While the Australian economy is doing better than most at the moment, it still has its problems — while unemployment is low, a large number of people were forced into part time work during the short recession, and has its concerns — economic growth is too heavily dependent on China.

Interesting coverage of a tour of Australia by a former member of the China Central Bank Committee can be found here:

http://www.theaustralian.com.au/fears-prompt-an-rba-rates-rethink/story-e6frg8zx-1225804353146

On a related note an interesting article “China has now become the biggest risk to the world economy” from the UK:

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/6575883/China-has-now-become-the-biggest-risk-to-the-world-economy.html

Some valid points/concerns in both articles. I’ve never understood why we have a World Trade Organization that acts as a global policeman/adjudicator, why tariffs and subsidies are generally banned, why dumping of goods is banned, yet currency manipulation by countries is allowed. It doesn’t make sense … to me anyway.

China

These are buoyant times for (some) commodity investors, and (some) commodity producers, what does it mean in terms of a global recovery?

A common feature among people drawing conclusions about the economy from commodity markets tends to be a sole focus on price, and even then only prices in exchange traded commodities. If buyers out number sellers prices rise, so rising prices mean a return of global demand which in turn means global recovery — right? Well not quite, despite the enthusiasm displayed in many articles pushing that line. The flaw in this line of thought is that the buyers who are out numbering sellers in commodity markets need not be end users of the commodity. There can be speculative demand from speculative buyers just as there can be economic demand from industrial buyers. From the point of view of the markets, or the commodity producer, it doesn’t matter who the buyer is: more buyers than sellers means rising prices. The problem arises when you use market price — at face value — to draw conclusions about the economy. Since most of the people who connect price to economic recovery without digging deeper tend to be economists, I’m assuming economic theories don’t allow for speculators.

Let me focus on metals and minerals (e.g. iron ore, coal). People don’t eat these (unlike food commodities), they are used as inputs for industrial production. As global demand picks up we would expect to see increasing consumption of metals and minerals. When buyers out number sellers prices rise. This is clearly what is occurring at the moment, you only need to look at price charts–which I haven’t reproduced here because we’re all familiar with them. But what if the majority of buyers are not end users of the commodity and do not take delivery, i.e. speculative buyers? If the buyer doesn’t take delivery then you would expect stockpiles to rise. In other words if speculators are out numbering industrialists you would expect to see quantities of the commodity that are available, i.e. stockpiled, to increase. In the first chart we have the base metal stockpiles on the London Metals Exchange.

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LME prices · LME stockpiles