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Kaboom: Peak copper, superspike prices, oil and US debt

by Jerome a Paris Sat Apr 8th, 2006 at 08:14:08 AM EST

This chart, representing oil prices, you're probably familiar with by now:

This one, for gold, you've probably heard about:

But how about aluminium?

and copper?

click on all charts for original graph from http://www.freecharts.com

See a pattern? Prices going inexorably up and up? What's up with that?

From the diaries ~ w.


And that's not all:



Other precious metals continued to trade strongly after Thursday's rally with silver at $12.16 a troy ounce. Platinum traded at $1,080 a troy ounce while palladium traded at $353 a troy ounce.

So, here's little bit about copper, from the Financial Times of London:



Copper nears $6,000 a tonne on low stocks

Copper prices have hit record highs almost daily over the past two weeks, getting close to an unprecedented $6,000 a tonne, double the average price of two years ago, and creating a situation some followers of the red metal label a "super spike".

CRU, the London-based metals consultancy, says that with global inventories at very low levels of about two weeks of demand, the market will be unable to weather any further supply disruptions - there have been production problems in Indonesia and Mexico in the past month - without continued price rises.

(...)

The "super spike" scenario was put forward last year by Goldman Sachs, referring to the oil market in a situation in which stocks are low and supply cannot be increased, leading prices to jump to a level that deters consumption. "This is where we are today in copper," Mr Kettle said.

So, prices strongly up. Liquid, global markets. This should be a signal for demand to go down and supply up, right?

Well...



Copper producers fear affect of high prices on future demand

With copper approaching $6,000 a tonne, you would think that producers of the metal would be in buoyant mood. In fact, they are starting to worry that prices at this level may ultimately damage future demand.

Miners also believe that current prices reflect the challenges of increasing output of the red metal, given a background of lower copper ore grades, higher energy prices, and environmental issues.

(...)

"We had a situation last year where demand did not grow, even though the global economy was growing very strongly, by more than 4 per cent. But prices kept on going higher," Mr Venegas said.

Copper is used in the construction, power, electronics and automobile sectors. One reason for the flat demand growth for mined copper was that industrial users of the metal were using their stockpiles as they baulked at the prospect of paying record prices for the metal.

This resulted in falling global stockpiles - including producer, consumer and futures exchanges inventories - which are now at the equivalent of about two weeks of global demand, according to CRU, the metals consultancy and forecaster.

Industrial consumers, who have run down their own inventories, are now facing the prospect of paying even higher prices than the levels they were reluctant to pay last year.

(...)

CRU predicts global copper demand will rise by 4.3 per cent to 17.53m tonnes this year, which it expects to be met by a greater rate of supply growth. The London-based group estimates that copper supply will rise by 7.1 per cent to 17.84m tonnes in 2006.

However, mining executives appear to be pessimistic about whether this supply growth can be achieved. (...)

"A one million tonne increase is a lot to expect and it has not been done many times before, and I think the funds are betting that supply will disappoint this year, which will in turn push prices higher," Mr Venegas said.

Funds have good reason to take this view. Last year copper production fell 500,000 tonnes short of the forecasts made by the International Copper Study Group at the beginning of 2005. In addition, the recent supply disruptions at Grasberg, the world's second-largest copper mine in Indonesia and strike action at Grupo Mexico's La Caridad copper mine have led to lower supply estimates for the second quarter.

This has resulted in a supply shortfall in one of the strongest demand periods of the year for the industrial metal, leading in turn to copper inventories falling further from already critically low levels and making prices more vulnerable to further price spikes.

Let's summarise:

  • strong underlying demand growth from a buoyant world economy (expressed, in this case, in decreasing stocks rather than increased apparent demand);

  • producers unwilling or unable to produce more, and faced with increasing production costs;

  • short term disruptions like weather events or strikes that cause major price volatility;

  • financial investors reinforcing the trends in the expectation of more to come.

Sounds familiar? It is. The above 4 points are absolutely true for oil, and it seems that the same dynamics are at play.

