21/09/2011 - 09:06

7 billion - that’s why the boom continues

21/09/2011 - 09:06

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Softening global commodity demand is this month’s worry. Next month there will be “seven billion reminders” as to why the resource boom will run for decades.

October 31, according to the United Nations, is the day the world welcomes its seven billionth person – with another billion expected to be added in the next 13 years.

Much will be written about over-population by sociologists and demographers when the UN officially declares the arrival of person number seven billion. There will also be critics who ask how anyone can calculate the exact population of the earth.

Investors, however, will interpret the numbers in a different way because more people equals more consumption of resources, and that’s when the human desire to breed bumps directly into the natural barriers of geology, and the availability of fertile farm land.

Before looking in a little more detail at global population it is worth considering what happened overnight when the big miner, Rio Tinto, added its weight to warnings about a slowdown in minerals demand.

“It is noticeable that markets are somewhat weaker,” said Rio boss, Tom Albanese in an interview in London. “In a few cases, customers are asking to reschedule deliveries. This is consistent with customers being cautious about the current state of business.”

Other miners and commodity trading firms have reported similar conditions. Cargill, a food industry specialist, has warned the global growth is weak and weakening. The price of the bellwether metal, copper, has dropped 11% in just three weeks.

Important as the warning from Albanese is, and worrying as the prices falls might be, the reality is that we are looking at two events.

The first is a short-term adjustment to slower global growth as Europe stumbles into the next phase of its debt crisis.

The second is the long-term transfer of wealth from the western world to the east, where most of the rapid population growth is occurring.

China and India alone already account for about 35% of the global population and both are determined to lift the living standards of their collective 2.5 billion people.

That’s why demand for Australia’s food, fibre and minerals might hit the odd speed-bump but the long-term direction is up, for tonnage and price.

Person number seven billion will want to be fed, clothed and housed, like everyone else on the planet, and that’s where the ability of the earth to satisfy his/her needs becomes a serious question.

Geologically, there is a finite amount of material in the earth’s crust that can be usefully used. The price mechanism liberates more of a resource as demand rises, a process seen in rising (not falling) oil production.

But, eventually the available volumes of a particular commodity hit a wall of supply caused either by limits to land access (over-population, environmental pollution), or a sky-high price which deadens demand.

The arrival of person number seven billion will also focus on how quickly the world population has been growing over the past 100 years: 1.3 billion in 1900, 2.5 billion in 1950, 4.5 billion in 1980, 6.3 billion in 2003, and 7 billion in 2011.

The upward trend continues, and so long as people can afford to buy Australia’s commodities (and that is a reasonable question to consider) then the resources boom will gather pace, with or without Europe participating, thanks to the spread of urbanisation in Asia.

By 2018 the world is expected to welcome person number 7.5 billion, with the 8 billion mark clocked sometime around 2024.

The great Austrian economist, Joseph Schumpeter, made his name with a theory about economic waves of differing times dictating the business cycle. The shortest is said to last four years, the longest 54 years.

What we’re seeing today is an example of a short and long-term wave. Albanese and others are watching short-term demand fall away as Europe stumbles, while other observers are watching the long-term population wave which will underwrite resources demand for decades.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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