Construction In China Fuels Commodities Investing
2010 has been quite the year for commodities. No doubt you’ve seen the various headlines about soaring gold prices. You may have even seen how higher wheat and corn prices are impacting the price of groceries.
From a big picture perspective, the iPath Dow Jones-UBS Commodity Index ETN (DJP) is up almost 13% year to date. DJP holds a basket of 19 commodities weighted on market prices.
But DJP doesn’t do justice to the year we’re seeing in commodities.
In fact, a handful of individual commodities are having unbelievable years. Cotton is the year’s biggest winner, up a ridiculous 104% year to date. Some other headline grabbers are silver, up an amazing 74%, and corn, up a stellar 46%.
And those are just some of the flashy winners. There are over 15 major commodities with greater than 20% gains this year! That’s crazy.
No matter how you look at it, it’s been an incredible year for commodity investors.
Here’s the thing…
We’re just scratching the surface of where commodities can go.
You see, the incredible growth in China means commodities are only going higher.
Of course, it only makes sense. China’s growing economy is one of the primary reasons commodities are having a historically bullish year. It means there’s heavy demand for everything from energy to food, and even cloth.
Let’s dig a little deeper into China’s growth. I think there’s something interesting which isn’t getting much attention in the financial press.
China’s population is roughly 1.3 billion people. About 600 million of those people still live in the poorer, rural areas of the country. But as the economy improves, it’s the cities which are offering the better quality of life.
You know what that means…
Rural residents will be flocking to the cities. Over 300 million Chinese are expected to move to cities in the next two decades. That’s roughly the population of the United States!
Think about it… after years and years of living in substandard conditions, who wouldn’t want to improve their quality of life? Especially when it’s as easy as moving to the nearest urban center.
So what’s it mean for commodities?
Simple – more buildings.
And more buildings mean certain commodities are positioned for big gains.
The one construction related commodity which is getting a fair amount of press is copper. It’s up a solid 28% so far this year and is expected to go much higher. Copper is used in wiring and piping, which is why it’s so vital to the construction industry.
But, if you just focus on copper, you’re missing out on the bigger picture.
Think of everything that goes into a building. Beams, siding, wiring, piping, fixtures, roofing, and much more. Tons and tons of this stuff are going to be used as Chinese cities expand like crazy.
Here’s my point… copper is just one of many products needed in buildings. There are several other industrial metals used in construction, and of course, there’s lumber.
Imagine how much lumber will be used in the next couple decades. It’s already up 47% this year… and no reason it can’t go even higher.
And then there are the industrial metals.
I’ve mentioned copper already, but several other industrial metals are key ingredients in the construction industry.
Tin is important for its use in soldering. It’s soared nearly 60% higher already this year. What’s more, nickel – used mostly as an alloy – is up 28% year to date.
On the other hand, aluminum and lead have yet to participate in the commodity rally. Aluminum has many uses in construction including siding, wiring, and piping. Lead isn’t as common, but can be used for siding, fixtures, and gutters. Aluminum is only up 4% this year, while lead is actually down 3%.
Here’s the bottom line… I think they’re all going up.
Whether you pick a lower performer like aluminum or a high flyer like lumber – they’re all necessary fuels for the Chinese construction boom.
Millions of rural Chinese are moving to the cities. The fact is, those people are going to need places to live, work, and shop. That means more buildings… and lots of them. Demand for construction materials can only go higher. Consider adding commodities to your portfolio, I see only strong moves ahead.
Category: Commodities
