Rosamond Hutt, World Economic Forum 1h 701
Commodities have already had a tough 2015 – but earlier this week, prices for everything, from crude oil to industrial metals such as iron ore and copper, plummeted even further.
The sector is contending with the lowest prices since the financial crisis, perhaps even this century. Here is a brief guide to what is happening, how each of the main commodities are faring, and why it matters for global growth.
How bad is this crunch?
Earlier this week, crude oil dipped below $40 a barrel for the first time since 2009. The situation was so dire that the Bloomberg Commodity Index, which covers a wide range of natural resources, dropped to its lowest level since June 1999. After two days of freefall, prices have plateaued, with the oil price managing a brief recovery.
What’s causing the slump?
A combination of oversupply and weak demand have wreaked havoc on the natural resources industry. The growth slowdown in China and other emerging economies such as Brazil has reduced demand for natural resources like steel, iron ore and crude oil. Meanwhile, on the supply side, cheap borrowing costs and a failure to predict China’s slowdown led producers to expand too much in recent years. Now there is a glut that analysts say might continue well into 2016, with prices unable to pick up until global supplies decrease.
Who are the winners and losers?
Falling commodity prices are forcing the world’s mining giants to restructure their businesses in order to stay afloat as they battle declining profits. The market capitalization of the top 40 global mining companies has fallen by nearly $300 billion this year.
The crash is particularly devastating for economies that rely on export earnings from commodities. The oil-producing states of the Middle East, Russia, Brazil and a number of African nations have all been badly affected.
Conversely, in Britain and the Eurozone, low energy prices have benefited both consumers and business.
How are the big commodities faring?
Oil: China has been the biggest driver of oil demand in the past decade, so the country’s economic slowdown means bad news for crude consumption. Traders and investors are concerned that the oversupply will persist, with OPEC producers flooding the market.
Copper: Demand for copper in China has been weaker than expected this year, growing by about 2-3%. The metal fell to a six-year low this month, and is trading below the cost of production. Some analysts are blaming the drop on a slump in Chinese infrastructure investment, especially the power sector, which is one of the biggest consumers of copper.
Aluminium: The market for aluminium is oversupplied – global supplies rose more than 10.3% in the first half of the year. Meanwhile prices are trading at the lowest level in six years. China is also switching from being a customer to a producer of the metal, which is putting pressure on Western producers.
Iron ore: This base metal has done better than other commodities over the past few months. It hit a record low in July but has since recovered about 25% thanks to a reduction in exports from Brazil and Australia. However, supply continues to outweigh demand.
Gold: The precious metal has slipped 9% this year and is on track for its third year of losses. Traditionally gold has been viewed as a safe haven for investors, but analysts are watching carefully to see how prices will react to a predicted rise in US interest rates.
Read the original article on World Economic Forum. Copyright 2015.
China’s inflation figures just hit a five-year low. Price growth is falling for consumers, and companies producing goods are already recording sharp deflation.
Why does it matter? One simple reason: debt.
China’s debts as a proportion of GDP climbed to 245% in 2014 from 144% in 2007. That debt is worth one entire Chinese economy’s total output for a year, accumulated in just seven years. That’s a lot, and it puts the country in a pretty grim situation.
Here’s how it looks:
Debt was actually falling as a portion of GDP for the few years running up to the financial crisis before rapidly picking up afterward.
Deflation and lower inflation only make that worse. What matters for reducing your debts is nominal growth.
The economic growth figures that you usually see strip out the effect of inflation. Nominal GDP doesn’t do that: It is a simple measure of how much money is in the economy without trying to remove the effect of rising or falling prices, and it’s very important for debt.
Michael Pettis, one of the most authoritative voices in the world on the Chinese economy, explained this during the most recent round of Chinese inflation data (emphasis ours):
For nearly two decades, when nominal GDP growth was as high as 20-21% and the GDP deflator at 8-10%, (economists use a deflator to remove the effect of inflation) even if they were horribly mismanaged the nominal value of assets soared relative to debt … Under those conditions it was pretty easy to ignore debt costs, and even easier to pick up very bad investment habits. Now that nominal GDP growth has dropped to around 8-10%, and could be substantially lower in a deflationary environment even if growth did not continue to decline, as I expect it will, those bad habits have become brutally expensive.
In short, it’s easy to keep borrowing if your income is growing by a fifth every year, but those habits (and your existing debts) are a lot harder to deal with if that falls to one-tenth, or one-twentieth. Your debts are suddenly not being inflated and grown away as they previously were. That’s what’s happening in China, and the lower both inflation and growth fall, the worse that will get.
