CNN tells us in breathless tones that there’s an asteroid out there worth $10 quintillion. Most cool – and it’s also drivel. Mind gawpingly ignorant drivel at that.
Global GDP – just as a number to use among friends – is $100 trillion a year. That’s the value of everything produced or, equally, the value of everyone’s consumption or, equally again, the value of everyone’s incomes. Production equals consumption equals incomes, d’ye see? So, we’ve, at maximum, if we decide not to eat or anything that year, $100 trillion to spend on asteroid derived metals. If we saved up for century then we’d have 100 times $100 trillion, which is $10 quadrillion. Which is 0.1% of the $10 qunitillion we’d need to buy the asteroid. We’d have to save up for 1,000 times a century, or 100,000 years, to buy that much metal.
Given that we’re not going to stop eating for 100 millennia the asteroid ain’t worth that, is it?
It is possible to dig a little deeper and I have done so, several times, in hte past. The really important point being in the very last line below.
How Can the Sci Fi Billionaires’ Planetary Resources Make a Profit From Mining Asteroids?
We’ve now had the announcement of the business plans of Planetary Resources. Enough to excite everyone who read Heinlein or Jerry Pournelle as a teenager. But the big problem is how might they actually turn a proft? To which the answer is manipulation of the futures markets.
an asteroid 7 metres in diameter and weighing 500 tonnes could contain as much gold, platinum and rare earth metals – such as rhodium
As ever when matters get technical the newspapers don’t get it. Rhodium is a platinum group metal, not a rare earth.
You can, to a certain (not very high) level of accuracy, divide asteroids into three types by composition. The two that are of interest are the water bearing ones which Planetary Resources intends to mine to produce water in space then the metallic ones. These are nickel iron and it’s thought that they will be high in platinum group metals (platinum, palladium, osmium, iridium and rhodium). Three of these are used in large volumes here on Earth and have high prices: in the $50 million to $150 million a tonne level.
Bringing down 100 tonnes or so of each of these, if they really can be found and mined up there, would defray quite a lot of costs if not actually make a profit. Leave aside though whether it is technically feasible, which it probably is at some level of cost, and consider the economic feasibility. For sadly it fails at this point.
These metals have such high values because of their rarity against the value we can extract from their use. Having a huge increase in supply doesn’t change the value we can extract from their use: but a huge increase in supply will definitely change their rarity and thus collapse their price. Which means that mining asteroids for them only works in economic terms if you either don’t mine very much of them or you don’t bring them back to Earth. Neither of which will make you much money to defray the enormous costs.
Which leaves the company in something of a bind. If they cannot create the technology to mine these metals in large quantities then they cannot make any profit. But if they do create the technology to mine them in large quantities then they also cannot make any profit because large supplies won’t be worth very much.
However, there is a way out of this for the company. Use and manipulate (entirely legally of course) the futures markets. I wouldn’t say this is an entirely serious suggestion but it is indeed possible.
So, imagine that they have reached one of the nickel iron asteroids, it is high in the platinum group metals, they can mine it and they can deliver those pgms to Earth. The moment everyone knows that there is some hundreds of tonnes of these metals on the way down the price will collapse. The answer? Sell the metals in advance, through the futures markets. Get today’s price for delivery in the future.
In fact, sell many more futures than the amount of metal which is to be delivered: go short. As an example, say platinum is $2,000 an ounce (not far off the real price, $62 million a tonne). Planetary Resources is going to deliver 100 tonnes. But instead of selling $6 billion’s worth of platinum for delivery in three months, sell 10 times as much: $60 billion’s worth*. When that 100 tonnes splashes down, in fact when the market knows that the 100 tonnes is likely to splash down, then the market price will fall. Substantially but for illustration we’ll say to $200 an ounce.
The company then delivers that 100 tonnes for which it is paid the $6 billion agreed on those futures deliveries. It still owes the market another 900 tonnes but it can now cover its short at $200 an ounce having sold the futures at $2,000 an ounce. Use the $6 billion that’s going to be incoming to do so and what do we have at the end?
