US President Donald Trump doesn’t seem to be a big fan of free trade.
And tariffs — a tax on foreign imports — are his preferred weapon of choice when it comes to trade policy.
We’re not just talking about China, either.
He’s put tariffs on goods from Europe, Mexico, India and even his friendly northern neighbour Canada!
I mean seriously, who goes to any kind of ‘war’ with Canada?
Simon Lester, of the Cato Institute tried to explain Trump’s thinking:
‘His constant praise for tariffs suggests that maybe he is imposing tariffs simply because he sees benefits in using tariffs to protect domestic industry from foreign competition, and he likes the tax revenue they bring in’.
Yes indeed, he seems to like tariffs and like them ‘bigly’.
And it’s this penchant for protectionism that has had uranium miners on tenterhooks for the last 18 months.
But as of yesterday, it seems they’ve dodged a bullet.
Let me explain why…
Good news for Australia’s uranium miners
In early 2018, two US uranium miners petitioned the president to implement a Section 232 measure in their industry.
Section 232 is a part of the US Trade Expansion Act that allows barriers to trade on the basis of ‘national security’.
Hmmm, sounds more like some rent seekers with some serious self-interest to me.
Anyway, if approved, it would’ve locked out many foreign companies from supplying as much uranium to US nuclear power plants. With US uranium miners getting favoured status.
Which means there’d be less uranium bought from the ‘threatening’ countries of Canada, Australia and Kazakhstan, which currently make up most international uranium exports.
Absurd as it may seem, that seemed to be the most likely outcome. Mainly because US Commerce Secretary Wilbur Ross was behind the petition.
But surprisingly, Trump rejected it yesterday:
‘At this time, I do not concur with the Secretary’s finding that uranium imports threaten to impair the national security of the United States as defined under section 232 of the Act,’ he stated in a memo.
It appears that the interests of the nuclear power plant owners won the day.
You see, such a move would’ve increased the price they would pay for supplies of uranium fuel.
Not that such considerations have stopped Trump before. Like when it came to steel tariffs, for instance.
But there are also thousands of jobs at nuclear plants in swing states. And with competition coming from natural gas power plants, higher uranium prices might put some of these jobs at risk.
Which could cancel out the mere ‘hundreds’ of jobs an uplift in uranium mining might create.
Trump knows ‘ratings’ and made the necessary political calculation. That’s my best guess, anyway.
But whatever the real reason, it’s clear this was good news for Australia’s uranium miners.
As TD securities explained in a note to their clients:
‘By not supporting quotas, President Trump is potentially avoiding a situation that would have seen higher cost uranium production being encouraged into a market that is already more than adequately supplied…
‘Quotas may have resulted in a two-tier uranium pricing environment that could have seen a small higher priced US domestic uranium market and a lower price for uranium elsewhere’.
In other words, this move will prevent the creation of uncompetitive supply from US producers at the expense of cheaper (i.e. more efficient) foreign uranium miners.
Adam Smith would have rejoiced…
Three uranium small-caps to watch
Uranium juniors on the ASX were quick to draw attention to the outcome in a series of pre-dawn market updates.
Boss Resources Ltd [ASX:BOE] head Duncan Craib stated:
‘Australia has been a long-term, reliable and important supplier of uranium to the US and this decision will see this continue, underpinning project development in Australia, as well as providing foreign investment’.
This decision will aid Boss Resources as they attempt to restart the Honeymoon uranium project in South Australia.
Vimy Resources Ltd [ASX:VMY] was also quick to put out a statement saying:
‘[It was] a very positive outcome for the Australian uranium industry, as any sort of tariff or quota would have been prejudicial to uranium sales within the US market which accounts for 30 per cent of uranium consumption’.
Hylea Metals Ltd [ASX:HCO] — the recent buyer of Paladin’s second uranium mine — was a little later coming to the party, waiting until lunch time to put out their note welcoming the ‘conclusive resolution to Section 232 Trade Investigation.’
It seems the prospects for junior uranium miners just dramatically improved overnight.
A final thought on free markets…
Uranium aside, it’s clear the Trump effect on the rules of free trade should now be a big consideration for you as an investor.
The old rules don’t apply.
His supporters would argue he’s only correcting ‘bad deals’ made by previous administrations.
He’s just a plain old-fashioned populist, making ad-hoc decisions to shore up his political power. There’s no thread of ideology, just what wins votes at the time.
But make no mistake, this is a dangerous route for the US and the world to go down.
You might support Trump, but what if Bernie Sanders is the next president? Would you be happy with him wielding such power?
The fact is, if we allow governments to pick winners, we’ll simply transfer financial power from capitalists to politicians.
History shows that free markets are infinitely better than that alternative.
Regardless, it’s something you’ll have to consider with your own investing these days.
Editor, Money Morning
PS: Uranium is down over 90% in 10 years…but my colleague Greg Canavan thinks it’s about to surge 2,000% (again). Download his FREE report now to find out more.