The rapid industrialization of China and India continue.
While we should be happy that the living standards in these countries have been increasing we should also be aware that extreme demand pressures in the face of declining supplies will put upward price pressure on many commodities for at least the next several years and perhaps much longer.
The following is from the Daily Reckoning news letter service:
“the entire world can’t get enough copper, zinc, lumber and oil. But bringing on new production takes time. Supply can’t catch up with demand overnight. In fact, it’s going to take quite some time, especially when you throw the consumption potential of India and China (37% of the world’s population) into the mix. Consequently, commodities, the market for the essentials, will remain tight for the foreseeable future. ”
Of course, markets do not move in a straight line, especially commodity markets. However, the long side of markets like copper, lead, gold, silver, lumber, and oil should be favored for many years to come.
That means buying or adding to positions on price corrections, and looking for the bull market to continue for a long time to come.
The commodities markets are influenced by many factors. Of course, on a long term trading basis fundamentals are important. The demand and supply balance of a commodity will ultimately determine prices.
However, on either a short term or long term basis the news of the day , week, or month, can have a major price impact.
For example let’s say there is a severe drought in a major US corn growing region. News of a rain producing weather front moving in come have an immediate impact on corn futures prices.
News of continued drought and damage to the corn crop will have a bullish impact.
Another example of how news could immediately effect a market would be news of a terrorist attack against a key Saudi Arabian oil production facility. News of this magnitude could easily cause a $1.00 to $2.00 a barrel surge in crude oil prices.
When you trade commodities you must closely follow the news.
The growth of the Chinese economy has been nothing short of amazing. The growth rate has been around the 10% annual rate level for the past several years.
This high rate of growth has fueled a massive demand for industrial commodities.
According to the International Monetary Fund from 2002-05, China accounted for 48% of the increased demand for aluminum. This means that China alone absorbed 48% of the increased world production of aluminum over this time period.
Take a look at the short table below, which shows the percentages for other commodities:
Clearly as goes China so goes the market for many commodities, When you trade commodities today you had better keep a watchful eye out for how well the Chinese economy is performing.
Any pronounced slow down in China’s rate of economic growth would cause a rapid decline in commodity price levels, especially in industrial commodities.
