What is it good for?
Well, one special, niche metal, apparently.
But before I get into the details of this big investment opportunity, a quick point. I want to be very clear. I don’t want wars to happen.
I don’t want hurricanes in Florida, floods in Bangladesh or an earthquake in Mexico either.
But life happens.
Investors react. Guess. Speculate. And invest.
Wishing and hoping are not investment strategies.
Managing risks, hunting opportunities and putting it all together are.
With that out of the way, back to this unique metal that’s rising so fast.
Described by the European Union as a ‘critical commodity’ it became a flashpoint in 2012 when US President Barack Obama filed a complaint to the World Trade Organisation against Chinese supply curbs.
And the Chinese are at it again now. They are restricting exports and making western manufacturers very nervous.
So what is this key commodity?
The metal in question is tungsten.
The price of tungsten has jumped 52% since early July, according to Metal Bulletin Ltd.
It has beaten all 22 major materials in the Bloomberg Commodities Index. Tungsten has gained for six straight months. The longest rally since 2012.
Tungsten, joined with steel, forms materials that are stable at high temperatures.
At more than 3,400 degrees Celsius, it has the highest melting point of any metal on Earth.
The biggest consumer is the auto industry. About 25% of supply is for cutting and machining tools. It’s also a component in lighting, steelmaking and mining.
Tungsten’s high density means it’s also used in ballistic missiles, to help penetrate defences. And this is why it’s sometimes referred to as the ‘war’ metal.
At the moment China controls around 80% of world supply.
They have a quota system to limit output. It’s very similar to the situation in the rare earths industry.
In the past, quotas have usually gone over the limits by as much as 50%. This is because tungsten is often a by-product of other forms of mining.
The Chinese government has turned a blind eye, until now.
This new clampdown on quotas — under the guise of environmental regulation — appears to be serious.
It’s part of a larger plan.
The Chinese want to control a whole host of critical rare earths.
What does this mean for tungsten prices going forward?
Well, if history is any guide, probably not much…
In 2011, Tungsten prices jumped 35% on concerns China would reduce exports. But since then the price fell gradually by around 50%. Until the recent surge.
This time might be different, though. US–China relations are more fraught than usual. And with the tense situation in North Korea, supply security is more pressing than it was in 2011.
Indeed, we’ve seen rare earths stocks like Lynas Corp [ASX: LYC] go from $0.04 per share to a whopping $0.21 in just 12 months.
I’ll come clean and say I didn’t particularly like Lynas from a fundamental point of view when I looked at it earlier this year. It has a lot of debt and a complicated ownership structure of warrants and options that I thought would leave current shareholders vulnerable to debt holders.
How wrong I was!
In my defence, the share price rise in Lynas isn’t a completely fundamental story. It’s mostly been driven along by geopolitical worries. The same worries over supply security that might boost tungsten stocks.
Lynas is one of the only non-Chinese producers of many critical rare earths. And the Japanese in particular — with their high tech manufacturing base — are keen to diversify their supply.
To clarify, tungsten is not strictly a rare earths material. But it follows the same global theme.
So, how can you invest in tungsten?
Well, it’s not that easy to invest directly. But there are three Australian companies I found that have exposure to tungsten production.
Carbine Tungsten [ASX:CNQ], King Island Scheelite Limited [ASX:KIS] and Vital Metals [ASX:VML].
These are all early stage microcap companies. In other words, be ready for volatility and risk, while hoping for gains.
Further, if tungsten prices remain at highs, you can anticipate other companies making efforts to discover and produce it.
For Western and Japanese customers right now, though, it’s more important than ever that new mines get up and running outside China, in order to overcome any additional export restrictions that might come from Beijing.
If the Chinese stick to these quotas more strictly this time, we could see a rush to fund the most advanced external projects as soon as possible.
To my mind, that spells investor opportunity.
Editor, Money Morning