China Demand WIll Continue to Drive Commodities Bull Market
Commodities / Resources Investing Sep 02, 2008 - 07:18 PM GMT
Tony Sagami writes: When I am in Asia, I'll talk to anyone I think can help me find the next home run stock. I have often learned a great deal by talking to bellmen, taxi drivers, sales clerks, or the lone diner at the table next to me. And some of the most useful information I've ever gathered comes when (and where) I least expect it.
The latest example of this came during my recent trip to Beijing, where I spent a Sunday walking the Mutinayu section of the Great Wall of China.
Most travelers to Beijing go to the much-closer Badaling section of the Great Wall, but I drove an extra hour to Mutinayu to avoid the crowds.
Walking the Great Wall is truly one of the most memorable experiences of my life and is a must-do for anyone traveling to China.
A lot of other people feel the same way, I guess. Because even though the crowds were smaller at Mutinayu, I ran into two people I would have never expected: NBA all-star and Olympic basketball team member Dwayne Wade and an American investment banker from one of the big, household-name Wall Street firms.
I only took a picture of Wade and didn't talk to him. But I did have a whopper of a conversation with the investment banker. What did I learn from him?
The Bull Market for Commodities Still Has a Long, Long Ways to Go ...
Here is my condensed version of our conversation:
Me: You guys must be making a killing from the steady stream of Chinese companies going public. Do you expect the IPO pipeline to dry up?
Investment Banker: I don't work in the division that takes companies public. I work on the M&A (mergers and acquisition) side. My job is helping Chinese companies buy other companies, mainly foreign.
Me: You mean like Aluminum Corporation of China's (Chalco) attempt to buy Rio Tinto or Sino Steel's hostile takeover of Midwest Corp.?
IB: Exactly. My firm actually represented BHP Billiton on the Rio Tinto deal.
Me: There seems to be a pattern to what sort of companies the Chinese are buying. They almost all seem to be designed to help China secure the strategic materials — mainly natural resources — that it needs to fuel its economic growth ambition.
IB: Absolutely. We have marching orders to scour the globe for natural resource acquisitions. Copper, alumina, bauxite, iron ore, oil, natural gas ... you name it. China wants it and has the money to do it.
Me: How big of a scale are you talking about and how long do you think this spending spree will last?
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| China's demand for natural resources shows no sign of slowing ... |
IB: Trillions of dollars and for decades.
Though this investment banker didn't give me any inside tips on the next takeover target, he did confirm the depth, scale, and Chinese lust for natural resources.
In the process, he also confirmed my number one rule for making money over the next decade, which is ...
Get 'Long' Whatever the Chinese Are Buying!
In past issues, I've talked about the Chuppies (Chinese yuppies) and their spending spree for Louis Vuitton purses, sea eel pizza, electronic doodads, and gambling junkets to Macau.
But as the investment banker told me, an even bigger spending spree for natural resources is unfolding. And the one commodity the Chinese need more than any other is oil.
Last week, the U.S. Department of Energy released some stunning numbers about OPEC. In just the first six months of 2008 alone, OPEC countries sold $645 billion of oil. That almost matches the then-record $671 billion that OPEC pulled in for all of 2007.
With oil stuck over $100 a barrel, those numbers didn't surprise me at all. What did surprise me was another statistic that I found buried deep in the report.
The surprise was that the percentage of business that OPEC gets from China increased from 4% in 1999 to 11% today. At the same time, the percentage of revenue from the U.S. decreased from 12% to 7.5%.
Heck, China is spending so much money on oil that you can bet it has a few oil targets in its sights already. Do you remember China National Offshore Oil Corporation's (CNOOC) failed $18.5-billion takeover attempt of Unocal in 2005?
While I don't know who China has its sights set on, I am very confident that it is only a matter of time before another deal happens.
What's this mean to you as an investor?
First, it means that natural resource prices are going to stay high and likely go even higher.
Second, it means you need to make sure your portfolio includes a stake in natural resource. One of my favorite ways to do that is by investing alongside Li Ka Shing, the Warren Buffet of Asia, who owns Husky Energy (look at it the next time the stock goes on sale).
Third, it means that the business of transporting natural resources to China is going to be very lucrative. My Asia Stock Alert subscribers already own a dry bulk shipper that is making a fortune as well as paying out a 6% dividend.
And whatever you do, keep your eyes on China because they (along with India) are driving the commodity markets.
Best wishes,
Tony
P.S. Before I leave China, I will be sending my Asia Stock Alert subscribers my #1 recommendation. Not only will I name the company, and give all the important background details ... I'll also provide specific trading instructions.
If you're not a subscriber, sign up now for a risk-free trial to Asia Stock Alert . If you subscribe by 3 pm on September 12, you'll get my new China recommendation the minute I fire it off, plus you'll be able to immediately download six special reports on other great Asian stocks. Click here for all the details.
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