There has been continued talk of a commodity super cycle which is hard to argue against since 10-20 year cycles by their very nature are few and far between. Any extended commodity rally could be considered a super cycle; nevertheless, there is something going on that is different with his rally. Most important, the rally is not just a response to supply shocks. Certainly there have been some significant supply shocks in the last year. Many have been weather related. These supply shocks will cause price increases but to get an extended rally you need two other conditions. One, there has to be a decline or low inventory levels. If there is less inventory, the buffer stocks of commodities cannot be used to smooth prices. Second, there has to be strong demand.
In the first case, we are seeing lower inventory levels relative to consumption or use. The level of inventories are low relative to historical numbers. This is not the case for all markets and many markets still show contango which suggest that inventories are plentiful. But the key markets seeing the highest gains seem to be having backwardation in contracts. Second, there is a strong demand shocks which will not be just a temporary shift. The demand shock which is the real driver for the super cycle is coming from the increase in the middle class for emerging markets.
The story of stronger commodity demand is a play on emerging markets. The super cycle is that this demand will not go away quickly because it represents the explosion of a growing middle class which is unlikely to move back to poverty. From the Euromonitor and Morgan Stanley, households with disposable income over $10,000 in the BRIC's now outnumber those in the US, over 100 million. These middle class households will now outnumber those in the EU by the end of this year. Middle class households in China will exceed the number in Japan and will exceed the US by 2014. Middle class is defined as household disposable income above $10,000.
Auto sales in BRIC countries exceeded the US in 2008. The gap is only getting larger with annual sales over 20 million unit versus between 10-12 million in the US. PC unit sales in China increased 13.1% in 2009 versus 2.2% in the US. Income distribution is changing from low income to something more balanced across different income groups. In less than 5 years P&G sales to developed countries have increased from 23% to 32% of the firm total, an increase from $13 billion to $25 billion. Household debt to GDP in many of these countries is below the average for developed countries. The purchases of goods is for cash. If there is more consumer credit, product demand will show further increases.
If you want to call this a super cycle, go ahead. The tailwinds to higher commodity prices are strong.
In the first case, we are seeing lower inventory levels relative to consumption or use. The level of inventories are low relative to historical numbers. This is not the case for all markets and many markets still show contango which suggest that inventories are plentiful. But the key markets seeing the highest gains seem to be having backwardation in contracts. Second, there is a strong demand shocks which will not be just a temporary shift. The demand shock which is the real driver for the super cycle is coming from the increase in the middle class for emerging markets.
The story of stronger commodity demand is a play on emerging markets. The super cycle is that this demand will not go away quickly because it represents the explosion of a growing middle class which is unlikely to move back to poverty. From the Euromonitor and Morgan Stanley, households with disposable income over $10,000 in the BRIC's now outnumber those in the US, over 100 million. These middle class households will now outnumber those in the EU by the end of this year. Middle class households in China will exceed the number in Japan and will exceed the US by 2014. Middle class is defined as household disposable income above $10,000.
Auto sales in BRIC countries exceeded the US in 2008. The gap is only getting larger with annual sales over 20 million unit versus between 10-12 million in the US. PC unit sales in China increased 13.1% in 2009 versus 2.2% in the US. Income distribution is changing from low income to something more balanced across different income groups. In less than 5 years P&G sales to developed countries have increased from 23% to 32% of the firm total, an increase from $13 billion to $25 billion. Household debt to GDP in many of these countries is below the average for developed countries. The purchases of goods is for cash. If there is more consumer credit, product demand will show further increases.
If you want to call this a super cycle, go ahead. The tailwinds to higher commodity prices are strong.
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