This one chart shows who’s really running the show

Thursday, 19 September 2019
Adelaide, Australia
By Bernd Struben

  • This is no sideshow trend
  • The power of the Fed

If Trump truly wants to rid his nation’s reliance of China, he needs another rare earths supplier. That’s where Australia comes into the picture.

Sam Volkering, Australian Small-Cap Investigator

There’s been no shortage of kerfuffle over Australia’s domestic oil reserves. And for good reason.

According to the International Energy Agency (IEA), Australia should hold a minimal 90 days of emergency supplies. And for a nation almost entirely reliant on imports for its refined fuel, 90 days is indeed minimal.

Yet a quick check of the Department of the Environment and Energy’s dipstick reveals Australia holds less than a third of this. At best we may have 30 days’ worth of petrol should imports be cut off for any reason.

Now that’s deplorable strategic planning. But it pales in comparison to the absurdly careless manner in which the US has failed to ensure a secure supply of a crucial commodity. Or commodities, to be precise, without which its world leading defence and technology industries grind to a halt.

I’m talking about rare earths. (See, I told you we’d get back to this.)

The US has a voracious appetite for these metals. Last year, the US consumed over 18,000 tonnes of rare earths. Or about 10% of global production.

So just how absurdly careless have previous US governments been in ensuring a secure supply?

First, let’s look at why the US needs rare earths. Now there are 17 of these metals, but for simplicity’s sake we’ll lump them all under the ‘rare earths’ category.

Outside of direct military applications, rare earths are vital components in just about every modern device you can think of. Computers, smartphones, electric vehicles, flat-screen TVs…the list goes on.

But it’s rare earths’ crucial role in military applications that’s really lighting a fire under the Trump administration. Without them the world’s most powerful 21st century military force would all but lose its teeth.

No more fancy new satellites. No more cruise missiles. No more fighter jets or submarines.

And I’m not being hyperbolic here.

According to a 2013 US Congressional Research Service report, some 920 pounds (418 kg) of rare earths go into the production of every F-35 Lightning II fighter jet. Which is nothing compared to what an SSN-774 Virginia-class submarine requires. That’s closer to 9,000 pounds.

OK. Now we know why rare earths are so important. So where do they come from?

If you answered China, give yourself a gold star.

In fact, China controls more than 80% of the global trade in rare earths. And the US no longer produces any at all within its borders. None. That means the US now imports 78% of its rare earths from China, according to Seeking Alpha.

This level of reliance on China for vital commodities is questionable at the best of times. But I don’t need to tell you that US–China relations aren’t anywhere near the best of times.

Which presents a few select Australian stocks with a lucrative opportunity.

More, after the markets…

Markets

Yesterday (overnight our time) the US Fed opted to cut interest rates by 0.25% for the second time this year. That takes the US benchmark rate to the 1.75–2.0% range.

Trump, as you can see from his tweet below, was less than thrilled.



chart image
Source: Twitter
Click to enlarge

So how did markets react?

Overnight, the Dow Jones Industrial Average closed up 36.28 points, or 0.13%.

The S&P 500 closed up 1.03 points, or 0.03%.

In Europe the Euro Stoxx 50 index closed up 6.78 points, or 0.19%. Meanwhile, the FTSE 100 fell 0.09% and Germany’s DAX closed up 17.01 points, or 0.14%.

In Asian markets Japan’s Nikkei 225 is up 64.34 points, or 0.29%. China’s CSI 300 is up 0.01%.

In Australia, the S&P/ASX 200 is up 29.11 points, or 0.44%.

West Texas Intermediate crude oil is US$58.17 per barrel. Brent crude is US$63.61 per barrel.

Turning to gold, the yellow metal is trading for US$1,490.90 (AU$2,186.07) per troy ounce. Silver is US$17.70 (AU$25.95) per troy ounce.

One bitcoin is worth US$10,176.49.

The Aussie dollar is worth 68.20 US cents.

