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The Hitchhiker’s Guide To Global Commodities 2011

Commodities / Social Issues Mar 05, 2011 - 09:58 AM GMT

By: Patrick_Henningsen


Best Financial Markets Analysis ArticleCeapach Donald writes: Metals, food and fuel beat stocks, bonds and the US dollar for a third straight month- the longest winning streak since June 2008. Price rises fundamentally driven by short supplies lifted all soft commodities like the grains, vegetable oils, sugar, cotton and rubber, intensified by investor speculation that violence in the Arab and Muslim world will curb oil supplies…

At the same time they provisionally bet that well-protected regimes in the region with few qualms about firing on civil protestors, like Iran’s one-party state, Algeria’s military junta, Saudi Arabia’s absolute monarchy and its smaller look-a-likes along the Gulf coast will keep spending on food imports- to try keeping a lid on their cellphone-wielding youth revolutions.

Key commodity indexes like the Rogers International RICI, or the Goldman Sachs GSCI Total Return Index of 24 commodities gained as much as 4 percent in the 28-day month of February – both of them rising for a sixth straight month. Compared to the commodity indexes, measures of global equity and bond performance showed paper wealth did a lot worse. The 45-nation MSC equity index, for example, gained only 3 percent, while indexes measuring government and big corporate bond performance, like MerrillLynch’s Global Index gained less than 0.3 percent in the month. The US dollar, despite heightened geopolitical tension that traditionally helps the greenback pare losses, or gain against other leading moneys fell nearly 1.2 percent in the month.

FLASH MOB MENTALITY: While the North African economy sinks, loans will come pouring in for Europe and the IMF.

Some may argue that further US inaction in North Africa and the Middle East- in its traditional role of saving reliable oil pumping allies, and keeping Arab export platforms for US corporations in business, will likely further erode confidence in the dollar.


The business correct explanation of why commodity asset values are powering ahead is emerging economy growth and signs of recovery in the debt-strangled OECD countries. Faster global growth is defined as raising the risk of pushing up raw-material prices until market magic generates new supply.Surprise shocks like the ouster of Libya’s Muammar Khadafi (or civil war in Libya) provide some excitement and opportunity to speculate on oil prices on the way up, when supplies from Libya are cut,and on prices going down when or if Libya’s oil supply is resumed.

But the month-on-month rise of commodity prices well before a single Arab dictator had bitten the dust,or fled to Saudi Arabia with a traditional consignment of gold bars in his airplane baggage hold, is a sign of rising threats to the global growth process. In turn this threatens confidence in the all-new No Alternative economy, ushered in by US president Ronald Reagan and the UK’s Margaret Thatcher far more than 30 years back in time and somewhat shop soiled, as it dates from well before cellphones became mass ownership items able to assemble a Flash Mob in very quick time.

Linked to the growth of real resource prices with a related loss of interest in paper value and fiat money, central banks almost worldwide, including China and India, Russia and Brazil, are currently raising interest rates and boosting the reserve requirements they set for commercial banks operating inside their territories. Their explanation is to fight inflation and safeguard confidence in their national paper currencies. Equity buying is an immediate collateral victim, due to easy credit being a basic for any paper asset bubble, but not being quite so necessary for a real resource bubble.

Underlining this difference, both the emerging countries, and a growing list of developed world central banks are buying fiduciary gold, hundreds of tons of it to back up threatened paper money. These purchases are physical metal – not paper. In turn this sets major challenges for the entire system of gold and precious metals buying, worldwide, which depends on a large proportion of purchases never going physical, that is staying paper. In this cosy system, that shelters paper money and paper equities, gold trading limited to paper gold in the form of Exchange Tradable Funds (ETFs) linked to physical gold but not held by buyers, gold mining shares, long-dated paper futures in gold, and so on. In all cases, physical delivery is either avoided or delayed.

Like the rush to buy real asset hard commodities, ever rising physical demand for gold and other precious metals due to fear of inflation and declining confidence in paper money is basically driven by resource shortage and its corollary: not enough production. To be sure, this is couched in market-friendly talk by operators and analysts, who admit the number of hard commodities facing what they call a supply issue has only grown, since around 2005, with the short respite of a 12-month downward blip at the deepest point in the 2008-2009 recession.

