Commodity Conflicts?

Stephen DeAngelis

February 4, 2008

Everyone knows how rapidly China has been growing. A couple of years ago, China was consuming 40% of cement in the world (US=6%), 33% of cotton (US=7%), 27% of steel (US=12%), 23% of lead (US=21%), 20% of copper (US=16%), 19% of aluminum (US =24%), 18% of soybeans (US=23%), 18% of wheat (US=6%) and 12% of oil (US=25%). In terms of sheer demand, China is beginning to determine the shape of commodity markets around the world to a degree that doesn’t just rival the U.S., it largely surpasses it. That is a profound rule-set change unfolding. The Chinese are now being joined in the commodity market by other countries flush with oil money, putting even greater pressure on the markets.

Take, for example, Saudi Arabia [“The Construction Site Called Saudi Arabia,” by Jad Mouawad, New York Times, 20 January 2008]. Mouawad describes a new city, Rabigh, and industrial complex rising on the Saudi Red Sea shoreline:

“Amid a forest of cranes, towers and beams rising from the desert, more than 38,000 workers from China, India, Turkey and beyond have been toiling for two years in unforgiving conditions — often in temperatures exceeding 100 degrees — to complete one of the world’s largest petrochemical plants in record time. By the end of the year, this massive city of steel at the edge of the Red Sea will take its place as a cog of globalization: plastics produced here will be used to make televisions in Japan, cellphones in China and thousands of other products to be sold in the United States and Europe. Construction costs at the plant, which spreads over eight square miles, have doubled to $10 billion because of shortages in materials and labor. The amount of steel being used is 10 times the weight of the Eiffel Tower. ‘I’ve worked on many big things in my life, but I’ve never worked on anything this big,’ an American project manager mused during a bus tour of the project, called Petro Rabigh, a joint venture of the state-run oil company Saudi Aramco and Sumitomo Chemical of Japan. Size isn’t the only consideration. The project is Saudi Arabia’s boldest bet yet that this oil-rich kingdom can transform itself into an industrial powerhouse. The plant is part of a $500 billion investment program to build new cities, create millions of jobs and diversify the economy away from petroleum exports over the next two decades.”

As competition for raw materials increases, so will their prices. Saudi Arabia has largely ignored investment in its future for the past several decades. But with its treasury bursting with oil cash, it has finally decided to look beyond being an exporter of oil. The same is also true elsewhere in the Middle East.

“The kingdom’s lofty economic goals would have been unthinkable without the surge in energy prices that has filled the coffers of oil producers. Oil prices have quadrupled since 2002 and reached $100 a barrel in New York this month. Persian Gulf countries earned $1.5 trillion in oil revenue from 2002 to 2006, twice as much as in the previous five-year period, according to the Institute of International Finance, a global association of banks that is based in Washington. As the top exporter, Saudi Arabia has been the main beneficiary. … A growing share of today’s petrodollars are staying at home to finance megaprojects like Petro Rabigh, analysts say. That money is financing the biggest economic boom in a generation, helping to build not only the high-rises of Dubai, where the world’s tallest tower is going up, but also telecommunications networks, roads and universities throughout the Middle East. Abu Dhabi is planning to spend close to $1 billion for a new museum with the help of the Louvre, in Paris. Dubai’s latest grandiose idea is to build a small-scale replica of the French city of Lyon, complete with residential housing, a museum, a culinary school and a soccer club. In Saudi Arabia, Riyadh looks like a boom town: sprawling over 40 miles, it is teeming with shopping malls, electronics stores and luxury boutiques. But while times are good today, many Saudis realize that their country is locked in a race against time to create industries that produce more than just oil in order to keep a young and growing population employed. The kingdom, which has a population of 24.5 million, including nearly 7 million foreigners, has what one analyst called a ‘human time bomb.’ About 40 percent of Saudis are under 15, and because the country has one of the world’s highest birth rates, the population is expected to reach nearly 40 million by 2025.”

Middle Eastern countries are not alone in a rush to invest in infrastructure. Russia is beginning to join the construction boom [“Paving ‘a Road to Russia’s Future’,” by Jason Bush, BusinessWeek, 3 December 2007].

“Here’s a number to ponder: 25,500. That’s how many miles of expressways China has built since 1988. The same statistic for Russia? A few hundred. As the Chinese have carried out a building campaign unparalleled in history, Russia—with its billions of dollars in oil wealth—has done little to improve its infrastructure. Now, the Kremlin is embarking on an ambitious program to bring its highways, railroads, and airports into the 21st century. ‘A modern transport infrastructure is the real road to Russia’s future,’ President Vladimir V. Putin said … while visiting a highway construction site in the Siberian city of Krasnoyarsk.”

All of this construction and competition for resources, raises the specter of conflict over commodities [“The Coming Commodity Clash,” by Frederik Balfour and Manjeel Kripalani, BusinessWeek, 3 December 2007].

“The global scramble to lock up critical energy and industrial commodity assets is fast, furious, and unlikely to abate anytime soon. That reality is behind the outcry from Japanese, Korean, Chinese, and European steelmakers over the proposed $138 billion merger of Australia’s BHP Billiton and Anglo-Australian mining giant Rio Tinto, which together would control nearly one-third of global iron ore supplies. Iron isn’t the only hot commodity these days. Aluminum, zinc, copper– and, of course, oil–are all much in demand, particularly from the rapidly industrializing economies of China and India. The competition for resources could color the global inflation outlook and industrial merger strategies. There is already consternation in Washington over China’s investment strategy in Iran and its dealings with autocratic regimes in Africa, for instance. Consider the rapacious commodity needs of China. This hungry dragon will consume about 35% of the world’s iron ore output, 30% of its aluminum, 25% of its zinc, and 23% of copper supplies by 2010, according to estimates by Deutsche Bank. And India’s iron ore demand is expected to double to 150 million tons a year by the end of the decade. ‘China and India have a very strong appetite for commodities,’ says Deutsche Bank analyst Amanda Lee.”

So what does all this mean? It certainly means rising prices as those selling commodities look for the best deals they can get. But will it lead to conflict? The authors, in spite of their provocative headline and subtitle (“Voracious demand from fast-developing countries sets the stage for a face-off over industrial assets”), don’t speculate about the future. They simply note that countries hungry for commodities continue to bump into one another as they scour the globe trying to set up deals. Conflict isn’t inevitable; but countries have gone to war over dumber things than resources. Perhaps one of the few benefits of America’s faltering economy will be a slow down in the rush to secure commodities. Regardless, this is an area that needs watching.