Hi rederob,
I have been in commodities for the last 5 or 6 years.
How often have you heard the threat of the US collapsing would signal a slower demand for commodities and energy? It has proven to be a complete fallacy.
Chip Goodyear EX CEO of BHP a few years ago showed some brilliant 100 year commodity charts. The key to us entering a Supercycle was largely due to two major emerging economies China & India to enter the arena. The US is no longer
the most important country on the planet. Even if the US were to fall over tomorrow, the key to this can be seen with both China and India requiring massive energy & Resources for their own consumption.
Below is a fantastic read that someone posted from another forum.
Source Southern Cross Equities
According to an excellent report titled "Preparing for China's Urban Billion" by The McKinsey Global Institute (McKinsey & Company's economics research arm) China's urbanisation will lead to the following.
350 million: will be added to China's urban population by 2025- more than the population of today's United States.
1 billion; people who will live in China's cities by 2030
221; Chinese cities will have one million + plus people living in them- Europe has 35 today
5 billion; square meters of road will be paved
170; mass transit systems will be built
40 billion; square meters of floor space will be built- in five million buildings
50,000; of these buildings could be skyscrapers- the equivalent of constructing up to ten New York cities.
5 times- the number by which GDP will have multiplied by 2025.
It's worth noting that MGI's work is completely independent and has not been commissioned or sponsored in any way by any business, government or other institution.
Just have a think about some of those numbers above. 2025 is only 17 years away. If these forecasts are even half right the ramifications for the Australian resource sector and Australia are enormous. I realise we are in an equity market that currently can't see past tomorrow, but just consider what the ramifications of China's urbanisation could be. Remember, we are at the infancy of that urbanisation right now, not the end of it as the equity market wants to believe. Where is the raw material supply going to come from to meet China's ambitious urbanisation and GDP growth goals?
No wonder the talk is now Beijing is preparing to take a stake in BHP Billiton. Personally, I am surprised it has taken them this long to turn up on BHP's register.
The chart above was recently published by BHP Billiton. It's a great chart. The question copper bears have to consider is where is the supply going to come from to meet demand? The answer is "it isn't" and prices will continue to rise to reflect structural change in the demand supply balance (and the cost of getting it out of the ground) for industrial commodities, led by copper.
As we have written numerous times before it is the "supply side" response everyone is over-estimating, and particulalry so in the "red metal" copper. The "supply side" is simply not keeping pace with demand. Copper is the baromtere of resource sector sentiment and the correlation between the copper price and Australian resource sector share price performance is very high. The chart below shows LME spot Copper (red) vs. the ASX Materials Index (XMJ) in blue
Give or take a few periods where the equity market simply didn't believe the spot copper price was sustainable (and they were right for that short period), the direction of the copper price is highly correlated to the performance of the Australian materials index.
I realise many of you will be saying "of course it is", but even commodity super bulls such as myself hadn't realised that this correlation between the direction of spot copper and the Australian materials index (of which BHP is 45%) was so high. It's pretty clear that getting the direction of spot copper right is crucial to getting the direction of the Australian materials index, and its largest component in BHP, right.
Right now the conditions are clearly in place for a copper "super spike". We wrote as recently as the 11th of March on this topic but since then the copper market tighterned even further with global inventories down to just 2.5 days global consumption. The world is short copper; it is as simple as that.
For two years now I have been reading article after article about how slowing demand from the US housing construction sector was going to impact demand for copper and the price would retreat to the marginal cost of production. This is the consensus view.Those who have not analysed the supply/demand fundamentals in detail have come to the very simplistic conclusion that the US is the marginal consumer of the red metal. As the chart pack below from BHP confirms, that is not the case for Copper or any of the other industrial metals (or Oil). The commodity prices are clearly decoupling from the US economy because the US is no longer the marginal consumer or price setter.
According to recent Chinese customs statistics, January copper imports rose 16,400t m.o.m to 128,071t, the highest monthly level since April 07. Global production constraints continue with Chilean production down 1.4% to 439,123t.This represents the first yoy decline since 2006. In addition, the world's largest producer Codelco announced that 2008 production is expected to remain static considering the new Gaby mine will compensate for declining grades and lower production from other operations. Chile, which accounts for 35% of world copper production (and 30% of the worlds copper reserves) also has water and power issues that are not getting better.
Despite the constant predictions of increased supply from new greenfield projects and brownfield expansions, global copper production remains constrained due to lower grades from mature operations and chronic shortages in skilled labour and machinery. We believe global copper production might rise by just 1.5% this year against a backdrop of a 2.9% increase in world demand. This would result in a deficit of close to 200kt.
We expect static global production combined with 6-7% pa demand growth from China, is increasing the possibility of deficits continuing out to 2010. Since the last US recession China has accounted for 70% of the growth in world copper consumption. As a result China now accounts for 24% of global demand while the US has fallen to 10%. The days of $US0.70clb for copper are gone forever.
As a result copper drawdowns continue with year to date LME inventories down by 43%, representing just 2.5 days of consumption due to strong re-stocking from China and Europe. Currently the spot copper price is now only a few cents away from the record high of $US4.04 lb achieved in May 2006. Although speculative and hedge fund buying (short covering) has contributed to the strong year to date performance for copper there is no doubt that Chinese demand remains very strong.
It's also becoming clear that copper consumers believed the consensus view that copper prices were going to collapse and had aggressively run down inventories via de-stocking. That price correction has not come and it appears copper consumers are now dangerously short inventory with prices about to go through record highs (triggering technical buying) and analysts now looking for a supply deficit this year. That is a BIG change from forecasts of just six months ago which showed a substantial supply surplus this year. You watch the consensus copper price forecasts follow the spot price up from here. There is nothing surer than the commodity forecasters will chase the spot price higher over the remainder of this year. I saw some of these upgrades start yesterday, but they are classic rear-view mirror style ones that just push out the timing of the copper price collapse. Problem is they have been doing that for 5 years.
Continued........................
Cheers markcoinoz