The commodities sector has endured quite a remarkable period since November last year, with demand for commodities rebounding strongly.
There has been an air of confidence we may have reached the bottom as far as economic woe is concerned. One of the main catalysts for the improved sentiment is the consideration of the enormous amount of fiscal stimuli worldwide, and in particular, in China. Here, fixed asset investment is at around 30% growth rate year on year. And, of course, this means demand for certain commodities will be necessary to sustain this growth. As a result, we have seen strong restocking in China for such commodities, as well as others that are important in the industrialisation process. Many commodities have doubled in price since their lows to reflect evidence of renewed China demand and the expectation of the need for such commodities in the future as the world emerges from recession.
So why is China grabbing so many headlines? To put it simply, China is so important to the natural resources sector because of its sheer scale. It consumes, for example, 50% of the world’s iron ore and at least 20% of most of the world’s other commodities – its demand for copper and nickel being particularly voracious.
With production of many of these commodities having fallen – a result of financing problems and lower demand last year – any resulting tightness in supply actually adds to price pressure.
We are not concerned that Chinese demand for commodities is under threat. China’s authorities are keen to see growth remain – they have a democratic imperative to keep the economy on track. Of course, there will be anxiety, as the recent troubles show, but it is looking like they will achieve their target of 8% GDP growth this year, which is a quite remarkable level of growth.
China is the leader of an impetus worldwide towards huge infrastructure projects, which do not appear to be derailed by the financial crisis. Even if we just take projected emerging market infrastructure, spending here is expected to almost treble from $600bn in 2008 to almost $1.8trn by 2017.
This enormous investment is to accommodate a considerable migration from rural to urban areas, with hundreds of millions expected to move to cities in emerging markets over the next few decades. Again, the upshot of all this is a strong future demand for commodities.
As far as we are concerned, companies with world-class potential (low production costs, capable of generating large profits, resources that are easy to extract, highest management quality) will thrive with a return to sounder footings. Barring a slip into a global depression, which we consider very unlikely, the tentative steps are already evident.
Nicole Vettise is client portfolio manager of global equities at J.P. Morgan Asset Management
