«This rally hasn’t even started yet,» Mr. Rozencwajg says. «Huge changes in investment flows are about to take place with large implications. Investors should use any pullback as an opportunity to increase their exposure,» Mr. Goehring adds.
Mr. Goehring, Mr. Rozencwajg, investments in the commodities sector are performing well in the current market environment. What are the prospects for the future?
Mr. Goehring: This will be the decade of shortages. For over thirteen years, huge amounts of the global economy have been starved of capital. Obviously, this trend was showing up first in the global oil and gas industry which is hugely capital intensive. Investments in these areas were cut back drastically, and two forces were responsible for that. One is that oil and gas prices on average declined almost 80% from peak to trough. In the US, oil prices went even severely negative. Prices got so low in many areas of the extractive industries that it made little sense to go forward with investment projects.
And what’s the second force?
Mr. Goehring: It was this erroneous belief that demand for oil and gas on a global basis would have entered into a steep decline by now. There was this view that 2019 was going to be the peak in global energy consumption, and fossil fuels were all going to be replaced by solar farms and wind farms. I make the case that we are further away from that than we have ever been. In many commodity markets, the underlying fundamentals are so strong that demand has confounded time and time again to the upside. And, because we cut back investments, we can’t satisfy that demand. That’s where we are today, and that’s what’s producing the shortages. They are showing up everywhere: There is a shortage of refining capacity, a shortage of coins in the US, a shortage of baby food. These types of shortages are going to pop up here and there. It’s going to be one of the great themes of this decade.
Whether it’s oil, natural gas, copper, uranium or grain: prices have already risen sharply in many areas. Is it even still worth getting in now?
Mr. Rozencwajg: We would argue that this rally hasn’t even started yet. For instance, the energy sector is still less than 4% of the S&P 500 versus 10% on average, and 30% as a high. So what’s going to change that? What’s going to make capital move and ultimately rush into the commodity space? We think an understanding that the era of the last forty years in terms of falling interest rates, low inflation, and rising stock and bond prices together, might be over, and that we are going to have to deal with persistent inflation.
However, fears are growing that the global economy is cooling down which could weaken demand for raw materials.
Mr. Goehring: I would say this is going to be short-term. Demand for commodities just surprised everyone tremendously over the last four to five years, and there is a specific reason why demand is coming in much stronger than most experts thought. Those forces are still massively at work. They are going to be at work for the entirety of this decade - and almost no one has it in their models.
What kind of forces do you mean?
Mr. Goehring: It’s the phenomenon that happens when a country goes through this notch from being poor, measured as $2,000 per capita GDP, to becoming a middle-income country, measured as $10,000 to $15,000 per capita GDP. In the post-World War II period from the early 1950s all the way to 2000, there were approximately 500 to 700 million people globally in that notch. When China entered that notch in 2000, it all of a sudden jumped to almost 2 billion people. Since then, Indonesia, the Philippines, Vietnam and Thailand have joined that notch phase. That’s another 600 million people. The huge wild card no one is focusing on is India. India has now reached exactly that stage where China was in the year 2000. And it’s beginning to exhibit the same characteristics that China did, especially in oil and natural gas consumption. And then, you also have Bangladesh and Pakistan. So in total, there are another 2 billion people potentially in this notch period.
