The commodity crunch

MY WORD!

Back in the '70s Swiss banker turned novelist Paul Erdman scripted a nightmare economic scenario for the world and called it the Crash of 79.

If he was turning out another novel today it would probably revolve around soaring steel prices and rapidly diminishing copper stocks. In the background would be a gurgling sound as the world's essential commodities vanished down a giant, insatiable plughole called China.

Novelists need convenient black and white situations that can be turned into coherent plots. Real life "" fortunately, or unfortunately "" seldom works like that. Nevertheless, there's a nervousness building around the globe as the Chinese dragon keeps swallowing up the world's commodities at an unimaginable speed.

The steel shortages that have built up in the last year have affected different industries in different ways. India's steelmakers haven't had it so good for this last decade. But other industries in this country, from air-conditioners to automobiles are already trying to figure how much they can push up prices without killing demand.

Indian manufacturers aren't alone as they figure how much they can hike prices before the customer begins to balk. In the United States prices of hot-rolled coil steel have zoomed by 66 per cent since last June.

The rising prices are leading to the inevitable tales of steel manufacturers reneging on fixed-price contracts and chaos on the market. "The world's gone mad. I've never seen anything like this," says Peter Fish, managing director, UK steel consultancy, Meps.

The desperate shortages of steel are creating shortages of everything that's used in its production. This week the prices of molybdenum, which is also used to make steel, shot up to record highs. Coking coal shortages have become widespread in the last three months.

The result is that steel giants like Lakshmi Mittal have started talking about buying iron ore and coal mines to protect themselves from possible shortages.

The China Syndrome is also being felt in the world's copper markets which, despite are feeling the pinch more than ever before. The metal exchanges currently have about two weeks of stocks and that's far below normal levels.

What's more, prices are touching new highs and still showing signs of being ready to rise further. The leading copper companies reckon that shortages will last for the next six months at least.

What happens in such a scenario? Does the world reach a situation where stocks start to run out? No. But the unstoppable dragon is making its impact felt on countries as far apart as Australia and Chile, where giant mining companies are re-opening old mines now that prices are zooming through the roof.

BHP Billiton, for instance, has just announced that it's commencing a four-year programme to open nickel mines that were too expensive to operate a few years ago.

Metal industry analysts don't like the move because their calculations show that demand will peak by about 2006 but BHP Billiton reckons that nickel is needed to make stainless steel and will be in demand for a long time in Asia.

Steel and copper shortages could have a ripple effect around the globe. But, there's also the additional danger that China's oil consumption could have the same impact of pushing up prices.

The Middle Kingdom has already overtaken the Japanese and become the world's largest crude oil importer. The Chinese government's latest prediction is that crude oil requirements this year will continue to be 'robust'.

Where does India fit into the new emerging scenario? Well, now everyone is re-doing their sums and coming up with a very obvious answer: if it's China today, can India be far behind? Their conclusion is aided by the fact that India has emerged as the back-office of the world and is likely to have growth rates of 8 per cent this year. Also, India is one of the world's fastest growing mobile phone markets.

What happens if India develops an insatiable appetite for everything from metals to oil? Will it be a huge driver for the world economy or could it lead to shortages that spill over into violent battles for commodities? These are questions that will need answers in the not too distant future.