Commodities Boom – Not A Bubble

Donald Coxe, the strategist for the Harris Bank has for several years , advised clients to invest in all things that the Chinese and Indian economy needed to satisfy millions of newly minted middle class consumers.

He correctly forecast that “this time it’s different” meaning the commodity boom was not going to be followed by a bust. Oil, copper, lead, nickel and uranium haven’t collapsed but moved ever higher.

Jim Rogers has cited the economies of China and India as the reason for a commodity “super cycle” a term you can see being picked in in the media.

Coxe has told investors to buy the resource stock companies and hold on for the takeovers that the new cycle would produce. We have seen International Nickel and Falconbridge vanish but more money will be made in other producers , The ichiteck Apprentice Millionaire Portfolio has purchased Teck Cominco and Hudbay.

Canadian oil sand owners may receive takeover offers from the big U.S. and international oil companies seeking to replace their declining reserves. The major U.S. producers have not believed oil prices would remain as high as they are and did not spend enough to keep their reserves expanding. As a result of that underinvestment they will be looking to buy up Canadian oil sands projects as a way to quickly book extra reserves. Investors can still buy Suncor and CNQ at attractive valuations.

What is the difference “this time” ?.

A summary of reasons can be easily set out – it is Economics 101 .

1) Lack of Supply

Underinvestment in new supply (new mines) for years when commodity prices were low.
This means that new mines ,taking years to build , won’t lower commodity prices many time soon because there aren’t enough new supplies coming on stream.

Australia , home to 40 % of the coal used in steel making has seen flooding knock out most of the supplies to the extent coal prices have tripled from 2006 contract prices.

Australia, home to significant deposits does not permit uranium mining in several key areas and this has led to underinvestment. If the restrictions are listed it may be years before new supply is on the market.

Cameco had a huge mine site at Cigar Lake ready to begin production but flooding at
Cigar Lake has postponed that production for up to seven years. This is tremendously important because it holds Cameco’s earnings down and keeps supply tight. Cameco is tied to contracts- for a much as half of its production – signed years ago at prices far below the market. For this reason – low current spot and contract prices – the uranium producers are on a watch list rather than in the AMP Portfolio.

2) Expansion of Demand

China has expanded its economy at 9-10% for more than five years. India has now approached that growth rate. Both nations are building their economies by huge amounts of money spent on infrastructure – roads, energy production and telecommunications. This expansion and the export based economies have resulted in millions of jobs and thus millions of new middle class consumers.
China is scouring the world and India is competing with it, to acquire oil to feed the demand
for oil supplies. The same demand from China and India is responsible for the continuing demand for metals.

To see where this demand may lead you have to consider that current usage in China is one thirteenth of the that of the U.S. emerging markets are still only at the first stages of expansion. Their demand has yet to be calculated and is likely to result in continuing high commodity prices.

Electricity demand will be met ,in large part by China’s own coal supplies. It is estimated that China opens a new coal fired plant every day – and most without pollution controls. Electrical transmission requires huge amounts of copper cable as well as steel transmission towers etc, etc, etc.

China opens a billion dollars of highways every month – and those roads are being filled with new automobiles and trucks that consume oil and gas. The cars and trucks require copper, steel, nickel etc. ,etc., and etc.

Nuclear Power

France is the only European country not in fear of Russian demands and control over gas and oil used to produce electricity because it has a majority of its needs met by nuclear power plants. Germany is now reconsidering its plans to close nuclear plants.

China will open two new nuclear plants a year for the next ten years.

There are 30 nuclear power plants being constructed in the world and more being considered as a consequence of the concern over greenhouse gases being produced by gas fired power plants.

Profits in Base Metals

Imagine the “wants” of millions of consumers in the developing countries. Coxe has said that millions are now seeking what every North American enjoys – and each consumer item from cars to washing machines requires base metals. Phelps Dodge . BHP Bilton, Rio Tinto and CVRD are majors now profiting and likely to continue, Smaller producers like FNX, Fronterra Copper and Breakwater Resources offer more leverage to the pricing in today’s market.

 

 

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