we need to reorganise the industry because it's an underperforming industry. So there is a fairly scarce resource of this. It's about 85 ,000 metric tons a year is all the tungsten that's used. It's not a super exciting market because it's very expensive and because it's mainly used in places like tool shops and mines. Most of that stuff gets recycled. If you're in an auto tooling shop, once your drill bit gets worn out, it might get reground or you might just send it and it'll be recycled.

20:09So there's not a sort of huge ongoing demand surge for tungsten. It really sort of grows at the pace of cooling capacity worldwide. Can you talk to us about the market structure of tungsten as well? Because I know Joe said he didn't buy the tungsten cube as an investment. But if you had, I mean, you would have a hard time actually looking up the price of tungsten right now because it doesn't seem to have a forward curve in the way of a traditional commodity like oil or something like that. So if you're an investor trying to make a bet on a tungsten mine, it seems really hard to predict what your current returns are going to be, much less your future returns.

20:47I think that's absolutely right. And I think it's one of the biggest problems with critical minerals generally, because there's not a futures market, because there's no way of hedging your costs. With any mine, you are making capital investments right now for something that might only pay off in years five to 10. Now, if I'm doing that with copper, I can go to the London Metal Exchange or COMEX and I can have as many contracts as I want, setting the price of copper five years hence. And then I can take that to the bank and say, look, here's my operating costs. Here's the value of copper. Here's how much I'm going to produce.

21:22This is a bankable project. Very simple. Totally different with Tungsten. There simply is no futures market in this because it's such a tiny market. Most of the time, one investor I spoke to, I think he's been on a podcast before, actually. Alex Turnbull. He said sometimes it could be three. He said like tungsten, it could be$300 dry metric ton unit, which is the unit they use. It could be$3 ,000. $300,$3 ,000 each is a reasonable price for it because depending on the state of supply and demand of the market, the fact that China may suddenly close off supply and China has 80 % of supply and then you have most of the world fighting over the remaining 20%, any of these prices is viable.

22:03And that means that if you're stuck in the middle and most tungsten mines outside china are above that a ton level then you find it very hard to finance your mind no no banker will really lend money to you on that basis because they don't know what your revenues are going to be you know next year let alone five

22:21Tracy Alloway:years from now there's no forward curve in tungsten but we do have one ticker on the terminal which is tungsten held in warehouses in rotterdam and i said oh my god this chart just makes me want to cry. It was literally, it was three, probably about$300 for a ton when I bought it sometime in 2022. And it is over$3 ,000 right now. So if I wanted to, yeah. I should say that's$3 ,000 for this thing, this weird thing, which is a dry metric ton unit. It's actually about$400 ,000 for a ton of tungsten. Wait, wait, wait, actually, this is helpful. Great. So when I actually, so when I see that 3 ,000.

23:00Tracy Alloway:What is this? I like learning stuff like this. What do these prices even mean? So I had to spend like half a day trying to work out what this even means. So the price you're seeing is a thing called ammonium paratungstate, which is a compound of tungsten. And it's a nice, easily tradable form of tungsten. You can just put it in sacks and ship it around the world. And then I think you heat it and the ammonia comes off and you've got tungsten oxide, and then you can quite easily turn it into a lot of other things. And that is priced quoted in dry metric ton units, which a few critical minerals are quoted in these units.

23:36A dry metric ton unit contains about, I think, 7.93 kilograms of tungsten. So if it's$3 ,000 a dry metric ton unit, it's about$400 ,000 for a ton of tungsten. So that's why someone stole your cube. It's good money.