Part two: Your front-row seat to the coming boom in critical metals

Thursday, 6 October 2022 — Albert Park

[7 min read]

Dear Reader,

Australia is called the lucky country and for good reason…

The last mining boom was fuelled by enormous demand for iron, and it was Australia’s high-grade ore that commanded a premium over competitors.

I’m sure you’re well aware that the Pilbara gifted our country enormous wealth over those boom years.

With up to 75% iron content, these rocks were said to be of such a high grade that boil makers welded rocks to their steel-cap boots!

China had an insatiable appetite for our Pilbara ore.

As we knock on the door to the next mining boom, Australia sits in an enviable position (yet again).

But this time round, our competitive advantage will look much different.

China will still be an important part of the story but perhaps not in the way you would think.

I’ll have more to say on that further in the piece.

But first…

A fundamental shift in Australian mining

It’s been a long time coming but Australian producers are finally value-adding their product by selling refined metal to the market directly, not raw ore, which was the default approach of the past.

Emerging operators are now regularly designing downstream processing facilities into their feasibility plans. It allows companies to reap a greater share of the gains from the product they extract.

But this change in strategy is not just about company profits.

In September 2021, the federal government announced a $2 billion funding commitment to drive growth in Australia’s efforts to produce critical metals.

While it’s a decent chunk of cash, there’s a deep back story to this announcement that plays into the looming crisis in critical metal supplies.

In March 2022, the government released key details behind its push to drive Australia’s role in meeting the world’s demand for critical metals.

You can read the specific details published by the Department of Industry, Science and Resources here.

But the essence of the report is this: the Australian Government has been put on notice, as the world needs an alternative supply of critical metals.

Right now, China dominates extraction and processing of several critical metals including lithium, rare earth elements, and cobalt, plus a whole host of lesser known but vitally important minerals.

The latest USGS’s ‘Mineral Commodity Summaries’ report also adds weight to the global outlook, it found China as the dominant supplier for no less than 16 critical minerals. In addition to being a ‘major’ producer for an additional 20 critical minerals.

Unease is brewing throughout the developed world.

Non-Chinese manufacturing of EVs, solar panels, iPhones, smart TVs, laptops, and defence technology will come to a standstill should China decide to ramp up its pressure against Western powers.

The very threat of cutting off supplies will send shivers down the spine of major manufacturers.

So, what’s the contingency plan for the US or Europe?

Nothing.

China has played a smart long-term move

The West may have an enormous price to pay as it recoils from its blindsided stupidity in ignoring early warning signs.

Toward the end of the last mining boom, the global economy overlooked the importance of raw materials. For a decade now, major manufacturing companies in the US and Europe have taken the steady supply of raw materials for granted.

Meanwhile, as resource companies collapsed during the depths of the last commodity downturn, China stepped in and purchased major deposits for pennies on the dollar.

The downturn gifted China an enormous opportunity to dominate world supplies of critical metals.

Critical metals are China’s greatest weapon in bringing the West to its knees

As a reflection of the growing anxiety, US Republican Congressman Ken Calvert recently communicated his fears by stating:

‘Reliable access to critical minerals is essential to America’s economic and national security, America must be clear-eyed about the Chinese and Russian aggression when it comes to consolidating critical mineral resources.’

While China, and to a lesser degree, Russia, hold the vast supply of critical metals, they have amplified its dominance by securing additional mines in emerging countries such as the Democratic Republic of the Congo (DRC). This war-torn country accounts for approximately 70% of global cobalt, a critical metal used in computer and smartphone devices.

China has bolstered its global dominance while also ensuring the ore processing takes place safely within its borders.

Again, the West has been utterly blindsided and benign on the issue of Chinese dominance throughout the resource rich emerging economies.

Against a backdrop of growing geopolitical tension, it’s no wonder leaders of advanced manufacturing economies are finally scrambling for a reliable alternative. Just take a look at the graphic below, which neatly demonstrates China’s dominance in supplying the world with ‘clean energy metals’:

Tension is brewing and shots are already being fired.

In 2020, China threatened a rare earth embargo against US defence contractor Lockheed Martin as the contractor upgraded Taiwan’s Patriot air defence missiles.

But it was an Australian company that benefited from this political stoush.

Lockheed Martin struck a deal between the US Department of Defense and an Australian producer to construct a rare earth separation facility in Texas.

The Australian company involved was Lynas Rare Earths [ASX:LYC].

And it’s not the only time Lynas benefited from geopolitical tensions with China.

A little over two weeks ago a Tokyo-based company called Sojitz, Japan’s largest metal dealer, signed a $250 million procurement deal with Lynas.

According to Sojitz, China now produces 95% of the world’s rare earths. After the deal was signed, it left a stark warning to global manufacturers:

‘[T]he outlook for stable shipments from the Chinese mainland remain far from certain.’

The comments were made on the back of a Beijing blockade on Japan-bound shipments of the rare earth elements after a dispute over islands controlled by Japan but claimed by China.

This was a stern warning to the world that China was prepared toweaponise its dominance of critical metals.

But there is a silver lining to all of this, and it sits in our very own backyard…

While Australia, alone, won’t be able to meet the enormous supply of critical metals for the future, a handful of local late-stage explorers are set to shift into production just as the issue reaches a tipping point within the next two years.

Companies extracting and processing critical metals outside Chinese borders will have an extremely valuable card to play.

Safe secure supplies will come at a premium.

A massive payout for Australian producers looks imminent on the back of growing tensions.

