Supply, Demand Critical In Commodity Investment

HONG KONG, June 23 /Xinhua-PRNewswire-AsiaNet/ — Investors should not automatically assume China has an insatiable appetite for commodity imports, according to Standard Bank, lead sponsor of Commodity Investment World Asia 2005.
“China is one of the most efficient commodity producers in the world and its growing influence in the commodity market cuts both ways,” stressed Andrew King, Global Head of Resources Banking, Standard Bank, in the conference’s opening address in Hong Kong today.


While he acknowledged China’s increasing demand for commodities to support its rapidly developing manufacturing sector, he explained that China itself is a top-five world producer of steel, coal, lead, aluminium, tin, gold, corn, rice, wheat and cotton.
King acknowledged that buying and holding commodities has earned more money over the past three years in US dollar terms and attracted more bullish projections than most other investments. “However, while many believe that commodities are entering a bullish ‘super cycle’, investment caution is necessary, as commodities can lose up to 40 per cent-50 per cent in a single year.”
He stressed that the commodity market has a habit of surprising investors with its ability to respond to high prices with more supply than necessary. “This time is likely to be no exception,” King said, adding that this is a situation that Standard Bank as a major worldwide financier of commodity producers knows only too well.
Nor, he feels, is the current fear that the world is about to run out of oil a sufficient criterion alone for commodity investment. “Existing proven conventional oil reserves are more than sufficient to last until 2030, and will be supplemented by unconventional reserves in countries such as Canada (oil sands) and Venezuela (heavy oil).”
King recognised that the world’s dependence on oil would remain significant in the transport sector, making supplies vulnerable to disruption. However, he added that research by the International Energy Agency indicates that natural gas and coal are expected to supply 48 per cent of the incremental energy required by the world until 2010, followed by oil with 34 per cent and renewables with 18 per cent.
“Proven reserves of natural gas and coal are even more plentiful than those of oil, particularly in China, India and Russia, where much of the incremental energy demand will come from over the next 25 years,” he maintained. “Also, China is adding significant amounts of hydroelectric and coal-fired capacity over the next three years and this is a direct substitute for oil.”
King also stressed the importance of detailed currency analysis. “One of the primary drivers of positive US dollar-based commodity investment returns over the past three years has been the weak US dollar. Therefore, investing in a dollar-based commodity index based on past performance history is just as much a bet on currency as a bet on commodities.”
It is also a gamble on the specific basket of commodities selected, weightings applied, whether the index makes use of spot, futures or options and other criteria, he added. “Indices may be constructed to reflect an attractive performance history, but investing in history is not a good idea, unless you like antiques.”
King advised that commodities should never be viewed as a single, homogeneous asset class. “Commodities move at different times and for different reasons and the correlation between price movements of individual commodities is often low. Timing is therefore as essential as careful commodity selection.”
He explained that, “As a resource banking and commodities specialist, Standard Bank firmly believes that price volatility in commodities, and the emerging markets that are becoming increasingly dominant in producing and consuming them, provide great investment opportunities.
“But only a detailed analysis of supply and demand fundamentals, as well as currency, technical and other factors by a commodities specialist can help reap true rewards in this complex investment market,” King concluded.
Standard Bank is South Africa’s leading banking and financial services group with total assets of more than US$100 billion. With offices in 17 African nations and 21 other countries in major financial centres and emerging markets, it employs more than 35,000 worldwide.
The bank is acknowledged as a leading world specialist in commodities, natural resources and emerging markets. Its Hong Kong office serves as the hub for its international investment banking activities in the Asia-Pacific region, where it has offices in Shanghai, Taipei, Singapore and Sydney, and an investment advisory operation in Kuala Lumpur.
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SOURCE: Standard Bank
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