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This Wall Street Journal article, As China Goes, So Go Commodities, is the clearest explanation I’ve read about how trends in China’s economy might affect commodity prices.
You want to know where the global commodities markets are heading in the coming years? Then it’s probably best that you remember a single word: China.
Liam Pleven outlines three possible scenarios for China’s economic future and describes how these would affect the worldwide market for commodities like oil, copper, and soybeans. These three scenarios have huge implications for China-Latin America trade because Latin America is a major supplier to China, and this trade is a major component of Latin American economies. For example, Chile currently supplies 29% of China’s copper and this constitutes a very large percentage of Chile’s exports. When copper prices fluctuate, so does the dollar-peso exchange rate.
Source: The Wall Street Journal.
Here are the three forecast scenarios :
Full Speed Ahead
If China’s consumption of commodities continues to grow at the rate it has over the past 10 years, this is what the world would have to do to meet that demand in 2020, assuming that the rest of the world’s collective appetite doesn’t change at all:
[this would mean, among other things]
• Extract nearly three times as much new copper as the current annual production from Chile, which mines about four times as much as any other nation.
The Hard Landing
A growth rate of 4% to 6% would be a big leap forward for the U.S. economy and plenty of others. But not for China….
Demand for steel, copper and other industrial metals could drop significantly if China does stall, because those materials are heavily used in construction—which would be at risk from weakness in the Chinese real-estate market—and because China often accounts for some 40% of global demand for those materials. Coal demand could also tumble, she says, because the fuel is heavily used in China to generate power.
Slower but Steady
For many China watchers, including Barclays, the most probable scenario is an economy that keeps expanding strongly but at a less blistering pace, with annual GDP growth rates in the high single digits. That would mean continued upward pressure on most commodities prices, with some possibly rising substantially, but in most cases not the soaring prices that a red-hot economy would produce.
I took this photo at a wedding I attended in Beijing in 2009. I think it's an appropriate way to illustrate this rather technical post about Chinese economic trends because this is the real face of oil/gas/copper/soybean consumption. This wedding had mass amounts of meat (lamb but no pork since the bride's family is Huimin, part of a Muslim minority.) As China grows more prosperous, more people will be eating more meat and hosting ever-more-elaborate weddings.
Note: I’m curious to hear your feedback on this post because I am thinking about starting a whole new blog about China-Latin America relations, in both English and Spanish, perhaps in partnership with the small number of other people who blog about this emerging topic. Gracias!!
I have a dream, a common dream of the people devoting to renewable energy source around the world, that for the blue sky and white cloud of the later generations, qualified products are used to realize renewable energy substitution.
I have a dream that one day throughout the whole world, renewable energy sources will take the dominant position.
I have a dream that one day my entire country fellows, even the global citizens, know about solar energy and make full use of it.
I have a dream that one day solar industry will be as advanced as IT industry, as mature as electric home appliances industry, and as large-scaled and automatic as automobile industry.
I have a dream that one day the sky will be much bluer, the water will be more limpid; our homeland will be full of sunshine, tranquil with no war.”
– Huang Ming
This quotation really touched me. I found it endearingly Chinese and idealistic (not mutually exclusive.)
The world faces a massive challenge, a common challenge, to channel the power of the sun, wind, and sky, into resources to power our modern lives.
This photo shows Huang Ming in January 2011, when he accepted the CCTV China economic innovation prize.
Huang Ming earned the 2011 Right Livelihood Honorary Award:
“… for his outstanding success in the development and mass-deployment of cutting-edge technologies for harnessing solar energy, thereby showing how dynamic emerging economies can contribute to resolving the global crisis of anthropogenic climate change.”
Huang Ming is a visionary, dedicated, and passionate entrepreneur and change-maker in the field of solar thermal energy. He set up the Solar Valley in Dezhou as a national and global example for solar as a realistic alternative to fossil and nuclear energy and rising CO2 emissions. In 2005, Huang Ming was instrumental in getting the Renewable Energy Law passed in China, thus building a strong case for his country to take a leading role in preventing growing climate chaos.
Huang Ming was born on March 10th 1958. He worked as an engineer at the Petroleum Research Institute of Dezhou. After the birth of his daughter, he became worried about the living environment of her and other children because of the pollution. He started his career in the solar energy field secretly, without quitting his job at the institute, because he needed to fund his initial solar research by his salary.
I like that keep-your-day-job-while-you-scheme strategy, something I hear about more often from bloggers-turned-solopreneurs than onetime engineers at Chinese government institutions!