This is no sideshow trend

Getting back to rare earths…and the opportunities at hand…

Whatever the results of the US–China trade talks next month, the growing divisions between the world’s two largest economies aren’t going away anytime soon.

That’s seen the Trump administration actively looking for alternative supplies. Ideally from close allies, like Australia.

From The Australian:

It’s taken a long time but suddenly the United States under Donald Trump has woken up that it has a potential “rare earths” crisis and is calling on Australia to help.

Indeed, one of the most dramatic features of the discussions between President Trump and our Prime Minister was the Trump plan to link with Australian enterprises to help the US break Chinese domination of rare earths.

The article above stems from February 2018. And the prime minister in question was Malcolm Turnbull.

With the spectre of China cutting off its rare earths supply looming larger than ever, rare earths are again a hot button issue. And this will top the agenda when Scott Morrison meets with Trump in Washington DC over the coming week.

This headline comes from Sunday’s AFR, ‘Rare earths on the Trump-Morrison agenda’. The article continues:

The development of alternative supplies of critical minerals, as well as other  joint efforts by Australia and the United States to address Chinese influence in the region, will dominate talks in Washington DC at the end of this week between Scott Morrison and Donald Trump…

The Australian Financial Review reported in June that the US State Department was working with Canada and Australia to better understand what critical minerals each country had and how these could be developed.

It is regarded as a top-line national security issue.’

So where does this leave us as investors?

Here’s how Sam Volkering addressed the opportunity to readers of Australian Small-Cap Investigator:

Having the US government and military involved ensures that this isn’t some sideshow trend. National security issues are not a trifling matter.’

To give you some idea of how the stocks in this sector can move, let’s take a look at Aussie rare earths miner Lynas Corporation Ltd [ASX:LYC]. Year-to-date Lynas’ share price is up 66.2%. That brings its market cap to $1.8 billion.

But that 66.2% share price surge is nothing compared to when China restricted rare earths exports back in 2010. That was over a dispute with Japan, sending the price of rare earths rocketing.

And as you can see in the chart below, it did wonders for Lynas stock holders:



chart image
Source: Yahoo Finance
Click to enlarge

Between mid-2010 and April 2011, the share price soared 431%.

Today, with US and global angst growing over China’s supply dominance, Australia’s rare earths miners are in a great position to potentially see similar…or even larger…gains.

According to Sam’s latest research, three ASX-listed rare earths miners could end up the biggest beneficiaries.

Unlike Lynas, all three are small-cap stocks. That means they potentially can see much more explosive share price gains if the rare earths market heats up as expected. Albeit with more risk.

As Sam explains, ‘It means a sizeable order from the US could put some serious heat under the share price of each company.’

You can get all the details in Sam’s new research report here.

The power of the Fed

So what was that about the one chart that shows who’s really running the show?

Here it is:



chart image
Source: Google Finance
Click to enlarge

This is how the S&P 500 moved yesterday.

As mentioned earlier, the Fed cut interest rates by another 0.25% yesterday. That’s less than most optimistic traders had been hoping for. And Fed Chair Jay Powell threw more cold water on their cheap money hopes by indicating this could be the last rate cut of the year.

That news hit US markets at 2pm (EST). Check the chart to see how investors reacted.

Like kids disappointed with the gifts under the Christmas tree they promptly threw a tantrum and stormed out of the room.

But wait kids…wait! Uncle Powell has something else for you.

At 2:50pm investors received the following comments from the Fed Chairman:

Going forward, we’re going to be very closely monitoring market developments and assessing their implications for the appropriate level of reserves. And we’re going to be assessing the question of when it will be appropriate to resume the organic growth of our balance sheet… It is certainly possible that we’ll need to resume the organic growth of the balance sheet sooner than we thought.

Powell, in Fed speak, is talking about relaunching quantitative easing (QE). And if there’s anything markets like more than cheap money it’s free money.

Have another look at the chart above.

On receiving the latter news the kids rejoiced…and danced late into the night.

That’s all for today. Tune in tomorrow for a special guest essay. I’ll be back with you on Monday.

Cheers,
Bernd