London Politica 12/20/23 London Politica 12/20/23

The 2024 BRICS Expansion: Risks & Opportunities

With its 15th summit on August 2023 BRICS gained increased attention. The main focus of the summit was on the potential enlargement of BRICS by admitting new members. During the summit, it was announced that 6 countries - Argentina, Egypt, Ethiopia, Iran, Saudi Arabia, and the United Arab Emirates - had been invited to join the group, with their official entry into the bloc set to take place in January 2024.
The expansion of BRICS has raised questions regarding the implications for international politics and economics. And while most analysts seem to agree that it means something significant, it remains unclear what exactly. This report, therefore, analyses the potential risks and opportunities of the expansion, with a particular focus on the commodities sector. Our analysis addresses questions regarding the interests of BRICS+ countries, the challenges and opportunities for the bloc itself, and the wider commodities sector.

Download the report here

London Politica 5/11/23 London Politica 5/11/23

Powering the future: Cobalt in the EV battery value chain

Download report here

London Politica 4/3/23 London Politica 4/3/23

The 2020s Commodities Boom: How Long Before the Outlook Dives?

The link between commodities boom during recession and inflation is well-established. During a recession, central banks often lower interest rates to stimulate economic activity, which can lead to inflationary pressures. Inflation can also be driven by increased demand for commodities as economies recover. This was evident during the global financial crisis of 2008-2009, where a sharp increase in commodity prices occurred during the recovery phase.

Similarly, the COVID-19 pandemic in 2020 led to a sharp recession, followed by a commodity boom in 2021 due to a combination of factors, including supply chain disruptions and increased demand as economies reopened. The result was a surge in commodity prices, including oil, copper, and agricultural commodities that had continued well into 2023. It is important to highlight these dynamics between economic performance, and commodity rallies, to better outline market performance, and make better long term trading decisions. The link between commodity prices and inflation is made visually available by the St. Louis Federal Reserve.

To project when the outlook in the commodity markets can settle down a time-series analysis must be conducted using historical data to identify trends and patterns in commodity prices, such as the ones above. The analysis must also include macroeconomic variables such as interest rates, inflation, and GDP growth to identify the drivers of commodity prices. However, it is important to note that commodity prices are highly volatile and subject to various unpredictable factors such as natural disasters, political instability, and global events. Yet, based on current trends and projections, it is likely that the commodity boom will eventually settle down as global supply chains stabilise and interest rates cool down. However, the timing and extent of this will depend on a range of factors and will require ongoing monitoring and analysis.

The most likely estimate would be, not before FY2024. Given the reaction of markets to the increase in interest rates, multiple cases of bankruns, the subsequent banking crises, and ongoing Russian invasion of Ukraine, volatility is here to stay for the short-run. However, the CPI (Consumer Price Index) has been showing signs of improvement, with inflation in North America, and the Eurozone, almost at the cusp of weathering down. This follows a decline in energy prices, and can be credited to deflationary fiscal policies aimed at slowing monetary velocity. Given the response of the Federal Reserve, the fallout of the bank failures has been prevented from adding fuel to the fire, and efforts from both banks, and the government, to reassure depositors of confidence in the institutions that govern them, have allowed for the stabilisation of outlook for the short run. To conclude, investors can expect the commodities rallies to continue through 23’, although as economic and geopolitical forces begin to stabilise, the inflated boom can be seen as a short term bubble, waiting to burst as growth returns.

London Politica 3/2/23 London Politica 3/2/23

Analysing the Volatility of Coal Prices: Why they Spike in Fall

Coal prices have a tendency to peak in the fall. A variety of factors contribute to this phenomenon. Understanding the underlying causes of this can help inform policy decisions and investment strategies related to coal.

A major factor that affects coal prices is the seasonal demand for energy. As the weather gets colder in the fall, there is an increase in demand for heating which in turn leads to an increase in demand for coal as a fuel source. The increase in demand drives up the price of coal. For example, in the United States, coal consumption for electricity generation tends to increase during winter months as the demand for heating increases. Historical data shows coal prices tend to increase in the months of October and November, as the weather gets colder.

Another factor that contributes to the higher coal prices in autumn is the timing of industrial production. Many industries, such as steel and aluminium sectors, have a seasonal cycle where production increases in the fall. Higher production levels lead to an increase in demand for coal, which drives up prices. For example, in China, a major consumer of coal, steel production typically increases in the fall as demand for construction materials increases. This increased demand for coal can be seen in the historical data, with coal prices tending to increase in the months of September and October, when industrial production increases.

