Economics

Les montagnes russes des matières premières

Nov 19, 2015 Carmen M. Reinhart

CAMBRIDGE – Le super-cycle mondial des matières premières n’est pas un phénomène nouveau. Bien que les détails varient, les exportateurs de matières premières ont tendance à jouer la même pièce et les résultats économiques ont tendance à suivre des modèles reconnaissables. Cependant, l'élément de prévisibilité de la trajectoire suivie par le cycle des matières premières, tout comme dans le cas des montagnes russes, ne rend pas ses rebondissements plus faciles à supporter.

Depuis la fin du 18^e siècle, il y a eu sept ou huit booms des prix des matières premières hors pétrole, par rapport au prix des produits manufacturés. (Le nombre exact dépend de la façon dont les pics et les creux sont définis.) Les booms ont typiquement duré 7-8 ans, bien que celui qui a commencé en 1933 ait duré près de deux décennies. Cette exception a été soutenue en premier lieu par la Seconde Guerre mondiale, suivie par la reconstruction d'après-guerre en Europe et au Japon, ainsi que par la croissance économique rapide aux États-Unis. Le boom le plus récent, qui a commencé en 2004 et s’est terminé en 2011, est davantage conforme à la norme.

Les phases descendantes des cours des matières premières – pouvant représenter des chutes dépassant 30% – ont une durée similaire, environ sept ans en moyenne. La baisse en cours en est maintenant à sa quatrième année et les prix des matières premières hors pétrole (par rapport au prix à l'exportation des produits manufacturés) ont jusqu'ici chuté d'environ 25%.

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0 Comments on this paragraph, 9 Comments on this article

Rob Carter Nov 23, 2015

Rob Carter didn't even read more than this Headline to believe she is wrong: Sure PRC helps it drop price as lower demand does to employment and then economy as a whole.
However it is Iran's release from Embargo by their agreeing atomic reductions. They are able to now declare 1mn barrels increase each year starts now, and Saudi is already at economic risk and monarchial fear of being unseated as they must reduce quantum or lower prices so far they are bankrupted.
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jagjeet sinha Nov 23, 2015

The charts reveal a fascinating correlation between struggles for superpowerdom and commodity prices.
Commodity producers achieved their best bargains whenever the reigning incumbency is challenged.
The two world wars show the spikes clearly.
The 1973 spike followed the demise of the dollar standard - the first battle for the Euro.
The advent of the Euro in 1999 brought about the spike soon thereafter - the second battle for the Euro.
The European struggle to challenge the dominance of The Anglosphere is never over.
Whether Paris calls for coffee with America after tea in Berlin - perhaps the key.
The dreams of DeGaulle and Chirac of the PetroEuro never took off - thanks to the brilliance of Kissinger.
But with the options of PutinEuro or PetroRenminbi - commodity price roller coasters continue.
When the trough becomes past break point, the Commodity producers always able to strike bargains in these struggles @ The Top Table.
Not gazing at the charts like a commodity analyst, the fascinating correlation predicts much more the price of coffee.
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Procyon Mukherjee Nov 20, 2015

