Base metals prices may have eased of late as risk aversion has mounted, but the long-term outlook remains positive. As David Fuller points out on Fullermoney.com, industrial commodities have been spearheading a commodities supercycle. Global growth is fuelling unprecedented demand, with industrialising Asia's 3.5 billion people being the main factor; countries with under one billion people accounted for most of the demand in the big 1970s bull run. According to Evy Hambro of the Blackrock World Mining fund which has topped the S&P Commodity and Natural Resources sector over three and five years Brazil, Russia, India and China will jointly need 140% of last year's global aluminium demand and 105% of its copper output. BHP Billiton thinks the global amount of copper likely to be used in the next 23 years will exceed world consumption between 1900 and 2006.
Supply, however, remains constrained as investment in capacity was neglected in the long bear market and shortages of mining basics are exacerbating the problem. Rio Tinto, for instance, is having to wait two years for essentials, such as power generators, to be delivered. Mining firms have resorted to takeovers rather than risk building up their own productive capacity, says Hambro. Only when they embark on "grand supply expansions" will the supercycle be close to peaking. Analysts remain pessimistic, while history also suggests the supercycle is far from mature: commodities have been rising since 2001, while previous supercycles have lasted ten to 20 years.
Oil looks set to be a similar story. Surging demand and tight supplies are underpinning prices and "there's no relief in sight on either side", says Moira Herbst in BusinessWeek; the International Energy Agency has warned of a "supply crunch" within five years. Note that global oil reserves fell by 0.5% last year, says Liam Halligan in The Sunday Telegraph, even though Opec operated the highest number of rigs since 1980. Opec's efforts to find new crude reminded markets that "no one has found a really decent field for the best part of 30 years".
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