Investment Research Group
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BHP, for example, is down 4% in the past month. I believe these fears appear to be overblown and the outlook for commodities is positive for many years to come.
One who shares this view is Frank Holmes, CEO of investment advisory and funds management firm US Global Investors. He notes that rapid urbanisation (for the first time, there are more than half of the world's population living in cities rather than the countryside) and industrialisation, better infrastructure and growing consumption are significant trends.
They are also key drivers in the rising demand for oil, steel, copper, cement and other resources. Imagine what the following trends will do for resources demand for the foreseeable future.
Urban populations in emerging nations are growing by 3 million people per week. India has a US$500b plan to expand and upgrade its highways, airports and other transportation assets by 2012. More than 13m cars and light trucks were sold in China in 2009 and this is growing by 10% a year.
Much of China's GDP growth of 8% last year (and a government committed to keeping this rate up) was driven by commodity-heavy infrastructure investment. China has a rapidly growing middle class. As many as 25% of Chinese fall into this category now, with a doubling possible within the next decade.
Such a trend is also occurring, although less rapidly, in India, Brazil and elsewhere. "This trend has huge implications for commodities. Wealthier people want a better lifestyle. That means more and better housing - in addition to the structure itself (cement, steel), that means more wiring for electricity (copper), more plumbing (copper, zinc) and more basic appliances (steel, copper and other metals)," he says.
They also want better transport, as shown in China. Over the past decade, China has gone from being the world's 20th largest oil consumer to second behind the US as a result of its accelerating shift from the bicycle to the car.
Getting around also means more roads, more bridges, more airports all of which add to commodities demand.
While demand is growing, the supply of many key commodities is not keeping pace. Holmes notes it is increasingly difficult and costly to find and develop large new oil fields, and mining projects are often slowed down by environmental opposition and tighter regulatory requirements.
Many promising new commodity sources are in countries with inadequate infrastructure and/or significant political risks. "Commodity supercycles typically last 20 to 25 years - the current supercycle began in 2000, so we are just at the halfway mark. A stress in the markets is that insufficient capital has been invested in resources in recent decades, while at the same time the world's population has doubled and there has been spectacular growth in the middle class. Any supply disruptions quickly lead to price spikes," he suggests.
If prices for commodities rise, one way investors can protect themselves against the impact of that price increase is to invest in those commodities.