The commodities have moved sideways for some time now after a steep fall (especially in oil, coal and some metals and Iron Ore) and the triggers for the change in trajectory seemed to be muddled in a host of supply side factors; the problem is as much micro as macro. The underlying demand, although that may not be fundamentally flawed, is never the reason for the current woes; the triggers for price signals have shifted weight from fundamentals of demand and supply to other pastures for a long time now.
This is perhaps the first time that a commodity price trough is coinciding with a near zero interest rate environment in the West, which perhaps means that monetary policy instruments would not play truant to the needs of a recovery.
Commodity producers, due to the lack of inherent differentiation, have only the logistics costs on the in-bound and outbound that defines their competitiveness, which works through the premium that is on offer. But the attractiveness to trade, which impacts prices, is greatly influenced by a host of factors, which I would like to cover.
Let me frame the current environment for triggers:
1. Monetary Policy Direction: The biggest trigger is the direction set by the Fed for monetary policy and that is just not the interest rate per se, but also the impact that the current communication would have on the overall movement of the U.S. economy. The FOMC meetings are demonstrating a rising divide between the Fed members, Yellen and Fisher on one extreme end and Brainard and Tarullo on the other, with Evans and Kocherlakota in the middle (going by what Tim Buy or Gavyn Davies confirms in a range of Posts). It is not very normal that a Hawkish stand at this point of time could have any logical support from the more extended committee and the fraternity of Economists and the polity at this point of time. No one has any doubt that the current consumer confidence and spending (0.1% retail sales growth in August) is pointing to anything above 1.5% overall growth of the economy. But the discomfort in accepting a position of “no change” for an extended period is what is plaguing the current process of communication, which makes a stunning case for volatility to continue for some time now.
The rate change is the fundamental trigger as that changes the complexion of power amongst the market participants; with a rising rate the ability to finance either the physical side of the production or the hedges get impacted with the changing risk appetite. The overall net short positions held by the speculative ring must balance the net long positions held by the producers, but the relative size of the bets would change with the ability to finance the margin requirements, given that the overall financing costs will change. The physical inventories and their built-up so far have been muted by the sentiments of a looming rate rise; given the change in sentiments, it could be a matter of time when banks could step in with renewed interest in commodities.
2. The direction of the Dollar: The movement of the dollar in its ascendency factored in the Fed funds rate change around the third quarter of the year. Now with the doubts being raised it is only to be seen how the dollar actually performs against a basket of currencies in the near term. Commodities being traded in dollars have a direct impact on the price depending on the strength of the dollar; higher dollar generally has a debilitating influence on the price.
The Dollar index has lately moved sideways after a spurt from the lows of 85 to touch 100, but has settled range bound in the nineties.
Most commodity cost curves are denominated in dollars, while the local currency cost could remain the same, the dollar costs would change thus influencing the relative position on the cost curve; for example most Russian commodities that get exported have had a dream run due to depreciation of the ruble.
3. More micro than macro: The macro triggers fail to explain how specific commodities behave as that depend largely on the micro factors, the most potent of them is how deep the pockets are to absorb losses by the individual companies in oil & gas, metals & other commodities. The level of debt in each of the commodity-company could be different and the loan covenants would disallow further debts to be accumulated for some. Some specific commodities already have a limiting case on the aggregate debt levels, like oil & gas, which includes fracking. But in general the current prices seem to be testing the limits of financing abilities of most of the companies that are in the wrong end of the cost curve. It could be a question of time for some of them, but the brakes on the interest rates make a small allowance for their borrowed time; most businesses in commodities are embroiled in mundane cash management, especially those that are in the wrong end of the cost curves.
4. China: This is more a supply side question as investment led growth created a supply over-drive for almost two full decades. New capacities added in the last five years were based on the next decades’ consumption growth, which going by the investment growth failed to factor in the looming slide in the leading indicators, something which Michael Pettis has been talking for quite some time. But the deeper question is when the economy would shift its gear from an investment led growth to a consumption led; this is never a quick switch and none of the great world economies ever moved so rapidly from one to the other.
5. Impact of low commodity prices on the general economy: The jury is out and perhaps the impact is a mixed one. If we take the U.S. economy the entire lag on inflation can be explained by one single big factor of the oil and natural gas prices being what they are. But this is the quandary that we are in that low inflation (especially one well below the Fed’s target) is just the opposite of what Fed is attempting to do and the scepter of dis-inflation is no less dangerous than the one which attracts the rising threat of inflation. The low prices of commodities have failed to jump-start higher levels of consumption as text book economists would have predicted.
6. Structural Reforms in the Emerging Economies: The emerging economies with muted growth rates cannot only wait for monetary policy instruments for their salvation. Intrinsic factors like structural reforms should get the better of harrowed discussions on monetary policy. Also the timing of fiscal responses in some would become far more crucial for investments in infrastructure where commodities finally get consumed in bulk. This is the most neglected area of the current times. It is also time for fiscal policies to shift from pro-cyclical to counter-cyclical.

In sum, the three potent triggers are the following:
-Fed’s definitive announcement on the interest rate, which cannot be only about timing but the exact quantum of change
-China’s visible actions on the rebalancing efforts that will be reflected in policy announcements as well as in actions
-Emerging market reforms, as these markets simply cannot rely on monetary policies.
- hari naidu Nov 21, 2015
  
  A very precise and excellent input to the debate. Given your Zurich background, I suggest you get more involved with similar contribution henceforth. I'm an old hand (OECD) in commodities, 1960s - on, Cargill is currently undergoing restructuring (cut in traders) which more or less confirms we're in for lengthy downturn and more ....
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Jose araujo Nov 19, 2015

Why does Carmen associate a lower commodity price with bad news, shouldn't it be good news?

For sure in times of growth commodity prices goes up, and the inverse happens when crisis sets in.

Sometimes they are the cause, namely when commodity prices go up, think the 70's crisis.

I honestly don't see how commodity prices going down can be a bad thing, they can be a sign if things are bad and demand is going but ceteris paribus, its good.

Another causation/correlation confusion by Carmen Reinhart... That's a problem when you are a Prophet of the Apocalypse, anything can be a bad omen...
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Robbie Jena Nov 19, 2015

"and then by the post-war reconstruction of Europe and Japan, as well as rapid economic growth in the United States. "

That is what I am trying to do for the last six years...but no one is listening...what can one do?
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Marc Laventurier Nov 19, 2015

"The current bust is now in its fourth year, with non-oil commodity prices (relative to the export prices of manufactures) having so far fallen about 25%." Besides the PRC's transition to a consumer economy disrupting their historic buildout of fixed assets and infrastructure, it's worth noting that standard forex indexes of the relative value of the USD in which most commodities are priced have appreciated roughly 30% since 2011.
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Walter Gingery Nov 19, 2015

Now is the time to invest in public works in the US; the cost of money and materials and labor could scarcely by more favorable.
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Michael Public Nov 19, 2015

Interesting. More 'big picture' articles like this please.
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Les montagnes russes des matières premières

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