Commodities and Canada

NEW YORK CITY - Commodities in general and Canada in particular have been the darlings of the world's stock markets.
That's why tomorrow's (march 5) opening of the Prospectors and Developers Association annual convention in Toronto is expected to enjoy another record attendance.

Commodity prices have soared 91% in the last four years as measured by the Reuters Jefferies Commodity price index. Prices represent the highest level in 26 years. The index tracks metals, energy and agricultural commodity prices.

But like all booms, there is a constant guessing game as to whether this is, or will be, a stock market bubble or a looming bust or merely a slowdown.

"Prices were unsustainably low with gold and oil in the late 1990s at 20 year lows," said Fred Sturm, Ivy Global Natural Resources Fund manager in a report. "This forced mergers."

Mergers created stock market gains, then price increases did. He expects a third rally.

"The last will be a true scarcity rally," he said based on projected global and Asian economic growth figures.
Gil Knight, senior portfolio manager at money manager Gartmore US, is convinced that the rally will be robust enough to invest significantly in mining stocks this year.

Others are more targeted.

John Hill, Citigroup analyst, recommends gold due to Chinese, Indian and petrodollar purchases and Newmont Mining and Barrick Corp. as vehicles.

Still others are cautious.

By contrast, Stuart Schwaitzer, global markets strategist at JP Morgan Asset Management believes this year will be lackluster.
"I'd be surprised if the commodity-type stocks are a top-performing group in 2006," he told the New York Times last month.
Helping hoist the market for commodities is the fact that pension funds and money managers moved into commodities last year and plan to do so this year in order to diversify from stocks and bonds.

This can be either bullish or bearish, depending upon your viewpoint. Institutional demand puts upward pressure on prices while, historically speaking, their group participation often marks the end of the rally as their participation gives others a chance to cash in.

Barclays Capital estimates that in 2006 another US$40 billion will be invested by institutions in commodity indexed markets in addition to the US$70 billion which had been invested by the end of 2005. This is up from only US$15 billion invested by the end of 2003.

The commodity price boom in markets is only part of the story.

Prices, at record highs for several years, have led to expanded corporate exploration budgets, capital projects and profits.
The boom has secured Canada pre-eminence in mining financings. In 2005, an estimated C$3 billion was raised in Canada compared to C$1.75 billion raised throughout the rest of the world. This continues the dominance of Canadian investment bankers in this critical sector.

In 2004, some C$3.75 billion was raised compared with C$2.2 billion throughout the world and in 2003 Canadians raised C$2.75 billion compared with C$1.75 billion worldwide.

This year's PDA convention is expected to attract a record 13,000 attendees from 35 countries. This reflects the fact that 700 Canadian exploration companies work abroad on 3,500 exploration projects. Canadians dominate the action and are credited with opening up activity in both resource-rich Chile in the past and Mongolia more recently.

An estimated 50% of the venture capital for exploration and mining projects around the world is raised on the TSX or the TSX-Venture.

But the nagging question for those outside the industry is whether commodity prices will continue to rise.
My bet is that they will.

China is cited as the reason for price hikes. But that's only part of the story. India grew by 8% last year, South Korea by 5% and the world overall by 3.5%.

Barring unforeseen events, these trends should continue.

There are also other important, overlooked, factors. These include the return to respectable economic growth in Japan and Germany; the continuing growth of the United States (at an estimated 3.5% this year) plus the massive windfall of petrodollars to OPEC and others which is being increasingly invested in gold and other commodities.

China is the biggest buyer now of base metals going from 5% of the worldwide total in the 1980s to 22% in 2005. It also is running out of oil and doubled oil imports in five years.

Interestingly, commodity prices may increase due to another factor: U.S. political pressure on China to revalue its currency higher. China has already increased the Yuan slightly and an agreement to raise it more will give it greater purchasing power with which to buy commodities, thus driving demand.