Commodities play a key part in the global economy and investors need to identify trends of supply and demand
Before 1870 China and India were key drivers of world gross domestic product, accounting for more than 40 per cent for a sustained periods of time. Our expectation is that the current level from China and India of close to 20 per cent is likely to rebound strongly in the long term as these economies grow. This is important for commodity investors as long-term trends and demographics will drive demand.
China is currently the largest consumer of all commodities, excluding oil, and consensus forecasts expect its economic growth to remain at between 8 per cent and 10 per cent in 2011. The content and tone of China’s next five-year plan will be an important short-term driver of commodities markets and its long-term influence will be substantial. As the global recovery continues into next year, we expect to see improving economic activity and commodity demand from both the developed and emerging world.
The sustained pick-up in industrial activity has led to significant increases in silver and copper prices, with gains of 41 per cent and 12 per cent respectively. Since the financial crisis, some metals have been able to increase supply as demand has recovered.
Structural challenges, such as the trend towards more underground mining, the prospect of mining lower-grade deposits – where there is a lower percentage of copper in the ore – and political instabilities in some production regions, such as the Democratic Republic of the Congo, are all constraining supply.
Oil has been a notable laggard within the commodities rally this year, broadly remaining range bound between $60 to $80 (GBP38 to GBP51) a barrel. Oil demand fell during the financial crisis and the gradual pick-up has been absorbed by high inventory levels and spare capacity from the Organisation of Petroleum Exporting Countries. At times the price has broken out of the range shown above largely due to weakness of the US dollar.
Bullish analysts estimate the price could soar above $100 (GBP64) a barrel
The trend of rising energy prices highlights the need for secure energy sources by governments. This is likely to refocus investor interest on the new energy market as alternative energy and energy efficiency will be instrumental in providing energy security in the long term.
the gold price had further to appreciate from current levels. We should note that a strengthening US dollar, higher real interest rates or an above consensus global recovery could negatively impact this view.
Emerging market governments, such as India, are adding to demand in their drive to diversify reserves from the US dollar alongside many other countries such as Russia, Saudi Arabia, Mauritius and Sri Lanka, who have all announced increases to their gold holdings in foreign exchange reserves this year.
Combined with the mining industry’s inability to incrementally increase supply – mining production peaked in 2001 – and a lack of supply from central banks, we expect these factors to be supportive of a higher gold price in the long term.
While demand fundamentals for many commodities remain uncertain, I have a positive outlook for those commodities which are experiencing supply constraints. I believe this will offer exciting opportunities for investors in 2011, where commodity and stock selection will be integral to successful investment in this sector.