Queensland could transform our view of commodities

Today, the world is facing natural disasters on an unprecedented scale: more than 255 million people were affected by natural disasters globally each year, on average, between 1994 and 2003. During the same period, these disasters claimed an average of 58,000 lives annually,with a range of 10,000 to 123,000 casualties. In the year 2003, 1 in 25 people worldwide was affected by natural disaster. Then, the Indian Ocean Tsunami in 2004; Hurricane Katrina 2005 in the USA; the Yogyakarta Earthquake in Indonesia in 2006; Sichuan earthquake in China in 2007; Cyclone Nargis in Myanmar in 2008, the Haiti Earthquake; Chilean Earthquake and Pakistan in 2010. Now, the floods in Queensland. This one is different – where many disasters have a local impact, this one is having a far reaching global significance – a “butterfly effect” that should help to transform global thinking on commodity based logistics and supply chains in a fundamental way. That does not mean that it will …

Rising tides don't raise all boats

Coal is the world’s forgotten fossil fuel but, with coal supplies meeting 40 per cent of global energy needs and demands far outstripping supplies; coal is the new black gold. Queensland has the largest coal reserves in Australia with 34 mines generating 120 million tonnes or, 75 per cent of Australian coal exports. That is roughly 15 per cent of global output. This coal is top class thermal quality with less than 15 per cent ash. In fact, China relies on it to bump up the energy quotient for its steel mills and, with output on the rise this becomes increasingly important.

China uses coal for a staggering 78 per cent of its energy needs and, with air pollution from coal fired plants responsible for an estimated 400,000 to 750,000 premature deaths a year, it is seen as a key environmental priority. In recent years, China has closed over 10,000 mines and has plans to shut down a further 1,000. This means a serious reduction in coal exports – a drop of 80 million tonnes represents 12 per cent of global coal exports – this has seen a dramatic shift to coal imports. A Citigroup Report on Chinese coal imports published in November 2010 made it clear: “Net imports should rise from (an estimated) 143 million tonnes in 2010 to 233 million tonnes in 2011. Demand surplus expands; and both domestic price and international price should rally.”

China is not alone. India, with coal meeting 70 per cent of its energy needs – is increasing imports from around 30 million in 2008 to 60 million as soon as possible. By the way, India produces well over 400 million tonnes of its own coal but most of this is low quality with a high shale content – useful for power plants and steel mills and this adds yet another premium to Queensland coal. Then, there’s Japan which has seen a run on its coal reserves as an earthquake damaged a nuclear power station in 2007 and, a serious issue with the decline of Chinese coal exports – Japan’s traditional source. So, the outlook for coal is clear – more needed.  Suddenly, the media is full of flooding in Queensland. Make no mistake about it, this is a human tragedy with a global economic sting in the tail. Look no further than the price per tonne for prime thermal coal. On 29th October 2004, global price of thermal coal was $53.90. This week, this price has risen to $240 and could reach $300.

Queensland is not all about coal. In fact, global wheat and sugar markets will suffer from the dislocation of production as world demand continues to climb and supply loses Queensland’s significant capacity. In fact, Queensland is but one area affected by the wider La Ninya* phenomenon which has drenched countries from Australia to Colombia to Indonesia and concerns mount that this could impact the US growing season – the world’s largest exporter of agricultural commodities.

Commodities analysts worldwide have been forced to consider meteorological bulletins as well as supply and demand forecasts. In the past six months alone, this weather system has triggered a surge in thermal coal by 32 per cent; rubber by 42 per cent and Arabica coffee by 75 per cent. It is feared that the dry spell in Argentina and Southern Brazil could threaten the soya bean and corn crops in these countries which together, according to a Report in the Financial Times (06/01/11) account for 45 per cent and 26 per cent of global exports respectively. Given the reductions in capacity elsewhere, this will send suppliers to reserves – and there is not much left. The same FT article highlights the hike in prices for key commodities since January 2010. It makes for sobering reading – Rubber, up 78.8 per cent; Corn, up 42 per cent; Soyabeans, 32.6 per cent; Iron Ore, 43.4 per cent.

In all of this, there is the very real threat posed by Financial speculators as the incentives to migrate from financial instruments (sub-prime mortgages) and move to commodities gathers momentum. As global population grows from 6 to 9 billion by 2050; food production will have to climb by 60 to 70 per cent to meet increased demand and these speculators could be ready for a set of bonuses that will make previous bull markets look tame.

Queensland should be a wake-up call for the global economy. In the wider context of free markets, Amartya Sen et al (Gray, False Dawn; Bakshi, Bazaars, Conversations & Freedom; Reinart, Rich Countries, Poor Countries; Bateman, Why doesn’t microfinance work; Beattie, False Economy; Jackson, Prosperity without Growth; Chang, Kicking away the ladder; Cassidy, How markets fail; Lynn, Cornered and, The End of the Line; Lancaster, Whoops; Soros, Crisis of Capitalism; Canuto & Giugale; The Day After Tomorrow; Polanyi, the Great Transformation) have cautioned that the market could make a bad situation worse and that speculators could aggravate the price hikes triggered by emergencies such as these – to the detriment of democracy; not just the household budget. Free Market fundamentalism and the assertion that there is no alternative to free markets, as Soros has argued, is seen as a root cause of the Financial crisis and, with the average share on the New York Stock Exchange being owned for no more than 7 months, the notion of unfettered markets opens itself to further scrutiny.  As Greenspan made clear to a Congressional Committee at the time – the 2008 financial crisis demonstrated that the free market that had run the global economy for decades was flawed.

