1、 1No. E2009007 2009-12 Chinas Factor in Recent Global Commodity Price and Shipping Freight Volatilities Feng Lu*, Yuanfang Li China Center for Economic Research Peking University, Beijing, China, 100871 No. E2009007 Dec. 15, 2009 Abstract: This paper attempts an investigation on the impact of Chinas
2、 factor on the global commodity and ocean shipping freight volatilities in recent years. It measures Chinas contribution to the incremental demand growth for selected bulk commodities and ocean shipping in the world. Chinas impact on the price volatilities is statistically analyzed through a convent
3、ional econometric framework. Key words: the world commodity markets, global ocean shipping freights, Chinas factor in the global commodity markets. *Email address: . The authors thank Mr. Liu Liu, Ms. Xie Ya, Mr. Tang Jie for their works in collecting data and other support during various stages of
4、research leading to this paper. We are grateful to Mr. Liu Liu for his excellent help in preparing most of the notes for data sources for the figures and tables in this paper. The early version of this paper was presented by the first author at “Commodity Prices, Commodity Currencies and Global Econ
5、omic Development, 20thAnnual East Asian Seminar ” held in Hong Kong. June 26-27, 2009. The first author is very much grateful for invitation by the Seminar organizers and the comments provided by the discussants at the conference. 2The world commodity and ocean shipping markets have witnessed remark
6、able growth and large fluctuation since the beginning of the new century. The commodity boom, identified in a World Bank study as “the largest and longest of any boom since 1900” (World Bank, 2008), presents profound challenges to the global economy. Huge swings in the relative prices for the commod
7、ities have produced world-wide distribution effects for the income and wealth. The market developments have re-generated active discussion about the sustainable supply of the raw materials and energy, and revived the concerns among the central bankers and academic circles over the so-called “importe
8、d inflations”. China figures prominently in the new round of the world commodity price volatility. As the largest emerging economy undergoing the process of rapid urbanization and industrialization, the unprecedented growth in consumption of bulk commodities and energies tips the balance of supply a
9、nd demand equations for various commodities in the global landscape. Through surging imports of the primary commodities over the last decade or so, Chinas factor has contributed a crucial driving force, perhaps the single most important one, behind the world commodity boom. On the other hand, commod
10、ity price volatility also presents crucial challenges for the Chinese economic growth through changes in terms of trade, pressure of domestic inflation, coordinating and managing relationships with the supply countries in the rapidly changed environment. Though Chinas impact in the context has been
11、wildly acknowledged and commented, systematic study on this emerging issue is still lacking and rare. This paper attempts an empirical investigation on Chinas factor in recent commodity price volatility mainly with two steps. Initially, the issue will be approached by measuring and observing Chinas
12、contribution to the incremental growth of global consumption in several major commodities. The impact of Chinas factor will then be investigated more rigorously in conventional econometric model of commodity price determination. The paper is organized as follows. Section 1 observes the recent commod
13、ity price and ocean shipping freight volatilities with the relevant descriptive data. Section 2 discusses the general causes for the commodity price and ocean shipping freight volatilities. Section 3 provides measures for Chinas contribution to the global consumption growth in several major metals a
14、nd the petroleum oil. Section 4 attempts an empirical investigation on Chinas impact on recent commodity price volatility using the conventional econometric framework. Section 5 presents concluding remarks. 1. Recent global commodity price and ocean freight volatilities Since the turn of the century
15、, commodity markets have undergone a new period 3of remarkable volatility. A World Bank report summarized the recent exceptional commodity boom to be “the largest and longest of any boom since 1900” (World Bank, 2008). As shown in Figure 1, the apparent declining trend in real CRB non-oil bulk commo
16、dity price index during 1980s and 90s changed after 2002. It increased from less than 50 in the early this century to about 77 in the early 2008. Due to the recent global financial and economic crisis, it plummeted to 55 in the early 2009, but bounced back rapidly to near 70 by the mid-2009. 4050607
17、080901001101201301401501955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 20101957=100Figure 1. Real CRB commodity index (1960M1-2009M6) Notes and source: CRB index is from Commodity Research Bureau. Real CRB index is deflated by U.S. PPI from U.S. Bureau of Labor Statistics. Extends of price sw
