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Thursday, October 12, 2006

Commodities Demand Is Growing But So Is Supply

By Yaser Anwar, CSC of Equity Investment Ideas

Investors constantly hear that comparing the current emerging market/commodity environment to the technology boom is not fair. Demand is growing but supply isn't standing still.

The argument for BRIC growth of China, India, and other emerging economies is putting “demand stress” on energy and commodity supplies, as if there will not be any capacity response.

On the contrary, I would point out that the Saudis expect to bring oil production up to 14 million barrels per day by 09, according to published reports, to add some excess capacity to the markets, and that the Canadian tar sands could see another 2.0 mbd of output added within five years.

The recent Chevron find in the Gulf of Mexico could be brought on line within three to four years.

In addition, investors should understand that iron ore production is climbing in Australia, as new steel plants continue to be built in China. Investors should realize that it’s not as if everything on the supply side is standing still.

At the same time, second half of 06 production cuts by the automakers should affect steel, aluminum, glass, and rubber demand, along with demand for chemicals.

Weakness in housing activity will likely trim demand for lumber, as well as for light construction equipment, which in turn hurts industrial production and steel demand.

While many perceive electricity demand to simply be a function of ongoing residential use, most electricity demand is driven by commercial and industrial users.

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