Commodities, Globality and the Next Billion Customers

What is the end result of globalization? A new era of international hypercompetition - and sky-high commodities prices - called "globality," says Harold [Hal] L. Sirkin, co-author of 2008's "Globality: Competing with Everyone from Everywhere for Everything."

Sirkin, senior partner of the Boston Consulting Group's Chicago office, has written about globality's impact on businesses and the markets for BusinessWeek, Harvard Business Review and the New York Times. He's also a frequent guest on CNBC, Fox Business News, MSNBC and CNN. HardAssetsInvestor.com Associate Editor Lara Crigger recently chatted with Sirkin about globality, including how it impacts commodities supply and demand, which emerging markets could soon dominate the markets and who exactly are "the next billion customers."

Lara Crigger, HardAssetsInvestor.com (Crigger): What is globality, and how is it different from globalization?

Hal Sirkin, senior partner, Boston Consulting Group (Sirkin): Primarily, globalization was about companies from the developed world - the U.S., Western Europe, Canada, Japan - looking for ways to save money and to be more competitive. Those companies went to the developing world to source parts, components and products, because they could forgo wage rates that might have been $20-30/hour in the U.S., and work with people who were earning $1/hour. And $1/hour was actually good money in those poor countries; it was a good opportunity for them to improve their standard of living.

But this created an interesting dynamic that wasn't anticipated - companies in those markets began to learn about how to produce products for the developed world, and they weren't satisfied by just serving the traditional multinational companies. They wanted to serve the end customers themselves.

So these suppliers became competitors. It became a two-way street. And it wasn't just about going and getting low-cost labor; you started to see the real development of companies like Bharat Forge and Tata in India or GoodBaby in China, who are now selling products in the developed world. Globality is about that shift.

Crigger: So what impact does globality have on commodities prices and markets?

Sirkin: Well, it's a dynamic we haven't really seen in the world yet, at least not at this magnitude. The population of the traditional definition of the developed world - the U.S., Western Europe, Japan, the people who did the bulk of the consumption before - is less than a billion people. But now, individuals [in developing markets] are seeing increases in their standard of wealth, and it's causing what we consider "the next billion customers" to emerge.

So now there's higher demand for things like cell phones, better household appliances, cars and other things. That increases demand for petroleum and steel and all the other commodities. But the world can only produce commodities at a certain rate, and, of course, there's a limited amount of commodities on the Earth. Therefore, you're going to see big changes in the supply/demand balance.

Crigger: So that means, long term, prices will have nowhere to go but up, right?

Sirkin: Obviously, there are short-term fluctuations that take place. But if you look at the long-term trends, the long-term trend says there's just going to be more demand, and increasing difficulty meeting that with supply.

Crigger: So this really is magnifying effects already in play.

Sirkin: Yes. You're taking a billion people in the world who lived in abject poverty, whose daily focus was on getting enough calories to make it to the next day, and then all of the sudden they're living a better life. That's going to put more stress on the world's producers to be able to support that. Yes, it's a good thing that there will be another billion people who no longer have to focus every day on whether they starve to death or not. But it has other impacts, and that impact is that it will cause more demand on the world's resources, and we've got to find ways to solve that.

Crigger: Are there certain commodities that should fare better than others in this scenario?

Sirkin: I don't know the commodities trading world enough to say which ones will do well or not. But I think it comes down to the simple economic physics of things. If you rapidly increase demand, you're going to see an increase in prices, because even if the resources are there, the world can't ramp up production fast enough.

As India and China get more cars - for example, cars require lots of commodities: They burn gasoline and diesel fuel and therefore also oil - demand will rise over time very quickly, and they can only ramp up so fast. We saw that in the five years prior to the recession: Oil prices got up to $150 a barrel, and then dropped down to $35/barrel, and now are back up to $70/barrel. And that's driven by many things, but supply/demand imbalance looks like a driver in the long run.

Crigger: Does speculation still factor in? Didn't speculators have a lot to do with the previous run-up in commodities in 2007-2008?

Sirkin: Well, there was some speculation, but I'm not sure I would pin the whole thing on speculation. There was that fundamental ramp-up in demand.

Take demand for oil. When you get to the point at which there's only 3-4% spare capacity between production and consumption in the oil market, all of a sudden prices ramp up.