18、ing differ substantially among the CRB sub-indices. As indicated by figures 2 and 3, the peaks and troughs of different commodity prices covered by CRB index vary greatly, and the metal index underwent the most spectacular spike. The soaring index reached its 1970s record in real terms and then more
19、 than halved in just a few months by the end of 2008. Nominal price of metals peaked more than 5 times its lowest level since 2000 while CRB spot index as a whole peaked just over 2 times its lowest level during the same period. 40100200300400500600CRB IndexLivestockFatsfreight index of 6tanker voya
20、ge between Jan 1959 and Nov 2003 is from Review of Maritime Transport (various issues); freight index of tanker voyage between Dec 2003 and Dec 2008 is from Lloyds Shipping Economist (various issues). Freight index of dry cargo tramp voyage between Jan 1952 and Nov 1999 is from Review of Maritime Tr
21、ansport (various issues); freight index of dry cargo tramp voyage between Dec 1999 and May 2009 is from the website of China Daily News Shipping (Zhonghua Ribao Hangyun Dianzibao, http:/.tw/box/bdi.htm, Accessible on Dec 1st, 2009). 2. Overview on causes for price volatilities What are the driving f
22、orces behind the recent tremendous price volatilities in the world commodity and ocean shipping markets? The causes are discussed mainly through three perspectives. The first explanation focuses on some key macroeconomic variables underlying the surge in major commodity prices during 2002-2008. The
23、apparent co-movement of metals and oil prices in recent years suggests significant common factors at play. Thus it is natural to examine the recent commodity price volatility in a macroeconomic framework. Some important aggregate variables suggested in literature for explaining variation in commodit
24、y price are the real interest rate, US Dollar real effective exchange rate, and the relative strength of worlds industrial activities(Frankel, 1986; Gilbert, 1989; Reinhart and Borensztein, 1994; Hua, 1997; Krichene, 2008). Together they form a macroeconomic “demand-driven” model. The industrial pro
25、duction growth will raise the demand for raw materials and energy, while the real interest rate affects the opportunity cost of holding commodity stock as well as the economys investment activities both in commodity sector and manufacturing sector. The real effective exchange rate works its effect i
26、nto the real commodity prices denominated in U.S. dollar through the law of one price. As indicated in Figure 6, the real interest rate calculated on the basis of US Federal Funds Rate dipped below zero bound during 2001-2005. The previous experience of negative real interest rate in US went back to
27、 1970s; it fueled the most serious inflation in the country after the second world war. The relative oversupply of dollar liquidity injected by loose monetary policy could cause investors to redistribute their portfolio towards more commodities stockholding. This increased demand for commodities cou
28、ld then have an immediate positive effect on commodity prices. Krichene(2008) identified a monetary shock to be underlying soaring commodity prices during 2003-2007. The state of business cycle in industrial countries is often used as a proxy. 7-3-2-10123451995199619971998199920002001200220032004200
29、5200620072008%deflated by CPIdeflated by core CPIFigure 6. Real U.S. federal funds overnight rate (1995M1-2007M9) Notes and source: U.S. federal funds overnight rates are from Board of Governors of the Federal Reserve System. CPI and core CPI are from U.S. Bureau of Labor Statistics Closely related
30、to U.S. loose monetary policy is the development of US Dollar real effective exchange rate. Shown in Figure 7, its index depreciated more than 20% during 2002Q1-2008Q2, from 114.4 to 76.5. Since primary commodities are quoted in US Dollar, market arbitrage exerts inflationary pressure on dollar pric
31、es of these commodities. 6070809010011012013014015019801982198419861988199019921994199619982000200220042006200820101973=100realnorminalFigure 7. U.S. real and nominal effective exchange rate (1980M1-2009M9) Source: Board of Governors of the Federal Reserve System. US dollar depreciation relative to
32、major trading partners, worlds low real interest rates, and general favorable conditions of world economy during the time, have all boosted commodities markets. However, the vigor varied across different 8category. To account for the strongest base metals and oil price development for nearly three d
33、ecades, the unprecedented demand growth proves worthy of our notice. Hence follows the second explanation based on the conventional supply and demand analytical framework. Giving the expansion and adjustments of long-term production capacity are lagged and slow, unexpected change in demand for consu
