Raw materials second half of 2011.
I look generally at 3 raw materials as a proxy for different types of export/import price levels:
1) Oil: This doesn’t need a rocket scientist to understand – because oil is directly and indirectly involved in almost any kind of consumption and investment prices. Furthermore oil is strongly influenced by political strengths and agendas.
2) Corn: A proxy for food. It can either be consumed directly by humans and more importantly as a fodder for pigs – so it covers variations in diet as well.
3) Cobber: A proxy for industrial production and construction. I could have used steel; but steel is heavily influenced by the scrap metal prices – there is a great recycling in that raw material.
You could have argued for other indices and materials; but I flatly refuse to correct for fluctuations in millipede footwear. It is not entirely accurate; but live with it – I do.
Since summer (July) there has been a drop of 20% in copper prices – which is hardly surprising considering the general slowdown. It is reflected in dropping food prices as well – which made the Iowa caucus of some importance – about 15%. Oil has not really moved – a measly 5% – and there is lots of pundit explanations for that.
A raw material prices in themselves does not explain an awful lot, as in a competitive world market it is interesting what the competitors are loaded with. We must include exchange rates.
There IS a revaluation of the USD in relation to the Euro – again hardly surprising considering the tired look on Merkels face.
More relevant is the steady decline of the USD in relation to the eastern currencies. One thing is the US trade deficit; but more importantly is the effect on the debt. Between September and now there is a depreciation of 25% of the USD in relation to the Japanese Yen. So Japan is more concerned about their imports than their exports.
I could explain the Chinese interest in lending Japan money – in the vain hope, that they might get their money back. Vain, because after the disasters that have hit Japan they have investments that actually might be sensible. In this context it is smart for Japan to run into debt.
If we take both effects: The drop in raw material prices AND currency fluctuations we can get a picture of the effect on the respective economies.
I have tried to correct the different composition in import contents in the different economies – using what crappy information that can be gleaned from consumer price indices. The important thing is here to realize that the US is both an importer and exporter, whereas China and Japan are mainly importers of these raw materials.
The US has seen a 20 % drop, Europe about 25 % and China only 15%. Thus the slowing down of the economies has hit China with a fuller force than the rest of the world, but the beneficial effects on the import situation has to a large extend not softened the punch.
This is just an overall picture; but a continued growth in China might very well be stifled by import prices. Cobber might still be going down; but even Chinese have to eat, and food prices remain high. Thus the rest of the world should not set to high hopes on China being a world economy growth locomotive.
China has the further problem that a change over from being a net exporter to a net importer will make the policy of undervaluing their currency to promote export counterproductive. This then hits back yet again on the large fortunes of foreign bonds.