Escaping the Commodities Choke Chain

With some 3 billion people in Asia, Latin America, and Africa breaking the yoke of poverty and becoming real consumers for the first time in their lives, the world suddenly needs more of everything. And ?€œmore?€ doesn?€™t happen overnight.

The U.S., Europe, and Japan already consume most of the world?€™s resources. When demand exceeds supply, prices for everything from coal to the so-called rare earth elements (some of which increased in price by more than 2,500 percent last year) have nowhere to go but up.

Consider the most basic fossil fuel: coal.

Since 2005, China?€™s need for coal, which already ties up some 45 percent of the country?€™s rail capacity, has outstripped its ability to produce it, according to Craig Richardson, a Winston-Salem State University professor who monitors the Chinese economy for the American Institute for Economic Research. So China, already the third-largest coal consumer in the world, must import coal to meet its growing demand.

Worsening Problem

With 500 new coal-fired power plants scheduled to come on line in China in the next decade, the problem will only get worse. ?€œIn 10 years,?€ Richardson writes, ?€œChina will need to import the equivalent of the entire coal production of Australia, Indonesia, South Africa, and Russia.?€ Huge questions remain about where this needed coal will come from, how much it will cost, and what effect China?€™s needs will have on its own and the global economy.

Coal is just one small part of the equation. With the U.S. and European economies still recovering from the Great Recession and the Japanese economy suffering from the great earthquake, tsunami, and nuclear-power crisis, little excess capacity exists in the energy and commodities pipeline. Supplies are stretched. Prices are rising. The specter of significant inflation looms ahead.

Americans understood the supply-demand cost equation when our own booming economy was driving things. Gasoline at more than $3.50 a gallon seemed tolerable when Americans had jobs. But now Americans are paying such prices (and some are predicting future highs of $6 a gallon) to support jobs in China, India, Brazil, and other fast-developing countries. For most Americans, that?€™s a lot less tolerable.

The commodities choke chain has few safety valves. Increasing supplies is neither quick nor easy. It takes years to open a single new mine. Finding substitute commodities is an arduous, costly process.

Algae Fuel?€™s Potential

Consider the effort to substitute algae fuel for fossil fuel. Kenneth Green, a resident scholar at the American Enterprise Institute in Washington, calls algae-based fuel ?€œthe most promising liquid replacement fuel on the horizon.?€

Government and industry have already invested hundreds of millions of dollars in algae-fuel research and technology. In 2009, for example, ExxonMobil poured $600 million into a research partnership with Synthetic Genomics of La Jolla, Calif.; the investment could grow to the billions.

?€œThe industry is still young,?€ says Stephen Mayfield, director of the San Diego Center for Algae Biotechnology at the University of California, San Diego, and one of the founders of Sapphire Energy, a pioneer in algae-based fuel. ?€œBut we have made so much progress in the last three years that I now see commercialization reachable in the next five years.?€

Meanwhile, the choke chain will continue to tighten. Limited supplies and rising prices can push us in only two directions: toward price inflation or a slowdown, as companies and individuals curtail their spending as a result of higher prices.

So what can companies do to improve their competitive position today while longer-term solutions make their way through the pipeline?

1. Invest now. If you believe Brazil, China, India, South Africa, and Vietnam will continue to grow faster than other countries, requiring more resources in the process, try to lock in long-term supplies of needed commodities at today?€™s prices. With billions of new consumers and a burgeoning middle class, demand for infrastructure improvements, industrial equipment, and consumer goods will increase significantly as these countries prosper. This will fuel further increases in commodity prices. There are many ways to lock in supplies, from hedging on the commodities market to investing in asset production?€"by acquiring mines, for example. This is common in the aluminum, copper, gypsum, steel, and tin industries, where manufacturers often own and operate mines. Why shouldn?€™t a giant utility similarly own a coal mine? Why shouldn?€™t a major construction company own quarries? Whatever path you take, you are betting that market prices will continue to increase over time while your own costs will stabilize or increase less.

Authors: Commodities - Yahoo! News Search Results

Read more: