Objective Capital's Americas' Resources Investment Congress 2011
Ironmongers' Hall, City of London
1 February 2011
Speaker: Chris Watling, Longview Economics
1. AMERICAS’ RESOURCES
INVESTMENT CONGRESS
America and the Commodity Supercycle
Chris Watling – CEO, Longview Economics
IRONMONGERS’ HALL, CITY OF LONDON ● TUESDAY, 1 FEB 2011
www.ObjectiveCapitalConferences.com
2. Commodity Super Cycle: Alive & Well?
Chris Watling, CEO & Chief Market Strategist, Longview Economics
Presentation to Objective Capital Conference
January 2011
3. Commodity super cycle – alive & well?
CRB commodity index – rebased to 100 @ start of the bull cycle
Feb-11 www.longvieweconomics.com 3
4. Commodity Super Cycle – Alive & Well
Commodity Super Cycles (1780 – today)
US Commodity Super Cycles (1780s – today)
Start of super End of Super Size of Super Length of cycle Index
cycle cycle Cycle (years)
Mar-1788 Dec-1814 135% 26.8 Warren and Pearson
Kondratieff, a Russian
Dec-1814 Feb-1843 -62% 28.2 Warren and Pearson
economist working in the
Feb-1843 Aug-1864 208% 21.7 Warren and Pearson 1920s, found evidence of
Aug-1864 Jun-1896 -70% 31.8 Warren and Pearson a commodities super
cycle back to the 1780s
Jun-1896 April-1920 218% 24.0 Warren and Pearson
Apr-1920 Jun-1932 -80% 12.2 CRB monthly Since his work in the
Jun-1932 Jan-1951 689% 18.6 CRB monthly 1920s, those super
Jan-1951 Jul-1968 -40% 16.6 CRB monthly cycles have continued
although appear to have
Jul-1968 Oct-1980 215% 12.3 CRB monthly
shortened in duration
Oct-1980 Oct-2001 -31% 21.0 CRB monthly
Oct-2001 today 137% 9.0 World, CRB, Spot Index
Feb-11 www.longvieweconomics.com 4
7. Commodity Super cycles – What drives them?
1. Industrialisation phases
2. Weather cycles
3. Monetary cycle
4. Long Capex cycles
5. Long term demographic trends
“Price historians in Europe have suggested seven causal explanations, which might
be called monetarist, Malthusian, Marxist, neoclassical, agrarian, environmental,
and historicist models” From ‘The Great Wave’, David Hackett Fischer.
Feb-11 www.longvieweconomics.com 7
8. Demand Drivers:
Developing (& industrialising) Asia: A 3 billion elephant
Largest non developed Asian economies
Asia (Population rank in GDP GDP per capita population Long term Real
size relative to RoW) ($bn 2008) (US$2010) (bn; % of ASIAN total) growth rates
Asia (23) (a) $7,239bn 4,070 3.60 (100.0%)
China (1st) $3,206bn 3,999 1.33 (36.9%) 9.1% (1997-2007)
India (2nd) $1,200bn 1,124 1.13 (31.4%) 9.7% (1997-2007)
Indonesia (4th) $433bn 2,858 0.23 (6.4%) 5.9% (2001-2010)
Pakistan (6th) $143bn 1,067 0.164 (4.6%) 4.8% (2000-2009)
Bangladesh (7th) $68.4bn 624 0.147(4.1%) 7.4 % (1997-2007)
Vietnam (12th) $68.6bn 1,168 0.086 (2.4%) 10.0% (1997-2007)
a: excludes HK, Japan, Singapore, South Korea & Taiwan
NB USA = 3rd 304mn pop; Brazil =5th 191mn; Russia = 8th 142mn; Nigeria = 9th 137mn; Japan = 10th 128mn; Mexico = 11th 110mn
Feb-11 www.longvieweconomics.com 8
9. China & India:
Climbing the Industrialisation commodity intensity path
Chinese, Korean and Taiwanese Copper Chinese, Korean and Taiwanese Oil
consumption and real GDP per head consumption and real GDP per head
35 20
Oil consumption per head (barrels)
Copper consumption per head (kg)
18
30
16
25 14
12
20
10
15 8
10 6
4
5 2
0 0
- 5,000 10,000 15,000 20,000 - 5,000 10,000 15,000 20,000
China South Korea Taiw an GDP per head
GDP per head
China South Korea Taiw an
