“The commodities supercycle is alive and well,” says the Australasian Investment Review. Global mining giant BHP Billiton, reporting a 21% jump in annual profits, says raw materials prices should stay high. The US economy may be slowing amid the fallout from the subprime saga – but according to a survey of its major customers, in developing economies it’s “essentially business as usual”.
Strong expansion in emerging economies should prop up global growth, reckons BHP’s CEO Chip Goodyear, who points to a “step change” in demand for resources as industrialisation continues. The industrialisation and urbanisation that have driven China’s growth “will continue for several decades as billions of people strive for a better quality of life”. China accounts for 20% of BHP’s income, and sales to India have jumped to 4% from “almost nothing… this is where China was six or seven years ago and we expect rapid growth”. Meanwhile, “supply-side pressures will remain high”.
BHP is putting its money where its mouth is: its dividend is 50% up on last year and it will raise its exploration budget to three times the 2002 figure, while other miners are also committing more resources to finding new supplies. “There could be no more vivid… demonstration of how the world’s two most populous nations are reshaping the planet,” says James Harding in The Times. All this is a reminder that miners are likely to “continue providing excellent returns for a number of years”, says Arjan Palthe of ABN Amro. Setbacks such as the one of the past few weeks are buying opportunities for long-term investors, says Eoin Treacy of Fullermoney.com.
Tight supplies and booming emerging-market demand are also boosting agricultural commodities’ prices. Population growth means that by 2020 the world will need 40% more food, says Richard Girling in The Sunday Times, while developing world diets are changing as greater wealth leads to greater protein intake. China’s per-capita milk intake is set almost to double to 40kg by 2020, while greater demand for meat will put pressure on grain prices: it takes 8.3 grams of grain to produce one gram of beef.
The boom in biofuels is boosting demand and constraining supplies; 20% of the US corn crop is already used to produce ethanol. “Agricultural commodities are the subject of a growing battle” between the demands of cars and hungry developing world populations, Michael Lewis of Deutsche Bank told The Times. Urbanisation and climate change are reducing arable land, while stocks of many softs are at record lows. Global stockpiles of wheat hit just 40 days’ supply in 2006 and are at their lowest since 1979, helping to explain why prices reached a record high last week. Expect to hear a great deal more about rocketing food prices in the years ahead. London-listed ETFs offer access to a range of softs in addition to the Dow Jones Agricultural Commodities Index.