Onshore Energy Conference — London Onshore Energy Conference — London | Page 28
COMMODITIES PRICING
1984 – 2016
10,000
9,000
Aluminium
Copper
Iron ore (RHS)
Coal (RHS)
Brent (RHS)
8,000
$/tonne
6,000
200
150
5,000
100
4,000
3,000
50
2,000
1,000
0
20
10
20
12
20
14
20
16
08
06
20
20
04
02
20
20
8
6
00
20
19
9
19
9
2
0
8
6
4
19
9
19
9
19
9
19
8
19
8
19
8
4
0
SOURCE: pH REPORT, IndexMundi
Their pricing soared during the subprime
period of the early 2000s, and went even
higher during the post-2008 period. But
this proved to be a temporary illusion,
as the promised economic recovery
was unsustainable in the long term.
The past two years of The Great Unwinding
have, therefore, seen investors facing, Januslike, in opposite directions at once. They
could not ignore the mounting evidence
of over-supply in oil markets, for example,
where the International Energy Agency’s
latest monthly report has warned that June
saw OECD commercial stocks of crude and
products “swelling by 5.7 mb (million barrels)
to a record 3,093 mb”. But nor could they
simply ignore the impact of new stimulus
measures by central banks in Japan, Europe
and the UK, as these provided the firepower
to fund some short-lived but spectacular
speculative rallies in futures markets.
Today, however, the chickens are coming
home to roost with regard to the policy
failures of the stimulus period. Pension
funding has now reached “crisis point”, in the
words of the UK’s former pension minister,
while Deutsche Bank’s CEO has argued that
ECB policies are “working against the goals
of strengthening the economy and making
the European banking system safer.”
The critical issue is that central banks
have been in denial about the changes taking
place in demand patterns as a result of ageing
populations and falling fertility rates. Their
Federal Reserve/US-type forecasting models
still assume that raising interest rates will
28
$/tonne $/bbl
7,000
250
reduce demand, and lowering them will release
this pent-up demand. But today’s increasing
life expectancy and falling fertility rates
are completely changing historical demand
patterns. We are no longer in a world where the
vast majority of the adult population belongs
to the wealth creator cohort of those aged
25–54, which dominates consumer spending:
Increasing life expectancy means people
no longer routinely die around pension
age. Instead, a whole New Old generation
of people in the low spending, low earning
55+ generation is emerging for the first
time in history. The average western baby
boomer can now expect to live for another
20 years on reaching the age of 65.
Fertility rates in the developed world
have fallen by 40 per cent since 1950. They
have also been below replacement levels
(2.1 babies per woman) for the past 40 years.
Inevitably, therefore, this has reduced
the relative numbers of those in today’s
Wealth Creator cohort, just as the New Old
generation is expanding exponentially
The Fed/US models are therefore long
past their sell-by date. The New Olders
already own most of what they need and
their incomes decline as they approach
retirement. So they have no pent-up demand
to release when interest rates are reduced.
In fact, they have to save more and spend
even less, in order to avoid running out of
cash during their unexpectedly extended
retirement. A more modern forecasting
model, based on these demographic realities,
would immediately recognise that demand
growth and inflation are therefore likely
to be much weaker than in the past.
“You cannot print babies” should be the
motto hanging on every central bankers’
wall. Unfortunately, it is too late to quickly
reverse their demographic myopia. Instead,
The Great Unwinding is now set to evolve into
The Great Reckoning. Investors, companies and
individuals must prepare for heightened levels
of volatility, as markets continue their return
to being based on the fundamentals of supply
and demand, rather than central bank liquidity.