Archive for the ‘Commodities’ Category

Export restrictions the way of the future, question mark

The known exacerbator of Peak Oil is the decline in exports (i.e. not only is less oil being pumped out of the ground, but even less of that is being let out of the country, after domestic use). E.g. the Export Land Model (pic is from the Oil Drum)

wikipedia pic

So to the Financial Times. They put up an interesting article today concerning much the same thing about, in this instance, rice:

Rice prices jumped 30 per cent to an all-time high on Thursday, raising fears of fresh outbreaks of social unrest across Asia where the grain is a staple food for more than 2.5bn people.

The increase came after Egypt, a leading exporter, imposed a formal ban on selling rice abroad to keep local prices down, and the Philippines announced plans for a major purchase of the grain in the international market to boost supplies. Global rice stocks are at their lowest since 1976.

The Egyptian export ban formalises a previously poorly enforced curb and follows similar restrictions imposed by Vietnam and India, the world’s second- and third-largest exporters. Cambodia, a small seller, also on Thursday announced an export ban.

These foreign sales restrictions have removed about a third of the rice traded in the international market.

The immediate price effects of course are about as “no” as brainers get. This is an interesting phenomenon to watch, though going forward. Will it expand into other sectors of the agriculture economy? It ought to scatter no end of eggshells beneath international relations.

If the days of tit-for-tat diplomacy (referring to tariffs) were to return, we really ought to ask ourselves, country by country: what can we threaten to withhold in retaliation? Some countries, currently wealthy and powerful, may not much like their answer.

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The IMF has a sense of humour like you won’t believe…

I mean, I’m assuming this was intended as a lesson to the rest of us about how dry wit can actually be. Right?

Commodity prices part speculative

The strength of commodities prices, such as crude oil, this year is explained in a large part by speculative factors such as investors piling into the new asset class and the weakness of the US dollar, the International Monetary Fund said on Thursday.

The IMF said that the constellation of dollar depreciation and falling short-term real interest rates “has pushed up commodity prices through a number of channels, including by enhancing the attractiveness of commodities as an alternative asset.”

“Overall, these financial factors seem to explain a large part of the increase in crude oil prices so far in 2008, as well as the rising prices of other commodities,” it said.

Laugh? I nearly died. Next they’ll be telling us that the problem with fund management is that managers aren’t actually investors – they just get paid to buy and sell things. Maybe their directors will just give a succession of progressively more curmudgeonly interviews in which they reminisce about their day, when markets trading according to fundamentals. Then maybe they’ll apologise to Argentina.

“Everyone wants to eat like an American on this globe”

Don’t ever forget that this is exactly the problem – and why not? Remember the famous words of Oscar Brown Jr: “You so rich and free and fat; Son-of-a-bitch that’s where it’s at!”

Whether an American, Brit, Netherlander – it doesn’t matter. Plenty of people on this Earth are rich and fat and clean. We bang wives made out of girls from Ipanema, buy, wear, drive and eat whatever we like and send our kids off to University to learn how to do even better than us. Good God, man, who wouldn’t want a part of that?

From the New York Times:

Everywhere, the cost of food is rising sharply. Whether the world is in for a long period of continued increases has become one of the most urgent issues in economics.

Many factors are contributing to the rise, but the biggest is runaway demand. In recent years, the world’s developing countries have been growing about 7 percent a year, an unusually rapid rate by historical standards.

The high growth rate means hundreds of millions of people are, for the first time, getting access to the basics of life, including a better diet. That jump in demand is helping to drive up the prices of agricultural commodities.

Farmers the world over are producing flat-out. American agricultural exports are expected to increase 23 percent this year to $101 billion, a record. The world’s grain stockpiles have fallen to the lowest levels in decades.

