 The
Casey Files
Base Metals Bears
David Galland
Managing Editor
Doug Casey's International Speculator newsletter
Jul 30, 2007
It is not our purpose here
at Casey
Research to massage the data to fit our point of view. In
fact, we are nothing if not open minded. Recently, we asked readers
to propose scenarios that might cause things to break in a direction
other than that we expect. In response, a subscriber forwarded
an article from Bloomberg with a very sound-sounding bearish
view on base metals. You can read the entire article by clicking
here.
To save you some reading time,
the theme of the article is that, due to high prices, the supplies
of base metals coming onto the market will quickly reach the
point where they'll overwhelm demand, driving prices down. This
scenario will be exacerbated, according to the base metals bears,
because China's rocket-like economic expansion must surely slow,
thereby simultaneously reducing the demand at the same time supplies
are increasing.
According to the Bloomberg
article, despite the strength of their argument, these same bears,
most notably the folks at JP Morgan, have been wrong about the
base metals for some time now. To quote...
"An investor who acted
on the advice of JPMorgan, the third-largest U.S. bank, missed
gains of 67 percent for nickel, 30 percent for copper and 41
percent for lead, the best-performing commodities in the 26-member
UBS Bloomberg CMCI Index."
Even so, just because they
have been wrong in the past doesn't mean they are going to continue
to be wrong, and so one shouldn't use that as an excuse to dismiss
their arguments. (We have also been cautious on the base metals,
but rather than eschew the sector altogether, we have simply
tightened the criteria a base metal play has to meet before we
recommend it in the pages of our monthly International
Speculator newsletter.)
Always happy for a second opinion,
I forwarded the Bloomberg article on to long-term friend Clyde
Harrison, the brains behind the Rogers International Commodity
Index.
After reading it, he gave me
a call. His view can be summed up as "They may be right,
in the short term. But a year down the road, the base metals
are going to be trading much higher than they are today."
Why?
According to Clyde, the debate
about China's growth is already over, underscoring that contention
by sharing just a few data points.
For instance, there are currently
168 power plants being built in China. In addition to the massive
amount of metal used in constructing those plants, consider the
copper wire those power plants are going to be connected to.
"Will there be a fall-off in demand for copper? Not likely,"
Clyde replied, answering his own question.
He also noted that China built
and sold as many cars as the U.S. last year.
And it is important to understand,
Clyde continued, that today one billion people use 2/3 of the
world's natural resources. The balance of 5.6 billion people
use the other third, but they are quickly becoming more successful,
setting up a serious competition.
Which goes a long way toward
explaining why there are now 50,000 students studying geology
in China, versus 900 in the U.S. (of which 300 are foreign).
And why the Chinese are increasingly showing up in remote corners
of the world, checkbooks open, eager to trade our dollars for
tangible resources. Unlike businessmen from the U.S., the Chinese
buyers don't insist that the sellers start labor unions or clean
up their pay practices, they're just there to do business.
In that regard, the Chinese
have no qualms of passing across a briefcase full of cash if
that's what's required to get the deal done. That's something
a U.S. executive would go to jail for. Behind Door A is a briefcase
full of cash. Behind Door B is a Happy Meal and nothing else.
Who do you think is going to get the deal?
Then there's this.
According to Clyde, historical
data shows that when a country starts to industrialize, per-capita
usage of oil typically goes from about 1 bbl at the beginning
of the industrialization, to between 17 and 27 bbl per capita
by the time the industrialization is completed.
That China is just beginning
to industrialize, and has much further to go, is evident when
you consider the Chinese currently consume just 1.7 bbl per capita
per year. And the citizens of India use just 0.9.
Like Clyde, we believe there
is no putting the Chinese genie back in the bottle. In fact,
in our view, what we are witnessing in China is evidence that
when the mainland Chinese, while preparing to take Hong Kong
back from the British, came to the realization that free market
capitalism with little hindrance from the state was the only
way forward.
A New Economic Age in the Making?
The implications of that shift
in thinking are making itself felt around the world, with the
world's largest nation now super-charged by the world's best
economic system.
That is not to say that there
won't be rough spots in China's future - the level of stock market
speculation there is bound to cause a problem - but the trend
in China, and elsewhere, is well entrenched and not going to
change any time soon.
If you take another step or
two back, it is worth noting that Dubai, a patch of desert with
little in the way of natural resources, has used the same laissez-faire
economic approach to transform itself into a global economic
powerhouse. It is not out of the question that other countries
may begin to take note, and follow suit. In which case, the future
is bright indeed... as is the case for all the natural resources.
Jul 27, 2007
-David Galland
International Speculator
David Galland is the managing editor of Doug Casey's
International Speculator newsletter, now in its 27th year, dedicated
to bringing investors unbiased research on precious metals investments
with the potential for 100% or better returns within 12 months.
To learn more about the International Speculator and a no-risk
trial subscription offering you the opportunity to view all current
recommendations, click
here.
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