With no surprise, this problem can only get worse, if the global economy does not re-enter recession at least as deep as 2008-2009. Finding the politician or the TV talking head who says that out loud is like finding a country willing to shelter Colonel Khadafi.


The last time commodities beat stocks, bonds and the dollar for three straight months was in June 2008 when oil prices hit their absolute highest peak in all time. Similar periods when this happened stretch back to the 1973-1974 Oil Shock and its aftermath. Market folklore always attributes oil price surge to violence in Iraq, the Iranian mollahs, African intrigue and in 2008 Goldman Sachs Co goosing the oil market to bankrupt one of its clients, Semgroup Holdings. Simple supply/demand realities are alwaysignored, but they explain the price surge a lot better. In July 2008 oil futures reached a recordUS$147.27 for the August delivery, and US regular gasoline at the pump climbed to more than 4-dollars for a US gallon (3.785 litres).

At the time, and today, average European car drivers paid and pay around US$ 8 a US gallon, but apart of their higher fuel prices are offset by the massive car subsidy payments they get from central governments trying to stem job losses in the car industry and keep consumers doing what they are supposed to do – consume anything and above all pay taxes. This nicely classic Keynesian economic management was hysterically rejected by the Reagan-Thatcher duo more than 30 years ago – and has remained in use for more than 30 years. The reasoning was and is that it is fine, if it works, and we can ignore the ticking resource clock runs because God will provide. By devil’s luck, Thatcher was able to squander UK North Sea oil resources like Reagan squandered Alaskan oil, and today we have the prospect of a vast gas bubble in the shape of shale and fracture gas.

This however changes little on the natural resource front. Outside the gas bubble, all the fossil fuels are resource constrained and especially oil and uranium. All the soft commodities, and especially the food grains, vegetable oils, sugar and non-food bio-resources led by cotton and rubber are facing a severe uphill struggle to meet and match ever rising demand – and declining land, water and bio-resources to keep producing more. The non-energy minerals, from aggregates for concrete production through bauxite and iron ore for aluminium and steel, to copper, tin, lead and zinc, and all the high-tech metals including vanadium, chromium and molybdenum, as well the Rare Earth metals have a one-way price track whenever the global economy is not in deep recession: up.


Whether in or out of ever deeper recession, average OECD iron and steel per capita consumption stays high, at around 750 kilograms a year: one basic reason is the OECD national car fleet average of close to 400 – 450 cars per 1000 population in all 30 member countries. Average cars need about 1 ton of iron and steel, 100 – 175 kilograms of plastics, and 5 tyres which are up to 40 percent oil by weight. From this we get a read-out on car oil dependence: about 4 to 9 barrels per car, only for its construction.

Operating the average OECD car then needs about another 9 barrels, every year. Trying these figures out on China and India – at 450 cars per 1000 population – delivers an instant killer hit to any fantasy ideas of the global economy muddling through to its supposed will-of-the-wisp conclusion of Universal Abundance. Not only the oil limit, but limits as basic as iron, steel and rubber supply make it impossible for the Chinese and Indian car fleets to ever reach more than a fraction of the per capita car ownership of the OECD nations today. Any attempt at this impossible goal with regular-type oil powered cars as we know them would generate one-only forecast: worldwide economic meltdown and global economic implosion. This helps explain why government friendly media and our great democratic deciders are so coy and discreet about giving us such a simple, clear and certain proof that you cant get there from here.

We never hear a simple basic fact like this for another reason, above and beyond keeping the Consumer Herd both greedy and stupid AKA “confident”: so-called decoupled Asian growth from China and India to Indonesia and Vietnam is our supposed biggest and best hope that the go-go days of global growth could or might come back, inch’allah. Growth of the Asian car market is lauded by each and every OECD leader, almost in the same breath as they whine about oil prices, showing their fantastic hypocrisy is also matched by their wall-to-wall schizophrenia.

