Thursday, 13 June 2024

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

Twitter (X): @JCooperGeo

[6 min read]

Dear Reader,

Today, we will revisit the ongoing trade fracturing between China and the West and what it means for investors.

But first, why does it matter?

On the surface, ongoing tensions could spell bad news for Australian mining… China remains a major importer of the nation's raw materials.

Far from easing tensions, governments on all sides seem to be finding new ways to escalate trade hostilities.  

That reached a new tipping point last month when the Biden Administration hiked tariffs on Chinese-made EVs from 25 per cent to a whopping 100 per cent!

According to Biden, it’s all about saving US automotive jobs.

In reality, it’s another push against China’s growing influence on the global stage.

Major firms pivoting away from China

But whether you believe the US is within its rights to impose whopping tariffs against China matters little. These policies are having an impact. 

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, looking to restore manufacturing closer to home.

According to Business Insider, multinationals are not the only ones closing their doors; Chinese-owned enterprises are also looking to build new factories outside China in a bid to outmanoeuvre Western tariffs.  

So, what does this all mean?

China’s path to becoming a manufacturing giant took decades to assemble, but will it only take a few short years to dismantle?

Reshoring manufacturing poses a major threat to China’s economy.

And then there’s the other side of the story…

The country’s dominance of REFINED critical materials: lithium, graphite, cobalt, copper, rare earth, and steel, among many others!

It’s one reason the US installed a framework that attempts to eliminate China’s control of the downstream supply of these raw materials.

Known as the Inflation Reduction Act (IRA), the law penalises companies that source Chinese raw materials, which are the building blocks of global manufacturing.

The winners from a China exodus

Obviously, some countries will benefit massively from these policies… Southeast Asia, India, Mexico, and Eastern Europe are already benefitting from a China pivot.

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… during which manufacturing shifted from the West to the East, specifically to China. 

Will we see another CAPEX boom and demand for raw materials as these new hubs get built?

It’s certainly interesting to consider.

That could have the surprise impact of increasing demand for industrial raw commodities like iron ore, aluminium, and copper.

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 here in Australia.

The big winners from a China exodus

Traditionally, miners have put all their efforts toward digging up ore and shipping it to China for processing. It has enabled China to become a powerhouse in the global supply chain of processed raw materials.

Yet, trade barriers in the West will majorly impact this status quo.

The Biden administration is set to lift tariffs on a wide range of battery metals from 0-7.5 per cent to 25 per cent. Some sources believe this is only the beginning.

Importantly, that makes critical metal developers in Australia far more competitive.

Recognising the opportunity, some budding critical metal miners in Australia have already incorporated fully integrated processing into their feasibility studies.

However, developing these facilities will remain a major challenge even with China tariffs helping alternative suppliers.

Refining and processing critical minerals is highly sophisticated and requires vast capital expenditure.

Building these facilities requires years of testing using pilot plants, which are then customised to suit the characteristics of the feedstock ore.

Processing critical minerals is a niche and highly technical field. As the world’s leader, China controls most of the intellectual property in designing these systems.

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.

Yet that project has been riddled with problems.

Breakdowns, a lack of technical expertise, and spats with the local government… led to the closure of its Malaysian facility last year.

But these problems won’t slow the pivot away from the Middle Kingdom.

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 2000’s commodity boom.

At the time, his ambitions of becoming a major force in the iron ore market were ridiculed; the CAPEX commitment to break into the iron ore market was a major hurdle to overcome.

Yet those challenges transformed into an opportunity 20 years ago as iron ore prices took flight.     

And with history rhyming, critical metal developers face a similar capex expenditure dilemma.

That’s why I like to say critical metal stocks are the iron ore developers from 2003…

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 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.

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]

Today, in a very roundabout way, we continue looking at America’s missing wealth. The more we look, the more ‘nothing’ we see. 

We began our annual migration on Sunday. Like caribou aiming for Arctic pastures, we headed to France for the summer.   

The trip means driving to the car ferry at Rosslare, Ireland, and then getting off in Wales. We spent the night in Narberth and continued on to London yesterday. Today, we’re ‘takin’ care of business’ in London, before continuing to Calais, via the Chunnel, tomorrow.   

