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ยป World growth carries resource sector forward
Date published: 29/09/2011
World growth carries resource sector forward
Given present market turmoil, I’d like to put things into what I believe is their proper context against a background of continuing world growth.
Yes, growth is continuing and will continue in the world’s emerging economies. But debt and economic issues that are plaguing the US and Europe will continue and will prolong market volatility.
This was always going to be the case post-global financial crisis and nothing had changed. To think that serious economic issues would be resolved quickly was fanciful. Many advanced Western economies have serious endemic problems that need addressing, and the lacklustre response of politicians has only made the situation worse.
Heavily indebted nations have needed to take their economic medicine for the medium to longer-term health of their economies, but politicians with their eyes on opinion polls have not had the intestinal fortitude to make the tough decisions.
From my perspective growth will continue and provide fertile ground for resource sector investors, just as we’ve seen for the past decade. Yet at the same time there will be enormous ongoing volatility.
Essentially, this highlights the difference between being a speculator and an investor. In my mind you “invest” with a multi-year view in the resource space, knowing full well that volatility is part and parcel of the business. Speculators on the other hand are driven by a much shorter horizon and will most likely seek to flee the market at the first hint of uncertainty.
I wish I’d had a dollar (a rapidly-appreciating Aussie) for every occasion over the past decade that I’ve heard an “expert” proclaiming the end of the commodity bull market. Of course it was all supposed to end during the GFC in 2008, but it didn’t. Commodities like gold, oil and copper have grown significantly in price despite the problems afflicting mature markets like the US and Europe.
What isn’t stopping, despite the financial stuff-ups in some of the world’s mature economies, is growth in the world’s population, which will hit seven billion in the blink of an eye. As people migrate to cities and incomes rise in the emerging economies, global demand for commodities and natural resources will continue to increase.
Essentially, a larger, wealthier class of people in the world’s emerging nations is demanding more goods to improve their standard of living.
While all this is happening, the supply of these much-prized raw materials is being adversely impacted by geopolitical factors, adverse weather conditions and more mature mining operations, leading to lower productivity and higher prices.
The story begins in emerging markets where economies are growing at healthy but most importantly stable rates. Current economic growth rates for countries such as China, India, Malaysia and others are in the 6-10% range. These are sustainable levels that are not characteristic of overheating economies.
Importantly too, these growth rates (unlike the West) are not built on credit. Many of these emerging markets are only now just discovering credit. India, China, Brazil and Russia all have consumer debt levels growth below 20%, while other burgeoning countries like Saudi Arabia and South Africa have less than 5%.
These are the sorts of statistics that put what’s happening in the short-term with respect to financial markets into proper perspective against the much broader picture of inexorable economic growth among the world’s emerging economies.
Perhaps the best illustration of my argument is in the energy space. The transportation sector has historically accounted for around 35% of all energy consumed in the developing world. However over the next one to two decades, this is estimated to climb to around 60%, comparable with levels in North America and Western Europe.
China is now officially the world’s biggest oil-consuming nation. Emerging market demand is largely the reason global oil demand levels are still close to record highs, despite a sluggish (non-existent) economic recovery in the US and Western Europe.
But it’s not just oil. China’s most recent five-year plan calls for $US50 billion to be spent on upgrading the country’s power grid and an another $110 billion on building 13,000 kilometres of high-speed railways. This is one of the major reasons why the prices of metals like copper, lead, tin, nickel and zinc have jumped by more than 100% over the past two years.
So don’t be fooled by the sudden influxes and withdrawals of speculative money from the resource sector. Speculators have seen the opportunity to profit from one of the greatest economic expansions in history, which has provided fertile ground for sizeable swings in commodity prices.
It’s important to bear in mind that very little has changed in terms of the long-term bull case for commodities – US debt woes fanning inflation; emerging markets consuming more in terms of raw materials and energy and supply-side concerns that put a big question mark over long-term supply.
So it’s very important to maintain your perspective while everyone else is losing theirs.
For more information, or to discuss your specific situation, please contact me directly.
Gavin Wendt
Founding Director & Senior Resource Analyst
MineLife Pty Ltd
Now that you have read this, what do you think? Do you have other ideas? Please share you views with other members (eg by blog or discussion form) and/or request professional member(s) to contact you directly.
