A number of commodities have topped their record levels multiple times since the start of 2008. NYMEX crude price stays over US$100 a barrel, while gold price surges to above US$970 per troy ounce. Many analysts are confident of gold price surging above US$1000 per troy ounce. Agricultural products also share the upward streak, with corn, soybeans and wheat all reached record levels in recent months.
The glamorous performances of commodities have switched investors’ focus from traditional stock markets to the commodities market. However, the doctrine that governs commodities prices is not as simple as it might seem to be.
Connections “behind the curtain”
Like other “commodities” in the world, the prices of commodities that are traded in exchanges are largely determined by the basic demand and supply principle.. It might seem simple on the face of it, but not only demand and supply of different commodities are driven by different factors, there are also some “behind-the-scene” factors that affect the demand or supply of certain commodities. If an investor does not realize the existence of those factors, he or she might miss the best opportunity of entering or exiting the commodities market.
One of the many examples is corn. Methane can be extracted from corn, and is the raw materials of bio-fuel. The awareness of environmental protection has been rising in the recent decades. Environmentally friendly biofuel industry is on the rise, pushing the demand of corn. Many expect the biofuel industry will be on a long-term growth, making a bright outlook for corn price. Investors should pay more attention to these implied connections, so as to react promptly whenever the related news break out.
Capital influx supports price surge
Another notable factor that affects the commodities prices is the flow of capital, including hot money and speculative capital. This is independent of the fundamental demand and supply. The slowdown of the US economy almost seems inevitable now. The FED has lowered the forecast of US economic growth from 1.8% to 2.5%, to 1.3% to 2%. Chances are good that the FED will implement another series of rate cut this year, which would result in the further weakening in USD. Meanwhile, inflation in China “the world’s factory” has been worsening. CPI in January 2008 has soared to an 11-year high of 7.1%. The US and Europe, which import huge amount of Chinese goods every year, will be vulnerable to “import inflation”, on top of the inflationary pressure brought by surging oil prices.
Amidst low interest rates and high inflation, cash has been greatly depreciated. While the US stock markets are not providing satisfactory returns, many investors have turned to the strong-performing and inflation-hedging commodities. Especially for gold, as it is usually seen as the substitute for USD. The influx of capital has contributed to the soaring of commodities prices. The slowdown in US economy is expected to continue for a while and the FED is likely to cut rate in the near future, the low correlation between commodities and traditional stock markets would attract more capital to the commodities markets.
Commodities index outperforms major markets
To get to know the trend of the commodities market, investors may refer to the Reuters/Jefferies CRB Index. The Index tracks the performance of a basket of 19 different commodities, including crude oil, natural gas, gold, corn, live cattle and wheat. Benefit from the strong performance of commodities and the influx of capital, the Index has surged over 10% from the beginning of 2008, outperforming many major markets. It has recently reached its record high.
The traditionally way to invest in the commodities market is through commodities futures trading. But the risk and volatility of commodities futures are relatively high, and the entrance fee is far from low. For instance, when the oil price is US$100 a barrel, a unit of oil futures will cost as high as US$100, 000, barring most of the retail investors from entering the market. Most of the time, it is the institutional investors who trade commodities futures for hedging or speculative trading.
A more accessible way to invest in the commodities market would be investing in ETF that tracks the performance of the Reuters/Jefferies CRB Index. The minimum investment of this kind of ETF would normally be much lower than that of commodities futures, while the basket of 19 commodities could help diversification of portfolio. ETF also allows for intraday dealing within trading hours, making them more liquid than most of the funds, and become one of the ideal tools of capturing the growth potential of commodities.
XINYANG, China: Li Bin, a barrel-chested retiree on special assignment for this city’s Communist Party boss, strode down an empty hallway of the Xinyang Middle Court in search of bureaucrats. He rattled locked doorknobs and barged into offices without knocking. A court officer retreated in red-faced terror.
The booze squad had arrived.
“Blow,” ordered one of Li’s young subordinates a few minutes later as he pressed an alcohol monitor to the lips of a nervous Communist Party functionary.
