Commodities as Destiny?

[rffrydr]

Trading on Commodities
Niall Ferguson. Wall Street Journal. (Eastern Edition). New York, N.Y.:Dec 19, 2006. p. A.16


In the Hollywood adaptation of Hemingway's "To Have and Have Not," Lauren Bacall offers Humphrey Bogart a justly famous explanation. "You know how to whistle, don't you Steve?" she asks. "You just put your lips together and blow."

Well, the past year has given commodity traders plenty to whistle about. Prices of nickel and zinc have more than doubled since January. Copper and lead are up roughly 50%. The other good news is that other commodities -- like sugar -- are down in price. Best of all, the world's most important -- oil -- has been both up and down. Volatility has been touching historic lows in bond and equity markets. Not in commodities. Correlation, meanwhile, has been touching record highs for most securities. Not for commodities.

Small wonder it's become modish to refer to commodities as a "new asset class." There has been a boom in commodity-linked financial instruments. Issuance of medium-term notes has soared. Collateralized commodity obligations are the new new thing.

The drivers of commodity price volatility are well known. On one side there is roaring Asian (especially Chinese) demand and the prospect of supply shortages. Between 2002 and 2005, according to the IMF, China accounted for literally all the global growth of zinc and lead consumption, and more than 80% of the increase in tin and nickel consumption. At the same time, lack of investment and increased political risk have combined to constrain the supply of many key commodities -- and not only oil. The market for coltan (a substance used in the manufacture of mobile phones) is also tight, to give just one example.

On the other hand, there are powerful forces working in the opposite direction: a slowdown in the growth of the U.S. economy; the prospect of increased government regulation, whether through resource nationalism or environmental concern; and the possibility of technological breakthroughs that might reduce our dependence on fossil fuels, like the development of ethanol-burning engines.

The real question to ask about commodities, however, is not whether prices will go up or down. The complex interplay of these variables means that prices will almost certainly go up and down. It is far more important to ask whether or not the uneven geographical distribution of key commodities is a potential source of conflict. Many commentators have argued that China is engaged in re-enacting the 19th-century "Scramble for Africa," securing vital sources of commodities in return for development aid and a blind eye to human rights abuses. The danger, South African leader Thabo Mbeki warned recently, was that Africa could end up in a "colonial relationship" with China.

Another potential source of trouble is Russia's dominance of the European natural gas market. Along with Iran and Venezuela, Russia has emerged as one of the world's new energy empires, treating its vast fossil-fuel reserves (which include more than a quarter of the world's proved reserves of natural gas) as a source of power as well as profit. In Georgia Mr. Putin has already earned the nickname "Gasputin," following recent attempts by Moscow to play politics with petrol.

The world's most advanced economies -- the United States, the European Union and Japan -- have good reason to worry about the geopolitics of commodities. Between them, they account for nearly two- thirds of global oil imports, but only 6% of exports. The Middle East and the former Soviet Union account for more than half of oil exports. Nearly half of all the natural gas imported by Europe comes from Russia.

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Does history give us reason to fear a future clash of "haves" and "have-nots" (terms that were often used in the interwar period to characterize the international balance of power)? It's a question worth pondering.

Think of world history as falling into roughly four ages. In the first, prior to around 1500, the key commodities were grain, livestock, wood, stone and base metals. In the second, from around 1500 to 1800, the key commodities were silver, spices, silk, tea, coffee, sugar and tobacco. The third age of commodities was the industrial age from 1800 to 1900, when it was cotton, coal, iron, gold and diamonds. Our own fourth age was different again: an era dominated by the consumption of oil, natural gas and rarer metals like aluminum.

In each of these ages, there have been haves and have-nots. In the first age, when fertile territory was everything, the haves included Western Europeans and Eastern Chinese; the have-nots, nomads like the Mongols. In the second age, when commodities from the New World and Asia were at a premium, the haves (initially) were in Peru, Mexico, India and China. Back in 1500, the have-nots were Spain, Portugal, Netherlands, England and France.

By 1800, those have-nots had become haves thanks to conquest and colonization. The luck of the geological draw meant that Britain was also a have in terms of coal, the key fuel of the industrial age, as were Belgium, Germany, Russia and the U.S., which also grew plentiful cotton. Less well endowed with key industrial inputs were Austria- Hungary and Italy. Finally, our own age has seen a further reshuffle. In the hydrocarbon age, the biggest haves (in terms of oil production) are Saudi Arabia, Russia and the United States. The vulnerable have- nots are most of Europe and Japan.

