Thoughts on food aid

Development requires fresh thinking. Throwing money at tried and failed programs is as deplorable as inaction. But new doesn't necessarily mean good.

Cash distribution is something that has been floating around among young(ish), forward thinking development scholars and practitioners for a while. Owen Barder makes the case:

American legislation requires that food aid be bought in the US, that  50 percent of commodities be processed and packed in the US before shipment, and that 75 percent of food aid managed by USAID and 50 percent of the food aid managed by the US Department of Agriculture be transported in “flag-carrying” US-registered vessels. The result is that only 40% of money spent on food aid by the US actually goes towards buying food; the rest goes to US transport companies. Buying the food locally would be better, but best of all might be something even more radical.  Why not give the money itself to people who are hungry?

Not a bad idea, but keep in mind that most countries that really, really need international food aid are often not open to the help: Burma after last year's Cyclone Nargis, Zimbabwe for the past 29 years, North Korea - the list goes on. De-tying food aid from American agricultural producers is a noble cause and a good idea, but that doesn't mean direct cash aid is its' logical, or even possible, conclusion.

The Plugin Hybrid

As a technology nerd, I am excited about the prospect of plug-in hybrid electric vehicles (PHEV). General Motors recently sponsored a Society of Automotive Engineers task force to develop a standardized power connector for recharging electric vehicles.  Several major auto makers have agreed to adopt the technology.

Beyond standardization within the industry, environmentalists and techno-nerds alike have reason to be excited about a bright future for cleaner transportation.  First, one can expect that PHEV's won't single-handedly overload the power grid: the Energy Information Administration's 2009 annual energy outlook predicts "Plug-in electric hybrid vehicles are not expected to reverse the trend of slowing growth in electricity demand, which increases by only 0.1 percent for every 1 million PHEV-40 vehicles in operation." Second, batteries from PHEVs will minimally impact the environment.

However, one long-term issue could diminish the environmental benefits of PHEVs. These vehicles shift most emissions from gasoline to electric power plants.  The US needs to make its electricity sources look more like this, instead of this.  Coal provides the U.S. with half of its power, and no, clean coal is not a viable solution. Strip mining and the disposal of coal ash wreak havoc upon the environment.  Society must not trade its problems, but one can hope that the mass adoption of PHEVs encourages a cleaner power generation.

Please, one at a time

Just in case you thought the financial calamity fulfilled our quota of global crises, remember, the food crisis isn't over yet.

If you didn't believe us back then, maybe you will now - Conceicao and Mendoze, two UN economists, have crunched the numbers. Guess what? They concluded that we're only one supply shock (drought, tsunami, you name it) away from encountering a serious global famine.

Lehman Brothers: Nuclear power?

Bloomberg broke the story this week that Lehman Brothers Holdings Inc. is sitting on a nuclear bomb's worth of yellowcake uranium. Apparently, the bank physically acquired the uranium after a futures contract matured. It now sits in a secure storage facility in Canada. Which begs the question:

How the hell did Lehman allow this to happen?

Actively traded futures contracts are typically closed out before the contract expires. This absolves the trader/firm from having to take physical delivery of the underlying commodity. It is remarkable that Lehman failed to close such a massive contract. DealBook wonders if the contract simply slipped through the cracks amidst all the chaos of the Lehman bankruptcy.

However it happened, the bankrupt bank is reportedly sitting on the uranium until prices rise; uranium has fallen for five straight months as traders expect delays to nuclear power projects in China and India, and under the expectation that Lehman could dump its stock on the market. Essentially, by holding tight Lehman depresses the very market it needs to recover.

I highlight this story because it underlines just how disastrous, and far-reaching, the Lehman bankruptcy has been. Lehman was an active commodities trader in the broker-dealer and exchange markets, and it got caught on the wrong side of a massive trade that continues to depress an illiquid market. The ripple effects of Lehman's failure haunt us in the most improbable of areas.

