Over the last decades, Chinese demand has play a crucial role in the Australian mining boom, triggering generations of prosperity by trade. As mining boom’s economical contribution weakens, Sydney’s Tartana Resource Limited is seizing a new round of business opportunities in China’s environmental protection policies and a worsen trade relationship with the another superpower.
Tartana Prospectus (Selected Chapters)
Over the last few months commodities have responded to escalating tensions between the US and China in a trade war where US President has sought to address the US trade imbalance with China as well as protect US technology patents. Market commentary highlights that this action increases the risk of a recession in the US and a further economic slowdown in China. However, the equity markets appear to have a less pessimistic view.
The Dow Jones Industrial Average has moved 5% higher from a temporary dip in early June 2019 on the back of expectations that the US Federal Reserve will act quickly to lower interest rates to support US economic activity if the trade conflict appears to be impairing this economic activity. The strength in equity markets is also reflected in the Australian market with the ASX 200 closing at an 11 year high on the 11 June 2019 and outperforming the regional Asian markets. However, funds and speculators have responded to the perceived risk of a world recession by significantly shorting metals and commodities as reported by SP Angel on 31 May 2019. The report also notes that equity markets tend to look 6-9 months ahead while commodity markets appear more reactive to near-term news. Hence, a potential consequence of the current commodity price weakness stemming from short positions could be a major swing on the upside if commodity markets turn positive, reports SP Angel.
Earlier in March 2019 the Chinese Premier Li Keqiang announced cuts in taxes and fees worth nearly 2 trillion yuan (US$289.28 billion) in his opening remarks at the annual National People’s Congress. The Premier commented that risks threatening the world’s second-largest economy may warrant “stronger mitigating action” as growth is expected to slow further this year. However he believed that monetary policy will neither be too tight nor too loose in the future and that policy will also maintain a stable yuan.
Overall while there are no immediate resolutions evident in the trade war between the two superpowers, the equity markets are factoring in mitigating action by the Central banks to minimise downside economic risk. The question now is when will the commodity markets also factor in this potential mitigating action which perhaps requires a positive stimulus which could also involve the closing out of the short positions in these markets. Elsewhere a key theme emerging in recent years is China’s persistence in addressing environmental pollution and this ranges from curbing smelter pollution to tackling auto emissions.
Recently China’s economic think tank, the National Development and Reform Commission(发改委), released a draft working plan for 2019-20 which includes measures to stimulate scrap collection and recycling capabilities as well as special subsidies for low-emission vehicle upgrades or replacement as well as for green and smart home appliances. This has led to reduced supply of some metals while elsewhere and in line with a world-wide trend to reduce greenhouse emissions, has led to an increase in demand for other commodities, particularly metals associated with tech – applications, battery metals and industrial metals associated with the construction of electric vehicles including copper (motors) and zinc (panels).
Indeed, the forecast demand for electric vehicles has increased significantly over the last few years as many countries adopt a zero emissions strategy. As reported by SP Ange in April, there is now US$300 billion of investment in electric vehicles planned over next 5-10 years and which includes:
- $91bn VW / Audi / Porsche
- $42bn Daimler
- $20bn Hyundai / Kia
- $15bn Changan
- $13.5bn Toyota.
Copper Early in 2019 the US$ copper price increased to around US$3.00 lb in early March before drifting sideways until the end of April and then steadily softened to the current price around US$2.60 lb in line with market expectations of weaker world growth from the US – China trade war discussed earlier. However, a depreciating AUD/ USD exchange rate over the same period has mitigated the recent fall in the A$ copper price with the current price around A$3.75/lb.
Copper is often referred to as a bellwether of the markets and the supply/demand balance is often dominated by demand expectations which itself reflects the outlook for world economic growth but particularly with China. As noted in a presentation at the ICSG conference by analyst Simon Hunt – it is not possible to pretend that China is just another big player in the copper market – it is the biggest player in the history of the world!
As well as copper demand in electric vehicles, stronger copper demand stems from new infrastructure projects in China and India including the expansion of their respective power grids and in China, the development of the high-speed rail network and domestic demand (air conditioners, etc.). Last year Deutche Bank was forecasting a market deficit although we expect it was closer to a balanced market. However, by the end of 2019 the market could move to a deficit and Rio Tinto estimate that a deficit will steadily expand to 2030. Earlier this year a Rio Tinto Copper CEO is quoted as having said that the world will require the same amount of copper in the next 25 years as it has produced in the last 500 years!
The zinc price has followed a similar trajectory as the copper price and steadily rose in the first quarter of 2019 to peak above US$1.35/lb in mid-April and then soften to the current price which is around US$1.20/lb. Similarly, the A$ zinc price has been strong with prices exceeding A$1.90/lb in mid-April and falling to the current level around A$1.70/lb in June 2019.
China is also a significant player in the zinc market as investment in infrastructure and any pick-up in construction could drive overall demand higher – perhaps a consequence of further Chinese economic stimulus during the trade war. However, the high zinc prices in 2018 stimulated a mine supply increase and this is evident this year in the zinc concentrate market where treatment charges for zinc concentrates settled at US$245/t – higher than previous years.
According to the International Lead and Zinc Study Group, after increasing by 1.3% in 2018, global zinc mine production is forecast to rise by 6.2% to 13.48 million tonnes in 2019. New zinc supply has been dominated by Australian producers with higher production from Dugald River, McArthur River and Lady Loretta mines together with increases at the recently commissioned Century and Woodlawn tailings projects. Elsewhere, modestly higher production is forecast from the South African Gamsberg mine as well as mines in Canada, Cuba, India and Namibia. In addition, a modest increase in European production will be offset by forecast lower production in the US, Mexico and Peru.
In terms of world demand, the Group forecasts that global demand for refined zinc metal will exceed supply in 2019 with the extent of the deficit forecast at 121,000 tonnes. This maintains an ongoing market deficit since 2016 and despite the recent production increases, we expect the zinc price to remain highly leveraged to any upturn in perceived world economic growth. —quoted/edited by Tartana Resources Limited Prospectus 2019.
More information about Tartana Resources Limited’s coming IPO campaign can be found at https://tartanaresources.com.au.
Edited by Joreal Qian