An author of the name Donald Horne wrote a book about Australia’s economy in 1964 titled The Lucky Country.
As you might know, this book is now part of Australian folklore.
Horne suggested Australia’s ascent to power and wealth was the result of luck rather than fortitude.
He attributed much of this good fortune to the nation’s vast mineral wealth…something that’s changed little over several decades.
Take the early 2000s mining boom…a prosperous era that sent the country’s national wealth soaring.
Australia’s terms of trade became the envy of the world on the back of lucrative iron ore exports to China.
The period from 2003 to 2012 proved Australia most definitely was the lucky country.
But like every other boom before it, the vast wealth generated from this once-in-a generation China-led infrastructure surge, was squandered on frivolous government-led programs or absorbed into ever rising property prices.
No doubt, Australia is betting big on another round of outsized commodity exports…the next resource super cycle is duly needed.
But the coming boom won’t be anything like the last.
What do I mean by that?
Well, throughout the early 2000s Australia grew fat on upstream mining…
Digging up ore, loading it on a train and shipping it to Beijing…these were easy riches.
However, this next boom won’t revolve around iron ore or coal.
It will be led by critical metals.
Commodities that require extensive midstream and downstream infrastructure to refine and process ore on site.
Gearing up for this coming boom will need enormous effort and capital investment.
In other words, it’s going to take a lot more than just luck to participate in the coming wealth.
But according to a research group known as the Observatory of Economic Complexity (OEC), this could be a major challenge for the Australian economy.
The OEC rates Australia’s economy as one that lacks diversity or economic sophistication.
In fact, in its global economic trade complexity ranking, the OEC positions Australia at just 82 on a list of 131 countries!
That’s despite having the 13th largest economy in the world.
It’s by far the lowest rank among all OECD countries.
Uzbekistan, Jamaica, Egypt, Iran, and El Salvador all rank higher in terms of their economic sophistication.
Thanks to decades of easy riches from coal and iron ore mining, Australia has a ranking on par with the East African nation of Kenya…a country with a per capita income of just $1,200 US dollars per year.
Soon to be the NOT so lucky country!
Luck breeds complacency…
The wealth most Australian’s take for granted depends entirely on the China gravy train and its insatiable appetite for iron ore and coal.
But that era is coming to an end…perhaps far earlier than most anticipate.
Australia’s economy is a one-trick pony that could be headed towards economic backwater status. That’s the reality that no Australian wants to hear.
But there is a way out.
Right now, the economy sits at an important juncture…one path leads to opportunity, another leads to demise.
The last mining boom was easy…
The nation cashed-out on digging up iron ore and shipping it to China.
Don’t expect straightforward gains this time round.
Other than lithium, Australia does not dominate the supply of future facing metals as it did with iron ore and coal.
Graphite, copper, cobalt, rare earths, platinum, nickel, titanium are all dispersed across different nations.
That means Australia will need to work far harder to gain its share of the windfalls on offer.
Value adding its supply of critical metals into a usable product for manufacturers is a logical first step in diversifying its export market and increasing trade sophistication.
But according to Benchmark Intelligence, Australia produced just 1.2% of the world’s refined lithium product last year, that’s despite being responsible for a whopping two fifths of global lithium mining.
But not all Aussie miners are stuck in the lazy habits from the past…
The rare earth producer, Arafura Rare Earths [ASX:ARU]holds one of the world’s largest, neodymium and praseodymium (NdPr) enriched deposits globally…vital ingredients in EV drivetrains and wind turbines.
To its credit, the company is looking to become a major supplier of refined metal…with direct application for manufacturing industries.
If it can achieve its ambition, it will be one of the only downstream suppliers located outside China.
Obviously, steep hurdles remain…building infrastructure for refining and processing these niche commodities requires engineering innovation that’s both labour and capital intensive.
Yet it’s difficult barriers to entry like these that will position the company as an exclusive supplier in the market for many years to come.
That’s the advantage of being an early mover.
Another company looking to ‘value-add’ its product is the graphite miner, Renascor Resources [ASX:RNU].
This is another company held in the D&D portfolio.
The stock is embarking on a purification process that eliminates the use of hydrofluoric acid, a highly polluting substance used in the production of small-flake graphite for the EV anode market.
It’s pioneering this processing technique to develop an industry leading alternative.
It offers EV manufacturers a greener option, allowing them to produce a car that actually helps the planet rather than degrade it further.
But similar to our rare earth stock, this company is positioning itself as one of the few graphite miners (outside China) with downstream capacity.
That remains a major consideration for investors.
Critical metals…China’s ace card against the West
As I stated in your reports last year, I believed China would start reacting to Western trade hostilities in the best way it could…
Weaponising its dominance of critical metals.
At the time, it probably sounded a little alarmist.
But as it turns out, I was right!
China has now fired the first shot and this should be a warning to all investors.
In July, China banned germanium and gallium exports to the US…these are key commodities in the manufacturing of semi-conductors.
It’s why investors must ask this key question…
Which critical metal will China ban next?
If the communist state is looking to impart the greatest pain on the West, it will do so by restricting exports on a critical metal for which it holds the greatest market share.
It’s estimated China supplies around 90% of the world’s neodymium and praseodymium and an astounding 100% of world’s purified spherical graphite (PSG) for the battery anode market.
China holds a major ace up its sleeve in this geopolitical stoush.
Given the US shows no sign of letting down…we should be bracing for more bans from China.
Critical minerals — central to defence, tech and the green energy transition — have the potential to set-off a global economic panic as they become entangled in China and US trade disputes.
If that happens, expect a rapid repricing of the select few companies looking to take market share away from China as they attempt to build downstream capacity.
Mainstream media will be blindsided when this situation unfolds, and so too will most investors. That’s despite China already making its intentions blindingly obvious.
Editor, Fat Tail Commodities