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