The interesting thing to note, once again, is the difficulty for supply to go up. There are objective factors (energy prices, the slow internalisation of environmental costs, and the depletino of the best reserves), and there are the "political" factors (a reluctance to increase production, as it could bring prices down and make the additional investments unprofitable).

What we see confirmed, once again, is the deadly combination of increasing demand and the inexorable increase in the marginal cost of the resources, leading to massive price increases. The era of cheap commodities seems to be truly over.

Interestingly, the IMF blames that situation for the consumption binge in the US:



IMF in warning on high energy prices

High energy prices are "exacerbating" global economic imbalances, increasing the risks of a crisis, the International Monetary Fund will warn next week.

The IMF will say in its World Economic Outlook report that "global current account imbalances are likely to remain at elevated levels for longer than would otherwise have been the case, heightening the risk of sudden disorderly adjustment". (...)

High oil prices are increasing the US trade deficit, the report says. In addition, the recycling of petrodollars is driving down interest rates providing an unsustainable boost to US private consumption.

(...)

Washington has blamed surpluses in Japan as well as in emerging Asian countries, particularly China, for its current account problems. But the IMF's concentration on oil prices and global imbalances shows that the issue has grown in complexity over the past two years.

This is an issue I've written a lot about, and where Stirling Newberry has written some fairly extensive diaries as well, but it's new to see that link between oil prices, debt and global unbalances from an institution such as the IMF.

In effect, higher oil prices have a double negative effect:

  • the increased cost of oil creates a significant trade balance for the USA;

  • but at the same time, the dollars captured by the oil producers are re-invested in US Treasuries, thus lowering the interest rates and making it easier for Americans (and international investors) to borrow - thus leading to increased spending and increasing imports (thus worsening again the deficit), and inflated asset prices, and creating, strangely enough, a appearance of increased wealth;

Oil costs more, but as the dollars it costs are recycled in the US financial system, they end up being spent a second time (via debt), this time on Chinese stuff. As the Chinese also recycle their dollars in the US, to protect the exchange rate of the yuan against the dollar, the cycle can start anew...

And thus oil prices increase, consumption still grows, and the US debt balloons.

If this sounds like a pyramid scheme, well, it looks suspiciously like one. And as we've already seen, it can last for a long time, as it is in the interests of no one in the cycle to rock the boat.

So, what will break its back?

Hmm, maybe a little war in Iran?

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Crossposted on dKos: http://www.dailykos.com/story/2006/4/7/104617/4294

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Fri Apr 7th, 2006 at 10:57:48 AM EST
We just recently talked about peak sugar, didn't we?

Holy crap.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Carrie (migeru at eurotrib dot com) on Fri Apr 7th, 2006 at 11:04:53 AM EST
You noticed a trend as well?
Ahh, mathematicians...

(You'll love the fact that a good third of the comments on the dKos thread are to scold me for not having zero-based graphs...)

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Fri Apr 7th, 2006 at 11:43:54 AM EST
[ Parent ]
I saw that ;-)

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Carrie (migeru at eurotrib dot com) on Fri Apr 7th, 2006 at 11:44:15 AM EST
[ Parent ]
Now seriously, are we really going to hit production peaks of everything at the same time? Because if that's the case we're in pretty deep trouble.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Carrie (migeru at eurotrib dot com) on Fri Apr 7th, 2006 at 11:45:56 AM EST
[ Parent ]
Do you think the Club of Rome might now be allowing themselves a quiet, smug "We told you so", having received buckets of scorn for the last 3 decades?

More seriously, I think we are beginning to see the result of a strong bias in human nature, manifested in both politics and markets, not to plan for medium-term problems?  Even (especially) when the problems are forecast well in advance, and are effectively a no-brainer.  

I have in mind the fact that serious economists (Jerome will correct me if these economists were flippant) can state, last year IIRC, that the population of China and India can and will achieve the living standards and consumption levels of the USA.  Pure insanity, in my book.

by GreatGame2 (fishy_logic_at_yahoo.co.uk) on Fri Apr 7th, 2006 at 02:25:42 PM EST
[ Parent ]
I read Beyond the Limits when it was published in the early 1990's but I was not really ready to understand the nitty-gritty. I should get my hands on The 30-year update.

