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© Elliott R. Morss All Rights Reserved

Introduction

For the last six months, I have recommended investments in commodities and U.S. real estate. I explained in my last article why I believe U.S. real estate remains an attractive investment. In this article, I take a look at commodities I follow. I start by asking whether the commodity-rich countries of the world deserve a closer look.

Commodities

My interest in commodities stems from the following certainty: with the world's population growing, the demand for commodities will continue to increase. Table 1 provides information on commodity prices from 2007 through the global recession to the current day. It might surprise some to learn that overall, commodity prices are 35% higher today than they were in 2007.

Energy prices are interesting. While oil is 44% higher and coal is 35% higher, natural gas prices depend on where you are buying. The natural gas price in Germany is 40% higher than in 2007, while in the U.S., it is 47% lower than in 2007. One wonders how long U.S. gas prices will stay down and how these prices will impact markets for other energy sources. The uranium price is down sharply. Most of the decline is attributable to the falloff in demand for nuclear plants after the Fukushima disaster.

Food prices are up 35% with variations due to weather and harvest conditions. Wheat prices are just 8% higher than 2007 while rice, corn, and soy prices are 60%+ higher.

Overall, agricultural raw material prices are up only 16%. In part, this is attributable to weak timber prices resulting from the global real estate/building collapse. But cotton, wool, and rubber prices have increased significantly.

There are sizable variations in metal price changes since 2007. While China's construction boom and resulting need for steel has caused iron ore price to increase more than 300%, lead, aluminum, and nickel prices are lower.

Table 1. - Commodity Prices, 2007 - 2013

Change

Index

2007

2009

2013

from 2007

Overall

135

120

182

35%

Energy

Crude Oil

71

62

103

44%

Natural Gas, Germany

138

150

192

40%

Coal

138

151

186

35%

Natural Gas, US

79

45

42

-47%

Uranium

355

167

148

-58%

Food - Overall

127

134

171

35%

Rice

115

205

194

68%

Soybeans

142

170

230

62%

Maize

166

168

265

60%

Wheat

167

147

180

8%

Non-Food Agricultural

114

94

132

16%

Rubber

153

128

248

63%

Wool

144

115

211

46%

Cotton

115

114

157

37%

Timber

107

101

102

-5%

Metals - Overall

183

137

197

8%

Iron Ore

130

285

526

303%

Tin

196

184

323

65%

Copper

194

140

212

10%

Lead

265

176

230

-13%

Aluminum

139

88

104

-25%

Nickel

251

99

114

-54%

Source: IMF World Economic Outlook Database

Timber prices can be expected to recover as the housing cycle gains steam. But beyond that speculating on commodities is a high-risk game. Consequently, I turn now to countries that export commodities for possible investment opportunities.

What about Commodity Investments in Sub-Saharan African Countries?

Table 2 provides data on the largest 10 Sub-Saharan African countries [SSA] as measured by GDP, population, area, and/or per capita GDP. Including the top 10 from each category results in 21 countries. South Africa has the highest GDP while Nigeria has by far the largest population. The Democratic Republic of the Congo is the largest country in SSA, just a bit smaller than Algeria, the largest country in Africa. And Botswana has the largest per capita income in SSA followed by South Africa.

Table 2. - Sub-Saharan Africa: The Largest Countries

GDP

Population

Area

GDP/P

Country

(bil. US$)

(millions)

(sq. km)

(US$)

South Africa

384.3

51.2

1,221,037

7,507

Nigeria

268.7

164.8

923,768

1,631

Angola

118.7

20.2

1,246,700

5,873

Ethiopia

41.9

86.8

1,104,300

483

Kenya

41.1

42.1

580,367

977

Ghana

38.9

24.9

238,533

1,562

Tanzania

28.2

47.1

945,087

599

Cameroon

25.0

21.5

475,442

1,165

Côte d'Ivoire

24.6

23.4

322,463

1,054

Uganda

21.0

35.6

241,550

589

DR Congo

17.7

74.7

2,344,858

237

Botswana

17.6

1.9

582,000

9,398

Mozambique

14.6

22.5

801,590

650

Namibia

12.3

2.2

824,268

5,705

South Sudan

12.2

10.4

644,329

1,175

Chad

10.8

10.7

1,284,000

1,006

Mali

10.3

16.3

1,240,192

631

Niger

6.6

16.1

1,267,000

408

Sierra Leone

3.8

6.2

71,740

613

Eritrea

3.1

5.7

117,600

546

Cape Verde

1.9

0.5

4,033

3,604

Source: IMF World Economic Outlook Database and United Nations

Oil

Oil exports a very important for some SSA countries as indicated by Table 3. Equatorial Guinea's oil export dependency is extreme while Nigeria and Angola are the largest exporters.

Table 3. - SSA Oil Exports

Oil Exports

Country

(% GDP)

(bil. US$)

Equatorial Guinea

84%

14.5

Angola

59%

70.9

Gabon

48%

8.8

Nigeria

36%

95.6

Côte d'Ivoire

14%

3.5

Cameroon

10%

2.6

Ghana

8%

3.0

Source: IMF World Economic Outlook Database

Table 4 provides economic performance data on SSA countries with 20 million+ people. Certainly by Western standards, the GDP growth rates of most of these countries are impressive. However the government deficits of Ghana, Tanzania, Kenya, South Africa, Côte d'Ivoire and Mozambique are high. Government debt levels of most countries are low, largely because there is no market for them.

