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The commodity supercycle myth or reality

The commodity supercycle myth or reality

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Published by: geradar on May 20, 2008
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Monday, May 19, 2008
The commodity supercycle: myth or reality?
By Ron MandelSince 2001, commodities have experienced a powerful bull market. Precious metals, basemetals, coal, uranium, oil, natural gas, grains and potash have all gone up in price. Thelist goes on and on, and the price charts all look the same: they start somewhere on thebottom left, and move up to the top right-hand corner.With a powerful bull market now in its eighth year, some market commentators haveasserted that this is a "commodity supercycle," a bull market like no other. Is thecommodity supercycle for real, or is it just one more commodity bull market the likes of which we have seen before?One authority on the subject is Marius Kloppers, CEO of Melbourne- based
BHPBilliton
(BHP-N, BLT-L), the world's largest miner. BHP has made a pre-conditionalmerger offer to
Rio Tinto
(RTP-N, RIO-L), another mining giant, which was rejected. Inan interview in
The Wall Street Journal
in late March, Kloppers compares the presentcommodity boom to those that occurred during the colonial age and after the SecondWorld War. He says that the present boom is even bigger -- not only involving theindustrialization of China, but also India and large parts of Southeast Asia. Kloppers saysthat new people are entering the modern industrial age, and with massive urbanizationprocesses under way, commodity demand is strong. With such a bullish outlook, nowonder BHP is interested in Rio Tinto.Another upbeat view is expressed in a March report by McKinsey Global Institute, theeconomics research arm of management consultants McKinsey and Co. In a reportentitled
Preparing for China's Urban Billion,
the McKinsey researchers make boldgrowth projections that, if accurate, would require prodigious amounts of commodities of all kinds. They say that 350 million people will be added to China's urban population by2025 and that the population of China's cities will reach 1 billion by 2030. By 2025, therewill be 221 Chinese cities with populations greater than 1 million, and of these, 23 citieswill have populations greater than 5 million. This scale of urbanization will also requiresizable investments in public transit, and the report estimates that up to 170 mass transitsystems could be built, with up to 28,000 km of metro rail, three times the length of theTrans-Siberian railway. Five billion sq. metres of road will be paved, and 40 billion sq.metres of floor space will be built in 5 million buildings. Of these buildings, between20,000 and 50,000 will be skyscrapers (buildings of at least 30 storeys).The McKinsey report projects that China's gross domestic product (GDP) will havegrown fivefold by 2025. Vast amounts of energy will be required to power thisexpansion. The report says that between 700 and 900 gigawatts of new coalfiredgenerating capacity will have to be installed between 2005 and 2025. Although the reportdoes not connect these projections directly to the level of commodity demand, we canassume that if these staggering growth projections do materialize, they will spell
 
sustained high demand over the next 17 years for a broad spectrum of commodities suchas base metals, steel, cement, construction materials, asphalt and energy.Another proponent of the bullish case for commodities is Frank Holmes, chief investmentofficer of San Antonio, Texas-based
US Global Investors(
GROW-Q), which projectscommodity demand based on an infrastructure boom driven by globalization,urbanization and wealth creation. In a presentation entitled
The infrastructure boom and its impact on commodities like gold,
Holmes says that the world is in the midst of amegatrend in infrastructure build-out, which will require massive amounts of commodities. This is not limited to emerging economies: the U. S. requires aninfrastructure investment of US$1.6 trillion. Even this amount is dwarfed by theworldwide (including U. S.) infrastructure spending over the years 2005 to 2030, whichHolmes projects to reach a mind-boggling US$41 trillion, about three times the size of the U. S. GDP. Imagine what this could do to commodity demand.Population growth coupled with rising affluence and urbanization creates demand for allkinds of goods, in turn raising demand for commodities. Living standards in emergingeconomies still have a long way to catch up, with an average per capita GDP of US$5,000 compared with US$40,000 in developed countries. Holmes projects rising percapita consumption levels of oil, steel and electricity in emerging economies. A numberof developing countries, including China, are creditor nations, and so have substantialfinancial reserves, putting them in a strong position to invest in development. Corporatebalance sheets in emerging economies are also strong, carrying less debt than theircounterparts in the developed G-7 countries.As an example of commodity demand this infrastructure boom implies, Holmes projectsthat the amount of copper that will be consumed during the 25 years from 2007 to 2032will equal the entire amount of copper consumed throughout history until 2007. Contrastthis strong demand with the lagging supplyside response, and the conclusion is thatfundamentals are bullish for the red metal. Turning his attention to gold and oil, Holmessays that all the fundamentals point to continued strength in both commodities.Stephen Leeb is chief investment officer of Leeb Capital Management in New York Cityand coauthor of the books
The Oil Factor: Protect yourself and profit from the comingenergy crisis
and
The Coming Economic Collapse: How you can thrive when oil costs$200 a barrel.
Leeb agrees with the commodity supercycle theory, but from a differentperspective.He looks at the market from the energy angle, and specifically from the perspective of theoil market. According to Leeb, the price of energy, and especially oil, will continue torise. Since mining is an energy intensive activity, it will become more and more costly,and rising costs will find their way into commodity prices. The bottom line: firm pricesfor mined commodities.Patricia Mohr, vice-president economics at Toronto-based
Scotiabank
(BNS-T, BNS-N)also believes that commodities are indeed in a supercycle. Mohr's economics department

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