The article mentions, interestingly, how fortunate farmers are (one, in particular – what’s a newspaper story without an anecdotal anchor, after all?). I’m not so convinced. Costs are increasing for them, also. Fuel and food are big parts of their factor costs and, while they can certainly extract greater rent from Consumer (non-lexicographically-inclined readers, this means jack up the price to make more profit), even the mere perception of this is going to put signficant strain on America’s thoroughly embarassing farm welfare. Meanwhile those costs are appreciating rapidly, just as they are for the rest of us (the NYT does mention this). The only difference is that farmers are producing one of the inflating-price goods: how’s your control over the labour market going, these days? Yeah, didn’t think so.

This – the death of farm welfare – is a good thing, certainly – provided it comes off. More likely is that, with even greater control as a lobbied-for group, farmers will also extract rents from Governments trying to get them to grow basic foodstuffs for the common good (not, for example, mustard seeds – and yes, David, I know ‘the market’ should sort all of that out).

In all this, though, what the writer really nailed was one of the two causes: global demand (the other is crop yields – maybe climate change (I think so), maybe not):

As the newly urbanized and newly affluent seek more protein and more calories, a phenomenon called “diet globalization” is playing out around the world. Demand is growing for pork in Russia, beef in Indonesia and dairy products in Mexico. Rice is giving way to noodles, home-cooked food to fast food.

Though wracked with upheaval for years and with many millions still rooted in poverty, Nigeria has a growing middle class. Median income per person doubled in the first half of this decade, to $560 in 2005. Much of this increase is being spent on food.

Nigeria grows little wheat, but its people have developed a taste for bread, in part because of marketing by American exporters. Between 1995 and 2005, per capita wheat consumption in Nigeria more than tripled, to 44 pounds a year. Bread has been displacing traditional foods like eba, dumplings made from cassava root.

Mr. Ojuku, the man who buys fewer loaves, and one of his fellow tailors in Lagos, Mukala Sule, 39, are trying to adjust to the new era.

“I must eat bread and tea in the morning. Otherwise, I can’t be happy,” Mr. Sule said as he sat on a bench at a roadside cafe a few weeks ago. For a breakfast that includes a small loaf, he pays about $1 a day, twice what the traditional eba would have cost him.

To save a few pennies, he decided to skip butter. The bread was the important thing.

“Even if the price goes up,” Mr. Sule said, “if I have the money, I’ll still buy it.”

Eco 1 students, for the extra credit: is Mr. Ojuku behaving rationally?

Oil prices aren’t going anywhere

So while oil prices surge (any doesn’t our media love new words? I look forward to collective MSM embarrassment in a few years, pretending, so 90210, that they themselves, never used it. Or never really liked it, or whatever they think makes them sound cool), it’s worth keeping an eye out for why that trend isn’t going away.

Yes, Peak Oil is a big factor.

Here’s another: oil is an import, from the perspective of the US, and it is bought with the ever-of-less-value US dollar. As long as the dollar loses value, dollar-priced oil will gain it. Hence these manner of stories:

Australia’s central bank increased its benchmark interest rate for the second time in four weeks and said there are signs the highest borrowing costs in 12 years are prompting consumers and companies to temper spending.

Governor Glenn Stevens and his board raised the overnight cash rate target by a quarter point to 7.25 percent in Sydney today to stem the fastest inflation since 1991. Stevens said rates have risen “substantially” since mid-2007.

The nation’s currency dropped and bonds rose as investors bet the central bank may not raise rates again in the next 12 months. The 1 percentage point increase in the benchmark since August contrasts with the U.S., Canada and the U.K., which have cut rates to cushion their economies from slower global growth and credit-market turmoil.

Yes, a full percentage point. We had our sixth rate increase in 3 years during the election campaign, and this is the second again since thing – the commodities boom is simply very strong. Nor are we alone in our willingness to face inflation. More relevantly, though, capital is moving away from low-interest-rate US to other currencies (Euro, Yen – I certainly don’t imagine it’s all heading to Australia), and operating currencies (NGOs, multinationals, small governments) are probably quietly diversifying, removing an old source of over-value for the US dollar.