34、mption for the commodities and ocean shipping services may cause drastic changes in the market prices. Table 1 compares the growth of consumption for 3 metal raw materials and petroleum oil during the periods of 2001-2007 and the previous three decades. The world economy had undergone robust growth
35、before the most recent economic crisis. As a result, world consumption of primary commodities accelerated during 2001-2007. Take iron ore for example: it took the world 30 years to increase the annual consumption of iron ore by 3 billion tons, but only 6 years passed when the number grew from 10.7 i
36、n 2001 to 18 billion tons in 2007. It follows that the annual growth in world iron ore consumption during 2001-2007 was 10 times that of 1970-2001. Annual consumption of copper, aluminum and crude oil also accelerated recently. Table 1. World Consumption Growth in 4 Commodities (1970-2007) Iron ore
37、Copper Aluminum Crude oil Annual consumption (billion ton) (million ton) (million ton) (billion ton) 1970 7.7 7.3 10 17.1 2001 10.7 15.1 24.9 28.1 2007 18 18.2 37.8 30.9 Annual growth rate (%) (%) (%) (%) 1970-2001 1.1 2.4 3 1.6 2001-2007 11.1 3.1 7.2 2 Notes and source: World iron ore consumption i
38、s substituted by world iron ore production due to lack of consumption data. World iron ore production is from U.S. Geological Survey. World consumptions on copper and aluminum before 2007 are from World Metal Statistics Yearbook (various issues) and data in 2007 and 2008 are from Shanghai Nonferrous
39、 Metal (2009). World crude oil consumption is from U.S. Energy Information Administration. Strong demand growth for metal materials and petroleum oil over the recent period has mobilized the expansion of international trade. In turn, it has generated an accelerating growth in seaborne shipping activ
40、ities. As Figure 8 shows, seaborne trade volume for major commodity categories all moved along steeper trends since 2002. Among them, 5 major dry bulks displayed the most conspicuous growth, averaging 9.5% annually, Iron ore, as the largest single item of dry cargo in seaborne trade, increased its s
41、hare in world seaborne trade from 11% in 2002 to 15% in 2007 (UNCTAD, 2008), a record never reached ever since iron ore became a major ocean shipping item. 9020004000600080001000012000140001950195519601965197019751980198519901995200020052010billion tonmilescrude oil Beenstock and Vergottis, 1993). B
42、esides, shipping market is characterized by long construction lag. When most laid-up tonnage has been drawn out for service, the short-term shipping supply can only be expanded through faster steaming, with fuel consumption increasing at cubic or even higher power. If shipping demand meets supply at
43、 this range, sea freight rates tend to respond with extreme sensitivity to demand shocks. This is what happened in the recent shipping market. In recent years, laid-up tonnage of both oil tankers and dry bulkers has been gradually depleted (Figure 9). With one to three years of construction lag in s
44、hipbuilding, short-term 10supply of shipping has been inelastic. It resulted in huge price spikes as shown in Figure 8. Consistent with the story of soaring iron ore demand, dry bulk shipping market has registered the highest real freight rate for nearly 50 years. 05101520253035404519701975198019851
45、9901995200020052010%oil tankerdry bulkerFigure 9. Laid-up tonnage as percentage of respective fleet (1970-2008) Source: Review of Maritime Transport (various issues). As for the general situation of supply side factors, the crude oil sector may presents a more special case. It has been observed that
46、 some major oil fields of the world are suffering production drain due to gradual aging (Hamilton, 2008). It has become a strenuous task for them to make ends meet, maintaining existing capacity on the one hand and keeping up with rising demand on the other. In summary, sluggish response in supply s
47、ide factors and strong surge of demand for the commodities underpinned the price volatilities in the markets. The third explanation relates to the role played by the financial investors in the derivative markets for commodities such as copper, petroleum oil, cereals etc. One special feature with thi
48、s round commodity price volatility is that the drastic swings of the prices correlated with the huge funds totaling hundreds of billions of USD pouring in and out the markets. There are debates regarding how to interpret the relationship between the investors behavior and the market structure for th
49、e derivative instruments on the one hand and the price swings on the other hand. For example, as argued by Masters (2008), the speculative behavior of the financial investors plays an important role in facilitating and even creating the price swings, so he strongly advocates that the conduct of financial investors should be more rigorously regulated. On the other hand, Greely and Currie (2008) holds the view that financial speculative investors did not cause the commodity price swings but help reveal changes in underlying forces of supply
