Trade war pause? Not for this booming sector

Monday, 16 December 2019
Melbourne, Australia
By Bernd Struben

  • Made in China
  • Fake news?
  • Charting the trade war
  • Sell the News?

We’re told phase one of the US–China trade deal is a go.

Sort of.

No real surprises there.

Both sides had widely been expected to hit the pause button heading into the end of year holidays. And that’s really all this is likely to be. A pause.

Yesterday’s deadline, 15 December, has come and gone without Trump slapping additional tariffs on Chinese imports. Some existing US tariffs will also, reportedly, get rolled back.

In return the Chinese will match tariff reductions on their US imports. They also pledged to ramp up their US agricultural imports along with taking vague steps to strengthen intellectual property rights.

It all sounds like a decent small step in the right direction.

But the thing is, nothing has actually been signed yet. The Chinese are waiting for the new agreement to be ‘properly’ translated and have left the door open to revisions.

If you’ve been following along with this saga from the get-go, this will sound suspiciously familiar. It’s essentially what led to the unravelling of the last trade agreement. The one US negotiators touted as a done deal until their Chinese counterparts edited out key commitments.

Judging by the muted reaction in US and Chinese markets so far, investors aren’t convinced this time will be different.

We’ll see if this mini-deal works out next month.

But even in a best case scenario, trade relations between the US and China will never be the same.

That’s not necessarily a bad thing. Particularly for the rare earths industry operating outside of China’s control.

More, after a look at the markets.

Markets

Over the weekend, the Dow Jones Industrial Average closed up 3.33 points, or 0.01%.

The S&P 500 closed up 0.23 points, or 0.01%.

In Europe the Euro Stoxx 50 index closed up 24.72 points, or 0.67%. Meanwhile, the FTSE 100 gained 1.10%, and Germany’s DAX closed up 61.08 points, or 0.46%.

In Asian markets Japan’s Nikkei 225 is down 4.58 points, or 0.02%. China’s CSI 300 is down 0.07%.

The S&P/ASX 200 is up 115.02 points, or 1.71%.

West Texas Intermediate crude oil is US$59.83 per barrel. Brent crude is US$64.96 per barrel.

Turning to gold, the yellow metal is trading for US$1,474.37 (AU$2,145.79 per troy ounce. Silver is US$16.94 (AU$24.65) per troy ounce.

One bitcoin is worth US$7,125.92.

The Aussie dollar is worth 68.71 US cents.

Made in China

No matter what the Chinese agree to in phase one…or two…or three of any trade agreements, one thing is clear.

The US is determined to break China’s stranglehold on the strategic rare earths market.

As a quick reminder rare earths cover a group of 17 metals, which are vital in almost every tech gadget you can imagine. Without them there would be no smartphones or computers. No electric vehicles or sat-nav to guide you to your destinations.

And from a modern military perspective the picture is even more dire.

The 21st century US military machine is wholly reliant on technology. Every piece of that tech needs one or more rare earth element to function.

Take the F-35 Lightning fighter jet, for example. Each plane requires 400 kilograms of rare earths, like dysprosium, to power its stealth systems and sensors. (The other 16 rare earths are equally hard to spell and pronounce.)

And heading into the 2020s, the next generation of military hardware is even more reliant on technology…and rare earths.

As our in-house tech pro Sam Volkering writes in his special report ‘Aussie Rare Earth Saviours’:

The US army is set to commission all-new laser weapons powerful enough to destroy incoming cruise missiles. Each laser system is estimated to cost upwards of $40 million. And without rare earths, these laser systems won’t work.

It may sound like something Dr Evil dreams up in an Austin Powers film. But these lasers are the real deal.

And as Sam reminds us in his research report:

America’s military superiority is dependent on the continual supply of Chinese rare earth minerals.

The US might be home to the most powerful military force on the planet…but their most advanced and deadly weapons are made with Chinese-sourced rare earth minerals.

With one ‘flip of the switch’, Beijing could stop US-bound rare earth supplies and strangle America’s armed forces.’

Just how dependent is the US on Chinese rare earths production?

Have a look at the chart below:



chart image
Sources: US Geological Survey / Reuters
Click to enlarge

You may need to click the ‘enlarge’ button to get a proper view. But the chart reveals that the US sources 80% of its rare earths from China.

80%!

Clearly a long line of strategic planners have been asleep at the wheel. But that’s all changing. Fast.

Earlier in December the US and Australia inked a new deal that paves the way for Australia — rich in rare earths — to provide a secure pipeline for the critical minerals.

As Minerals Council of Australia chief executive Tania Constable puts it (quoted by the SMH):

We have every commodity, rare earth element on the periodic table available in Australia. So we make a natural partner for countries that are seeking diversification of supply.

And the US military is putting its money where its mouth is.