(photo source)

Say uncle: So much for that commodities rally

In my last post, "The inflation hedge of choice", I highlighted the recent run-up in commodity prices, buffeted by OPEC production cuts and speculative capital seeking a hedge against the Fed's big inflationary adventure. While I expressed deep scepticism over the sustainability of such a rally, I did anticipate a speculative run up in prices over the near-term. Perhaps I should have broadened my outlook.

A trip over to Bloomberg.com made me say uncle. Headline: Commodities Head for Worst Slump Since 2001 as Demand Shrinks. D'oh! The Reuters/Jefferies CRB index fell 5.8% in the first quarter, on top of a 50% decline in the second half of 2008. Afshin Nabavi, senior vice president at MKS Finance SA, shot down the idea that speculative capital would contribute to a commodities rally, “For commodities, the main mover is demand and supply and if demand is down, then the price comes down, no matter how many speculators are in the market.”

True, in a perfect market. But speculative capital often drives prices beyond levels justified by supply and demand fundamentals. No one still believes that $150 oil was driven solely on the strength of Chinese demand. Right? Mike Wittner, head of oil-market research at Societe General SA, makes the point that, while we have seen speculative inflows driving certain commodities higher (oil, for instance), the focus will quickly shift away from long-term inflation and back towards "the global recession, weak demand, and still-high stocks." Copper, which I cited as one of the highest-performing commodities, is still expected to decline by over 9% in 2009, in spite of the 30% run-up thus far. This would mean another price collapse is right around the corner.

I draw two important points from these experts. One, this commodities rally is likely to be shortlived. Two, it is misleading, financially speaking, to speak of "commodities" as one monolithic asset-class. As the article notes, while copper and gasoline have experienced a significant recovery this year, it was more than overwhelmed by further declines in natural gas, wheat and nickel. That is the mistake I made in my last post: I took a particular segment of market as indicative of a broader trend.

So beware of false rallies, bet on gold instead and don't take investment advice from me. Or this guy.

(photo from the following photo stream)

The global tea party

Tea prices are about to jump...

to an all-time high after damage to production in the world's key exporting countries from simultaneous droughts...Dry weather has led to low yields in India, Kenya, and Sri Lanka. The output fall in the three countries, which account for half the world's exports, will exacerbate last year's market deficit.

Droughts, yes. But Kenya and Sri Lanka are also undergoing serious civil strife. I can't help but imagine that political unrest and violence have contributed to the price rise, either by disrupting supply and delivery chains or through the flight of foreign capital and investors that finance tea farming.

Tea, unlike opium, is not used to finance insurgencies. Maybe the governments, if they are strong or capable enough, should take this chance to encourage the farming of such a storied and legitimate crop. Tea has long been exposed to price fluctuations on the open market, like most commodities. But governments should be careful in the tide of rising protectionism to resist placing restrictions on the trade of tea and encourage its widespread promotion and consumption. Empires have been built on less.

(Photo from thebensteads)

The inflation hedge of choice

On Wednesday, the US Federal Reserve "shocked the world" by announcing plans to buy $300bn of government debt and double its purchases of Fannie and Freddie securities. According to the FT, once the Fed's plans are fully realized its balance sheet could swell to $4,ooobn, one third the size of the US economy. Hellicopter Ben, meet Bazooka Ben.

The Fed's actions are an attempt to literally shock life into the credit markets. It may also have the convenient effect of driving down the cost of government borrowing. However, the Fed runs the very real risk of stoking a very big inflationary problem down the road. Weimar Republic the US is not, but the money supply is growing at such a rapid rate that the Fed had better hope the US economy rebounds this year. Remember central bankers, there are unintended consequences to such dramatic monetary easing; like say, a housing bubble (Mr Greenspan, I'm looking in your direction).

What then are some of the likely consequences of the Fed's policy innovations? For one, the dollar was the big loser last week; in fact, it registered its worst week against the major currencies in 24 years. This fed into an accelerating rally in commodities, the moment's inflation hedge of choice. The benchmark S&P GSCI index was up 8% last week. Or take copper, up some 28% this year, a feat completely divorced from the underlying fundamentals. Though, the FT has an article this morning on the actions of a "secretive" Chinese state institution stockpiling copper supplies (which sounds like the perfect plot for Bond film). Oil is back over $50, supported by the OPEC cuts, but boosted in recent weeks by Fed policy. The speculative inflow into commodities, as an asset class, may be small compared to the bubble of recent years, but it is nonetheless paring the steep losses experienced in the second half of 2008.

