Goldman’s commodity-equity team — as made famous by analyst Arjun Murti and his $200 oil call last year — is out with a new collaborative note. Unsurprisingly, it’s pretty bullish.
A choice extract (our emphasis):
We expect a commodity supply shortage in 2010 We have long emphasized that the commodity problem is, at heart, a supply shortage due to decades of suboptimal investment, which has been exacerbated over the past year by the sharp drop in prices and tight credit conditions. As the commodity markets rebound with the broader global economy we expect a redux of 2008 when severe supply constraints forced the rationing of demand through sharply higher prices to keep the markets balanced.
The note goes on to say they believe the imminent crunch will be so bad, governments will end up having to conduct coordinated policy responses, much like they did over the financial crisis.
As to what drives us to that scary predicament? Goldman believes two factors in particular will underpin the rally: underinvestment in production and plain old simple demographics.
Meanwhile, because governments have spent most of their time resolving global financial imbalances instead of focusing on the commodity crisis, the situation has actually got worse:
The financial crisis has exacerbated the supply problems In commodities, the opposite is true. In fact, the imbalances have actually worsened owing to the sharp drops in prices and tight credit conditions that have further impeded investment. In this context, it is important to emphasize that the commodity crisis is, at heart, a supply shortage. Although emerging market demand growth has been strong, the structural rise in prices that has been a key feature of commodity markets for the past several years would not have occurred if supply were sufficient. In reality, trend demand growth for many commodities has been slowing due to supply constraints that are restricting overall demand growth despite robust emerging market demand growth.
Higher prices, inevitably, say Goldman, will be needed to create demand destruction in developed markets to settle these imbalances.
Of course, there is a way to profit from the impending commodity crunch. Here, for example, are Goldman’s equity tips:
Our global Energy team has placed focus on ten ideas globally which benefit from a supply-constrained environment. Cairn India (India), Cameron (United States), CNOOC (China), Hess (USA), Lukoil (Russia), Petrobras (Brazil), Suncor Energy (Canada), StatoilHydro (Europe), Technip (Europe), and Weatherford (United States) are capable of showing multi-year organic growth potential led by investment in the BRICs plus Canada. These companies should also benefit from chronic underinvestment in countries like Iraq and Mexico.