It is important to point out that most of the above observers are pro-capitalist but object to any mention of TINA – There Is No Alternative – to the inherently monopolistic and speculative tendencies inherent in the species of capitalism that has grown out of innovative financial instruments. The point at issue is the gap between rich and poor and the need to address it. It is expensive to be poor; the amount they spend on food is already high and will nor survive the knock on effect of commodity price hikes that will have the same impact over time as rising tides or drought conditions are having now – calamitous.

As Queensland deals with the local impact and the global economy wakes up to the backlash of this sudden and hugely significant drop in Queensland’s productive capacity in key commodities we should remind ourselves of a subtle message for western markets made by the Chinese Premier, Wen Jiabao, in a recent interview with CNN. Asked about hobbies, he spoke of his delight in reading books on Chinese and foreign history because “history is like a mirror”. Warming to the theme, he professed admiration for the Theory of Moral Sentiments by Adam Smith – this is the book he wrote before the Wealth of Nations and, in which he makes plain the need for an ethical dimension to all economic decisions. In other words, self-interest is not the one best way. Interestingly, the early Confucian scholar Mencius argued that violating the right to food and material well-being is a greater crime than denying political rights. Humility and compassion, not flamboyance and egoism, are the cherished virtues. A sobering thought in so many ways.

Allow commodity prices to go the way of sub-prime markets and the risks will not be easy to hide in some arcane mathematical formula. Make no mistake about it, people’s livelihoods will pay for that wave of bonuses and, the consequences could be dire. This should give those in favour of unregulated Globalisation – a free flow of goods, capital and people; a rising tide to raise all boats – pause for thought. Trade and globalisation are not a zero sum game. Contrast much of recent behaviours with that of the Norwegian Sovereign Wealth Fund.

Those in the developed world have to be ready and willing to allow of alternatives to the economic monologue of the past few decades. And this is as true of logistics as it is of economics. It is time to move from ever better (for whom?); cheaper (do we factor in the true environmental cost?) and faster (is this the race to the bottom?) supply chains to more inclusive exchange – transformational logistics. We are moving from a capitalism that champions innovation and entrepreneurial energy to make things on the ground to one that makes its money on speculating on force majeure and all our futures – using the most vulnerable as monopoly money. This is NOT what Adam Smith meant at all – but it does re-affirm economics as the dismal science.

In terms of Logistics and Supply Chains, we have to seek to uphold values as well as value. This is the profits, planet and people triple bottom line. As Eric Schmidt, CEO of Google puts it in today’s FT:”In this global era our real enemies are inflexibility, proprietary systems and “walled gardens” that let the elite in but leave the rest of the world out”. When it falls, rain falls on us all. We cannot delude ourselves that we can dodge the raindrops as others get wet.

* FT Note (06/01/11) – La Ninya is a recurring climatic event caused by a decrease of the water temperature in the tropical Pacific. Alternatively known as El Viejo, the old man, it is the opposite phenomenon to El Ninyo, the little boy, that refers to an increase in the tropical Pacific’s water temperature. The phenomenon occurs in a loose cycle of three to five years and the intensity varies greatly. As Bill Patzert, an oceanographer at NASA puts it – “this one is the real deal”.

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10 Responses to Queensland could transform our view of commodities

  1. karen hughes says:

    Very sobering! Yet the idea of locally produced energy and food stuffs isn’t yet resonating and will not until it is economically and socially more viable from a macro stand point. 1)There is far too little innovation, research and development of alternative energy and food sources that take a holistic view. 2) Many petrochemicals can be developed from renewable energy sources; they don’t have to be petroleum based. 3) Development of clean coal technology, biofuels, solar energy…The list goes on, but until governments are forced to put legislation in place that facilitates development of alternatives and finances R&D, nothing will change. Instead we must debate religions and fight wars over religious principals and support the military industrial complex. Sure has done us a lot of good hasn’t it?

  2. James Henry says:

    Again, this is a terrific insight into the interplay between natural disasters and the ability of the free market to cope. I agree, sub prime mortgages are one thing but, a 25 per cent hike in commodity prices in the past six months and future demands will be even more attractive to our beloved bankers. I can see a flotilla of yachts bought on bonus and moored off the coasts of various countries – just like cruise liners and haiti.