The sustainability of this rally is highly suspect. With Chinese growth forecast at 6% for the year, and the G7 contracting by 3.2%, the global recession will depress demand for commodities well into the year (with the possible exception of food, but that's another discussion). However, loosey-goosey monetary policy (as A-Rod would call it) comes at a price, with inflation second only to a loss of confidence in US treasuries. Bernanke has demonstrated that he is willing to throw everything in the Fed's arsenal at the credit markets. Until he wins, expect commodities to outperform as an asset class.

(photo courtesy of Shiny Things' photostream)

Mo' Rubles Mo' Problems

Amidst the spring-time clouds and snow over the Moscow sky, there appears to be one bit of good news: the ruble, for now, seems to have stabilized, defying the critics of the Kremlin’s ruble stabilization program. When I was in Russia just two months ago, every stop at the ATM was like a special delivery from Ded Moroz, as the RUB/USD rate dropped from 29 to 32 in 8 short days. In the spirit of the season, I decided to do my part for the economy by “donating” my extra 10% of purchasing power to the fine brewhouses and eating establishments of St. Petersburg.

Yet, before we start celebrating, we should keep in mind that movements in the ruble have correlated almost entirely with movements in the price of oil, which is really the only marketable Russian export (in addition to vodka, defunct ideology, and depressing literature), and thus the indicator for the overall Russian economy. As crude has now stabilized above $40/bbl, so the ruble has stabilized below the euro-dollar basket of 41. This is a good thing, but it can also create an illusion of stability and economic upturn. Meanwhile, inflation continues to soar in Russia, outpacing other Eastern European countries. While inflation has picked up, salaries, both nominal and real, have been falling, and consumption has dropped sharply – it has even hit one of the most rock-solid sectors of retail! Sadly, many of my friends have recently had to choose between leaving their jobs or taking pay cuts of up to 50% - one friend tells me that her employer has not even paid her in the past 2 months, and she has taken out a line of credit to fund her basic living costs.

This last part is particularly worrying, especially since ruble stabilization has necessitated a significant rise in the already sky-high interest rates for personal and business loans at Russian banks. Faced with double-digit interest rates, Russians have done what many in the former Communist bloc have done over the past few years – take out loans in foreign currency, particularly in Euros, at much lower rates. This was great when emerging markets were booming, but now that currency devaluation has hit, consumers and businesses are struggling to make payments, with the latter raising prices on goods. Already in Russian cities, most real estate rental prices are set in Euros. As small businesses get hit with higher real costs for rent and loan payments, prices continue to rise. Moreover, as confidence in the ruble continues to wane, the desire for holdings (and lending) in foreign currencies grows still.

What is the Kremlin to do? Lowering interest rates on loans below the current 13% inflation rate would effectively mean government subsidization of lending, and would drive further devaluation of the ruble, and price inflation for imported goods. While this could cause a further flight of capital from Russia and could plant the seeds for ‘90s era economic chaos, it could also stimulate lending and growth, if coupled with prudent policy reforms, particularly toward small businesses which are drowning in bureaucracy and corruption. It might also cost the Kremlin less, and be more effective, than continuing to subsidize banks who then speculate against the ruble in the Forex markets. Keeping interest rates high, however, may create the illusion of stability, but will surely continue to stifle growth, and will hurt ordinary Russians most. In any case, winter in Russia may not end for some time to come.

(photo from Alcoyotl's photostream)

FT Energy Source

It has been a particularly busy beginning of the week, so instead of my usual fare I thought I'd draw your attention to another blog offering really great coverage of the energy/commodities markets.

I recently discovered FT Energy Source, and it is already one of my regular reads. It brings together all the best energy coverage from around the web and the newspaper itself, while also providing terrific original analysis and behind-the-headlines insight. Its coverage this weekend of the OPEC meeting perfectly illustrates the access and insight it offers.

