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China, Jim Rogers & Commodities

Pertinent observations about the commodity markets, Jim Rogers, China and the US economy...

A COUPLE OF WEEKS AGO, I mentioned to readers of my commodities 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, writes Emanuel Balarie of Commodity News Center.

   The logic behind this statement is quite simple. China has been responsible for the majority of the increase in world commodity demand over the last decade; so keeping a pulse on its commodity consumption gives you a pretty clear picture of where things are moving from here.

   Just consider the facts.

China's On-Going Commodity Demand

   It is important to note that there are two components to Chinese commodity demand. The first component comes as a result of industrialization and foreign investments. The second component is a result of consumer demand.

   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-minute 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.

Cement, Energy & 400 Million Chinese Farmers

   In 2005, the Chinese government put in place a “National Expressway Network Plan” which is supposed to connect the capitals of all provinces and autonomous regions with Beijing and other cities. According to government reports, the length of these highways is expected to total 85,000 km and take another 25 years to complete. As you can imagine, building roads will not only compound the demand for certain raw materials like cement and energy, but it will also expand industrialization.

   The United Nations still expects that about 400 million Chinese farmers will move into the cities within the next decade. A huge number of these farmers are still living in those provinces yet to be impacted by the country's 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: "Buy Airlines Amid Commodities Boom"

   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.

   But when I was in China, I saw Jim Rogers state in an interview on local television that he was bullish on airline companies. At first, I was taken aback by this. In the midst of rising fuel prices, a slowing global economy, and airline bankruptcy, why would a serious investor like Rogers want anything to do with air flight?

   While Jim Rogers himself admits that he is not a short-term trader, he remains accurate on longer-term themes. I still think it’s too early to invest in airlines, but I agree it could indeed be a value investment play. Why? Because 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 passengers are still willing to pay the higher cost.

China, Airlines & the US Economy

   When I was flying to and from China, I also noticed that greater than three-quarters 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 their numbers, domestic air travel was down during the last quarter by 0.3% from 214.4 million passengers carried in the same period in 2007. International travel, however, experienced a gain of 5.4% 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. In short, the 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.

Commodities Bull Market: How Many Reasons Do You Need?

   During my trip, I also had the 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 continue to push commodity prices higher, they asked me a question that shocked me

   They wanted to know some “other factors” for rising commodity prices!

   Yes, 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. But unfortunately for anyone needing new stories to justify such a long-term trend, the reasons for why oil is eventually going to be above $200 per barrel, why Gold will reach over $2000 per ounce, and why the commodity bull market has at least another 5 years of upward movement, remain the same.

   There is no new earth-shattering development to report. Just the simple fact that demand for raw materials continues to grow, while supply lags – and lags badly. And if investors have not quite yet grasped the magnitude of this commodity bull market already, they probably never will.

If you haven’t participated in the commodity markets yet, it’s not too late to get informed. You can receive my free weekly email letter here...

Emanuel Balarie is author of Commodities for Every Portfolio: How You Can Profit from the Long-Term Commodity Boom (Wiley, 2007). A regular guest on CNBC, Balarie has been frequently quoted in dozens of financial publications including the Wall Street Journal, Reuters, MarketWatch from Dow Jones, and Barron's.

See full archive of Emanuel Balarie articles

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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