When I was a full time commodities analyst I found you could make a living if you could call a demand cycle. But if you could call a change in intensity of use, you could make a fortune. Intensity of use has changed, and it's staying changed.
Why will intensity stay changed? The key point is set out in the next chart. This chart takes some explaining. If you imagine every worker in the world in a line – in order of their income. From someone earning $100 a year – to Gates and Buffet on the other end. The chart answers the question – who gets the last dollar - the marginal dollar – of growth?
The answer in the 90s was someone with a high income – averaging $18,000-20,000 a year. But from 1999 – when it was someone earning $22,000 to 2008 it halved. Now, the marginal dollar goes to someone earning $11,000.
Why is this important? Because it completely changes intensity of use.
The left hand chart on the following slide shows why. Down at the low incomes – growth leads to a much steeper increase in energy use, than does a dollar of growth in high income countries (where the curve is flatter). The same is true for aluminium on the right hand side.
Why is this important? Because it completely changes intensity of use.
The left hand chart on the following slide shows why. Down at the low incomes – growth leads to a much steeper increase in energy use, than does a dollar of growth in high income countries (where the curve is flatter). The same is true for aluminium on the right hand side.
But take a look at two more charts. On the left hand side is mobile phones. Here the scale is different – it’s penetration not units sold. A 30% increase in income from around $6,000 trebles demand. There are only minor gains beyond $10,000. But it’s a high value added good – so a combination of increased productivity and low unit labour costs has pushed down prices. It’s a classic deflationary boom.
On the right side is advertising spend. And that’s a completely different picture. Down at the low incomes – there’s only a very gradual incremental spend on ads. But it goes vertical at the higher incomes.
On the right side is advertising spend. And that’s a completely different picture. Down at the low incomes – there’s only a very gradual incremental spend on ads. But it goes vertical at the higher incomes.
Why’s this important – because it causes a massive change in intensity of use.
The next chart shows what happens to the trend demand growth for a basic good, and a value added service if you change the mix of global growth (no change to total global growth, just the mix). The results are extraordinary.
If two thirds of global growth comes from the developed world, as it did in the 1990s, then the trend demand for a basic good is just over 2%. The trend for a value added service is nearer 6%. But switch that growth two two thirds emerging markets, as we see now, then things change completely. Trend growth in basic resources jumps to 6%.
The next chart shows what happens to the trend demand growth for a basic good, and a value added service if you change the mix of global growth (no change to total global growth, just the mix). The results are extraordinary.
If two thirds of global growth comes from the developed world, as it did in the 1990s, then the trend demand for a basic good is just over 2%. The trend for a value added service is nearer 6%. But switch that growth two two thirds emerging markets, as we see now, then things change completely. Trend growth in basic resources jumps to 6%.
So even if global growth fades back to trend, or a little below this year, the fact that the growth is coming from the emerging markets mean that we’ll have an above trend 5-6% growth year again for basic goods and for commodities. Value added services are due a much weaker year.
The following stat brings the story home…..
Now I said earlier that global commodities supply would be below trend again this year, despite some record prices across the complex. Why?
Well, here are some key points for oil;
And not only had strong relative growth in emerging markets, we’ve had, as Larry Summers said ‘not just the strongest five years of global growth in a generation, but the strongest in all of economic history’.
When you get that….
And when you get shortages – prices can rise with a very small change in fundamentals. And when you start seeing shortages, combined with infrastructure deficits – thy have habit of concatenating – feeding off each other to create more shortages.
The basic point is that when there is a shortage – returns rise on the shortage, and they fall on labour and capital. The chart below shows April retail sales in the US. Quite clearly, US consumers are being forced to spend more on gas and food, and they’re choosing to spend less on cars, furniture, and in regular retail stores.
That’s the centre of my very big picture call. I'll talk about more immediate issues in my next post.
Now I said earlier that global commodities supply would be below trend again this year, despite some record prices across the complex. Why?Well, here are some key points for oil;
And not only had strong relative growth in emerging markets, we’ve had, as Larry Summers said ‘not just the strongest five years of global growth in a generation, but the strongest in all of economic history’.When you get that….
And when you get shortages – prices can rise with a very small change in fundamentals. And when you start seeing shortages, combined with infrastructure deficits – thy have habit of concatenating – feeding off each other to create more shortages.
Perhaps the best example of concatenation is food for oil. Back in 2000 only 3% of US farmland went to biofuels. Last year it was 17%. Food prices duly followed.
The basic point is that when there is a shortage – returns rise on the shortage, and they fall on labour and capital. The chart below shows April retail sales in the US. Quite clearly, US consumers are being forced to spend more on gas and food, and they’re choosing to spend less on cars, furniture, and in regular retail stores.
That’s the centre of my very big picture call. I'll talk about more immediate issues in my next post.
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