If you are looking to build on the energy/commodities coverage of zzzeitgeist, I recommend checking out FT Energy Source. After us, of course.

Trash talk

The United States may finally be stuck with all of the discarded paper, scrap metal, and old computer parts that had previously been shipped to China for recycling. The New York Times recently reported that the once fruitful recycling industry in China that had been soaking up numerous waste products from around the world has become largely unprofitable after the fall of commodity prices, a trend we have been following closely here on zzzeitgeist. Among these commodities, paper prices have fallen by as much as 80%, meaning an end to the old practice of smuggling medical waste in crates marked for recycled paper. As environmental concerns shape into policy, the throw away culture of the past will hopefully reform in both the United States and China, leading not only to greener disposal practices but less waste as a whole. Finding viable solutions for managing the waste we've already created will open the door to cleaner practices in the future. In this era, the already fine lines between waste management (nuclear included), renewable energy, and culture will likely fade away.

(Photo thanks to Patrick)

Feeding humanity

* Posts on agriculture represent my personal opinions on the subject.*

Yesterday, Rory made an important observation: the global food crisis isn’t over. Indeed, many of the long-term changes in global food supply and demand haven’t changed since last year’s price spikes. And as the world’s population continues to grow, finding a way to feed everyone will become an increasingly central challenge for humanity.

When it comes to the feasibility of significantly increased food production, I am no Malthusian. The great promise of genetically-modified crops, combined with current low levels of agricultural productivity in most of the developed world, suggest that current yields can be substantially increased. To this end, we should support programs that aim to increase productivity in the developing world through better rural infrastructure, mechanization of agriculture, increased fertilizer use, seed pilot programs, etc. We should also encourage biotechnology research and development in rich countries.

However, agricultural land, like any natural resource, is distributed unevenly. Some countries are better positioned to grow food than others. Because of this, we need to advocate strongly for total liberalization of international agricultural trade. This is the only way to ensure that every country, including those with poor resource endowments, has equal access to market-priced agricultural staples. Let’s not forget that a significant trigger of global food price spikes were temporary export controls enacted by major wheat and rice exporting countries. Improve agricultural productivity wherever possible and work simultaneously toward agricultural free trade.

But agricultural trade liberalization would require an unprecedented degree of global policy cooperation. I am particularly worried that the economic crisis will actually result in a breakdown of international cooperation, which could herald a significant domestic retrenchment of politics. History shows us that globalization is hardly the natural state of international affairs. However, some of the most dangerous problems that humanity faces, like climate change and food security, will require global solutions. If we can’t find a way to cooperate, our shared future will be bleak.

The food crisis never ended

Christopher Delgado, an agricultural policy advisor at the World Bank, recently said of the global food crisis, "The food crisis has not gone away...In fact, it is coming back."

Combing through the media, it would be easy to assume that the food crisis had long ago subsided as demand for imports, commodity prices and economic growth declined. However, risks to food security and the possibility of famine are still very high in many countries. While food commodity prices have fallen from their record highs in 2007, the US Department of Agriculture forecasts that they will remain above historical levels in 2009. The combination of rising food prices, economic contraction, export/price controls and tight trade credit exposes many vulnerable countries, particularly LDCs, to serious risks of famine, poor crop yields and higher prices coinciding with falling income. This doesn't even begin to include the impact on food production by drought, land degradation and other environmental conditions; the UN recently warned that global food production may fall 25% by 2050.

Given the still prevalent risks, it is disconcerting that less is being done to combat the problems directly. Further, certain policy responses to the financial and economic crises, such as looser monetary policy in the developed world, or expropriation in countries like Venezuela, risk stoking the rising food commodity prices. Which brings me to the real danger on the horizon (beyond, of course, the human cost): that the financial, economic and food crises will reinforce each other in a vicious cycle. A food crisis is a likely second-round affect of the financial and economic crises, which in itself breeds political and economic instability, undermining the recovery process and further destabilizing the global economy.

Policy responses to the financial and economic crises are understandably driven by the need for immediate action; to stop the bleeding, so to speak. But what if the very policies necessary to bring us out of this downward spiral only reinforce it in the medium-term?

