Speaking of a World of Shortages

Looks like the mainstream press is finally starting to catch on...

.. it really is different this time (the most dangerous words ever said) ... too many humans wanting to live a modern (read: urban) lifestyle. As I've written before 2006 was the first year more humans lived in urban settings than rural. If this urban residence rate ever gets to 60-65% I truly wonder how the world will cope. In economic theory, prices will shoot up (far more than they have now), but short of telling people to "go back to how they lived 20 years ago" in these emerging markets I am unclear how it will play out from there. But these are long term trends that will take years/decades to play out; in the near term (3-7 years) we seem to have some major issues coming and a US recession is not going to stop them (slow them temporarily maybe, but not stop the direction or magnitude). I do also expect China to slow down building to some degree in the coming 2 years as they grapple with overproduction of "everything", but these issues will re-accelrate in the early 2010s, as China and India's own middle class begin to emerge in self sufficient manner Keep in mind there is the equivalent of 5 USAs in China, and 4 USAs in India - and India is growing far faster than China (and projected to pass them in population within next 25 years- so we will have the equivalent of 10 USAs wanting to live a good consumption lifestyle - if only 4 of those USAs reach middle class (assume 4-5 of these USAs among 'Chindia' will remain rural poor) - well imagine a world of 4 more countries like us, created from scratch - and tell me where we will find the resources for them. So I expect a mini slowdown in commodity inflation at some point (in which people will say, whew problem solved!) only to see the real era of inflation to arise after that. This is why I say Bernanke is helpless on the inflation front, he might as well put the pedal to the medal to stoke growth.

In the long run, my hope is some technological revolutions happen between now and the ultimate "then" (imagine if instead of 3.5 billion people living in cities we have 4.5 billion in 20 years?).... if not, as I've stated in the past, I do expect at some point for 'major conflicts' to arise among countries over natural resources (not named oil) in the future i.e. water. But other than that.. have a nice day! :)

As you read this keep in mind the government (yet again today with CPI figures) is telling us inflation is a moot point and going up 2-3% a year (well it jumped to 4% this year but before this year it was almost invisible). Seriously....

• The price of copper has tripled in five years. Zinc has doubled. Wheat and soybeans rose 70 percent in 2007. Futures prices of crude oil, gold, silver, lead, uranium, cattle, cocoa and corn are all at or near records.
• A global boom in the cost of commodities, the staple ingredients of a modern economy, is entering its sixth year with no end in sight. Commodities have always been subject to boom-and-bust cycles, but many economists see a fundamental shift driving the markets these days.
• As development rolls across once-destitute countries at a breakneck pace, lifting billions out of poverty, demand for food, metals and fuel is red-hot, and suppliers are struggling to meet it. Prices are spiraling, and Americans find themselves in what amounts to a bidding war with overseas buyers for products as diverse as milk and gasoline.
• “It is absolutely a fundamental change in the global economic structure,” said Bart Melek, global commodities strategist for BMO Capital Markets, an investment firm based in Toronto. “Global commodities ranging from oil to base metals to grains are moving higher as billions of people in China and around the world get wealthier and are consuming more as they produce products for us, and increasingly for themselves.”
• Now, with the United States economy slowing, the question is what happens next. One possibility is that a recession in this country, should it occur, would suppress demand enough that commodity prices would fall substantially for the first time in several years. But many economists argue that demand overseas would keep prices high even with a recession in the United States. That would compound the economic pain for Americans, forcing them to continue paying a premium at the meat counter and the gas pump even as their paychecks suffered.
• These economists say it will be hard to stop the ascent in commodity prices because it is connected more than at any other time in recent years to events beyond the United States, particularly the industrialization of China, and to a lesser extent of India, and in booming oil economies like Saudi Arabia and Russia.
• Meeting that demand is becoming more difficult. Oil is no longer easy to find, and the cost of producing it is escalating. Droughts and in places excessive rain have produced sporadic grain shortages
• The biggest single factor increasing commodity prices is China’s rush to construct factories, other buildings and roads to satisfy a growing, increasingly middle-class urban population with a taste for cars and other consumer goods.
• China today has 7,000 steel factories, double the number in 2002. Every new factory needs electricity, which means that power plants must be built. More diesel-powered trains are required to get the coal to the power plants, and more trucks and expanded ports are needed to move the steel to market.
• China’s industrial revolution caused an increase in crude oil consumption to 7.5 million barrels a day last year from 5.5 million barrels in 2003, according to the International Energy Agency, representing 31 percent of the total rise in global demand. Over the same period, China was responsible for 64 percent of the increased global demand for copper, 70 percent of that for aluminum and 82 percent for zinc.
• The International Energy Agency projects that China and India combined may increase their oil consumption to 23.1 million barrels in 2030 from 9.3 million a day in 2005. The demand for oil is also growing in big developing countries like Russia and Mexico, where car ownership is rapidly rising.
• That global demand lifts both metals and food prices. Vast construction projects to dig up oil sands in Canada and drill for conventional oil across the Middle East and Africa are under way, driving up the price of steel.
• As fuel costs go up, countries like the United States and Brazil look for alternatives like biofuels. The ethanol boom in the Midwest has driven up the price of corn. Since corn is a vital feed product for animals, the prices of meat and milk have followed. The prices of other grains are going up as their acreage is supplanted by corn. “You are trying to feed people, cattle and cars, so you have this global fight between food and energy,” said Michael Lewis, global head of commodities research at Deutsche Bank. He noted that the United States was responsible for 60 percent of the increase in the global demand for corn last year, which he said resulted primarily from the rapid expansion of ethanol production.
• The rise in commodity prices is accompanying a broadening of the middle class in many countries, but recent protests in Mexico after a steep climb in tortilla prices showed that not everyone stands to gain. The world’s poor spend a large percentage of their income on food, so higher grain prices tend to hit them hard.
• Economists and some others say the continuing boom in commodities prices may slow this year, if for no other reason than the 2007 pace for many crucial commodities — up 57 percent for crude oil and more than 70 percent for wheat and soybeans — was so stunning. Since the 2001 recession, the Commodity Research Bureau’s broad price index has risen by 100 percent.
• Nevertheless, Mr. Robinson said commodities prices would probably remain steady in 2008 and possibly slide in 2009. The prices of many, if not most, major commodities — including nickel, copper, sugar, silver, cocoa and coffee — have continued their climb so far this year. “Demand will be very difficult to slow down unless you take a very bearish view on the long-term global economy,” Mr. Robinson added.

Anyhow, something to contemplate for yourself why we bemoan why Apple is $160 instead of $175. ;) Big picture stuff is always interesting...