Table 4. - Economic Performance, SSA Countries, 2010-12) Averages

GDP

Government

Government

Growth

Deficit

Debt

Country

Rate

(% GDP)

(% GDP)

Ghana

9.8%

-7.6%

48.7%

Ethiopia

7.5%

-1.4%

25.0%

Mozambique

7.3%

-3.7%

47.0%

Nigeria

7.2%

-1.7%

16.8%

DR Congo

7.1%

0.3%

35.8%

Tanzania

6.8%

-5.5%

39.7%

Angola

5.2%

8.1%

32.8%

Kenya

4.9%

-5.3%

48.9%

Uganda

4.9%

-4.5%

31.2%

Cameroon

4.1%

-1.6%

13.6%

South Africa

3.0%

-4.6%

39.2%

Côte d'Ivoire

2.5%

-3.8%

70.1%

Source: IMF World Economic Outlook Database

Stock Markets

South Africa and Nigeria with stock market capitalizations of $908 and $51 billion respectively. Both have ETFs that track them: South Africa - EZA and Nigeria - NGE. I view both countries as very high risk. Religious and ethnic tensions are increasing in Nigeria and the recent economic performance of South Africa has been disappointing. So other commodity exporting countries are examined next.

The Leading Global Commodity Exporters

Table 5 provides data on the 10 largest commodity exporting countries. The high numbers for the three European countries are due to the fact that exports to other European Union countries constitute 50% of their exports. In the U.S., including this data would be analogous to counting food sales from Kansas to the rest of the country as exports. So what are we left with? The U.S., Canada, Australia, and Brazil along with three oil exporters. My view on oil exporters: better to buy a global oil company than bet on a country.

Table 5. - 10 Leading Commodity Exporting Country Shares, 2012

(World Totals in US$ bil.)

Primary

Agricultural

Ores,

Iron,

Natural

Total

Country

Commodities

Food

Raw Materials

Metals

Fuels

Steel

Coal

Oil

Gas

Exports

Russia

6.6%

1.2%

3.3%

2.7%

10.9%

4.7%

9.7%

10.2%

16.4%

2.9%

US

6.6%

9.8%

11.9%

6.6%

4.0%

4.2%

10.7%

4.0%

2.1%

8.5%

Saudi Arabia

5.4%

0.3%

0.1%

0.3%

9.7%

0.3%

0.0%

11.5%

1.6%

2.1%

Netherlands

4.3%

7.5%

7.4%

2.5%

3.6%

3.2%

0.9%

3.8%

3.1%

3.6%

Canada

3.7%

3.3%

5.8%

4.3%

3.4%

1.5%

4.8%

3.4%

2.7%

2.5%

Australia

3.4%

2.2%

2.7%

11.5%

2.1%

0.1%

30.5%

0.5%

3.6%

1.4%

UAE

3.4%

0.7%

0.2%

1.1%

4.7%

1.0%

0.1%

5.2%

2.9%

1.5%

Germany

2.9%

5.4%

4.1%

5.6%

1.1%

7.0%

0.4%

0.8%

2.9%

7.8%

Brazil

2.5%

5.4%

3.2%

5.1%

0.8%

2.3%

0.0%

0.9%

0.0%

1.3%

Belgium

2.2%

2.9%

2.3%

2.1%

1.5%

3.5%

0.8%

1.5%

2.1%

2.4%

World

6,269

1,417

284

762

3,397

493

141

2,799

419

18,272

Source: UNCTADSTAT

There are three other countries worth considering as commodity exporters: Chile, Indonesia, and Peru. Their data are presented in Table 6.

Table 6. - Commodity Export Shares, 2012

Primary

Agricultural

Ores,

Iron,

Natural

Total

Country

Commodities

Food

Raw Materials

Metals

Fuels

Steel

Coal

Oil

Gas

Exports

Indonesia

2.0%

2.4%

4.0%

1.6%

1.9%

0.4%

18.6%

0.6%

4.9%

1.0%

Chile

1.1%

1.0%

1.4%

6.3%

0.0%

0.1%

0.0%

0.0%

0.0%

0.4%

Peru

0.6%

0.6%

0.2%

2.6%

0.2%

0.0%

0.0%

0.1%

0.5%

0.2%

Source: UNCTADSTAT

So, let's consider the economic performance of the seven countries from the two tables above. Table 7 provides average data for the 2011-13 periods.

Table 7. - Economic Growth, Government Deficits and Debt, 2011-13

GDP

Government

Government

Growth

Balance

Debt

Country

Rate

(% GDP)

(% GDP)

Peru

6.5%

2.9%

19.8%

Indonesia

6.3%

-1.6%

24.0%

Chile

5.4%

0.8%

11.2%

Australia

3.0%

-2.3%

26.3%

Brazil

2.2%

2.9%

66.9%

US

2.0%

-6.3%

105.7%

Canada

2.0%

-2.9%

85.4%

Source: IMF

Conclusions

Commodities are risky - too much speculation. But the countries listed in Table 7 are all good investment bets. The world needs their resources and will keep buying them. Investment vehicles for all of them (ETFs and mutual funds) are readily available, e.g., Peru - EPU, Indonesia - EIDO, Chile - ECH, Australia - EWA, [[Brazil]] - EWZ, U.S. - USCI and Canada - EWC. But if I were forced to choose between investing in a continuation of the U.S. real estate recovery or these countries, it would be U.S. real estate. Brookfield Asset Management - BAM - has investments in both commodities and real estate.

Source: Investing In Commodities Or U.S. Real Estate - And How About Africa?