The target of Li’s midafternoon sting last week was not just tipsy cadres but a ritual that many Communist Party officials have long considered a part of their job description: the hours-long, alcohol-soaked midday banquet (usually paid for with public money). For the past year, Li and other investigators have swooped into government offices in this grimy city of seven million people to catch civil servants partaking of the liquid lunch. One violator was fired on the spot.
With Beijing trying to rein in official corruption, the campaign in Xinyang, in Henan Province, might seem like comic relief. But public disgust with official privilege is so palpable that the campaign has attracted national attention, spawned imitators in other cities and offered a tantalizing hint at how much China’s liquor industry profits from the thirst of Communist Party officials.
Wang Tie, the Xinyang Communist Party chief and architect of the crackdown, estimated that the policy saved his government almost $6 million in six months. Local restaurants have reported sharp drops in profits. Last month, the Henan Alcoholic Drink Industry Association, a trade group alarmed at losing its best customers, challenged the policy as a violation of the legal rights of civil servants.
“The country’s Civil Servant Law doesn’t require civil servants to refrain from drinking during their lunchtime,” argued Kang Yinzhong, a lawyer for the trade group, according to state media. “Drink or not, it is the civil servant’s right. Public power has no legal ground to interfere in a civil servant’s life if he or she doesn’t mess up their afternoon work.”
Wang, the party chief, said the policy could withstand any challenges, and he proudly provided a positive editorial from People’s Daily, the Communist Party’s authoritative newspaper. “Everyone knows there is a problem in China with cadres eating and drinking on public funds,” Wang said. “It’s a big problem, and to deal with corruption you’ve got to start with issues like this.”
Wang, who is getting fan mail, added, “We wanted the cadres to have energy for work.” Indeed, service is not always a priority for government workers after a few hours of slugging down shots.
“Sometimes you’ll go to the civil affairs bureau after lunch and they are sleeping or playing cards,” said one Xinyang taxi driver. “Sometimes you can’t even find anyone.”
Drinking on the job is hardly unique to China, but ritualized drinking is deeply ingrained in China’s business culture. Restaurants usually offer private banquet rooms, some with lounge areas, flat-screen televisions and private bathrooms. Tables are often set with specific glasses for beer, wine or baijiu, the fiery Chinese liquor that lubricates nearly every banqueting experience.
A banquet is considered a mandatory exercise for welcoming guests on official business. Hosts will lose face if a guest is perceived to be uncomfortable or having less than a jolly time. By this same logic, one way to ensure good feelings and build rapport is for everyone to drink. And, often, drink very heavily.
“It’s like a form of communication between people,” offered Zhu Xiaojun, general manager of Jigongshan Baijiu, a distillery in Xinyang. “It would be disrespectful to not drink with a guest.”
Many of the growing number of foreign business executives in China would probably welcome some disrespect. Baijiu is distilled from sorghum and other grains, has the clarity of vodka or gin but contains far higher alcohol levels than most spirits. It is served in shots and its taste has been compared with rubbing alcohol or diesel fuel. Toasting is customary and can sometimes take on the bonhomie of hazing.
“When there are six people and you see three bottles of baijiu waiting on the buffet table, start eating and start eating fast,” said one American businessmen in describing his survival strategy. He said he once faced baijiu at consecutive banquets for lunch, dinner and breakfast.
Banquet war stories are legion. Tim Clissold, author of “Mr. China,” a memoir about doing business in China, described an evening banquet with a Chinese mayor that featured course after course of exotic food: cow’s lung soaked in chili sauce, goose stomachs, fish lips with celery, goat’s feet tendons in wheat noodles, ox forehead, turtle casserole and, finally, deer’s penis. Round after round of baijiu toasts followed until the banquet ended and Clissold staggered from the table.
“I’ve never met anybody, even at the heights of alcoholic derangement, prepared to admit that they actually liked the taste,” Clissold wrote of baijiu. “After drinking it, most people screw up their faces in an involuntary expression of pain and some even yell out.”
Baijiu does usually enliven conversation. In 1974, Henry Kissinger played host in New York to Deng Xiaoping and commented on the powers of Maotai, the most famous brand of baijiu.
“I think if we drink enough Maotai we can solve anything,” Kissinger said.
“Then when I go back to China, I must increase production of it,” Deng responded.
