Guest Post: Brian Finn From Brazil

04Aug10

A Little Rant About Metals

We have more or less forgotten about the metal industry in the US. Metals companies as a whole compromise almost 3% of total world market capitalization. However, most of these companies are domiciled in Australia and the UK. There are practically no major American mining companies left. Nor is America, the land where big steel began its life, home to any great steel or finished metal product companies. We have by and large let the rest of the world worry about mining and metals.

The fact is that it is easy to forget about metals. When is the last time you went shopping for a metric ton of zinc? You probably have never been a primary consumer of an alloy or metal in your entire life. However, practically every consumer item you have ever purchased contains some amount of metal or alloy that was mined somewhere in the world. Not only that but big things, things like apartments, roads, infrastructure in general require a ton of metal. When a country such as China goes from being an agrarian one to an industrial one, the most important input is metal.

While our media has us focused on other things, huge sweeping economic changes are occurring throughout the world with billions of people joining the industrial society and the relatively higher standards of living that that gives. The two most important input variables to bring about this transition are metals and oil. Hence when a country like China invests abroad to secure assets – it is not looking to buy software companies or manufacturers. It is after mining assets and oil fields. They know that without being fed a constant supply of metal and oil the whole game would be over.

The fact is that game isn’t over. Those guys are not close to getting to where they need to be as far as infrastructure and economic modernization is concerned. When that game finishes, it will be unto India, Indonesia, Latin America, Africa, everywhere else in the world where people are still scratching out a squalid existence using more or less the same infrastructure that they have had place for the last hundred years.

I say all this I suppose to justify my interest in this field and explain why I think at least from an investing perspective, there are few industries with better long run bull market characteristics. The last bull market in commodities happened in the 1960s/1970s when 70 million Europeans and Japanese entered the middle class. This current bull market is happening as roughly 2 billion people spread out across Asia and Latin America try to enter the middle class. Yes our technology is better to access different resources but the size of the upcoming demand will swamp whatever improvements we have made in acquisition methods.

If the economic crisis had not happened when it did, who knows where the price of oil and basic metals would be right now. The fact that oil and these other commodities came back so quickly illustrates that supply is not keeping up even with demand relatively tepid as it is. Once demand really ramps up, all commodity prices will shoot up. We are running out of stuff. People haven’t quite figured this out yet but we just wont be able to all enjoy a middle class lifestyle at current prices. Something will have to give.

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