Trouble Brewing Beyond the Oil Fields
It does not take much to rattle the commodity markets these days. Despite a dramatic slowdown in the United States and within Western Europe, there is certainly enough demand and enough speculation to have a new record close for oil this week above $100 dollars a barrel.
The trigger for the final close above that benchmark was a refinery explosion. Fingers were also pointed at the falling dollar, potential unrest in Nigeria and Hugo Chavez’s unpredictable nature as the overseer of Venezuelan crude.
With the strong growth underway in the Middle East region for this year and the mammoth construction boom, prices for everything from iron ore to make steel to Arabica coffee beans to make cappuccinos are at record highs.
There is a whole basket of so-called soft and hard commodities skyrocketing – and for good reason. Demand outside of the Group of Seven countries remains strong and minor “events” create reasons for speculators to drive prices higher.
Take Kenya and the prolonged negotiations over the power sharing talks with President Mwai Kibaki, and renewed fighting in Sri Lanka between the government and the Tamil Tigers in the north. Together those two countries represent 50 percent of tea exports. Tea demand is up 12 percent over the last year. Again, don’t look to the traditional tea houses in London for the answer, but places like India and China which cannot meet domestic demand.
Last week, prices for high quality Arabica coffee beans soared to a ten year high, after prices climbed 36 percent in 2007. Cocoa prices hit a 24 year high after surging 45 percent last year. Upcoming elections and civil unrest in the Ivory Coast provide plenty of “grist for the mill” (or reasons to speculate) if you are a trader of cocoa beans.
I don’t know if you are a daily scanner of the commodity section of your preferred newspaper, but right now they make for interesting reading beyond the daily staples of our diet. Platinum, iron ore and gold are all in record territory. We are seeing that major steelmakers are settling on contracts for raw supplies that are up more than 70 percent over last year. No doubt, the construction companies of the Middle East will be paying higher prices for steel plates and wire, only adding to the inflationary pressure we are seeing for real estate in the region.
The sum of all the parts is this: The rise across the board of this basket of commodities is not esoteric, “does not affect me” kind of stuff, but the real deal. While a slowdown in the West may slightly correct the imbalance of supply and demand near term, it will not solve the problem created by prosperity and a more globalized world. One thing I am not reading between the lines is the potential for the extra supplies coming onto the market to curb these prices. This applies to both quality coffee and quality crude.
Which leads me back to the recent rise of oil. Doing some quick math on Saudi Arabia, at roughly nine million barrels a day, the Kingdom brings in $6.3 billion a week in revenues from oil production; $325 billion a year. That is a great deal of money for a population of just 27 million. The government is in the midst of reallocating that money with a whole set of new economic cities, airports and universities. They don’t want to see a replay of the 1970s boom and bust scenario. There is an effort underway to build a foundation for future growth, beyond the barrel if you will.
We’ll take a closer look at that effort next week while on the ground for the Jeddah Economic Forum.
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ABOUT THIS BLOGJohn Defterios’ blog accompanies the weekly business program, Marketplace Middle East (MME) that is dedicated to the latest financial news from the Middle East. As MME anchor, John Defterios talks to the people in the know, finding out their opinions on the big business moves in the region, he provides his views via this weekly blog. We hope you will join the discussion around the issues raised.
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