History is full of stories of booms and musts. Of technology disruptions. Of the collapse of entire economies when the tables turned. One such story appears in Thomas Hager’s book The Alchemy of Air. This is a fascinating history of fertilizers, the development of the Haber-Bosch process that transformed the industry, and the geopolitics that went along with it throughout. The economies of Peru and Chile went through incredible booms during the 1800s on the back of their ability to produce nitrates that were used in agriculture. And as surely as technologies come around to offset the rising dominance of a few economies, the Haber-Bosch process (for the production of ammonia, the most important fertilizer in the world), would eventually lead to the receding of Peru and Chile from international prominence.
Are there other such stories in the making? Perhaps lithium? Cobalt? In any case, I stumbled upon this interesting story from the book. So emblematic of the pattern of boom and bust in stock markets, on the back of commodity demand cycles.
John Thomas North, age twenty-nine, debarked in Iquique [this is in Chile, and a place which was a hotspot for nitrate mining] in 1871. He was one of thousands of British citizens who came to seek their fortunes in South America during the nitrate era. He had some training as a mechanic and a keen eye for business, and he started his new life in South America by getting into a surefire business: the shipping of water to Iquique from springs farther north. He familiarized himself with the nitrate trade as well, watching as desert properties were bought and sold, and speculating a bit himself if he saw an attractive deal.
Then came the war and the Chileans. The takeover of Iquique and the Tarapacá threw all previous ownership—all the deals that Peru had made—into question. In the confusion and uncertainty many owners were willing to sell cheap. North began buying. He worked closely with the new Chilean inspector of nitrate mills (another British-born émigré) and was soon making serious money, buying nitrate properties at distress-sale prices and turning them around, sometimes in the same day, for two, three, or four times as much. He advertised his success in London, where he used his growing personal fortune and portfolio of nitrate holdings to float loans to start companies like the Liverpool Nitrate Co. Ltd., which gathered British investors for more purchases. In the mid-1880s, nitrate speculation went wild in England, thanks in great part to North’s enthusiasm. During his increasingly opulent visits home, he described to the rich of his nation the enormous profits to be made by anyone smart enough to buy and sell chunks of the desert and shares in the refineries that made nitrate. It was an absolutely necessary commodity. Fortunes were there, in Chile, for the taking. Enormous investments were made in North’s companies. North built some refineries himself, and then sold stock in them. His investors began making 10, 15, 20 percent dividends in a single year. “The company promoter has only to whisper the magic word ‘nitrates’ and the market rises at him,” marveled London’s Financial News. Speculators started calling Chilean nitrate white gold.
…Then the bubble burst. Rampant nitrate speculation led by North pushed share prices well beyond the value of the land and mills. To keep returning high profits the refineries overproduced, flooded the market with nitrates, and held down prices. By the end of 1890 shares in nitrate companies were being sold for a quarter the price they had commanded a year or two earlier. One day North’s broker entered the London Exchange to find men piling copies of his latest company’s prospectus on the floor and setting them on fire. North kept telling nervous investors that nitrate sales naturally fluctuated, that the core value of his enterprise was buttressed by the value of his railroads alone, and that the long-term future was bright. But even North could not single-handedly keep the nitrate market afloat. As precipitously as they had gone up, the value of nitrate investments went down. North, his fortune depleted but not gone, retreated into private life.
The book is a fabulous read. Some of my snippets from the book are here.