- February 24, 2011
- Unrest and its Effect on Oil
We’ve all watched with uncertainty as an uprising in a small North African country more than a month ago has turned into a revolution for the entire region. The turmoil has sent global markets tumbling and oil prices above $100 per barrel for the first time since 2008.
The events are unfolding so quickly that it may be difficult to keep up to speed. I’ve found two good sources which help explain what is going on. The first is from The Wall Street Journal and is an interactive timeline that takes you all the way back to December when the first signs of unrest began in Tunisia. You can also get a country-by-country breakdown of the latest events and key statistics at CNN.com. The breakdown also includes some insightful maps and details on the origins of the uprisings.
Oil has increased because many are expecting delays, if not an extended shutdown, of Libya’s oil production. An Organization of Petroleum Exporting Countries (OPEC) member, Libya is heavily dependent on its oil. The hydrocarbon industry accounted for 95 percent of export earnings and 80 percent of the country’s fiscal revenues in 2008, according to data from the International Monetary Fund and the U.S. Energy Information Administration.
The country produces 1.58 million barrels per day of oil, roughly 2 percent of global oil supply. Most of this oil gets shipped to Western Europe, China and even the U.S. Other countries, such as Algeria, which is Libya’s western neighbor and produces 1.25 million barrels per day, haven’t seen the same degree of protest, as of yet.
Amidst the turmoil and uncertainty, it’s important to remember this is a short-term spike. We expected to see $100 per barrel of oil prices some time this year and the uprising in Libya isn’t going to shut down the world’s oil industry.
If it turns out that Libya’s production is shut down for an extended period of time, the market will eventually adjust. In fact, OPEC is sitting on three times Libya’s daily oil production in excess production capacity, according to Zacks Investment Research.
What is more important for the long-term oil story is the economic recovery. Already in the U.S. gasoline prices have hit seasonal highs. In order for oil prices to maintain these levels, demand must be resilient. As Zacks says “oil spikes have a history of getting in the way of economic stability and growth.”
BCA Research has some interesting data regarding the economic impact of rising oil prices. The firm says that every $10 rise in oil prices translates into a 0.1-0.2 percent reduction in economic growth. This reduction doesn’t mean much when we have a slow rise in prices over an extended period of time, but can become meaningful during a compressed time period.
We expect more volatility in the near term as revolutionary forces overthrow oppressive regimes but our focus remains on the strength of the global economic recovery and its ability to withstand higher gasoline and energy prices.
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- February 14, 2011
- Growing Opportunity in Agriculture
Bushels of corn reached their highest prices in nearly three years this week after the U.S. Department of Agriculture (USDA) reported that corn inventories will fall to levels not seen since 1996.
We’ve witnessed nearly a 100 percent surge in the price of corn over the past year as increased demand has been met with diminishing supply. Dry weather conditions due to La Niña in Argentina and other disruptions have shriveled supply despite a near record amount of acreage being planted. Globally, corn consumption has increased 10 percent over the past five years to reach record levels and stock-to-use ratios for corn suggest we’re currently experiencing the tightest global corn market since the late 1970s, according to Macquarie.
This jump is due to increased corn consumption for ethanol and greater demand for feed grain. The USDA estimates that just under 40 percent of U.S. corn production will be consumed for ethanol, up from 31 percent in 2008-2009. China will likely need to import 5 million tons of corn in 2011 in order to meet the country’s booming need for feed grain. In the U.S., an additional 60 million bushels will be used for feed despite a reduction in livestock, according to the Des Moines Register.
Corn is just one part of the food pyramid that is rising. Around the world, prices for wheat, soybeans, cocoa and other grains have jumped in the last 18 months in conjunction with the global recovery. Prices have jumped because demand outstripped supply.
This chart from Potash Corp. shows that grain production has failed to meet consumption in seven of the past 11 years. This is despite producing a significantly larger amount of grain in 2009 than in 2000. Potash Corp. estimates world grain production declined more than 4 percent in 2010. An extreme drought in Russia chopped grain production in the country by 38 percent and 13 percent in neighboring Ukraine.
These tight supply/demand fundamentals reflect the impact of a growing global population and increasing economic strength in emerging markets, Potash says.
As per capita wealth has grown in other countries, there has been a huge jump in demand for grains. This chart shows the amount of bushels consumed as GDP per capita rises.
Much of the rise is due to people consuming more meat as their fortunes rise. To meet this higher protein diet, more chickens, cows and hogs are fed grains and demand skyrockets. You can see that China and India are still in the very early stages of increased consumption.
We think the agricultural space is ripe with opportunity. With global grain inventories relative to demand at multi-year lows and the rising emerging market middle class showing a healthy appetite for more meat and dairy products, demand for increased crop yields should remain strong.
None of U.S. Global Investors Funds held any of the securities mentioned in this article as of 12/31/10.
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- February 10, 2011
- BRIC Self Sufficiency Index
Demand for natural resources in the emerging world is increasing, but how much of this increased demand is met by the country’s own production?
This interesting chart from Bank of America-Merrill Lynch shows the supply/demand fundamentals of several key industrial metals and basic materials.
The dotted line represents a key tipping point. The resources to the left of the line are those the BRIC countries must obtain outside of their own borders in order to meet domestic demand. The BRICs produce an excess amount of the two metals to the right of the line and export the remaining amount to other countries.
