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.
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.