Source: Longview Economics, Reuters Ecowin, WMBS Source: Longview Economics, Reuters Ecowin, BP
Statistical Review of World Energy June 2010
Website: www.longvieweconomics.com Feb-11 9
Twitter: ChrisatLongview
LinkedIn: Longview Group
10. Commodity Super Cycle – Alive & Well
China's share of world consumption (% of total)
1998 2008 2020**
Copper 11% 28% 43%
Aluminium 11% 33% 45%
Oil 6% 9% 20%
Lead 9% 36% n/a
Gold 8% 13% n/a
Coal 29% 43% 50%+
Natural Gas 1% 3% 15%+
Source: Longview Economics, WMBS, BP world oil report
**Forecast Longview Economics
Feb-11 www.longvieweconomics.com 10
11. Short Term Risks:
Residential Housing Bubble
Average house price to per capita Residential property prices in ‘Top
disposable income in major cities Tier Cities’ RMB (per square metre)
Website: www.longvieweconomics.com
Twitter: ChrisatLongview Feb-11 11
LinkedIn: Longview Group
12. Why will money creation continue?
US Total debt to GDP (%): 1916 to 2009
400.0%
370.6%
This spike in the debt to GDP ratio peak
reflects a 30% fall and subsequent 2008
350.0% pick-up in GDP, not dramatic
changes in debt levels, although
debt rose rapidly, prior to that in the
Total credit market debt to GDP (%)
1920s
300.0%
250.0%
200.0%
150.0%
100.0%
1916
1920
1924
1928
1932
1936
1940
1944
1948
1952
1956
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
2008
Feb-11 www.longvieweconomics.com 12
13. Ageing Western populations
Drives Rapid increases in Public/government Debt
Public
debt as a
% of GDP
OECD
estimates
Source: BIS
WP300, March
2010
Feb-11 www.longvieweconomics.com 13
14. Four phases of the Gold Price
(1971 – 2010)
Long term gold spot price (USD/ounce)
Feb-11 www.longvieweconomics.com 14
15. Monetary Argument:
4 Phases of Real interest rates (1971 – 2010)
The 4 phases of real interest rates (1971 to 2010)
15.00
real rates
Loose/negative sharp tightening of real rates - broadly
low/negative this
real rates real rates stable early/mid 80s to
past decade
mid/late 90s
10.00 sharp falls in
gold price
Gold price up
gold price gold price up
sharply thro to
broadly flat sharply
1980 peak
5.00
%
0.00
71
73
75
77
79
81
83
85
87
89
91
93
95
97
99
01
03
05
07
09
n-
n-
n-
n-
n-
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Ja
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-5.00
-10.00
Fed funds rate less 1 yr forward inflation Fed funds rate less 3 yr forward inflation
Source: Longview Economics, Reuters EcoWin
Feb-11 www.longvieweconomics.com 15
17. contact us at: info@longvieweconomics.com
join our LinkedIn Group: “Longview Economics”
follow us on Twitter at: “ChrisatLongview”
www.longvieweconomics.com
Longview Economics
T +44 (0) 207 062 8802 Market Timing, Macroeconomic, Thematic & Commodity Research
Info@longvieweconomics.com
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It does not purport to be a complete description of the securities, markets or developments referred to in the material. The information on
which the report is based has been obtained from sources which we believe to be reliable, but we have not independently verified such
information and we do not guarantee that it is accurate or complete. All expressions of opinion are subject to change without notice. This
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• Longview Economics is not authorised nor regulated by the FSA.
Feb-11 www.longvieweconomics.com 18