Saturday, August 1, 2009

The stock market is up but will fear overtake greed?

Greed is back. The stock markets in China, Japan, the US and Europe are up. Folks are losing the fear factor they had last October and traders continue to increase the price of oil, copper, and other commodities. So what has changed since governments have pumped almost half a trillion dollars into stimulus and five trillion dollars into the banking system? Really nothing has changed except that greed has replaced fear and there is an expectation that consumption as a driver of economic growth will return.

The Chinese now produce close to 500 million tons a year of steel. This is flat with production over the past couple of years but four times as much as their production in 2000. Does China need to produce this much steel going forward? I think they may not need to produce this much steel and that half of the worlds steel production comes from China is not sustainable in the future. Perhaps the Chinese government will shut down old inefficient and highly polluting steel mills and the world will be minutely better for this. The WSJ reported that some steel workers in China beat up and killed the mill manager when it was announced the government owned mill will be sold and the mill may be shut.

Finally we have a report form the agency that reviews commodities trading that speculators drove up the price of oil to $150 a barrel last year. Come on! Is this news we did not know? Of course greed drove up the price and fear drove down the price. Greed will certainly drive it up again but perhaps this time it will peak below a $100 a barrel, because at that price alternates exist and consumers start economizing. The government can quell speculation in the oil markets by enacting laws that tax commodities trading profits at 90% and only allow a 10% tax deduction on trading losses. Long term the governments must enact energy laws that favor conservation.

The government appropriated one billion dollars of funds for the “cash for clunkers” program to spur the trading of old inefficient vehicles for new ones. Within one week the entire billion was used up and now another two billion dollars is being proposed by the government to keep the program going. We will get news in a few weeks that some greedy folks came up with a scheme to defraud the government by trading in stolen or non existent cars. The Chinese government should come up with a program to give cash to the workers in old inefficient steel mills that need to be shut. This program could be called cash for junk smelters. Western Europe, Canada and US have all gone through the cycle of shutting down steel mills that no longer make economic and correspondingly environmental sense. The US peaked at 150 million tons a year of steel production in 1973 and now we produce under 100 million tons.

In 1875 Britain accounted for 40% of world steel production and by 1889 the US superseded Britain as the world’s largest steel producer. China took over the global leadership in steel production from the US just before the end of the 20th century. My fervent hope is that India does not overtake China in the steel production race as this is kind of the most stupid race mankind has ever undertaken. I am all for the production of steel. I even live in a steel framed house and drive a vehicle that is made primarily from steel. However it makes no environmental sense for a country like China to produce half of the world’s steel when they do not have enough iron ore nor metallurgical coke. Australia is becoming one big quarry for China. Steel should first be made by recycling old cars, cans, and appliances and secondly in a non coke process that uses natural gas as a substitute. I estimate that Nucor in the USA that produces steel from recycling as well as natural gas has a carbon footprint per ton of steel that is half that of the average Chinese mill. I was disgusted to learn that the contractor building a power plant for Duke Power in the same state that is home to Nucor has a policy to buy Chinese steel for the project. Are we dumb or is it plain greed that drives these decisions?


  1. Lindsay -- I expect that the contractor building the power plant for Duke Power pays 20% less for the steel shipped from China and made from Australian iron ore. They can presumably use the 20% margin to employ more US workers employed in higher skilled jobs that pay much more than the miners in China earn. These US workers in turn can pay taxes that pay for clunkers. I wonder what the net carbon footprint looks like when all that is considered?

  2. Raelo
    Actually the contractor is trying to get big projects in China and the steel from China is not less expensive than steel from Nucor just that China is a promising market for big construction projects. Do I blame the contractor ? No Do I blame the US for not adding a carbon tax to the least green steel in the world? probably yes. Removing clunkers from the road is good policy. Conservation will do more for our carbon footprint than most alternative energy technologies. Letting the Chinese make everything for us is not the answer. I am not into eating melamine as a protein substitute.