(photo from snake.eyes' photostream)

How not to build foreign investor confidence

Bolivian president Evo Morales won a January 25 referendum on a new constitution that significantly increases the central government's control over strategic sectors, including mining and natural gas. The new constitution is but the most recent victory in the Movement to Socialism's drive to nationalize the Bolivian economy and consolidate political power (amongst other objectives, of course).

Obviously, the risks posed to foreign investors have increased substantially since Morales gained power in 2005. This uncertainty has resulted in a 75% decline in foreign investment since 2006. But amidst the commodity price and credit collapse of 2008, Morales seemingly realized that the Bolivian government could not fund, explore, extract and manage its natural resource wealth without foreign involvement. State-owned and private Bolivian firms simply lacked the expertise and capital to maximize the country's production/export potential. A number of public assurances and overtures last fall led some to adopt a more optimistic outlook on the role of foreign investors in the Bolivian economy.

Well, if the referendum itself didn't temper this optimism, February 10 sure did. One day after saying that the government would encourage foreign investment in the natural gas sector, the energy minister announced the central government's intentions to nationalize 4 of the power sector's largest companies, including Empressa Electricia Guarachi SA, majority owned by British firm Rurelec Pc.

February 9: Open for business!

February 10: No soup for you!

At this rate, Bolivia better hope General Motors' restructuring includes a whole lot of electric cars, because their mining, natural gas and power production is in a bit of trouble.

(photo: germeister's photostream)

Russia and China: a Power House or Broken Home?

Russia and China seem pretty chummy of late. Both countries essentially head the Shanghai Cooperation Organization – an organization which frightens the West because it promotes cultural, security, and economic cooperation among China, Russia, and Central Asia. In the cultural arena, China has dubbed 2009 the year of the Russian language, and Russia will make 2010 the year of the Chinese language. To promote security, the two countries established a hotline between their heads of state.

Most recently, the countries displayed extraordinary economic cooperation. Russia secured $25bn in loans from China in return for supplying oil for the next 20 years. This deal is the largest trade financing agreement between the two countries to date: Russia desperately needs money and China desperately needs oil. Everyone’s happy, right?

Not exactly. Days after the historic agreement, a Russian warship opened fire on a Chinese cargo ship and sunk it. The two countries' foreign ministries blame each other. But Clifford Levy of the New York Times actually blames deteriorating bilateral relations. Why?

While both countries enjoy honoring agreements that are mutually beneficial (economic cooperation) or mutually benign (language exchange), Russia and China have a tendency to disregard cooperation when it affects domestic politics. Levy likens the sinking of the Chinese cargo ship to last year’s Russian-Georgian conflict. China didn’t support Russia because Russia recognized the autonomy of South Ossetia, and China didn’t want to encourage Tibet’s or Xinjiang’s calls for autonomy.

What's clear is that Russian-Chinese relations are only as simple as each country’s domestic politics, which is to say they're not all that simple. Notably, Russia and China don’t have an alliance or even an established method to resolve disputes and disagreements. They just have a mechanism for cooperation, which can be honored or ignored at either country’s whim. Hopefully, ignoring the cooperation won't lead to any more drowned sailors.

Tin miners and tourists?

Gabon, a small previously oil-rich country in Central Africa, needs some income. Having flittered away it's oil money on bureaucratic diners, the country is attempting to revamp itself as a holiday spot.

But with lacking infrastructure and inhospitable neighbors, Gabon is not a prime tourist destination and finds itself needing some quick cash to buoy the economy. 

Instead it's finding its forests overrun with Chinese prospectors instead of tourists. Chinese strategic interest in African resources is nothing new, but Gabon was once a reason for hope in Africa's dismal resource management record. 

History repeats itself.

(Photo via bear_in_va)

The paradox that is South Africa

The past week has laid bare the stark contrasts between South Africa's ambition and reality, progress and failures.

On February 21, tickets went on sale for the 2010 World Cup. ZA is the first African country to host the tournament. Its winning bid came to symbolize not just the country's post-apartheid progress, but a sense that the entire continent's development was turning a corner as well. While ZA is still racing to complete the massive infrastructure projects associated with the event, the dream many doubted would ever be realized seems all but assured. The importance of this event to a football-mad continent should not be underestimated.

