Investors know what is driving the resource boom: growing demand from China and India as well as restraints on increasing supply. However, what most investors have not quite grasped is the sheer enormity of these drivers. Often our under­standing tends to lag behind reality; how many of us could think, for example, 15 years ago that e-mails or social networks like Facebook would become such dominant factors in the way we communicate?

Likewise, prices of most resources will go higher and for longer than most investors currently imagine. The key is per capita demand. China currently con­sumes just less than 4 kg of copper per person per year; Japan, Germany, and other industrialized countries each consume 12-14 kg. Take oil: as you can see in Figure 1.7, the USA currently consumes around 21 million barrels of crude oil per day and China around 6 million barrels. If we compare the consumption per capita in each country, the average American citizen consumes around 27 barrels a year, industrialized countries from Korea, Japan to Europe around 17 barrels and a Chinese citizen 2.7 barrels per year.

Significantly, the pattern of demand growth in all these countries has been remarkably similar: from very low starts, slow appreciation as the economy starts to industrialize until a “takeoff” point is reached; this is then followed by rapid acceleration that lasts a decade or more until the economy matures and per capita consumption levels off.

The pattern has been the same, for country after country, in resource after resource. What is significant about China, of course, is the scale; there are an awful lot of capita’s in that country — about 20% of the world’s population — and they all want the same things we take for granted in the industrialized countries (better housing, electricity, automobiles, stoves, refrigerators, etc.). All of these things require resources and far more than what they replace. Increasingly, not only do the Chinese people want these things, but also more and more Chinese

citizens are moving up the middle-class ladder and have the financial means. China today is right at the cusp of that take-off point when per capita consumption starts to accelerate.

Now, China will not necessarily move to the industrialized world norm in the consumption of various resources. It may use less oil per person than other countries, for example. It uses more coal for power and plans on using more nuclear power; there may be increased efficiencies and more viable "green” alternatives. However, China’s consumption of oil and other resources will increase; in 2010, it became the world’s number one oil consumer. It may not reach the industrialized world norm, but it will approach it. Even at one-third the industrialized norm of oil consumption, this would mean a doubling of China’s per capita demand. Similarly, with copper: perhaps China will eventually use only half as much copper as other industrialized economies. That would mean a 50% increase in per capita consumption — remember, again, we are talking about per capita consumption. China is already the top consumer in absolute numbers for most commodities.

Thus, based on history, there is enormous potential left and we are only at the end of the beginning. Many commentators are concerned about the effect China’s tightening policy will have on the economy and demand for resources. However, even if China’s growth slows from 9 to 5%, that would still imply a dramatic and continuing increase in demand for resources, and for many resources today there is no meaningful inventory.

I am not suggesting that there cannot be a slowdown in China’s economic growth. I am suggesting that, unless China’s development comes to a halt, the demand for resources will accelerate over the next 5-10 years and there is nothing on the horizon now to suggest that that demand can be met without higher prices. The biggest problems in China are the discrepancy between the incomes in rural areas and in coastal zones. Inflation keeps creeping up and it remains an open question if the Chinese government will be able to keep inflation in check, and thus domestic stability. China is a "leading indicator” in commodities. Unrest in China and a declining Chinese demand will have profound affects on world trade and commodity demand.

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