Big Opportunities from a China Exodus |
Thursday, 8 February 2024 — Adelaide, Australia | By James Cooper | Editor, Mining: Phase One and Diggers and Drillers |
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Twitter (X): @JCooperGeo [6 min read] In this issue: China’s dominance of processed materials creates exciting opportunity for resource investors Bill Bonner: Full speed ahead on election year spending… |
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Dear Reader, Last week we looked at the latest developments in China’s real estate market woes. If you weren’t aware, Hong Kong courts ordered the liquidation of the country’s largest property developer, Evergrande Group. The announcement offered high octane fuel for the China’s bears…headlines were again flashing red on China’s economy. But this is a worn-out narrative. The story has been rehashed time and again over the last 10 years. Whether it’s stimulus, monetary easing or targeted government policies, China’s officials continue to extinguish spot fires in the world’s second largest economy. And that’s the beauty of running an authoritarian state! Pulling the economic levers works when citizens oblige and accept orders. Yet, we’re told China’s economy still sits on the brink. But here’s the key point… Other than civil dissent (unlikely in China), the real threat in an authoritarian state won’t come from within, it’ll arrive from abroad. Chinese officials are powerless to stop external pressures. That’s what the China bears, focused entirely on the country’s real estate market, are missing! China’s Biggest Risk Last year, tech giant, Apple, quietly announced a $300 million investment in its Vietnamese hub. A move some experts believe is Apple’s pivot AWAY from China. But this is not new. Manufacturers have been exiting China ever since former US President Donald Trump launched a trade war with the country back in 2018. Tesla recently announced a new gigafactory in Mexico as it looks to reshore manufacturing closer to home. And according to Business Insider, it’s not just multinationals shutting up shop…Chinese-owned enterprises are also heading for the exits. China’s manufacturing dominance took decades to assemble, but it may only take a few years to dismantle. But another important factor is the country’s dominance of REFINED critical materials; lithium, graphite, cobalt, copper, rare earths, steel, among many others! It’s one of the reasons the US installed a framework that attempts to eliminate China’s control of the downstream supply of raw materials. Known as the Inflation Reduction Act (IRA), the law penalises companies sourcing Chinese raw materials. The building blocks that allow global manufacturing to function. Yet, the US government clearly seeks to destabilise global trade by fragmenting these supply chains. Given the US still wields enormous power on the world stage, investors should be looking ahead. Obviously, some countries will benefit massively from this shift…South-East Asia, India, Mexico, and Eastern Europe. Absorbing manufacturing capacity from China. But consider the vast infrastructure needed to build-out these NEW hubs. To get some sense, recall the last commodity boom from the early 2000s…where manufacturing shifted from west to east, specifically to China. Will we see another CAPEX boom and demand for raw materials as new hubs get built? It’s certainly interesting to consider. But don’t forget the other part of the equation…China’s dominance of processed minerals. In my mind, that presents the most exciting opportunity for resource investors. The big winners from a China Exodus Traditionally, miners across the globe have put all their effort behind digging up ore and shipping it to China for processing. It’s enabled China to become a powerhouse in the global supply chain of processed raw materials. But the world’s largest manufacturers are on notice…the US government is committed to ending China’s dominance. Recognising the opportunity, some developers have incorporated fully integrated processing into their feasibility studies. But that won’t be an easy feat. These refining and processing plants are highly sophisticated and capital intensive to build. They require years of testing using pilot plants, which are then customised to suit the particular characteristics of the feedstock ore. That extends development times and costs! Early movers have already demonstrated how difficult this task is… Australian owned Lynas [ASX:LYC], installed the world’s first rare earth processing facility outside China. But it has been riddled with problems. Breakdowns, lack of technical expertise, spats with the local government…it led to the closure of its Malaysian facility last year. But these problems won’t slow the pivot away from the Middle Kingdom, especially if the world’s most high profile China critic, Donald Trump, resumes his presidential post later this year. Manufacturers are facing the daunting task of stepping away from China’s supply of refined raw materials and the deadline is fast approaching. So, what’s the investment angle? Undeterred by a critical mineral sell-off last year, mining insiders continue to pivot toward this trend. And really, who are we to question the billionaires that have made their fortunes from this industry? Recall the criticisms fired at Australia’s iron ore magnate, Andrew Forest, in the fledging years of the early-2000s commodity boom. At the time, his ambitions of becoming a major force in the iron ore market were ridiculed…the CAPEX commitment was a major hurdle to overcome. But that changed rapidly on the back of rising iron ore prices. And with history rhyming, critical metal developers are again faced with similar challenges. It’s why I like to say critical metal stocks are the iron ore developers from 2001… Sitting at the door of enormous opportunity but facing massive barriers to entry. Just like it did with iron ore in the early 2000s, expect the downbeat sentiment to shift rapidly in line with rising prices. This is how commodity cycles work. And this is how unfathomable capex finds its way into new projects. But there is another strategy that could work if this trend plays out in the years ahead… Follow the companies tasked with building and maintaining all these downstream facilities. In other words, the mining service stocks set to capture massive contracts from the miners looking to value add their ore. That’s what