China and India Driving Commodities Boom

The economic rise of China is behind the rise in commodities on world markets on a scale the world has never seen before, and now India is rising up to take up any slack in the world markets, according to Michael Power from Investec Asset Management. Here’s a transcript of the conversation with Classic Business Day.

LINDSAY WILLIAMS: Michael, we’ve spoken many times about China and India - last week you produced a new piece about the economic situation of both of those countries - what’s the latest?

MICHAEL POWER: I think everyone is turned on to the idea that China is changing the world, but perhaps what they haven’t recognised is that China is not the only kid on the Asian block that’s actually making a difference - now we can see India is starting to move onto the scene. I noted that Chip Goodyear from BHP Billiton [NYSE:BHP] said in his latest report that he felt that India was only five years behind China - that means a 1.4-billion person economy and a 1-billion person economy are taking off at pretty much the same time.

LINDSAY WILLIAMS: Five years behind means that if demand from China starts to drop off a bit India is right behind to start to mopping it all up - it sounds fantastic.

MICHAEL POWER: Something like that - even the Chinese State Metals Bureau hasn’t actually recognised that they’re probably being chased by not quite the same sized economy, but potentially one that’s almost as large.

LINDSAY WILLIAMS: So we shouldn’t worry too much about the gold price dipping below $550 or platinum not going through $1.100 or copper not going through $6,000 and that sort of thing - this is just a lull and the relentless demand will continue with the JSE will soaring to greater heights?

MICHAEL POWER: It will, although I think that we’ve obviously got to be quite discerning about which parts of the JSE will work for us - if we as a nation continue to consume more than we produce, and continue to run up a current account deficit the way that we are at the moment - we’re in for some interesting times.

LINDSAY WILLIAMS: I was reading an article in an English newspaper the other day about a place called Changking in China - they call it a municipality. It has 31-million people - it’s the biggest megalopolis in the world. Throughout your travels in China and India are you coming across these massive conurbations, and are they continuing to stagger you?

MICHAEL POWER: Indeed. At the moment I think the rate of rural immigration into the urban areas of China is running at about 16-million per year - if you want to think about it in a slightly different way, I understand there are 18,000 new people arriving in Mumbai Bombay every day. It’s the greatest migration of humanity in the history of the world, and that - more than any other single fact - is what’s behind this staggering increase in growth, and indeed in resources consumption.

LINDSAY WILLIAMS: So how do little people like investors in South Africa take advantage of it? One thing I noticed recently was that a plan several years ago to build storage facilities on the east coast of China has now been completed - they’re going to start buying on the open market to fill these massive storage facilities will millions of gallons of oil - do you think that’s going to affect the oil price?

MICHAEL POWER: I think it is going to affect the oil price in due course - if China is actually building up some sort of strategic reserve obviously they’re going to be a little more circumspect about the timing of their purchases, but one can’t but think that that would act as a fairly firm underpin on the price.

LINDSAY WILLIAMS: Apart from the obvious one’s that we talk about every day - gold, platinum and copper - any there any other commodities that have maybe been ignored like fluorspar?

MICHAEL POWER: Uranium. That is the one that I think is very interesting. The world debate on nuclear power is now neutralising in certain countries, and swinging positive in again in others - in China there doesn’t seem to be a debate at all, and nuclear power is very much on the cards, indeed nuclear power that uses the South African-pioneered pebble bed modular reactor technology.