Materials Risk

“There is oil in the Middle East; there is rare earth in China.”

Deng Xiaoping

Published in October 2015, David S. Abraham’s book, The Elements of Power “tracks the trail of rare earth metals from mine to gadget”. Working in the Japanese Ministry of Economy, Trade and Industry he had a ring-side seat to watch how the escalation of a territorial dispute between Japan and China evolved to a situation where China cut off its rare earth metal exports to Japan. As Abraham’s outlines, China was now using a new geopolitical trump card with its competitors, “The battle over resources, which started when the first person learned how to coax metal from stone, had expanded into a larger battle-a war over the periodic table.” read more

According to the latest projections from the IEA, India will be at the centre of global energy demand growth over the next two decades. That bodes well for growth in commodities too. However, there are downside risks to this outlook. India is at a critical point exemplified by the protests by farmers distrustful of market based reforms. Far from an unimportant back water, it may pay to watch out for how things develop. If the government can push through reforms India could be one of the main drivers of energy and commodity demand growth for a generation. read more

The price of emission credits on the EU’s Emissions Trading Scheme (ETS) increased six-fold in the two years to mid-2019 reaching €30 per tonne. Over the following 18 months the price has typically traded between €23 and €30 per tonne, except for a brief drop to €16 per tonne during the March 2020 liquidity crisis. Since then the price of carbon has knocked on the €30 per tonne ceiling twice more before breaking through that resistance decisively during December. Over the past two months carbon prices have surged by one-quarter to around €38 per tonne. read more

Over the past week the financial word has been focused on the battle between members of the decentralised hedge fund WSB (otherwise known as WallStreetBets and found on the subreddit r/wallstreetbets) and the old school hedge funds shorting GameStop. The former successfully provoking the latter into massive short covering. No surprise then to see that the front page of this weeks Barron’s magazine leads with the GameStop story.

Since the weekend attention has moved to silver as traders attempt to provoke the same short covering reaction by hedge funds, hence the hashtag #silversqueeze. The price of silver price jumped above $30 per ounce on Monday with silver miners posting double digit gains. read more

In an interview with Bloomberg TV, the Finnish governor of the European Central Bank, Olli Rehn said that the Eurozone’s inflation outlook is “too low for my taste, and more importantly, too low for our aim”. Rehn goes on to argue that the ECB’s inflation goal should be changed to a clear 2%, rather than the current position which is just under 2% over the medium term. How to meet the 2% goal? “I would not enter into a speculation on one or another instrument in our monetary toolbox”, Rehn responds, “I would just say we are indeed ready to use and adjust all our instruments as appropriate,” read more

In a previous post I explained the various long-term cycles that tend to characterise commodity markets. Recall that there are two types of long term cycle. The first type sees prices rise for 15–20 year super-cycles, and then slide over the following 10–15 years. Since supply is price inelastic an increase in demand results in higher prices until eventually excess investment leads to a flood of supply and the cycle resets. This shorter of the two cycles takes 25-35 years to complete.

Meanwhile, longer-term cycles spanning 60 years are closely related to demographics This very long-term cycle is based on the idea that economic activity gradually rises and is coupled with low interest rates and rising prices. However, a turning point is reached where asset price bubbles start to form, interest rates rise and economic growth slows. The final phase of the cycle involves recession or depression, and an unwinding of the excesses of the earlier economic boom. read more