- May 25, 2011
- Why Asia is the Epicenter of Oil Demand Growth
A few weeks back we highlighted the strong link between GDP growth and oil consumption by showing you how oil consumption per capita has risen in selected countries as per capita incomes rise (Read: The Strong Link Between GDP and Oil Consumption).
Specifically, we noted the potential for China’s oil consumption—already the second-largest oil consumer in the world—to catch up on a per capita basis with other Asian countries such as Taiwan and South Korea.
That’s where we think China’s oil consumption is headed, but this chart from Carnegie shows how strong oil consumption per capita growth has been over the past 50 years. Back in the days of Chairman Mao, China’s oil consumption per capita was roughly 0.2 barrels per year (b/y). When Deng Xiaoping took over in 1982, that figure had grown to roughly 0.6 b/y.
Since then, there’s been no looking back. China’s oil consumption per capita has increased over 350 percent since the early 1980s to an estimated 2.7 b/y in 2011. In fact, consumption per capita has risen nearly 100 percent in just the past decade.
Oil consumption per capita in the U.S. currently ranks among the top industrialized nations in the world at 25 b/y. However, today’s consumption levels are approximately 20 percent lower than they were in 1979.
China isn’t the only emerging country to show big increases in per capita consumption; in fact, the growth in consumption for several other countries far outpaces China. You can see from this next chart from Carnegie that consumption per capita in Malaysia has nearly quadrupled since the mid-1960s. Consumption in Thailand and Brazil has more than doubled to roughly 5.7 b/y and 4.8 b/y, respectively.
Meanwhile, many developed countries—especially those in Western Europe, have experienced substantial declines.
Today’s per capita consumption in Sweden is roughly 12 b/y, down from 25 b/y in the mid-1970s. That’s one of the largest declines in the developed world over that time but isn’t the only one. France, Japan, Norway and U.K. all use less oil on a per capita basis than they did in the 1970s.
This trend is why we feel emerging countries, especially Asia, are the epicenter of oil demand growth for years to come.
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- May 20, 2011
- The Dollar and Oil Debate on CNBC Europe
While I was in London earlier this week, I joined CNBC Europe’s Commodities Corner to discuss an earlier post regarding my Three Reasons to Believe in $100 Oil.
Of the three reasons I gave, most striking to this group was my belief that higher oil prices will continue because of a weakness in the dollar. What I explained during the discussion was that a falling dollar causes short-term volatility. As the demand for a particular type of commodity increases and the dollar weakens, or vice versa, investors need to deal with an exaggerated movement in the price of commodities. However, I stressed the short-term nature of these events.
More importantly to the long-term investor, I asserted there should be two main focuses over the next 10 years. One is the supply and demand factors driven by infrastructure needs, not only from China, but also many other emerging markets.
For example, investors should compare the economic situation of the E7 – Brazil, China, India, Indonesia, Mexico, Pakistan and Russia – which are the most populated countries against the G7 which are Canada, France, Germany, Italy, Japan, the U.S. and the U.K. While the money supply growth rate of the G7 countries is less than 4 percent, the rate of the E7 group is at 18 percent. To me this means, over the next five years, asset prices should double.
The second important long-term focus is on government policies for infrastructure spending. One noteworthy example I like to use is the expanding infrastructure projects including high-speed rail in China to connect 250 cities and 700 million people. This is a significant driver for commodity prices.
The U.S. Trade Weighted Dollar Index provides a general indication of the international value of the U.S. dollar. M2 Money Supply is a broad measure of money supply that includes M1 in addition to all time-related deposits, savings deposits, and non-institutional money-market funds.
The following security mentioned in the article was held by one or more of U.S. Global Investors family of funds as of March 31, 2011: Kinross Gold.
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- May 18, 2011
- Chart of the Week: Emerging Europe’s Middle Class
Middle-class, affluent, bourgeois, white-collar … they all describe a group of people who enjoy a comfortable life, have access to healthcare and, most importantly, have discretionary income. And across developing nations, there is a growing group of affluent people that are just settling in to this lifestyle.
A few weeks ago we discussed how economic power is gradually shifting eastward and highlighted a McKinsey Global Institute report that showed China, Latin America and South Asia are projected to account for most of the middle class children by 2025. (Read: Middle-Class Middleweights to be Growth Champions).
Those regions aren’t the only ones. Our emerging markets team uncovered this chart for last week’s Investor Alert which shows a surging middle class exists in Eastern Europe as well. China leads the developing world with a middle and affluent class of 149 million—roughly the same size as the combined total populations of Japan and Taiwan.
While China is far ahead of all developing market countries with 149 million members of the middle and affluent class, investors shouldn’t overlook another important trend: The combined middle and affluent classes of the Czech Republic, Hungary, Poland, Romania, Russia and Turkey equal that of China. Among emerging market nations, Russia has the second-largest middle and affluent class with 70 million people; Poland’s rivals that of India.
Turkey, which currently ranks seventh, has especially strong prospects. Already, its middle class is second among emerging markets in terms of GDP per capita at $17,586. In addition, this class is expected to grow at a 5.1 percent annual rate through 2029.