All of this means that the prices of things that are typically priced in US dollars are going to appreciate. E.g. Gold (’cause it’s easier to find):

gold prices

Flattening it out:

ln gold prices

We still see the US Dollar prices moving from the Euro price up towards the AUD price. Why? Well, see the price of the US dollar:

exchange rates

What do you think that will do to the percentage changes in price, USD, EUR and AUD? Exactly. Again, gold (or oil) is appreciating in price, but moreso when that price is denominated in a sinking currency.

How to keep an AUD30bn surplus

The short version: you can’t. Not (politically) tenably, at any rate.

The Federal Government could deliver a record budget surplus of between $26 billion and $30 billion under its new fiscal policy tactic for putting downward pressure on inflation.

As the Government faced calls yesterday from a business group to freeze spending, it is emerging that the surplus for next financial year is set to be much larger than the $18 billion flagged.

This would allow the Government to use the budget to sell its message that it is tightening fiscal policy enough to contain inflationary pressures despite keeping its promised $31 billion in tax cuts.

The Treasurer, Wayne Swan, said yesterday the Government would apply a “new era of fiscal discipline” for years to get inflation under control.

Mr Swan said a Business Council of Australia submission calling for no real spending increases correctly identified challenges in areas like improving workforce skills and infrastructure.

I don’t know how the government plans to pull that off. Our economy is under very serious inflationary pressure – as was well-presented only over the weekend by Ross Gittins:

When our real resources reach the point of being fully employed, the economy (gross domestic product; aggregate demand) simply can’t grow faster than aggregate supply is growing – which these days the econocrats estimate to be 3.5 per cent a year at most, and probably nearer 3 per cent.

When we attempt to grow faster than that we don’t succeed, we just generate imports and inflation.

If, for instance, the state governments decide it’s time to start making inroads into the infrastructure backlog, their extra spending is more likely to bid up wages in the construction sector than cause more roads and schools to be built.

So how do we reduce the likelihood of such an unhappy event? By reducing the need for the Reserve Bank to rely as heavily on the blunt instrument of further interest-rate rises by making more use of the budget’s braking power.

And that means Kevin Rudd not being so stupid as to keep his ill-considered promise to cut taxes in July.

Needless to say, now that they are in opposition, the liberal party has a different view:

the Opposition Leader, Brendan Nelson, defended the Coalition’s approach. “As a Liberal Party we take the view that those taxes [are] money taken out of the pockets of hard-working, everyday Australians,” Dr Nelson said.

“Once we’ve delivered on our commitments in defence and health, education and roads and all of the things that we need to do to look after pensioners, then that money wherever possible ought to be returned to the people who actually paid it.”

Actually, as a liberal party, you should not have set those tax revenues up in the first place, while allowing a now-probably-non-solvable export bottleneck to hold productivity back.

Budding Austrian economists! This is why (big G) Government isn’t supposed to take away more than the minimum required to do the things for which it was created. It always ends in tears, eventually. I don’t much look forward to another recession we will have to have had (I’m the Picasso of tenses, it’s true).

Given, as Gittins explains, that we are at (and, probably beyond) the non-accelerating inflation rate of unemployment, giving Australian households AUD31bn in negative taxation is not going to help much – irrespective of how much money the government isn’t giving back.

If today’s IHT is correct, the commodities boom could, soon, be boosting Australia’s income still further, as Latin America faces its own problems:

Argentina and Brazil are facing the possibility of short-term energy crises from a lack of natural gas, which is needed to fuel industries and generate electricity for residents. Bolivia is sitting in the middle, with the region’s largest gas reserves.

I’m with Gittins: the government should really consider holding onto that money for awhile. Pour it into the migration of labour within the economy, from low to high-productive areas/industries, if necessary.

This returns us to the notion of complexity, though. If you’d promised AUD31bn in tax cuts, and then I came along and explained the macroeconomic risks of delivering on that promise – the promise of tax cuts – what would you do? Unfortunately, the government is also in politics.

Commodities, sovereignty and vertical integration

Aluminum Corporation of China, (Chinalco), suprised everyone, buying into Rio Tinto yesterday.

China on Friday weighed into the bidding battle for the world’s minerals deposits when it launched the largest-ever dawn raid to snap up a 9 per cent stake in Rio Tinto, the UK-listed mining giant at the centre of a takeover battle.