Copper Caps Worst Year Since 2011 as China’s Economy Cools
By Agnieszka de Sousa and Joe Deaux – Dec 31, 2014, 1:34:50 PM
Copper capped the biggest annual loss in three years in London amid signs of an economic slowdown in China, the world’s largest metals consumer.
The final reading this month for the manufacturing Purchasing Managers’ Index for China from HSBC Holdings Plc and Markit Economics came in at 49.6, the lowest in seven months. A figure below 50 signifies contraction. China is on course for the slowest year of economic growth since 1990, according to a Bloomberg survey. Copper dropped 14 percent this year amid prospects for fading demand from the Asian nation.
“The biggest stumbling block is you have China certainly slowing down,” Tai Wong, the director of commodity products trading at BMO Capital Markets Corp. in New York, said in a telephone interview. “If people have trades that they want to put on for the start of 2015, buying copper doesn’t seem to be one of them.”
Copper for delivery in three months on the London Metal Exchange fell 0.4 percent to settle at $6,300 a metric ton ($2.86 a pound) at 2:50 p.m. The drop this year was the biggest drop since a 21 percent loss in 2011.
The global copper market is poised to swing to a surplus of 139,000 tons next year from an estimated 128,000-ton deficit this year on more output from mines, according to RBC Capital Markets. Slowing demand in China could push the market into a bigger surplus in 2015, RBC analyst Fraser Phillips said in a report last week.
Copper stockpiles tracked by the LME rose 2.8 percent to 177,025 tons, the highest since May, data showed today. Inventories are down 52 percent this year, the biggest decline in a decade.
Aluminum, lead and zinc were also lower in London, while nickel and tin advanced. The LMEX index of six metals fell 7.8 percent this year.
In New York, copper futures for March delivery declined 1 percent to $2.8255 a pound on the Comex, closing down 17 percent for 2014. Trading was 54 percent below the average of the past 100 days for this time, according to data compiled by Bloomberg.
To contact the reporters on this story: Agnieszka de Sousa in London at email@example.com; Joe Deaux in New York at firstname.lastname@example.org
To contact the editors responsible for this story: Millie Munshi at email@example.com Joe Richter
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Two Chinese ministers offered support for Russia as President Vladimir Putin seeks to shore up support for the ruble without depleting foreign-exchange reserves.
China will provide help if needed and is confident Russia can overcome its economic difficulties, Foreign Minister Wang Yi was cited as saying in Bangkok in a Dec. 20 report by Hong Kong-based Phoenix TV. Commerce Minister Gao Hucheng said expanding a currency swap between the two nations and making increased use of yuan for bilateral trade would have the greatest impact in aiding Russia, according to the broadcaster.
The ruble strengthened 4.1 percent against the dollar today amid the signs of willingness by China, the world’s second-largest economy, to prop up its neighbor. Russia, the biggest energy exporter, saw its currency tumble as much as 59 percent this year as crude oil prices slumped and U.S. and European sanctions hurt the economy. President Xi Jinping last month called for China to adopt “big-country diplomacy” as he laid out goals for elevating his nation’s status.
“Many Chinese people still view Russia as the big brother, and the two countries are strategically important to each other,” said Jin Canrong, Associate Dean of the School of International Studies at Renmin University in Beijing, referring to the Soviet Union’s backing of Communist China in its first years. “For the sake of national interests, China should deepen cooperation with Russia when such cooperation is in need.”
Russian President Vladimir Putin, left, shakes hands with his Chinese counterpart Xi Jinping, right, before their meeting at the Asia Pacific Economic Cooperation (APEC) summit in Beijing, China, on Nov. 9, 2014. Photographer: Mikhail Klimentyev/AFP/Getty Images
China and Russia signed a three-year currency-swap line of 150 billion yuan ($24 billion) in October, an agreement that can be expanded with the consent of both parties. The People’s Bank of China published a chart detailing how such an agreement works in a microblog dated Dec. 19 and the official People’s Daily newspaper said today that the explanation was provided to address concerns the nation could suffer losses if Russia used the facility to obtain funds.
“As all we pay out and receive in return are renminbi, we don’t have to bear exchange-rate risks,” the PBOC said in the microblog, using an alternative name for the yuan. The swap amount can be adjusted to allow for changing circumstances and prevailing exchange rates, rather than pre-determined, are used, it said.