To us, the English seem very similar to the Irish.  They look the same.  They dress the same.  Their weather is the same.  They drive on the same side of the road.  And they share an interlocked, blood-soaked history. 

One of the most curious public policy ideas in America today is providing compensation to groups of people for injuries suffered by their ancestors.  It sounds reasonable until you realize that the ‘reparation’ payments must come from the living, who had no part in the wrongdoing, and go to other living people, who did not suffer from them.  

 A ‘reparations’ payment would raise GDP…as a part of government spending…but actually reduce real wealth, like a swindle, by taking money from the people who earned it and giving it to people who didn’t. And then you have the challenge of deciding which groups, historically, suffered the most…and which other groups, today, should pay for it. 

Horrible Torments

Britain and Ireland both appear to be peaceful, pleasant places.  But both have endured horrible torments. Both islands were inhabited by unknown peoples who were then “replaced” by Celtic invaders around 1,000 BC.  Britain was conquered by Romans in the first century AD. The Celtic tribes put up a fight, led notably by Queen Boudica.  But the Romans were better organized and supplied.  The local people submitted.  Or they were killed.   

It was the colonisation of Britain that led to the famous remark by Roman historian, Tacitus.  “They make a desert and call it peace.” Much of the native population of southern Britain was exterminated, leaving large areas of the island to go back to nature. 

Ireland was not invaded by the Romans.  Instead, when the Romans left, Irish tribes invaded the west of Britain. The Scoti tribe, for example, gave Scotland its name.   

While the Irish came from the West, Germanic (Anglo-Saxon) tribes settled (peacefully, it appears) in the East of Britain. Then both islands were invaded, repeatedly — by Norwegians, Danes, and Normans. The last of these attacks, by the Normans, began with the arrival of Duke William at Pevensey, England, in 1066.   

Again, it was a bloody conquest in which a substantial part of the population was killed or starved to death.  The Normans were fierce and ruthless fighters, often inflicting tortures and mutilations on their prisoners.  But in this regard, they were little different from their enemies. Murder, mayhem, massacres – all in a day’s work. 

Bogtrotters

It took six years of fighting before William was comfortably seated on the English throne.  About 100 years later, Anglo-Normans landed in Ireland.  This time, it took 600 years of on-again, off-again slaughter, but Ireland was finally subdued by England.  Then, the invasion went in the other direction as waves of hungry immigrants from Ireland soon showed up in Britain, looking for work. 

The English considered the Irish an inferior race.  They were dirty, poor, and lawless; “bogtrotters” they called them. 

That reputation stuck with the Irish as they came to America, too.  The ‘wild Irish slums’ were not for decent people.  Irish workers were thought to be undisciplined and difficult; victims of popery, poverty and alcohol.  Often, they didn’t even speak English. 

Before 1865, Black slaves in the US at least had a capital value — of about $900 (or about $30,000 in today’s money). No slave owner wanted his slaves to die. So, they turned to the Irish to do the most dangerous work. For example, in 1832, the City of New Orleans undertook to dig a canal through the mosquito-infested swampland, which later became known as the New Basin Canal. Mary Helen Lagasse reports: 

‘The builders of the city's New Basin Canal expressed a preference for Irish over slave labor for the reason that a dead Irishman could be replaced in minutes at no cost, while a dead slave resulted in the loss of more than one thousand dollars.’ 

Irish workers had no owners.  And no capital value.  So, they were expendable.  Eight thousand Irish immigrants died of malaria, cholera, and other diseases digging the canal. 

But now, the Irish diaspora is well established in both countries…often in commanding positions.  And now the interests of the Irish in America and England are identical to those of the rest of the voters.  And one of the main hot buttons for them all – in America, Ireland, and England -- is immigration. They generally don’t like it.   

We leave the social and political problems to others.  But immigration plays a role in our story, too.  While immigrants boost GDP and employment numbers, they may actually lower the real wealth of the average American.   

Tune in tomorrow for more… 

Regards,

Bill Bonner,
For Fat Tail Daily