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Commodities demand not insatiable:
Expert
HONG KONG -
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, held
recently in Hong Kong.
"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 at South
Africa-based Standard Bank, at the conference's
opening address in Hong Kong. While he
acknowledged China's increasing demand for
commodities to support its rapidly developing
manufacturing sector, he explained that China
itself is among the top five world producers of
steel, coal, lead, aluminum, 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 40-50% [of their value]
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
scenario which 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 by
itself a sufficient criterion 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 recognized 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% of the
incremental energy required by the world until
2010, followed by oil with 34% and renewables with
18%. "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 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 centers
and emerging markets, 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.
(Asia
Pulse) |
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