Our trip to Chile’s IV Region has brought us up close and personal with Chile’s most high-profile wind energy projects.
Parque Eólico Totoral
On Ruta 5 Norte between Los Vilos and La Serena, you can see these turbines at the top of the hill.
Built by Norwegian developer SN Power, it contains 23 125m wind turbines, and generates 46MW of electricity. The project required an investment of $140,000,000 and opened in January 2010. The developers submitted the Declaración de Impacto Ambiental in 2007, and the project was approved in 2008.
The wind farm’s economic viability depends on carbon credits. The operation of this site implies a reduction of 65,000 tons of CO2 per year, which is equivalent to eliminating 15,000 cars from the streets of a city like Santiago. (Note: I am not sure if any plants were actually taken off the grid in response to the construction of this site. My guess is that this project adds extra electricity to the SIC, alongside electricity generated by other power plants – coal-fired, hydro, etc. Let me know if you have more information about this.)
I saw a Vestas truck driving around the property, suggests that these are Vestas turbines.
The scene was so dramatic that it made me wish that I had a fancy camera on hand to capture these images, instead of just my iPod Touch.
Here’s a map of Chile’s IV Region. (Click it twice to see a bigger version.)
115 MW Ovalle Project
In the September 23 edition of El Día, La Serena’s regional paper, I read that Ovalle will have the biggest wind farm in South America. More than 20 wind turbine towers will be installed on the coast of the jurisdiction to generate clean energy. 115MW will be entered into the SIC. The developer, an American company called Pattern AEI, has been studying sites in this area since 2008, has determined that this site has the best wind in the zone. The company has held citizen consultations and has pledged to improve the roads in the area, which will benefit all residents.
100 MW Vestas Project in Limari
From the Press Release:
Vestas has started the construction of a fully owned wind project for 100 MW in Chile, the Talinay Oriente (‘Talinay East’) Wind Power Plant, which will be located in northern Chile in the Limari Province. This project, which will be constructed with the Vestas 2 MW platform, will at its completion be the largest wind power plant in Chile.
Vestas acquired full ownership of Talinay Oriente from a local developer. This is a strategic environmental decision following the Vestas principle “As green as it gets” and the company’s goal to continue increasing the share of renewable energy sources used to cover Vestas’ energy consumption worldwide and in the countries where Vestas operates, while contributing to reducing the carbon footprint. [more]
Barrick’s Parque Eólico Punta Colorado
This wind farm is on the northern edge of the IV Region, in an area that is full of mines and some villages but otherwise a bit desolate.
Barrick is one of the world’s largest mining companies. The company invested $70 million in the 242- hectare site near the village of La Higuera. The first phase includes 10 turbines, and the complete project will include 18 turbines, and contribute 36MW into the SIC.
The slogan, “Un aporte de la mineria a las energias renovables en Chile” translates to “a contribution from the mining industry to the renewable energies in Chile.” The copywriter in me notes that this wording emphasizes the corporate social responsibility and public relations aspects of the project.
We got a lot closer to these turbines than those at Totoral. So pretty against the bright blue sky and rolling clouds.
For more information about Chile’s renewable energy laws and electrical grids, read this post: Chile’s Renewable and Non-Conventional Energy (ERNC) Law: Translation and Notes.
Yesterday I wrote about failure, and how it could be one of the keys to success. This connects to the recent controversy over Solyndra’s failure, as well as to energy and innovation in general.
Solyndra headquarters. photo via totalsolarenergy.co.uk
I found this brilliant paragraph by Matthew Nordan, whose bio reads “I’m a venture capital investor at Venrock focused on energy and environmental technologies. Earlier, I co-founded and led Lux Research and forecasted technology futures at Forrester. I really do live and breathe this stuff.”
Failure is a fact of life in venture investing – and energy innovation. VCs provide capital to high-risk businesses that can’t be funded any other way. Most venture investments either fail completely or deliver mediocre returns. Cases like Solyndra come with the territory, and they say no more about all the other VC-backed energy start-ups than Webvan said about Amazon: The whole point is to risk failure, because you have to take on many (informed, balanced, and uncorrelated!) bets for a shot at a big outcome. Those outcomes, in turn, pay for the failures many times over – while improving lives and creating jobs. There’s a legitimate argument about whether taxpayer money should be deployed in this pursuit, but to treat even a very costly cratering like this one as anything other than de rigeur seems silly. [more]
Below are some several excerpts from reports about Solyndra’s failure.
