Supply, Demand, Speculation, & Gouging: Oil, Metals, Food

[Hannah Bell]

I'm reading a lot of "sky is falling" threads. The Chicken Little meme is useful to those who wish to herd folks into their prearranged solutions. Shock Doctrine.

Though you wouldn't know it from the media, or the Peak Oil bugs, or the guns, gold & 1 year of food folks, there IS more to the story....

The problem is oceans of inequality & the corruption of our economic & political "leadership". The solution is organized political pushback.



OIL

"http://www.niemanwatchdog.org/index.cfm?backgroundid=10 ... "

Speculators – not supply and demand – are to blame for skyrocketing gas prices: July 11, 2006

A bipartisan Senate report, largely ignored by the media, says that there's no oil shortage and none is expected. Rather, it's massive, unregulated speculation that is costing consumers billions of dollars – and vastly enriching people like T. Boone Pickens.

The conventional explanation for high gasoline prices doesn't work. The notion that energy demand, especially in places like China and India, created a world-wide oil supply shortage which drove up prices and caused Americans to pay more at the pump cannot be squared with the facts.

The report was barely touched on in the news media but its analysis of petroleum prices demands serious attention. This story is far too important to be left lingering on the back pages of the trade press. Petroleum prices deserve better than a mere repetition of the high-demand-low-supply theory, particularly when it is conspicuously inconsistent with the facts.



METALS

Presentation to World Bank: Metals

"In the first part of this paper on the “Commodity Bubble”, I make the case that, in real terms, we have had an unprecedented commodity bubble in this decade. This bubble has occurred because of unprecedented investment and speculation in commodities, largely by way of derivatives. The far more important engine of this bubble has been leveraged speculation by hedge funds....

If you take all the economies in the world, valuing GDP based on exchange rates, the overall global growth rate has not significantly changed since the mid 1970’s. So if it is not a new era of supercycle demand growth and supply restraint, what has led to such a high amplitude and long duration bull market in commodities in this cycle. My answer is speculation – nothing more. And speculation on an unimaginable scale."

"http://www.venerosoassociates.net/Reserve%20Management% ... "



FOOD

http://www.flonnet.com/fl2316/stories/20060825001904300 ...

Speculation moves forward

C.P. CHANDRASEKHAR

The introduction of futures trading in essential commodities under the reform regime has paved the way for speculative price increases.

FORWARD trading has a long history in the country, but it has never been a matter of much public concern. Until recently, that is. While searching for explanations for the increase in the prices of food that began a few months back, some observers turned their attention to the massive increase in forward and futures trading in commodities. What emerged was revealing.

According to Bloomberg, quoting the Forward Markets Commission, volumes on the National Commodity Exchange, which trades futures contracts in 48 commodities, reached $226 billion in the year ended March 31, 2006. That was more than the $184 billion of shares traded on the Bombay Stock Exchange in the same period. Forward and futures trading had been promoted on the ground that it helped traders deal with market uncertainty by hedging their transactions, and stabilised prices for the final producers. However, the surge in futures trading could not be explained by pure hedging requirements, and obviously reflects an increase in speculative activity.



WHEAT STOCKS - 2006

"According to reports private firms such as Cargill India, Adani Exports and ITC and the Australian Wheat Board have together purchased as much as 30 lakh tonnes of wheat this year. While some of this is for conversion into processed goods in their own facilities, a significant part is for resale at a profit. Private firms have also been involved in trading in other commodities. This indicates that large trading firms have cornered supplies of many commodities at prices higher than the minimum support price offered by the government.

One consequence of these trends has been a decline in government stocks from record levels and a rise in stockholding by the private trade for speculative purposes. Thus the government has managed to procure only 92 lakh tonnes of wheat this year as compared with 147 lakh tonnes last year. As a result, wheat stocks with the government stood at 93 lakh tonnes on June 1, having declined continuously when compared with the level on the same date of the last few years, starting at 413 lakh tonnes on June 1, 2002. Overall food stocks with the government stood at 223 lakh tonnes on June 1, 2006, close to a third of their peak level of 648 lakh tonnes on June 1, 2002. These declines are far more than warranted by trends in production, indicating that the private trade has managed to corner a significant volume of stocks."

[Lasher]

1. Check your links

Use this for your first one:

http://www.niemanwatchdog.org/index.cfm?backgroundid=100&fuseaction=Background.view

Second and third links don't work.

Good point about the speculation but it's pretty clear S&D also has an influence on prices.

[Hannah Bell]

2. trying again....

http://www.flonnet.com/fl2316/stories/20060825001904300.htm


http://www.venerosoassociates.net/


Sure, S & D plays a role. One point some of the writers are making is that there's no gap between S & D to explain the huge price rises.

[Lasher]

3. I think that is an interesting point

Thanks for sharing this.

