The Daily 200,000 -  Why the Commodities Supercycle is just beginning - Global Perspectives White Paper - August 2012
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The Daily 200,000 - Why the Commodities Supercycle is just beginning - Global Perspectives White Paper - August 2012

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"The summer of 2012 began with widespread reports in the press that the Commodity Supercycle that had been in place since the turn of the century was now coming to an end. ...

"The summer of 2012 began with widespread reports in the press that the Commodity Supercycle that had been in place since the turn of the century was now coming to an end.

The slowdown in China and some of the other BRIC countries meant that the cycle had concluded and the price of commodities would now decline in the decades ahead - as they had (bar oil) for the whole of the 20th Century.

This fundamentally misunderstands what is happening in the long-term global economy.

This White Paper explains why the global boom in commodities prices is just beginning and why it is set to escalate in the years and decades ahead".

The web address of this White Paper is -!thedaily200k

You can also access/sign up for all our White Papers here-!white-papers

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  • 1. A Global Perspectives White Paper “The Daily 200,000” Why the Commodities Supercycle is just beginning By Shane Brett, Managing Director Global Perspectives th Date 29 August 2012
  • 2. Contents “The world population grows some 200,000 each day. 7 days a week, 365 days a year.Introduction 2 This year, next year, the year after that.....Where we are now 3 I would counter the world is just starting aWhy the Commodities Supercycle is Supercycle in commodities. Just depends on your timeframe.just beginning 3The Good News 6 10 years from now we will need more grain,Investment Strategy 7 more water, more oil, more copper than we use today”.Conclusion 7 “Tas10”, Seeking, 2011 Introduction The summer of 2012 began with widespread reports in the press that the Commodity Supercycle that had been in place since the turn of the century was now coming to an end. The slowdown in China and some of the other BRIC countries meant that the cycle had concluded and the price of commodities would now decline in the decades ahead as they had th (bar oil) for the whole of the 20 Century. This fundamentally misunderstands what is happening in the long-term global economy. To understand why this is nonsense it is important to explain where we are now in the commodities cycle and what is going to happen in the years ahead. These are some of the most important developments for mankind and will have a huge impact on populations worldwide. Like all economic cycles, it will also open up many investment opportunities for both asset managers & investors. This White Paper is intended as an introduction to our forthcoming e-book on this topic. Shane Brett from Global Perspectives will be publishing this e-book later this year which will provide a comprehensive analysis of the Commodity Supercycle, as well as specific recommendations for investment opportunities in the commodities sector.
  • 3. Where we are now looking more likely in the months ahead (just as was experienced in 2008).The reports of the end of the CommoditySupercycle comes after a period ofintense economic uncertainty, huge Why the Commodities Supercycle isaversion to risk in the markets and the just beginningcollapse in the value of many smallerresource companies. Even though short term commodity prices may decline slightly due to the Chinese economicPrices of many important commodities slowdown, the world is about to enter a new eralike Copper (the traditional bellwether of of explosive growth in commodity prices.economic health) and Iron Ore hadbegun to fall from their highs of 2011. We have identified 5 mains reasons that the commodity Supercycle will accelerate in theMost importantly, it looked like China, years and decades ahead. This will be a periodwith its seemingly bottomless demand of much higher prices for minerals, metals andfor the world’s commodities, was finally most importantly, food.slowing down. This would greatly reduceits demand for so much of the world’smineral resources. 1. “The Daily 200,000”.Put simply, after a decade of rapidexpansion, commodities have become The most important fact in understanding whyunfashionable. the demand for commodities will grow hugely this century is simply this – the world’sAs we shall see, the problem with this population increases by 200,000 each day.viewpoint is that the timeframe is far tooshort. That’s every day of the week, 365 days a year.It completely overlooks the scale of the It equates to 75 million people born annually (i.e.changes taking place in the global a new Germany every 12 months).economy right now, which will proceedfor at least the next 3 or 4 decades and There is no debate over these numbers. It is notthroughout the whole first half of the something that can be brushed away or21st century. misinterpreted. It is a fact.In the months since the Commodity These children exist, they are being born - andSupercycle was declared dead, we have will continue to be born in these numbers untilalready seen a number of events in the the middle of the century when the world’sworld economy that make a mockery of population stabilizes (and when finally thisthis thesis. Supercycle may start to end).A horrendous drought in the US, More importantly, these children will need foodcoupled with a poor Indian Monsoon and clothes; they will need housing and energy:means food prices are set to rise they will need transport and education. They willsharply in the months ahead (just as also be the best educated, healthiest, longestthey did in 2008 - abating only when the lived and richest generation in human’s worst Post-War economic crisissated demand). Unlike previous generations, vast numbers of these children are not dying in infancy orThe price of Corn alone has increased succumbing to infectious diseases or 60% in the summer of 2012 andunfortunately the very real risk ofsignificant developing country unrest isGlobal +44 (0) 20 3239 2843
