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Tuesday, March 01, 2005

Commodities and China: An Addendum 

On the heels of Thomas' post, here is a paper, co-authored by a colleague at Wharton that summarizes commodity price movements and returns over the last 45 years. I recommend reading it (with a warning that it might be a tad technical), to get a better idea of how these prices change with inflation.
As pointed below, the growth in China is likely to help the bullish view on commodities - some private equity firms have already benefited from some great commodity related investments (specifically coal) that have paid off due to such macroeconomic factors. This brings me to a concern that I have considered important in the discussion of China's growth - population trends. The Economist has similar concerns

Projections by Asian Demographics, a research organisation, show China's total population, which hit 1.3 billion in January, inching up to 1.31 billion in 2019 and declining rapidly thereafter. The number of people aged under 40 may already have peaked at 800m and is forecast to decline by one-third, or 250m, over the next 20 years. By contrast, those aged over 40 will grow by 270m, or more than half, over the same period (with those aged 60 and older growing the fastest). By 2024, they will make up 58% of the population, up from 38% today. By then a full three-quarters of Chinese households may be childless.

As a result, Asian Demographics forecasts average annual increases in GDP of only 4.8% over the next ten years, and of below 4% thereafter. Yet foreign corporations are currently pouring $60 billion of investment a year into China on the basis of 7-8% annual economic growth during the coming decades. If demography really is destiny for China's economy, those investments could prove disappointing.


While this will change the nature of products sold (expect drug companies to do well), what is relevant here is the impact on demand for commodities. Given that India continues to grow (both economically and demographically), I won't be surprised if the growth in commodities is driven by demand in India, that is, if commodities are still on their way up!