Historically, we've just added capacity. And the question is, as the developing world grows and becomes a bigger chunk of the world, can you continue to ramp up production faster than that? That's going to be a tough thing to do.

Crigger: Besides, eventually we're going to start running out of things.

Sirkin: Right. You get the peak oil guys coming in, saying how difficult it's going to be, and do we even have the ability to do it?

But some of the oil is in countries that aren't actually interested in ramping up production, or maybe doing things that don't allow it; for instance, Venezuela, where they're certainly not letting Western oil companies come in and explore. So there's a whole set of other dynamics that if the demand ramps up might make it difficult to have supply match it. Things will have to change.

Crigger: Is globality still in force during the recession?

Sirkin: Absolutely - now more so than ever. Consumers want lower-cost options for their products, and developed market companies are looking to reduce their costs even more. That means more and more, companies are looking to lower-cost-producing countries.

The second thing is, companies in the developing world want outlets for their products, they want to control their own distribution, their own future, and control their own destiny. So we've got this East meets West, West meets East thing going on that is causing globality to be an even more powerful force, because cost pressures are making it that way.

Crigger: As commodities prices continue to rise, won't that eventually dampen the development we're seeing in these poorer developing markets?

Sirkin: I don't think so, because we've all been impacted. Obviously, there's the recession, and we are seeing the impact of that, but I'm not sure it negatively affects these countries in a differential way, more so than the developed markets.

I think they still have a lot of structural advantages. In fact, in some ways, the building and the infrastructure is more modern. In West China, when they built infrastructure, they built it more energy efficiently. And that will give them an advantage.

Crigger: Along those same lines, how do you think the force of globality will impact the push away from oil and toward renewable energy?

Sirkin: As oil prices get higher, in the short term, there may be higher prices, and that will dampen consumption. And in the long term, people will find ways to generate more energy, and the price will rise, making all the alternatives - particularly the renewable ones - more attractive.

Crigger: With globality in mind, which countries or regions should become dominant players in commodities in the future?

Sirkin: Well, it depends. The obvious ones have high mineral resources or materials, like oil in the Middle East (although it may be hard to make plays on that as an individual investor). Or think about Brazil with its natural resources; or copper and other parts of South America. We know where in the world all these resources are, and it's pretty easy to figure out which companies control them, and people can invest in those companies.

Comments

[Vuke:]

Next billion? How about the next three billion? All over the world Asians, Africans, East Europeans and South Americans are vying for commodities for building, transportation and a better life.

Think of the hundreds of millions of scooters, bikes, cars, generators, refrigerators, air conditioners, fertilizers and so on required. Then think of the lack of investment in commodity production and decide on the direction of commodities pricing.

Currencies too, are impacted, as nations print more to get their share. Gold and silver will rise because of this.

Jun 20 06:37 PM

[Moon Kil Woong:]

I think globalization started with countries trying to gain access to limited raw materials first. People were fighting over Mid East oil long before they were setting up sweatshops in China. For industry human capital is just another resource, abet a renewable one as long as you don't work them to death before they reproduce or they don't overthrow the "friendly government" that supports such business.

Thankfully, now globalization has actually encoraged global competition for innovative discoveries, tech development, and other high value endevours. Although this is looked upon as a problem for developed nation it's a godsend to humanity. Which goes to show, although the free market path is filled with rather unsightly phases, it can ultimately result in good (that being a more productive, more skilled population, with better health, education, and prosperity, in which some people can actually pursue what they like rather than simply labor in order to survive).

All in all, globalization poses some real problems but if you can curb its misuses, its a worthy pursuit.

Jun 20 10:37 PM

[John Petersen:]

In a recent presentation attended by Eric Wesoff of Greentech Media, clean-tech venture capitalist Vinod Khosla reportedly said, “500 million people on earth enjoy a lifestyle that 9 billion people will want in 2050.” Actually, it would be more accurate to say "6.2 billion people already know how the other 500 million live and every single one of them wants his piece of the dream." The trick will be finding a way to raise the standard of living in developing economies without crushing the standard of living in developed economies. For that to happen without catastrophic conflict and horrific environmental consequences, the world must find relevant scale solutions for persistent shortages of water, food, energy and virtually every commodity you can imagine.

