If we learnt one thing from the 2008 stock market crash it’s that all asset prices can fall, regardless of the market fundamentals.
Leading up to 2008, many thought companies that dealt in hard assets (commodities such as iron ore, gold and copper) would be immune from price falls.
Why?
Because they owned the rights to tangible assets. The copper would still be in the ground…it wouldn’t suddenly disappear, and therefore these stocks would be safe.
What they forgot is that iron ore, gold and copper in the ground isn’t the same as iron ore, gold and copper in your hand.
To dig up those resources, a mining firm needs another kind of resource – money. And when markets crash (especially in a credit crunch where it’s harder to borrow money), money is harder to come by.
So, with the market hitting the skids and some analysts (including our own Slipstream Trader, Murray Dawes) predicting further big falls for the Aussie market, is there a resources ‘safe haven’ investors can rely on?
We think there is, and we’ll explain why now…
Now, before we go on, let’s make one thing clear. The resource investment we’ll mention isn’t immune from price falls either.
In fact, some of the stocks we’ve looked at have already fallen by double-digit percentages in recent weeks. And they could fall further.
No. When we talk about a ‘safe haven’ we’re talking about the fundamentals of the commodity rather than the price action of the commodity.
It’s a commodity that we believe will still be in demand even when the Chinese economy comes to a grinding halt. And even if another major economy doesn’t replace China’s huge demand for resources.
So, does such a resource even exist?
After all, you’ve probably read the stories about how China consumes 70% of the world’s concrete, 60% of the world’s coal and iron ore, and 40% of the world’s copper.
Yet, such a resource does exist. In fact, there are two of them.
As the following chart shows:
You’ll notice the two bars on the right of the chart – oil and natural gas. As of 2009, China’s share of world demand was 10% and 4% respectively.
Yes, the figures have grown since 2002. But they’re still small compared to total world consumption.
So where a collapse in demand for iron ore and metallurgical coal will see prices slump and funding for coal and iron ore explorers dry up, a collapse in China’s demand for oil and gas should have a much lesser impact on oil and gas prices and demand.
Again, we’re not saying there won’t be an impact. What we’re saying is, even after a Chinese economic collapse there will still be a big demand for oil and gas. That’s not something you can say about commodities like iron ore and copper.
We mean, who will take up the slack when China stops buying iron ore? Who will take up the slack when China stops buying copper…or aluminium?
If China’s iron ore demand slips back to 2002 levels, you can say goodbye to the iron ore explorers and producers. Especially firms that have borrowed big, like Fortescue Metals [ASX: FMG].
So your guess is as good as ours on who will replace China as the dominant market for bulk metals. What about India? We’re not convinced, but we guess it’s possible.
The way we look at it, the problem with bulk metals is the lack of innovation. Maybe if we saw a change like in the late 19th century when steel pushed aside iron in the building industry, then we may see a good future for bulk metals.
But we don’t.
Compare that to the innovation you see in the energy markets. Take this story from Bloomberg News as an example:
‘Shell’s plan to spend $250 million on an LNG plant and a string of filling stations is the biggest single investment yet in making frozen gas a transport fuel, a shift advocated by proponents of energy independence including billionaire investor T. Boone Pickens. Switching engines to run on LNG is becoming economic because a glut of fuel from North America’s shale rocks has made the U.S. the world’s largest natural-gas producer and forced prices to record discounts versus crude oil.’
The outlook for natural gas is even stronger thanks to new technology in the energy industry.
The US shale gas revolution has set the US on the path to energy independence. Now that there’s proof the technology and recovery methods work, the pattern of energy independence is set to spread world-wide.
When the Chinese economy finally implodes (it’s on the way), the last place you’ll want to have your money is in bulk metals.
As we say, energy stocks will take a hit too. But if you want a resource that has the best chance of recovering early and marking up big gains as the world adjusts to a post-China global economy, the best place to bet is the energy market…
And especially natural gas.
Cheers,
Kris.
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