The company has $60 billion incoming from having sold futures. It has delivered 100 tonnes at $6 billion and covered the short for that $6 billion. Net profit $54 billion minus the cost of the space program. Which is pretty good really.
We can take this further as well. At $200 per ounce for platinum almost all of the global platinum miners will go bust. So will the refiners, the drop in value of stocks going through the refineries will see to that. So, start using that $54 billion to buy up all of these now bust companies. For entirely peanuts, for they’re bust, entirely undermined by a new production technology.
However, this leaves Planetary Resources with something of a problem itself. Just for giggles you understand, we assume that mining asteroids doesn’t in fact make a profit in itself. Certainly not at the $200 an ounce that the delivery has caused the price to collapse to. So, after having bought up those now bankrupt platinum miners and also gone long (ie, bought futures contracts for delivery in the future of platinum at today’s prices of $200 an ounce) the company announces:
“Well, yes, we did deliver 100 tonnes. But we’ll not be delivering any more. Because we can’t make money doing that.”
At which price the platinum price soars but the company owns the Earth based platinum miners plus a lock on future deliveries of the metal at absurdly low prices. A really rather large profit is gained from this manouvre all easily financed by the earlier covering of the short sales.
In fact, if we spiral off into real implausibility, the company can make this profit without in fact doing any mining of pgms or delivery of them. Go ahead with the satellite launches, appear to be doing all the work. Announce that the first deliveries will be coming soon having positioned oneself in the futures market properly. The price collapses ahead of delivery, the position is covered, everything proceeds as above and then the announcement is made:
“Well, we were going to deliver 100 tonnes but the price collapse has meant we’re not going to.”
The vast profits are made still, even if not one single ounce has ever been or ever will be mined or delivered.
Yes, yes, I know, all entirely fictional. It’s not going to work out like that and the reason is that even if they did try to manipulate the markets in that manner they wouldn’t in fact be able to. There’s just too many people with too much information to be able to fool the futures markets in that manner.
However, the whole business plan that they are in fact following has been trailed in various of those science fiction stories that the investors and I clearly and obviously devoured in our youths. And at least the first part, the selling short before a huge delivery of mined asteroid material, was the major plot device of a very bad sci fi novel whose name I fortunately cannot now remember. So who is to say that some of the investors did not read the same schlock I did?
* The futures markets may or may not be liquid enough to absorb these sums. This is all entirely illustrative, nothing more.
From The Register:
Isn’t it exciting that Planetary Resources is going to jet off and mine the asteroids? This is every teenage sci-fi geek’s dream, that everything we imbibed from Verne through Heinlein to Pournelle is going to come true!
But there’s always someone, isn’t there, someone like me, ready to spoil the party. The bit that I cannot get my head around is the economics of it: specifically, the economics of the mining itself.
In terms of the basic processing of what they want to do I can’t see a problem at all, just as all those authors those years ago could see how it could be done.
Asteroids come in several flavours, and the two we’re interested in here are the ice ones and the nickel iron ones. The icy rocks, with a few solar panels and that very bright 24/7 sunshine up there, can provide water. That’s the first thing we need in abundance if we’re going to get any number of people up off the planet for any appreciable amount of time. And we’d really rather not be sending the stuff up out of the Earth’s gravity well for them.
It’s also true that those nickel iron asteroids are likely to be rich in platinum-group metals (PGMs). They too can be refined with a bit of electricity, and they’re sufficiently valuable (say, for platinum, $60m a tonne, just as a number to use among friends) that we might be able to finance everything we’re trying to do by doing so.
All terribly exciting, all very space cadet, enough to bring tears to the eyes of anyone who ever learnt how to use a slide rule and, as the man said, once you’re in orbit you’re not halfway to the Moon, you’re halfway to anywhere.
