Email of the day on cannabis and steel
Comment of the Day

January 23 2017

Commentary by Eoin Treacy

Email of the day on cannabis and steel

For information. Canopy has made an offer to buy Mettrum for Canopy stocks. This will triple my Canopy position and will help you to understand the reason for the similar chart pattern since early December. 

On your presentation yesterday (that I watched today), I was intrigued by the iron ore comment. Canadian iron ore companies (have a look at: Alderon, Labrador iron ore...) are on fire and I sold way too early exactly because I saw China slowing down and their financial situation reminded me of USA 2007-2008. 

So stock piling for war?.... hmm.. It is true that the US never really got out of the depression woes until their implication in the WW2 conflict, which they used also to help breaking European French and English ''Empires'' among others. This is certainly something to watch, and Trump ''shoot first'' attitude probably add to the concern for sure.

Eoin Treacy's view

Thank you for this additional intelligence on the Canadian cannabis sector. Iron-ore is an interesting market because steel is such a political sector. China is expected to account for 71% of global steel production this year according to this article from CNBC. That’s a lot of supply and not all of it is designed to cater to the domestic market. 

The long-term aim is simple. Depress prices enough so that competing overseas producers are forced to close. China then not only fortifies its position as a global supplier but gains a geopolitical advantage by possessing the capacity to redeploy production to weapons if the need arises. 

China has one aircraft carrier and is building three more. The USA has 10 in operation, holds one in reserve and is building 2 more. That does not account for decommissioned ships. Chinese steel production is in the order of 800 million tons per annum and one Nimitz class aircraft carrier requires around 47,000 tons.  .  

When you do the math, China has already stopped building empty cities. It is now building railways, military bases on rocks in the middle of the ocean and massive pieces of military materiel. That is in addition to flooding the international market with surplus steel in an effort to outcompete its geopolitical rivals. 

I agree Alderon and Labrador Iron Ore share similar characteristics with iron-ore miners globally. Medium-term the greatest risk is of a trade war where the USA imposes tougher restrictions on Chinese exports of steel.

Xi Jinping is the 7th president of Communist China but has signalled he favours erring from the prescribed order of nominating his successor. If protocol were followed he would need to nominate his successor at next year’s Party Congress. However he has already said he would favour delaying the handover. That’s quite a risk and highlights the typical Communist Party double speak of criticising Western democracy as flawed while cracking down on individual liberty at home. 

With the US becoming both more isolationist geopolitically and potentially more protectionist that creates a vacuum into which China appears eager to wade. Whatever about next year, 2019/20 will be a big year for China watchers because Xi could resort to war as a way of holding onto power beyond his defined term. 

From an investment perspective the Yuan was one of only three currencies in my click through that fell against the US Dollar today.  (The other two were the Indian rupee and the Philippine Peso).

Northrop Grumman remains in a reasonably consistent medium-term uptrend defined by a five-year progression of higher reaction lows. 


Back to top

You need to be logged in to comment.

New members registration