CaptainSparrow : Booming China: BHP
How to Double Your Money in China… Without Touching Chinese Stocks
by Dr. Steve Sjuggerud, PhD August, 2007
John Neu's trash has made him incredibly rich. He sold 2 million tons of it to China in 2004. Just beyond the Statue of Liberty, in Jersey City, he collected old toasters, bed springs, old cars, you name it. "Everything including the kitchen sink," he jokes. Well, not everything... everything that's metal. Neu, it turns out, was the major processor of mangled steel from the World Trade Center. It was 300,000 tons, which he shipped around the world. More than a third of Neu's scrap metal is sent to China — up from none five years ago. Initially, China didn't want America's scrap. But China's economy is growing so extraordinarily fast, it'll take it from where it can get it. China has made John Neu a happy man. When China joined the WTO at the end of 2001, a gross ton of scrap steel cost $57. The price more than doubled to $127 by the end of 2003. Recently, it soared up to about $300. In the grand scheme of things, John Neu's 2 million tons of steel scrap is small potatoes. China's appetite for steel right now is insatiable. China needs steel. So imagine if you owned the world's largest supplier of steel-making materials, and you're located right on China's doorstep. You'd be able to raise prices, practically at will. That's the business I'm recommending… the world's largest supplier of steel-making materials. The company is not just the world's largest supplier of steel-making materials, it is the largest raw materials/commodities play in the world. With over 100 operations in 20 countries, this company is near the top of the heap in aluminum, energy and metallurgical coal, copper, ferro-alloys, iron ore, and titanium minerals, and it has substantial interests in oil and gas, liquefied natural gas, nickel, diamonds, and silver. The story is simple. China is booming, and it desperately needs raw materials. One company is the largest outside provider of the exact raw materials that China needs. And that's where I recommend you invest. In the next few years, you could double your money on the "China Boom," without ever touching Chinese stocks. The Best Play for the Rest of the Decade Quite frankly, I think commodities will turn out to be a fantastic place to invest for the rest of this decade. Returns in commodities should easily beat stocks and bonds for the next five years. Commodity prices historically make giant leaps every 20-30 years. Look at the following study by the Di Tomasso Group, a commodities research and advisory firm based in Victoria, British Columbia: * From 1939 to 1954, the prices for real-world raw materials skyrocketed 99%. * From 1955 to 1969, prices went nowhere… and even trickled down. * Then, from 1970 to 1981, prices jumped 106%. * For the last 20 years, the prices on raw materials have trickled slowly down again. By the end of the 1990s, prices were at record lows — often even lower than the cost of production. * Right now, we're at the beginning of the next sky-high spike. In fact, it's already started. Over the last two years, commodities have done more than eight times better than traditional stocks. As Jim Rogers, a multimillionaire investor several times over, said in his best-selling book, Adventure Capitalist, "The new commodities bull market has started, but few realize it yet just as few recognized that a new bull market in stocks had started in the 1980s." This trend will inevitably continue for several reasons: First, we have a war to pay for. Second, our government is deep in debt. (The largest figure of government liabilities I've seen is about $9 trillion, roughly $117,000 per household in America.) Printing more dollars is simply the easiest way out. And as the dollar falls in value, the price in dollars of "real" things (commodities) — like a barrel of oil, a bushel of corn, or an ounce of silver — rises. Third, demand for commodities is soaring — and not just in China. * According to a U.S. Department of Agriculture (USDA) study, the world grain harvest of 2002 was 100 million tons short of world grain consumption. That marks the third straight year we've used more grain than we've produced, forcing us to dip into reserves. More than 100 countries around the world now import grain. And China is going to have to start importing grain for the first time ever. What will that do to prices? Look at what happened when the Soviet Union began to import large amounts of grain in the early 1970s. Prices skyrocketed 157% according to the International Monetary Fund. * Right now, we consume about 21 million barrels of oil a day in the United States. But countries like China, India, and South Korea are gaining quickly. Prices are going to rise. Just look at what it costs to fill your gas tank now. * The Wall Street Journal reported recently that the price for a ton of coal in Newcastle, Australia (one of the world's largest producers) has jumped more than 100% since 2004, because of skyrocketing demand. The point is, if you get in on this trend now, you stand to make a lot of money over the next year... and could turn a small investment into a sizeable fortune over the next decade. China Boom + Commodities Boom = A Great Opportunity You have to be careful when investing in China. Besides the fact that you're dealing with a foreign government, and foreign laws, it's easy to get burned investing in a country you know very little about. Many investors are just throwing their money at China without a clue as to what they're really buying. We'll accept that China's appetite for raw materials and commodities appears insatiable. But we won't bite on the direct China plays like the ones above, many of which will eventually disappear. Instead, I recommend you invest in the world's largest provider of raw materials — a company based in Australia that feeds China's appetite. Investors are flocking to China today as if it were America's Wild West during the gold rush. Chances are, most people that risked their life savings back then didn't make a nickel. But they all needed tools and mining supplies. By buying this company, we'll sell the supplies, and let everyone else battle it out. When China's bust comes (and that may not be for a few years), chances are this Australian behemoth won't be hurt badly. It'll profit handsomely in China on the way up, and be just fine on the way down, leading us to exceptional returns in the process. Here's how...
Time to Buy the Raw Materials Provider to China
The stock to buy is BHP Billiton (NYSE: BHP).
BHP Billiton is the world's largest resources company. It's valued at over $120 billion in the market. But that doesn't mean it's expensive. It's trading at a forward P/E of 14. That P/E is not as cheap as I like. But I think the analysts are underestimating BHP Billiton's earnings power. Wall Street analysts have conservative forecasts for commodity prices. BHP Billiton's earnings are clearly sensitive to moves in commodity prices. A small rise in commodity prices translates to a healthy kick to the bottom line. Roughly speaking, steel-making materials make up a third of their earnings, energy commodities (petroleum and energy coal) make up a third of their earnings, and metals make up the final third. This is truly a diversified resources company. Sales are split as well. A third of sales are from Japan, China, and "Other Asia," a third are from Europe, and a third are from North America, Australia, and others. The nice thing about being well diversified, both product-wise and geographically, is that when the China boom does come to an end, it's not the end of BHP Billiton. BHP Billiton serves the world. BHP Billiton's China opportunity is enormous. It is the growth market. To give you an idea, back in 1990, China demanded 4% of the world's seaborne iron ore. By 1995, that number had grown to 11%, in 2002, it was 23% and in december 2006 it had grown to 4.5%. No doubt, the opportunity in China looks great right now. But even if it disappeared tomorrow, BHP Billiton would be just fine. BHP Billiton is so huge that China currently makes up about 15% of sales. Investors are going to be looking for China plays. They'll be buying BHP Billiton. So the shares could really run up in the coming months. I wouldn't be surprised to see a 100% gain in all the hoopla. If the China bubble ends badly, we still own the world's largest diversified commodities producer... a great place to be.