China is promoting the yuan as an alternative to the dollar for global trade and finance and the PBOC has signed currency-swap agreements with 28 other central banks to encourage this. The nation’s foreign-exchange reserves of $3.89 trillion are the world’s largest and compare with Russia’s $374 billion.
“Russia is an irreplaceable strategic partner on the international stage,” according to an editorial today in the Global Times, a Beijing-based daily affiliated with the Communist Party. “China must take a proactive attitude in helping Russia walk out of the current crisis.”
Still, “China’s help for Russia will be limited,” the editorial said. While China can offer capital, technical and market support, it can’t address Russia’s economic structure and excessive reliance on energy exports, the editorial said.
China signed a three-decade, $400 billion deal to buy Russian gas earlier this year. Oil imports from Russia hit an all-time high in November, according to China’s General Administration of Customs.
Russia isn’t in talks with China about any financial aid, said Dmitry Peskov, a spokesman for President Putin, on Dec. 20.
Russia wouldn’t be the first country in financial strife to turn to China for support this year. Argentina’s central bank utilized a cross-currency swap with the PBOC to stem a slide in the peso, which dropped 24 percent against the greenback this year as the government defaulted on dollar bonds. The peso has weakened 0.3 percent this month following a similar decline in November.
A similar move by Russia could help stabilize the ruble, according to Jan Dehn, the London-based head of research at Ashmore Group Plc, which manages about $70 billion in emerging-market assets. It would also bolster Chinese efforts to make the yuan a global reserve currency, he wrote in a Dec. 18 report.
To contact Bloomberg News staff for this story: Fion Li in Hong Kong at firstname.lastname@example.org; Xin Zhou in Beijing at email@example.com
To contact the editors responsible for this story: James Regan at firstname.lastname@example.org Malcolm Scott
It’s all about ending Global Warming.
So buy a Tesla and install a Solar City panel on your house to support an end to Global Warming
Hedge against Electricity BlackOuts from storms like Hurricane Sandy or Hot Summers.
By CHRISTOPHER MIMS
Elon Musk and his cousin, Lyndon Rive, have always been close. Their mothers are twins, and Messrs. Musk and Rive grew up together.
“We’ve known each other for as long as we’ve been conscious,” said Mr. Musk, speaking at a panel this week at a private conference in New York.
There is an obvious, almost brotherly affection between the two men. Mr. Musk says Mr. Rive “is an awesome guy and really hardworking and driven, and you can trust him with anything.” And when Mr. Rive recounts the drive to Burning Man in 2004 when Mr. Musk told him his next venture should be in solar power, Mr. Rive says that when Mr. Musk tells you what area to get into next, you get into it.
Their closeness continues, and if Messrs. Musk and Rive can achieve their shared vision, the result will be a transformation of the world’s, or at least America’s, energy infrastructure.
The companies the two men run—Tesla Motors Inc. and solar energy system provider SolarCity Corp.—are uniquely compatible. It isn’t just a product of the affiliation of their founders, but is also a consequence of Mr. Musk sitting on the board of SolarCity and being its largest individual shareholder.
Tesla makes cars, but it also—in the not too distant future—will make batteries. Lots of them. Tesla is building a $5 billion “gigafactory” in Nevada for batteries, one so large that it will, says Mr. Musk, be larger than the whole of earth’s current capacity for manufacturing lithium-ion batteries, most of which currently go into phones, tablets, laptops and other mobile devices.
At the conference Wednesday, Mr. Musk disclosed that a portion of the gigafactory’s capacity will be set aside for building “grid-scale storage.”
In other words, Tesla is going to continue its tradition of manufacturing battery packs for SolarCity, only on a much grander scale.
Up to now, SolarCity has sold Tesla-built battery packs to a handful of corporate and residential customers. The rationale is simple: The sun doesn’t always shine, so the best way to manage solar power on-site is to save it up for cloudy days and overnight.
SolarCity’s revenue has been growing 100% a year since its founding in 2006, and Mr. Rive says his goal is to maintain that pace for as long as possible. To that end, SolarCity announced in June the acquisition of Silevo, a Silicon Valley-based maker of solar panels that Mr. Rive insists is capable of producing at scale the most efficient solar panels on the market.
Mr. Musk said that while his gigafactory won’t exclusively sell grid-storage batteries to SolarCity, conversations with the company are “our best feedback as to deciding what the product would look like.”
