Governments’ stimulus spending is driving a scramble for commodities.
The commodity super-cycle driving Western Australia’s economy is also starting to show its less attractive features elsewhere, as demand overpowers supply, igniting a damaging stampede for raw materials.
The worst example, so far, of the commodities rush is at the least valuable end of the spectrum: illegal mining of construction sand in Asia.
In a practice last seen in the boom years of 2010 and 2011, sand miners target riverbeds and lakes because material from those sources makes the best cement.
The problem is that draining a lake or redirecting a river by removing its banks can have dire environmental outcomes, reports of which are emerging from a number of small Indonesian islands and parts of India.
Massive government stimulus spending designed to lift the global economy out of the COVID-19 slowdown is expected to worsen the degradation caused by the illegal sand miners as they cash in on a construction boom.
A similarly disturbing environmental outcome results from mining the seabed for mineralised nodules, rich in nickel and other elements deposited on the sea floor from submarine volcanic activity.
Seabed mining trials are already under way in the Pacific Ocean. Ironically, the extraction of this material aims to meet the demands of the clean energy industry, which is displacing the pollution caused by burning fossil fuels such as coal and oil.
Proponents of seabed mining argue they’re simply responding to demand from companies that need battery metals, especially nickel, although with little apparent consideration for the potential to do more harm than good.
Another boom-time event that ought to have government and investors think more carefully is a proposal from a leading accounting firm to create a global mineral exporters club.
The proposed group, the Organisation of Mineral Exporting Countries, would start with the lofty objective of connecting countries that produce metals important in the production of clean energy with countries that need clean energy.
Examples of how OMEC might work is by connecting Australia – with its abundant deposits of lithium, nickel and copper – with a battery making country such as Japan (and perhaps China, if it is willing to trade with Australia).
Price fixing is not an element in the OMEC plan floated earlier this month, but it would be naïve to think that a country (or company) with a production advantage would not at some stage seek to gain a financial advantage.
The Organisation of Petroleum Exporting Countries started with the same ideal of achieving a rational development of oil resources to match global demand with supply (the same win-win situation envisaged for OMEC).
That grand concept, as proposed by OPEC, ran off the rails in the 1970s when the oil producers discovered they held the whip hand and could use their abundant supplies to blackmail the rest of the world; in turn, creating a group of unbalanced economies that rely almost totally on oil in what remains the best example of what’s called ‘the resources curse’.
Oil remains the best example of a commodity that can cause conflict, with the Middle East routinely buffeted by disputes over oil.
Australia’s darkest days in the early 1940s also had oil as their root cause, with Japan invading Indonesia to gain control of the oilfields around Balikpapan, and then eyeing Australia for its iron ore and other commodities.
Clean energy from the minerals that replace oil in the production and storage of energy might turn out to be not so clean after all, especially if the next few years really do see the unleashing of a commodity supercycle.
Big builds
If in doubt that there is a commodity super-cycle developing in the global economy, it’s worth considering the combined impact of four powerful forces being unleashed at the same time: Chinese raw material demand, post-pandemic government spending, the clean energy rush, and the unleashing of trillions of dollars in pent-up consumer spending.
China’s insatiable appetite for raw materials is best demonstrated by its need to continue buying WA iron ore even as it wages a one-sided trade war with the rest of the country, banning the purchase of Australian barley, wine and seafood.
But the reason the iron ore price keeps rising is a result of China being joined by the rest of the world in a construction rush.
Minerals and metals are just one side of the commodity coin, with timber outperforming iron ore: up 93 per cent in the US since the start of the year compared with iron ore’s 30 per cent and copper’s 35 per cent.
Sugar, corn and wheat are also riding the super-cycle as the world’s biggest economies expand in tandem for the first time in decades.
But the commodity that says most about the boom is one that has faded from WA’s enviable inventory of minerals: diamonds.
It’s debatable whether the closure of WA’s Argyle mine is behind a 20 per cent increase in an overall index of diamond prices since the start of the year or a 33 per cent rise in an index of rough diamonds.
The more likely force at work is people are feeling richer after the COVID-19 slowdown and are in a mood to spend.
A piece of the action
Of all the measures of boom conditions, there is nothing to match the utter nonsense of cryptocurrencies and the bizarre belief that buying a piece of Bitcoin or Dogecoin is in any way a form of investing.
Cryptocurrencies are so obviously a high-tech form of speculation it beggars belief that some reasonably smart people have been sucked into a joke to rival Holland’s tulip mania of almost 400 years ago, when the price of a single tulip bulb rose by more than 10,000 per cent.
Credit for the sharpest criticism of cryptocurrencies goes to David Kimberley of the Freetrade website when quoted in London’s Financial Times newspaper.
According to Mr Kimberley, Dogecoin is a classic example of the greater fool theory.
“Dogecoin investors are basically betting they’ll be able to cash out by selling to the next person wanting to invest,” he wrote.
“People are buying the cryptocurrency not because they think it has any meaningful value, but because they hope others will pile in, push the price up and then they can sell and make a quick buck.”
The key point in this structure, which is really nothing more than a form of pyramid scheme, is that everyone is hoping they won’t be the last buyer and will have time to get out before the pyramid collapses, which it will.
