Twenty-year bull market
By: Gareth Tredway
Posted: '14-OCT-04 16:00' GMT
By: Gareth Tredway
Posted: '14-OCT-04 16:00' GMT
© Mineweb 1997-2004
JOHANNESBURG (Mineweb.com) -- China’s entry into global markets, which has been pushing commodity prices ferociously higher on the back of high demand, could last longer than the historical five-year cycles experienced in the past when other powers have entered the global arena.
This is according to Michael Power, a strategist at South Africa’s Investec Asset Management, who dubs China’s entry onto the world scene as “the most important geo-economic event of our lives.”
“Basically there were two periods when we did see this, and that was when continental Europe in the late-1950s joined global markets, and then when Japan basically joined global markets in the late sixties,” Power told Mineweb Radio Wednesday evening, “And then you basically ended up with a mean reversion trend after they had joined the market.”
“But for a five-year period in both instances, you saw this rising saw-tooth shape in the markets. I think in the case of China, it is going to be longer, and the reason why is that: China is bigger, but it is not just China. What is happening actually is an Asian phenomenon that is centered on China. And standing waiting in the wings is India. And India is another billion people. In fact the Indian sub-continent if you throw in Pakistan, Bangladesh, and Sri Lanka, is actually a larger population than China. So I think we could see something here that could last 20 years. That is going to make life very difficult for investors, because you have to have nerves of steel to play a saw-tooth formation.”
Power says that, on a recent visit to China, he was told by a trading company that the Chinese are now getting wise on how to manage the high prices that are coming from the forecasts of high Chinese demand.
“The rest of the world thinks they are a one-way trade and you can basically sell anything in terms of agricultural and mineral sources to them, and they basically had to take the price that you are selling them at. The Chinese have learned that if they accumulate a little bit of stock, more than they absolutely need in the immediate sense, they can pop bubbles as they arise and basically give particularly speculators a bloody nose. I suspect they may well have been behind the base metals wipe out that we saw today, and I think it did start in Shanghai.”
On Wednesday commodities and resource shares took a knock worldwide, for quite a few reasons, depending where you ask. Robin Bahr, a base metals analyst at Standard Bank in London says the drop was driven by commodity trading advisors and unnerved weak and speculative longs. “Macro funds were happy sitting on their long positions, as there is good potential in base metals,” says Bahr. Bahr says the market does not give the Chinese enough credit, and says they knew that, if they start buying, prices would move against them.
On Wednesday the copper price dropped 10.8 percent from Tuesday’s price, nickel 16.56 percent and aluminium 6.07 percent. Precious metals and resource shares also felt the bite. Bahr calls it a “healthy correction” as prices had been on an unabated rise for over a month. Prices did show small gains by Thursday afternoon, adding meat to Power’s “saw-tooth” theory. Bahr says prices would have to fall another 10 to 20 percent for “what they call” a bull market to become a bear market.
In any event company’s like BHP Billiton, Kumba Resources and Anglo American that have already gained from the China factor, are still tipped as good investments by David Shapiro, a trader from BJM. “I am going Billiton, and Kumba, and I am not sure on my third, I should stay with Anglo American,” Shapiro told Mineweb Radio on Wednesday evening.
Power himself agrees on the diversified players, but also mentioned South African Breweries as a player and Anglo Platinum, the world’s largest platinum producer, as an interesting one. “I think if you have a ten-year horizon I think SA Breweries is going to make an absolute killing in China. I think Amplats (Anglo Platinum) is an interesting one because platinum is something that the Chinese understand extraordinarily well. In 1994 China did not feature in the top 20 platinum consumers in the world, today it takes 21 percent of the world’s platinum.”
As a third choice, Power chose De Beers, the world’s largest producer of rough diamonds and which is owned 45 percent by Anglo American. “The dark horse would be De Beers, there is early signs that they are catching on in terms of their diamond consumption,” says Power, “If you see what De Beers did to Japan in 1945. The diamond giving habit did not exist in Japan, and today over 90 percent of couples getting married use diamonds to seal their fates. You see it when you walk around the streets of Shanghai now, the combination of platinum and diamonds is the gift.” From a South African perspective, Trans Hex, a Johannesburg-listed diamond producer was also pointed out.