Yet it would be a gross caricature of the historical process to explain the great conflicts of those four ages primarily as clashes between commodity-rich and commodity-poor countries. First, there are numerous examples in each period of clashes between rival haves. World War I was fought between coal-rich countries, breaking out just as German coal production caught up with Britain and German iron production pulled ahead. The Cold War, too, was fought between the haves. Second, there is little evidence that tight markets for commodities -- as evidenced by high prices -- have been a trigger for conflict. Between 1873 and 1913, for example, the prices of most key industrial commodities fell, because production generally kept pace with demand.

In any case, commodity prices have for much of history been expressed in terms of one particular monetary commodity. The age of relatively abundant silver was succeeded by the age of relatively scarce gold; indeed, it was the restrictiveness of the gold standard that drove other commodity prices down so steeply in the 1880s. Only since the early 1970s have we entered the age of plentiful paper, a substance much easier to produce than precious metal. Much of the recent upward drift in commodity prices is in reality an expression of the excess supply of our monetary commodity.

Some German historians used to argue that it had been the decline of commodity prices before 1914 that had encouraged their country's ruling elites -- agrarian Junkers and heavy industrialists -- to gamble on war in the hope that it would shore up their crumbling economic and political position. But that theory has not stood the test of modern scholarship. Nor can it credibly be argued that Britain's real rationale for going to war in 1914 was to break up the Ottoman Empire and turn its oil-rich provinces into Iraq.

The only credible candidate for a major modern war sparked by commodity envy must be World War II. "The final solution lies in an extension of our living space," wrote Adolf Hitler in his 1936 Four Year Plan Memorandum, "and/or the sources of the raw materials and food supplies of our nation." Japan's military leaders made similar arguments about the need to establish a "Greater East Asia Co- Prosperity Sphere." There was at least some logic behind such demands for increased "living space." Germany had abundant domestic supplies of coal and iron, but before the 1930s it needed to import all its rubber and oil. Japan relied on imports for 100% of its rubber, 55% of its steel and 45% of its iron. No less than 80% of Japan's oil came from the U.S.

Of course, "living space" was also about acquiring agricultural land which the leaders of the Axis powers dreamt of populating with their own master races. But from an economic and military point of view, it was the oil and rubber that really mattered.

Unfortunately for Hitler and Hirohito, their staggering military successes in the first phase of the war did not suffice to eliminate the differential between the haves and have-nots. Once the U.S. and the Soviet Union were fighting alongside the British Empire, the odds against the Axis lengthened disastrously. And it wasn't just a matter of oil. Between them, the three principal Allied powers dominated the global supply of chromium, cobalt, manganese, molybdenum, nickel, titanium, tungsten and vanadium -- commodities vital for the production of modern armaments. Only if they had been able to turn the empires they conquered between 1937 and 1942 into thriving centers of commodity extraction could the Axis powers have avoided defeat. They failed to, and paid the price.

The lesson of history is that commodities are not destiny. A booming global economy and rising commodity prices may in theory increase tensions between commodity exporters and importers. But haves and have-nots are not doomed to conflict; wars may equally break out between rival haves. At the same time, falling commodity prices may be as disruptive of international order as rising commodity prices. The fall of the Soviet Union, after all, can be plausibly explained as consequence of cheap oil in the 1980s.

It will be ironic indeed if the next big story in the commodity market is a price slump in the context of a global economic slowdown. For then the joke will be on the haves, and particularly the energy- exporting empires. And it will be the turn of the have-nots to put their lips together and blow.
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

And Spain opening up roman-era gold mines:

http://www.bloomberg.com/news/2011-08-26/roman-age-gold-mine-revived-by-crisis-era-prices-draws-canada-miner-astur.html
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Today is the Tomorrow you worried about Yesterday!

[HenryTo]

Domestic mining of cobalt resumes:

http://www.technologyreview.com/computing/38458/?nlid=nldly&nld=2011-08-30

[rffrydr]

Perennial vs. Annual: we're livin' the consequences of the last millenium's "next big thing."

http://ngm.nationalgeographic.com/2011/04/big-idea/perennial-grains-text
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

Most of the bean counters on Wall St. have no idea how graced this country is for.... commerce:

[rffrydr]

Fitting end to empire:

http://www.businessweek.com/magazine/content/11_24/b4232037277920.htm

[rffrydr]

Diamonds in the Rough:

http://ftalphaville.ft.com/blog/2009/01/21/51485/rough-times-for-diamonds/
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Today is the Tomorrow you worried about Yesterday!