Lasher

[Art_from_Ark]

4. I am involved in a way with commodities in Japan

I do not buy and sell but I am on the front line, so to speak. Greatly increased demand from China, at least, is pushing up prices for many commodities-- gold, oil, gas and coal, for example (not to mention iron, zinc, copper and a host of other industrial metals). China is already competing with Japan to secure supplies of oil, gas and coal. For example, the price of coal from what used to be a pretty steady supplier for Japan, Western Australia, has been rising dramatically due to intense pressure from China. China is also very busy signing contracts for exploration and development of oil and gas fields in Africa, they have been making deals in the Middle East, and no doubt they are investigating South America as well.

Discounting the China card is not a good policy.

That being said, there is no doubt a lot of market manipulation going on with oil supplies, as there was with energy supplies in California a few years ago.

[Hannah Bell]

5. No one's discounting the China card.

What the writers are saying is that yearly demand growth is no greater than it ever has been, nothing that would account for historic highs in commodity prices. It's stayed pretty much the same since the 70s. The World Bank paper references sources.

Something like 2/3 of Chinese production is for the US market, which means that it's mostly production that used to go on elsewhere, not NEW production.

China's boom is no different from earlier asian booms (Japan, Korea, etc.)except in its potential, since China has a bigger potential internal market. But so far, the majority of China's people remain poor -- poorer than before, some of them, since prices for basics have risen & various subsidies or benefits they enjoyed before have dropped.

Manipulation throughout the metals market is at this time pretty widely acknowledged: there is no big jump in final use. However, the World Bank paper references stockpiling in China & elsewhere.

[Art_from_Ark]

6. I disagree

Having seen it up close and personal, I can say that there is far more to this picture than what the author is trying to paint.

First of all, China's boom is far different from earlier Asian booms-- China's population accounts for 1/5 of the world's total. It's 10 times the population of Japan, and nearly 40 times the population of Korea. It is trying to get in the world markets in a big way, and is trying to outbid other countries for limited resources. Moreover, Chinese industries are far less fuel efficient than the industries they are replacing in the Western world and Japan-- so fuel consumption per unit of production is higher in China. Furthermore, former raw materials suppliers, like Brazil, are drying up as they are shifting focus away from exporting their resources toward more domestic consumption. Other countries, particularly in Latin America, but also China, some of the old Soviet republics and elsewhere, are severely restricting the kinds and amounts and resources that they are now willing to export. On top of that, resources in other producing countries are being depleted, and reserves are not being found to keep up with demand. Add to the mix the growing demand for rare earths and other exotic metals, many of which (such as tungsten) are concentrated in China.

It's not that demand is relatively stable, it's that supplies --and suppliers-- are getting tighter.

[Hannah Bell]

7. counterpoint:

"China's population accounts for 1/5 of the world's total."

But the Chinese people aren't the primary consumers of Chinese-made goods. China is potentially a huge market, but it isn't one yet. Only a narrow segment of Chinese are increasing their consumption levels. China is producing for markets once served by other producers; production has shifted, but there's no big jump in global demand growth. Additionally, a lot of Chinese production is in reality foreign capital producing on a Chinese platform.

"Moreover, Chinese industries are far less fuel efficient than the industries they are replacing in the Western world and Japan-- so fuel consumption per unit of production is higher in China."

That may be: yet there's no big spike in global fuel use.


"former raw materials suppliers, like Brazil, are drying up as they are shifting focus away from exporting their resources toward more domestic consumption."

again, that may be, yet there's no spike in global consumption.


The statistics show something different from the media explanations.

[Hannah Bell]

8. I don't discount that there's competition

between Chinese capital & other capitals to secure resource bases, though. But it wouldn't manifest in 400% price spikes unless there's absolute shortage, & there's not - at least, according to the numbers.

[Art_from_Ark]

9. Who said anything about media explanations?

My comments are based on what I see in my work, and discussions with people who are involved with commodities in Japan.

The point you are missing is that we should not be focusing so much on demand growth here-- we should be looking more at supplies. Supplies, and suppliers, are becoming tight. Contracts are expiring and are not being renewed-- or are being renewed at higher prices. Former suppliers of minerals are focusing on domestic consumption. Other mineral suppliers are having problems finding new reserves. And some companies are gaining a stranglehold on some important resources to keep prices artificially high.

I don't know whose statistics you are using, but here in the real world, I see a much different picture.

[Hannah Bell]

10. Sorry, I was unclear. I understand you're talking about your

own experience. I was referring more generally to media accounts.

You say:

"Supplies, and suppliers, are becoming tight." in reference to metals in particular, it seems. Yet metal is the area in which it's most generally acknowledged that speculative activity is fueling price increases. By speculative activity, I don't just mean trading, I mean exactly manipulation of supply & gouging (as in the enron case). An example:

"On February 22, Brazilian mining giant Companhia Vale do Rio Doce announced that Chinese steelmaker Baosteel, in negotiations on behalf of the Chinese steel industry, had accepted a price hike of 65 percent for iron ore. The move followed a February 18 agreement between Vale and Japanese and Korean steelmakers, Nippon and Posco Steel, who also agreed to a 65 percent price increase...

To a significant extent, these remarkable price increases reflect the widely varying market power of the different industries. The highly concentrated iron mining industry — in which the top three producers, Vale, BHP-Billiton and Rio Tinto, control over two-thirds of world production, largely from mines in Brazil and Australia—can essentially dictate terms to the steel industry, which is far more fragmented. The top 10 steel firms produce 29 percent of the world’s steel...

