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Buy when investors panic - Jim Rogers
Lucas de Lange
Posted: Fri, 30 Jun 2006
[miningmx.com] -- "WHEN China sneezes the rest of the world will be reaching for aspirin." - Jim Rogers, well-known international investor and creator of the Rogers International Commodities Index.
That the visit to South Africa and six other African nations by Chinese Prime Minister Wen Jiabao last week revolves around the continent's commodities, which are so essential for China's continued rapid growth, is clear to all. The question that worries investors is whether the current downturn in commodity prices will develop into a bear market or not.
Jim Rogers, well-known market player who has made a thorough study of long-term commodity trends, is convinced that commodities are in an extended bull market, since there's been far too little investment in new capacity for a long time.
The bull market is strongly supported by the emergence of China, but here Rogers expressed a warning: investors must understand that China is undergoing a historic transformation. "Mix a massive amount of new market capitalism into a centrally controlled Communist system and you generate enough confusion and inexperience for a hard landing or two."
He added that when the Chinese political and economic shocks come, they'd set off waves worldwide.
China has an enormous need for commodities and the extent to which it already affects market sentiment is shown by the fact that when the Chinese premier on occasion mentioned that its economy must be slowed down to control inflation, it immediately resulted in price declines in several commodities (including gold), as well as on stock markets.
Click on image to enlarge
Rogers's research shows that so much of an imbalance developed between supply and demand due to the many years of insufficient investment in production capacity on the one hand and a world that's growing on the other that it's now possible to talk of a "historic bull market" that could continue until at least 2015.
The real money making opportunities will come when China experiences problems and prices fall. Many investors will panic. That's when "you and I must buy more", Rogers concluded.
The Chinese premier's visit to Africa follows visits earlier this year by the country's Minister of Foreign Affairs and by President Hu Jintao. That means that they've visited 15 African states so far this year, resulting in the signing of a number of agreements on the provision of oil and other commodities.
Their visits contrast sharply with China's activities in Africa in the Sixties and Seventies, when it followed a political agenda of supporting rebel groups. With the current visit, development aid and loans are being granted - almost in every instance linked with Africa's minerals and other resources. China has already overtaken Britain as Africa's third-largest trading partner, following the US and France. According to official Chinese statistics, two-way trade rose by 35% last year to just under US$40bn (R280bn).
China's reportedly already involved in up to 1 000 projects in Africa, including southern Africa. In fact, last week Jiabao officially opened a new highway in Ghana that had been built with a "soft" loan of $28m (about R200m). The highway opens an entire trading area, since it links Mali, Niger and Burkina Faso with Accra, Ghana's chief port.
Apart from that loan, Jiabao also pledged further development loans valued at $66m (R460m) to Ghana. There was apparently also talk of financing a hydroelectric scheme of $600m (R4,2bn).
But it's in Angola and Nigeria where it's prepared to make really big investments due to their oil resources. For example, in Angola's case credit of $3bn (R21bn) was made available to develop the country's infrastructure. In Nigeria, China bought an interest in an oil bloc for $2,7bn (R19bn) and apparently made $4bn (R28bn) available for four oil exploration licences. Africa already provides nearly one-third of China's oil imports.
Even the serious problems in Zimbabwe haven't put it off, and the Chinese Development Bank has apparently already promised the country a loan. Earlier transactions valued at $1,3bn (R9,1bn) were announced in terms of which a Chinese company and two Zimbabwean firms will develop coalmines and three thermal power stations.
Chinese companies also hope to become involved in exploration for uranium deposits in Zimbabwe. Energy is one of China's major headaches, and nuclear power stations are seen by Beijing as an important source in the future.
China has enormous financial resources. For example, its reserves currently total almost $880bn and those of Hong Kong (which is given separately, though it falls under the control of Beijing) nearly $160bn. Its state-controlled companies can take risks in Africa that private companies would avoid.
In which commodities must one invest to derive the greatest benefit from the boom, which, says Rogers, could continue until 2015? He believes in a broad spread, such as a unit trust that he formed based on the Rogers International Commodities Index, which consists of 35 different commodities.
For SA investors who want to invest directly, there are especially two international groups that show good promise: BHP Billiton, which has been described as a group with raw materials that fit China like a glove; and, to a lesser extent, that old stalwart Anglo American.
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