However, for major manufacturers, the situation will be grim. A matter of life or death.

Tesla, Apple, Toyota, BMW, Hyundai, etc. will put everything on the table as they compete for the raw materials needed to keep their manufacturing plants running.

The question then remains, how much will they pay?

Stay tuned for next week as we uncover the third part of our special series on critical metals.

Regards,

James Cooper,
Editor, The Daily Reckoning Australia

Dear Reader,

‘Things fall apart; the centre cannot hold;
‘Mere anarchy is loosed upon the world,
‘The blood-dimmed tide is loosed…’

William Butler Yeats

U-turn…no, you turn. We’ll all turn.

Yesterday morning, Liz Truss called off Britain’s proposed tax cut. Someone must have reminded her that the cut would inevitably lead to higher deficits…which would inevitably lead to more inflation…which would inevitably lead to un-happiness in merry ol’ England. From The Guardian:

‘The humiliating U-turn forced on the government will have economic as well as political consequences. A week of turmoil in the financial markets showed just how badly his mini-budget had gone down with international investors. The pound fell, the cost of government borrowing rose, mortgage products were pulled.’

Meanwhile, the Australians turned the wheel too…raising rates less than expected. And as the US economy weakens, investors bet heavily on a U-turn by the Fed. From Bloomberg: ‘Bulls Storm Into Stocks, Bonds Amid Peak-Rate Bets: Markets Wrap’:

‘A bullish start to the fourth quarter deepened in global markets, lifting US index futures and Treasuries, as investors wagered the end of monetary tightening is mere months away. The dollar slid for a second day.

‘Investors see weaker-than-estimated US manufacturing data supporting a dovish tilt at the Federal Reserve after 3 percentage points of hikes began to tell on the economy. Money markets now see the Fed Funds Rate peaking below 4.5% by March. Speculation is growing that the global wave of disruptive monetary tightening is nearing its end…’

Return to reckless?

‘Disruptive monetary policy’? That’s what the Bloomberg team calls the Fed’s attempt to get back to normal. The elite were having such a good time pumping fake money and credit into the system. And then…someone comes along to ‘disrupt’ the party. They don’t like it.

But this party is coming to an end, whether they like it or not. And not just because central banks are raising rates. The whole post-war era is petering out. Things are falling apart. Throughout the West, the elite are failing, flailing, and falling.

In Italy, voters (26% of them) chose a woman who talks like a conservative, of sorts. She is for motherhood. For Christianity. She wants men to be men…and women to be women. And she doesn’t like immigrants.

‘Fascist!’ Western opinion mongers were fast to tag her. But, like Trump, Giorgia Meloni seems little threat to the elite’s important programs; she will stick with them all — NATO, sanctions against Russia, welfare, deficits, the euro. The parts of the EU system that stick in her craw the most are those that would keep her from doing even more damage — that is, the restrictions on spending and debt.

In England itself, no one is quite sure where Ms Truss came from. As near as we can tell, she was chosen because she was such a nonentity that no one hated her.

In Germany and France, the elite are facing another crisis of their own making. The falling leaves may soon be followed by a ‘winter of discontent’ — made cold and dangerous by their own hostility to their number one provider of energy, Russia. And now terrorists — presumably from the US — took out the pipeline that could have brought them some relief.

Tip o’ the hand

US Secretary of State Antony Blinken revealed the gambit when he declared that the sabotage was a ‘tremendous opportunity’ for Europe to wean itself off cheap Russian fuel…by turning to expensive US fuel.

Why would Europe want to do such a thing to itself? The average German has no interest in punishing Russia for whatever crime he believes it has committed…but, for now, he goes meekly along with the elite program, however foggy its goals and dubious its means.

As the price of gas goes up…and the weather turns cold…people will cut back and make do, as best they can. Wood-burning stoves and firewood are said to be in short supply. Thermostats are being turned down. Streetlights are turned off. Even the Eiffel Tower has gone dark.

Big factories do not cut back little by little. They throw the switch. Already, some of Germany’s fertiliser and chemical output capacity is either closing down…or making plans to do so. This will have a huge effect on next year’s agricultural output.

The Netherlands already has the distinction of being one of the world’s smallest by landmass, but greatest by export, vegetable producers. It does so by growing its legumes in vast greenhouses, which you see when you fly into Amsterdam.

These farmers face staggering energy bills. Some 40% of them are said to be in ‘financial distress’. How many will go out of business? How many will close up? We don’t know, but the price of kale and cabbage may soon shoot up too.

The shutdowns of the COVID panic caused huge losses. So will the shutdowns from a lack of gas. Here’s Thomas Fazi for UnHerd:

‘In the UK, 45 million people are forecast to face fuel poverty by January 2023; as a result, “millions of children’s development will be blighted” with lung damage, toxic stress and deepening educational inequalities, as children struggle to keep up with school work in freezing homes. Lives will be lost, experts warn. Meanwhile, in Germany’s Rheingau-Taunus district, the authorities have carried out a simulation of what such a blackout would mean for them, and the results are shocking: more than 400 people would die in the first 96 hours. And this in a district of just 190,000 inhabitants.’

Like the Fed…the Bank of England…and the Truss Government…‘the People’ have their limits. They may be long-suffering…and, like all beasts of burden, slow to anger. But their patience is not unlimited. How far can the elite go? How much incompetence and corruption will the deplorables tolerate? How much can the economy stand? We may soon find out.

Regards,

Bill Bonner,
For The Daily Reckoning Australia