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Asian-led boom in commodities still has a long way to go

by Wayne Cheveldayoff, 2005-05-26

The Asian-led demand for commodities and resulting surge in Canadian resource stocks has been good for Canadian investors in recent years but are the recent pullbacks in oil and metals prices signaling the end of the commodities boom?

No, say two mutual fund managers with the Guardian Group of Funds (GGOF).

Their main message in a recent conference call was that while there may be some ups and downs along the way, “the long-term trend is inexorably for continued increases in demand for most raw materials from Asia as income levels increase and consumption patterns change.”

Backing up this view of the boom continuing, Guardian recently created two mutual funds to take advantage of it – the GGOF Resource Fund and the GGOF Asian Growth and Income Fund.

Paul Matthews, the San Francisco-based lead manager of the GGOF Asian Growth and Income Fund, observed during the call that growth patterns in Asia importantly are shifting somewhat from the export manufacturing-led model to one that calls for greater domestic consumption.

In China, for instance, in 1985 there were “only six refrigerators for 100 urban households. That number is close to 100 now.” Similar gains have been seen for color TVs and more recently computers and cell phones, said Mr. Matthews, who is chairman and founder of Matthews International Capital Management.

“But the big markets that China is only just starting to tap are for hard goods like automobiles, where only two households in 100 drives a car.”

As an illustration of how China is changing in less predictable ways, Mr. Matthews noted that some years ago “it was commonly assumed that people in China would not take to dairy products and they would not buy life insurance and those today are two of the fastest growing markets in China.

“Milk, for example has seen demand growth from under two kilograms per capita per annum just five years ago to closer to eight kilograms per capita per annum today. Everywhere you go in China, you see billboards with astronauts advertising the nutritional benefits of dairy product.

“So these kinds of changing consumer patterns, I think, are a 10-year story and one of the long-term areas where we see particular growth will be in personal transportation in China. It won’t be a smooth line, just as real estate privatization and growth has not been a smooth line. We expect significant ups and downs but we do think that over the next 10 or 20 years, we will see significantly more use of private cars by individuals in China and, of course, in India and in the smaller Asian economies.”

This, of course, will mean a growing demand for petroleum products and metals of all kinds in the context of a world where supply is constrained for the time being for a variety of reasons and it could take another four or five years before sufficient additional supply can be brought on.

Wally Kusters, who is a managing director and lead equity manager at Barrantagh Investment Management in Toronto and co-manager of the GGOF Resource Fund, believes supply will not catch up to demand for some time because resource companies haven’t been investing enough.

The managers of oil and gas companies, for example, have been more geared to drive up their returns rather than spend capital necessary to bring on new reserves, he said. And there have been other types of supply constraints, such as public resistance to the building of liquid natural gas facilities and protracted negotiations related to the Mackenzie Valley pipeline.

While there is a lot of oil and gas reserves in the world, he said, it will take higher prices to access them as commodity prices are geared to the extraction costs of the marginal producers involved in unconventional plays like coal bed methane or deep, tight natural gas.

In the metals area, he noted that nickel is a key component in stainless steel, which is in big demand in Asia, but nickel deposits take a long time to develop and bring on stream.

The GGOF resource fund, he said, invests not only in resource companies but in companies that service them, like drilling and machinery companies, or those providing transportation, like railways.

Wayne Cheveldayoff is a former investment advisor and professional financial planner. He is currently specializing in financial communications and investor relations at Wertheim + Co. in Toronto. His columns are archived at and he can be contacted at

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©2005 Wayne Cheveldayoff