Have we reached the 'peak' in commodities?

Feb 7, 2012

In this issue:
» US debt position worse than Europe
» Its high time the Fed raises rates
» Indian exports have started to slow down
» India does not have much room to ease policies
» ...and more!

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Peak oil was a coin that was termed in the early twentieth century when a geologist in the US predicted that oil production was going to peak in just 3-5 years. That scenario never materialized but even now the debate rages as to whether production has reached its peak or not. Interestingly, the 'peak' concept is not unique to oil. This reference has been made to commodities such as coal and water too. What is more, the spike in the UN's (United Nation) food price index in early 2011 meant that there were talks that food production has reached its peak as well.

One of the reasons why these alarms are going off is that global population has swelled dramatically in the last century especially in the emerging nations. This has fueled demand for not just food but also oil, water and other essential commodities. Moreover, the recent global financial crisis aside, quite a large number of people have seen their incomes increase in the past especially the middle classes and this has enabled them to vie for better standards of living. And so the competition in the global market for good and resources has only increased.

So far none of these alarms have materialized largely because technology has also evolved and countries are investing in finding new and better methods of extracting resources. And so although population and with it demand has risen, on a broader basis resources have been able to keep up pace. But this does not mean that one can afford to be complacent. Global population passed 7 bn last year and is projected to reach 9.3 bn by 2050 according to the UN. This means that at current consumption rates, the global economy will need two Earths by then. Thus, whether technological innovations will be able to meet this challenge will remain the million dollar question.

More importantly, efforts have to be made to conserve the resources that we already have. For instance, in India food has been a classic case in point. Food inflation had kept the overall inflation high in the country for quite some time and one of the reasons for this was the inadequate storage facilities and wastage by the government. At the end of the day as long as governments the world over understand each of their countries' resource requirements and take steps to ensure that these are met, there should not be a problem. But that is easier said than done.

Do you think that the global economy will see natural resources decline in the years ahead? Share your comments with us or post your views on Facebook page / Google+ page.

 Chart of the day
As high inflation continued to persist, the Reserve Bank of India (RBI) resorted to 13 consecutive rate hikes, all with the intention of cooling inflation. This did not do much in terms of bringing inflation down within the comfort levels of the central bank. What it did to is slow India's economic growth. As a result, there have been increasing cries across quarters that the RBI is now focused on bringing rates down. But is there enough headroom for the RBI to loosen monetary policy? Not really. Today's chart of the day shows that compared to other emerging nations, India has the least headroom to go in for an easing of monetary policy. This is hardly surprising given that the country fares poorly on at least two indicators, notably inflation and current account balance.

*Indicators are inflation, excess credit, interest rates, currencies, current account balances
Data Source: The Economist

There is no escaping the fact that Europe's influence on the world is in a downward spiral. Moneynews has put this down to just one word, debt. Yes, that's correct. The financial portal cites a World Bank report on how Europe's debts are not likely to reach manageable levels until as long as 2030. Now, what has this to do with declining influence? Well, with most European nations making debt reduction their top priority, their economic growth is likely to take a hit. This would allow other countries, mostly emerging nations to notch up higher growth rates and thus try and play catch up with their European counterparts.

It should be noted that only 13 of the 27 European Union member nations had debts below the 60% limit set by the European Commission. And only four of those members belong to the 17-nation and single currency area of the Euro Zone. If this wasn't surprising enough, it is worth adding that the European Union's borrowing as a % of GDP is not the worst amongst developed nations. It pales in comparison to the US and Japan, both of whom have even bigger debt burdens as a percentage of GDP. However, US seem to be getting away with its problems as of now. But we don't know for how long the party for dollar last? After all, even the US dollar cannot be immune to the laws of gravity.

That wrong policy making cannot work for long is evident in the way the US Fed is losing its supporters. Members of the US central bank's ancillary units are also divided on their views on the US Fed's interest rate policy. Take the case of St. Louis Fed President James Bullard for instance. Bullard believes that it is time the US Fed raises interest rates after cutting them to near zero three years back. He also believes that the Fed's claim of boosting employment with easy liquidity is shallow. According to him, unemployment is likely to stay high and labor markets will improve slowly even if rates are kept low for years. Given the threat of inflation, not just bankers and economists but policy makers across the globe have differed from the US Feb views about economic recovery. It is time the US Fed not just sets target for inflation control but also takes some pre emptive measures.

