Sometimes, reading economic magazines can help spot potential
arms purchases from our neighbours. Thailand exports rice and
rubber. Malaysia is palm-oil. Indonesia is oil.
----------------------
Testing their metal
Sep 16th 2003
From The Economist Global Agenda
Commodity prices have been shooting up.
THE price of steel in Japan is rising. By way of example, H beams,
which are the standard unit used in construction, have risen from
under ¥30,000 per tonne to about ¥45,000 per tonne over the past
four years, according to Jonathan Allum of KBC Financial Products.
Scrap prices are going up, too. For a country plagued for so long
by deflation, this seems odd, not least because it has been going
on for some while: the price of sophisticated manufactured goods
continues to fall in Japan, points out Mr Allum, even as the prices
of industrial commodities rise.
It is a trend that is not restricted to Japan. For all the
mutterings about disinflation and deflation (a word that seems to
be said only sotto voce, perhaps out of embarrassment now that
growth is picking up almost everywhere), commodity prices have been
rising at a fair lick. Is this rise the harbinger of higher
inflationary pressures, as in times past? Or, put another way,
could steel-traders be forgiven for thinking that Alan Greenspan
and his colleagues at the Federal Reserve have fretted unduly about
deflation? For his part, Buttonwood does not see the rise in
commodity prices fuelling inflation, but it does say something
interesting about the shift in global economic growth.
The Economists commodity-price index, first published in 1864,
which makes it the worlds oldest, has been sprightly of late. The
index as a whole has risen by 6% over the past 12 months in dollar
terms, but it is the prices of industrial commodities that catch
the eye. They have risen by 17% over the same period, and
non-food agricultural products have gone
up by 21%. Our metals index touched a bottom of
62.2 in October 2001; it now trades at a healthy 76. Though
aluminium prices have crawled up by a modest 5% over the past year,
platinum has gone up by 26%, copper by 17% and nickel by a scarcely
deflationary 40%.
The sharp rise in commodity prices has been driven partly by dollar
weakness. Most commodity prices are denominated in dollars, and
many of the worlds producers have currencies that have risen
against the greenback, sometimes by a lot. The rise in the dollar
price reflects, among other things, an attempt to claw back some of
the increased cost of selling in that currency. In other
currencies, the overall index has risen less; in euros, a currency
which has risen, the index has fallen.
But the interesting thing is that producers have managed to pass on
these increased costs in dollars. Demand, in other words, is
sufficiently robust. For that, thank in part hedge funds and the
like, which have piled into the market on the bet that prices will
rise as global growth picks up and manufacturers restock. What
makes the bet more compelling is that world growth has been
shifting to Asian countries, which have been growing much faster
than developed countries. China and India, for instance, have been
growing by around 7-8% and 5-6% respectively for many years. They
are also relatively intense users of commodities. At the beginning
of the 1990s, China accounted for 7-8% of the worlds metals
consumption. Now, says Paul McTaggart, an analyst at Morgan
Stanley, it makes up perhaps a fifth. And Chinese demand is growing
by around 10% a year. The effects of swings in that demand on
commodity prices are thus greater than they were.
And, to return to those Japanese H beams, this is particularly true
of steel. In 1990, China consumed 60-70m tonnes of steel. Now it
uses some 250m tonnes a year (around one-sixth of which it
imports), out of global consumption of perhaps 930m tonnes. By
2010, it may be consuming 350m tonnes. You want to be selling the
Chinese something they havent got, says Mr McTaggart. That
something is not just steel (Japan has some very expensive blast
furnaces; China has few and would rather spend the money on
something else), but industrial commodities in general. Perhaps
counter-intuitively for a country of its size, China is rather
short of these; and even when it has them, the infrastructure is
decidedly problematic. It takes about as long to get a container
from Long Beach, California, to Shanghai as it does to get one from
Shanghai to Chongqing, a thousand miles or so up the Yangzi river.
Worried about its dependence on foreign producers, the Chinese
government is now offering incentives to find and produce
commodities. It will, one suspects, be many years before any of
this makes a difference. Thats whats got people interested in
commodities, says Mr McTaggart, and you can see their point.
And the inflationary impact of all of this? Almost nil. Any
economist worth his salt will tell you that inflation is a movement
in the overall level of prices. And at this level, China works if
anything in the other direction, because thanks to its low-cost
labour force it can pump out goods of all kinds a lot more cheaply
than just about anyone else (intriguingly, it even has the market
for sex aids sewn up). But the rise of commodity prices does say a
lot about the extent to which growth has moved east. America gripes
about China and its unfair competition; Japan, which runs a trade
surplus with the Middle Kingdom, exports its H beams.