The Development Centre of the Organisation for Economic Co-operation and Development (OECD) Development Centre identifies the middle class population as the “consumer class” because of its importance on consumption levels. We agree with this designation as this class identifies an important global driver of economic growth.
We believe that people with discretionary income will seek to improve their way of life by buying their first vehicle, upgrading their home, purchasing appliances and gaining access to the Internet. For years to come, these middle and affluent classes should drive demand for new or improved infrastructure and needed commodities, thereby contributing to the substantial economic growth in several emerging nations around the world.
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- May 16, 2011
- Three Reasons to Believe in $100 Oil
After selling off nearly 14 percent the previous week, oil prices finished last week slightly higher at $99.65 per barrel. While the end result was a net positive, the volatility continued. Oil prices per barrel reached $104, then fell to around $96, before nesting just below $100.
As an investor, this volatility can be difficult to handle. Throw in the uncertainty of today’s geopolitical environment, and investors feel the need to downsize their positions in commodity investments, such as oil.
We think markets could remain volatile in the short-term, but here are three long-term indicators to support $100+ per barrel oil prices.
1) Long-Term U.S. Dollar Weakness
The U.S. dollar was up over 1 percent again last week and has increased nearly 4 percent since hitting a 52-week low on April 29. On a five-day rate of change, the dollar is up about 1 standard deviation.
As I said last week, this move is less about the vigor of the U.S. dollar and more about the relative weakness of the eurozone and other fledgling countries. In addition, it’s likely we’ll continue to see relative strength in the U.S. dollar as we get closer to the end of the Federal Reserve’s QE2 program, set to wind down in June.
We think these are short-term drivers and don’t accurately reflect the long-term headwinds facing the dollar. I’ve discussed these often and in an attempt to keep this note brief, I’ll let the following picture tell the story.
This snapshot from USdebtclock.org (taken late in the afternoon on May 13) shows the precarious fiscal and monetary situation of the U.S. As you can see, the overwhelming color is red. Even if Washington decided on a comprehensive plan to fix entitlement overspending, trim defense spending and reduce the U.S. deficit today, it would take years to see any meaningful shift in these figures.
Therefore, we feel the recent uptrend in the U.S. dollar is a short-term reprieve from a long-term downtrend.
2) Demand from Emerging Markets Outpacing Developed Market Demand
While developed world demand has struggled to retrieve its previous strength, emerging markets have captured a significant share of global demand over the past three years. Emerging market countries have narrowed the oil usage gap between developed and emerging markets from roughly 12 million barrels per day in 2007 to just 4 million barrels per day as of late 2010.
Last week, the Paris-based International Energy Agency (IEA) and the U.S. Department of Energy both communicated softness in global oil demand. The IEA noted that preliminary March data shows the first “marked slowdown” in annual growth for the first time since 2009. The IEA is forecasting growth of 1.3 million barrels per day in demand for crude oil in 2011, down from 2.8 million barrels per day in 2010.
This represents a significant slowdown in year-over-year growth and added to negative sentiment around oil last week, but it’s important to put things into context. You can see from the chart that global oil demand grew at an incredible pace in 2010. The 1.3 million barrels of demand growth that is expected for 2011 is less than last year, but is more along the lines with historical rates and maintains the forward momentum for rising oil demand.
Emerging markets, driven by China, are the main source of the increase in demand. You can see from this next chart how China’s demand for crude oil imports has grown over the past decade or so. China imported an average of just under 1.4 million barrels a day of oil in 2002 when prices were hovering around $20 per barrel.
In the years since, China’s crude oil imports have increased more than 260 percent despite per barrel oil prices jumping nearly four-fold. This is indicative of the insatiable demand that emerging markets have for oil.
3) Majority of Global Oil Reserves Located in Geopolitically Unstable Regions
In the April 11 update “Why High Oil Prices Are Likely Here to Stay,” we highlighted how a large portion of the world’s proven oil reserves and production comes from unstable countries and regions, including Nigeria, Venezuela, Iraq, Iran and Libya. According to some estimates, as much as 80 percent of the world’s oil reserves lie beneath these shaky regions.
Civil wars and attacks on oil facilities can create production slowdowns or even shut down production entirely. The conflict in Libya and unrest in several other Middle East countries shows just how quickly this can affect global oil markets. Iraq is another example of the difficulties inherent in production expansion in these regions. Last week, the country’s former oil minister said it would only be able to meet half of its stated production goal by 2017. The original forecast, clearly a lofty one, called for roughly 12 million barrels per day in oil production.
Over the years, the proximity of oil reserves to unrest has led to a reduction in global spare capacity or the excess amount of oil that can be produced, if desired, to meet demand. When the turmoil broke out in Libya, the general consensus was that Saudi Arabia’s spare capacity would be more than enough to meet market demand. That hasn’t been the case as Saudi Arabia has moved to calm its own population to prevent unrest.
