Thursday, 20 June 2024

By James Cooper Editor, Mining: Phase One and Diggers and Drillers

Twitter (X): @JCooperGeo

[6 min read]

Dear Reader,

Few people in the West acknowledge how effective China’s policies have been in securing global supply chains of critical metals.

As Western nations ignored investments in commodities throughout the deep bear market years between 2012 and 2020, China capitalised, buying overseas assets for a fraction of their early 2000 boom-era prices. 

As commodity prices sunk, China cultivated its raw material supply chain by investing in frontier locations throughout Asia and Africa.

It has been the West’s lack of foresight that’s left it immensely vulnerable to future disruption.

However, it’s not so much the mining aspect that’s allowed China to dominate critical metal supply chains… it’s the country’s move to develop downstream processing.

China is known for harbouring substantial mineral wealth, but its installation of refining and processing capacity has enabled it to monopolise the periodic table of elements.

For better or worse, the rise of China’s critical metal dominance shows how effective authoritarian governments CAN be in advancing national trade interests.

But with that, the West has been caught short.

Whether it’s pivoting away from fossil fuels, building up defence munitions, tech manufacturing, or simply maintaining relevance in the global economy, nations must secure stable supply chains of raw materials.

And its critical metals, with limited geographic distribution, that will be key.

So, how does Australia stack up in this future fragmented economy?

Cast your mind back to March 2024… Australia’s resource minister, Madeline King, made a well-profiled trip to the US and Canada.

Here’s the official line from King’s visit (emphasis added):

‘Australia, Canada and the United States have a shared commitment to market transparency and diverse supply chains for critical minerals, and a shared interest in promoting recognition of the high environmental, social and governance standards in our respective resources sectors.’

And this:

‘My talks in Canada and the United States will also discuss disruptions in global markets and any opportunities to address market uncertainties.’

It doesn’t take an expert to identify that the US clearly wants Australia and Canada to fill the looming critical metal shortfall as trade with China invariably breaks down.

King makes it abundantly clear that Washington is fully behind Australia’s role in developing a downstream supply of minerals.

In fact, less than a week after King returned from her ‘high-level’ meetings in Washington, the Australian Government indulged in a critical metal spending bender…

This culminated in the Federal Government team announcing a $840m package to fund Arafura’s [ASX:ARU] rare earth project in the Northern Territory. A commodity in which China accounts for around 80% of global supply.

That was followed by a further $185 million for Renascor Resources [ASX:RNU], which owns Australia’s most advanced graphite battery development project.

Again, according to some sources, China dominates this commodity, accounting for up to 90% of global supply.

But the cash splurge didn’t end there…a company known as Alpha HPA [ASX:A4N] received a $400 million package to build its ultra-high-purity alumina project in Queensland, Australia.

A commodity used in advanced tech, including semiconductor manufacturing.

So, what does all that mean?

It doesn’t take a crystal ball to see that the US is bracing for major disruption in China’s supply of critical metals. Who knows what America sees on the horizon here… Is it frontrunning an escalation in hostilities? 

In my mind, nothing about this looks particularly good for global peace.

In May, the Biden Administration increased tariffs on numerous critical metals supplied by Chinese firms.

I have no doubt Washington is pushing its agenda and telling King to do whatever it takes to get Australia’s critical metal projects online. Australia and Canada are set to play pivotal roles in the US’s ambitions to reduce reliance on China.

Following the Washington visit in March, Australia’s Federal government clearly targeted advanced developers in its multi-million cash splurge—companies with the capacity to enter production within five years.

That should be another clue as to when we should expect a ramp-up in hostilities between these two major superpowers.

But here’s another angle…

Trade fragmentation = higher inflation

A 1970s-like inflationary episode looms large amid escalating trade tensions. In fact, there are very few winners in this type of economic set-up.

That’s what the 1970s showed.

But are we really embarking on another decade of decimation?

It’s certainly worth considering.

And no matter how dire the future may seem; there are always opportunities for investors.

Amid rising inflation, war and trade tensions, the 1970s offered one of the best periods on record for commodity investors.

In fact, the commodity surge during this time rivalled the early 2000s boom. According to Jeff Currie, the former head of commodities at Goldman Sachs, copper prices reached as high as US$15,000 per tonne in 1968, adjusted for inflation!

Today, copper sits below US$10,000 per tonne.

While this presents a challenging time for investors, there are ways to mitigate the risks.

I believe commodities will be your closest ally in weathering the looming inflationary storm.

