Super cycle for commodities?Below is an extract from a convincing presentation (source: Pareto) arguing for a long lasting super cycle for commodities.
The iron ore super cycle: stronger for longer
Focus on the China effect on commodities
Crude steel production per capita, 1950-2006
• China still way behind Japan, it has only begun its long journey as a mature steel producing nation
Steel production per capita in 2006: Japan 900, China 320
• BHP Billiton recently told us (after the US subprime crisis emerged) ”…any changes to fundamental supply and demand - absolutely not”
The drivers
Where do people live?
Emerging economies: 80%
China + India: 40%
USA: 4,6%
Outside USA: 95,4%
The US share of global GNP: 30%
The rest of the worlds share of global GNP: 70%
Chinas masses migrate from their farms to (new) cities
• Around 10-15m Chinese urbanising annually, a mass migration never seen before in world history
• Equals the building of 3-4 cities like Los Angeles from ground up every year
• ~50% of worlds concrete is being consumed in China
• 50 Chinese cities exceeds 1m population (as opposed to 9 in the US)
• 300m Chinese defined as ”middle class”, ~100m have purchasing power parity as ”western” middle class, expected to grow strongly over the coming 2 decades.
• Still, 15% of the entire Chinese population lives on $1 a day, and there are 1bn ”rural” Chinese.
• The rest of Asia counts >2 bn people (and growing). They seek economic prosperity too.
In 2006 China had 20 cars per 1000 inhabitants. South Korea at the same level 18 years earlier. South Korea now have 230 cars per 1000 inhabitants.
Large populations passing important income thresholds
• China, Indonesia and India combined count close to 3 billion people, their prosperity has just begun
Size of population passing USD 5.000 per year income threshold, million:
Western Europe – early 1950’s – 310 mill.
Japan – early 1960’s – 100 mill.
Eastern Bloc – early 1970’s – 350 mill.
Asia Tigers – late 1970’s – 60 mill.
Thailand/Malaysia – early 1990’s – 85 mill.
Eastern Europe – late 1990’s – 120 mill.
Former USSR – early 2000’s – 290 mill.
Iran – early 2000’s – 70 mill.
China – mid 2000’s – 1300 mill.
Indonesia – early 2010’s – 230 mill.
India – mid 2010’s – 1250 mill.
China and India to dominate the world GDP in 20 years
China greater than Germany: 2010
China greater than Japan: 2016
China greater than USA: 2036
India greater than Italy: 2010
India greater than Germany: 2027
India greater than Japan: 2032
Commodity prices since 1920
• Historically still low real prices today
Discovery rate slow down
Low prices in the nineties cut back eploration and consequently discoveries
• Long lead times to get new mines into production
• A generation of mining labour wiped out, skills shortage adds to the problem
Commodities super cycle: long and strong
· Commodity prices expected to continue strong over the few next decades as supply struggles to keep pace with strong demand growth from BRIC-countries (B: Brazil R: Russia I: India C:China)
· Regardless of what happens in the West, 3 billion people in Asia are going through a process of modernization never seen before
· It is like Japan after World War II but 20 x bigger
· The modernization of Japan boosted demand of commodities for a couple of decades, but the present modernization of Asia involves 20x more people so the supercycle in commodities will last longer and stronger this time
· Commodity super-cycles have historically lasted 40 years
· ”People who continue to think of China in terms of a pool of cheap labour making stuff for other countries will miss out on the greatest investment opportunity the world has ever seen.” (Mr. L Roulston, June 2006)
Acute shortages constrain the supply side
• Delaying projects
• Increasing the marginal cost of production
2-4 years delivery time for equipment for the mining industry, more than double than normal in the past.