Chinalco, a state-owned mining company, in a joint exercise with Alcoa, the US aluminium group, spent $14bn in a move designed to block a planned $119bn takeover bid from rival miner BHP Billiton.

Together they secured up to 12 per cent in Rio’s London-listed shares. This investment gives them a 9 per cent overall stake in Rio which enjoys dual listing in London and Sydney.

BHP had been expected to launch an offer of three BHP shares for each Rio share on Wednesday, the deadline set by the UK Takeover Panel. But the Chinalco gambit threw BHP’s plans into disarray. Marius Kloppers, its chief executive, will this weekend decide whether to plough on with the bid or walk away.

Surprising because, the last we heard, China had no real intentions of becoming so defensively involved, and no real aspirations as to being able to. Back then, though, I wrote about how in China’s interests such a move was and, clearly, Chinalco has agreed:

A person close to the deal said the Chinese government had been looking at ways to block BHP’s takeover ambitions since late last year, and had finally decided that Chinalco would be the best state-owned enterprise to use as a vehicle.

One leading Rio shareholder said “this is global capitalism for political gain”.

These are the fortunes of war, which – in the world of international finance and commodities – this is. Everyone wants the source material for production, and everyone wants it as inexpensively as possible. If China is frozen out of the bench-mark pricing negotiations, we can hardly grumble when she takes her own initiative to secure the supply of a critical resource. Hey – at least they didn’t invade us and build a bunch of walled sub-cities and the biggest embassy the world has ever seen.

With such a substantial level of foreign engagement it shall be interesting, too, to see how our bottle-neck’d ports go as an international economic/diplomatic complaint.

Payments for ecosystem services

This is almost becoming a theme. The commodification and market-formation of carbon-trading has been discussed previously (here and here). So, too, the idea that the environment provides a service that should be supported (given that resource depletion depletes also the ability of the environment to provide that service).

Reduced Emissions from Deforestation in Developing Countries, or REDD, did well at the climate talks in Bali, a short while back. REDD is a deforestation-reduction trading scheme – paying local landowners not to cut down their trees (or not to sell their land to those who will cut down their trees). This follows, say, regulation that prevented the same (hence all the burning of the land – no trees, no trees to cut down, no law broken. The Asian “Brown Cloud”, of course, somebody else’s problem).

Deforestation of this type, one way or the other, accounts for an estimated 18 percent of global human-induced greenhouse (GHG) emissions – the second largest source of anthropogenic emissions, behind energy consumption. So the need to do something is acknowledged (more or less).

China Dialogue has an article running through criticism of the REDD model:

REDD and its closely allied “Payments for Ecosystem Services” hope to put a price on standing forest by tying forest protection to market mechanisms. The logic is that if the price is set high enough, there will be more interest in protecting forests than in logging or selling plantation rights. However, there are several problems with this logic.

First, the scheme depends primarily upon carbon trading to generate its funds; a system which has proved to be so inherently dysfunctional that after eight years of the World Bank Prototype Carbon Fund and two-and-a-half years of the Clean Development Mechanism (CDM), Joint Implementation (JI) and European Emissions Trading Scheme (ETS) the global rate of emissions increases from fossil fuels has doubled and emissions are rising in virtually all developed countries. Using markets does not deal with the drivers of destruction or put in place adequate safeguards to ensure ecosystem protection.

The Kyoto Protocol left rainforests out of carbon trading for well-founded reasons that have still not been addressed. These include the illegitimate transfer of land rights and the displacement (or “leakage”) of logging into new, often pristine regions.

Needless to say, they are not fans. The authors are from Biofuel Watch – a UK-based campaign “against the use of bioenergy from unsustainable sources, i.e. biofuels linked to accelerated climate change, deforestation, bio-diversity losses, human rights abuses, including the impoverishment and dispossession of local populations, water and soil degradation, loss of food sovereignty and food security.”

