By Andy Hecht, Editor, Trade Hunter
Dear Sovereign Investor,
In the spring of 1989, students demonstrated for democratic reform in Beijing, China. The movement was centered in Tiananmen Square, at the heart of the capital.
I watched the unprecedented coverage from my London office.
On June 4, the People’s Liberation Army moved in, killing hundreds, if not thousands of protestors.
Two weeks later, I talked to my colleague in New York.
“If we want to get close to the Chinese, let’s go there now – while the rest of the world is treating them as a pariah.”
That year, I was stationed in London to run Philipp Brothers’ global precious metals and nickel business. Our commodity trading house had been doing business in China for decades. I had travelled to China several times. I had many contacts there, although they were all government business people and fiercely loyal to the communist government.
We knew that China was the future. Not only did China produce commodities, but she consumed more and more of them each year.
We knew that China would grow and become the most important player in the commodities markets in the decades to come.
We also knew that the commodity trading companies that developed the best relationships over there would not only have an edge in the markets, but with Chinese orders to buy and sell commodities, those with the relationships would run the markets.
I contacted the People’s Bank of China. We were quickly granted visas and appointments with the government agencies that bought and sold everything from gold and silver to copper and the other base metals.
Some of our colleagues (and most of our families and friends) told us that we were crazy to go, it was dangerous. But my colleague and I decided that it was in the best interest of our business to be the first ones there. So we travelled to Beijing at the end of June, just weeks after the massacre.
When we arrived the airport was quiet. The streets were quiet. There were very few foreign visitors. The situation was tense.
The day before our meetings, we visited the square. We looked around at the stains and holes in the pavement. It was a difficult site to behold.
The next day, we were careful to only discuss business with our hosts. They were happy to see us and thanked us profusely for coming.
We all attended a banquet that evening. After many toasts and shots of Mao Tai (which tastes like grain alcohol), our hosts loosened up.
They asked what we were hearing in New York and London. They called it propaganda and said that no one was hurt. The protesters were made to “see the light” and they retreated. It was the party line.
Then they proceeded to reveal the most interesting and perhaps most prophetic information of our careers…
China’s 100-Year Plan
Our hosts explained that China was on a path to reform, but it could not happen overnight. Slow and steady was the only path for the Chinese people to grow and prosper.
You see, according to our hosts, the Chinese had a 100-year plan.
Unlike Eastern Europe that would become a ward of the West after the collapse of the Berlin Wall, no one was there to support China if her economic environment collapsed. The difference was a combination of history and geography. China was on its own while Eastern Europe had the wealth of Germany, France and England to support it.
The Chinese explained that we would see the Eastern bloc countries struggle economically while China would maintain a slow and steady pace of economic reform and growth.
The future would prove that they were on the correct path.
Our dinner ended as did our meetings. It was a successful trip. We built a good relationship with several Chinese officials.
For quite some time, the Chinese came to us with their business, much to the dismay of our competitors. More than that, however, I learned something.
Our hosts were dead right in their predictions.
I do not condone what the Chinese government did in Tiananmen Square. But just as she did then, China knows her path now.
What China Buys, You Should Buy
In the last 22 years, the world has watched China blossom into the second most powerful economy in the world, soon to be the first. China is not beholden to anyone.
Today, with the country in building mode, China is the demand side of the equation in the world of commodities.
China continues to grow and consume. Her emerging middle class is the biggest in the world. As it expands in wealth and numbers, it will continue to support prices for all commodities and raw materials for decades to come.
Evidence of China’s hunger for commodities is felt when she routinely buys on price dips. The need for raw materials in China is significant, and the government understands that strategic stockpiles and investments in commodity-producing companies around the globe will ensure that the country has sufficient supply.
The message for investors is clear – follow China in business. When she buys, you should buy. China is still very much the future.
One way for investors to monetize this trend is to purchase a diversified commodity producing company that will benefit from China’s continued need for raw materials and higher commodity prices.
Rio Tinto PLC (NYSE: RIO) is such a company.
RIO is involved in each stage of metal and mineral production. The company produces aluminum, copper, diamonds, gold, coal, iron ore, uranium and industrial minerals. The company operates in over 50 countries, but primarily North America and Australia.
And, the stock is cheap. RIO is currently trading in the $70 range with a price-to-earnings ratio of 9.96 times earnings. It also pays a dividend of 1.51%. In 2008, RIO traded up to $125 per share.
This powerhouse commodity producer is an excellent way to continue to participate in China’s growth. I would buy RIO up to $74 per share. The stock is a long-term play on continued commodity consumption – which is the China story.
Happy Trade Hunting…
Editor, Trade Hunter
Blog: Commodity Options Outlook