Mr. Musk went even further, describing “the product” as a bank of batteries that “looks good,” is about 4-inches thick and can be mounted on the wall of the garage in a home.
Thanks to the economies of scale that will come from Tesla’s gigafactory, within 10 years every solar system that SolarCity sells will come with a battery-storage system, says Mr. Rive, and it will still produce energy cheaper than what is available from the local utility company.
Mr. Musk also noted that in any future in which a country switches fully to electric cars, its electricity consumption will roughly double. That could either mean more utilities, and more transmission lines, or a rollout of solar—exactly the sort that SolarCity hopes for.
America’s solar energy generating capacity has grown at around 40% a year, says Mr. Rive. “So if you just do the math, at 40% growth in 10 years time that’s 170 gigawatts a year,” says Mr. Rive. That’s equivalent to the electricity consumption of about 5 million homes, which is still “not that much,” he says, when compared with overall demand for electricity. “It’s almost an infinite market in our lifetimes.”
There are almost innumerable barriers to the realization of Messrs. Musk and Rive’s plan. For Tesla, there is the possibility that a superior battery technology could come to market soon after Tesla and its partner, Panasonic Corp., build their gigafactory, rendering their $5 billion investment obsolete. And SolarCity has almost the exact same problem with its ambition to build its own solar panels. While Mr. Rive says that Silevo’s technology is “next generation” and can compete with the cheap panels that China has been exporting to the rest of the world, the oughts are littered with the carcasses of U.S. solar panel manufacturers who claimed they could do the same, including Solyndra Inc.
And while this is a threat to shareholders rather than his aims, there is also the risk that Mr. Musk will find other, more efficient routes to reaching his stated goals, which include moving the world onto electric transport and solar power generation as quickly as possible.
For example, when asked whether or not the U.S. should erect trade barriers designed to protect American solar-panel manufacturers, Mr. Musk said: “If the Chinese government wants to subsidize the rollout of solar power in America, OK, it is kind of like ‘thank you’ is what we should be saying.” And in a subsequent interview at The Wall Street Journal’s offices in New York, Mr. Musk emphasized that “the reason I created Tesla was to accelerate the transition to sustainable transport. And I made that clear to investors.”
Despite the dumping of solar panels by China representing a substantial threat to SolarCity’s $750 million bet on Silevo—which includes a $350 million acquisition cost and an estimated $400 million to build a solar panel manufacturing plant in Buffalo, N.Y.—Mr. Rive agrees with Mr. Musk that there should be no barriers to trade in solar panels.
“Any extra tax on solar is just bad,” says Mr. Rive. “We have a big problem to solve—let’s solve that problem.”
That “big problem” is climate change. And Mr. Rive has been no less public than Mr. Musk about the purpose of his company being more than turning a profit. It’s one more thing their companies—and the two men—have in common.
—Follow Christopher Mims on Twitter @Mims or write to him at email@example.com.
Markets on Edge as China Moves to Curb Risky Lending
By NEIL GOUGH and KEITH BRADSH
HONG KONG — China’s financial system is in danger of becoming too big to bail out.
Official bank lending has more than doubled since the global financial crisis, growing nearly twice as fast as the overall economy. The even bigger problem, however, appears to come from the rise of a shadow banking system that has allowed a number of companies and individuals, often with political connections, to borrow from state-controlled banks at low interest rates and relend the money at much higher rates to private businesses desperate for credit at almost any price.
Now, in an effort to wean the banks and the economy off their addiction to such risky practices, Beijing has pledged to deliver what amounts to the country’s most sweeping financial overhaul in decades. Markets will play the “decisive” role in directing the economy, policy makers promised last month after a key plenum meeting of the Communist Party leadership. Interest rates are to be liberalized, cross-border investment will be welcomed and regional and bureaucratic protectionism will be curtailed, they declared.
But already, even relatively modest government moves are producing turbulence in money markets; just this week China’s central bank was forced to back off, at least temporarily, to avoid putting too much stress on the banking system and potentially drawing an angry reaction from powerful vested interests in China accustomed to paying very little for their loans.
“It’s been pretty clear since June, and especially clear since the plenum, that the new crowd is interested in tightening monetary policy and letting interest rates rise,” said Arthur R. Kroeber, the Beijing-based managing director of GK Dragonomics, an economic research firm. “The purpose is to reduce the rate at which credit is expanding, which has been a bit of a problem over the last couple of years.”