Except I’m not sure that the numbers quite stack up here. I’m sure that the engineering is possible, I’m certain that it’s all worth doing and most certainly believe that we want to get up there and start playing around with other parts of the cosmos over and above Gaia. But, but…
Wrap your eyeballs around these fine figures
Start from the size of the platinum market. This is some 6.2 million ounces a year. 6.5 million ounces of virgin material, that is: given the value of the metal some to all of past usage is recycled as well. At our $2,000 an ounce price guide, that gives us a market value of some $13bn a year. That certainly seems large enough to keep a space programme running. (Do note, I’m ignoring palladium, a similar sized market, and rhodium etc, which are much smaller ones. They don’t change the final conclusion by their inclusion or exclusion.)
Except that’s not quite how markets work. There are demand curves as well as supply ones: sure, a nice high price will encourage new entrants like Planetary into the market. But in order to shift all this new material, prices will have to decline. The important question therefore is how elastic is the market? How far, if at all, will the price fall if a new supplier enters?
From a recent trade report we’ve seen recently, an extra 250,000 ounces has come onto the market. This has led to a 25 per cent fall in the price of platinum. Ah! Price is very sensitive to an increase in supply, then. Or, if you prefer, demand is very insensitive to a change in price. They’re the same statement, really.
Now it’s true that such sensitivities do not stay the same as you move up or down a supply or demand curve. As our little economics lesson for the day, think about the demand for water: if you’re getting less than one litre a day you’ll pay just about anything at all to get more. When you can have a swimming pool full just by turning on the tap then you’ll not pay much for each marginal unit. And such demand curves can invert too: when that pool overflows into the basement you’ll happily pay to have the water taken away, a negative demand for water.
But back to PGMs. We have something that we know the demand for, in the short term at least, is relatively insensitive to price. An increase in supply of as little as 250,000 ounces – seven metric tons – will drive the price down by a quarter. So instead of the $500m they were hoping for, our lads would only (yes, I know, “only”) get $375m. Can we run a space programme on that? The more platinum they try to bring down from space the lower the price gets, and so even more has to be brought down to finance the whole shebang.
Given this problem I thought I’d go and ask Planetary what they thought about it. And I got the answer I was hoping not to hear attributed to the organisation’s co-founder Eric Anderson:
If it turns out that we are able to bring back many times of the PGMs that are now used annually here, then we can create a situation of abundance. In this case, if the metals become a 100 times cheaper, then perhaps there will be annual sales quantities will be a thousand larger therefore both the market size of PGMs and their value to society will have gone up by a factor of 10.
The utility of PGMs is diverse from medical devices to catalytic convertors to micro-processors, and more – platinum and other PGMs have fabulous electrical properties and would have many, many uses, if only abundant.
You asked if the markets are large enough to support the mining costs – yes, especially if we are able to bring back so much that the price goes from $1,500/ounce to $15/ounce.
Ah, no, really not what anyone in the mining finance industry wants to hear at all. In fact, I ran this argument past a buddy who evaluates mining companies for inclusion in the London Stock Exchange’s AIM. After the coughing and splutters had subsided to mere giggles he said that there is no way at all that he would agree to finance on this basis.
The point being that, yes, of course we all know that at some point in time having lots of platinum around will mean that lots of people will use platinum. There will almost certainly be societal benefits from this happening too. But that’s not how you finance a company, from societal benefits. You finance a company from that fraction of those societal benefits you can capture.
An economist would go further: our calculation above about prices was looking at the short-term elasticity of demand. The long-term one will be very different indeed. But while we all recall Keynes saying “in the long run we’re all dead”, he also said “the market can stay irrational longer than you can stay liquid”. The demand for thousands of tonnes of platinum at $15 an ounce may well come about, but it may well also take 20 to 30 years to arrive. And I’m seriously unconvinced that anyone can finance a space project for that length of time from private pockets while awaiting the arrival of that demand.
