Supercycle: Phase II
This special annual supplement looks into the variety of issues relating to commodity investments
– the Why, Where and How.
By Guy Isherwood
EVERY TWO SECONDS one person is currently joining the planet’s
expanding urban population and this year – for the first time in
Fundamentals & Key Drivers
human history – a majority of people now live in cities.
• The world’s population will reach seven billion by 2010 (versus
Last month, the UN Population Fund released its State of World
2.5 bn in 1950) and with only 10% more land in production.
Population 2007 report calling for a “revolution in thinking” to help
• That is 80 million more people every year (e.g. a new
cities unleash their potential to spur economic growth and solve
Germany).
•A50% jump in population doubles food demand.
their inherent social and environmental problems. The imperative of
• Historical low relative agricultural prices vs energy prices.
developing our urbanising world sustainability in order to meet the
• Growing growth/supply imbalances: Demand growth and
needs of the 1.1 billion people projected to join the global popula-
supply constraints.
tion by 2030, is a colossal task. Whilst over half of these people will,
• Higher income translates into higher meat consumption. For
tragically, live in under-serviced slums, the rest will require ever
every gram of meat we need 7 grams of feed products. Meat
increasing amounts of ‘things’ – either grown out of or extracted
consumption is growing at twice the rate of population.
from the ground. Rising living standards more generally across the
• Urbanisation and change of diet, together with land
developing world will be the main driving force behind projected per
competition.
capita consumption growth of all commodities, and agricultural pro-
• The coming great shift of wealth and power to the East will
duce in particular. Indeed, more and more institutional investors are
reshape world agriculture trade and prices. Three billion new
considering agricultural commodities as a possible way to help sta-
‘capitalists’ (Eastern Europe, India, China) are joining world
bilise their investment portfolios in a volatile market environment.
markets and adapting western consumption habits.
That is just part of the real attraction of commodities. Population
• Since 1990, 3 billion people have joined the market economy.
growth, coupled with finite and depleting resources, greater regula-
As such demand for all commodities has increased. Demand
tory oversight, environmental degradation and, possibly worst of all,
growth in some (e.g. soybeans) has been dramatic whilst for
severe shortages in water, are some of the fundamental reasons why
others it has been less so.
investments in this sector are not only necessary but much needed.
They should also provide consistent returns to investors who commit tutions embroiled in the current credit
to the right ‘things’, at the right time, in the right places. squeeze (and especially where they
Last year, sentiment towards the sector was becoming more mixed could book profits).
and a shift in emphasis began to take hold in favour of agricultural Although energy, metals and agricul-
and livestock sectors. Nevertheless, strong gains have been seen in a ture have different cyclical and funda-
number of the metals, and oil prices have again reached a new nom- mental drivers, they all continue to
inal high (before the recent sell-off). Some had suggested that the share the same long-term, secular
‘commodities bubble’ was about to burst. This minority has been theme, which has been the primary
heavily disappointed. driver behind the sharp rise in prices
Whilst the different sectors continue to exhibit differing character- over the past three years. This secular
istics and medium to long-term trends, the complex as a whole con- theme has been driven by the depletion
tinues to look robust, even in the face of profit taking by some insti- of excess capacity along the commodi-
ty supply chain earlier this decade that
Trend in World Commodities Consumption
resulted in physical shortages, forcing
250
the market to shift from a two decade-
Corn (US Domestic Consumption (1,000MT)
Petroleum (1,000 barrels per day)
long exploitation phase to an invest-
200
Sugar (1,000 MT)
ment phase in which new investments
Coffee (1,000 60kg bags)
in long-term capacity are required to
Soybean (1,000 MT)
Rice Milled (1,000 MT)
grow the supply base. Coupled with
150
Cotton (1,000 480lb Bales)
this, the cost curve has continued to
move up markedly.
100
Metals and minerals demand has
remained extremely strong, driven by
one of the largest infrastructure build-
50
2
ing booms in history centred in China.
00
1990 199 1994 1996 1998 20 2002 2004 2006
The current commodity cycle differs in
Source: Diapason
a number of respects from previous
COMMODITIES NOW SEPTEMBER 2007 31
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