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The Winners and Losers in the ‘Commodities New World Order’

Commodities / Resources Investing Apr 29, 2010 - 05:15 AM GMT

By: Money_Morning

Commodities

Best Financial Markets Analysis ArticleMartin Hutchinson writes: In the "commodities new world order," commodity producers will be king.

Investors who need proof need only consider recent events. Iron ore prices are at record levels, and the annual-price-setting arrangement has broken down. Venezuela President Hugo Chávez has signed "dark side" agreements with Russian Prime Minister Vladimir Putin for Russian companies to develop Venezuela's oil-and-mineral resources. China may have invested $1 trillion or so in U.S. Treasuries, but the Asian giant's only truly successful investment so far has been the 17% stake it took in Canadian-resources player Teck Resources Ltd. (NYSE: TCK).


Welcome to the commodities new world order. These events serve notice that - as we put the global financial crisis behind us - the commodity "haves" will set the agenda ... while the commodity "have nots" will fall farther and farther behind.

The Birth of the Commodities New World Order
The commodities-and-energy bubble of 2006-08 happened at the end of a long boom, so it did not affect geopolitics much. The major commodity-producing countries had several good years, but since those had followed a succession of bad years the bubble was merely a brief respite that did not represent a longer-term change in their positions.

In late 2008, when commodity prices finally fell, it appeared that the traditional world order had been re-established.

This year, however, commodity prices have risen again - and in many cases have reached record levels - even though the global economy is only beginning to emerge from a deep-and-damaging recession. If energy-and-commodities prices continue to rise, the tectonic plates of global economic power will shift.

The Losers - Including Several Surprises
One big loser in the commodities new world order will be Japan. The once-seemingly invincible Asian powerhouse had already damaged itself over the last two decades through excessive public spending - and by trying "stimulus" after "stimulus" to break free from its long economic funk. But the combination of high commodity prices and a public-debt level in excess of 200% of gross domestic product (GDP) may now be too difficult to overcome.

It doesn't help that the current government has just reversed the one substantial policy achievement of the last decade - the slow-motion privatization of the $3 trillion Japanese postal system. Going forward, Japan will need all her exporting prowess to pay for necessary commodity imports, and living standards are likely to decline sharply.

Another loser, believe it or not, is China. U.S. Treasury Secretary Timothy F. Geithner's recent decision to delay a currency report that would have accused China of being a currency manipulator was caused by one extraordinary factor: China has started to run balance-of-payments (BOP) deficits. If that trend continues, it will strongly suggest that China's currency is not overvalued after all.

China country is large and well endowed with most commodities, but with 1.3 billion people and automobile sales that last year exceeded the U.S. totals for the first time ever, its thirst for commodities and energy have become insatiable. China is a principal driver of the inexorable rise in global commodity prices, and its domestic costs must inevitably increase rapidly as those rises feed through to Chinese consumers.

By the end of 2010, China is likely to be suffering from double-digit inflation, even in the country's heavily massaged statistics. The strength of the Chinese economy is so great that disaster is very unlikely, but that country's economy is certainly facing new headwinds.

Unlike China, which has the resilience to cope, India's economy is seriously endangered by high commodity prices. Its 1950s-socialist government is congenitally incapable of achieving anything close to a balanced budget - even during a record-setting boom - and the Reserve Bank of India keeps interest rates low to finance the deficits. Thus, India is extremely vulnerable both to inflation and balance-of-payments crises. Inflation ran at almost 10% in the 12-month-stretch that ended in February, while the trade deficit exceeded 7% of GDP in the year through January, so both of these dangerous catalysts are critically close.

Another loser is Europe, as is already being demonstrated by the struggles of the commodity-poor Mediterranean countries. Here Germany is magnificently competitive whatever happens to commodity prices, and Scandinavia has substantial commodity resources, so the strain will be felt in the economies of the PIGS - Portugal, Italy, Greece and Spain (or "PIIGS," if you want to include Ireland) - and through them on the coherence of the euro.

New World Winners: Australia, Canada & Co.
Turning now to the future kings on the commodities new world order, the principal winners among the world's "rich" economies are Canada and Australia - each of them well-managed, financially wealthy countries with abundant commodity resources. Australia has particular strategic importance as supplier of iron ore and coal to China, while Canada is even more crucial to U.S. oil security through the Athabasca tar sands. Americans have been prone to sneer at Canada's capabilities for the last two decades, but the shoe is on the other foot now that Canada's superior economic management is meshing with Alberta's oil resources and British Columbia's magnificent mining sector.

Let's turn, next, to Latin America and Africa - in theory both beneficiaries of higher natural-resource prices. If we look at specific countries, Brazil (both iron ore and oil), Chile (copper), South Africa (mining) and Venezuela, Nigeria, Angola and Ghana (all four in oil) stacking up as major winners. If Latin America and Africa were as well governed as East Asia, they could be expected to become substantially richer from a prolonged period of high commodity prices. After all, East Asian nations profited from the opening of global manufacturing to their low-cost, skilled work forces.

Regrettably, good government is scarce on both continents.

At one extreme, Venezuela and Nigeria are legendary for their mistreatment of foreign investors and their corruption, and are hence having financial difficulty even in this period of high prices (Russia is also in something of the same boat).

At the other end of the scale, Colombia, Chile and some small African countries such as Botswana are well managed, and are finding themselves climbing steadily up the global income scale. Chile, for example, is now about 40% richer on a per-capita basis than Argentina, whereas a generation ago it was only half as wealthy.

In the middle of the commodities new world (pecking) order are the two giants - Brazil and South Africa, where corruption and misguided development theories are in both cases showing signs of killing the goose that laid the golden eggs.

Brazil had a particularly good run in 2009, but the Luiz Inácio Lula da Silva government is showing signs of reverting to the statist policies that failed in the 1980s. A lot will depend on the election due in October.

As investors, we need to accept the king-making realities of this "commodities new world order," and to reorient our portfolios to countries where future gains are likely to arise. Regrettably, only a few commodity-rich countries seem likely to offer the gains that China and India have offered in the last decade. Still, in this commodities-oriented new reality, profit opportunities do exist in Chile and Colombia, while the portfolio that lacks substantial exposure to Canada and Australia is missing out badly.

Source : http://moneymorning.com/2010/04/29/commodities-new-world-order/

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