The story so far . . .

I’m checking my non-existent stocks (read: crash boom ba) due to some other good news I got this week and a funny thing happened on the way to the technical charts. One of them, Rentech, showed a ton of interest today. Not only that but apparently there is a ton of buy orders waiting for the morning on this stock all on rumours that China wants into Rentech’s Fischer-Trophsch process for converting coal into clean burning diesel and jet fuel. If its true that is big news.

For a run down on why this important – check this article by Dan Schrag. The short version: even if every car on the planet converted to electric – trucks, planes, and cargo carriers can’t. There is no current substitute for diesel or aviation fuel which means we still need oil for at least the next 50 years until a substitute can be found.

However . . . this got me thinking – why is China buying into Rentech.

While the CIA World Factbook identifies China as being the world leader in coal production, they are not exactly at the head of the pack in terms of coal reserves. Although the US prides itself on it’s share of the world’s coal reserves, Russia is really the heavyweight in this area.

About 10 years ago when I was studying under Dr. Joe D’Cruz and had the opportunity to take an MBA program with Dr. Alan Rugman, I was introduced to something they called the Rugman Double Diamond model of country competitiveness. This was essentially an extention of Dr. Michael Porter’s Diamond framework. Essentially, what Rugman argued was that to understand the competitive position of an industry within a country you need to express it in terms it ‘factor endowments’ with the countries in which it trades on a regular basis.

So for example, it is difficult to discuss the competitiveness of the Canadian economy without establishing its relationship to the US economy at the same time because over 1/3^rd of all international trade from Canada occurs with the US. The same holds true for a number of other country pairs such as Germany and Austria.

For all of the potential economic energy stored in China, and despite what Goldman Sachs has to say on the subject, surpassing GDPs is not the yardstick measure of true competitiveness. Let’s put this into perspective – China has four times the population of the United States. This means that an extremely modest standard of living increase to $12,500 PER FAMILY (not per person) would be enough to eclipse that of the US economy currently. That is really not a lot.

Essentially however what we are really talking about is a redistribution of wealth within the global economy. The US while having one of the largest standars of living in the world is also some $15 trillion dollars in debt. Currently China appears to be the largest holder of that debt which if left unchecked could eventually bankrupt the US and throwing multiple economies into major crisis. This isn’t like Russia going bankrupt as even at its height as a super power, the USSR wasn’t as integrated into world commerce as the US was and still is today.

One solution obviously is to readjust the balance of trade between the US and its trading partners, like China, in order to level the distribution curve of wealth. We already know from the billions of dollars paid to the Middle-East for oil that there is a huge market for oil reserves. We also know, because there is no currently commercially viable substitutes, that diesel for infrastructure is going to be very attractive for at least the next 30-50 years, maybe longer.

So here you are – you are China. You have a massive inexpensive labour force. You have access to cheap coal. You are holding a debt obligation that there is a good chance will probably be defaulted on, and you have a trading partner that is as addicted to oil and willing to pay for it especially if it can be delivered at a reasonable price. Its sort of like when FTD went into online shopping for floral arrangements. They already had a willing customer base that was addicted to the product and the cost of the delivery channel was already buried in the price so long as your customers don’t start shopping locally. The term “shooting fish in a barrel” comes to mind.

Hmmmmm … this starting to make a bit more sense now when you consider that Rentech’s Fischer-Tropsch process is just barely cost effective on US soil but would certainly be profitable if the technology were exported to an area where land, labour, and materials were substantively reduced. The distances to ship coal between Russia and China are not that different compared to the continental US.

Beyond this however is the fact that in most double diamond relationships, it is the country that is producing the finished goods that are the ones that drive the economic engine, not the raw materials producer. This seems to suggest that any type of Russia-China alliance with regards to coal export and processing would tend to favour China’s economy developing into a double-diamond framework within the energy industry and perhaps supplanting that of the Middle East for the first time in decades.

This is not to say that Rentech is going to change the world but this potential move by China would seem to indicate that there are certainly plans in place to leverage resources and relationships in Oceania in order to undercut a potential move by the US to get control over its own oil reserves.

Essentially the race is on to see whether the US has the where-with-all to take control over its own oil reserves future or whether it would be willing to give up that technological advantage to China and Russia thereby further weakening its economic positioning. To me this isn’t just about a tiny company and a couple of successful tests of synthetic fuels for US military aircraft. This is about who will be in charge of the economy in 50 years and how the global power base may eventually shift within that context. While it doesn’t seem like much the implications of a potential acquisition of technology like this by China I think speaks volumes as to strategic positioning in the longer term – something the US doesn’t seem to do well and for which China is can be masterful at given the right opportunities.

Should be fun over the next couple of years to see if anyone is awake in the US to take notice.

— Kevin Feenan