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Posts Tagged ‘Commodities’

The market for sand

April 16, 2017 Leave a comment

Sand Demand.pngSand 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.

Demand
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.

Limited supply
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.

Global Outlook
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

Categories: Supply & Demand Tags: , ,

‘Trading Places’ movie – short-selling explained

January 18, 2017 Leave a comment

The 1983 movie ‘Trading Places’, staring Eddie Murphy and Dan Aykroyd tells the story of an upper class commodities broker Louis Winthorpe III (Aykroyd) and a homeless street hustler Billy Ray Valentine (Murphy) whose lives cross paths when they are unknowingly made part of an elaborate bet.

There is a great part in the movie when they are on the commodities trading floor that explains price and scarcity. Winthorpe and Valentine are up against the Duke Brothers in the Frozen Concentrated Orange Juice (FCOJ) futures market.

How a futures market works
As opposed to traditional stock/shares futures contracts can be sold even when the seller doesn’t hold any of the commodity. For instance a contract of $1.30 per pound for a 1000 pounds of FCOJ in February indicates that the seller is compelled to provide the produce at that time and the buyer is compelled to buy the produce.

Here’s how it worked in the movie

The Duke Brothers believe they have inside knowledge about the crop report for the orange harvest over the coming year. They are under the impression that the report will state the harvest will be down on expectations which will necessitate greater demand for stockpiling FCOJ – this will mean more demand and a higher price. Therefore at the start of trading the Dukes representative keeps buying FCOJ futures. Others saw they were only buying and wanted in on the action, those that had futures were not willing to sell so the price kept rising. However the report was fake and Winthorpe and Valentine had access to the genuine report which stated that the orange harvest had not been affected by adverse weather conditions. Knowing this they wait till the the price of FCOJ reaches $1.42 and start to sell future contracts.

Then when the crop report is announced and it indiates a good harvest investors sell their contracts and the price drops very quickly. The Dukes are unable to sell their overpriced contracts and are therefore obliged to buy millions of units of FCOJ at a price which exceeds greatly the price which they can sell them for. In the meantime Winthorpe and Valentine for every unit they sold at $1.42 they only have to pay $0.29 to buy it back to fulfill their obligation. This results in a profit of $1.13 per unit.

Sub-Sahara economies hit by fall in commodity prices.

January 12, 2017 Leave a comment

Commodities have been the engine of growth for many sub-Saharan countries. Oil rich nations such as Nigeria, South Africa and Angola have accounted for over 50% of the region’s GDP whilst other resource-intensive countries such as Zambia, Ghana and Tanzania to a lesser extent.

I have mentioned the ‘resource curse’ in many postings since starting this blog. It affects economies like in sub-Sahara Africa which have a lot of natural resources – energy and minerals. The curse comes in two forms:

  • With high revenues from the sale of a resource, governments try and seek to control the assets and use the money to maintain a political monopoly.
  • This is where you find that from the sale of your important natural resource there is greater demand for your currency which in turn pushes up its value. This makes other exports less competitive so that when the natural resource runs out the economy has no other good/service to fall back on.

However it is the fall in commodity prices that is now hitting these countries that have, in the past, been plagued by the resource curse. As a lot of  commodities tend to be inelastic in demand so a drop in price means a fall in total revenue since the the proportionate drop in price is greater than the proportionate increase in quantity demanded.

The regional growth rate for 2016 is approximately 1.4% but it is not looking good for commodity driven economies:

  • Nigeria – oil – 2016 GDP = -2%
  • Angola – oil – 2016 GDP = 0%
  • South Africa – gold – 2016 GDP = 0%

In 2016 resource rich countries will only grow by 0.3% and commodity exporting countries have seen their exports to China fall by around 50% in 2015. Furthermore, public debt is mounting and exchange rates are falling adding to the cost of imports. With less export revenue the level of domestic consumption has also decreased.

