A Melman Minute — February 19, 2008

One of the most frequently heard sayings we encounter is, “You can’t keep a good man down.” Well, today’s markets have altered that saying slightly to, “You can’t keep a good commodity down!” Raw materials of many varieties are moving sharply higher today, from precious and base metals to the entire petroleum complex to the entire grain complex. In virtually every important commodity, prices are surging.

As of mid-morning, some of the more prominent examples among the metals include gold up over $20 (all prices US$) to just under $930 spot; silver up 40 cents to near $17.50; platinum up $40 to $2,140; Copper up a dime to near $3.70 and lead soaring ahead by a full six cents to $1.43 per pound. Gains in the petroleum complex are no less amazing with crude ahead by over $2.00 per barrel to just under $99 while heating oil and gasoline are also scoring stunning gains.

However, for widespread impact around the world, it is difficult to imagine a more important category than the grains which form the basis of many foodstuffs around this globe. Corn and wheat have moved sharply higher to near historic highs while soybeans - perhaps the most important food grain of them all - has just broken through the previously unthinkable level of $14 per bushel (see chart). The power of these rallies in the grains is absolutely remarkable - and they show no signs of abating.

While the rally in platinum might be even more spectacular, the impact on worldwide prices of soybeans is incomparably more significant. Platinum has few - but important - uses, while those influenced by price movements in the soybean complex are of a staggering variety. Some of the more prominent ones include tofu, soy milk, soy sauce, baby foods, beer & ale, breakfast cereals, high fiber breads, margarine, mayonnaise, meat products, peanut butter, salad dressings, soy flour, pet foods and huge quantities as feed for dairy and cattle herds.

When the price of such an important commodity triples within a very few years, the potential impact on end-use prices cannot help but pose a threat to government price inflation indexes. In fact, thanks to raw material price increases we have already seen, various price indexes around the world are setting off warning bells. China’s published rate of price inflation has reached over 7%, several European nations also report price increases of over 7 percent, Turkey and Argentina are over 8 percent, the Republic of South Africa has passed 9 percent while several smaller nations such as Pakistan, Switzerland (!), Venezuela and, of course, Zimbabwe, have published rates of price inflation which now exceed ten percent!

From a potential impact point of view, what happens in China’s enormous and rapidly expanding economy is of great importance. In that highly-populous nation of over 1.3 billion people, the demand for raw materials continues to swiftly expand while the dietary habits of the population are also undergoing a dramatic change, thanks to the growth of discretionary income which allows for a greater range of food choices.

And what of the future outlook for China? In a fact-filled study, “The Economist” magazine just published a report out of Beijing detailing the tremendous expansion of their entire infrastructure, an indication that authorities in that country anticipate huge growth into the future. A look at the details of their report is most instructive.

For example, Beijing has just completed the construction of a new international airport in that city which is almost beyond comparison with any other. More than 50,000 workers spent four years to build a terminal which is 3 km long (1.8 miles) and which contains more floor space than all the terminals at London’s Heathrow Airport combined! Passenger traffic is growing so fast that the airport, which ranked 26th in the world in 2002, is now the 9th busiest.

The airport is only one part of the Chinese infrastructure picture. Between 2001 and 2005, the amount spent in China on airports, highways and rail transportation surpassed the total expenditures of the previous fifty years and the rate is continuing to grow at double-digit figures every year since.

Projects which have just opened or are nearing completion include a thirteen hundred kilometer (800 mile) high-speed rail link between Shanghai and Beijing; the world’s longest sea-crossing bridge connecting Shanghai to its deep-sea harbors; the highest altitude rail link in the world to Tibet; plus the construction of a high-speed auto and truck expressway network that is second only to America.

One spin-off of the highway construction is a rapid escalation in driving by the Chinese motorist and auto sales are growing exponentially. In Beijing alone, one thousand automobiles are being added DAILY! To bring that figure into context, it is as if the total vehicles already in existence in a mid-sized North American city are being added to the Chinese capital city’s streets every year - and the rate is accelerating!

One last figure is also of great importance. China is construction rail lines at a furious pace in order to transport their raw resources and finished goods, and anticipates the addition of 120,000 kilometers (73,000 miles) of new rail construction by 2015.

The quantity of metal resources alone required to complete these expansions is almost beyond calculation and, once they are completed, the consumption of ADDITIONAL fuel energy to power the motor vehicles, airplanes and locomotives which will be using those facilities is likewise equally staggering to contemplate.

It seems clear that as long as China continues to develop its infrastructure to meet its growing economy and as long as even a portion of the discretionary income now available to hundreds of millions of Chinese is diverted toward improving the selection of foodstuffs, the thirst for worldwide resources will continue to exert upward pressure on the price structure in many nations.

Financial markets in Canada and the USA opened higher this morning. Canada’s TSX has showed relatively greater strength, thanks to the metals and oil, holding gains of near 200 points at mid-morning, while the Dow’s opening rise of 150 points has been trimmed by half.

DISCLAIMER

The information presented above is based on data which we believe to be from reliable sources, but the accuracy of which cannot be guaranteed. Any opinions or predictions contained herein are those of the editor and are likewise offered also for information purposes only.

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