Transcript The Clash of Civilizations And the Scramble for Commodities

The Clash of Civilizations
… and the Scramble for
Commodities
Diggers and Dealers, Kalgoorlie, August 2, 2010
Credentials
The mood in the room
+24%
YoY
Basic Materials equity index compared with financial services and consumer goods
So where are we?
• The West has narrowly avoided Great
Depression 2.0
• Through massive fiscal and monetary stimulus
• Which may yet prove insufficient to achieve
sustained recovery, but sufficient to cause
fiscal crisis
• The Rest meanwhile have suffered much less
• Thanks mainly to China’s sustained growth
A two-speed world
Source: IMF
The shift from West to East
Source: IMF
… now seems unstoppable
Source: Goldman Sachs
The U.S. deficit: Keynesianism?
Source: White House
Or world war finance without the war
Source: White House
America’s ticking time bomb: Debt
Source: CBO
Debt/GDP projections
Source: BIS
Debt/GDP projections
Source: BIS
PIGS
‘R’
US
Inflation can’t help the U.S.
Source: Bridgewater
It’s a monetarist contraction
The big crossover is approaching
Source: White House
But when?
2010 9%
2020 15-20%
2030 17-36%
2040 17-58%
2050 17-85%
Source: CBO
China sells Treasuries
From 13% to 10% of total
federal debt in public
hands (-20%); from 26%
to 22% of foreign
holdings
Source: TIC Monthly Reports
China: the new growth engine
Source: Bridgewater
An appetite for automobiles
Chinese auto sales have gone from 2 million per year in 2005 to a 14 million,
c/w U.S. 11 million annualized. Without China, the global levels of demand
for autos would be near 30-year lows.
Source: Bridgewater
An appetite for commodities
Source: Bridgewater
China: The overseas investor
• January 2010: Chinese investors made direct
investment in 420 overseas enterprises in 75
countries and regions: $2.4 bn
• Asia 44.7%; Africa 41.8%
• Communication & transportation 33.9%;
petrochemical 24%
• Labor service personnel dispatched overseas in
January: 24,200
• Total LSP overseas 770,000
Source: China.CN http://en.china.cn/content/d732706,cd7c6d,1912_6577.html
China’s alternative to Chimerica
• Reduce dependence on U.S. consumer;
increase domestic consumption
• Exchange dollar reserves for commodity
stockpiles and assets
– Informal empire in Africa
– The “axis of oil”: Iran, Sudan, Venezuela
– Cultivate relations with Australia, Brazil, Canada
Australia: A target of opportunity?
• Mineral industry: 8.9% of GDP and 38% of
total exports; China biggest customer
• ABARE forecasts export earnings for Australian
mineral and energy commodities will increase
by 18.6% to $154 bn in 2010-11
• Geoscience Australia calculates that the
country's “economic demonstrated resources”
of iron currently amount to 24 bntonnes
• But there’s much more than iron ore …
Source:Geoscience Australia
Blessing and curse of resource riches
• Strong growth at a time
of near Depression:
only one negative
quarter since 2007
• Strong terms of trade as
Chinese over-supply
manufactures and overbuy commodities
• Happy land attractive to
skilled migrants
• Dutch disease as other
sectors wither
• Growing strategic
dependency on China
• Parochial politics as
swing voters resist “Big
Australia”
• 21 million population =
Shanghai plus Beijing
(23 million)
Understanding the new epoch
• Chinese demand for all
commodities, combined
with supply
bottlenecks, is creating
the highest correlations
in commodity prices
since the world wars
• Recent price volatility
and correlations
incentivize China to
own commodity assets
• Historically, conflicts
over commodities have
been at the heart of all
the great imperial
struggles since the 17th
century (gold), 18th
(sugar), 19th (coal and
iron) and 20th (oil)
Industrial revolution 1.0
• North-Western industrial
revolution depended on the
proximity, elasticity and
cheapness of the supply of
coal
• It also depended on the
ability to import even
cheaper food and raw
materials from poor primary
producers
• Fossil fuels were plentiful,
money scarce (gold)
• German challenge to Britain
was serious partly because
of her superior coal
production and …
• Her ability to mount a naval
(submarine) challenge to
British food imports
• Plus her Japanese alliance
Industrial revolution 2.0
• Asian industrial revolution is
causing fossil fuel
consumption to exceed
production*
– OECD efforts to reduce CO2
emissions are being
swamped**
– Increased ethanol
production*** is a chimera
• Constraints on agricultural
production are causing a
food price shock round the
world
• Quantitative easing means
paper money is plentiful,
commodities scarce
• This will increase political
instability and reduce
international cooperation
• Doubtful if China’s “quiet
rise” can continue to
harmonize with U.S.
hegemony in Asia-Pacific
*72% of increased global coal consumption in 2006 **Carbon emissions up 35% since
1990 ***Up 100% 2002-6
The old face of empire
The new face of empire
© Niall Ferguson 2010