Today, baijiu remains a major player in China’s alcohol market, but nationwide production has steadily declined as rising prosperity has brought more alcoholic choices, like wines, beers and other spirits. A younger generation of business executives in cities like Beijing and Shanghai is more likely to eschew baijiu. Many prefer the golf course to the banquet table as a setting for doing business.
At the Jigongshan Baijiu distillery in Xinyang, Zhu said baijiu was a tough business with more and more brands competing for a slowly declining number of customers. He estimated that the Xinyang crackdown had cost him about 20 percent of his sales. Zhu described officials as an important segment of his customer base but remained hopeful.
“Most people can adjust their drinking to drink more at night,” he suggested. “Maybe two bottles instead of one. Or they can drink more on the weekends.”
Wang believes that his crackdown will not just save money and improve work performance but also liberate government officials from unwanted cultural expectations. He said many bureaucrats considered lunchtime drinking an onerous obligation. “A lot of people agree with the decision,” said one city official, Shi, who refused to provide his full name. “They felt obligated to drink at these lunches. If they didn’t, they would be accused of not treating their guests warmly.
“But,” he added, “it was tiring.”
Meanwhile, the inebriation inspections have become news media sensations. Three special alcohol SWAT teams make random checks on the city’s 120,000 officials and civil servants. Offenders are usually reprimanded or shamed by accounts in local newspapers and television reports. In January, a reporter from China’s state television network, CCTV, followed Li’s team and filmed him catching an inebriated ranking official. Li fired him.
Last week, Li, 60, took a reporter from The New York Times on a surprise visit to the Middle Court and the city’s construction commission. He said violators were quick with excuses: a good friend in town; a special family occasion; even a shot or two on doctor’s orders.
“I say, ‘We don’t care,’ “ Li said.
At the construction commission, a startled secretary said, “Who are you?” when Li’s team burst into one office. At the Middle Court, several offices were locked and empty, leaving open the possibility that their inhabitants were off drinking and not planning to return.
At the end of the day, Li’s team tested about 20 cadres and nary a one tested positive. He made only one exception when a roomful of older men shooed him away.
“We’re old bosses,” one of them said, explaining why they were not subjected to the test. “We’re retired.”
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A number of commodities have topped their record levels multiple times since the start of 2008. NYMEX crude price stays over US$100 a barrel, while gold price surges to above US$970 per troy ounce. Many analysts are confident of gold price surging above US$1000 per troy ounce. Agricultural products also share the upward streak, with corn, soybeans and wheat all reached record levels in recent months.
The glamorous performances of commodities have switched investors’ focus from traditional stock markets to the commodities market. However, the doctrine that governs commodities prices is not as simple as it might seem to be.
Connections “behind the curtain”
Like other “commodities” in the world, the prices of commodities that are traded in exchanges are largely determined by the basic demand and supply principle.. It might seem simple on the face of it, but not only demand and supply of different commodities are driven by different factors, there are also some “behind-the-scene” factors that affect the demand or supply of certain commodities. If an investor does not realize the existence of those factors, he or she might miss the best opportunity of entering or exiting the commodities market.
One of the many examples is corn. Methane can be extracted from corn, and is the raw materials of bio-fuel. The awareness of environmental protection has been rising in the recent decades. Environmentally friendly biofuel industry is on the rise, pushing the demand of corn. Many expect the biofuel industry will be on a long-term growth, making a bright outlook for corn price. Investors should pay more attention to these implied connections, so as to react promptly whenever the related news break out.
Capital influx supports price surge
Another notable factor that affects the commodities prices is the flow of capital, including hot money and speculative capital. This is independent of the fundamental demand and supply. The slowdown of the US economy almost seems inevitable now. The FED has lowered the forecast of US economic growth from 1.8% to 2.5%, to 1.3% to 2%. Chances are good that the FED will implement another series of rate cut this year, which would result in the further weakening in USD. Meanwhile, inflation in China “the world’s factory” has been worsening. CPI in January 2008 has soared to an 11-year high of 7.1%. The US and Europe, which import huge amount of Chinese goods every year, will be vulnerable to “import inflation”, on top of the inflationary pressure brought by surging oil prices.