  • 4. These numbers are largely surviving live longer, healthier lives. They will seek (andinto adulthood and globally will live far generate) employment that is higher up thelonger lives than in even the last century value chain. Accordingly they will be better paid.(current world life expectancy is 67 They will have more income.years - compared to only 28 in 1800). With this will come increased economic demand.The survival of huge numbers of healthy Just as in the first world, these people will wantchildren into adulthood is without to use their increased disposable income toprecedent in the history of mankind. improve their lives and the lives of their families.While this is great news for humanity it This means they will want (and demand) theis going to exert incredible pressure on trappings of first world comfort - their ownour planets resources. transportation, better housing, more protein, wider dietary choices, increased leisure optionsMerely by virtue of their existence “the etc. It will be up the world to try and supply thedaily 200,000” will hugely increase resources to satisfy these demands.demand for all the main commodities inthe decades ahead. This mass adoption of Western consumer culture will equate to a huge surge in the demand for the planet’s resources. For its agriculture to feed them, for its energy to transport them and for its minerals to build the 2. Growth in the homes that they will live in. Developing World.The vast majority of this “daily 200,000”are being born into the developingworld. 3. The rush to urbanize.This is a part of the world that has As of 2011 half of the world’s population nowexperienced major economic growth lives in cities. Quite rightly this event was widelyand opportunities on a scale unknown in covered in the media as a landmark in thetheir recent history (7 of the 10 fastest development of our race.economies in the last decade were inAfrica). What was less widely noted was that this is merely a marker on a continuing headlong rushIt can be hard to fully appreciate this to the cities by tens of millions of peoplefrom inside a debt-ridden, economically (primarily in the developing world).stagnant and gloomy first world cocoon. By the middle of this century an incredible 70%Worldwide more people than ever of humankind is expected to live in cities.before are set to enjoy a higherstandard of living than their parents. In the first decade of this century China moved 200 million people off the land and into its cities.In the BRIC countries this means people We all observed what this did to the prices ofwill have the possibility of owning their hard commodities like Iron Ore and Copper.own washing machines and traveling byair plane. They are the first generation China alone is currently planning to move 250whose future prospects are unlikely to million more people to move its cities in the nextbe totally destroyed by gross economic 15 years (i.e. almost the population of the USmismanagement, hyper inflation or even excluding California).war (as it was so often for their parents). Even if a short-term economic slowdown slightlyCrucially, their higher level of health, delays this process, the sheer scale of thisliteracy and education means they will migration is unprecedented in human history.Global +44 (0) 20 3239 2843
  • 5. And it is not just in China. In Africa and 5. Mismatch between Resourcethe other BRIC countries the number of Supply and Consumer Demand.people moving to urban environmentshas exploded in the last few decades. Our first 4 factors have focused on the reasonsThe majority of the world’s very big there will be an increased demand for the worldscities are already in the fast growing commodities in the decades ahead. Tocountries of the developing world. understand the effect this will have on the price of commodities (and more importantly the scaleThe demand this urban rush will place of this impact) it is important to consider theon supplies of steel, iron and copper will supply of resources that will actually bebe colossal. available. The primary reason why commodity prices will be far higher in the years ahead is because 4. The demographic surging demand on one side will be met by dividend declining, erratic or stagnant supply on the other.The “demographic dividend” is theperiod in a countries development This is the single most important factor forwhere the number of working people commodity prices in the decades ahead.increases in relation to the number ofpeople they support (children & the It won’t just be higher demand that will force upelderly). It occurs where there has been prices; it will be when it is met by falling supplya decline in the fertility rate. that the price of certain resources will increase exponentially.As women have fewer children and thenumber of people of working age We have already seen in recent decades whatincreases, the general income of the relatively small supply shocks to vitalcountry quickly starts to rise. The commodities like oil, coal or food stuffs can do tonumber of elderly people to be looked their price. In 2012 we are experiencingafter is still small so the society’s something similar for Corn and Soya costs remain low. Similarlythe number of children to be educated Ironically, periods of lower commodity pricesdrops so education costs are contained. lead to a drastic underinvestment in new mines, commodity exploration and even the moth-This bulge of working age people is balling of existing facilities. The Great Recessionoften described as a once off and its half decade of sluggish growth in theopportunity for countries to make a West have led to a recent slowdown insubstantial leap in their development. commodity prices. Many important resourcesSome countries in South East Asia have moved sharply back from the record highssuccessfully made this transition in the of only a few years ago. This has been reflectedsecond half of the last century. Many in the share price collapse of many smallercountries in Africa and Asia will be mining companies. Banks are far more riskamong the next to benefit (not China averse and funding is hard to find for newhowever - its population is too old) commodity exploration and production opportunities.As these societies start to becomewealthier they automatically start to Across many commodities this is storing upconsume and demand more resources significant supply side shortage for the future.