Quick…name one paper currency that has not eventually reached its intrinsic value.
Another week begins in a world saddled with debt and plagued by imbalances that refuse to balance. For example, China’s General Administration of Customs reports that the nation’s exports hit a record and June and generated a big trade surplus. Exports were up 43.9% year-over-year, while imports were up 34%.
The $22.84 billion surplus gives China more money to buy U.S. bonds, if it so chooses. But the alarming statistic, from an Australian perspective, is that imports of iron ore and copper were down for the third straight month. This isn’t proof positive that China is doubling down to its old strategy of exporting its way to prosperity.
But it does make you wonder if, without strong growth of consumption in China’s domestic market – the kind that might, theoretically, create demand for Western goods and services – the world is just treading water in the same trade model that has led us to the current over-production in the East and over-consumption in the West.
Not all Chinese exports were up, though. China again cut exports of rare earths , by 72% according to today’s Age. Rare earth elements, if you’re not familiar with them, are used to make a heap of high-tech modern wonders, from LCD televisions to the batteries that power hybrid cars (and much, much, much more).
We’ve been following this story for years for several reasons. First, rare earths are critical to modern technology and military appliances and applications. You can’t run a gadget, whiz bang economy without them. Demand is growing.
Supply, however, is not. China has become the world’s largest exporter of rare earths in recent this years. Its reduction of exports slowly puts the squeeze on non-Chinese consumers of rare earths wishing to continue production of goods that use them. China has developed a strong position in the market (the Saudi Arabia of rare earths). If you make goods with rare earths in them, it could be the only way you’ll get the rare earths you need is to locate your production in China.
This reduction in exports will probably become a trade issue. But it’s also an investment opportunity. There are only a handful of non-Chinese rare earth’s producers who can theoretically sell product to non-Chinese customers. Of them, a few are in Australia. And of those, one of them has a large ore body with a mine life of ten years or more.
This is the kind of opportunity Kris Sayce is always chasing up in the Australian Small Cap Investigator. However, you want to be a year or two early on these sorts of things, when projects and shares have not yet be “de-risked.” You have to take a risk when you’re taking an early punt on an unproven story. But that’s why the rewards are so much better for small cap punters.
Incidentally – if we were hedging our bets against the China real estate bubble/collapse theory that we put forward in Exit in the Dragon, we’d probably include rare earths in the portfolio of hedges, along with lithium and mineral sands. Today’s Australian Financial Review reports that new car sales in China were up 47.7% in the last six months compared to the same time last year. But coming off a low base, any big percentage increase is suspect. In this case, what matters is that 9.01 million new cars were sold in China in first half the year – more than the 5.61 million in the U.S. and 2.65 million in Japan combined.
Do you ever wonder if there’s enough oil in the world for the Chinese to drive their cars as much as Americans and Australians do? We wonder – especially when we think off-shore oil drilling will be verboten to publicly listed oil companies who don’t want to be sued out of existence. Where is the oil going to come from if not from deep below the ocean?
How about from the sun! Well, in a way, all hydrocarbons are all a form of stored solar energy. It’ s concentrated most in black coal but delivers its biggest wallop in liquid, transportable, crude oil. That makes oil – in both real and economic terms – very hard to replace.
Speaking of which, it looks as though the Gillard government will discuss more giveaways to the alternative energy industry (subsidies) to make them more “competitive” with conventional energy providers. In a way, this is probably what a carbon tax is about: putting a price on carbon so it raises the wholesale and retail price of conventional energy high enough to make make greener, less efficient sources more competitive.
But that doesn’t mean it isn’t an investment opportunity. If China doesn’t run its cars on coal or oil, maybe it will be batteries with lithium oxide. And maybe some Australian companies can benefit from that while the abundant lithium brines of South America go through the stunted development process that comes when the government claims lordship/ownership of resources in the name of the People/Crown.
Shae Smith is guest editing over at Money Morning while Kris Sayce works on his sun tan in England. She alerted us to a Wall Street Journal article in which a new state-sponsored ratings agency in China says U.S. sovereign debt deserves to be rated AA with a negative outlook on low-growth and high-debt factors while Chinese debt is AA with a positive outlook on high-growth and low-debt factors.
Sounds about right, doesn’t it?
But in truth, you shouldn’t need or rely on n ratings agency to tell you the value of sovereign credits. They are all, mostly, being marked down. A better strategy is to use your own brain and decide for yourself if a given institutions has racked up so much debt that the whole business has become about paying interest to creditors rather than generating a profit for shareholders.
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