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Walter Molano | Asia: The ongoing super cycle

Published:Friday | July 24, 2015 | 7:00 AM

Several commentators are bemoaning the end of the commodity supercycle as the Chinese economy loses its rhythm.

Although China is not growing as fast as it was in the past, its contribution to global GDP, due to the effects of compounding, is higher now than it was a decade ago when it was expanding at a double-digit rate.

Given its immense population, the impact that it has on global resources is staggering. To put things in perspective, during the 1990s, the average annual demand for cars in the United States (US) was 14.5 million units. This year, it will be 17 million units. That represents an increase of 15 per cent in a 25-year period.

China sold 430,000 units during the 1990s. This year, car sales are expected to be 19.6 million units. That represents an increase of 4,465 per cent during the same time period. However, the Chinese are just scratching the surface. Total car penetration in the US is 809 units per thousand inhabitants. China's is 101.

In other words, the US has eight times more cars per thousand persons than China. At the same time, Venezuela has 147 automobiles per thousand persons. Chile has 230 and Brazil has 249. Japan has 588 and Canada has 607. Although automobiles do not consume all of the oil that the US uses, transportation accounts for 70 per cent of total demand. Therefore, we can assume that Chinese oil consumption can only go up.

Many commentators talk about how China is overtaking the US in total oil imports. Unfortunately, this does not mean much. The US is a top-three oil producer, while China needs to import most of its energy needs.

The US consumes about 20 million barrels of oil per day, while China uses about 10 million barrels per day. This suggests that if China had as many cars per thousand inhabitants as Brazil, a relatively poor country, then its total consumption of oil would be higher than the US. With the North American superpower using slightly less than a quarter of the world's total oil output, these two countries would use up half of global production.

Should the Chinese use as much oil per capita as the US, it would consume almost 90 per cent of total output. In other words, there would not be enough oil for anyone else. This is the reason why the Chinese insist on bailing out rogue countries, such as Venezuela, Ecuador and Argentina. It is not for ideological or geopolitical reasons.

Had that been the case, Beijing would have been extending a lifeline to the Reds in Greece. It did so to secure a continuous supply of energy, from three very important sources of hydrocarbons. Therefore, thank God that alternative energy sources are appearing on the horizon. Let them become an important source of fuel, because at the current pace, there will not be enough oil on the planet to prevent some sort of military struggle.

The situation becomes even more interesting when we expand the analysis to India. Demographics are pushing it to become the next global giant. China's one-child rule is having a major impact on the economy.

As the number of new workers arriving from the cities and countryside taper off, wages are rising. Not only did China become more affluent, allowing it to purchase additional tangible assets, such as cars, it became less competitive.

Still, the global consumer is addicted to cheap products. Right now, Vietnam, the Philippines and Indonesia are filling the void, but a new labour force is about to be unleashed on the global stage. India does not have demographic constraints. On the contrary, New Delhi never restricted the size of families. Given the deep poverty that depicts the country, children are seen as assets instead of liabilities.

In poor countries, children are future workhands for farms and shops. They represent additional government benefits, or they are more hands to beg and rob. There is an income level, which varies by country, where children become liabilities. They need to be educated. They are not allowed to work. They are pampered.

China already crossed the threshold. Beijing's recent relax-ation of the one-child rule did not change the demographic trend. However, India remains poor and the size of the population continues to expand geometrically.

By the end of 2050, India's population may be 40 per cent larger than China's. This will eventually convert India into the next factory of the world. As a result, consumption will rise as Indian wages improve.

With only 16 cars per 1,000 inhabitants, the future strain on global commodity resources will be tremendous. During the 1990's India sold 310,000 cars per year. This year, it will be slightly below two million units, even though it has a similar population size as China.

It is fairly evident we are still in the midst of the commodity supercycle. We just took a pause as the Saudi's slashed oil prices to regain market share.

Dr Walter T. Molano is a managing partner and the head of research at BCP Securities LLC.

wmolano@bcpsecurities.com