Harshil:

Hi, Thanks for joining us on Redux. A Podcast by ACE on how events in the past influence investment strategy and decision making.

Commodity Prices have almost doubled in the last year and nearly hitting all-time highs. In this episode, we have Mr Niranjan Sridhar. Mr Niranjan has been an active investor for over 16 years. Currently, he is involved with advisory at ithought. Niranjan why don’t you take us through what the entire cycle was like in the 2000s.

Niranjan:

Hello Harshil! Thanks for having me here. Let me start off. The commodity cycle of the 2000s came nearly after 2 decades of very low commodity prices globally. Incidentally, the last run for commodities where the prices ran up really high was in the 1970s. Just to get a bit more perspective, between 1990-2000, there was no major war or economic crisis to stop development. China was on route to becoming the world’s manufacturer coupled with the factor of easy money policy from the USA, who also was doing very well economically. This was also a time that we were a decade into liberalization in India.

So what happened at the beginning of the 2000s was that, commodity prices were exceptionally cheap, and commodity companies were trying to deleverage their balance sheet after expansions done in the 1990s. Incidentally, this was also the time when both India and China were aggressively expanding their infrastructure. And naturally, the demand for commodities was starting to heat up.

In the first half of the decade of 2000, in India we had the golden quadrilateral project coming up. There was also the impending real estate boom. China was gearing up for Beijing 2008 Olympics. The parallel to the first decade of the 2000s commodity cycle would be the post World war 2 re-building of the global economy and the late 19th century-early 20th-century economic expansion. Incidentally, both these were commodity supercycles.

Harshil:

See now that you have touched upon China. How big was Chinas role in the entire cycle?

Niranjan:

China was becoming the DeFacto factory of the world, global companies were setting up manufacturing in China as labour was cheap and relatively well educated. The Chinese government set up many SEZs initially along the coast and later into deeper parts of the mainland. All this needed significant infrastructure in terms of power for manufacturing and roads for logistics. China obliged as there was a lot of FDI coming in, leading to the Chinese consuming commodities like no other.

The peak was during the run-up to the 2008 Beijing Olympics, where China wanted to showcase what it could do to the world economy. An example would be the prices of iron ore shipped to China rose sharply from around $10 per metric ton in 2003 to around $170 in April 2009. Although the Olympics was over in 2008 itself, the run doesn’t end immediately. This was more like Bryan Adam’s song- can’t stop this thing we started.

Harshil:

While they levered up back in the late stages of the 2000s. Now the focus for all these companies in India is to pay off their debt and it’s taken them nearly a decade to clean their books off. So tell me how are you able to relate to the events in the 2000s to now during the COVID era.

Niranjan:

How I’d correlate to the current scenario, it’s like this song. The song remains the same. It’s just the player are different early it was China which was consuming, this time it should be the United States given the fact that Joe Biden has announced they are going to be pumping into 3 Trillion dollars to refurbish the infrastructure in the United States.

To give you a sense of what’s happening in the United States is that all these infrastructures that you see have been built by Dwight Eisenhower who was President of the United States in the 1950s. All your interest rates, waterworks, railroads were done at that time. Then after that, we don’t have much for the last 70 years. So the state of the infrastructure in the United States is not I would rather say luck left to be decided in their standards. So that would be a lot of push from the United States for infrastructure development and we should be able to see a run on the commodities.

Incidentally, as we speak Steel is down 25% from its peak in the last 10 years. So that’s just I’m just taking the case of Steel because it an easily gettable commodity and telling you what’s happening in that space. Why spend on infrastructure? Because it’s a sure way of trying to get the economy to work. Basically having the engines of the economy fire so that it can progress. There will be a lot of economic activity, sub-economic activities, Tier 1, 2, 3 economic activities will happen.

For example, somebody gets a road contract, who would sub-contract with another player, and that’s how they will be able to spread out the word. So that’s the best way of doing it. Historically that’s how it works everywhere in the world. This is a good way of trying to stimulate the economy. 

Harshil:

Niranjan before I let you go we have to talk about whats the whole deal behind currency and commodities. The dollar index since 2020 as collected nearly 12%. Where does the real value lie?

Niranjan: 

Currencies versus Commodities, I think it is quite obvious. It is commodities for the simple fact that commodities are the finite entity, while your currency, with the way in which it’s being printed today, is quite liquid – quite unlimited. This way you will know the number of commodities that are left. But that might be still a large number that doesn’t mean that it’s going to last endlessly. I believe in physical assets commodities. The way liquidity is going to be sloshing around the system. We’ll have to see the run on a commodities basis. It might not be good for a lot of economies but this is the and result of currencies printing happening.

Harshil:

Thank you so much, Niranjan for your time and for sharing your experiences in the 2000s. I hope to connect with you soon.

Niranjan:

Thanks for having me here Harshil it’s a pleasure talking to you. Good Day!

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