Friday, 27 October 2023

By James Cooper Editor, Fat Tail Commodities

[6 min read]

Dear Reader,

It’s been a big week in mining circles and that’s being led by a surge in graphite stocks.

Before we get to that news, first a quick reminder that from next Wednesday Fat Tail Commodities will be delivered you from our new look e-letter brand Fat Tail Daily.

Nothing changes in terms of excellent insight in the resources market — you’ll still hear from me and Brian each week on Australia’s most important sector. It’ll just be under our new banner. We can’t wait!

Now, as you might be aware, authorities in China announced export restrictions over refined graphite last Friday.

It’s aimed specifically at the electric vehicle market, graphite anode material used in EV batteries.

But as a long-term reader, I’m sure this announcement hasn’t come as a surprise.

In fact, I warned readers of the Insider just this month that critical metal supply shocks were coming.

The article was titled; Which critical metal will China Ban next?

I highlighted graphite and rare earths as the most likely contenders. That’s because China dominates the supply of these two minerals.

We saw the first warning signs in July after export restrictions were placed over gallium and germanium, key commodities in the manufacture of semiconductors.

Another warning sign…the US Department of Defence has steadily poured billions into critical metal projects over the last 12 months as it scrambles to secure alternative supplies.

The Australian rare earth producer Lynas Rare Earths [ASX:LYC] was one of the big benefactors of the department’s attempt to boost domestic supply.

LYC received $120 million last year as part of a deal to build processing facilities on US soil.

But that deal was sweetened after China’s germanium and gallium export restriction, the company received a further $258 million in August.

Deals like this have barely raised an eyebrow. That’s why last week’s graphite export tightening shocked the market into a panic earlier this week.

Producer, Syrah Resources [ASX:SYR] is up 44% for the week.

Developer, Renascor Resources [ASX:RNU] is up 45%.

Conditions change rapidly in the commodity market, that’s why you should be positioning your portfolio ahead of these events.

Expect more critical metal supply cuts

The market didn’t pay attention to the gallium and germanium trade restrictions in July.

So, will it wake up to the looming supply problems once graphite’s stranglehold comes into force on 1 December?

Perhaps.

Especially when we consider graphite is a far more ‘mainstream’ commodity.

It’s why investors should be broadening their exposure across numerous critical metal stocks set to surge on the back of heightening US and China trade tensions.

There’s a very real possibility things could escalate further from here…

Russia, a commodity producing powerhouse, is in prime position to maximise pain over the west by partnering with China.

A multi-pronged attack placing export bans across numerous critical metals and energy.

This would be devastating to manufacturers across Europe and North America.

That’s why you need to seriously consider investing in critical metal stocks.

As last week’s development showed, the threats are real and reaching new levels of risk.

Manufacturing of EV batteries, solar panels, smart phones, laptops, TV’s, appliances, medical and defence equipment all hinge on the reliable supply of critical metals.

These raw materials are fed by China’s mighty midstream and downstream capacity.

With the flick of a switch, the world’s most important supplier can cut exports.

This is unfolding far earlier than most geopolitical experts have expected. Who knows how bad this situation could get in the months to come.

It seems unthinkable that multi-billion companies like Tesla, Toyota or BMW would be left stranded without the raw materials needed to build their products.

It’s the same situation for the massive US tech and defence companies relying on China’s supply of rare earths.

For too long, manufacturers have ignored the importance of investing in upstream supply...mining.

Their day of reckoning is approaching fast.

It’s why I believe critical metal stocks are positioned for a major set-up in 2024.

Given stock prices remain depressed, NOW is the ideal time to align your portfolio to this very real threat.

That’s what we are positioning for at Diggers & Drillers.

To access all the recommendations, you can do so here.

Until next time,

James Cooper,
Editor, Fat Tail Commodities