India is not as delinked from the global markets as it may like to think itself to be. Yes, the global recession has not hit us as badly as it has in the developed world. Yes our economy and stock markets have performed comparatively better. But the sector that relies on the global arena, our exports, has started to show signs of a slowdown. As conditions continue to remain bleak in US and other developed markets, Indian exports have started to slowdown.

Unfortunately, the slowdown has not been compensated by the exports to the developing nations. The reason for this is that the latter themselves rely heavily on exports to the developed world which has slowed down. The domino effect has finally reached India as well. The order book of 2012 has already seen a decline of almost 20 to 30%. As per the director of Indian Institute of Foreign Trade, the growth will decline significantly this year. However, he does not expect exports growth to slip into the negative territory. At least not for the time being.

Water is a basic necessity of life. And considering the inability of the government to provide clean water supply to people, water purification and treatment business has begun to flourish. Also, with state governments considering the idea of privatization of water supply, Private Equity (PE) investors are seeing huge value in the sector over the longer term. In the past year itself, these investors have invested 5 bn in Indian companies that are into the water treatment business.

Although the amount appears miniscule considering that the sector is expected to grow 15-20% annually, investments are likely to increase in future. RoI in the region of 25% is another attraction. Considering the huge potential evident in the sector, even exit in the form of IPO is virtually confirmed. However, the holding period is 5-6 years with scalability being a key to success. But this does not seem to deter the PE investors who are looking out for value in the longer term.

The youth of the world have youth on their side. But very little else. According to the United Nation's 'World Youth Report' people in the 15-30 age group are the biggest victims of austerity programs. During times of economic strife, these workers are the last to get jobs and the first to be given pink slips. The numbers speak for themselves. The 2008-09 economic crises forced the youth unemployment rate from 11.9% in 2007 to 13% 2009. It eased back to 12.6% in 2010 when things were back in recovery mode. But not in all parts of the world.

The Middle East was the worst hit on this front with 25.5% unemployment among young men and 39.4% for young women in 2010. North Africa followed with a 23.8% rate for men and 34.1% for women. If the world is to prevent another Arab spring, it needs to focus on providing youth with relevant job related skills. The current education system is too theoretical and not geared to the professional world. A renaissance of sorts is required.

In the meanwhile, the Indian stock markets were mostly trading in the green today. At the time of writing, BSE Sensex was up by 47 points (0.3%). Consumer durable (up by 1.3%) and oil & gas (up by 1.1%) stocks were the top gainers. Asian stock markets were a mixed bag of performance. Singapore (up by 0.7%) was leading the gains, while China (down by 1.7%) was losing the most.

 Today's Investing Mantra
"The four most expensive words in the English language are, 'This time it's different." - Sir John Templeton

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4 Responses to "Have we reached the 'peak' in commodities?"

T C Mehta

Feb 8, 2012

If we talk about agri based food, still enough of lands are there to be cultivated. Only improved methods of cultivation to be adopted. Whatever is grown should be used intelligentely in order to have minimum wastage. If we talk about non veg food, there also a natural cycle. Each one is depending on other for survival. If we make optimum use of resources available, do not hoard bothering about future, there is no worry. THERE IS PLENTY AVAILABLE FOR EVERY ONE.


Cdr. S S Kumar

Feb 8, 2012

It is a myth, that our population in 2050 will be 1.7b and the world will have 9.3b people. India will never exceed 1.5b and world 8b.So, in effect, soon there will be abundance of resources, far more than humanity can consume.
China for instance, has already reached max population and from next year its population will start reducing for ever. I can give presentation if desired. So don't worry and be happy. In next 10 years there will be 0 inflation and 0 interest rates all over the world. Remember Japan is leading this race.


sarat palat

Feb 7, 2012

Of course. The rate on which the population is growing and the greedy way we making use of the natural resource, there will be a serious after effects. The population growth to be curtailed by education. Here also, China is going to have an upper hand. Their one child policy is going to help them.



Feb 7, 2012

WORLD is worried a lot and these anxious moment seems to make currency of the world worthless.Stocks will become paper and weather will create havoc. Most of the predictions are made in linear fashion and nothing in this world goes that way...population predicted by 2050 etc inflation and lifestyle changes will take its own toll and reduce people interest in raising kids.Peaking commodities and oil at $200 shall be the mother of all innovation and bring massive changes be it the way we work and live.

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