China, Jim Rogers, And Commodities

I recently returned back from China with some pertinent observations about the commodity markets, Jim Rogers, and the economy. A couple of weeks ago, I mentioned in mycommodities newsletter that if anyone had doubts about the long-term direction of the commodity markets, they should simply hop on a plane and fly to China. The logic behind this is quite simple. Since China has been responsible for the majority of the increased commodity demand over the last decade, keeping a pulse on their commodity consumption trends can give you a pretty clear picture of where things are moving in the longer term. Here are some observations on various topics:

Chinese Commodity Demand

It is important to note that there are two components to the Chinese commodity demand. The first component is the demand for commodities as a result of industrialization and foreign investments. The second component is a result of consumer demand. I will talk more about consumer demand in China next week in my free newsletter.

When China began its transition from an agrarian based economy to a manufacturing driven economy, there was a huge influx of demand for metals, energy, cement, and other industrial materials. This demand came from both foreign investors who were interested in building manufacturing plants to profit from the cheap labor, as well as from governmental mandates that focused on economic and infrastructure development.

If you fly to China today, you will see state- of -the art buildings, manufacturing plants, roads, and rail systems. Since all of this was only developed over the past decade, it is easy to understand why China transitioned from being a net exporter of commodities to becoming one of the world’s largest importers of commodities.

One can get a much better understanding of this increased commodity-demand trend by observing the development of the transportation system in China.
In Shanghai for instance, you can jump on the world’s first Maglev train that will take you from the airport to downtown Pudong/Shanghai in record time. Since the train travels at about 430 km/hour, the typical 45 min trip (via car) will only take you about 8 minutes. If you decide to take the toll roads instead, you will also notice a very new and elaborate highway system that is still in the process of being built nationally.

In 2005, the Chinese government put in place a “National Expressway Network Plan” which is supposed to connect all capitals of provinces and autonomous regions with Beijing and other cities. According to government reports, the length of highways is expected to total 85,000 km and take another 25 years to complete. As you can imagine, building roads will not only continue the demand for certain raw materials like cement and energy, but it will also expand industrialization. The UN still expects that there will be about 400 million Chinese farmers that will move into the cities within the next decade. A number of these farmers are still living in the provinces that have not yet been impacted by the massive industrialization.

What is interesting about the transportation development in China is that it was initiated prior to this bull market in commodities, and before the country experienced 10% yearly economic growth. The Maglev train, for example, was first commissioned to be built in 2000-2001. Clearly, the Chinese government looked at the longer term prospects for its economy when it decided to invest the capital into building the train. Today, it is also clear that that this forward-thinking evaluation was spot on.

In the same way, China is thinking ahead in terms of commodity demand. While an economic slowdown in western economies might have a short-term affect on the Chinese economy, the longer-term prospects of growth in China remain strong. As a result, China is not shying away from commodity consumption any time soon. They still have roads to pave, factories to build, and cities to expand.

I wrote a couple weeks ago that another sign that this commodity bull market is far from over, was the fact that China, India, and Japan were investing heavily in Africa- a commodity-rich continent. Their initial investments are paving the way for future resource extraction. Clearly, there is a longer-term commodity demand.

Jim Rogers & Airlines

For many Jim Rogers fans, it is comforting to know that he has not jumped off the commodity bull market bandwagon. Rogers recently stated that investors should avoid the dollar and buy commodities. In fact, he believes that commodities will be one of the better investments this year.

When I was in China, I had an opportunity to listen to a Jim Rogers interview that was conducted on a local television network. During his interview, he mentioned that he was bullish on airline companies. At first, I was taken aback by his bullish tone in the midst of rising fuel prices, a slowing global economy, and airline bankruptcy. However, there is some validity to his point over the longer-term. While Jim Rogers himself admits that he is not a short-term trader, he has been fairly accurate on longer-term themes. I still think it’s too early to invest in Airlines, but it could indeed be a value investment play.

Having flown frequently over the past several years, I have noticed that the amount of people who are flying has not declined. In fact, I am actually noticing fuller planes. In the past, you might see empty seats around you. Today, the planes are jammed packed. One of the reasons has to do with the fact that there are fewer flights available in the midst of similar demand. As a result, airline companies are increasing their fares and baggage fees- and the passengers are still willing to pay the higher cost.

International vs. Domestic Travel

When I was flying to and from China, I also noticed that greater than ¾ of the passengers were Asian or Indian. This number is significantly higher than it was several years ago. In fact, I believe that with the declining dollar and rising wealth in emerging economies, you will begin to see a great increase in passengers coming to the US.

This assertion is backed by some recent data from the US Department of Transportation. According to the Bureau of Transportation Statistics, domestic air travel was down 0.3 percent from 214.4 million passengers carried in the same period in 2007. International travel, however, experienced a gain of 5.4 percent from the 28.8 million carried during the same period in 2007.

In terms of available seats in April, domestic travel experienced a 1.8% decline and international travel experienced a 6.3% increase. Clive Maund also writes about this topic in his recent commentary.

In short, the above airline trends and statistics reaffirm what I have been saying for the last several years- the consumer demand from industrializing economies will more than make up for the slowdown of the US consumer.

Boring- But True

During my trip, I also had an opportunity to speak to several high level executives of a global investment company. After I finished talking about the global demand and supply factors that would commodity prices higher, they asked me a question that shocked me. In short, they wanted to know some “other factors” for rising commodity prices. They already knew the basic supply/demand story for rising commodity prices, but it seemed that the story was getting quite old and boring. They wanted to hear something different and exciting.

Unfortunately for them, the reasons for why oil is eventually going to be above $200/barrel, why gold prices will reach over $2000/ounce, and why the commodity bull market has at least another 5 years of upward movement remain the same. There is no new exciting development to report. And if investors have not quite yet grasped the magnitude of this commodity bull market, they probably never will. As for me, I continue my longer-term view of higher commodity highs.

If you haven’t yet participated in the commodity markets, it’s not too late to get informed. I am offering a free weekly commodities newsletter. In addition, you can still order Commodities For Every Portfolio: How You Can Profit From The Long-Term Commodity Boom. I finished writing the book at the beginning of 2007. At that time, I predicted that oil would reach $150/barrel within the next two years, the US would head towards a recession, and that the agricultural sector (corn, wheat, soybeans) would post record highs. It is a good read for anyone who needs to be convinced that this bull market is far from over.

Emanuel Balarie

Jabez Capital Management

www.commoditynewscenter.com