We have to change towards a low-carbon society. The problem with carbon
dioxide is: we don’t smell it, we don’t see it, it is colorless, tasteless and invisible.
Al Gore — Speech at the Paul Scherrer Institute, Switzerland, 21 June 2010.

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Commodity Cycles — Past and Present

In August 1998, John Wiley & Sons, New York published my first book on com­modities called Profits from Natural Resources. Oil was trading at $10 a barrel, nobody was paying attention to natural resources, and the high-tech bubble was in full swing. Every investor jumped on the bandwagon of the Internet and computer stocks like Microsoft, Yahoo, Oracle, and Amazon. In those days Amazon was trading at $5 a share — in August 2012 it was trading at $230 a share (and by owning Amazon stock for 10 years you would have enjoyed a few stock splits on the way up as well)! At the beginning of the first decade of this century very few people were seriously investing in the basic resources of our world. Although my timing was a little ahead of what was going to unfold, the analysis of the book (i. e. the coming commodity boom) was 100% correct.

This book is not about speculation. This is not another commodity book about trading techniques in gold, silver, or copper. This book is not about exchange — traded funds (ETFs), leverage, selling short, or high-frequency trading. This book is a guide to liquid renewable energies called second-generation biofuels and solid biomass. I think this is one of the best investments you can make today. Such an investment is "early stage.” It is like buying Microsoft at $5 a share. However, those investors who have the vision and the courage to get in early will reap the biggest benefits.

Before we dig into the subject of this book, I first need to give you the big picture of the commodity world. I shall give you the top-down view of the global com­modity world before we make our feet wet in biofuels and biomass.

It is essential to understand that natural resources are raw materials. It is only after their transformation from raw to a pure material that they can be used in

Second Generation Biofuels and Biomass: Essential Guide for Investors, Scientists and Decision Makers, First Edition. Roland A. Jansen. r 2013 Wiley-VCH Verlag GmbH & Co. KGaA.

Published 2013 by Wiley-VCH Verlag GmbH & Co. KGaA.

industrial or consumer products. Depending on the sector, the resources we col­lect from Mother Earth first need to be found, then undergo one or more of processes like pumping, refining, drilling, harvesting, melting, roasting, drying, crushing, spinning, pressing, recycling, and condensing. In addition, the finished goods need to be transported and stored safely to become valuable basic materials. Raw materials are called “commodities” when they are traded uniformly in bulk, in large quantities. Wheat is a commodity, but diamonds are not. Is water a commodity? Some people say yes, other people say no. Open for debate!

This transformation of a raw material into a pure basic material can take many years. With the exception of fast-growing staple goods like soybeans, sugarcane, and wheat, so-called natural commodity cycles are long cycles. For instance, it takes 5 years to grow a coffee tree and 7 years for a rubber tree before we can collect the latex. Oil in the North Sea was found in 1967 and it was only in 1977 that you could fill up your tank at the gas station with North Sea gasoline. Thus, it takes years and huge investments before additional supplies of commodities become available, and sometimes billions of dollars are invested just to keep the present supply intact or to bring new supplies on stream with very meager results. This is case today with copper and oil.

However, there is one big difference from all the previous cycles: all the three super-cycles in the twentieth century were caused by supply constraints. Com­modity shocks like the Middle East oil embargo in 1973 and the Great Grain Drought in the Ukraine in 1972 were typically problems in the supply chain. This time, however, we not only have supply bottlenecks, but additionally we are wit­nessing a huge new demand from new markets. In Asia, the demand for raw materials is growing exponentially. Thus, I think this super-cycle will be very powerful in nature. Not only Asian countries, but also the United States, Brazil, India, and other large economies are experiencing rapid growth that is fuelling demand for all sorts of commodities. Energy is needed to drive growth, whereas metals and other basic materials form the inputs for what has been an explosion in infrastructure investments.

Imagine there is a lack of semiconductors in this world. We can go to India or China, build a factory, buy machines and robots, hire software and production people, and within 2 years we can produce as many semiconductors as the market can absorb. With raw materials it is a whole different story — the supply cycles of many commodities are very long, and at the same time the global demand for raw materials is exploding with rapid developing economies in China, India, and Brazil.

The global shortage of raw materials might not be resolved for some years also because of infrastructure bottlenecks and the long lead-time needed for new natural resources projects. A lack of investments in ports, in particular in Australia and Africa, is holding back imports and exports of important commodities such as iron ore and coking coal. If you go to cities like Singapore or Shanghai you can witness hundreds of ships waiting to unload or load cargo. A good example is steel. The current global bottleneck in the steel industry had its roots in the 1980s when the last commodity bull cycle ended and the former Soviet bloc economies opened

up to the West, making available extra capacity that took years to absorb. Since that time we have had 25 years of deflation, disinvestment, and lack of investments in drilling and mining. Now this oversupply of commodities has been consumed and absorbed. We are currently in a general supply squeeze, demand is booming, and it will take a decade before a sufficient supply of commodities or alternative energies comes on stream.

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