[Marxism] The anarchy of capitalist production
lnp3 at panix.com
Sun Jan 10 10:19:45 MST 2016
NY Times, Jan. 10 2016
China’s Hunger for Commodities Wanes, and Pain Spreads Among Producers
By CLIFFORD KRAUSS
Chile is expanding its largest open-pit copper mine below the northern
desert to dig up 1.7 billion additional tons of minerals, even as metal
prices plummet around the globe.
India is building railroad lines that crisscross the country to connect
underused coal mines with growing urban populations, threatening to dump
more resources into an already glutted market.
Australia is increasing natural gas production by roughly 150 percent
over the next four years, as energy companies build half a dozen export
terminals to serve dwindling demand.
Across the commodities landscape, this worrisome mismatch mainly traces
back to the same source: China.
For years, China voraciously gobbled up all manner of metals, crops and
fuels as its economy rapidly expanded. Countries and companies, fueled
by cheap debt, aggressively broadened their operations, betting that
China’s appetite would grow unabated.
Now everything has changed.
China’s economy is slumping. American companies, struggling to pay their
debts as interest rates rise, must keep producing. All the excess is
crushing prices, hurting commodity-dependent economies across emerging
markets like Brazil and Venezuela and developed countries like Australia
The geopolitical and financial consequences of this shift have shaken
investor confidence. Concerns over global growth intensified in recent
days, when weakness in China prompted a stock sell-off around the world.
The commodities hangover, the dark side of a decade-long boom, could
last for a while.
Multibillion-dollar investment decisions made years ago on big projects,
like the oil sands fields in Canada and iron ore mines in West Africa,
are just getting up and running. Facing huge costs, companies cannot
simply shut off projects. So the excess could take years to work through.
The flood of raw materials is pressuring prices, prompting a painful
shakeout. Oil companies have laid off an estimated 250,000 workers
worldwide. Alpha Natural Resources and other American coal mining
companies have filed for bankruptcy protection.
Saudi Arabia, a giant energy economy, has had to tap the credit markets
as its financial reserves dwindle. Venezuela, an oil-rich nation that
went on a spending spree, is struggling to meet $10 billion in debt
obligations this year, since 95 percent of export earnings depend on crude.
Michael Levi, an energy expert at the Council on Foreign Relations,
likened the reversal to a rainfall that first relieved a drought but
then created a flood. “Producers ended up being their own worst
enemies,” he said. “No one ever worried they would produce too much, but
that is exactly what has happened and gotten them into this mess.”
Lower energy and material prices are often welcomed by consumers. An
energy glut has allowed American households to save hundreds of dollars
a year on gasoline and heating oil.
But economists worry that the commodity mess reflects a weakening global
economy, lowering the value of trade worldwide and perhaps even pushing
some countries into the same kind of deflationary spiral that has
hampered the Japanese economy for decades. Global turmoil last summer,
stemming from China, prompted the United States to delay raising
interest rates until the end of last year.
“Lower oil prices have not proven to be as stimulative as economic
theory once had it,” said Daniel Yergin, the energy historian and vice
chairman of the IHS consultancy. “The question is what are weak
commodity prices telling us: Is it overinvestment in the past, or
signaling a weaker global economy forward? My own feeling is the answer
Commodities have always been subject to booms and busts, rising and
falling with the global economy. But China and the cheap debt have
changed the equation in some ways.
China’s rapid growth led to an increase in crude oil consumption to 7.5
million barrels a day in 2007, from 5.5 million barrels a day in 2003.
It is now the world’s biggest importer of crude, having surpassed the
United States. Other commodities have followed a similar pattern.
The increased demand fueled a surge in prices; copper tripled and zinc
doubled over the five-year period ending in 2007. Americans and
Europeans found themselves in what amounted to a bidding war for
products as diversified as gasoline and coffee.
Then the financial crisis hit in 2008. While the global economy
faltered, China continued to grow, buying ever more commodities from
developing countries. Those economies, in turn, flourished from the
infusion of money.
Peru, with its big bounty of copper and other metals, used its newfound
riches to expand its middle class, creating a boom in shopping centers
and apartment houses in its capital, Lima. Lagos, Nigeria, experienced
the same, benefiting from the high price of oil.
The low interest rates, which had been cut to the bone because of the
crisis, fueled the boom. The Brazilian energy company Petrobras
accumulated $128 billion in debt, doubling its annual borrowing costs
over the last three years.
In 2015, commodity prices had their worst year since the financial
crisis and global slowdown. Nickel, iron ore, palladium, platinum and
copper all declined by 25 percent or more. Oil prices have declined by
more than 60 percent over the last 18 months. Even corn, oat and wheat
prices have sunk.
And the commodity slide has continued into this year. At just over $30 a
barrel, oil has reached levels not seen in over a decade.
The bust is made all the more pernicious by rising interest rates, as
the Federal Reserve changes gears. Companies that took advantage of the
cheap debt to increase production are now stuck with a big bill that
will be difficult to cover.
Freeport-McMoRan is putting the finishing touches on a $4.6 billion
expansion of the Cerro Verde copper mine in Peru, which will triple
production. The project is so big that it could consume nearly 10
percent of Peru’s electricity.
With copper prices at their lowest level in seven years,
Freeport-McMoRan reported a $3.8 billion loss for the third quarter. The
company’s shares have dropped by more than 70 percent over the last
year. At the behest of the board, the executive chairman James R.
Moffett stepped down at the end of 2015, and the company’s next moves
Although companies are retrenching, they cannot completely retreat. Many
new mines, for example, are designed to function at full capacity to
keep them operating efficiently. And the sales are necessary to pay the
debts incurred to build them.
At particular risk are coal mines in the United States, Australia,
Indonesia and elsewhere. Not only is Chinese demand declining, but
rising environmental concerns are also hurting their prospects.
“Raw material producers invest according to current prices without
realizing how those prices might affect future demand,” said Michael C.
Lynch, president of Strategic Energy and Economic Research, a
consultancy. “Now that the demand is declining because of high prices,
they have too much capacity, and once it’s built, you can’t unbuild it.”
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