Editor’s Note: Regular readers know that the U.S.-China trade war is a recurring topic here at the Diary. As Bill correctly noted, history tells us that trade wars can be devastating for global economies.
But fears over the trade dispute may actually be overblown. That’s the message from today’s guest editor, Casey Research’s globetrotting resource expert Dave Forest. Read on to see why Dave believes the trade war could kickstart one forgotten industry.
I believe we are just at the start of a monster bull market…
But I’m not talking about bonds or U.S. stocks. I believe we’re kicking off a historic bull market in commodities.
The commodities market is highly cyclical. And you don’t want to get caught in a commodities bear. They can be brutal.
But when commodities run up, they really run. In the commodities bull market from 1971 to 1974, the GSCI – an index of 24 exchange-traded futures contracts that represent a large portion of the global commodities market – returned 371%. In the 1999 to 2008 bull, it climbed 454%. I believe those are the sort of returns we can expect in the years ahead.
But there’s one thing that’s got resource investors nervous: the ongoing trade war.
Today, I’ll show you why those fears are overblown. Then, I’ll reveal an unseen detail of the trade war that may actually help commodities in 2019 and beyond.
Trade War Jitters
Commodities investors, in general, have been jittery over the trade war. But it’s particularly true of mining investors.
In June, the White House slapped a 25% tariff on some $50 billion worth of Chinese imports. Copper prices fell 22% from early June to mid-August.
Other base metals fell as well. Nickel dropped about 23% between June and August. Zinc plunged about 28% over the same time.
But, if you look at the details of the tariffs, you see that none of these metals were targeted. It was finished products such as lasers and laundry equipment that were singled out. But investors assumed the worst and hit the sell button all the same.
We’ve seen a rebound in some of these metals’ prices since then. Copper has jumped about 5% since the end of August. Zinc is up about 6%.
One of the catalysts was likely the new trade deal between the U.S., Canada, and Mexico.
President Trump wasn’t a fan of its predecessor – the North American Free Trade Agreement (NAFTA). He thought it was a “bad deal” for the U.S.
The concern was that ripping up NAFTA would be bad for steel and other metals that cross between Mexico, Canada, and the U.S.
But then, in late September, these countries struck this new trade deal – the United States-Mexico-Canada Agreement (USMCA). We don’t have to get into all the details about the deal. Investors were likely just happy that something got done. Copper traded at a three-month high shortly after.
And there was another piece of news that got almost no coverage.
On September 30, China’s Ministry of Finance announced it was slashing tariffs on base metals and steel from 11.5% to 8.4%. Tariffs on other mineral imports were cut from 6.6% to 5.4%.
Why would China reduce tariffs in the midst of a trade war? Because Chinese consumers need it…
Desperate for Metals
China is one of the fastest-growing economies in the world. It’ll soon have the largest middle class in the world. That economic growth is impossible without copper and nickel.
Copper is used in building construction, consumer electronics, and automobiles. And China is heavily dependent on copper imports.
In 2017, Chinese smelters put out about 8 million tonnes of refined copper. But the country mined only about 2 million tonnes. They had to import the rest.
The demand for copper is forecast to rise to about 10 million tonnes by 2020. But production will stay more-or-less flat.
It’s simple. The growing demand for refined copper in China far outweighs what the country can dig out of the ground each year. This shortfall has to be made up in imports.
It’s a similar story with nickel.
China wants to be the world leader in electric vehicle (EV) production. Nickel is an essential metal for EV batteries.
But again, China can’t mine enough nickel to keep up with production. Only about 14% of the nickel that goes into Chinese smelters is mined domestically.
Neither China nor the U.S. wants a trade war. It slows down economic growth. Neither country wants to see that happen.
My hunch is that a lot of this is political posturing. There’s a good chance these trade disputes will get resolved sooner than people think.
What do you think will happen for commodities if the U.S.-China trade spat officially ends? It’ll be off to the races for commodities.
And finally, there’s one last detail I unearthed that’s bullish for commodities…
Rebirth of American Mining
The Trump administration is actively supporting the growth and expansion of the domestic mining sector.
Countries are learning that you can’t be too dependent on others for your essential commodities. Politically motivated tariffs and other sanctions could quickly disrupt your entire supply chain.
As an example, China supplies about 78% of the rare earth elements (REEs) imported by the U.S. REEs are a group of 17 chemically similar minerals that tend to be found in the same ore deposits. These elements are used in everything from microphones to wind turbines to electric motors in hybrid vehicles.
But the U.S. is dependent on China for its REE imports. If China decided to stop shipping REEs… or if it slapped punitive tariffs on them… U.S. manufacturers of products containing REEs would be in a tough spot.
So, instead of relying on China, the U.S. is looking to kickstart domestic mining. In September, Congress approved a $727 million funding package for fossil fuels research – a key focus being to extract rare earth elements from U.S. coal deposits.
And it’s not just rare earths.
In June, Congress passed a bill simplifying and streamlining the permitting process for extracting “critical and strategic metals.”
That makes it easier for American miners to set up shop and get a mine up and running.
This government support is attracting major mining firms to the U.S. at a rate I’ve never seen before in my more than two decades in this business.
Trade war fears are overblown. The U.S.-China trade dispute is no excuse to sit out the coming bull market in commodities. This is a trend you’ll want to keep on your radar for the foreseeable future.
Editor, International Speculator
P.S. I told you above how the American government passed a bill in June that makes it easier for American miners to set up shop. And I believe I know why the federal government took this step…
American miners are currently on the hunt for something I refer to as “Brandt oil.” It’s not a type of shale oil. In fact, it’s not a fossil fuel at all. But “Brandt oil” will be the fuel you use to power your car in the near future. Mining companies able to extract this material will soar by triple digits in the years ahead. Get all the details right here.