Supermarket Clue for the Next Hot Resource Sector

Supermarket Clue for the Next Hot Resource Sector

It goes without saying these days that there’s always a worry that China is going to fall over. Yet you wouldn’t think so looking at the recent numbers.

China’s economy has expanded faster than expected for the first two months of 2018, according to industrial production statistics. Retail sales came in nicely as well.

There’s more: China’s global trade surplus grew, and its property market is still firing.

Naturally, we should be sceptical of statistics. But we can cross-reference what we’re being told with stocks associated with China to get a clearer picture of the health of the Middle Kingdom’s economy.

This stock broke out strongly last night

One of my favourite bellwether stocks for China is Alibaba Group Holding Ltd [NYSE:BABA]. Few companies have the pulse of the Chinese consumer like this company.

The stock appears to be ticking over nicely, and there’s nothing to suggest trouble ahead for Alibaba. In fact, it broke upwards in overnight trade in a very bullish move. Keep an eye on it.

All this is good news for Australian exports. Chinese tourists keep pouring into Australia and spending big dollars. That’s the kind of healthy growth that an expanding middle class can bring.

One question is what type of car your average Chinese will be driving in the future.

We can’t forget China’s push to dominate the electric car market and battery sector. There have been some bullish moves here in the last few days.

Massive miner Glencore plc [LON:GLEN] revealed this week that it has sold three years’ worth of cobalt supplies to Chinese battery recycling company GEM. That’s over 52,000 tonnes.

And that’s not all…

Emerging ASX-listed lithium miner Altura Mining Ltd [ASX:AJM] also made public that it’s in takeover talks with its Chinese major shareholder and off-take partner. The issue is security of supply.

We’re getting the same vibe from Volkswagen.

It came out this week announcing that it had secured €20 billion in battery supplies to underpin its aggressive electric car rollout.

But it’s still worried about long-term cobalt supplies. That’s because Volkswagen expects the final battery bill to surpass €50 billion.

It’s no wonder. Volkswagen said it’s going to take the number of factories that can produce electric cars from three to 16 by the end of 2022.

Panasonic will be watching developments with interest. It’s currently partnered with Tesla as part of its massive Gigafactory in Nevada. But it’s also begun mass-producing lithium-ion batteries in China to supply the domestic market there.

I can’t recall one sector of the resource market getting such a lift in investment like this for ages.

Having said that, the lithium theme is probably spent as a ‘hot’ sector of the market. It’s been a good run.

It also means that you should be wary of diving into this space right now. Companies that are producing now or are very close to production should stay strong. Those further out might not find much momentum.

In general, I’m looking for opportunities in other sectors of the natural resource market. Ones that are less obvious. That’s where a likely advantage should be found from here.

Certainly gas stocks are worth watching. There are a lot of companies still getting hit with seriously expensive energy bills.

The chief executive of supermarket chain Ritchies told The Australian the other day that he expects the company’s energy costs to go up by $6 million this financial year. That’s a huge slug.

He added that the only way the company can control its cost base is by pinning wages as low as possible and cutting services.

Ritchies is by no means the only business struggling on this front. In fact, it’s something to consider for any stock you’re looking at.

There’s every incentive for explorers and developers to find and develop more sources of energy to help bring Australia’s domestic energy prices down.

Make no mistake: A low cost of energy is critically important for industry. It’s one reason the US economy is booming right now. Natural gas production has soared in the US.

It means US manufacturing is now competitive with China once transportation costs are taken into account. This is bringing production to the US. And it’s one reason why I remain so positive about the US economy for the foreseeable future.

2018 still has potential to see the ‘Big Three’ economies of Europe, China and the US fire at the same time.

Which could prove a timely boon for the stock market.


Callum Newman Signature

Callum Newman,
Editor, The Daily Reckoning Australia