Over the last few years Chinese demand (or weakness of) has been the main cause of volatile commodity prices. Copper has been one of those commodities but supply factors have also been influential in pushing copper prices to their highest level in the last two years. Strikes and supply disruptions (see graph below) in two of the world’s biggest mines will have a significant impact:
Escondido in Chile (the largest in the world) and Grasberg in Indonesia.
Both mines account for 9% of mined copper supply. One-month shutdown at both mines removes 140,000 tonnes which equates to 0.7% of world output. In both mines labour contracts are up for renewal and they account for 14% of production. The video below from Al Jazeera looks at the strike action by miners at Escondido in Chile where workers are rallying against cuts to pay and benefits by owners BHP Billiton which are designed to improve productivity. However, in the last three years productivity in the mine is up 48% and the labour force has been cup by 17%.
Add to this more demand from China and there is only one way copper prices can go – it is up 20%. Resolutions to labour relations are needed in both Chile and Indonesia if supply is to be restored to pre-dispute levels. Furthermore the outlook for copper demand is strong with its importance to electric vehicles and wind and solar energy units. In the long-term, depletion of copper ores will also put pressure on prices northwards.
Source: The Economist 16th Feb 2017. Al Jazeera 23rd Feb 2017
There are very high levels of oil storage at present are the main reason for oil prices to go below US$50. Why are the storage tanks so full reports The Economist?
1. OPEC’s agreement with non-members such a Russia to cut production from 1st January attracted a lot of demand to take advantage of future price increases. This did produce higher prices which win turn encourages more supply as American shall producers started to pump more oil. American oil rigs have increased in number from 386 in 2016 to 617 in 2017 producing 400,000 barrels of oil a day more than the low levels in September 2016. Much of the oil has gone into storage terminals.
2. Before OPEC cut production it increased output and exports. A lot of this oil went into storage in the USA as refineries there were down for maintenance reasons.
3. Futures prices of oil are closely related to the level of inventories. It was hoped that the OPEC cut in production would push the futures market into ‘backwardation’ – short-term prices are greater than long-term (futures) prices which means that purchasers will use the oil rather than storing it. However with the release of US storage levels the immediate price of oil fell in comparison to longer-term rates – referred to as “contango” which makes it worthwhile to buy oil and store it. It is estimate that the price of storing a barrel oil is 41 cents per month compared to contango of 65 cents for the same period. Therefore you make 24 cents on each barrel. See video below from EKTInteractive.
So the more oil stored the lower the short-term prices go – the challenge is to break the loop. Maybe oil output cuts beyond June may force some to release their inventory.
Source: The Economist 16th March 2017
Sand has become an integral part of the global economy and also the most extracted material. It is used in the construction industry where it is part of the process in making concrete and asphalt. Fine sand tends to be used to produce glass and electronics.
Since the GFC in 2008 Asian countries have been the big users of sand with China consuming up to 40% of world supply (Asia 70%) building 32.3m houses and 4.5m kilometers of road between 2011 and 2015. See graph from The Economist.
Although hard to believe, sand is becoming scarce as desert sand is too fine for most commercial purposes. Furthermore the cost of transporting sand can be very expensive in relation to the price and reserves need to be located near construction sites to make it more economical. By contrast Singapore and Qatar are big importers of sand to assist in their construction programme (especially the latter with the Football World Cup in 2022). Sand is also demanded to create more living area in a country. As is well documented, China has built fake island on coral reefs in the South China Sea. Japan has also claimed a lot of land by dumping vast amounts of sand.
Sand is being extracted at an increasing rate and this is having an impact on the environment with water levels in lakes being lowered and beaches in resort areas of the Caribbean and northern Africa. Indonesia and Malaysia have now banned sand exports to Singapore as a result of thinning coastlines. But with limited supply comes a higher price and with a higher price the black market starts to become prevalent. In India the illicit market for sand is valued around $2.3bn a year. Also the rising price of sand will lead developing-country builders to source alternatives to sand
Sand – elastic in demand as there are substitutes:
*Sand could be classifies as elastic as there are substitutes:
*Mud can be used for reclamation
*Straw and wood to build houses
*Crushed rock to make concrete.
With the continued growth of construction and manufacturing output global demand for sand is forecast to increase 5.5 percent to 291 million metric tons in 2018, with a value of $12.5 billion. Whether the supply can cope with this increase demand is another question. Higher prices will make illicit mining more attractive.
Sources: The Economist 1-4-17. Freedonia – World Industrial Silica Sand
Former US President Ronald Reagan said that the US tax system was “complicated, unfair, cluttered with gobbledygook and loopholes designed for those with the power and influence to hire high-priced legal and tax advisers”. Paul Solman of PBS News, looks at the US tax system in the video below and compares it to other countries. Even Paul Ryan, Speaker of the House states that the USA has the worst tax code in the industrialised world, bar none. T.R.Reid, author, “A Fine Mess” suggests that New Zealand is a model of good tax policy. “They have done what all the economists think is right, to get a tax code that is simple, fair and efficient”. He mentions the BBLR – broaden the base, lower the rates. You broaden the base by making everything taxable – health insurance, car park, pension contribution. By contrast Americans spend about six billion hours a year collecting the data and filling out the forms. They spend $10 billion to H&R Block and other preparers and, on top of that, $2 billion in tax preparation software, which still takes hours of work. Furthermore there are more than 400 additions to the tax code every year, and most of them are giveaways to one or two taxpayers. Of the 35 richest countries, in total tax burden, U.S. ranks 33rd. And in return, the US government spends less as a percentage of GDP than other governments.
