China stepping up search for alternatives to Australia
It looks like the trend we have seen before is continuing for the time being. China looks to have stepped up their search for alternative sources of Iron Ore, as the trade spat doesn’t appear to be cooling down. Iron Ore penny stocks with assets outside of Australia should be exceptional bargains now. Especially given the bullish outlook for steel.
Australia saw robust exports to China in the first half of the year, showing its increased dependency on the Chinese market, but it then recorded a 17 percent decline in exports to China in July, with metalliferous ores exports falling 12 percent from the level in June.
For those unaware, Iron Ore has been on a tear recently, and is testing previous highs.
China being the world’s largest consumer of Iron Ore is the primary driver for this price increase. With China having reopened earlier, and having a seemingly insatiable appetite for infrastructure spending, their demand for Iron Ore imports combined with supply constraints from Brazil has been very positive for Iron Ore investors.
Trade War
China had already been looking for new sources of Iron Ore. It looks like this is not the only Australian export to be part of the chopping block.
Other Australian exports to China, especially resources, declined as well. For instance, its coal exports to China dropped 42 percent during the same period, according to data from the Australian Bureau of Statistics.
Some may argue this is because of reducing demand, however this is not the case as their imports from other sources has increased.
Per data from India’s Department of Commerce, its exports of ore to China in July surged 53.18 percent year-on-year. Also, China imported 17.7 million tons of iron ore from Brazil in July, more than double the 7.7 million recorded in the previous month, Reuters reported. With COVID-19 coming under control, China has been speeding up its economic recovery and there is increasing demand for resources and raw materials.
This is not a minor event. China and India are not typically friendly, and have had military encounters in the past leading to conflict. In fact there is an on-going situation between the two countries right now. Surely if they’re importing from a country they’re having a military face-off with then they must be very serious about finding alternatives to Australia.
The flow of capital also appears to be impacted:
The same goes for Chinese investment in the Australian market. During the past few years, Chinese investment in Australia has slumped due to Canberra’s heightened scrutiny of Chinese capital. According to data from the University of Sydney, Chinese investment in Australia fell 58 percent year-on-year in 2019. The figure may further dip this year.
The Morrison administration recently blocked Chinese dairy behemoth Mengniu Dairy’s plan to buy an Australian dairy brand. The continuously deteriorating investment environment will cast a shadow on other foreign capital as well.
The investment thesis of Iron Ore sourced from geographies outside of Australia would be a no-brainer given the current tensions between the two countries.
Conclusion
Iron Ore penny stocks will certainly move up with the increase in steel demand. With China importing 69.1% of global Iron Ore supply, you can be sure they have a large part to play in the price of this metal. Traders and investors involved in mining penny stocks and microcaps surely want to be exposed to such a valuable metal, but want to pick geographic jurisdictions that are neutral or positive in relations with China.
We remain bullish on Black Iron Inc (TSX: BKI), and believe it is an exceptional bargain given the proximity to production, the ultra-high grade Iron Ore deposit, and the Ukrainian president publicly endorsing the company.