If only the country's economic outlook was so hopeful. South Africa's post-apartheid economic progress is evident. But it's only part of the story. While the emergence of a growing black middle class has been one of its greatest measures of progress, it thinly veils a broader failure to bring economic empowerment to the millions of residents of townships from Soweto to Langa. The percentage of South Africans living with HIV has been estimated at 20%; in fact, life expectancy has fallen by 10 years since the end of apartheid. Crime is truly epidemic. Oh yeah, and there are the tricky issues of Jacob Zuma, the ANC civil war and rising political violence.

One would expect these persistent problems to only worsen now that the economy appears to be falling of a cliff. The government reported today that the economy contracted in Q4 2008, ending the country's longest economic expansion on record. Thousands of jobs are being shed by foreign mining firms. Manufacturing output has slumped to a 40-year low. Even gold production, in which South Africa was the world's leader until 2007, plummeted to its lowest level in 86 years. This is troubling for a sector that accounts for 2.5% of GDP.

I know- quite the pessimistic outlook for a country that has been hailed as a model for post-conflict reconciliation and economic development. But South Africa faces a difficult year, all the while preparing for a remarkable one in 2010. Like other emerging market stars, South Africa represents a bright future. But there are dark days ahead.

The copper campaign

Building on Rory's discussion of China's investment in Rio Tinto, it's worth noting that China's most recent move to develop a stake in the international copper market goes back to early 2006, when demand for copper in China far exceeded growth in the industry. By March of that year, investments in copper smelting and the production of copper-based value added products like wires and cables seemed like a safe bet. According to some estimates, demand for copper grew by nearly 87 percent between 2001 and 2006.

If you were reading government publications, you might have thought otherwise. Just months before, in late 2005, five government ministries came together to publish "Proposals on Curbing Blind Investment in the Copper Smelting Industry," citing worries about the stability of copper prices, international copper supply, the environment, and the financial risks linked to loans for new smelting facilities. But news of these worries did not seem to hit mainstream media until August 2006, nearly a year later.

The most recent decline in commodity prices has kept these same copper smelting facilities and copper dependent industries on edge - over the course of 2008, growth in the industry dropped to less than 3 %. In December, Mineweb offered some interesting observations that bode poorly for copper's future. For one, they agreed with many economists that growth in China will no longer be in the double digit percentage range. And while "infrastructure counts for some 40% of copper consumption with the bulk being for power cables," the demand for copper is likely to fall proportionately with growth in the economy. Looking closer, "factory closures, leading to workers seeking new jobs, fits labor intensive infrastructure projects like roads, railways, bridges etc. rather than unwanted electricity generating and distribution capacity." On top of this, many power supply companies canceled orders for copper cables and some provinces have even begun using aluminum for cheaper medium voltage cables.

As the force of the economic crisis become a reality, China stepped forward to make a significant effort that may save the chunk of its economy leveraged by the copper industry. This effort began in January 2009 when China released a stimulus package aimed at infrastructure projects that will inevitably require copper wire and cable. Just a few weeks after this, they bought a huge stake of copper options with the hope of maintaining a supply of cheap unrefined copper. This has become a high profile campaign, but the stakes of unemployment and economic collapse in China is a high profile game that government cannot afford to lose.

(Photo from planewalker001's photostream)

Double, double oil and trouble

Little publicized fact: the $787 billion stimulus bill that Obama signed last week contains $16.6 billion for the Energy Efficiency and Renewable Energy (EERE) Office of the Dept of Energy. This increases the EERE’s budget tenfold, and it’s yet another signal that Obama is serious about alternative energy. That’s good.

Also this week, crude oil dipped below $40 for the first time in 2009, which has caused a stall in new energy projects. That’s bad. Oil prices are low because the economy is in terrible shape, which stifles demand. But the longer prices stay low, the harder it will be to commercialize advanced biofuels, which by one estimate will need an oil price of $80-$120 in order to be competitive in a reasonable timeframe.

