I recently returned back from China with
some pertinent observations about the commodity markets, Jim Rogers, and the
economy. A couple of weeks ago, I mentioned in mycommodities
newsletter that if anyone had doubts about the long-term direction of the
commodity markets, they should simply hop on a plane and fly to China. The
logic behind this is quite simple. Since China has been responsible for
the majority of the increased commodity demand over the last decade, keeping
a pulse on their commodity consumption trends can give you a pretty clear
picture of where things are moving in the longer term. Here are some
observations on various topics:
Chinese Commodity
Demand
It is important to note that there are
two components to the Chinese commodity demand. The first component is the
demand for commodities as a result of industrialization and foreign
investments. The second component is a result of consumer demand. I will talk
more about consumer demand in China
next week in my free newsletter.
When China began its transition from
an agrarian based economy to a manufacturing driven economy, there was a huge
influx of demand for metals, energy, cement, and other industrial materials.
This demand came from both foreign investors who were interested in building
manufacturing plants to profit from the cheap labor, as well as from
governmental mandates that focused on economic and infrastructure development.
If you fly to China today, you will see state-
of -the art buildings, manufacturing plants, roads, and rail systems. Since
all of this was only developed over the past decade, it is easy to understand
why China
transitioned from being a net exporter of commodities to becoming one of the
world’s largest importers of commodities.
One can get a much better understanding
of this increased commodity-demand trend by observing the development of the
transportation system in China.
In Shanghai
for instance, you can jump on the world’s first Maglev train that will
take you from the airport to downtown Pudong/Shanghai
in record time. Since the train travels at about 430 km/hour, the typical 45
min trip (via car) will only take you about 8 minutes. If you decide to take
the toll roads instead, you will also notice a very new and elaborate highway
system that is still in the process of being built nationally.
In 2005, the Chinese government put in
place a “National Expressway Network Plan” which is supposed to
connect all capitals of provinces and autonomous regions with Beijing and other
cities. According to government reports, the length of highways is expected
to total 85,000 km
and take another 25 years to complete. As you can imagine, building roads
will not only continue the demand for certain raw materials like cement and
energy, but it will also expand industrialization. The UN still expects that
there will be about 400 million Chinese farmers that will move into the
cities within the next decade. A number of these farmers are still living in
the provinces that have not yet been impacted by the massive
industrialization.
What is interesting about the
transportation development in China
is that it was initiated prior to this bull market in commodities, and before
the country experienced 10% yearly economic growth. The Maglev train, for
example, was first commissioned to be built in 2000-2001. Clearly, the
Chinese government looked at the longer term prospects for its economy when
it decided to invest the capital into building the train. Today, it is also
clear that that this forward-thinking evaluation was spot on.
In the same way, China is thinking ahead in terms
of commodity demand. While an economic slowdown in western economies might
have a short-term affect on the Chinese economy, the longer-term prospects of
growth in China
remain strong. As a result, China
is not shying away from commodity consumption any time soon. They still have
roads to pave, factories to build, and cities to expand.
I wrote a couple weeks ago that another
sign that this commodity bull market is far from over, was the fact that China, India,
and Japan were investing
heavily in Africa- a commodity-rich
continent. Their initial investments are paving the way for future resource
extraction. Clearly, there is a longer-term commodity demand.
Jim Rogers &
Airlines
For many Jim Rogers fans, it is
comforting to know that he has not jumped off the commodity bull market
bandwagon. Rogers
recently stated that investors should avoid the dollar and buy commodities.
In fact, he believes that commodities will be one of the better investments
this year.
When I was in China, I had an opportunity to
listen to a Jim Rogers interview that was conducted on a local television
network. During his interview, he mentioned that he was bullish on airline
companies. At first, I was taken aback by his bullish tone in the midst of
rising fuel prices, a slowing global economy, and airline bankruptcy.
However, there is some validity to his point over the longer-term. While Jim
Rogers himself admits that he is not a short-term trader, he has been fairly
accurate on longer-term themes. I still think it’s too early to invest
in Airlines, but it could indeed be a value investment play.
Having flown frequently over the past several
years, I have noticed that the amount of people who are flying has not
declined. In fact, I am actually noticing fuller planes. In the past, you
might see empty seats around you. Today, the planes are jammed packed. One of
the reasons has to do with the fact that there are fewer flights available in
the midst of similar demand. As a result, airline companies are increasing
their fares and baggage fees- and the passengers are still willing to pay the
higher cost.
International vs.
Domestic Travel
When I was flying to and from China,
I also noticed that greater than ¾ of the passengers were Asian or
Indian. This number is significantly higher than it was several years ago. In
fact, I believe that with the declining dollar and rising wealth in emerging
economies, you will begin to see a great increase in passengers coming to the
US.
This assertion is backed by some recent
data from the US Department of Transportation. According to the Bureau of
Transportation Statistics, domestic air travel was down 0.3 percent from
214.4 million passengers carried in the same period in 2007. International
travel, however, experienced a gain of 5.4 percent from the 28.8 million
carried during the same period in 2007.
In terms of available seats in April,
domestic travel experienced a 1.8% decline and international travel
experienced a 6.3% increase. Clive Maund also
writes about this topic in his recent commentary.
In short, the above airline trends and
statistics reaffirm what I have been saying for the last several years- the
consumer demand from industrializing economies will more than make up for the
slowdown of the US consumer.
Boring-
But True
During my trip, I also had an opportunity
to speak to several high level executives of a global investment company.
After I finished talking about the global demand and supply factors that
would commodity prices higher, they asked me a question that shocked me. In
short, they wanted to know some “other factors” for rising
commodity prices. They already knew the basic supply/demand story for rising
commodity prices, but it seemed that the story was getting quite old and
boring. They wanted to hear something different and exciting.
Unfortunately for them, the reasons for
why oil is eventually going to be above $200/barrel, why gold prices will
reach over $2000/ounce, and why the commodity bull market has at least
another 5 years of upward movement remain the same. There is no new exciting
development to report. And if investors have not quite yet grasped the
magnitude of this commodity bull market, they probably never will. As for me,
I continue my longer-term view of higher commodity highs.
If you haven’t yet participated in
the commodity markets, it’s not too late to get informed. I am offering
a free weekly commodities
newsletter. In addition, you can still order Commodities
For Every Portfolio: How You Can Profit From The Long-Term Commodity Boom.
I finished writing the book at the beginning of 2007. At that
time, I predicted that oil would reach $150/barrel within the next two years,
the US
would head towards a recession, and that the agricultural sector (corn,
wheat, soybeans) would post record highs. It is a good read for anyone who
needs to be convinced that this bull market is far from over.
Emanuel Balarie
Jabez Capital Management
www.commoditynewscenter.com
Emanuel Balarie
is President and CEO of Jabez Capital Management.
In addition, he is also editor of www.commoditynewscenter.com
and the author of Commodities For
Every Portfolio: How To Profit From The Long-Term Commodity Boom.
Mr. Balarie's industry experience ranges from
commodity stocks to futures to alternative investments. He is a highly
regarded advisor to clients and institutions on the commodity markets, and
has had his research published all over the world. In addition to being a
regular guest on CNBC, Balarie is frequently quoted
in financial publications such as, The
Wall Street Journal, Reuters, Marketwatch
from Dow Jones, and Barrons. Mr. Balarie is a graduate of UC Berkeley.
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