What makes a good tax?
A new part of the AS Level Economics syllabus is Canons of Taxation. Adam Smith’s contribution to this part of economic theory is still regarded as classic. His enunciation of the canons of taxation has hardly been surpassed in clarity and simplicity. His four celebrated canons are as follows:—
- Canon of Equality. Equality here does not mean that all tax-payers should pay an equal amount. Equality here means equality or justice. It means that the broadest shoulders must bear the heaviest burden.
- Canon of Certainty. The individual should know exactly what, when and how he is to pay a tax. Otherwise, it causes unnecessary suffering. Similarly, the State should also know how much it will receive from a tax.
- Canon of Convenience. Obviously, there is no sense in fixing a time and method of payment which are not suitable. Land revenue in India is realized after the harvest has been collected. This is the time when the cultivators can conveniently pay.
- Canon of Economy. This means that the cost of collection should be as small as possible. If the bulk of the tax is spent on its collection, it will take much out of the people’s pockets but bring little into the State’s pocket. It is not a wise tax.
I have blogged about the UBI and read about how India would provide a strong case for its implementation. The rationale for this is the fact that India’s welfare programmes (950 that the central government run) are numerous, inefficiently run and encourage corruption. Add to those the programmes run by each state and you have a bureaucratic nightmare unfolding. However this has been part of Indian society and not so long ago it took businesses 6 months to acquire a permit to import computers. The UBI was raised as an alternative to the inefficiency of welfare handouts and this unconditional cash payment be disbursed not just to the poor but to everyone. In more advanced countries the case for UBI is based on technology making many jobs obsolete and no new jobs being created in their place. Although this is not the case in India and it warrants the UBI for other reasons:
1. UBI is easier to administer than India’s current antipoverty programmes which largely take the form of subsidies paid to sellers of grain, fuel, fertilizer and other essentials. Current programmes are plagued by waste, corruption and abuse. UBI would save 2.07% of GDP.
2. By making everyone eligible, a universal basic income removes the messy task of identifying who is and who isn’t in need of assistance.
3. By paying money directly into bank accounts, it would allow India to do away with the vast administrative machinery currently needed to supply the poor with cheap wheat, rice and other goods.
4. By one estimate, around one-third of the grain set aside for India’s food-welfare program never reached the intended beneficiaries in 2012, the most recent year for which comprehensive data are available. Payments under a giant rural-work program are regularly delayed, leaving families in the lurch.
5. paying a basic income directly into bank accounts would encourage more people to use formal financial services, which would then help banks invest in expanding access to banks and ATMs.
1. households—“especially male members”—may fritter away their basic income on liquor and tobacco
2. India’s underdeveloped financial infrastructure could make it hard for many people to access their entitlements. According to the World Bank, there are only around 20 ATMs for every 100,000 adults in India, compared with 70 in South Africa, 114 in Brazil and 132 in the U.K. Although the government says it has helped open 260 million bank accounts since 2014, one-third of Indian adults remain unbanked.
3. The government paper suggests that 25% of the population should be excluded in order to make it more affordable. However deciding who is poor and who isn’t an easy task especially when over 35% of the richest 1% of Indians benefit from subsidized food to which they are not entitled.
4. There is a risk that a UBI would just supplement the welfare programmes rather than replacing them.
Source: The Economist – Wall Street Journal
Sad news yesterday of the passing of John Clarke. As well as his Fred Dagg character he was part of ‘Clarke and Dawe’ which aired on ABC Australia in which prominent figures speak about matters of public importance. Below is the time they look into what Quantitative Easing actually is. Very amusing and his sense of humour will be missed.
Dairy prices fell dramatically in 2014 and 2015, prompting the RBNZ to reverse 2014 OCR increases in 2015. Average prices on the GlobalDairyTrade auction fell by 38% in 2014/2015 and 20% in the 2015/2016 to mid-March.
Inconsistent Chinese demand and increased European/US dairy supply causing the perfect storm of plummeting whole milk powder prices. Thankfully, for dairy farmers and the NZ economy dairy prices recovered in late 2016 but can it be maintained into 2017? Here are some reasons why prices may recover:
- EU production is slowing down
- New Zealand production is also likely to fall
- Demand from China is likely to increase
- ASB rural economist Nathan Penny noted three things that would impact the price of milk. One as the fact that milk production was held back before the removal of annual quotas at the end of March 2015 as countries avoided paying penalties associated with producing above quota. Two, after the April removal of quotas, production surged in the EU with April production rising over 3% on a month-by-month basis. Three that post-quota surge has now passed, with production growth slowing, particularly since July, as farmers have struggled with low milk prices.
Once supply is more aligned to demand, global prices are expected to rise again. Europe collectively is the world’s largest dairy exporter, accounting for nearly a third of global export sales. EU exports increased by 6% in milk equivalent last year.
Sources: National Business Review and PWC