Jun 21 01:18 AM

[mkreisel:]

I totally agree.


On Jun 20 10:37 PM Moon Kil Woong wrote:

> I think globalization started with countries trying to gain access
> to limited raw materials first. People were fighting over Mid East
> oil long before they were setting up sweatshops in China. For industry
> human capital is just another resource, abet a renewable one as long
> as you don't work them to death before they reproduce or they don't
> overthrow the "friendly government" that supports such business.
>
>
> Thankfully, now globalization has actually encoraged global competition
> for innovative discoveries, tech development, and other high value
> endevours. Although this is looked upon as a problem for developed
> nation it's a godsend to humanity. Which goes to show, although the
> free market path is filled with rather unsightly phases, it can ultimately
> result in good (that being a more productive, more skilled population,
> with better health, education, and prosperity, in which some people
> can actually pursue what they like rather than simply labor in order
> to survive).
>
> All in all, globalization poses some real problems but if you can
> curb its misuses, its a worthy pursuit.

Jun 21 03:50 AM

[Tom E.:]

The next step for US retailers is to cut out the middle man (the US multinationals) and buy direct from the foreign factories.

Jun 21 06:51 AM

[Doc 224899:]

John Peterson is often directly on target with his focus. Bravo. Here's how I put a fune point on it: The standard of living enjoyed by the 500 million requires more energy and resources than are available for sharing it with the other 6.2 billion, regardless of whether the 6.2 billion want it or not. The faster "developing" occurs, the faster we all face a condition Leeb calls "Game Over".



On Jun 21 01:18 AM John Petersen wrote:

> In a recent presentation attended by Eric Wesoff of Greentech Media,
> clean-tech venture capitalist Vinod Khosla reportedly said, “500
> million people on earth enjoy a lifestyle that 9 billion people will
> want in 2050.” Actually, it would be more accurate to say "6.2 billion
> people already know how the other 500 million live and every single
> one of them wants his piece of the dream." The trick will be finding
> a way to raise the standard of living in developing economies without
> crushing the standard of living in developed economies. For that
> to happen without catastrophic conflict and horrific environmental
> consequences, the world must find relevant scale solutions for persistent
> shortages of water, food, energy and virtually every commodity you
> can imagine.

Jun 21 11:45 AM

[wundr:]

Globalism will not be good for the average US citizen. The average wage will decline. Jobs will continue to be exported. The dollar will drop in value. $1 an hour jobs will not support huge infrastructure developments required in some countries. More people does not necessarily equate to a huge increase in demand per capita, especially if they still can't afford to buy things. Sure there might be 1 billion more people, but it could just pan out to be 999 million more people living with a hand to mouth basis, trying to eek life in a very expensive world.

Jun 21 02:16 PM

[Advill:]

The conditions affecting commodities are in both trends, up and down.

Up ; more car, trucks, scooters etc.
Down; more trains, more subways, more bici.ways

Up: MOre houses and buildings using cooper.
Down; More use of plastic tubes for water and fibers for telecos

Up; More use of fossil fuels for transportation
Down; Internet promoting in house or in office reducing use of fuels.

Etc... Yes, the trend is up, but is not logaritmic or exponential, each commodity has alternatives, moves elastic markets and generates new technology, winners are not so obvious.
Regards.

Jun 21 03:12 PM

[ETF Grind:]

Fabulous case for commodities. I love how commodities investors are focusing on the fundamentals, while people who are currently overweight equities can't shut up about the technicals.

Jun 22 12:52 AM

[cameroni:]

Commodities are the future. Who knows, the west may end up paying off it's debts in commodity trades with poorer nations and it's creditors just to keep the peace and stay solvent.

The other 5 billion do know how we live though. I was astonished in my travels through Africa to come across a family in the absolute middle of nowhere who had a satelite dish, tv and a 10 year old addicted to a Playstation. And it was a mud house!

As I traveled north to Ethiopia I met a woman who worked 12 hours daily in exchange for bread, accommodation and 15 cents a day salary. Her two children were of course malnourished. We always hear about the poverty and dollar a day incomes but don't consider it is an average in some countries.

She knew all about the west too. The fictional lands where you can earn as much in an hour as her neighbors earn in a month. And they all want in on the action. They are working hard to better themselves too and are prepared to do long hours for a share of the wealth.