Last week’s iron price hike is only the latest in a series of price rises in recent years. According to figures published in the French daily Le Monde, prices have increased 176 percent over the last five years, with price rises of 71.5 percent, 19.5 percent, and 9.5 percent in 2005, 2006, and 2007.

Despite claims that price rises reflect the increasing strain on mining companies to meet Chinese construction firms’ demand for steel, it is clear that the massive price hikes are being imposed to fatten the mining firms’ already immense profits.

According to the companies’ income statements, published by Dow Jones Market Watch, from 2003 to 2006 Vale’s ....gross operating profit from $2.5 billion to $10.1 billion; BHP Billiton’s ...from $10.3 billion to $26.1 billion; Rio Tinto’s ... from $4.3 billion to $15.2 billion."

http://www.wsws.org/articles/2008/feb2008/chin-f27.shtml

The maket for iron ore is oligopolistic; the suppliers are price-setters. There's no real increase in demand or decrease in supply to justify the rises - just, they can get away with it. And it's possible there's some geo-politics behind it as well.

[Art_from_Ark]

11. I did allude to this in my previous post

I decided to delete the reference to iron ore, but you have posted essentially the same thing that my boss was telling me. The market for iron is, indeed, oligopolistic

[Hannah Bell]

12. So we may be essentially in agreement, then.

I'm using the term "speculation" in maybe an imprecise way, but what I mean by it is all forms of "cheating" & use of financial power to screw the folks with less money, less info, & less market power. Pump & dump, supply restriction, collusion, etc.

When 3 suppliers - with ties between them - control 75% of supply, S&D constraints are effectively null.

[Art_from_Ark]

13. We are essentially in agreement

The iron ore market is as you describe. My boss predicts that Japan, and Korea, are going to be royally screwed in a couple of years as a result of the iron oligopoly. This goes along with what I was mentioning about suppliers.

With that, do you have any opinion about the PDAC conference that was recently concluded in Toronto?

[Hannah Bell]

14. You mean your boss thinks they'll stop supplying Japan/Korea

or...?


I don't know what the PDAC conference is - whAt happened there?

[Art_from_Ark]

15. They won't stop supplying Japan and Korea per se

but he thinks the steel industries here and in Korea will be priced out of competitiveness, or at best will have to pass on much higher costs to their respective auto and other steel-consuming industries, which in turn will have to significantly increase the prices of their products.

PDAC is one of the "Big Three" mineral resource conferences in the world-- the others being AMA in London and Indaba in South Africa. Apparently, the Chinese had a rather large presence at the PDAC conference this year, after being virtually invisible before. There was also a bit of speculation about the gold market and potential manipulation.

Speaking of the gold market, I asked my boss what kind of effect the US presidential election might have on the prices of precious metals. He said it probably wouldn't matter, since the international consensus seems to be that none of the candidates have much to offer, and that no matter who wins, the US is going to continue to lose a lot of its clout.

[Hannah Bell]

16. Interesting. I've been hearing about gold hijinks too.

Thanks for your info. Are you some kind of metals dealer, then?

[Art_from_Ark]

17. I'm not a metals dealer per se

I have a strong interest in coinage and other metals, but I'm not a dealer. I'm more of a metals researcher.

There are some potential hijinks in the precious metals (especially gold) market. In the past, you could always count on European central banks to squash significant gold rallies. They would dump at a high price, then quietly buy back when the price was lower and start the cycle again. It was quite a racket. But now that the EU have pledged to keep their yearly sales to a cumulative 500 tons, investors seem to have taken this as a sign that the gold market will be allowed to climb. I think this may be contributing to Chinese and Indian buying, although it is by no means the only reason.

At the same time, China has been busy buying up marginal mines, in this case, mines that need a gold price of at least $400-500/ounce to break even. At nearly $1000 per ounce, it is quite profitable to operate these mines. But there is talk that the major gold producers would like to drag the gold market down to below the threshold for the marginal mines, forcing their closure and subsequent sale at bargain prices. Then the survivors would slow down production to bring the gold price back up again.

I don't know how doable this scenario is. If it is indeed doable, then the major gold producers would probably only be shooting themselves in the foot if they tried. The last time the gold market was at such heights, and then crashed, it took decades for the market to recover. Then there is the China card. I don't think the Chinese would just sit back and sell their gold mines at a loss if the price went below the break-even level. The Chinese government is awash in cash, and I can just envision them buying up gold at "bargain" prices of $500-600, if it ever came to that.

Then there's the inflation card. Gold buying tends to become more active if there are fears of major inflation. The official government statistics are a joke, because they do not reflect the real increases that consumers are dealing with in their daily spending. The markets are aware of that, hence another reason for the interest in precious metals. How long the precious metals bull market will last is anyone's guess. One prediction sees the gold price reaching a plateau later this year, maybe in September, then falling next year. Other predictions call for rising prices for at least this and next year. I can see it going either way. But I doubt that we'll be seeing $300/ounce gold again.