China has experimented twice this year with much higher, market-driven interest rates. As with a similar experiment in June, the central bank allowed rates late last week and early this week to soar to unsustainable levels. Instead of regularly scheduled open-market operations, the bank tried unconventional methods of guiding money markets.
That approach involved the central bank’s turning to posts on China’s Twitter-like social messaging service, Sina Weibo, to chasten banks to “make rational adjustments to the structure of their assets and liabilities, and improve their liquidity management using a scientific and long-term approach.”
But as in June, the experiment did not last long. On Tuesday, China’s central bank, the People’s Bank of China, provided a direct injection of fresh money after the market pushed seven-day interest rates to nearly 10 percent, double their earlier level. The central bank’s action eased pressure on the financial system and quelled fears of an immediate credit crisis. But rates remain elevated, and the bank may have only postponed the moment of reckoning for a few months.
“The key message from the current central bank-induced tightness is deleveraging,” said Stephen Green, the head of research for greater China at Standard Chartered. “We’ll see what happens when we see greater levels of corporate distress in 2014, whether Beijing buckles or not.”
A complex and loosely regulated network of financial go-betweens has sprung up to profit from repackaging and reselling China’s new mountains of debt, turning loans into investment products. Such products have become popular among ordinary investors in China because they pay much higher interest rates than deposits in savings accounts, where rates are capped by the government to protect the state-owned banking system from competition.
But loosely regulated financial businesses can make a dicey business model, as Wall Street learned in 2008. And they pose a particular threat in an economy where growth is slowing, as it has been in China for the last three years.
“The final users of the money will not be able to earn returns high enough to repay the money and promised interest,” said Yu Yongding, a senior fellow at the Institute of World Economics and Politics of the Chinese Academy of Social Sciences and a former member of the monetary policy committee at China’s central bank. “The chains of lending and borrowing can be long, just like the securitized subprime mortgages. The result can be devastating.”
Indeed, the real-life stress tests the central bank has been experimenting with are not without casualties. As markets became jittery in the run-up to the June credit crunch, two branches of the state-owned China Everbright Bank technically defaulted on 6.5 billion renminbi, or $1.1 billion, worth of short-term payments.
In a regulatory disclosure that was part of its $3 billion Hong Kong share offering earlier this month, the Everbright Bank explained that while it had sufficient financing and liquidity at the corporate level, “the branches did not manage to fulfill their obligations to repay short-term interbank loans.” Instead, the payments were settled a day late.
The bank said that in response to the episode and to the greater volatility in China’s bank-to-bank lending market, it had increased reserve levels and “emphasized among our departments the overriding importance of sound liquidity.”
The big risk for China’s cosseted banks is not necessarily bank runs of the sort seen in the early 1930s in the United States, with depositors lining up to withdraw money before a bank can fail. The Chinese authorities have made clear that they will not tolerate disorderly closures of banks, and over the years have reportedly rushed cash to banks that faced sudden withdrawals.
Instead, the greater worry has been what some experts describe as “a walk on the banks” — depositors steadily removing their savings from banks after losing enthusiasm for deposit rates that have long been set by regulation at levels often below the inflation rate and only occasionally slightly above it. That slow drain could imperil the banks’ ability to continue pumping ever-larger loans to state-owned enterprises and politically connected individuals, even when many of those loans appear to be for helping borrowers repay previous loans.
Banks in China have been able to stay profitable while lending at low rates only because the government has required all of them to pay even lower rates for deposits. Savers have had few alternatives to banks until very recently: Real estate prices are already stratospheric relative to incomes, the weakly regulated and highly speculative domestic stock markets are widely distrusted and shadow banking businesses are periodically reined in by the government.
Total credit in China, although growing fast, remains slightly smaller relative to economic output than in the West. The worry is that the eventual proportion of nonperforming loans may prove even higher than other countries have had to manage, while China’s less developed financial system may make it hard to bail out less regulated entities, even as the central bank retains tighter links to the four main state-owned banks.
While policy makers say they are worried about upsetting the delicate mechanisms of the current banking system, public criticism continues to grow, even within China’s elite. That suggests further market-oriented experiments could be coming soon.
“Banking in China has become like a highway toll system,” Yao Jingyuan, the former chief economist at the state statistics agency, said late last week during a speech at Nanjing University, according to numerous Chinese news reports. “Banks charge every time money goes through them.”
“With this kind of operational model,” Mr. Yao added, “banks will continue making money even if all the bank presidents go home to sleep and you replaced them by putting a small dog in their seats.”