>A COMMODITY SHORTAGE LIES AHEAD (GOLDMAN SACHS)

Commodities in Crosshairs – a commodity shortage lies ahead

■ 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.

■ Industrialization, Globalization, Westernization drive demand
The world’s population is increasing at its fastest pace in history. As the developed world increasingly begins to consume like Westerners the demands placed on the finite resources of the planet increases. This trend of human populations growing faster than the earth’s ability to produce not only impacts food production but that of commodity usage.

■ China matters for demand … Brazil for supply
The leverage a commodity has to China matters both in the context of their share of global consumption but more importantly their relative shortness of supply domestically. These criteria suggest agriculture and metals have the greatest leverage. Brazil has little in the way of natural resource protectionism and is long commodities in its resource base.

■ Prosecuting the theme through stock selection
We see opportunity to benefit from these trends across four global stock complexes: E&C/Machinery, which take advantage of capex trends, Global Energy, where we highlight key beneficiaries of oil capacity constraints, Agriculture, where companies are addressing the challenges of feeding the world, and Consumer, where we dig into consequences of expected commodity volatility.

■ Introducing the GSGLCIC3 basket
We have created a long basket to help investors track and trade implications of a commodity supply shortage in 2010. The basket contains potential beneficiaries based on our assumptions.

To see full report: COMMODITY