So – there is a bias here. The signal is not the message, and the message is not the information that would have been to hand. A couple of things about the complaint. First:

There is evidence that deforestation bans and moratoria can work: China, Thailand, Costa Rica and Paraguay have all implemented at least partially successful bans or moratoria. Paraguay achieved an 85% success record in its eastern territory within a single year. Logging companies and some governments are even now calling for payments for non-deforestation. One reporter writing for the Jakarta Post in Bali responded by describing REDD as a set-up for “blackmail”.

Deforestation bans, however, will only work comprehensively if the underlying causes of deforestation are addressed at the same time. The over-consumption of agricultural and forest products, the current rush to biofuels, the corruption and the lack of guarantees for protection of land rights of indigenous and other forest peoples all need to be addressed.

The first part is fine, as far as it goes – which isn’t far. I can police my backyard, sure – but that hardly means me and a cricket bat, or a dozen people so armed, can handle a few blocks. Or the alley full of pimps and dealers. Expansion of the system into meaningfull levels of reduction is the key.

The second is also fine, as far as it goes – again, though, we cannot wish away the tendency of people (in worlds 1st to 3rd) to want more than resources can sustainably supply. The external costs are too far from home. We need to figure out a solution, given that people are, on aggregate, trying to kill their own planet.

Following this:

Bali saw a strong call for a systemic approach to stabilising climate and protecting forests by Friends of the Earth International, the Global Forest Coalition, the World Rainforest Movement, Via Campesina and nearly 60 other organisations who signed the Forest Declaration. The declaration calls for a genuine solution, which combines the twin needs of verifiable fossil-fuel emissions cuts and the total protection of old growth forest ecosystems.

This is also fine, as far as it goes – but you’re not impressing me by telling me that Friends of the Earth International signed such a declaration. White supremacy doesn’t work because KKK-freaks sign a declaration – it fails because the rest of us, with the power, refuse. For a system to work the biggest, worst polluters/emitters have to be on-board. It just won’t work without them.

We don’t like hearing this. We don’t like knowing that the best system for global emission reduction is held hostage to the favour of the people least-inclined to acknowledge or address the problem. Sometimes, though, that’s the way it goes.

There is another flaw in these arguments, which – although I criticise such models, often – is worth pointing out. This is new technology; these markets are young and quite small, relatively speaking. We weren’t killing children born in 1941 because they could fight the war, were we?

This is a similar problem with the Copenhagen Consensus (and that is a link worth following, even though I disagree with some of the outcome): its assumptions. First, that the solutions to climate change are the one’s listed: we know, now of newer and better solutions. Why? New technology, new information.

Similarly, the assumption that a technology will do a certain amount of good, for so long, is flawed. Technological change is endogenous. Reward it, and you promote technological innovation. Increase innovation, and you will most likely get a technological change that increases the effectiveness of achieving the solution. Keep pursing renewables, and you’re likely to hit upon an energy harvesting/storing method (see the latest in batteries) that lets us base-load a grid. Keep trying markets and, through information and synergy, one that works the most efficiently (since all markets are inefficient) will, eventually, emerge.

As Bjorn Lomborg explains in the afore-linked TED talk, the problem at the moment is that we persist in doing nothing, or doing nothing very well.

These authors are correct: such schemes as these are designed to foster economic growth, and economic growth leads to greater resource use. However (a) it doesn’t need, necessarily, to lead to greater resource depletion, and (b) any scheme designed to foster economic decay, decline or atrophy has zero chance of success. So.

Mexico closes main oil ports due to bad weather

Originally found at the Oil Drum. Mexico is 9th in the world’s exporters, but 3rd in terms of US sources of oil.

Mexico closed all of its main oil exporting ports on Sunday due to bad weather, the transport ministry said on its Web site.

Mexico’s exports have been repeatedly disrupted in recent months by bad weather that has halted shipments for days at a time and, in some cases, triggered the evacuation of oil rig workers.

