- China will buy those commodities that it considers strategic (i.e. required to meet centralised growth plan) as well as those that it does not produce a lot of. Therefore, expect these commodities to trade at a premium (e.g. copper is required for infrastructure growth & China is a net importer).
- A suggested FX basket for playing commodities: NOK (oil), CLP (copper), AUD (iron ore) & BRL (oil, iron ore & aggregates).
- ZAR is not as much of a commodity play as other currencies since it is unable to increase its commodity exports.
- OECD industrial production (IP) is a good leading indicator for commodity demand. Expect IP to trough mid 2009.
- Excluding oil, China is consuming 20-30% of annual commodity production and its GDP is c. 10% of global GDP. China is therefore 'punching above its weight' in term of commodity consumption.
- Disagrees with peak oil theory since we are not yet at the point where there are no know exploitable oil fields.
- The marginal cost of production for oil is $70 bbl, driven by other commodity prices essential to extraction (e.g. steel, concrete...). When the prices of those commodities rise, so does the breakeven oil price.
- Having initially been a gold bear, he expects gold to average $1,000 in 2009 due to the sheer level of inflows into the commodity. Having initially benefited from risk aversion (see performance of gold versus TED spread or 2 year swap spreads), future performance likely to come from the inflation trade. However, he doesn't recommend buying gold yet, until scrap sales & risk appetite wane and jewelry demand increases. Ultimately, gold is a scarce asset and so only a small increase in demand is required for a large increase in price.
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