Short-Term Key: Neutral Long-Term Key: -44 (Neutral)
So often, the crucial stories never make the headlines. They are relegated to the back pages precisely because no one is paying attention to the issues they raise.
One such story that was released last weekend concerns China's new five-year economic plan. Of particular note were the goals regarding energy efficiency.
China intends to reduce the amount of energy it consumes for every unit of GDP. It also plans to maintain annual GDP growth of roughly 7% a year (such goals are usually understated, so we can probably expect to see growth of 8-9%).
At the same time, we deduce that China's energy consumption will rise by 5% a year. In 2009 China consumed energy equal to 3 billion metric tons of coal each year, but it expects that figure to reach 4 billion tons within five years.
Where will all that extra energy come from? Obviously, it will have to come from virtually any place they can find it. China clearly needs more energy from all sources including coal, oil, gas, nuclear, solar, wind, etc.
Of course, many will be driving home at the end of the day to one of the 35 million new homes China expects to build over the next five years. The construction will take a lot of energy, and once built these homes will be filled with all the modern energy-consuming appliances. And all the homes and workplaces will be connected to a new electrical grid that crisscrosses hundreds of thousands of miles and will be composed of a massive amount of copper and other metals. You'd better believe China needs energy efficiency and energy, and virtually every other raw material you can name.
The report on the five-year plan doesn't make clear how much of China's new energy consumption will come from alternative energy, and perhaps that's deliberate. We suspect the answer is “as much as possible.” Reading between the lines, we think China could spend over $1 trillion on renewable energy sources over the next few years. It's really the only way to match energy supply with expected demand.
Of course, renewable energy is not cheap, and it's getting more expensive all the time as commodity prices rise. To take one example, silver prices touched $36 today – up from around $18 last summer. Since 1993, they’ve risen 10-fold. And 10-fold, incidentally, is the minimum increase we expect in China’s demand for solar energy in just the next five years.
Silver, as you know from past updates, is an industrial metal essential for building solar panels and alternative energy infrastructure. Today, it is also being treated as an investment asset, much like gold. So the more uncertain the global economy is, the more expensive silver will become, and the more difficult it will be to meet our energy needs and create worldwide growth.
Copper is another essential energy metal that has also risen strongly during the past year. But curiously (and thankfully) the one laggard so far has been oil prices. Even with the tensions in North Africa and the Middle East, silver and copper have outpaced oil since March 2009. Yet, if silver and copper use has been rising, shouldn't energy prices be rising just as strongly?
We suspect some entity has been accumulating silver and copper for future use, because they know shortages are likely to develop. We also suspect that entity is China. The only way China could hope to achieve its growth and development goals is with a massive build out of alternative energies, for which it must have sufficient supplies of raw materials like silver.
Unfortunately, because silver is both an industrial and a precious metal, it is difficult to model its supply/demand/price characteristics. What makes it harder is that the U.S. is now in the process of cutting energy research (exactly the wrong move with energy supplies becoming constrained). Nonetheless, we expect silver's longer-term trend is decidedly up, thanks to both Chinese and investment demand.
Disclosure: Leeb Group, its officers, directors, shareholders, employees and affiliated entities and/or clients of such affiliated entities may currently maintain direct or indirect ownership positions in financial instruments (i.e., stocks, bonds, options, warrants, etc.) of companies or entities whose underlying exposure is in the companies mentioned in this article.