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Chinese and U.S. Demand Drives Commodities Surge
Chinese and U.S. Demand Drives Commodities Surge
By CLIFFORD KRAUSS
The price of copper has tripled in five years. Zinc has doubled. Wheat and soybeans rose 70 percent in 2007. Futures prices of crude oil, gold, silver, lead, uranium, cattle, cocoa and corn are all at or near records.
A global boom in the cost of commodities, the staple ingredients of a modern economy, is entering its sixth year with no end in sight. Commodities have always been subject to boom-and-bust cycles, but many economists see a fundamental shift driving the markets these days.
As development rolls across once-destitute countries at a breakneck pace, lifting billions out of poverty, demand for food, metals and fuel is red-hot, and suppliers are struggling to meet it. Prices are spiraling, and Americans find themselves in what amounts to a bidding war with overseas buyers for products as diverse as milk and gasoline.
“It is absolutely a fundamental change in the global economic structure,” said Bart Melek, global commodities strategist for BMO Capital Markets, an investment firm based in Toronto. “Global commodities ranging from oil to base metals to grains are moving higher as billions of people in China and around the world get wealthier and are consuming more as they produce products for us, and increasingly for themselves.”
Now, with the United States economy slowing, the question is what happens next. One possibility is that a recession in this country, should it occur, would suppress demand enough that commodity prices would fall substantially for the first time in several years. But many economists argue that demand overseas would keep prices high even with a recession in the United States. That would compound the economic pain for Americans, forcing them to continue paying a premium at the meat counter and the gas pump even as their paychecks suffered.
These economists say it will be hard to stop the ascent in commodity prices because it is connected more than at any other time in recent years to events beyond the United States, particularly the industrialization of China, and to a lesser extent of India, and in booming oil economies like Saudi Arabia and Russia.
“The world is coming alive and the lights are coming on across Asia,” said James Glassman, a senior economist at JPMorgan Chase. “What we are dealing with is a tremendous demand for resources.”
Meeting that demand is becoming more difficult. Oil is no longer easy to find, and the cost of producing it is escalating. Droughts and in places excessive rain have produced sporadic grain shortages; some scientists link such extremes in weather to global warming and the rising use of fossil fuel.
The biggest single factor increasing commodity prices is China’s rush to construct factories, other buildings and roads to satisfy a growing, increasingly middle-class urban population with a taste for cars and other consumer goods.
China today has 7,000 steel factories, double the number in 2002. Every new factory needs electricity, which means that power plants must be built. More diesel-powered trains are required to get the coal to the power plants, and more trucks and expanded ports are needed to move the steel to market.
China’s industrial revolution caused an increase in crude oil consumption to 7.5 million barrels a day last year from 5.5 million barrels in 2003, according to the International Energy Agency, representing 31 percent of the total rise in global demand. Over the same period, China was responsible for 64 percent of the increased global demand for copper, 70 percent of that for aluminum and 82 percent for zinc.
The Chinese economy grew well over 10 percent last year, compared with an American growth rate of perhaps 2.5 percent. China has grown briskly since 1982, when Communist leaders began to revamp the economy. India’s economy is growing almost as fast, in large part from a surge in domestic consumption.
The International Energy Agency projects that China and India combined may increase their oil consumption to 23.1 million barrels in 2030 from 9.3 million a day in 2005. The demand for oil is also growing in big developing countries like Russia and Mexico, where car ownership is rapidly rising.
That global demand lifts both metals and food prices. Vast construction projects to dig up oil sands in Canada and drill for conventional oil across the Middle East and Africa are under way, driving up the price of steel.
As fuel costs go up, countries like the United States and Brazil look for alternatives like biofuels. The ethanol boom in the Midwest has driven up the price of corn. Since corn is a vital feed product for animals, the prices of meat and milk have followed. The prices of other grains are going up as their acreage is supplanted by corn.
“You are trying to feed people, cattle and cars, so you have this global fight between food and energy,” said Michael Lewis, global head of commodities research at Deutsche Bank. He noted that the United States was responsible for 60 percent of the increase in the global demand for corn last year, which he said resulted primarily from the rapid expansion of ethanol production.
The rise in commodity prices is accompanying a broadening of the middle class in many countries, but recent protests in Mexico after a steep climb in tortilla prices showed that not everyone stands to gain. The world’s poor spend a large percentage of their income on food, so higher grain prices tend to hit them hard.
Consumers in the United States have less to spend at the mall when they pay $3 a gallon for gasoline. The national average for a gallon of unleaded gasoline has climbed to $3.07 from $2.24 a year ago, according to AAA, the automobile club, while a gallon of diesel fuel has climbed to $3.43 a gallon from $2.61.
Price shock has also accompanied trips to the supermarket. According to preliminary estimates by the Department of Agriculture for 2007, beef and veal prices rose 4.5 percent, poultry 5.2 percent, dairy products 7.4 percent and eggs 28 percent. The department is projecting increases for many food items this year, although it says that they may ease for those that rose the most in 2007. Experts, though, say that similar sustained food inflation has not been seen in the United States since 1990.
Economists and some others say the continuing boom in commodities prices may slow this year, if for no other reason than the 2007 pace for many crucial commodities — up 57 percent for crude oil and more than 70 percent for wheat and soybeans — was so stunning. Since the 2001 recession, the Commodity Research Bureau’s broad price index has risen by 100 percent.
“I would temper wild-eyed bulls who think China can grow at 10 percent plus without a strong United States,” said Adam Robinson, an energy analyst at Lehman Brothers. He said that China, which was an importer of steel and aluminum as recently as 2002, is now an important exporter of both to the United States and Europe and that some of the new steel factories could fail if there was a global recession.
Nevertheless, Mr. Robinson said commodities prices would probably remain steady in 2008 and possibly slide in 2009. The prices of many, if not most, major commodities — including nickel, copper, sugar, silver, cocoa and coffee — have continued their climb so far this year.
“Demand will be very difficult to slow down unless you take a very bearish view on the long-term global economy,” Mr. Robinson added.
So what do you think? While some commodities are a bit over the top IMHO, high prices will stay there for a long while, even if the dollar makes a long-term comeback...