First, the company’s original announcement. Emphasis mine. Solyndra Suspends Operations to Evaluate Reorganization Options
August 31, 2011 – Solyndra LLC, the American manufacturer of innovative cylindrical solar systems for commercial rooftops today announced that global economic and solar industry market conditions have forced the Company to suspend its manufacturing operations. Solyndra intends to file a petition for relief under Chapter 11 of the U.S. Bankruptcy Code while it evaluates options, including a sale of the business and licensing of its advanced CIGS technology and manufacturing expertise. As a result of the suspension of operations approximately 1,100 full-time and temporary employees are being laid off effective immediately.
I think it’s interesting that the press release emphasizes the macroeconomic nature of the problem, as well as the specific shutdown of manufacturing operations, since other operations could continue.
But this won’t be easy. This Greentech Media post distills Solyndra’s situation into a clever subhead: For sale: factory. In Fremont. Little used. IP portfolio as well. Serious inquiries only. Here are my favorite lines:
Any potential acquirer would also inherit a titanic-sized bookkeeping and public relations headache. Solyndra has received more than $1 billion from VC partners and over $535 million in loan guarantees from the Department of Energy. Congressional opponents of green policies like Michigan Congressional Representative Fred Upton regularly hold up Solyndra as an example of why the U.S. shouldn’t support green energy policies.
The only green jobs that have been created, one wag told me today, have been ones for accountants and bankruptcy attorneys. [more]
Well, Obama and other politicians do always tout “green jobs,” and accountants and bankruptcy attorneys need work, right?
Solyndra’s failure has become a political football, which is a valid debate but not without some misconceptions. In a Washington Post piece, “Five myths about the Solyndra collapse,” Brad Plumer writes:
the fact that China hurls money at solar isn’t necessarily a bad thing, since cheaper solar prices can benefit the United States too. The Energy Department seems to have recognized that going toe-to-toe with China on direct subsidies may be futile and is instead trying to focus on complementary efforts to bolster innovation, through programs like its Sunshot Initiative. Also, for all China’s subsidy frenzy, the United States still exported$1.9 billion of solar products last year and actually has a trade surplus in solar with China. [more]
Also, a lot of the controversy has focused on the loan guarantees that the Obama Administration gave to Solyndra. Bryan Walsh, writing for TIME’s Ecocentric blog, says the Solyndra “Scandal” is Washington Business as Usual.
My response: meh. TIME’s Michael Grunwald has covered this from the start, and while he’s unhappy—to say the least—with executives at Solyndra for misleading the government on its financial health, the solar industry more broadly is doing well, thanks in part to the money the Obama Administration has channeled towards more successful companies. And it’s worth noting that in addition to government loan guarantees, Solyndra also scored over $1 billion in private capital—including from GOP-friendly investors like the Walton family of Wal-Mart. Solyndra turned out to be a bad investment—the company failed in part because it made the wrong bet on solar technology, failing to foresee that silicon prices would drop drastically. Bad investments are a part of business, especially a cutting-edge industry like renewable energy, and failure is a necessary ingredient for innovation. (Just ask the famously fired Steve Jobs.) The idea that the collapse of one solar company discredits the entire solar industry is absurd. [more]
What do you think? What does Solyndra’s failure mean for the future of solar energy in America and beyond?
I just read this detailed report from SINOLATIN CAPITAL - ENERGY: WHY CHINA AND LATIN AMERICA?
SinoLatin Capital is the first advisory and principal investments firm focusing exclusively on transactions between Latin America & China.
With dozens of graphs, this report outlines the market for energy and commodities that connects China and Latin America. In short, China has a great demand for energy and commodities, and depends on imports to meet these needs. China is cash-rich, and has been investing more and more in the Latin America, especially to import oil, copper, iron, soybeans, and other soybeans.
I found slides #48-50 especially interesting, since these give a brief overview of the market for wind and solar energy in China and Latin America.
Here is my summary of these slides:
The worldwide capacity of wind turbines is currently 196Gw. 38Gw of this was added last year, and 18Gw of that was in China. Only 1.2% of these new installations were in Latin America. Chinese equipment is smaller, and a lot cheaper, and it is possible to get financing from from China Development Bank (CDB) and Export-Import Bank (Exim).
China currently controls 40% of the world solar energy market (up from 0% in 2005.)
Key considerations for new wind and solar projects include:
- Do you have a Power Purchase Agreement (PPA)?
- How far away is the grid?
If you’re at all interested in China-Latin America trade, I highly recommend reading the whole report. (Thanks T for the link!)
I'm Leslie and I connect entrepreneurs in Chile, China, California, and beyond — especially through translation, training, and trade. More about me.