From Reuters:

The U.S. Army plans to fund construction of rare earths processing facilities, part of an urgent push by Washington to secure domestic supply of the minerals used to make military weapons and electronics…

The Army said it will fund up to two-thirds of a refiner’s cost and that it would fund at least one project and potentially more. Applicants must provide a detailed business plan and specify where they will source their ore, among other factors.’

In case you’re wondering, the last time the US military pumped money into commercial rare earths projects was during the Second World War. That was to supercharge the Manhattan Project in the race to build an atomic bomb.

This time around, they could be in the game for a lot longer.

One of the big winners from the announcement is Aussie rare earths producer Lynas Corporation Ltd [ASX:LYC]. Lynas’ share price is up 19.5% since Wednesday’s close.

Lynas should continue to do well as the West moves away from China for its rare earths needs. But with a market cap of $1.8 billion, it’s hard to see Lynas becoming a 10-bagger anytime soon. (That’s a stock that delivers you 10 times your investment.)

For those kinds of gains…and with a lot more risk…you need to look at the smaller end of the market.

In Sam’s latest research report he uncovers three small-cap ASX-listed rare earths miners that could end up the biggest beneficiaries of the global shift towards secure suppliers.

Now all three are currently down from his initial recommendation date. But he still believes each stock has the potential to shoot up in the order of 1,000%…or more.

Just remember. The small-cap space is risky. You should never invest more money than you’re prepared to lose.

If you’re OK with that level of risk, you can find all the details in Sam’s report, ‘Aussie Rare Earth Saviourshere.

Fake news?

In a reminder to take everything you read — most especially poll results — with a shovel sized load of salt, we leave off today with this excerpt from last Monday’s The Australian:

Shock private polling for the Conservative Party shows a Labour coalition forming government is now a “major risk” a day before Britain’s general election.

The Tory lead has shrunk in the past week — one pollster had them just six points ahead on Tuesday, which could leave Britain with another hung parliament.

The dramatic turnaround in Tory fortunes leaves Prime Minister Boris Johnson fighting to hold his seat.

I believe you know how this ‘shock polling’ forecast turned out.

Labour took its biggest trouncing since 1935…and now holds 203 seats in Parliament.

Boris Johnson ‘fighting to hold his seat’ led the Conservative to a take 365 seats.

Chuckle.

Charting the trade war

As part of our regular Monday feature, below veteran stock trader Murray Dawes share’s this week’s trading tips and insights.

In his premium advisory service, Alpha Wave Trader, Murray uses his proprietary ‘slingshot method’ to hunt down rapid fire profits from stocks while minimising risk.

Today he looks at how last Friday’s détente in the trade war impacted Hazer Group Ltd, a stock he discussed with you in a previous video.

Scroll down and click on the image below to watch Murray’s latest video now.

You can learn more about the edge Murray offers active traders over at Alpha Wave Trader by clicking here.

Cheers,
Bernd


Sell the News?

 

[Click on the picture to see Murray analyse the S&P 500 and ASX 200 now that the US–China phase one deal is done. He also looks at a stock he mentioned recently called Hazer Group Ltd [ASX:HZR].]

The ASX 200 is powering ahead today after good news about the US–China phase one trade deal. This could be enough to ignite a strong close to the year, with the Fed also flooding the market with liquidity to avoid a year end cash crunch.

US markets are certainly pointing up so it would be a very brave person that stood in front of them. I will need to see a weekly sell pivot, at least, before I become even a little bearish on US equities.

But our market is looking a little different. The ASX 200 confirmed a weekly sell pivot a few weeks ago and until I see a weekly buy pivot I am a little cautious, even after the 100-point rally we have seen today.

It won’t take much for me to turn 100% bullish on our market, though. All I need to see is a weekly close above 6,890 in the ASX 200 which is only 40 points above current prices. But until that happens, there is a chance we could see some weakness from this area.

We will know more in the next few days as the S&P 500 reacts to confirmation of the trade deal. Will it be a case of buy the rumour sell the news?

Hazer Group reacts to hydrogen offtake agreement

Hazer Group Ltd [ASX:HZR] is a small company working on new technology to transform methane into hydrogen and graphite. It is still years away from making money, but if things work out for them they will be worth many multiples of where they are trading now. I mentioned them in a ‘Week Ahead’ update recently and thought I should follow up with an update after some good news that was out today.

The chart for HZR is a great example of the types of situations I look for in Alpha Wave Trader. I like to see a euphoric rally that has been reversed with a long grinding sell-off as investors are shaken out of positions. Then when I get signs that things are turning back up, I look for entry points based on my pivot strategy.

I set out the steps I follow before I enter a stock and show you how I choose my stop-loss levels in the video above.

Regards,

Murray Dawes,
Editor, Alpha Wave Trader