With the ASX down again today and the All Ordinaries index recently coming off an all-time high, it is shaping up to be wild ride for investors in 2019.
The US-China trade war has traders on the edge of their seats and central bankers are mashing the rate cut button.
The iron ore price started to tumble and big name iron ore miners like Fortescue Metals Group Ltd [ASX:FMG], Rio Tinto Ltd [ASX:RIO] and BHP Group Ltd [ASX:BHP], are beginning to trend down after a stellar run driven by events in Brazil.
What’s more, the depreciation of the yuan could play a role in increasing the operating cost of steel mills in the coming months as China attempts to wriggle out from under the downward pressure generated by a fresh round of tariffs.
So if iron ore is off the cards for Australian commodity investors, where to next?
Today we look at three commodity investments that could outperform in 2019.
They are gold, nickel and rare earths.
Each resource offers a unique way to play the market in 2019.
Gold for instance, is the ultimate no-confidence vote in central bankers, QE and the prospect of negative interest rates.
Nickel on the other hand, offers a way to cash in on the battery metals boom that has left lithium by the wayside.
Finally, rare earths are the speculative resources that have been unloved since 2011, but could be primed to go ballistic in the event of a genuine trade war meltdown.
Gold stocks have been on a serious run
If you have followed our gold stock coverage on Money Morning, we have profiled a number of companies that have been benefiting from the market’s pivot toward the precious metal.
With the gold price sitting at US$1508, up nearly 24% in a 12 month period, Aussie gold miners have benefitted.
Also working in their favour is a weaker Aussie dollar which has been forced down by slower global growth (China in particular) and the RBA’s two rate cuts.
After laying dormant for a long period, gold is starting to have a broad based appeal as a store of value when central bankers tinker with interest rates.
Nickel stocks could be next up to benefit from battery boom
Have a look at the Independence Group NL [ASX:IGO] chart from the past year:
That’s a strong bullish move from a bottom in November last year.
The company gets its earnings from a 30% owned JV gold mine called Tropicana and a 100% owned nickel-copper-cobalt mine called Nova.
You can see a breakdown of its EBIDTA profile from the two resources below:
So while gold may have been the driving force behind its upwards momentum, its nickel margins could be poised to grow in the coming years as an increasing amount of nickel is used in EV batteries.
Lithium has disappointed of late, with 6% lithium spodumene concentrate going for between $550–$620 a tonne, down 33% in 2019 according to Benchmark Minerals.
South American lithium carbonate is down 22% this year to $10,500 a tonne in July from a high of $24,750.
It seems there is too much supply in the market at the moment.
Independence Group, citing Roskill projections, is forecasting an increasing supply shortfall for nickel:
Despite only bringing in an NPAT of $76 million in FY2019, Independence Group (along with other nickel stocks), could be primed for improved earnings in the next reporting period.
You can catch a more in-depth look at nickel’s increasing role as a battery metal and the names of other nickel stocks here.
Rare earths space could explode if Trump and Xi-Jinping reach an impasse
With the 1 September deadline approaching, rare earths are the most speculative of the trio of investment ideas presented here.
If Trump and Xi-Jinping reach a deal, it could be a massive dud (in the short term at least).
But if they don’t…
Interest in Lynas Corporation Limited [ASX:LYC] is ramping up on headlines suggesting that its Malaysian operating license could be extended.
Northern Minerals Ltd [ASX:NTU], a lesser-known rare earths play, is also making intriguing moves.
They have recently canceled their offtake agreement with Lianyungang Zeyu New Materials Sales Co., Ltd, and promptly announced thyssenkrupp Materials Trading Gmbh as their new offtake partner.
Thyssenkrupp is a massive German multinational, so you would imagine the offtake agreement would bring Northern Minerals’ rare earths supply into the hands of European companies in an important strategic shift.
Northern Minerals CEO George Bauk is quoted by mining.com as saying the following:
‘All of a sudden, you’ve got the U.S. government realizing they have a problem…the reason why you are seeing the pressure in the rare earths space is because of the military applications — you are talking about security.’
So if you can read the trade war tea leaves correctly, rare earths shape as an intriguing investment vehicle — especially if you have a high tolerance for risk.
We go into further detail in our free rare earths report which can be downloaded here. We discuss applications, supply dynamics and reserve locations. With 1 September coming up quickly, it is a must read document.
To conclude, disappointed iron ore investors have a bevy of options available in the commodity space if the iron ore price continues to disappoint.
Whether it’s a defensive gold play, a bet on innovation with nickel, or going long on security with rare earths, there is plenty to consider.
For Money Morning