This is according to Michael Power, a strategist at South Africa’s Investec Asset Management, who dubs China’s entry onto the world scene as “the most important geo-economic event of our lives.”
“Basically there were two periods when we did see this, and that was when continental Europe in the late-1950s joined global markets, and then when Japan basically joined global markets in the late sixties,” Power told Mineweb Radio Wednesday evening, “And then you basically ended up with a mean reversion trend after they had joined the market.”
“But for a five-year period in both instances, you saw this rising saw-tooth shape in the markets. I think in the case of China, it is going to be longer, and the reason why is that: China is bigger, but it is not just China. What is happening actually is an Asian phenomenon that is centered on China. And standing waiting in the wings is India. And India is another billion people. In fact the Indian sub-continent if you throw in Pakistan, Bangladesh, and Sri Lanka, is actually a larger population than China. So I think we could see something here that could last 20 years. That is going to make life very difficult for investors, because you have to have nerves of steel to play a saw-tooth formation.”
Power says that, on a recent visit to China, he was told by a trading company that the Chinese are now getting wise on how to manage the high prices that are coming from the forecasts of high Chinese demand.
“The rest of the world thinks they are a one-way trade and you can basically sell anything in terms of agricultural and mineral sources to them, and they basically had to take the price that you are selling them at. The Chinese have learned that if they accumulate a little bit of stock, more than they absolutely need in the immediate sense, they can pop bubbles as they arise and basically give particularly speculators a bloody nose. I suspect they may well have been behind the base metals wipe out that we saw today, and I think it did start in Shanghai.”
On Wednesday commodities and resource shares took a knock worldwide, for quite a few reasons, depending where you ask. Robin Bahr, a base metals analyst at Standard Bank in London says the drop was driven by commodity trading advisors and unnerved weak and speculative longs. “Macro funds were happy sitting on their long positions, as there is good potential in base metals,” says Bahr. Bahr says the market does not give the Chinese enough credit, and says they knew that, if they start buying, prices would move against them.
On Wednesday the copper price dropped 10.8 percent from Tuesday’s price, nickel 16.56 percent and aluminium 6.07 percent. Precious metals and resource shares also felt the bite. Bahr calls it a “healthy correction” as prices had been on an unabated rise for over a month. Prices did show small gains by Thursday afternoon, adding meat to Power’s “saw-tooth” theory. Bahr says prices would have to fall another 10 to 20 percent for “what they call” a bull market to become a bear market.
In any event company’s like BHP Billiton, Kumba Resources and Anglo American that have already gained from the China factor, are still tipped as good investments by David Shapiro, a trader from BJM. “I am going Billiton, and Kumba, and I am not sure on my third, I should stay with Anglo American,” Shapiro told Mineweb Radio on Wednesday evening.
Power himself agrees on the diversified players, but also mentioned South African Breweries as a player and Anglo Platinum, the world’s largest platinum producer, as an interesting one. “I think if you have a ten-year horizon I think SA Breweries is going to make an absolute killing in China. I think Amplats (Anglo Platinum) is an interesting one because platinum is something that the Chinese understand extraordinarily well. In 1994 China did not feature in the top 20 platinum consumers in the world, today it takes 21 percent of the world’s platinum.”
As a third choice, Power chose De Beers, the world’s largest producer of rough diamonds and which is owned 45 percent by Anglo American. “The dark horse would be De Beers, there is early signs that they are catching on in terms of their diamond consumption,” says Power, “If you see what De Beers did to Japan in 1945. The diamond giving habit did not exist in Japan, and today over 90 percent of couples getting married use diamonds to seal their fates. You see it when you walk around the streets of Shanghai now, the combination of platinum and diamonds is the gift.” From a South African perspective, Trans Hex, a Johannesburg-listed diamond producer was also pointed out.
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