Good point LAM, building materials are going to be at a premium, especially now. And i forgot to mention the interest only loans, the equity ratio on homes is looking good, if you are the bank! Why is Vegas the new Manhattan though? I would buy home depot stock i think, but commodities are driven by world demand and the outlook is bullish without Katrina.
The Perfect Storm:
How to Make a Fortune
in the Commodities Crunch
A Special Report For Subscribers To Commodities Trends
CHAPTER ONE
THE PAST IS PRESENT
Picture this: There???s concern about inflation
and restlessness in the currency markets. A
war is raging in Afghanistan as Iran and the
US are at a standoff. There???s also an energy
crisis. Hard assets are vogue and paper
assets???their simply that???paper.
Though this snapshot of the world may
appear to be all-too current, it actually depicts
the 1970s.
Where did this turbulence lead us? During
the ???70s, the CRB Index, a basket of commodities, appreciated to more than 100 percent. The Dow Jones Index, a basket of ???blue
chip??? US stocks, went nowhere for more than
10 years (see chart on next page
???Commodities Loves the Seventies???).
Conditions today are similar to those of the
late-???70s. Thus it???s fair to say that we???re entering another boom in the commodity market.
Crucial to this is the incredible rate of population growth around the world that adds 80
million people every year. To demonstrate this
point, imagine we could shrink the earth???s
population to a village of 100 people. With
existing population ratios, it would look
approximately like this:
??? 14 people would be from the western
hemisphere (only five from the US)
??? 27 people would be from Africa,
Australia, Europe, and the Middle East
??? 57 people would be from Asia, with 38
from China and India
With only about 5 percent of the population residing within the US and over half of
the total in Asia, it makes sense to pay particular attention to the developing world.
The rapid movement of China and India
into the mainstream of the world economy is
generating new demands for commodities, the
likes of which have never been experienced.
Look at oil, for example. Today, the US consumes approximately one quarter of all the oil
produced; this is nearly 25 barrels each year.
During Japan???s accelerated economic
growth (from 1950 to 1970), Japanese oil
consumption rose from one barrel per-capita
yearly to more than 17 barrels. China and
India are now in the early stages of a similar
growth curve, today consuming slightly more
than one barrel per-capita per year. China and
Table of Contents
Chapter One:
The Past is Present 1
Chapter Two:
The Big Cycle 2
Chapter Three:
Technical View 4
THE PERFECT STORM Page 1
Commodities Loves the Seventies
Index
(1970=100)
350
300 CRB
250
200
150
100
Dow Industrials
50
70 71 72 73 74 75 76 77 78 79 80
Source: Bloomberg
India???s combined populations are 18 times
that of Japan. As their consumer economies
continue to expand, it???s hard to fathom the
stress that will be placed on the world???s limited and diminishing capacity to produce crude
oil (or metals or food for that matter).
China, in particular, is in the back of
investor???s minds these days because it???s driving
the most powerful investment trend witnessed
since the tech bubble burst in 2000. Look at
food consumption trends. China has a huge
population with a rapidly growing economy
and an expanding middle class.
As its population becomes richer, subsis
tence-level eating just won???t be good enough.
China can???t grow enough food to feed its peo
ple (which is behind the huge exports of soy
beans and wheat to China).
CHAPTER TWO
THE BIG CYCLE
All countries face a crop failure every decade
or so. What happens when one of the world???s
major food producers, such as the US, Brazil
or China has the next one?
In 1995, due to a poor domestic crop, China
turned from the largest corn exporter in Asia
into a corn importer. It was no coincidence that
this was the year of the greatest bull corn market in history, with corn prices surging from
less than $2 per bushel to more than $5.
Chinese agriculture also brings about other
demands. For example, a large part of increasing the efficiency of Chinese agriculture is fertilizer. Good fertilization could dramatically
increase China???s ability to produce the basic
foodstuffs it needs. And most fertilizers contain a mineral known as potash???a mineral
China simply doesn???t have enough. In fact,
industry estimates put China???s requirements at
about 10 million tons five years from now, of
which it???s able to produce only about a million tons domestically.
Five years ago no one had ever heard of the
Dalian Commodity Exchange in China.
Today, it???s the ninth largest exchange in the
world, and growing.
The Chinese factor isn???t going away.
Instead, it???s accelerating the demand for commodities???everything from gold and copper to
soybeans and wheat. As a result, this decade
and beyond will be the era of a new and sustained mega-bull market for commodities.
If history is any guide, this secular bull market should be with us for a decade or more.
Few remember that while stocks roughly
marched in place for most of the late ???60s and
all of the ???70s, commodities boomed.
Conversely, from 1982 until 2000, stocks
boomed and commodities slipped. That cycle
is changing again and commodities will be the
big beneficiary in the decade ahead.
Furthermore, since the global economy is
still trying to get its bearings in a post-bubble
era, real assets should perform extremely well.
Short-term profit taking and volatility
notwithstanding, commodities should reward
the patient investor handsomely.
As outlined above, there???s no doubt Asia is
the region with the greatest long-term growth
potential. China and India are the two main
drivers, with many of their smaller neighbors are
set to follow. What???s more, these economies are
far from their saturation points, so commodity
consumption will stay strong for years to come.
China and India are both large countries
with enormous populations. A good chunk of
Page 2 COMMODITIES TRENDS
the world???s manufacturing base has already
been outsourced to China, and many service
functions are being outsourced to India.
The reason is quite simple: Low wage rates
and rising skill levels mean that basic manufacturing and service functions can be performed
at a fraction of the cost of what???s available in
the US or Europe. With an almost unlimited
supply of labor, this trend isn???t likely to stop
anytime soon.