The result is little wiggle room to meet demand should we experience a boom in demand or an event disrupting production. In general, these supply/demand dynamics support historically high prices.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. Standard deviation is a measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is also known as historical volatility.
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- May 23, 2011
- Asian Tiger Sinks Teeth Into Gold
The World Gold Council (WGC) released its quarterly “Gold Demand Trends” report last week and, as always, it was filled with fascinating data on the strength of the global gold market. Gold demand grew 11 percent to 981.3 tons during the first quarter of 2011, worth $43.7 billion at quarter-end’s price levels.
The increase was driven by a significant rise in demand for gold as an investment, up 26 percent from a year ago, as emerging markets look to protect their assets from rising inflation. Demand for gold bars and coins was up 62 percent and 42 percent, respectively.
A slight pullback in prices during the middle of the quarter and “persistent high inflation levels” pushed China into the position as the world’s largest market for gold investment. Chinese citizens devoured nearly 91 tons of gold bars and coins, more than double the amount of a year ago.
This isn’t exactly a new phenomenon in China. From 2007 to 2010, investment demand grew at a compounded annual growth rate of 68 percent, according to the CPM Group. The firm forecasted Chinese investment demand to increase 34.7 percent during 2011 but based on this new data, it may need to adjust its forecast.
Song Qing, director of Shanghai-based Lion Fund Management, told Bloomberg news that, “Gold has taken on a new role in China amid concern about inflation…Just imagine the total wealth in China and even a small percentage of that choosing to buy gold. This demand is going to be enormous.”
The “Love Trade” was also in full swing during the first quarter. Led by India and China, jewelry demand rose 7 percent on a year-over-year basis. Combined, the countries accounted for roughly 67 percent of world total jewelry demand.
For the first time, the demand for gold in China was so strong it outpaced the combined total of the developed West during 2010. If you lump together the gold demand of the U.S., France, Germany, Italy, Switzerland, the U.K. and other European countries, the sum of these countries is still outpaced by China. That’s despite triple-digit increases in demand from France, Germany and Switzerland.
The CPM Group says the origins of this milestone in China’s gold market can be traced back to the late 1980s when the government began lifting restrictions on gold ownership. This led to the establishment of the Shanghai Gold Exchange and other ways Chinese citizens could put a portion of their wealth in gold.
Then in 2001, the government lifted its final controls on the gold market, igniting one of the greatest booms in gold demand history. From 2001 to 2010, China’s annual consumption of gold grew at a 7.5 percent compounded annual growth rate.
This chart shows how China’s demand for gold jewelry has increased from just over 500,000 ounces in the late 1980s to over 12 million ounces at the end of 2010, in spite of gold going from $200 to $1,000 and now $1,500 an ounce.
The rise in gold prices and consumption has coincided with a dramatic rise in China’s per capita incomes. The chart on the left shows that per capita incomes in China have risen from around the $3,000 level in 2000 to roughly $7,000 in 2010. This means that the average Chinese citizen has over twice the income he or she did in 2000. Today, China is second only to the U.S. with a middle class population of 157 million people, according to the Organization for Economic Co-operation and Development (OECD).
The chart on the right shows, at least in part, what many have chosen to do with that additional money—buy or invest in gold. On a per capita basis, per capita consumption of gold in China has more than doubled since 2005.
Despite this strong rise in per capita consumption, an analyst from Standard Chartered Bank said that there is still much room to grow, “In terms of gold consumption per capita, there is no doubt that [China and India] have a lot of catch-up potential and the impact on gold prices could be dramatic.”
One way China’s per capita consumption can catch up is if investors continue to seek safety from inflation in the yellow metal. Demand for gold as an investment has grown at a 14 percent annual clip since the Chinese government deregulated the local gold market in 2001.
This chart, courtesy of my friend Adrian Day, shows Chinese citizens’ gold investment as a savings. Similar to the other charts I presented, it shows how much China’s gold market has changed over the past 10 years.
The total amount of household savings invested in gold has grown from about $200 billion in the late 1990s to $1.2 trillion in 2010. In fact, the total savings invested just during the first quarter of 2011 is equal to the total amount invested in 2004, and more than the previous six years.
Recently, the government and state banks have encouraged citizens to purchase gold and initiated gold purchasing programs. In February, the Industrial and Commercial Bank of China (ICBC) and the WGC launched the “Only Gold Gift Bar” program which offers gold bars weighing 10, 20, 50, 100 and 1000 grams. In less than three months, this program has already generated orders totaling 1.8 tons, according to the WGC.
The first quarter of 2011’s demand trends leads me back to the two drivers I’ve highlighted before and are captured in the new report - Two Key Drivers of Gold Demand: Fear Trade and Love Trade. In the U.S., the Fear Trade, a factor of negative real interest rates and increased deficit spending, is driving demand for gold. In China, India and other emerging markets, the Love Trade, a combination of rising incomes and a cultural affinity for gold, is driving demand for gold.
Together the two are powering gold demand to new levels. Download your copy of the special report now.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. None of U.S. Global Investors Funds held any of the securities mentioned in this article as of March 31, 2011.
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