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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
Commodity Super Cycle: Alive & Well?
Chris Watling, CEO & Chief Market Strategist, Longview Economics
Presentation to Objective Capital Conference
January 2011
Commodity super cycle – alive & well?
         CRB commodity index – rebased to 100 @ start of the bull cycle




Feb-11                       www.longvieweconomics.com                    3
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
Kondratieff Waves 1750 - 1910
         Warren & Pearson & CRB combined Commodity index (1750 – 1910)




Feb-11                        www.longvieweconomics.com                  5
Kondratieff Waves: 1900 - present
         Warren & Pearson & CRB combined Commodity index (1900 - present)




Feb-11                         www.longvieweconomics.com                    6
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
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
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
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
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
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
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
Four phases of the Gold Price
                                     (1971 – 2010)

         Long term gold spot price (USD/ounce)




Feb-11                            www.longvieweconomics.com   14
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-

                                              n-

                                                     n-

                                                            n-

                                                                    n-

                                                                            n-

                                                                                    n-

                                                                                            n-

                                                                                                    n-

                                                                                                            n-

                                                                                                                    n-

                                                                                                                            n-

                                                                                                                                    n-

                                                                                                                                              n-

                                                                                                                                                     n-

                                                                                                                                                            n-
         Ja

                  Ja

                       Ja

                            Ja

                                    Ja

                                          Ja

                                                   Ja

                                                          Ja

                                                                  Ja

                                                                          Ja

                                                                                  Ja

                                                                                            Ja

                                                                                                   Ja

                                                                                                          Ja

                                                                                                                  Ja

                                                                                                                          Ja

                                                                                                                                  Ja

                                                                                                                                          Ja

                                                                                                                                                 Ja

                                                                                                                                                        Ja
          -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
Potential Geopolitical Challenges/Resource Wars
  Resource Bottlenecks – Potential Conflict Flashpoints
Global trade chokepoints/bottlenecks




Feb-11                                 www.longvieweconomics.com   16
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
•    Disclosures: This report has been prepared for information purposes only and is not a solicitation, or an offer, to buy or sell any security.
     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
     report has been prepared solely for the person to whom it is addressed and must not be relied upon by any other person for any purpose
     whatsoever. We accept no responsibility whatsoever for any investment or asset allocation decision taken on the back of any or all of the
     information and/or advice in this report.

•    Longview Economics is not authorised nor regulated by the FSA.




Feb-11                                                  www.longvieweconomics.com                                                              18

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America and the Commodity Supercycle

  • 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
  • 5. Kondratieff Waves 1750 - 1910 Warren & Pearson & CRB combined Commodity index (1750 – 1910) Feb-11 www.longvieweconomics.com 5
  • 6. Kondratieff Waves: 1900 - present Warren & Pearson & CRB combined Commodity index (1900 - present) Feb-11 www.longvieweconomics.com 6
  • 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- n- n- n- n- n- n- n- n- n- n- n- n- n- n- n- Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja -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
  • 16. Potential Geopolitical Challenges/Resource Wars Resource Bottlenecks – Potential Conflict Flashpoints Global trade chokepoints/bottlenecks Feb-11 www.longvieweconomics.com 16
  • 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
  • 18. Disclosures: This report has been prepared for information purposes only and is not a solicitation, or an offer, to buy or sell any security. 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 report has been prepared solely for the person to whom it is addressed and must not be relied upon by any other person for any purpose whatsoever. We accept no responsibility whatsoever for any investment or asset allocation decision taken on the back of any or all of the information and/or advice in this report. • Longview Economics is not authorised nor regulated by the FSA. Feb-11 www.longvieweconomics.com 18