Will we see a switching of the guard from the tech bubble to commodities?

By Dale Gillham. Published at Sep 11, 2020, in Features

Vale (BVMF: VALE3), the world’s largest producer of iron ore pellets and nickel, has approved the $US1.5B (AU$2.06) Serra Sul 120 project in Brazil.

Some may remember in January 2019 that the $309B capped Vale had a disastrous dam failure that halted their operations in Brazil, which resulted in Australian mining stock prices rising strongly. From January to July 2019, BHP (ASX:BHP) rose over 20 per cent while Rio (ASX:RIO) increased by 30 per cent and Fortescue (ASX: FMG) by a whopping 128 per cent.

BHP and RIO peaked in July of 2019 before falling away with the miners still trading below their highs right now. Fortesque, on the other hand, benefited from the Vale mine shutting down, as it is still up more than 80 per cent on its July 2019 levels. While Vale expects the project to commence in the first half of 2022, I don’t believe this will be a positive move for Australian miners, especially Fortesque.

While Brazil has been hit hard with COVID-19 infections, which is slowing down Vale’s attempts to get the Serra Sul 120 project up and running, the big issue facing Australian miners right now is our strained relationship with China.

Currently, Australia delivers roughly 60 per cent of the total iron ore imports to China, which puts BHP, RIO and FMG heavily at risk if this changes.

Despite the COVID-19 pandemic, exports in iron ore to China have increased by around 8 per cent, which is good news given that China has imposed bans on beef and tariffs on our barley, not to mention the investigation into wine that caused Treasury Wines (ASX: TWE) to fall heavily.

Australia is a significant player in the world when it comes to metals, so while China is not targeting our iron ore like other commodities, we do need to be prepared, as I believe Fortesque is most at risk given that it supplies lower grade iron ore.

That said, when the world moves into recovery mode from the COVID-19 recession, materials are likely to create the next boom, as nations focus on infrastructure to stimulate their economies. Given this, I believe we will see a switching of the guard from the tech bubble to commodities in the not too distant future.

Australia is well placed to profit from this.

Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of the award winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good bookstores and online at www.wealthwithin.com.au.

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