China Still a Safe Bet for Commodity Bulls

Recently there has been a spate of headlines that suggest that the Chinese continue to show a high degree of investment interest in resources. Here are just a few examples:

• China invests $16b in Venezuelan oil fields
• Survey shows Canada to be of great interest to Chinese investors (for its energy and natural resources, agri-food and biotech sectors)
• China buying gold from domestic producers

These stories are anecdotal and suggest that China understands that she is commodity short and is trying to gain long-term control of supply. But stories don’t tell the whole picture. Analysis from the Center for Geoeconomic Studies gives us a better picture of China’s external investment weights: [click to enlarge]
This chart, along with their announced direct investments, seems a lot like the effects of a long-term investment policy that doesn’t change easily. Many of the announced investments are of the FDI (foreign direct investment) variety, which cannot be sold easily like a stock holding.

While there are some indications that China may be pulling back on their commodity demand in the short-term, don’t mistake tactical decisions with the long-term strategic picture.

As long as China is growing, it will mean a secular friendly environment for commodity bulls.

Comments

[jeremiah74:]

i wouldnt argue with you on the main content, but i think your time horizon is important here. long term, which means years or decades you are right. but if in 1-3-6 months from now commodity demand will be where it is now, is questionable

Sep 24 09:02 AM

[Larry House:]

There will be more and more demand for natural resources and food resources as populations increase. Seems a reasonable place to make an investment whether it makes a good trade or not.

Sep 24 04:33 PM

[tripleblack:]

Actually, I would recommend any trade based upon Chinese demand for commodities be done for reasons OTHER THAN increased populations. China is holding the line on their population.

Now, watching to see how much of that huge population they shift from dirt farming peasants to the industrial middle class DOES make sense - and of course becomes quixotic at any time the flow reverses, as it has been showing signs of doing in some areas lately.

China is still essentially a quasi-centrally planned economy mixed to a declining extent with the typical chaos of an emerging market. It is unique, and will remain so for the foreseeable future. Attempts to lump it in with ANY other examples are problematic.

Sep 24 05:45 PM

[Wildebeest:]

I'd agree with jeremiah74, there seems little doubt that supply constraints will push prices up in the future, in fact I think the next spike in prices will be higher than 2006-2007, but it isn't going to happen until economies other than China return to consistent growth.

We see examples at the moment where China is (has been anyway) actively stockpiling minerals/metals yet because of the lack of demand from other nations there is surplus supply.

Sep 24 07:15 PM

[Senan:]

Long term China will have to evolve into a big consumer like the rest of the developed world, hence raising its need for certain commodities.

Sep 24 07:18 PM