This is a paradox worth watching as it plays out over the next 25 years. Ideally, you want clean and cheap energy. But that's still a ways off, and for now it seems like you can mainly have one or the other. Which is more important? How do you balance the two demands?

(photo from ifijay's photostream)

Commodity price collapse: who wins and who loses?

One of the great back stories of the ongoing economic crisis is the collapse in commodity prices, which occurred in the second half of 2008 after a record boom period lasting at least five years. The bursting of the bubble has produced clear winners and losers. Thanks to our fantastic contributors, zzzeitgeist has had excellent coverage of these repercussions. I thought I’d try to tie things together.

The biggest winners are consumers, particularly first-world automobile drivers. In the last 7+ months, oil has fallen from $147/barrel to about $37/barrel now. Economists reckon that amounts to a ‘stimulus’ of more than $240 billion. Also, now that the world food crisis has largely subsided, developing-world consumers stand to benefit from cheaper food prices. This means a lot when you spend more than 50% of your budget on food.

The mining sector is obviously a huge loser. Mining is often a boom and bust industry, because it takes a long time to develop new mining projects. It’s hard to forecast future supply/demand fundamentals (remember when this seemed like a good idea?) and unfortunately they can change drastically and rapidly, which is exactly what has happened in the last year. As a result, a number of firms are closing mines, because prices are too low to justify operating costs. Mining firms often take on a lot debt out of necessity – digging mines ain’t cheap. But thanks to the financial crisis and the disappearance of cheap credit, heavily indebted companies are suddenly struggling to stay afloat. Case in point: Rio Tinto, the world’s second largest mining conglomerate. See Rory’s excellent treatment of Rio’s debt woes here.

Finally, commodity-dependent countries suffer perhaps the worst. When prices are high, resource-rich countries are suddenly flush with cash, which they can use to advance geopolitical aims, reward cronies, or invest in infrastructure, education and health to avoid the resource curse (don’t hold your breath). Falling commodity prices have scaled back these ambitions. See Dan’s analysis of Venezuela, Rory’s take on Russia, or this money quote about Iran.

In my mind, these are the biggest winners and losers, but this list is by no means exhaustive. Falling commodity prices also have an enormous effect on agricultural trade, international cooperation, foreign direct investment, Guinea, South Africa, Australia, several Latin American countries, etc. Who else am I missing?

(photo from jeff-o-matic’s photostream)

China: the ultimate value investor

On Febraury 12th, Rio Tinto announced plans for a $19.5bn cash injection by Chinese state-owned firm Chinalco. The heavily indebted mining group will issue convertible bonds and receive investments in three strategic partnerships, giving Chinalco minority positions in some of Rio Tinto's best mining assets and increasing its total share of the firm to 18%. The plan is subject to shareholder approval and requires official permission by the governments of Australia (which swiftly moved to amend its foreign investment rules to consider convertible bonds as equity) and Chile; approval is far from certain and the deal is already highly controversial amongst Rio's existing shareholders.

Rio is effectively selling pieces of its best assets to one of its biggest customers; empowering a shareholder whose self-interested desire for low commodity prices directly conflicts with the interest of the others (high prices). But should the deal succeed, it would be the biggest Chinese investment ever in a foreign company, and herald a new focus in China's pursuit of resource security. China's investments in Africa are well-documented and readers of zzzeitgeist will surely be familiar with China's "FDI for access" bargain. But an 18% capital investment in one of the world's largest mining groups suggests a higher profile campaign to leverage the relative economic strength of the Chinese government towards the acquisition of strategic corporate assets.

While the era of the sovereign wealth funds came and went with a whimper, state-owned companies with decent balance sheets seem primed for a foreign buying spree, particularly in the heavily indebted mining sector. With mining assets cheap, and the financial backing of the Chinese state strong, the opportunities for Chinese companies abroad are immense. That is, if they can overcome the tricky little problem of economic nationalism.

A final academic point: the US has been referred to as the world's largest venture capitalist. Perhaps we should begin referring to China as its largest value investor.

(photo from kt_bluesky's photostream)