As these countries become wealthier, there
will be important changes to the world economy. Basic infrastructure like roads, housing,
telecom and electric networks need to be built
or improved. After all, manufacturing activity
simply comes to a halt if there aren???t roads
and a reliable electric supply to transport
workers and service the factories.
On the consumption side, per capita income
in urban households is already up about 55
percent since mid-1999. An increasingly
wealthy middle class in China will demand
more con-
China Imports sumer goods,
Thousands of Aluminium
Metric Tons as well as
Copper
98 99 00 01 02 03 04180 access to mod
120 ern electric
60 networks,
0 housing and
waterworks.
Thousands of In addition
Metric Tons
300 the size and
200 population of
100 China and
0 India suggest
98 99 00 01 02 03 04 this consumer
Thousands of Iron boom will be
Metric Tons
21,000
the largest and
14,000
longest lasting
the world has
0 ever seen.
98 99 00 01 02 03 04 This all
7,000
Soybean spells a boost
Million Tons
3
in demand for
basic commodity products.
2
1
Already China
0
01 02 03 04 and India
Source: Bloomberg are hungrily
importing the South American Exports
Millions
world???s excess US $ Brazil
supplies of 10,000
Chile Metals Production
98 99 00 01 02 03 04
most commod
7,500
ity products.
With thin 5,000
supplies for 2,500
basic materials
like copper, 0
iron ore and Index
even food Value
350
products,
prices are 300
rising rapidly. 250
Don???t just 200
take our word
for it, check 15098 99 00 01 02 03 04
out the charts.
They show Source: Bloomberg
Chinese imports in four basic commodities
over the past few years and total imports into
India excluding energy. China doesn???t have a
large enough domestic supply of aluminum,
copper or iron to satisfy increasing demand.
To keep the economy humming, these goods
have to be imported from abroad???and both
the prices and volume of those imports are
rising quickly.
Take copper as an example. The metal???s
good conductivity makes it the backbone of
electric networks everywhere. It also has uses
in construction and telecom networks and
with pipes to carry water. The chart of
Chinese imports at left shows just how fast
demand is growing.
But that???s only half the equation???metal
supplies remain limited. Take a look at our
chart of Chilean metals production since 1998
(above). Chile is among the world???s largest
producers of copper, and copper is one of the
country???s most important exports. Clearly, the
low copper prices that prevailed for most of
the ???90s were bad news for Chile. In fact,
some copper mines became uneconomical in
that environment.
Since 1998, however, Chile has been
ramping up copper production. Exports are
hitting record levels with most of those
exports destined for Asia.
THE PERFECT STORM Page 3
Commodity Prices Production
$ perhas risen a solid
Metric Ton Copper4,000 15 percent
since 1998, but
3,000
that???s still not
enough to
2,000
meet China???s
demand.
1,000
00 01 02 03 04 Consider that
China???s
cents perbushel Soybean imports of cop
1200
per have more
900
than doubled
in the same
600
period???
demand is
300
01 02 03 04 clearly outstrip
ping supply.
Source: Bloomberg
The same
pattern is evident with the world???s other
major copper producers. That list includes
the US and Canada.
Both have seen big jumps in copper exports
to China during the past few years. The offshoot of all of this is higher copper prices.
CHAPTER THREE
TECHNICAL VIEW
Copper prices were up on the order of 40
percent in 2003 alone.
It???s not just copper prices that are moving
rapidly higher. China???s huge population needs
to eat, and as the population gets richer they???ll
be needing more and more basic foodstuffs.
Imports of food products like soybeans and
corn are rapidly rising as are prices for these
basic commodities.
Consider the dramatic bull market in soybeans during 2003. A weak crop in the US
meant there was even smaller supply of
beans than in a normal crop cycle. But
demand for beans from China flourished.
The growing demand coupled with low supply sent prices skyrocketing to levels unseen
for about a decade.
This illustrates just how fragile the balance
is in the soybean market between demand
from Asia and supplies in the US and South
America. With imports to China rising quickly
during the past several years and exports from
major agricultural producers like Brazil getting
stretched, commodity prices have only one
way to go???up.
In the case of commodities, the charts confirm the fundamentals. Take a look at our
chart of the Commodity Research Bureau
Index (CRB), a good broad picture of what???s
going on with commodities of all stripes.
This monthly chart shows two prominent
lows on the CRB index in 1999 and late
2001/early 2002. These lows were at almost
exactly the same level???around 185 on the
CRB. The rally in the CRB from 1999 into
2000 went as high as 230.
Broadly, the index traced out a ???W??? shaped
pattern that technicians call a double bottom.
Double bottoms of this sort are confirmed
when the index (or stock) breaks above the
high point of the ???W??????in this case, the top
of the 2000 rally was around 230. That
occurred in late 2002.
Given the sheer size of this pattern and the
duration of the bear market that led into it,
the move is likely to be much larger than that.
Fortunately, Commodity Research Bureau Indexthis boom in Index
Value
commodity 300
prices offers a
myriad of 250
money-making
opportunities 200
for the well-
placed investor. 15098 99 00 01 02 03 04
KCI Communications, Inc., 1750 Old Meadow Road, Suite 301, McLean, VA 22102. Subscription and customer services: P.O. Box 3808, McLean, VA 22103-9823,
800-832-2330. It is a violation of the United States copyright laws for any person or entity to reproduce, copy or use this document, in part or in whole, without the
express permission of the publisher. All rights are expressly reserved. ©2004 KCI Communications, Inc. Printed in the United States of America. CPS0904-ST.
The information contained in this report has been carefully compiled from sources believed to be reliable, but its accuracy is not guaranteed.
CPS0904
Page 4 COMMODITIES TRENDS
