China Oil & Commodity Demand Opens a New “Silk Road”

In importance and influence, the new Silk Road may stand to rival its namesake. As with the old Silk Road, the new one will make some investors rich.

The old Silk Road was not even a road in the normal sense of that term. It was, as travel writer Colin Thubron describes it, "a shifting fretwork of arteries and veins, laid to the Mediterranean." Thubron recently covered 7,000 miles in eight months following the old trails of this fabled trade route.

The Silk Road ended, or began, in Antioch, Turkey. It stretched all the way to old Changan, or what is today known as Xian, in China. For a long time, it had no name. A German geographer coined the term "Silk Road" only in the 19th century.

Yet traffic along the Silk Road goes way back into the slipstream of humanity's past. Thubron writes: "Chinese silk from 1500 B.C. has turned up in tombs in north Afghanistan, and strands were discovered twisted into the hair of a 10th-century B.C. Egyptian mummy." Archeologists found silk dating from 1100 B.C. lying in the grave of a prince in Germany. The stuff got around.

The Silk Road carried much more than just silk across its rugged landscape. From China, the West got jade, lacquer, ceramics, the first roses, azaleas. Also, oranges, peaches, mulberries, apricots and rhubarb. Coming from the West to the East came glass, gold, silver, Indian spices, gems and linen. Also, fig trees, flax, pomegranates, jasmine, dates and olives.

Back and forth went vegetables, fruits, furniture, artifacts of all kinds, musical instruments - even slaves. Even weapons. The crossbow, a Chinese invention, made its way across the old Silk Road to arm the Norman and Capetian kings in their battle with the dreaded English longbow at Crecy (in which they were famously defeated).

The old Silk Road seemed to embrace almost every national and ethnic group from Arabia to Japan - Persians, Turks, Sogdians, Syrians, Indians and many others. (Often called the greatest traders of the Silk Road, the Sogdians were an Iranian people. The Chinese believed them born traders. Myth held that "their mothers fed them sugar to honey their voices, and their baby palms were daubed with paste to attract profitable things," writes Thubron.)

None of them made the journey the whole way through. No Roman ever walked the streets of Xian or visited the tomb of the Yellow Emperor. No Chinese trader ever gazed upon the pillars of imperial Rome or dipped his toes in the Mediterranean Sea. Or perhaps it would be safer to say such journeys must have been extremely rare.

Instead, the Silk Road was more like a long relay race. Only luxury items could generally make the whole journey - the jade and the silk, for example - or perhaps incidental items people carried with them, like a flute or an old trader's pipe. It was simply too expensive to ship most things the whole distance, except those things people were willing to pay a heavy price for.

Still, the old Silk Road was the dominant trade route in human history for over a thousand years. Its importance only diminished sometime in the 16th century, when ships replaced the harrowing journey overland and transported goods much cheaper and faster.

There is a Silk Road revival, though, at least metaphorically. The old trading posts worked in storied cities such as Samarkand, Kashgar and Meshed. The new Silk Road weaves through Dubai, Riyadh, through Mumbai and Chennai in India, to Kuala Lumpur, Singapore, Hong Kong - even as far as Tokyo.

Like the old Silk Road, the new one is not a road either. But it is a useful metaphor to describe the surge in trade between the Middle East and Asia. Between 1995-2005, trade between these two regions increased fourfold, according to McKinsey & Co. Projections call for trade between the six members of the Gulf Cooperation Council (GCC) - Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates - and East Asia to explode from $59 billion to $300-500 billion by 2020.

Why is this happening? Short answer: The GCC has cash and Asia has huge investment needs.

Rapidly growing Asian economies have, at least in part, driven demand for oil. Higher oil prices in recent years mean overflowing coffers in the GCC. They need to put that treasure to work. More and more, it is winding up in Asia. McKinsey reports: "Recent interviews with more than a dozen Gulf investors who collectively control more than $300 billion in assets revealed that they are set to shift their portfolio asset allocation toward Asia by 10-30%."

It's a feedback loop. More growth in Asia means more China oil demand - with more and more coming from the Middle East. By 2030, estimates put half of China's oil imports coming from the Middle East. Asia - including India - could account for half the increase in the world's demand for oil. That means more cash for the GCC and more investment in Asia - in real estate development, in banking, in communications, in infrastructure. And on it goes.

In the meantime, Chinese, Indian and other Asian companies are active in the Middle East. They bring low-cost consumer goods (Dubai is already home to Chinamexmart, which McKinsey describes as a "mini-city of Chinese companies distributing their products throughout the region"). Asian companies also bid on major construction projects in the Middle East.

Another interesting barometer of economic activity: As late as 2000, there were only seven daily flights between the Gulf states and China. Today, there are more than 48.

Thubron notes on his trip how the influence of the old Silk Road flowed into even remote hamlets. "The nervous system of the Silk Road radiated into the poorest extremities," he writes. "It traversed minor ecological divides, as well as empires." Likewise, this new surging trade between these regions will have ripple effects in the patterns of world trade and in financial markets everywhere.

Owning the assets the new Silk Road demands and investing in businesses with ties to the region should prove profitable. Our own Nabors Industries (NYSE: NBR) is active in the Middle East and also has a joint venture with a Chinese rig manufacturer. We also own several companies with valuable oil and gas properties - such as Canadian Natural Resources (NYSE: CNQ), an indirect beneficiary of Asian consumption. Finally, ABB (NYSE: ABB) is another way we've invested in the global boom in infrastructure.

Such feverish growth in trade will have its pauses. Even the hummingbird must sleep. But remember, the old Silk Road dominated trade for a thousand years and made many a fortune. Perhaps the new Silk Road will do the same.

Regards,

Chris Mayer
for The Daily Reckoning Australia

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