(meat, metals, and energy). Thisadditional income from the An increasingly volatile climate, lower returns on“demographic dividend” will translate fertilizers as well as the erosion of existing waterinto a surge of commodity demand in supplies, means the price of foodstuffs willthe decades ahead. increase while the supply becomes moreGlobal +44 (0) 20 3239 2843
  • 6. volatile. This is why China has bought The Good Newsup huge tracts of arable land globally.They understand that in a future foodcrisis, exports from many countries We should never underestimate humanwould simply be banned (like in 2008) ingenuity.and they would not be able to buyenough food for their population at any Over the last 70 years our ability to create newprice. ways to feed, house, heal, transport and communicate with each other has beenThe cost of mineral extraction will also astounding.accelerate for most metals. We havealready extracted the easy to find The great irony here is that just when humanminerals (Iron Ore, Cooper etc) from development has finally starting to significantlyrich countries with good governments in expand beyond the privileged West and out toeasy geographical environments (e.g. the rest of humanity; the sheer numbers of uswhy go digging in Congo or Angola make the availability of the world’s resources allwhen you can go to Canada or the more precarious and threatens our long termAustralia). Ominously for some future.commodities, miners are also having todig out more ore from the earth to returnthe same amount of metal. The good news is that despite a massive increase in world population over the last couple of decades, there has also been a huge drop inThe price of finding and producing a global fertility (Iran now has a lower fertility ratebarrel of oil has been steadily than Ireland). This means by the middle of thisincreasing. The break-even point now century our population – and with it our resourcestands at somewhere between $70-$80 demand – should start to stabilize.dollars a barrel. We are still finding moreoil, but it is no accident that it is in hardto reach places (like below the Atlantic We are also still finding huge amount of certainOcean floor 300 miles off the coast of resources in some parts of the world.Brazil). The easy oil has been Specifically the incredible gas bonanza openingconsumed. up before our eyes in the US has the potential to transform its economy and provide cheap energy to the US and the world for decades toAlso, the geographical concentration of come. The potential of this opportunity shouldsome important commodities will affect not be underestimated.their future availability (for example 75%of all Phosphates are in Morocco & 90%of Rare Earth minerals are in China). Work is also advancing to re-engineer manyThis means that even commodities seeds of our most basic foodstuffs (like Wheat -which have ample supply may not with a view to increasing its yield by up to 50%).actually be available to buy on the world This could help feed the 10 or 11 billion peoplemarket. that will be on our planet by 2050. There is also plenty of opportunity to use our resources more efficiently (the food industry, for example, is notoriously wasteful). The size of the resource price shocks in the decades ahead will force people, governments and companies to consume commodities far more carefully. In this the Market can be a great motivator.Global +44 (0) 20 3239 2843
  • 7. Investment Strategy “The Daily 200,000” will continue to be born regardless of our current stage in the economic boom and bust cycle.The growth of an enormous new middle The challenge for our planet is to meet the risingclass in the developing world which is resource demands of 10+ billion people, whohungry for commodities means there will through the advances of education and medicinebe many new investment opportunities are living far longer, healthier and more literatefor asset managers. lives.Which commodities will be most in The challenge for investors is to analyse thesedemand or especially prone to supply trends and make the best investment allocationsshortages? Which resources should be appropriately.invested into or are best avoided?Which specific commodities will offer thebest hedge against inflation?The forthcoming Global Perspectives e- Look out for our forthcoming e-bookbook by Shane Brett (Q4 2012) will in Q4 2012 “-analyze all these and related trends inmuch more detail, as well as providing “The Daily 200,000 - Why theclear recommendations regarding the Commodities Supercycle is justbest commodity investment beginning & which commodities youopportunities in the years and decadesahead. need to buy”. To pre-order email:- the future, mankind will no doubt findand extract huge quantities ofcommodities. However the current Sign up for our monthly Whiteindications are that for many resources Papers at-the costs of production is set toincrease, while the demand for these!white-resources will continue to grow. papersThe growing scarcity of key minerals,metals and agriculture will mean much Or email: - base prices for mostcommodities.In the West we need to take a muchlonger term view. Those who havepredicted the end of the CommoditiesSupercycle are using far too short atimescale. We need to stand furtherback and see the big picture and in thisdemography always leads the way.Global +44 (0) 20 3239 2843