our latest Diggers & Drillers recommendation seeks to achieve. A tectonic shift in global trade is approaching and commodities sit at the heart of it all. To access all the details, you can do so here. Regards, James Cooper, Editor, Mining: Phase One and Diggers and Drillers James Cooper has been a working geologist in mines across Australia, Canada, and Africa since the early 2000s. He’s led the operations of tiny explorers through to huge producer outfits. He’s seen booms and busts firsthand and he also understands the cyclical nature of individual commodities. For example, James was right there when Barrick Gold launched an enormous $7.5 billion takeover bid for Equinox. That was the peak of the last cycle. With his background as a geo and finance professional, he brings a unique insight and experience to Fat Tail Investment Research. He writes the broader resource-focused investing letter Diggers and Drillers and the ultra-speculative explorer-focused trading service Mining: Phase One. Advertisement: BREAKING: What’s this tiny gold explorer just discovered? It could be the most significant gold find in decades... Get the full story here |
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| By Bill Bonner | Editor, Fat Tail Daily |
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[3 min read] Dear Reader, Here’s a shocker. A high government official — Jerome Powell — is trying to warn Congress that it is headed over a fiscal waterfall. Business Insider: America is racking up dangerous amounts of debt because of its excessive spending, and future generations are likely to suffer the consequences, Jerome Powell said. ‘The US federal government's on an unsustainable fiscal path," the Federal Reserve chair said in a "60 Minutes" interview broadcast on Sunday. "The debt is growing faster than the economy." Fiscal deficits over the past four years alone have totalled about $9 trillion, which has helped to more than triple the national debt to a record $34 trillion in the past two decades, Treasury data shows. ‘Unsustainable’ means it can’t go on. But it’s already gone on for a long, long time. Since 1970, US GDP rose from $5 trillion to $25 trillion — a five times increase. US debt meanwhile rose from $350 billion to $34 trillion — or nearly a 100x increase. This will not come as a shock to anyone. Everyone knows it. But it has gone on for so long, most people — if they think about it at all — must think it is perfectly sustainable. After all, it’s been this way for half a century. A Trillion Here… What is new about this…is not really new at all. It’s just the pattern of fiscal tomfoolery holding steady. It begins with small deficits….allowing spending to rise too. It wasn’t until 1982 that US debt went over $1 trillion. It took another 27 years, until 2009, to increase the debt by $10 trillion. Gradually the deficits increase…and then, all of a sudden, they are mammoth. From 2009 to today — just 15 years — the debt has increased by $22 trillion. And now, based on the first five months of this fiscal year, the deficit is headed for around $2.5 trillion…which will be added to the national debt. What Chairman Powell is signalling is not a change in direction, but a change in speed. The direction was set in 1971 when the US switched to a fake money. It was slow going at first, unlearning all of the lessons of the real money world. The wisdom of countless generations had been distilled as instincts: …a penny saved is a penny earned… …waste not, want not …a borrower nor a lender be… All of this ‘common sense’ had to be replaced with uncommon new habits. Balance the budget? Cut out unnecessary spending? Turn the lights off when you leave a room? Who does that anymore? In this new and altogether remarkable world, deficits didn’t matter. Nutty? Yes. And finally, someone — other than ourselves — is spreading the alarm. A Trillion There… Alan Greenspan. Ben Bernanke. Janet Yellen. None of them thought debt was worth mentioning. And so, while the men and women at the helm changed…no course correction was made. The ship just went further and further towards the lip of the financial world, where economies plunge into chaos and catastrophe. And now what? This warning will come like a fire-alarm test in a cruise ship. No way are people going to go out onto a cold deck in their underwear. ‘The ship has never sunk before,’ they’ll say to themselves; ‘it won’t be this time either.’ Meanwhile, it’s full speed ahead. Cap’n Joe Biden will spend as much as possible in preparation for the November election. Money for Israel. Money for the Ukraine. Money for the chip industry. Money for the firepower industry. Money for DEI and WTF. Money for everything. Money for everyone. The money is already flowing all over the place. Tickets to the Superbowl, for example, are edging towards $10,000. But wait. What if Mr Trump wins? Ahem. The Other ‘T’ Word This is the same Donald Trump who pestered Jerome Powell to lower interest rates…to make it easier to borrow…back in 2017. And this is the same Donald Trump who ballooned up the biggest deficit in US history — over $3 trillion. He now says that if he is elected, one of his first acts will be to fire Jerome Powell. Barrons: Trump Says He Would Replace 'Political' US Fed Chair Powell In an interview published Friday, Trump accused Powell, who he as president first appointed to run the independent US central bank, of being "political," suggesting Powell may move ahead with interest rate cuts to help the Democratic party win reelection. "I think he's going to do something to probably help the Democrats," Trump said in an interview with Fox Business published on Friday, referring to the upcoming presidential elections in November. Cutting rates is just what Powell has not done. Yet. Instead, he said he wanted to see inflation firmly at his 2% target level before cutting rates…and he has warned Congress and the public that this borrowing, printing, and spending will have to be brought under control. But Trump is right; if he sticks with his positions, and really wants to bring overspending under control… …Powell will have to go. Regards, Bill Bonner, For Fat Tail Daily All advice is general advice and has not taken into account your personal circumstances. Please seek independent financial advice regarding your own situation, or if in doubt about the suitability of an investment. |
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