That’s why we’ve just finished compiling a comprehensive report detailing which investments you should consider targeting as we brace for further hostilities and trade tensions.

To access all the details, click 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.

By Bill Bonner Editor, Fat Tail Daily

[3 min read]

Here’s the headline news. The Washington Examiner: 

‘The federal budget deficit will be nearly $2 trillion in fiscal 2024, the Congressional Budget Office estimated Wednesday.’ 

CNBC: 

‘A blockbuster May jobs report showed the U.S. economy added 272,000 jobs last month, well above the Dow Jones’ forecast of 190,000. Meanwhile, the Bureau of Labor Statistics reported last week that consumer prices in May remained unchanged, and even fell slightly on an annual basis. This dynamic — a heating job market and cooling inflation — is in part the result of increased inflows of immigrants. The May jobs report found that the health care, government, and leisure and hospitality sectors saw the most growth.’ 

Isn’t it great, dear reader? More jobs. Lower wages. Less inflation. And a bigger deficit; who cares about that? 

We recall a remarkably dumb story in the Economist magazine a few years ago. It lamented Italy’s low growth rate...they blamed it on the ‘nonnas’ [grandmothers]. 

Rather than move to the go-go centres of commerce... get jobs... and put the kids in daycare, which would raise GDP growth numbers, the benighted Italians preferred to stay near home so the grandparents could look after the children.  

You might wonder... maybe the children were better off with their grandmothers than in a day care centre. Maybe parents had more confidence in their own families than in commercial, or government-run, child warehouses.

Maybe the children themselves would be happier... under the careful eyes of their grandmothers... or maybe the grandmothers might appreciate their new roles — as guardians of the next generation... rather than just getting their hair done and watching daytime TV. Italian society might be more stable. Better anchored. Healthier. 

None of those maybes had a place in the statistics. The nonnas were standing in the way of GDP growth... that was all there was to it. But numbers often tell a tall tale. Credit-based ‘growth’ is often fraudulent. And the wealth it produces can be largely fictitious.  

Human happiness

An example...of 3.5 million veterans who served in Iraq or Afghanistan two thirds say the wars were not worth fighting. 1.8 million came home with a ‘permanent disability’. Total veterans’ disability costs will reach as much as $2.5 trillion by 2050. Those disability payments increase GDP. Do they also increase human happiness? 

The financial cost is a statistic. But what about the real cost... the effect of missing legs and arms on a real person... where is that number? 

Or...US retirees get an inflation adjustment in January. Monthly payments went up 3.2%. GDP went up! 

More money for farmers... more for ‘Green Tech’ hustlers... and chipmakers, too... whatever... GDP up! 

We are lost in a whirlwind of statistics. But the numbers are often empty... misleading... or just plain false.  

In the boom years, low-cost imports held down US consumer prices. Now, immigrants — legal and illegal — have poured across the border...and are willing to work for less, thus holding down labour rates (wages) and inflation. 

What part of this story is true? What part is statistical gibberish? How about the jobs themselves? Are they real?  

According to FXHedge, the Bureau of Labor Statistics overestimated job growth in the fourth quarter of last year by half a million. That’s 500,000 jobs that never existed.  

Yes, you can add ‘phantom’ jobs to the long list of frauds, fictions and statistical ghosts in the US economy. But there’s more...  

On a discussion platform, we found this comment: 

‘That BLS data is as bad as I have ever seen it. The cynic in me says... election year shenanigans. The jobs data is a mess... not merely labor market weakness, but a prelude to recession. Another set of faulty data are the GDP numbers, which are increasing[ly] showing negative revisions. After 3.1% GDP growth in 2023, the initial Q1-24 print was 1.6%, only to be revised down a month later to 1.3%... hardly a “robust” economy...if you are a democrat, the economy looks relatively great... however, republicans and independents have an altogether different view...’  

The fake money regime — post-1971 — changed America’s economy. From exporting finished products, at a profit, we shifted to exporting dollars. The good jobs went abroad with them. Economists and the financial press looked at the statistics and proclaimed the system a great success. But it was really an abject failure... replacing real wealth — earned by making things — with fake wealth, based on credit rather than real output.  

The credit-based dollar fostered credit-funded consumption and credit-backed asset prices. Now we have nearly $100 trillion of public and private debt. How much of that debt will go bad? How much of the stock and bond markets depends on it?  

We don’t know. But as much as $50 trillion in US fraudulent wealth could disappear — in defaults, bankruptcies, write-downs, mark-downs, and inflation — as the Primary Trend continues. 

Regards,

Bill Bonner,
For Fat Tail Daily