Green shoots could be great news for black gold.
That is how some traders are reading signs that global growth is returning. They are bidding up the prices of oil and other key commodities, and there are two primary reasons: US stimulus efforts and China. Optimists may be wrong on both accounts, particularly the latter.
Expectations of a quick US rebound cooled in the last 10 days. US stocks slumped this week after Standard and Poor’s downgraded the credit ratings of 18 banks. Optimism is still coursing down Wall Street, though, that the worst is over.
The more obvious area of misplaced cheer is Asia’s second biggest economy. China bulls argue government largesse will not only boost Chinese growth, but global demand, too. In this scenario, recent gains in commodity prices will be sustained over the next few years. Things may be more complex than that.
“The reality is not so rosy,” says Jamie Dannhauser, an economist at Lombard Street Research Ltd in London. “Exports show no sign of life and the increase in domestic spending reflects a massive state-led programme of raw material stockpiling—hardly the foundations for sustained gains in domestic final demand in an export-dependent economy.”
Commodity prices were a key issue this week when the leaders of Brazil, Russia, India and China, the Bric nations, met in the Russian city of Yekaterinburg. Steady increases in costs will undermine their development efforts.
Recent comments by Alexei Miller, deputy chairman of OAO Gazprom, about oil reaching $250 (Rs12,025) a barrel were also probably on officials’ minds.
Miller first made that forecast last year, before it was clear that the collapse of Lehman Brothers Holdings Inc. was an omen of global chaos. On 9 June, Miller said recent market turmoil “does not mean our forecast was unrealistic”.
Imagine how $250 oil would hurt rich economies such as the US, Japan and Germany, never mind Thailand or Vietnam. Watching how the Federal Reserve, Bank of Japan and Bank of England are shovelling liquidity into global markets, one can’t help but wonder if crude oil—now priced at about $71 a barrel—will rise further.
Also, China aims to diversify its $2 trillion of currency reserves away from the dollar. Along with buying other currencies, says investment strategist Simon Grose-Hodge of LGT Group in Singapore, that may mean stockpiling commodities. China “will keep a very large reserve of oil”, Grose-Hodge says.
China’s ability to drive global growth is more limited than many investors realize. In a 16 June report, Albert Edwards, a London-based strategist at Societe Generale SA, argued that a “bubble of belief” in China’s outlook is likely to burst and end rallies in commodity prices and mining company shocks.
“We will look back on the Chinese economic miracle as the sickest joke yet played on investors,” Edwards wrote.
That may also explain why some oil industry bigwigs are dismissing Miller’s $250 forecast. Peter Sutherland, chairman of BP Plc., called it an “apocalyptic” claim, the London-based Times reported on 11 June. That’s strong language, and from Europe’s second largest oil company.
Of course, any argument for skyrocketing oil prices has some basis in China. With most of the world’s biggest economies in recession, attention is turning to Asia. China, along with India, is among the few bright spots on the growth front. China is expanding more than 6%, India slightly less than that.
China’s sheer size and level of development put it at the core of any commodity price speculation. Petro states have lots riding on whether officials in Beijing can maintain rapid growth. And to China’s credit, they acted quickly and assertively to stabilize their domestic economy.
Looking at the breakdown of import data, though, much of China’s demand is for raw materials—not final goods that households might buy or parts used to assemble exports. That means China’s growth may be doing more to prop up despotic African governments than other nations’ economies are.
Without a snapback, especially in the US, China will be hard-pressed to grow at 6% or faster on a consistent basis. If it can, is that expansion rate in a $3.2 trillion economy enough to fill the global void? It’s simply not. And a US recovery may be farther away than economists say.
Policymakers won’t be spending much time in the short run retooling China’s lopsided economy. Without national safety nets for the unemployed, the household savings rate will remain absurdly high. The impediments to developing a stronger domestic economy are structural and formidable.
China’s 4 trillion yuan (Rs28.49 trillion) stimulus plan certainly helps, yet it’s not a long-term growth strategy. If global growth doesn’t return soon, today’s public spending may morph into tomorrow’s bad loans. A deflationary cycle may even hit China.
It’s possible all that liquidity sloshing around the world will boost commodity prices. Those betting a Chinese boom will get us to $250 oil should get used to disappointment.
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