Ore and More

The new barrier to entry is the environmental license to operate. Okay, that seems like a simple statement, but whenever I look at industries that interest me–and I do not mean mines, but actual factories–the single largest barrier to entry seems to be the license to build the plant. This, coupled with at “not in my backyard” (NIMBY) attitude toward many factories, is resulting in some serious, unintended, and largely ignored environmental consequences.

“Not in my backyard,” said one little hen to another of a new steel mill. “Well, we must make the steel in China and import it then,” replied the second little hen. The first little hen can drive off in her Toyota Prius and feel like she has won a major battle, but she hasn’t really. In her backyard, the factory would have been built to stringent Western environmental impact standards. In China, the factory will be built to no standards.

Now, this transplanting of factories will not happen in some cases. Whether it does or not wholly depends on the weight-to-value ratio of the goods being produced. Gravel, for example, is very hard to ship, It has a value of around $10 per tonne, or $20-30 per cubic meter. It is not going to travel very far without the freight costs ending up eating the margins on the product. On the other extreme, finished computer products, which have values in the $10 million per cubic meter, will go anywhere there is money to buy them.

So a corollary emerges from the convergence of NIMBY attitudes, the environmental license barrier to entry, and weight-to-value ratios. If a product has a good value-to-weight/density ratio, it can be made anywhere and then will move to the land of the highest selling price because the freight costs less than getting the environmental license. If a product has a low value-to-weight/density ratio, it might still move, but it won’t go far because the freight costs will more quickly outweigh the cost of the local permit.

An interesting conundrum thus develops when the NIMBY attitude and environmental license barrier to entry are paired: this pairing won’t move out all factories, and the factories that do move may cause far more damage in their new location than they would have in the West.

Steel is a “not in my backyard” sort of product. It, however, can travel. An oversupply anywhere in the world will quickly travel to the backyard of the people who do not make it. Even if, for example, it is impossible to get a permit for a new blast furnace in the UK, one can be built in India. The product from that one in India, if it cannot be sold in India, will wash around the world as quickly as it legally can. This ease of travel is, in fact, the steel market’s weakest link. A 3% oversupply in China will result in a global meltdown of steel prices.

The funny thing is, for a NIMBY product like steel, the third world is only too happy to make lots of plants to make it, knowing they can sell it wherever they like if they make too much. And in making these lots of plants to no standards, they are doing lots of harm. So all of you environmentalists, next time you boycott that oil refinery in the United States, remember you are just going to support a new one in India, one that, I can assure you, will do much, much more environmental damage.