Last year, copper, nickel and coal were all top-half performers of the 14 commodities we track in our popular periodic table. The two metals the BRIC nations produce an excess amount of (aluminum and zinc) were among the worst-performers.
These materials are the necessary elements needed for emerging nations to take the next steps in their development. You can see that the BRICs must rely on imports in order to meet demand for metallurgical coal, copper concentrate, thermal coal, iron ore, refined copper and uranium.
For example, BRIC production of metallurgical coal is less than 20 percent of BRIC consumption. Met coal, or coking coal, is used to make iron and steel—very important to the infrastructure build-out taking place in Asia.
Thermal coal is also important because it is principally used for power generation. Coal is the primary source of electricity in the emerging world, supplying more than 50 percent of Asia’s power. The BRICs consumed nearly 2 billion tons of coal for electricity in 2009, according to BP’s World Energy Statistics.
In order to combat these supply deficiencies, the BRICs have looked beyond their borders. In India, there were 27 cross-border deals in the metals and ores sector last year, according to research firm Grant Thornton.
China has been especially proactive in this regard. From 2005 through early 2010, the country inked more than $45 billion worth of cross-border deals for coal, copper and iron ore. These are deals in countries near (Vietnam, Mongolia) and far (Peru, Canada).
We think these areas are especially important for investors because these are the areas where we’re seeing wider profit margins and stronger returns on capital. This is why our Global Resources Fund (PSPFX) is currently seeking the best opportunities in this area.
Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.
Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. Because the Global Resources Fund concentrates its investments in a specific industry, the fund may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries.
BRIC refers to the emerging market countries Brazil, Russia, India and China.
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- February 9, 2011
- The What? And Why? Of Rare Earth Metals
Over the past few months, there’s been a buzz surrounding rare earth metals. These are metals such as europium, lanthanum, neodymium and 14 others found in small concentrations attached to other metals and resource deposits. They’re actually not that rare, just expensive and difficult to pull out of the ground.
These naturally occurring elements are essential in everything from wind turbines to lasers to iPads.
Rare earths are a conundrum for the environmentally conscious—they hold the key to green energies but create toxic waste when being separated away from other elements. “Just one wind turbine generating 3 megawatts of electricity requires 600 kilograms of rare earths for its magnets,” a source told the United Kingdom’s Guardian newspaper.
Electric and hybrid cars can contain more than twice as much rare earth metals as a standard car. This image from the NY Times breaks down how these metals make up critical elements of a Prius.
Currently, China controls 97 percent of the world’s production of rare earth metals. In October 2010, the country cut exports of the metals by 70 percent, disrupting manufacturing in Japan, Europe and the U.S., and sending the prices of these metals up 40 percent.
China currently controls production but the country only has 37 percent of the world’s estimated reserves. This second visual published by the NY Times shows the identified rare earth metal deposits around the globe.
The U.S. used to be a top manufacturer of rare earth metals back in the 1960s, but eight years ago environmental infractions shut down the Mountain Pass, California mine, the largest deposit of rare earth metals outside of China. Currently, there are efforts to restart production at the mine but several hurdles must be cleared first. Today, the U.S. imports 87 percent of its rare earths from China.
Other countries such as Kenya, South Africa, Malawi and Greenland are believed to be sitting atop large deposits of rare earth metals as well.
Increased production outside of China is required in order to meet increased demand. Estimates show that global demand is expected to reach 205,000 tons by 2015, according to the Guardian. As high tech becomes a greater part of people’s lives in both the developing and emerging world, the importance of these metals should continue to rise.
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- January 20, 2011
- Commodities Continue to Sizzle in 2010
If 2009 was a recovery year for commodities, 2010 was the year they regained their crown. The Reuters-Jeffries CRB Index jumped 17.44 percent in 2010. Combined with 2009’s 24 percent gain, the CRB has climbed nearly 45 percent off 2008 lows.
Twelve of the 14 commodities we track were in positive territory in 2010 and nine of them saw gains exceeding 20 percent. That’s in stark contrast to the bloodshed of 2008 when gold was the only commodity not in the red.
This updated version of our popular commodities periodic table shows how strong the bounce back has been.
Palladium was the top performer, rising over 96 percent during 2010. Part of this rise can be attributed to the explosion of auto sales in emerging markets since palladium is a critical component of catalytic converters in cars. Marketwatch reported in December that Johnson Matthey estimates palladium demand to have risen 27 percent in 2010.
Silver (up 83.21 percent), corn (up 51.75 percent) and wheat (up 46.68 percent) were next in line. Natural gas was the worst performer, falling more than 21 percent—its third-straight year of declines.
Looking over the past decade, you can see how strong the commodity space has been. Nine of the 14 commodities have averaged a double-digit gain per year since 2001. Silver has been the best performer, averaging a 21 percent rise each year, but lead (up 18.25 percent annually) and copper (up 18.1 percent annually) aren’t far behind.
The past ten years have been very kind to gold investors. Since 2001, gold has had a positive return each year and has averaged 17.97 percent a year.
It’s impossible to say whether the bull run can continue in 2011 but we believe that the same critical factors that have carried high commodity prices into this decade remain intact. Demand should continue to rise along with the emerging world and supply for most of these commodities will be hard pressed to keep up.
The Reuters/Jefferies CRB Index is an unweighted geometric average of commodity price levels relative to the base year average price.
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