The inevitable impact of the Coronavirus on the world’s rare earths supply.

Critical materials-based supply chains may be hanging by a thread, the thread of the size of existing Chinese inventories.

The coronavirus outbreak in China has had a foreseeable but unintended consequence. Truck drivers have refused to make deliveries into areas either identified as or suspected of harboring the disease.

This has interrupted not only the flow of minerals out of the affected areas but also the refining and manufacturing of metals, food, and fuel. Among the under-reported deficiencies thereby caused the most important ones for the global rare earths production and utilization industries is the interruption in the flow of chemical reagents necessary for refining rare earths and for producing metals, alloys, and magnets.

It cannot be overemphasized that the shutdown of a supply chain on purpose is time consuming, and its re-start even more so. Supply chains are not turned on and off with the flick of a switch.

The dependence of American and European manufacturing on the just-in-time delivery of components means that their industries maintain limited or even non-existent inventories. We do not know much about Chinese inventories, but we do know that they cannot be infinitely large.

If the coronavirus outbreak continues, we will soon learn a lot about the size of Chinese inventories providing, of course, that export from China does not also shut down (It is certainly slowing down).

Rare earth enabled components for moving machinery, such as automobiles, trucks, trains, aircraft, industrial motors and generators, home appliances, and consumer goods, almost all today come from China or Japan (which of course gest its rare earth magnets, alloys, phosphors, and catalysts from China). That flow is now slowing. This will have a domino effect on American and European industry. These items cannot be re-sourced due to China’s monopoly of rare earths production and its monopsony of rare earth enabled component manufacturing.

We were told that even if the Chinese stopped the flow of rare earth enabled products to the USA in retaliation for tariffs it wouldn’t matter. I said at the time that it would indeed matter.

Now we may have to face the consequences of such an interruption even if our countries have an amiable (or, better said, convenient) trade relationship.

There is an urgency now for the creation of a total domestic rare earth end-use products supply chain in the USA, Europe, and non-Chinese Asia.

The anchor of any such supply chain is a working mine-in this case many more than one, since we need both light and heavy rare earths, which are not usually found together in accessible, developable deposits.

The US Army’s choice of vendors for its rare earths production solicitation is now more important than ever — the best projects must now be prioritized for development.

A domestic North American rare earth industry is now more important than ever.




The Wuhan Coronavirus crisis leads to some investment opportunities

The Wuhan China Coronavirus continues to spread with the latest report at 170 dead and over 7,700 infected, mostly in China but spreading globally. Sadly this may just be the beginning as the WHO considers declaring an International Emergency.

Severe acute respiratory syndrome (SARS)

The most similar coronavirus outbreak was the SARS epidemic between November 2002 and July 2003 lasting about 6-7 months. An outbreak of SARS in southern China (notably Hong Kong) caused an eventual 8,098 cases, resulting in 774 deaths reported in 17 countries.

Investors seeking a safe haven or some positive returns should read on.

The Wuhan Coronavirus – Focused on China but is spreading globally

Source

Some areas to look at should the Coronavirus get worse

Health care stocks and ETFs (vaccines, treatment, protective clothing)

The Global X MSCI China Health Care ETF (CHIH) or the KraneShares MSCI All China Health Care Index ETF (KURE) are two excellent places to get widespread coverage to the Chinese health care sector. Valuation does not come cheap with the CHIH fund having a PE of 24.71. Nonetheless, China has an aging population and growing health needs. For a global perspective, Blackrock’s iShares Global Healthcare ETF (IXJ) has appeal.

Some individual stocks that focus on virus treatment and prevention/vaccines include Biocryst Pharmaceuticals (NASDAQ: BCRX), Gilead Sciences (NASDAQ: GILD), Moderna (NASDAQ: MRNA), Novavax (NASDAQ: NVAX),

Stocks that make or supply face masks and protective clothing may also see gains. Some names include Alpha Pro Tech Ltd. (NYSE: APT) and Lakeland Industries Inc. (NASDAQ: LAKE).

Screening and treating for the deadly Coronavirus

Source

Medical staff transfer patients to hospital in Wuhan, China, on Jan. 17.

Source

Chinese internet related stocks (food delivery, entertainment etc)

As consumers choose the safety of home, online shopping and entertainment sites should be winners, particularly in the worst regions such as China. The KraneShares CSI China Internet ETF (KWEB) should benefit as it holds the key Chinese internet stocks. The top ten holdings including online shopping companies Alibaba (NASDAQ: BABA) and JD.com (NASDAQ: JD), food delivery giant Meituan, and gaming and social media giant Tencent (OTC: TCEHY). Conversely TAL Education and TRIP may come under pressure, and it is possible home delivery service companies may run out of willing workers at this time. 

The KraneShares CSI China Internet ETF top ten holdings

Source: Kranes

Some investments to avoid if the coronavirus gets worse

Any stocks related to Wuhan or nearby areas may take a hit. PepsiCo, Siemens, and automakers Peugeot, Citroen, Renault, Honda, and Dongfeng all have bases in Wuhan or the wider Hubei province. Particularly impacted would be consumer discretionary such as restaurants, entertainment, and shopping centers as people avoid close contact with others.

Chinese travel (E.g: Trip.com (TRIP) (formerly CTRP) and tourism stocks (airlines, cruises, hotels etc) may be badly impacted, especially those linked to Wuhan. During SARS Hong Kong’s Cathay Pacific stock fell 30%.

Safe Havens

  • Gold and silver
  • Cash (the US Dollar, Japanese Yen, or Swiss Franc usually do best)
  • Bonds

Closing remarks

Given the Wuhan Coronavirus started only about 1-2 months ago in mid-December 2019 in Wuhan China, the number of affected cases is already approaching the 8,098 SARS cases over the 6-7 months SARS epidemic. This could suggest the epidemic may be 3x or larger than what we saw with SARS. To date, the death rate is smaller so that is a plus.

For now, we should probably assume that we are looking at another 4 months or more of the coronavirus impacts, and further global spread. This would mean despite some early positive moves in the stocks and ETFs discussed, larger gains may still be ahead.