Like Freddy Mercury told us before he disappeared and died, The Show Must Go On! In Asia this means national car market growing at typical rates of 15 – 20 percent per year. To be sure, keep-the-party going boomers like Renault’s Carlos Ghosn, Tesla Roadster founder Peter Thiel or Wired News editorialists will tell us, hand on heart (and the other in our pocketbooks) that production of $40K all-electric cars will soon be ramped so high it can solve the problem – if the makers get enough free government cash- raked from consumer taxes, and the dumb public stays patient, very patient.


Liberal economic doctrine refuses to talk about resource depletion, and only with foot-dragging was able to get around to ideas like the diseconomies of pollution. When the elite discovered these are, in fact, a real nice way to levy new taxes their coming out was sure: in a splendid example of sudden change of mind and an 180-degree flip-round of elite herd mindsets, pollution taxes became media friendly and politically-correct. Straight depletion and disappearance of a resource- like Freddy Mercury being sadly no longer able to fire up the beer swiller mobs at football matches, is however still not accepted as being possible or real world any place under the consumer sun.

Trying out simple facts like the estimated 10 000-plus of animal and plant species that are made extinct,every year has little or no traction. Polar bears paddling in slush, because consumers do not rush to buy the latest fuel-efficient roadster, or play churlish and do not adore subsidy-based windmills and nuclear power plants, are however deemed as consumer friendly by the elites. Even the likely near-term extinction of the red tuna is given careful and balanced attention by the media – that is red tuna may not be menaced at all and low-grade tuna can be injected with betadine to turn them red enough to fool average gulpers in designer sushi bars. Human innovation will always triumph, at least in the tacky fairy story of progress-progress-progress that goes along with the greedy, cynical and mindlessdestruction of the biosphere and natural resources to profit the elite. In other words, any talk about straight depletion and disappearance of resources is like they say technical.

OTHER HOLY MATTERS: Obama prays for another round of generous finance from Bejing.

The market is always right (right?), so we check how traders and Ponzi scheme operators respond to the challenge of progress. We find and instant ideology conflict generated by the heroic quest to keep resource supply up, so consumers can have the thrill of throwing more away, also resulting in traders being able to talk up resource prices, through the ceiling, anytime the global economy is not in crash dive to recession. We find that any resource will do: metal prices can be talked up as talking up food, or fuel prices. In February 2011, metals and minerals commodities, from bauxite and iron to technetiumor dysprosium gained close to 4 percent after reports showed Chinese manufacturing is still on a tear and Obama’s heroic spending- of printed and borrowed cash had resulted in US factories starting to lumber out of their recession winter.

Rubber prices are now at a 30-year high, to make tyres for the world yearly output of about 70 million new cars and to re-equip the world’s estimated fleet of 950 million units – which by an interesting quirk that shows the effective morality of consumer “civilization” is exactly the same number as FAO estimates for how many persons face chronic or acute food shortage in the world, with about 45 million more in the 8 months since July 2010. As we know, the average sophisticated consumer will tell us that nobody really cares, in those sushi bars hogging betadine-tinted tuna and enjoying it so much.

Cotton prices advanced 14 percent in February, driven by domestic production in China, the world’sbiggest importer and consumer, falling more than 6 percent to 6 million metric tons last year, the third consecutive yearly drop. Rising import dependence for China will almost certainly keep world cotton prices powering forward in 2011 and perhaps further– unless there is sharp and steep global recession. Designer T-shirts, as well clothes for the world’s poor will be up in price, which could be grave for consumer civilization as we know it – and maybe don’t love it.

The read out and bottom line is always the same: this process will continue until and unless there is global economic recession.

Welcome to the No Future our No Alternative friends cooked up and frothed at the mouth about for decades and decades – like an evil spell we now have the chance to smash. In recession, things get clearer to see. Those who profit from other persons’ misery, and the destruction of natural resources and the biosphere, are a lot easier to identify. As the recession deepens, their attempt to save their skins gets more pathetic by the day – making it easier to put them out of their misery, like any rabid dog.


A. Ceapach Donald is a veteran analyst for major state players and the energy cartels. He is a guest writer for 21st Century Wire and has recently received his peerage in the Gonzo Town writers guild.

Editor Patrick Henningsen

21st Century Wire

© 2011 Copyright Patrick Henningsen - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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