Additionally, supply-side factors also play a role in the peak in coal prices in the fall. For example, in some regions, fall is the time when mines are closed for maintenance and this reduces the supply of coal. This then contributes to higher prices. Furthermore, natural disasters such as floods and typhoons can disrupt coal mining operations, leading to a temporary shortage, again driving prices higher. Among the most important, and also potentially the most overlooked is the nature of monsoon rains in India, and their subsequent effects on the supply of coal. India is second largest producer and consumer of coal in the world after China, with production being 778 million tonnes and consumption being 1052 million tonnes; with it seeming to increase for the short term (till 2030) peaking at about 1192-1325 million tonnes. Coal is a critical fuel source for the country's power plants, factories, and households, accounting for over half the country’s energy needs. The monsoon season typically occurs between June and September and often has major impacts on coal production and transportation. For instance, the Piparwar Area in 2019, which is known for its overwhelming share of coal mining in the country, was hit by severe flooding causing a halt in production, leading to supply crunches. In areas where mines are located near rivers, the monsoon rains can cause flash floods that then completely inundate the mines, making it impossible to extract coal. In addition, the heavy rainfall can cause landslides and washouts along transportation routes, making it difficult to transport coal from mines to power plants, ports, and other destinations.

In conclusion, the peak in coal prices in the fall is the result of a combination of factors such as seasonal demand, industrial production cycles, and supply-side constraints. By analysing historical trajectories, one can assess the impact each of these factors have had to drive the fall peak in coal prices over time. This knowledge can help inform policy decisions, investment strategies related to coal and can also be used to predict future price trends.

London Politica 2/28/23 London Politica 2/28/23

Powering the future: Lithium in the EV battery value chain

Download report here

London Politica 12/5/22 London Politica 12/5/22

Risks of the German gas plans

This comprehensive mini-report from the Global Commodities Watch identifies the risks involved with German preparations and plans to curtail Russian gas supplies.

Download mini-report here

London Politica 10/27/22 London Politica 10/27/22

Will Inflation Destroy the Credibility of the U.S. Dollar?

The US Dollar is widely considered as an indispensable part of international trade. It’s the pillar of the Bretton Woods system. Since the end of WWII, the U.S. Dollar emerged as a standard medium of exchange for international trade, which was only further entrenched after the collapse of the Soviet Union, the fall of the Iron Curtain and end of the Cold War. The Bretton Woods system came to an end after the termination of the convertibility of the Dollar to Gold in 1971, rendering the Dollar a fiat currency. In recent years, the U.S. economy has been losing the dominance it once had in its share of global GDP.

The COVID-19 pandemic acted as a catalyst for this changing dynamic. The most important factor for a financial powerhouse is the entity's share in the world as a reserve currency. Historically, the Dutch East India Company made the Guilder an important player in global trade, a position which was then passed to the British Pound Sterling, followed by the U.S. Dollar. The pandemic and the reckless money printing by the Federal Reserve will and has caused irreversible damage to the U.S. economy.

The critical reason for the Dollar's importance as a reserve currency is because of the confidence investors, bankers and traders put in it. It is the standard currency for conducting almost all transactions, as mentioned earlier. Right now, the Dollar is the best performing currency relative to global foreign exchange rates. This can be attributed to a variety of geopolitical risks within the global economy such as China’s zero Covid policy and its troubled real estate sector. These events have driven investors to safe-haven investments. The problem is, what happens if the very value of this medium of exchange is under threat? There will be an erosion of faith in the currency. If these volatilities are to be realised, it would cause an exodus of investments away from the Dollar, propelled by behavioural economics and high frequency trading that could lead to its value crashing. It should be noted this is an extreme scenario. A key reason for considering the possibility of Dollar ‘hyperinflation’ is the money printing of the past 24 months, which has inserted a staggering 80% of all Dollars ever created into circulation. Inflation is not instantaneous, it takes months, sometimes even years. A cause for this delay is the lack of ‘monetary velocity’. Monetary velocity is the rate of transactions that occur within an economy, put more simply, the amount of money that changes hands. The pandemic abruptly halted this monetary velocity, but this was only temporary. We now see inflation rates of over 8%. The White House blames this on the Russia-Ukraine war. The war has indeed exacerbated the rise in commodities prices and even inflation to an extent but this trend preceded the invasion. Even with the Federal Reserve raising interest rates, it is not nearly enough to retract funds already in circulation.

In the coming months, inflation is most definitely set to worsen and there is the possibility of the US economy slipping into recession. Although bears often have an alarmist tendency of screaming ‘perpetual crisis’, upcoming quarters are not viewed with a positive outlook.

The Chinese Renminbi had been referred to as a competitor that could topple the status the Dollar currently holds. This is questionable. Although the Chinese economy is the closest competitor to the United States, this cannot be said for foreign exchange dominance. The Renminbi does not possess nearly the same level of investor confidence that the Dollar does. The currency's volatility is also problematic with Beijing restricting convertibility for its citizens and diaspora. In the long run, the prospects look a lot more decentralised, meaning instead of the Dollar being completely replaced, there is a higher probability of a basket of currencies emerging that could include alternative currencies such as Renminbi and the Euro.