Congratulations to our President-elect, Mr. Obama. It's fitting that an African American shall take up America's top job to salvage this country from an imminent political, social and economic collapse. Closer ties with Africa, a land blessed with rich natural resources, might provide the best opportunity we desperately need to save America and continue our prosperity!
Circuit City (CC) bankrupted. General Motors (GM) could be next and Ford (F) is not much better. Mean while we are bailing out AIG for the second time (or maybe the third time) in just a few months as it seems to be just another growing black hole. And who will bail out the Federal Reserve Bank or the US Government itself?
If you read my past articles, you know my favorite precious metals are palladium and platinum. PGM metals used in catalytic converters in vehicles account for half of global demand. Am I concerned about these two precious metals' future prospect?
I am not concerned at all, not only because PGM metals are precious metals and hence are safe haven investments just like gold and silver, not only because PGM metals have strong demand in emerging new applications especially in alternative energy categories such as fuel cell, hydrogen economy, bio-fuel, and coal-to-liquid, but even within the auto sector, the global demand continue to remain strong fundamentally.
Enron collapsed a few years ago. Did we stop using electricity at the time? No. Do you stop buying auto insurance if AIG goes out of business? No. More than ten years ago, the last American-owned TV manufacturer went out of business or was acquired by a foreign entity. It did NOT stop Americans from watching too much TV today, either.
The downfall of the US auto industry is a completely separate story from global auto demand, just like a sunset of US-based TV manufacturers did not mean a sunset of consumer demand of TVs and other electronics. It simply means that the US auto industry is no longer competitive in the marketplace against foreign automakers like Toyota (TM) and Honda (HMC). Businesses go bankrupt even during good economic times, if they cannot compete. But I truly feel sad about the current status of the auto industry and other elements of the manufacturing infrastructure of this nation.
From a fundamental point of view, the global auto demand is expanding even as the world enters a period of severe economic recession. IEA recently revised the projection of global oil demand in 2008 and 2009. The lowered projection is 86.5M barrels per day for 2008, which is still 0.5% higher than 2007, and the projection for 2009 is 87.2M barrels a day, yet higher than 2008. Higher oil consumption must mean higher vehicle demand.
Let's do some simple calculations. One barrel of oil produces roughly 19.5 gallons of gasoline and 9.2 gallons of diesel, totalling about 28 gallons of road vehicle fuel. If global oil demand is 86M barrels a day, that's 880 billion gallons of fuel consumed per year. An average vehicle drives 150,000 miles during its lifespan and consumes fuel at a rate of roughly 20 MPG, so lifetime consumption of fuel is 7500 gallons. So 880 billion gallons per year means the world is wearing out vehicles at a rate of 117 million per year. That is the expectation of global new-vehicle demand in the next few years, versus current 70M auto sales per year.
China just announced a 4 trillion yuan ($586B) stimulus plan to transition her economy to one based on domestic consumption demand rather than on exportation. Chinese demand on commodities, goods and services will be insatiable even as her growth slows down, because China's population is just huge and the per capita consumption is still at a very low level compared with the global average, leaving plenty of room for growth.
October auto sales in China increased 8.37% over last year. For the first ten months, auto sales were 5.67 million, which is 6.8M annually. There are only 40M passenger cars in China. These numbers are incredibly low considering China's 1.3 billion population. Global average ownership of cars is roughly one car per 6 persons. China has one car per 33 persons. China today consumes 8M barrels of oil a day, still less than half the global average. Using the rough numbers above, that correlate to 11 million vehicles wear-off per year in China. So China needs 11M new vehicles a year just for replacements, not to mention new ownerships. I will not be surprised if auto sales in China double or triple in the next 5 years.
The global commodity bull cycle will continue if you understand the impact of China's demand growth. Global consumption of many raw materials can easily exceed available supply by a large margin, even if China's per capita consumption only reaches where global averages are!
No wonder we see ever increasing Chinese influence in Africa. Africa is blessed with some of the world's richest mineral resources, especially South Africa, owning over 90% of the world's PGM metal reserves and virtually every species of mineral resources, missing just a few. China is also blessed with mineral riches. China is rich in more than half of all known mineral species, especially in rare earth metals and tungsten, antimony, indium, etc. But China doesn't have much base metal reserves. China has zero reserve in PGM metals and very little in cobalt, metals of critical strategic importance. What China doesn't have, Africa has aplenty. And what about the USA? We are the world's capital of helium. We have plenty of coal. That's about it. America desperately needs to develop good relationships with Africa and South America, if we want to be prosperious in the 21st century.
Upon his inauguration, President Obama needs to first pay a visit to China, second to Africa, and third to Russia. America, now the world's top debt nation, needs to be bailed out by the world's emerging economic powerhouses. We cannot afford to be a superpower any more as we are not self sufficient and cannot survive on our own any more. We need a peaceful and co-operative world to help us. President Obama must prevent an Iranian War or World War Three from breaking out during his term(s). Prosperity comes from peace, not from aggression.
Coming back to the US auto industry: Is there still hope in the Big Three -- GM, Ford (F) and Chrysler? I think the fundamental demand of autos from US consumers is still there. The current credit crunch means a consumer may not be able to get an auto loan. But it does NOT destroy the auto demand, it merely postpones it. If I see a vehicle break down on the roadside, or a vehicle crashed on the highway, I am pretty sure that within less than 24 hours, a certain auto repair shop or a new car dealer will see a new customer come to their doors for business, regardless of how many credit cards the customer may have. The mobility needs can not be eliminated. The question is, will the customer come to a Toyota (TM) dealer or a GM one?
There might still be some hope if GM can adapt itself to meet customer demand, but I don't think it can do it alone. It needs a government bailout. I am against using taxpayer money to bail out private enterprises. But it is in our vital national interest to bail out the US auto industry to preserve jobs and our manufacturing basis. The current GM shareholders must be wiped out. GM must go bankrupt, then the government must immediately come in to help the bankruptcy re-organization and give the auto maker a second life.
Disclosure: The Author is heavily invested in SWC and PAL, two palladium mining companies, as well as in OMG, a cobalt chemical company. The author does not have a position in GM or Ford, and does not intend to buy or short either.