    All very well. However, let’s not run away with the idea that the Chinese are purely altruistic on all of this. There have been a number of forced re-settlements (Tibetan and Mongolese nomads come to mind) and, a number of disasters that have threatened food security and food safety. And it is sobering reminder to recall the plight of Zhao Lianhai, a former food-safety worker who was jailed last month for organising a campaign for compensation over a contamination milk scandal that left 300,000 ill and killed at least six babies. As de Shutter of the UN was moved to comment: “You cannot protect the right to food without the right to freedom of expression and organisation”. What would Mencius have said?

  3. Byron says:

    Sharp as ever!

  4. phillipcrockford says:

    Very stimulating and cogent argument Rob. Thanks from a Queenslander who is in the middle of a rainstorm you wouldn’t believe. A couple of further points…

    As the speculative predators and vultures shift to commodities, they will, as you intimate, look to create risks that they can profit from, look to scale up and consolidate monopolies or “cosy oligopolies” that make market manipulation easier.

    One more piece: as the high impacts and dreadful consequences to the world’s poorest and most vulnerable unfold, the piper will be paid by governments. i.e. it’s the taxpayers who will pick up the tab, while the press report it as though it’s all some sort of unfortunate accident.

    Schmidt has a point,, but it’s a bit hard to swallow his preaching, since his business model is the natural enemy of proprietary systems and his profits derive from a “better, cheaper, faster” approach to the ‘logistics’ of (other people’s) content.

    You are right though: it’s another great stimulus for a re-think. One wonders where to look for opportunities to create beachheads of new action and new practices for transformational logistics.

  5. sravea says:

    Great Work Rob!…….On the other note, Floods in the Pakistan and Unseasonal rains in India has affected the mainstay of its fragile economy of domestic textile, yarn industry and Onions. On the “welcome development” between India and Pakistan has alleviated each other shortages.

    The Indian government decision to restrict the export of cotton to 5.5 million bales in 2010-2011 was taken keeping view the demand of the domestic textile and yarn industry and the estimated production this year. There was no country –specific quota. But amid rising world prices and high demand, Indian traders evidently found it more advantageous to priotires shipments to china and Indonesia, and the orders for one million bales from Pakistan went unheeded. Also, traders were given an extremely short calendar to register orders. A small upward revision by the cotton Advisory Board in the projected cotton harvest has evidently enabled the Indian commerce Ministry to consider raising the export ceiling as a reciprocal measure to Pakistan agreement to exporting onions to India through the Wagah border.

    The Pakistani government has frozen the trade on this route to keep domestic prices in check. It has allowed onions to be exported only by sea, but this long and expensive alternative defeats the purpose for which India wants Pakistani onions. Islamabad must consider New Delhi’s proposals with an open mind. An agreement on this may not translate into paradigm shift in India – Pakistan relations, even a small step towards goods neighbourliness can go some way in altering the mood of mutual hostility. it now appears that both the countries are tentatively preparing for another round of engagement in March, most likely between Foreign secretaries on the sidelines of the SAARC standing committee meeting at Thimpu.The Foreign ministers may hold talks later in New Delhi, although the date for the meeting has not been decided yet. Cotton and onions are unlikely drivers of India-Pakistan diplomacy, but they could help smoothen the stage for the forthcoming rounds of talks.

  6. sravea says:

    Great Work Rob!…….On the other note, Floods in the Pakistan and Unseasonal rains in India has affected the mainstay of its fragile economy of domestic textile, yarn industry and Onions. On the “welcome development” between India and Pakistan has alleviated each other shortages.
    The Indian government decision to restrict the export of cotton to 5.5 million bales in 2010-2011 was taken keeping view the demand of the domestic textile and yarn industry and the estimated production this year. There was no country –specific quota. But amid rising world prices and high demand, Indian traders evidently found it more advantageous to priotires shipments to china and Indonesia, and the orders for one million bales from Pakistan went unheeded. Also, traders were given an extremely short calendar to register orders. A small upward revision by the cotton Advisory Board in the projected cotton harvest has evidently enabled the Indian commerce Ministry to consider raising the export ceiling as a reciprocal measure to Pakistan agreement to exporting onions to India through the Wagah border.

    The Pakistani government has frozen the trade on this route to keep domestic prices in check. It has allowed onions to be exported only by sea, but this long and expensive alternative defeats the purpose for which India wants Pakistani onions. Islamabad must consider New Delhi’s proposals with an open mind. An agreement on this may not translate into paradigm shift in India – Pakistan relations, even a small step towards goods neighbourliness can go some way in altering the mood of mutual hostility. it now appears that both the countries are tentatively preparing for another round of engagement in March, most likely between Foreign secretaries on the sidelines of the SAARC standing committee meeting at Thimpu.The Foreign ministers may hold talks later in New Delhi, although the date for the meeting has not been decided yet. Cotton and onions are unlikely drivers of India-Pakistan diplomacy, but they could help smoothen the stage for the forthcoming rounds of talks.

  7. sravea says:

    Good and interesting points to know!…

  8. Jan Husdal says:

    As always, very well observed. I think it’s time to realize that cheap food and cheap energy are going to be a thing of the past and I guess it’s no coincidence that soft commodities is a hot topic on CNN’s Richard Quest Means Business these days.

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