By Prieur du Plessis, on May 10th, 2011 posted in: Commodities, Investment Leave your comment

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By Cees Bruggemans, Chief Economist of FNB.

After a sharp speculative shakeout last week in the commodity space, quo vadis (whereto next)?

Outlook for oil is rosy, base metals cloudy, precious metals murky and coal a special case (there may be others as well).

With China standing on its monetary brakes, it is not unreasonable to expect a more subdued price performance out of base metals for a while, though allow for specific demand/supply situations.

Longer term (beyond this year) the fundamental Chinese growth story is expected to stay strong, in addition to which India is approaching its resources constraint, in future increasingly becoming import dependent as well if its GDP growth were to remain in 7%-9% territory.

Oil was fired by many things in recent months, as much economic fundamentals as political premiums and speculative froth.

The froth was creamed last week, but the fundamentals stay very positive, with political premiums about supply security hardly yet ready to fade.

With world economic growth set to continue at 4%-5% for some years, given the attempt to narrow the large rich world output gaps and the continuing EM growth dynamics, oil demand is expected to keep growing at 2mbd annually.

In contrast, oil supply seems to be expanding at only 1mbd annually, indicative that the oil balance will keep tightening. There may still plentiful oil in the world today (as variously claimed by Saudi, Exxon and President Obama), but reserve buffers will be eroding, underpinning high oil prices.

The Arab world remains in flux, with as yet no clear indication how far the Arab Spring will progress and how Saudi may be affected. Until much greater clarity prevails, the relatively unstable nature of the region will likely keep demanding oil price premiums regarding supply security.

Coal is a special case. It is benefiting short-term from the high oil price and the Japanese quake disturbance of nuclear space. In addition, world growth of 4%-5% also fuels coal demand, giving an upward bias to prices.

A special factor is Chinese import demand, following major internal changes since 2009 in the Chinese coal industry, turning the country overnight into a major coal importer.

These changes, however, are aimed to get better Chinese production efficiencies, and the world is uncertain whether therefore China has only temporarily become a major coal importer, using global supply to facilitate its domestic restructuring, eventually returning to greater domestic reliance.

This obviously has implication for the likely trajectory of coal prices.

Then also there is India.

It makes longer term coal price prospects uncertain.

Precious metals outlook is murky, meaning a high water mark could be near (after which could follow a long cyclical slide) or there could still be substantial upside potential.

The case for threading cautiously is based on a strong global growth performance of 4%-5%, with rich countries with large output gaps steadily succeeding in witling these down and eventually normalizing their monetary stances without inflation mishaps.

Continue reading Commodity outlook rosy, cloudy, murky

By Prieur du Plessis, on April 26th, 2011 posted in: Commodities, Investment 2 people had their say - chime in!

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Jeremy Grantham has become a familiar and very popular face on this site. For those treasuring his insight, wisdom and prescient calls, the co-founder and chairman of Boston-based GMO has just published the 1Q 2011 edition of his newsletter. As the title above implies, his report discusses the effects of our dwindling natural resources on the prices of commodities in the context of a rising world population.

Here is the summary of Grantham’s thoughtful newsletter:

• Until about 1800, our species had no safety margin and lived, like other animals, up to the limit of the food supply, ebbing and fl owing in population.

• From about 1800 on the use of hydrocarbons allowed for an explosion in energy use, in food supply, and, through the creation of surpluses, a dramatic increase in wealth and scientific progress.

• Since 1800, the population has surged from 800 million to 7 billion, on its way to an estimated 8 billion, at minimum.

• The rise in population, the ten-fold increase in wealth in developed countries, and the current explosive growth in developing countries have eaten rapidly into our finite resources of hydrocarbons and metals, fertilizer, available land, and water.

• Now, despite a massive increase in fertilizer use, the growth in crop yields per acre has declined from 3.5% in the 1960s to 1.2% today. There is little productive new land to bring on and, as people get richer, they eat more grain-intensive meat. Because the population continues to grow at over 1%, there is little safety margin.

• The problems of compounding growth in the face of finite resources are not easily understood by optimistic, short-term-oriented, and relatively innumerate humans (especially the political variety).

• The fact is that no compound growth is sustainable. If we maintain our desperate focus on growth, we will run out of everything and crash. We must substitute qualitative growth for quantitative growth.

• But Mrs. Market is helping, and right now she is sending us the Mother of all price signals. The prices of all important commodities except oil declined for 100 years until 2002, by an average of 70%. From 2002 until now, this entire decline was erased by a bigger price surge than occurred during World War II.

• Statistically, most commodities are now so far away from their former downward trend that it makes it very probable that the old trend has changed – that there is in fact a Paradigm Shift – perhaps the most important economic event since the Industrial Revolution.

• Climate change is associated with weather instability, but the last year was exceptionally bad. Near term it will surely get less bad.

• Excellent long-term investment opportunities in resources and resource efficiency are compromised by the high chance of an improvement in weather next year and by the possibility that China may stumble.

• From now on, price pressure and shortages of resources will be a permanent feature of our lives. This will increasingly slow down the growth rate of the developed and developing world and put a severe burden on poor countries.

• We all need to develop serious resource plans, particularly energy policies. There is little time to waste.

Click here for the full report (free registration is required).

Source: Jeremy Grantham, GMO, April 2011.

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