[SCMP Column] Time to count the winners in global commodity crash

January 18, 2016

With oil at prices lower than we have seen for more than a decade, the stock markets down on average 15% in the first 15 days of the year, and commodities at record lows everywhere, it does not take gloomy weather to tell us there is panic in the air.

But as I combed through the global commodities data to try to work out what is going on, I stumbled across one particular chart that amazed me – in the National Geographic of all eccentric places. Innocently enough it traced cement production worldwide since the year 1900. The first shock was that  China in 2014 produced 30 times more cement than the US (2,740 million tonnes versus 91 million tonnes in the US). Shock number two is that over the three years from 2012 to 2014, China has produced more cement than the US has produced in the past 115 years.

Apart from the appalling implication for global CO2 emissions, nothing could demonstrate more clearly China’s awesome need for resources, and the reality that it faces scale challenges in meeting its development needs that no country has ever faced anywhere ever in human history. The world’s broking analysts and investment bankers may want to blame China’s economic slowdown for the drab state of the global economy, but here is a stark reminder that the locomotive force of its economy for the rest of the world remains huge and unprecedented.

After thanking the National Geographic magazine for that moment of light relief, I was forced to return afresh to the unremitting gloom that envelopes the global economy. Oil is clearly putting everyone in a funk. Take the Financial Times, usually so calm and measured: “The slump in oil prices has become a rout… a crash that is outpacing increasingly frantic efforts to slash costs.”

It is true, some of the data does look pretty bad. Oil industry investment amounting to maybe US$400 billion has been cancelled. Around 65,000 oil industry jobs have been lost in the UK alone. And the harm inflicted on some economies’ trade balances is truly awesome: Russia’s trade balance is more than US$220 billion worse; Saudi and the other Middle East oil producers are maybe US$400 billion worse off.

But hang on a minute. What about the beneficiaries? Oil importing regions like the EU are US$300 billion off and Asia US$390 billion better off – largely gains felt in Japan, China and India. And lower oil prices are bringing big gains in fuel consuming sectors like land transport, logistics and aviation (IATA says the airlines saved US$89 billion in 2015 because of lower fuel costs). The farm sector, in its own right an important user of petrol for farm vehicles, is buying cheaper fertilizers and other petrochemical inputs. The money consumers worldwide are saving on their petrol bills is also being spent in other areas of the consumer economy. In net terms the IMF says lower oil prices have boosted the world economy by half a percentage point in 2015, and leached significant inflationary pressure out of the system.

And we should not forget that the average oil price worldwide throughout the 1990s and up to 2005 was US$20-30. The extraordinary time was when prices surged above $100, and perhaps we are simply reverting towards a long term norm. More fool those who in the past decade have committed themselves to oil that costs $100 a barrel or more to get out of the ground (the worldwide industry average is around US$62 a barrel I understand – which suggests a lot of oil producers face a lot of pain for a long time to come). No pity deserved here.

But beyond oil, the world’s “commodity recession” is now entering its sixth year. With the exceptions of cocoa (up 50% in the past two years) and coffee (up 8%), most commodities have suffered shocking price collapses. Iron ore prices are down a remarkable 70% on the past two years, but other metals are down too – aluminium by 20% and copper by 30%. Logs and cotton are down 20%. Palm oil is down 25%. Food commodities like soya beans, wheat and rice are down by between 25 and 30%. Input commodities like fertilizers are down 45%, and fish meal down 15%. Pretty much any miner or farmer worldwide is facing serious duress, and farmers are in pain too. This is a very bleak scene – as much to do with the crash in the global consumer economy since 2008 as with falling commodity demand inside China. But of course China’s massive scale of demand makes it a convenient scapegoat.

One other area of acute pain jumped out at me as I scoured the commodity data – the global freight market, in particular shipping. The justifiably unwatched Dry Baltic Index which tracks the state of the market for shipping dry bulk cargoes around the world, like grain or iron ore, currently sits at 400 – compared with 4000 in 2010 and 1000 last year. In real terms this means that those gigantic “cape size” vessels that cost $8000 a day to operate are currently being leased out at $5000 a day.

So what do I make of all this? On balance, I think the panic about oil prices is overdone and that low prices will actually do us some good as we try to breathe life back into the global economy. But I think the gloom emanating from the commodity economy tells a darker story, suggesting a long haul ahead before we get any spring back in our step. The scale demands inside China driven by new cities, new airports, new mass transit systems, and 400 million or more emergent “middle class” consumers will in due course come to our rescue, but it will take time. Our year of the fire monkey might not quite be an outright disaster. But for most of us, it is unlikely to be fun either.
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