Commodities Overview
08 April 2008Commodities look set to continue to perform strongly, in our opinion, driven by a growing hunger for food, energy and raw materials.
Strong Asian demand and constrained supply has seen increased prices across many commodities. Oil, gold, corn, soybeans and rice all hit record prices in 2008. Copper and iron have also soared. Although oil clearly dominates broad commodity indices and much of the media attention we believe that there are three themes worthy of particular interest within commodities.
1. Chinese and Indian demand for industrial metals. Over 35% of the world’s population live in China and India. Much of the growth in the economies of both countries is driven by their thriving manufacturing sectors and by substantial investment in infrastructure. This in turn is driving demand for industrial metals globally. A growing middle class in both countries and the rise in intra-Asian trade help insulate this demand from negative economic events in western countries.
2. Asian demand for food. As wealth grows in Asia so to does the demand for more sophisticated food and more of it. A similar pattern is also occurring in other emerging markets such as Russia and Brazil. At the same time as these structural changes increase demand for soft commodities we are seeing supply constraints. Global inventories of grains are at their lowest levels for at least 26 years.* Rising food prices and low stocks are causing a number of Asian countries to protect local food supplies by reducing agricultural exports. Population growth along with land and water constraints are all limiting the ability to increase supply by planting more crops. A third factor affecting food supply is the growing shift in land usage away from food to biofuels.
3. The growth in biofuels. The ethanol and biodiesel industries have expanded rapidly in the last decade. The pressure to meet climate change targets is seeing increased growth in biofuels. Future growth is expected to be dramatic. According to Dr Jan Riese of McKinsey & Co the global annual biofuels capacity could double over the next five years and reach enough to meet 10 percent of world transportation fuel demand by 2020.Δ The surge in biofuel growth and usage is driving demand for biofuel soft commodities such as canola, corn, soybean and sugar.
The structural changes in demand combined with supply not keeping up with demand leads us to believe that the commodity story as a whole, and certain sectors in particular, to be very strong andlikely to remain so. As a result, the commodity momentum index may take advantage of the broad story along with individual themes. As certain themes become more dominant so will their importance in the index.
* “Rice Jumps to Record, Corn Near High as Demand Outstrips Supply”, 2/4/2008, Bloomberg.
Δ From the speech,“Beyond the Hype: Global Growth in the Biofuels Industry” as reported at http://biopact.com/2007/03/vinod-khosla-predicts-exponential.html