It is a different story for the non-resource countries of sub-Sahara. It is estimated by the IMF that they will grow at 5.6%. By contrast they have been helped by falling oil prices which has reduced their import bill and public infrastructure spending which has increased consumption.

africa-oil-effectAs is pointed out by The Economist numbers should be read wearily as GDP figures are only ever a best guess, and the large informal economy in most African states makes the calculation even harder. Africa may have enormous natural reserves of resources, but so far most Africans haven’t felt the benefit. In Nigeria, for instance, what’s seen as a failure to spread the country’s oil wealth to the country’s poorest people has led to violent unrest. However, this economic paradox known as the resource curse has been paramount in Africa’s inability to benefit from resources. There is a gravitation towards the petroleum industry which drains other sectors of the economy, including agriculture and traditional industries, as well as increasing its reliance on imports. What is needed is diversification.

Commodity prices – supply and demand in action.

November 24, 2016 Leave a comment

commoditiesThe Economist has a graph showing the change in price of commodities from 5th January 2016 to 18th October 2016. The change in price is purely reflected in simple supply and demand theory. In 2015 raw material price dropped mainly because of over-supply. The main points from the graph are:

  • Oil – $50 per barrel – expectations that supply might decrease by OPEC countries
  • Sugar – price up by 56% – unfavorable weather therefore supply decreases
  • Grain – prices down by 9% – bumper harvests in the USA
  • Beef – prices down by 24% – oversupply of beef

 

 

Categories: Inflation Tags:

Commodity Currency – Aussie dollar overvalued.

May 12, 2016 Leave a comment

Below is a video from the FT that I showed my A2 class this morning. The significance of it is the Australian dollar and how its value is strongly linked to iron ore prices. Recent growth in China has exceeded expectations and this has led to a rebound in commodity prices especially iron ore. The belief is the AUS$ is higher than the equilibrium level suggests and that this rate will not be sustainable. There are two reasons for this:

  1. Commodity prices have accelerated which has led to more demand for AUS$ which might not be sustained.
  2. Higher relative interest rates has made the AUS$ strong as ‘hot money’ has been attracted in the country. The Reserve Bank of Australia (central bank) has recently cut the cash rate (interest rates) to 1.75% and there is talk of a further cut this year.

Cyclical vs Structural

November 27, 2015 Leave a comment

Below are some interesting graphs and comments from a recent ANZ Bank presentation which address the issue of unemployment.

Both cyclical and structural factors seem to have played an important role in the recent recession. From a cyclical point of view output and the unemployment rate of the economy reflect this and should recover to pre recession levels. Structural change involves the shift of resources from slower growing areas of the economy to faster growing areas. Indicators such as the savings rate and employment in the different sectors of an economy, seem to be driven more by structural changes and might not return to levels seen before the recent recession.

Economists spend a lot of time talking about the “cycle”, but this can be at the expense of the “trend”.

  • And isn’t it the trend that is more important for businesses?
  • We can get bogged down in the detail and forget about some of the high level themes that dominant
  • Often these trends or themes can be relatively clear. But a lot of the time they are not.
  • Arguably, today’s economic backdrop is one where there are more questions over the overarching trends than the cycle itself (although that is not that clear either!).

Structural Questions

Categories: Growth, Inflation Tags: ,

Copper – Supply and Demand

June 4, 2015 Leave a comment

The price of copper is on the up. Below are some Supply and Demand factors.

Supply curve shifts to the left.
Disruptions to production in
* Peru – protests
* Chile – strikes
* Zambia – power shortages

Demand curve shifts to the right
In the light of fast-modernising its power grid the demand for copper in China is vast.
“Copper consumption estimates for China are being revised up. Huge spending on copper-intensive power infrastructure on the state grid in ‘rural areas’ will continue through 2012 (12 bn RMB). Beijing has also renewed the ‘home appliance subsidy scheme’ and is promoting electric cars, which are twice as copper-intensive as conventional vehicles.” – Patricia Mohr, Economist, Scotiabank

Graph from The Economist.

Copper Price

Categories: Supply & Demand Tags: ,
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