Regarding the economists' claims about China and India, I don't doubt that the living standards are likely to (approzimately) equalize, but we'll probably meet in the middle. $15,000 per capita PPP does not seem patently absurd.

I really need to learn macroeconomics.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Carrie (migeru at eurotrib dot com) on Fri Apr 7th, 2006 at 03:28:18 PM EST
[ Parent ]
I, too, need to learn macroeconomics.  

IIRC (again) the part of the claims i found absurd was the consumption side - ie per capita levels of resource use in a general sense equal to current US levels.  No need to recap the peak oil objection to this cornucopian scenario, I suspect this achievement for food alone is beyond the productive capacity of the globe's ecosystems, particularly the freshwater demand.

More so given the obvious potential 'clusterfuck' as I think our cousins would call the phenomenon observed by Jerome.  For example, food production will probably become more expensive, and total capacity be reduced, as other resources such as energy become scarcer and more costly due to all the people who need the food.  Wash rinse repeat.

Kaboom indeed.  The sound of a dominant macroeconomic theory imploding?

I very much share the concern that the powers-that-curently-be are now in urgent need of a distraction.  And suddenly here's this conveniently badly-run middle-eastern country looming large in the news agenda.

by GreatGame2 (fishy_logic_at_yahoo.co.uk) on Fri Apr 7th, 2006 at 04:19:19 PM EST
[ Parent ]
So, what will break its back?

I've been thinking about this for a while.  In the event that sombody took out Ras Tanura, Saudi's mail oil export facility, or there's a direct hit on the Port Fourchon, the huge oil import facility in Southern Louisiana (US, I'd think that the temptation to kill demand as a way to reduce prices would be strong.  

In 1999, I remember paying $0.69/Gallon for gas (or about €0.15/liter).   Now I pay 4 times that happily.  I was commuting 120 miles a day last year for 5 months, and I ended up moving to live in the city with my brother in the wake of Katrina.  I remember my panic when I had to cough up $3.46/Gallon right after Katrina.  Using 4 or 5 gallons a day that meant I was spending a 5th of my income on gasoline.  So what happened in 1999 that made my gas so cheap?

The East Asian Financial Crisis:

fter the Asian crisis, international investors were reluctant to lend to developing countries, leading to economic slowdowns in developing countries in many parts of the world. The powerful negative shock also sharply reduced the price of oil, which reached a low of $8/barrel towards the end of 1998, causing a financial pinch in OPEC nations and other oil exporters. Such sharply reduced oil revenue in turn contributed to the Russian financial crisis in 1998. Major emerging economies Brazil and Argentina also fell into crisis in the late 1990s (see Argentine debt crisis).

The crisis in general was part of a global backlash against the Washington Consensus and institutions such as the IMF and World Bank, which simultaneously became unpopular in developed countries following the rise of the anti-globalization movement in 1999. Four major rounds of world trade talks since the crisis, in Seattle, Doha, Cancun, and Hong Kong, have failed to produce a significant agreement as developing countries have become more assertive, and nations are increasing turning toward regional or bilateral FTAs as an alternative to global institutions.

This all happened because of a crisis of confidence in SE Asia.  Imagine if the same thing happened again with China as the epicenter, and the feeder economies of  Southeast Asia as collateral damage.  How low could oil go? Copper? Steel?

How could this be provoked?

China's economy is dangerously dependent on export driven growth. For all the growth in country, the Chinese haven't been able to reorient their economy to drive growth from home.  If the US takes a hard line on China, and slaps high tariffs on Chinese products, coupled with the developing labor shortage, and low productivity, could lead to a situation in which Chinese goods are unprofitable.   Even easier, and harder for the rest of the planet to condemn the US for would be to pass serious legislation on port security.  Forget the Lexus or the Olive tree, the standardized shipping container is the premier icon for globalization, and it is an economic immigrant the crosses the US border everday with no one noticing.  But only 2-3% of containers are ever searched.  Pass legislation that establishs  a tiered security system.  Offshore inspection to make sure there's no blatant contraband on the ship, followed by X-ray inspection of all containers that have manufactured goods inside (Note that bulk dry or wet goods are exempted, so the oil tanker and the ship bringing copper from Chile goes through security.) And finally the coup de grace full unloading and inspection of a representative sample (let's say 10%), all paid for by the shipping company.  Suddently the aburdity of shipping parts from the US to China for assembly, and back for sale, exchanging 3-5% transportation costs (on the total cost of the good) for a reduction of 10-15% on labor costs (on the total costs of a good.)  Make transportation more expensive, you change the economics.  

