Friday, April 26, 2013

Copper price trend: Some clouds in the landscape

Copper prices have moved steadily in upward direction in the last 11 years, from U$$/lb 0,60 in the year 2002 to U$$/lb3,15 on April 24th this year. Thus , it has increased by five times since then, and the question now is whether this trend has come to an end. The answer to this question requires to know the variables which push its prices up. A short list about it includes: a.-. Strong demand from China which count for 40% of global refined cooper demand. For instance, in 2012, world usage of refined copper grew by around 3,1% as compared with 2011,mainly due to China demand.- b.- Lack of supply capacity at the beginning of this cycle (2002),compared with copper demand increases, and its slow pace of adjustment upward due to higher production cost. c.- New and different uses of copper. The average car contains 1.5 kilometers (0.9 mile) of copper wire, and the total amount of copper ranges from 20 kilograms (44 pounds) in small cars to 45 kilograms (99 pounds) in luxury and hybrid vehicles.( d.- Dollar depreciation since its peak in 2002.Between 2002-2008 the (inflation adjusted)trade -weighted dollar exchange rate depreciated by 25%(18% against the yuan), at a pace of 3-4% annually. Following a short appreciation period (2008) ,the dollar began to depreciate again between 2009-2012 and fell by 16% through mid 2011(CRS Reports for Congress, ).Despite some forces on the contrary, the dollar value trend,is closer to further depreciation. Of all of these variables, (a) and (d) influence short run and mid term(2014) movements in copper prices. Looking ahead into 2014, because of local government debt adjustment, China is more likely to decrease the pace of its expected economic growth. Some analysts believe China economic growth might decrease to 6,5% next year (, April 22nd) . Without, compensating demand increases from other markets , copper price might move downward the current level. On the other side , Copper Supply grew in 2012 in most of the global producers,(global supply capacity grew from 80% in 2011, to 82% in 2012). Thus, there is already in place a higher copper supply capacity which will push inventories upward ,as demand turn out to be weaker than expected. Therefore, there are strong reasons to believe that Copper Prices might fall down next year further its current level. Is this situation the end of high copper price cycle ?. The cycle has transitory(adjustment in demand) and permanent(innovation flows, substitution alternatives) sources of volatility. In the copper case it has relatively lower transitory persistence partly due to the impact of the short lived shocks on it. Therefore what matter for the cycle fluctuations are the permanent sources.( Energy economics 30 pg606-620).Thus, current copper price changes, seems to be part of normal volatility, with prices adjusting toward new lower levels,but still within the cycle at least for now( more cautious approach is needed to be applied beyond 2014.

Friday, April 12, 2013

The Iron Lady: A woman of her time

Former prime Minister Margaret Thatcher legacy (1979-1990),will be hard to forget as times goes by. Although she did not focus too much her attention about Latin America, but after she decided an unnecessary war with Argentina(1982), with it, she sealed her vision about the British role for years to come. Quite remarkable is that she probably did not expected to get that outcome in that way. How come? a.- The seventies were rough time for Great Britain. The old fashion socialism of Former Prime Minister Harold Wilson(1964-1970,1974-1976) ,led the country to a self diminish path which required strong leadership to turn things around. Those were years of ideology, and as Guy Sorman has said “ideology get to more ideology ”, which what Ms Thatcher message was about. To confront the threat on freedom arising from an increasingly invasive State , the answer was stronger markets. The weaker the ability the markets to solve the allocation of resources and the improvement of the welfare community, the stronger becomes the state which take its place. For this purpose she had Strong allies, like Ronald Reagan President of the USA(1981-1989)and clear mind inspirer like M Novak. Deregulation, more flexible labor markets , privatization and competition were the key to what became a counter Keynesian revolution. b.- Free markets policies in Europe in the mid seventies , looked like very unorthodox approach for improving welfare levels. Europe created the welfare state, based on high taxes , fiscal expenditures ,subsidies, regulations and generous programs for public health. Those were the years of Olaf Palme, Willy Brandt , Aldo Moro ,Francois Mitterand. In such scenario, to try the alternative path it was like moving backward the history clock . However the unexpected happened, and It was even claimed early in the nineties that the end of history had been reached .Free markets policies seemed to settle down as “the “ alternative .- Did it all worked out the way it supposed to ?. The outcome is not that much negative. Since 1990 UK economic growth was higher that its European partner, and unemployment is currently lower than the average rate for the EU(12%) .Besides, in the years 2000, Germany made reforms to reduce the distortion of the welfare state, to improve the incentives to look for jobs . The winds of prosperity has arrived to new places throughout globalization , which is the direct result of private sector expansionary strategies. Latino America did not stay either away from the wave of reforms. Following its external debt lost decade (1980-1990), deep reforms were made according to the new policy framework: The private sector instead of the State as the engine for growth. The outcome so far, does seem to fit the minimum higher growth, less unemployment and poverty, unthinkable achievements in the beginning of the nineties. Latin America economies look forward to what come next, instead of feeling sorry for what it did in the past. Does all this means that free market policy and Reagan- Thatcher legacy, has definitely become the new paradigm, like they dreamed ?.Not necessarily so. The Financial crisis of 2008 indicates that deregulation is that much dangerous as it is regulation, specially in the extreme sides. There is a middle ground between them, which is the challenge of policy makers to find out. Furthermore, markets energy need an institutional framework to get its way through for welfare improvement , otherwise it can be very close to become self destructive.