While the vagaries of the world’s oil markets have dominated most media coverage as well as the downward investment trends, four major global commodities have displayed remarkable similarities.
This quartet of Brent crude oil, rubber, tin and palm oil couldn’t be more diverse in their overall usage, but all are marching to the same drummer of recent peaks and valleys. According to a recent chart published by the International Monetary Fund, all seem to have shot upward shortly after the turn of the current millennium with the exception of oil, which hit an all-time high of $145 per barrel in June 2008 just before the financial market crash. But even after that dip, oil resumed a sharp climb to top $125 per barrel in 2012.
By now, it’s well-known that the current “commodity crisis” was brought on by a collapse of China’s buying power (one third of world commodities), a lackluster worldwide financial crisis recovery and an unprecedented global production capability powered by technology.
As diverse as rubber, tin, crude oil and palm oil might be, they share the universality of worldwide usage. When analyzing this particular time period from a global perspective, it will be designated as a timeframe when the massive commodity-producing undeveloped and developing countries were losing their momentum due to the resultant supply/demand inversion.
This, in turn, has abetted the increasing correction the world is experiencing. While primarily centered in the Mideast (the world’s oil production center), it also is spreading to Central and South America, Africa and even Europe. The latter is further burdened by millions of displaced persons surging into Central, Eastern as well as Northern Europe.
While the crude oil production inversion is impacting the U.S., the American economy’s gross domestic product is slowed, but not deeply affected by oil’s price misfortunes. In fact, since the U.S. economy is primarily dependent on two-thirds support from its consumer sector, the oil debacle has actually served to increase the nation’s consumer buying power.
It also has been instrumental in restoring the U.S. per capita savings rate to a solid “plus” position from the increasing rise in spending on borrowed money that preceded the great financial crisis.
Scrap sector in decline
Although metal scrap may seem of little interest to most economic observers, its recent drop to the demand bottom is a telling indicator of the global commodity slump.
What rarely is noted about scrap — the vestige of recycled metal consumer and producer goods — is that the U.S. is the world’s dominant producer of steel scrap. While more than 60% of U.S. steel production is made from scrap, only 7% is used in conversion to steel by China, the world’s leading producer of that commodity.
The decline in metal prices has resulted in steel scrap going from 24 million tons in 2011 to 13 million tons in 2015, and the price paid to manufacturers and others producing scrap has dropped from a high of $475 per ton in 2011 to $203 during the first quarter of 2016. While steel production in the U.S. was down 11% to 79 million tons last year, this was partially due to the fact steel mills dramatically reduced their scrap demand.
This, in turn, has caused the 10-to-12-million-unit junked automobile scrap sub-sector to pile up as dealers in this drab business vainly hope for prices to recover from this ever-increasing steel scrap “glut,” which is reaching all-time record proportions. It also has had the further effect of deflating the overall scrap industry, which had been a $100-billion-a-year business at its height not more than a short five years ago.
It also mirrors the fast decline of the many facets of heavy industry that produced all types of industrial, commercial and retail goods used in the U.S. This also has led to the demise of more than 50 metal scrapyards that have ceased operations in the U.S. during the short post-financial crisis end period, according to the Institute of Scrap Recycling Industries. It also has badly hurt U.S. scrap steel exports, which fell to $4.1 billion in 2015 from $6.2 billion a year ago.
While China and India continue to flood the world market with their record exports of basic steel, there is little hope for a U.S. steel scrap turnaround in the foreseeable future. Even a moderate overall economic recovery will take a long time before U.S. scrap regains its leading position, if it ever does.
Offshore drilling commitment voided
With the Obama administration facing the last few months of its eight-year reign, restraints on fossil fuels (coal, oil and natural gas) are speeding up. With the Environmental Protection Agency as its spearhead, the current government leadership is attempting to tighten all previous commitments that might generate future fossil-fuel production and revenues.
This latest blow against future oil production came in the form of abdication of drilling rights for the Atlantic Ocean waters off the coasts of Virginia, North and South Carolina, Georgia and Florida. Although additional drilling rights, supported by adjoining states’ governments (both Democrat and Republican), are not much of a priority right now, it closes the door for future expansion.
Offshore drilling in the Atlantic had drawn heavy support from major oil companies as well as the American Petroleum Institute, which was looking at the long-term future of industry expansion once prices reach more reasonable levels. This move by President Obama also is laying the groundwork, as best he can, for his successor, especially if it’s Hillary Clinton.
Her stated position on coal elimination and the reduction of oil and use of natural gas by utilities in favor of solar, wind, or geodesic input spells out the tack Obama’s successor would take, if elected.
The major expansion of renewables, at the cost of fossil-fuel diminution, will become a major factor in the budding confrontation between the nominees for president of the two major parties. It is very likely the future of energy development as a leading factor in America’s future will be a reflection of the forthcoming administration, if the Democratic hold on the White House is maintained.
From an economic point of view, this factor likely will be the most decisive aspect affecting America’s future enrichment and growth development depending on which candidate emerges victoriously.
Whatever positions are taken on the climatological issue, the success of America’s future energy development will become instrumental in ascertaining the extent of America’s future economic success.
Manufacturing employment less relevant?
Judging by the latest reports from the U.S. economy’s employment composition, the manufacturing sector seems to be on an irretrievable downward track. As of 2016’s first quarter, this once-leading aspect of U.S. productive power is on a single-digit downward slope as part of the total factory jobs percentage.
As late as the early 1980s, manufacturing represented one-quarter of the nation’s active employers. And in the height of the post-World War II period, manufacturing had employed as much as 40% of the nation’s overall manpower availability.
The current low level of manufacturing employment, as a component of the United States’ leading gross domestic product, is now at a level to which it had dropped during the great financial crisis. While economic employment observers put the blame on the surging dollar, the inability to fend off foreign competition worldwide and replacement by technological breakthroughs play a significant role in the overall global slowdown.
While U.S. presidential candidates promise legislation and positive efforts to reverse this trend of lessening employment, such empty commitments have no base of reality in the immediate economic future. This trend makes ongoing factory
employment less likely in a more technologically-oriented slow-growth economy.
Furthermore, aggressive tariff-induced trade reduction will invite retaliation by current trading partners. This could invite a revival of the 1929 Smoot-Hawley legislation that induced a worldwide depression in the early 1930s through counterpart tariffs by import-export partners.
This pro-activist firewall against foreign goods by the U.S. Congress at the inception of the Great Depression in 1929-1930 proved counterproductive. It resulted in worldwide retaliation and the closing of U.S. manufacturing import doors by the nations affected by the newly innovated U.S. tariff walls.
In attempting to project the direction of America’s factory employment in the years ahead, the growth of America’s manufacturing employment may well be relegated to new products and their subsequent consumerism expansion. Therefore, the promises of bringing former U.S. manufacturing jobs home should fall on deaf ears.
But those diminishing companies that have projected the highest quality of safety, security and overall service to their distributors and end users may well be the remaining Made in the USA producers that make their consumers resistant to the replacement by foreign competition.