Donald Trump wants a trade war with China. But it won’t stop the Middle Kingdom from booming.
China’s economy is growing at close to 7%, according to government data. That’s several times the US expansion rate. And it’s why Chinese-based US businesses have thrived.
The lower US dollar has made exports from China more attractive to buyers. Lots of US companies reported stronger second-quarter earnings for that reason.
Remember, there are more than 1.3 billion people living in China. That’s more than enough to fuel its economy through consumption. Reuters reported yesterday:
‘“In general China is still a growth market for lots of US goods and services…the Chinese consumer is driving more and more the growth in China itself — that’s a very positive shift in compositional growth for a lot of U.S. companies that do provide goods and services for consumers, as opposed to building skyscrapers,” said Joe Quinlan, head of thematic investing at Bank of America, U.S. Trust.’
China wants to become a consumer-driven economy. Today, the country is an investment-driven economy. It grows by importing resources and selling products. But that will change. As it moves towards a consumer-driven economy, one resource should benefit most — nickel.
Nickel has lots of potential. It’s used in both investment and consumption economies. It’s primarily used to create stainless steel. Home appliances, vehicles, electronics, new factories and restaurants all require nickel.
As wealth spreads, people will demand a better standard of living. And that means more demand for nickel.
In saying that, the base metal hasn’t entered a bull market yet. But it’s a sector that could potentially make you massive gains today. You just need to back the right stock.
Low nickel punishing big miners
The Globe and Mail reported on 10 August:
‘First Quantum Minerals Ltd said on Wednesday it plans to suspend operations at its Ravensthorpe nickel mine in Western Australia next month due to persistently weak nickel prices, affecting around 450 employees and contractors.
‘The mine will be placed on care and maintenance, which is expected to take effect in early October, it said.
‘“This decision is disappointing to us,” First Quantum Chairman and Chief Executive Philip Pascall said in a statement, blaming “continuing depressed nickel market conditions, over some years.”
‘The suspension comes despite moves by some miners to combat weak traditional markets for nickel in steelmaking by moving to capture demand from the burgeoning electric vehicle battery market.’
Low nickel prices? Take a look at the chart below:
Source: Kitco Metals
[Click to enlarge]
The nickel price is trading near one-year highs. It has boomed over the past two months, hitting US$5 per pound last week.
Indeed, prices are down by about two-thirds since early 2011. That’s when Ravensthorpe resumed operations. It was shut down by previous owner BHP Billiton Ltd [ASX: BHP] in 2009, when nickel prices also dropped. First Quantum Minerals bought the mine for $340 million in 2010.
Ravensthorpe produced 23,624 tonnes of nickel last year. That shouldn’t be ignored. The global market stands at roughly 1.8 million tonnes. Though not a significant reduction of supply, it’ll still result in less nickel coming on the market, which should support the price.
Make the right investment
The Globe and Mail continues:
‘“Ravensthorpe makes one of the perfect nickel products to go into the battery space,” said UBS commodities analyst Daniel Morgan. “The battery companies run the risk that all these nickel mines they are going to need are going to start shutting because they are not paying up enough for the nickel.”’
The battery story will only grow for nickel lovers. But, unfortunately, the big miners might gain the least from it. Keep in mind that they tend to buy high-cost-producing projects near the top of the cycle. That’s partly because their directors follow rosy investment bank forecasts. That’s a mistake. Investment bank forecasts assume that the trend in motion stays in motion.
That never happens.
The world changes. And prices change. That’s why you should focus on buying low-cost mines around the bottom of the cycle.
You probably don’t have deep pockets like BHP Billiton or First Quantum to buy the assets. But it doesn’t matter. You merely need to back the right miners that own the best assets.
Editor, Resource Speculator