This relates to an ongoing discussion I have with people – the price of oil vs. gasoline. The latter has benefitted mightily from the buffer of (a) refining stocks in the US, and (b) refining capacity (demand generating enough monopsony power that the US can get better prices). But US refinery stocks of gasoline haven’t been doing so well (I was too lazy to make a nice graph):

EIA gasoline stocks

And raw material stocks aren’t performing any better – to the extent that there is little in the way of a buffer.

Crude oil stocks

Data courtesy of the US government’s Energy Information Administration. This data extends only to October 2007 – meaning it does not include 2 more months of probable running-down of those stocks.

So pessimism, basically, is my point – don’t expect those gasoline prices to fall far, too soon.

Mind you, Mexico’s peak has come and gone – its position in the field of US suppliers will most likely do the same (image stolen from the Oil Drum’s Oilwatch Monthly).

oilwatch chart

We shall see, by and by, what the US Government’s adeptness at Supply Chain Management is like.

Economic uncertainty to dominate Davos

From today’s Financial Times:

The hot ticket at Davos last year was the “dialogue in the dark” event, when delegates at the World Economic Forum were plunged into complete darkness to experience the loss of sight. This seems an apt metaphor for the blindness of the world’s elite to the fragility of the global financial system.

Unlike the Financial Times itself, of course, whose writers all saw this coming from miles away…

To continue.

With the state of the financial world having seen a dramatic turnabout in the past year, WEF organisers have staged a series of high-profile debates on financial stability and banking risk, and there will be a flurry of senior bankers in attendance, ranging from JPMorgan’s Jamie Dimon to Goldman Sachs’ Lloyd Blankfein – as well as some of the newly appointed Wall Street chief executives such as John Thain at Merrill Lynch.

They will be joined by a clutch of senior European policymakers – such as Jean Claude Trichet of the European Central Bank and many European finance ministers – allowing a flurry of transatlantic behind-the-scenes debate about global policy responses to the credit crunch before next month’s crucial meeting of the Group of Seven finance ministers and the spring meetings of the International Monetary Fund and World Bank.

Another notable swathe of attendees – which marks a contrast with earlier years – comes from the sovereign wealth funds, and other manifestations of the cash that continues to swirl around Asia’s exporters and the oil-rich Gulf. Officials from the China Investment Corporation and Dubai International Capital, for example, will all be in attendance – and a planned debate on their investments could be a highlight of the meeting.

Indeed, sovereign wealth funds could overshadow one topic that was prominent at last year’s event: the role that private equity now plays in the global economy. For while the Harvard professor Josh Lerner is due to release a landmark report on the sector – which was commissioned at last year’s Davos event – the turn in the credit cycle means that buy-out funds are no longer generating so much fear.

It would appear, then, that the days of Davos meeting concerning themselves with what to do about the world’s poor and the world’s problems are over, for now. We have our own problems – the poor are on their own. I should be very surprised if these rooms of wealthy elite are brimming with debate over the Copenhagen Consensus.

This, specifically, was actually worrying (for me):

Another sign of the shift in sentiment is the inclusion of a new set of topics on this year’s agenda: competition for global commodity resources. For the first time Davos is staging a series of debates about food supplies – a topic that could generate lively debate given the recent sharp rise in many agricultural commodity prices, and the political challenges this is generating in emerging economies.

Yes, that’s the OECD core of economic power, getting together to trade notes on securing the world’s stockpiles of commodities. Meaning the developing world is probably about to fall about another century behind.

Russia expands its sphere of influence over natural resources

The last time this came up, Russia (Gazprom) was offering their help to Serbia. Today, it’s Bulgaria:

Bulgaria has agreed to a gas pipeline deal with Russia that is expected to strengthen Moscow’s grip over energy supplies to Europe.

The Bulgarian cabinet has agreed to allow the planned South Stream pipeline to pass through the country on its way from the Black Sea to southern Europe.

The South Stream project is seen as a rival to the planned Nabucco pipeline, which is backed by the EU and the US.

Interestingly enough, Bulgaria has a 20% stake in the Nabucco pipeline, too. One can see why they have an interest in the South Stream project, though (from the BBC):

BBC map

Who wouldn’t want to have their hands on the fuel faucets of Europe?