It's a great time to be invested in energy metals, says Chris Berry, president and founder of House Mountain Partners. The current worldwide desire for a higher quality of life is a trend that will continue, argues Berry. In this interview with The Energy Report, Berry highlights the amount of research and development underway in the tech and energy sectors and why it spells a bullish message for lithium, graphite and uranium.
The Energy Report: Please tell our readers about TIMBIs and CIVETS and their expected contributions to global gross domestic product (GDP) growth over the next five years and beyond.
Chris Berry: About 10 years ago, Jim O'Neill from Goldman Sachs coined the term BRICs: Brazil, Russia, India and China, referring to major emerging markets that will drive above-trend global growth. Since then, other acronyms have emerged as investors hunt for other countries offering higher returns. Not long ago, HSBC coined the phrase "CIVETS" to refer to Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa. Recently, the magazine Foreign Policy created an acronym for Turkey, India, Mexico, Brazil and Indonesia, now referred to as the TIMBIs. Clearly, investors are looking for additional avenues of growth aside from the BRICs and many believe these countries are the answer.
What makes these countries unique and has put them on the radar screen of investors is that they're characterized by several consistent factors: a young population, a growing population, relative political stability and a diversified economy.
China has been the linchpin of global economic growth for some time now, but there are troubling signs on the horizon: Wages in China have risen by at least 15% for eight straight years. In 2000, the average hourly wage in China was $0.50/hour, and today it's $3.50/hour. We met with investors in southern China in December and had an opportunity to talk about some of these data points and confirm some of our suspicions. We know that inflation is indeed a problem on the mainland.
A bigger, silent problem with China is whether or not the country will grow rich before it grows old. The country is facing a serious demographic crisis. Census data tells us that more than 50% of China's population is urbanized. That's about 691 million (M) people. By way of comparison, the US reached this milestone of 50% of the population being urbanized in 1920, and the United Kingdom reached it in 1851. So that gives you an idea of how long it takes societies to urbanize and what happens with respect to growth rates once they do. I think that China will continue to grow for some time at above-trend GDP growth rates, but it's clearly unsustainable and it's going to slow down. A young and growing population can sustain economic growth and based on current demographic trends, China is in trouble.
Source: Foreign Policy
So, coming back to CIVETS and TIMBIs, we think that a focus on second-tier or additional emerging markets for growth is prudent going forward. It's what we use in screening for discovery investment companies.
China's population is at 1.33 billion (B), and the collective population of the TIMBIs is about 1.79B. I know India is included in that number, but it tells you that should China slow, either marginally or dramatically, there is a ready, willing and able group of consumers out there that could potentially sop up any fall in demand from China.
TER: China's GDP, though declining, is expected to remain well above 7% in 2012 compared with about 2–2.5% for the U.S. this year. Do you expect China's GDP to dip below 6% before 2017?
CB: It's hard to know for sure. China's 2011 GDP was $5.87 trillion (T). The combined GDP of the TIMBIs in 2011 was $6.29T, so we can see that sufficient demand exists in these other countries as the collective TIMBI GDP is growing, and it's already larger than China's. I think that paints an optimistic picture should China slow down. If we assume that the TIMBI GDP collectively grows at 6.5%/year out to 2020 and China grows at an average rate of 7.2% over the same timeframe, then the collective TIMBI GDP will be $11.12T and China's GDP will be $11.06T. This is only back-of-the-envelope math, but it shows us that the potential exists for other countries to absorb a lack of commodity demand from China. This is dependent on the GDP growth rates in the TIMBI countries remaining static with China slowing. In truth, this is only one of any number of scenarios.
Taking that one step further, when I conducted this analysis, I chose to ignore GDP growth in other parts of the world like the US, EU and Japan. It's clear that these three regions face some serious structural headwinds, but if substantial growth ever returns, you're looking at additional commodity demand.