Once Chinese proucts are more expensive than goods that cross the land border from Mexico, suddenly the Chinese economy only can support 2-3% growth, not bac, but not enough to keep the financial pyramid that uses future profits to offset bad loans afloat.  And millions of workers are put out on the street.  That has tremendous social consequences, likely ending in political reform, or revolution in the country.  With the Chinese economy growing at a much slower rate, or in collapse the demand driving up world commodity prices goes down, as do the prices of those commodities.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Fri Apr 7th, 2006 at 12:32:30 PM EST
I think gold is a special situation brought on by third world people getting weatlhier and not wanting to keep their wealth in the local currency. There is also some status buying in the form of jewelry.

There is no shortage of bauxite, but there may be some refining issues.

Similarly there are lots of copper mines that have been shut down waiting for the price to rise. I visited several last year in Arizona.

As has been pointed out by others the graphs need to be corrected for scale and probably also for inflation.

Silver demand should go down as photographic film is replaced by digital images and copper use should go down in communications and electronic devices. Long range communication is become wireless or glass fiber while electronic devices get smaller and thus use less raw materials.


Policies not Politics
---- Daily Landscape

by rdf (robert.feinman@gmail.com) on Fri Apr 7th, 2006 at 07:21:06 PM EST
As you probably know, most of the copper mines that have been mothballed, in Arizona and elsewhere in the world, have been those with sulfide ore deposits.

Processing of oxide ores is much cheaper, using acid leaching and electrowinning (as in aluminium production).

Traditionally sulfide ores, however, require a multi-stage process including concentrating; smelting; anode reduction and electrorefining. These required expensive plant, are not only more costly to run and they also produce a lot more pollution.

There are new plants in test-production in Arizona, Mexico and elsewhere, that are using bio-reactor leaching of sulfide ores, which may make copper extraction from sulfide ores much cheaper.

Bio-reactor leaching may also be useful in processing tailings from old mines, extracting not only the remaining copper but also other metals such as molybdenum.

Eats cheroots and leaves.

by NeutralObserver on Sat Apr 8th, 2006 at 07:24:05 AM EST
[ Parent ]
With all thouse metals running out we'll soon be unable to make tinfoil hats, and then they will have won!

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Carrie (migeru at eurotrib dot com) on Fri Apr 7th, 2006 at 07:27:01 PM EST
...In the New York Review of Books article about Crashing the Gate:
http://www.nybooks.com/...

When we consider Kos's own Web site and its numerous links to other blogs, we see something like an expanding hive of communication, a collective intelligence. And the results can be impressive. A writer with the pen name (mouse name) Jerome à Paris, for instance, organized dozens of other Kossacks interested in energy policy to write an energy plan that I find far more comprehensive and thoughtful than anything the think tanks have produced. It's been read and reshaped by thousands of readers; it will serve as a useful model should the Democrats retake Congress and have the ability to move legislation.

It's never too late to become what you might have been. -- George Eliot

by ZAPatty on Fri Apr 07, 2006 at 12:24:08 PM PDT

Congratulations on this mention.  I've tried to find that energy plan on DailyKos but without luck.  Could you post a link to it?

Point n'est besoin d'espérer pour entreprendre, ni de réussir pour persévérer. - Charles le Téméraire

by marco on Fri Apr 7th, 2006 at 11:58:56 PM EST
is here at ET in the archives somewhere. Couldn't find it for the moment. Maybe someone else remembers the title?

You can't be me, I'm taken
by Sven Triloqvist on Sat Apr 8th, 2006 at 09:28:21 AM EST
[ Parent ]
Sven, brunoken, just use the ET Wiki!