To sum up… in fact, I wish these numbers would sum up
As an aside, I know a company trying to finance the production of 80 tonnes a year of a different metal. There’s currently demand for about 10 tonnes globally per annum. We can all see a possible further 20 tonnes of demand if supply were available. But they need to produce 80 tonnes at current prices to make the sums add up. Having 50 tonnes a year of oversupply would make the 30 tonnes they could possibly sell worth spit. It’s not really a surprise that they are desperately struggling to find finance.
So, as I say, I’m all in favour of the Planetary Resources adventure going ahead. Private enterprise in space, sure! Explore the asteroids, get people up there? You betcha. But I don’t think their numbers work at all so I’m very glad they’re doing it with their money, not yours nor mine.
I did have one further question for them as well. Space law seems to be under the auspices of the United Nations. We’ve therefore, obviously, ended up with the normal sort of 1960s peace’n’love hippy nonsense. Anyone’s allowed to make commercial use of the place.
But there is no concept of private property. You may discover a nice nickel iron asteroid, but you don’t own it. You can’t own it, stake it nor claim it. Anyone else who can get there is able to come and mine it with you.
Let’s say Planetary is able to get to an asteroid worth mining, despite all of the above, and manage to make out in one piece. But as soon as they’ve proved it’s possible (why, says Mr Apple, “how nice to see you here Mr Samsung!”) then the plucky biz has no legal method of exclusion.
At which point we’ll have several outfits shipping hundreds to thousands of tonnes of platinum back and that would really screw the economics of the project.
By the way, Anderson added:
We would welcome competition in the industry, and the legal structure will be evolving.
Guys, I wish you all the luck in this little blue marble of ours, but I do think this is best described as an adventure, not a business.
From Forbes again:
No, Asteroid 2012 DA14 Isn’t Worth $195 Billion, Whatever Deep Space Industries Says
This is one of the petty annoyances of actually knowing what you’re talking about on any specific subject. Finding people who aren’t as specialist as you are making a hash of a claim in your field. So here’s today’s petty annoyance for me:
The pint-sized – in astronomical terms – asteroid that’s scheduled to buzz the Earth this Friday may have a street space value of about $195bn.
“Unfortunately, the path of asteroid 2012 DA14 is tilted relative to Earth, requiring too much energy to chase it down for mining,” say the wannabe space prospectors at Deep Space Industries (DSI), undoubtedly disappointed to watch that $195bn sail back off into space.
No. The value of any lump of rock is not the value of the metals trapped within it. It is the value of those trapped metals minus the cost of untrapping them. Thus that calculation of value by Deep Space Industries is simply wrong.
So, for example, a mountain of iron ore out in the Australian Outback is not worth the same as that same tonnage of iron ore sitting outside a steel plant in China. We must subtract the costs of tearing the mountain apart, grading the ore, building a railroad to the coast for it, the cost of the ships to transport it to China and, crucially, the cost of the finance to do all of this.
Similarly, those reports from a few years ago that Afghanistan has a trillion dollars worth of lithium, or copper, out there in the boonies. No, it doesn’t. We must calculate the cost of extracting and refining it which, in that part of the world at least, would presumably include a fairly serious security bill.
It’s the same with our asteroid. That $195 billion value rests upon two assumptions. The first, that there are no costs associated with going up there and mining it. The second, they are assuming the value of those materials in space, not the value down here. And they are calculating that value by taking the price on Earth and then adding the cost of boosting it into space.
On the first point, the costs of actually mining that asteroid. Well, at present, no one can actually do that. It’s simply not possible. Thus the price of mining it is infinite. $195 billion minus infinity is less than nothing.
On the second point, well, no one is able to make use of those products up in space at present, there just is no market at all. So even if point one fails, the value is still zero for that asteroid: for there just ain’t no one to buy it.
2012 DA14 isn’t worth $195 billion. It’s worth nothing. Sorry, but it is.
A useful little guide to the metals and minerals business for you. There’s dirt and there’s ore. Ore is where the things that you can extract from the dirt are worth more than the cost of extracting them. At our current level of technology asteroids are dirt, not ore.
That last line or two being the truly important point. Currently asteroids are worth nothing.