Demand will push commodity prices up, says analyst

SAN ANTONIO, Texas — There are three themes a person needs to know to understand the current state of the global economy, says a commentator on the topic.

The first is that China overdid it.

“China underwent an investment bubble that has burst,” said Vikram Mansharamani, who topped LinkedIn’s list of 10 Top Voices in Money and Finance for 2015.

“It’s over. They overbuilt.”

China has too much capacity, which means slumping demand for many commodities, considering it consumes 60 percent of the world’s concrete, 48 percent of its copper and 54 percent of its aluminum production.

China consumed more concrete between 2005 and 2015 than North America did between 1900 and 2000.

Half of China’s airports are operating at 50 percent or less capacity.

The slowdown in demand has depressed most commodity prices and is wreaking havoc with currencies around the world.

The second theme is that technological innovation is making the global oversupply situation worse. Manufacturers are able to produce more with fewer inputs.

Uber, the world’s most valuable transportation company, doesn’t own one car.

Airbnb, the world’s most valuable lodging company, doesn’t own one hotel room.

Facebook, the world’s most valuable media company, doesn’t produce any content.

Companies are able to add to the supply of goods and services with very little cost through technological innovation. It would all be very depressing if it weren’t for the third theme, which is the population boom that is occurring in India and Africa, two of the world’s fastest growing economies.

The average woman in Africa will have 4.4 children in her lifetime, which is more than double the 2.1 needed to sustain a population.

“Africa is about to explode from a population perspective,” Mansharamani told delegates attending Bayer’s AgVocacy Forum.

In Nigeria, 540 babies are born every hour. The country the size of Texas is forecast to be home to one billion people by the end of the century.

Rapidly expanding populations in two regions of the world with rapidly growing economies will result in an “exploding middle class,” which means more meat and grain consumption.

“Fundamentally we’re going to see a demand shock that results in higher prices for food,” he said.

That in turn will lead to food riots in countries like Nigeria, the Philippines, Pakistan, Vietnam and Indonesia, where people spend more of their income on food than anywhere else in the world.

For instance, the average person in Pakistan earns around $100 per month, 41 percent of which goes to food. If food prices rise 25 percent, that means $10 has to come out of somewhere else in the budget, but there is no extra money.

“Fundamentally that results in people taking to the streets,” said Mansharamani.

There is a risk that productivity in the agriculture sector will grow faster than demand, but he thinks that is unlikely, especially considering every one percent increase in temperature brought on by climate change will reduce yields by 10 percent.

The other reason for his optimism about rising commodity prices is that China is spending US$1 trillion rebuilding the Silk Road.

“It’s conceivable we start seeing a whole commodity boom 2.0 coming back,” said Mansharamani.

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