At this time there are 16 new universities simultaneously under construction across Ethiopia. The cost of an education is extremely low so participation rates are high. Africa does not get discussed a lot in the media except as a sad place of famine, poverty and corrupt governments.

I was really awestruck by the vibrancy of the places I saw. There was new construction absolutely everywhere and money was pouring in primarily from India and China. The people are hopeful and yes you can see that consumption and demand for resources is on a very steep ascent. Even in Ethiopia.

My concern from a geopolitical point of view though is that there are going to be a lot more reasons for conflict than cooperation in the future and it will revolve around basic resources and commodities. I wonder how all the differences can be settled without wars.

Jun 22 02:21 AM

[ArtfulDodger:]

Very good point, ETF Grind. I've notice this myself.


On Jun 22 12:52 AM ETF Grind wrote:

> Fabulous case for commodities. I love how commodities investors are
> focusing on the fundamentals, while people who are currently overweight
> equities can't shut up about the technicals.

Jun 22 06:09 AM

[Dirk McCoy:]

The 30 year trend in commodities- as globalization has spread- overall has been down. Gold, copper, milk- just look at the charts. Here's a link to a few:

www.gold-eagle.com/edi...

There was a slight uptick this decade in the midst of global boom- but there were a lot of houses and SUVs built over the past six years. Now, many of those SUVs and houses will be recycled over the next six years (consider that Flint is talking about bulldozing 40% of the city) and there will be much less steel used in cars with higher economy standards.

And I think John Petersen would tell you the demand forecast for Lithium could be vastly over-rated.

One last factor- as these next billion (or, hopefully, three) see their living standards increased, with specialization and education taking the place of subsistence farming, their family size will drop as it has everywhere else development has taken hold. Russia, China, Japan, Canada, Brazil, Turkey (and all of Europe) have birthrates with less-than-replacement levels.

Coupling fewer children with more recycling and technology that allows solar/electricy and telecommuting to replace gasoline doesn't necessarily cause me to worry about the future cost of commodities.

Rather, the increase in cost of higher education, healthcare, and government (limited by vision and people, not commodities) are a bigger concern most of us face.

While I'm not going to short commodities because they've been badly beaten the past year, counting on long term solid gains could be very disappointing, and leveraging to make bullish trades seems much too risky to me.

Jun 22 04:15 PM

[bricki:]

The long term historical trend of civilization has been the gradual increase in size of the political unit. From nuclear families, to foraging bands, to tribes, city-states, and to nations and multinational unions the trend has been inexorable. Globalization is merely the next logical step. The end result is that large scale international wars that plagued us in the past will disappear, and what will remain are small regional ethnic conflicts. We can see this happening right now.

While this is great for humanity as a whole, the exceptionalism of the American nature will necessarily fade away, much like the power of the British Empire has faded.

America will still exist, but it won't be an America that commands 25% of the world's wealth for 5% of the population.

Part of this great trend is that commodities will gradually increase in cost relative to the average income of Americans. So to protect your wealth long-term you should be investing in commodities.

Jun 22 07:46 PM

[Econ Base:]

For now commodities seem to have had their run. Better to stay on the sidelines with some cash in hand. Buy precious metals if you have none otherwise cash is king and better to be patient with long term in mind. Read portfolioforlife.blogs...

Jun 22 08:48 PM

[jtareen:]

Nanotechnology will take care of a lot of these shortages in commodities and infrastructure. Google "catoms". US will dominate the world in the next 200 years.


On Jun 20 06:37 PM Vuke wrote:

> Next billion? How about the next three billion? All over the world
> Asians, Africans, East Europeans and South Americans are vying for
> commodities for building, transportation and a better life.
>
> Think of the hundreds of millions of scooters, bikes, cars, generators,
> refrigerators, air conditioners, fertilizers and so on required.
> Then think of the lack of investment in commodity production and
> decide on the direction of commodities pricing.
>
> Currencies too, are impacted, as nations print more to get their
> share. Gold and silver will rise because of this.

Jun 22 10:53 PM

[Kenny G:]

Commodities investing and charts that updated every 10 minutes
www.opvest.com/quotes-...

Jun 23 03:04 AM