I have just returned from visiting companies and investors in mainland China. At every meeting, the US-China trade wars were an important topic.
Investors and company management teams have been concerned about the impact of the trade wars on the Chinese and global economy. But as my China trip highlighted, the trade wars are also creating threats – and opportunities – for listed Australian companies, particularly in resources.
US President Donald Trump’s aim in waging his trade war is clear: he wants to increase the US’s trade balance with Asian countries, particularly Japan and China.
There is concern that, if they come to a negotiated solution, the US could strike agreements that could disadvantage Australian exports to those countries.
On his recent visit to Japan, Trump – who had criticised Japan with its trade balance with the US – said the two countries were getting close to striking a deal that would help improve the balance in the US’s favour.
While trade talks between China and the US have ended, many expect Trump to strike a deal with China ahead of the 2020 election.
Japan and China are Australia’s two largest trading partners, and any incremental deals they do with the US could be at the expense of our companies and economy.
One major area of concern is liquified natural gas, or LNG. Australian listed energy players are looking to commission multi-billion-dollar LNG expansion projects from companies like Woodside in mid-2020s. The chart below indicates the increase in capacity that we may see in the coming years.
Those projects could be shelved if China and Japan agree to buy more LNG from America as part of any trade resolutions.
While the US has an abundance of cheap, ‘dry’ gas which could be liquified and shipped from its west coast to Asia, much of Australia’s gas is ‘wetter’ – which means it releases more heat per unit.
Australia is also closer to customers in Asia, but the advantages of better gas and proximity could be negated if there is a political decision from Japan, our most valuable LNG customer, and China, the world’s largest net new buyer. (The IEA expects China to increase purchases by over 120 billion cubic feet of gas – a valuable prize for any energy exporter.)
Opportunities in smaller commodities
But the good news is that the trade wars are creating some opportunities, particularly if they continue.
China has threatened to cut exports of rare earth minerals to the US which could see the US make some strategic investments to access some of Australia’s rare earth mines.
In our meetings in China, more than one contact said the upcoming high-power-demand season could see the Chinese government loosen import controls to alleviate pressure on supply and prices.
There have been a number of customs delays for thermal coal shipments at Chinese ports, and any loosening of controls would be incrementally positive for Australian coal exports to China.
There are also some opportunities in battery and electric vehicle segments, like lithium and cobalt, because China may have to increase subsidies in this area if it is going to hit the ambitious Chinese Government targets of two million electric vehicles by the end of 2020.
An eye on the fall out
So, while much of the focus has been on the global economic impact of the trade wars, Australian investors need to be focused on the potential domestic implications.
That includes listed companies.
But investors also need to focus on how the Australian Government reacts. How can the Government ensure our interests don’t get overlooked in negotiations between the US and the likes of Japan and China? And if the trade war does drags on, what domestic stimulus options do our authorities have to see us through a snap freeze in this modern-day cold war?
Subscribe to SMSF News below to receive my latest articles straight to your inboxDermot Ryan, Co-Portfolio Manager (Income)
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