Home' Trinidad and Tobago Guardian : August 27th 2015 Contents BG20 THE ECONOMIST
BUSINESS GUARDIAN www.guardian.co.tt AUGUST 27 • 2015
It was only a decade or so ago that
Scotland was hit by the "Great Drain
Robbery," the disappearance of 50
manhole covers in Fife. It gave an
inkling of the emergence of a new
era in commodity markets, spurred
by insatiable demand from China.
Scrap-metal prices---and so scrap-metal
thefts---soared. Africa was over-run by Chinese
engineers; Australia elected a Mandarin-speak-
ing prime minister; and emerging markets
from Argentina to Zambia relished the rising
values of their farmland and mines. The boom
was fanned by a weak US dollar, the currency
in which most stuff that comes out of the
ground is priced.
The gears have now gone into reverse. A
resurgent dollar has hammered commodity
prices: Many have recently fallen below their
levels of a decade ago. That is a fate not shared
by other tradable assets: not since the late
1990s have commodity prices been so weak
compared with shares.
The US economy is strengthening, but by
no means enough to encourage thieves to filch
bronze bells from Chinese temples to send as
scrap to the United States. The impact of its
recovery is dwarfed by slowing demand in
China, which still consumes about half the
world s metals such as iron, aluminium and
The real curse for producers is over-supply
in almost all raw materials. Yet they continue
to act as if they are blithely unaware of it.
Capital is still pouring into holes in the ground,
creating a hangover that may last at least a
Jeff Currie of Goldman Sachs said past cycles
suggest it can take up to 15 years to work
through the over-investment.
"The world has just flip-flopped," he said.
Analysts point out that not all commodities
act the same way. Coal prices started falling
in 2011; crude oil hung on until mid-2014;
agricultural prices hinge on the weather. But
a generalised whiff of fear about China s eco-
nomic prospects has re-emerged in recent
weeks, partly caused by sliding stock markets
and by the unexpected devaluation of the yuan
So far this year, almost all major commodi-
ties---energy, industrial metals and agricul-
ture---have fallen in a 10 to 20 per cent range,
a fairly homogenous performance.
What s more, the supply glut is being fed
by three common factors. Cost-cutting has
led producers to think they can bear the pain
of falling prices for longer. Heavy hitters,
whether OPEC princes or global miners, still
yearn to increase market share. And funding
is still available.
The cost cuts are part of a self-reinforcing
downward spiral. Outside America, cheap cur-
rencies vis-à-vis the dollar have made domestic
inputs, such as manpower, appear less pricey.
Ironically, cheaper energy and steel help, too.
In Australia, for example, Gina Rinehart, a
mining tycoon, uses low costs to justify opening
a US$13 billion mine in the outback that is
expected to produce 55 million tonnes of iron
ore a year; as much as the United States
In the oil world, cost cuts have come from
producers once thought likely to be wiped out
by falling oil prices: shale producers. "Frackers"
have slashed a third off their cost bases, and
continue to pump enough black stuff to depress
Lower costs may give them a false sense of
security about where prices will go: When
crude prices temporarily ticked higher in the
United States this spring, the number of drilling
rigs rose for the first time since December.
Shortly afterward prices fell again.
Among drilling titans, efforts to recoup mar-
ket share from fracking upstarts can appear
counterproductive. Led by Saudi Arabia, OPEC
is pumping well above its 30 million barrel-
a-day quota, helping push crude prices to
below US$47 a barrel on August 19, just about
the lowest level since March 2009. But if it
intended to strangle American shale producers,
its plan has backfired, instead pushing frackers
to become more efficient.
Meanwhile, global miners such as BHP Bil-
liton and Rio Tinto have continued to increase
iron-ore production, despite plunging prices.
Analysts say they are trying to drive higher-
cost competitors in China and elsewhere out
Funding avenues have not closed down,
however. Tomás Gutiérrez of Kallanish Com-
modities, an industry watcher, notes that in
China steel output has only recently peaked.
Yet rather than facing bankruptcy, many inef-
ficient steel producers are limping along thanks
to local-government support. Their surpluses
are exported, adding to the pressure on global
In the oil industry, Currie said unusually,
high-cost output, such as Canada s tar sands,
is owned by oil majors with strong balance-
sheets. Though they have cut spending, it may
take longer to shut down entire projects.
Eventually stresses will manifest themselves
more violently. Small shale producers may
find themselves in a pickle unless prices stop
falling. Deutsche Bank notes that energy com-
panies account for about one in six of the
United States high-yield borrowers. The bank
believes American crude prices below US$55
a barrel may push them into financial dis-
OPEC has its own invalids, such as
Venezuela, Nigeria and Libya.
But the latest leg down in crude prices may
not yet have run its course. Saudi Arabia, the
all-important swing producer of the cartel, is
deaf to talk of a cutback. Earlier this month,
it raised US$5 billion to offset flagging oil
America s summer driving season is ending.
If an Iran nuclear deal is ratified by America s
Congress next month, once-embargoed oil
will start flowing. Glencore, an Anglo-Swiss
miner and commodities trader, reported whop-
ping losses on August 19.
Its boss, Ivan Glasenberg, has railed against
rivals unwilling to throttle back production
and decried "prices that are still not making
If these are daunting headwinds, they are
not unusual. When prices fall far enough for
long enough, output does eventually decline,
as it started to do with nickel last year. In the
meantime, big mining and oil firms will take
over smaller ones and shut down their weakest
assets. Then another decades-long cycle can
@2015 The Economist Newspaper Ltd.
Distributed by the New York Times Syn-
Goodbye to all that
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