Asia Is in the Commodities Driver’s Seat

06/08/2009 12:01 am EST

Focus: GLOBAL

Prieur du Plessis

Author, Investment Postcards from Cape Town

China and the other emerging powers have already eclipsed the US as catalysts for commodities, writes Prieur du Plessis in Postcards from Cape Town.

The Chinese Purchasing Managers Index (PMI) for May remained in the expansionary zone—[above] 50%—although it moderated to 53.1% from 53.5% in April, according to Li & Fung Research Centre. Although eight of the 11 sub-indices were slightly lower than their respective levels in the previous month, the new export orders index returned to the expansionary territory for the first time since June 2008. "Strong domestic demand, together with an improving export situation, has helped resume the expansion of the manufacturing sector in China," said the report.

China’s PMI seems to indicate that the country might have seen the worst of the GDP growth statistics. Importantly, China’s PMI for new export orders [is] again expanding and, based on the close relationship with the [Shanghai] Metals Index, should provide further support for commodity prices.

David Rosenberg, the closely followed chief economist and strategist of Gluskin Sheff, argues in a newsletter on Monday that the Asian economic revival, with strength spreading across the continent, may be for real. This is, needless to say, bullish for the commodity complex, with gold, copper, and oil all having broken above their 200-day moving averages just as the US dollar has cracked below its key support level.

"The US is still the largest economy in the world by far, but it is losing its dominance each year and the fact of the matter is that it is a mature, service-driven economy. Emerging Asia in general, and China in particular, are still the marginal buyer of basic materials, and their economic success is more critical to the outlook for commodities," said Rosenberg.

He highlights that the world has just endured the steepest world economic setback in 70 years and yet commodity prices across a broad front—gold, oil, copper, soybeans—managed to bottom at their highest "recession levels" of all time. "This attests to the supply discipline by today’s resource companies compared to their predecessors, and affirms our belief that what we experienced last year was a severe cyclical correction in what is still a secular bull market—you can connect the dots on the chart and see that the CRB looks a lot like what the Standard & Poor’s 500 index looked like in the months following the sharp 1987 collapse," said Rosenberg. It seemed like the end of the world in October of that year, and yet in retrospect it was just the fifth year in what proved to be an 18-year secular bull phase.

My research concurs with Rosenberg’s conclusion that commodities still seem to be in a supercycle that was only temporarily interrupted by the global economic malaise. As inflation money finds its way into commodities, it is still not too late to purchase these, but only on price corrections that are bound to occur from time to time.

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