The ET version of that diary is here.

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Sat Apr 8th, 2006 at 12:47:00 PM EST
[ Parent ]
I have being told repeatedly by architects in my entourage that all construction material prices (steel, glass,...) have gone through the roof in the last 2-3 years due to China's skyrocketting demand (the building boom for the Beijing olympics probably played a significant role in this). In fact, construction material prices are rising so fast that most large projects are now fast-tracked in order to sustain usual profit margins on building ventures. I also vaguely remember reading something in Architectural Records about how 3-d modeling of buildings allowed firms to plan efficiently and order steel early in a project to save bundles.

An interesting read on global metal stocks (copper, zinc platinum, ...) and sustainability: Even with recycling, there's not enough metal to meet global demand

by Fete des fous on Sat Apr 8th, 2006 at 01:58:44 AM EST
Are the prices i dollars? How much is the effect on the dollars slide versus many other currencies?

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se
by A swedish kind of death on Sat Apr 8th, 2006 at 09:23:49 AM EST
and I take back everything I've said about charts ;-)

These charts all look like my blood pressure...

You can't be me, I'm taken

by Sven Triloqvist on Sat Apr 8th, 2006 at 09:24:27 AM EST
What good substitutes are there for copper? I mean, it's just a metal with a high electrical and thermal conductivity.

There must be dozens of applications where other things than copper can be used. Plumbing and roofing comes to mind, even though not many people use copper for roofs anymore.

What about recycling? There must be millions of tonnes of copper scrap lying around. Or is that already recycled?

----------------

I'll bet the price increase for aluminium is almost solely due to rising energy prices, because aluminium ore is abundant while electricity costs are 20-40% of the cost of aluminium.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Sat Apr 8th, 2006 at 09:30:14 AM EST
And here is a chart of M3 - $/bn (I know it's useless, but what the hell):

As the supply of commodities remains stable, more or less, and the total amount of dollars available to exchange for those commodities increases the price of the commodities in that currency must rise.  

It's classic monetary led inflation.

(The original of the chart is here)

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Sat Apr 8th, 2006 at 11:19:59 AM EST
I think you need to reevaluate, or rewrite part this paragraph:

but at the same time, the dollars captured by the oil producers are re-invested in US Treasuries, thus lowering the interest rates and making it easier for Americans (and international investors) to borrow - thus leading to increased spending and increasing imports (thus worsening again the deficit), and inflated asset prices, and creating, strangely enough, a appearance of increased wealth.

While I agree with most of this, I would argue that the effect on interest rates is more complicated than that.

Dollars being invested into the U.S. have only effected long term interest rates.  Short term rates continue to climb.  As a result, variable mortgage rates are climbing putting incredible pressure on the housing market (inventories have increased sharply), and consumer interest rates for such things as cars and credit card debt is rising (though businesses are using promotions to try and stem the effects of this rise).

As a result, at variation times over the past 30 days, there has been an inversion of rates (short term rates being higher than long-term rates).  this unsustainable situation almost always predicts a future recession.

The Fed's continued drive to raise rates has less to do with inflation than with a need to continue to attract foreign investment to sustain the deficit.  Now, we have reached a stage where higher interest rates are killing the economy yet the Fed dare not stop raising rates or else foreign purchase of the U.S. debt will slow or stop.  This suicidal cycle will only stop once the patient (the U.S. economy) finally keels over.

by numediaman on Sat Apr 8th, 2006 at 11:28:50 AM EST
The increase of adjustable rate mortgages and the growing prevalence of (incredibly stupid) interest-only mortgages implies the share of income devoted to already existing debt must increase and the share of income available for consumer purchases must decrease.  Unless some other 'consumer of choice' arises - does anybody see any sign of that happening in the next 2 years? - the world is going to be faced with a tremendous amount of productive capability attempting to sell into stable (the rest of the world?) or shrinking (US) consumer markets.  

Thus, when the "U.S. economy finally keels over" the chances are high for a very hard and long global recession the mirror of the global expansion led by debt-fueled US consumption.  

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Sat Apr 8th, 2006 at 11:59:44 AM EST
[ Parent ]


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