Amidst low interest rates and high inflation, cash has been greatly depreciated. While the US stock markets are not providing satisfactory returns, many investors have turned to the strong-performing and inflation-hedging commodities. Especially for gold, as it is usually seen as the substitute for USD. The influx of capital has contributed to the soaring of commodities prices. The slowdown in US economy is expected to continue for a while and the FED is likely to cut rate in the near future, the low correlation between commodities and traditional stock markets would attract more capital to the commodities markets.
Commodities index outperforms major markets
To get to know the trend of the commodities market, investors may refer to the Reuters/Jefferies CRB Index. The Index tracks the performance of a basket of 19 different commodities, including crude oil, natural gas, gold, corn, live cattle and wheat. Benefit from the strong performance of commodities and the influx of capital, the Index has surged over 10% from the beginning of 2008, outperforming many major markets. It has recently reached its record high.
The traditionally way to invest in the commodities market is through commodities futures trading. But the risk and volatility of commodities futures are relatively high, and the entrance fee is far from low. For instance, when the oil price is US$100 a barrel, a unit of oil futures will cost as high as US$100, 000, barring most of the retail investors from entering the market. Most of the time, it is the institutional investors who trade commodities futures for hedging or speculative trading.
A more accessible way to invest in the commodities market would be investing in ETF that tracks the performance of the Reuters/Jefferies CRB Index. The minimum investment of this kind of ETF would normally be much lower than that of commodities futures, while the basket of 19 commodities could help diversification of portfolio. ETF also allows for intraday dealing within trading hours, making them more liquid than most of the funds, and become one of the ideal tools of capturing the growth potential of commodities.
China’s latest crackdown: The liquid lunch
By Jim Yardley
Saturday, March 8, 2008
XINYANG, China: Li Bin, a barrel-chested retiree on special assignment for this city’s Communist Party boss, strode down an empty hallway of the Xinyang Middle Court in search of bureaucrats. He rattled locked doorknobs and barged into offices without knocking. A court officer retreated in red-faced terror.
The booze squad had arrived.
“Blow,” ordered one of Li’s young subordinates a few minutes later as he pressed an alcohol monitor to the lips of a nervous Communist Party functionary.
The target of Li’s midafternoon sting last week was not just tipsy cadres but a ritual that many Communist Party officials have long considered a part of their job description: the hours-long, alcohol-soaked midday banquet (usually paid for with public money). For the past year, Li and other investigators have swooped into government offices in this grimy city of seven million people to catch civil servants partaking of the liquid lunch. One violator was fired on the spot.
With Beijing trying to rein in official corruption, the campaign in Xinyang, in Henan Province, might seem like comic relief. But public disgust with official privilege is so palpable that the campaign has attracted national attention, spawned imitators in other cities and offered a tantalizing hint at how much China’s liquor industry profits from the thirst of Communist Party officials.
Wang Tie, the Xinyang Communist Party chief and architect of the crackdown, estimated that the policy saved his government almost $6 million in six months. Local restaurants have reported sharp drops in profits. Last month, the Henan Alcoholic Drink Industry Association, a trade group alarmed at losing its best customers, challenged the policy as a violation of the legal rights of civil servants.
“The country’s Civil Servant Law doesn’t require civil servants to refrain from drinking during their lunchtime,” argued Kang Yinzhong, a lawyer for the trade group, according to state media. “Drink or not, it is the civil servant’s right. Public power has no legal ground to interfere in a civil servant’s life if he or she doesn’t mess up their afternoon work.”
Wang, the party chief, said the policy could withstand any challenges, and he proudly provided a positive editorial from People’s Daily, the Communist Party’s authoritative newspaper. “Everyone knows there is a problem in China with cadres eating and drinking on public funds,” Wang said. “It’s a big problem, and to deal with corruption you’ve got to start with issues like this.”
Wang, who is getting fan mail, added, “We wanted the cadres to have energy for work.” Indeed, service is not always a priority for government workers after a few hours of slugging down shots.
“Sometimes you’ll go to the civil affairs bureau after lunch and they are sleeping or playing cards,” said one Xinyang taxi driver. “Sometimes you can’t even find anyone.”
Drinking on the job is hardly unique to China, but ritualized drinking is deeply ingrained in China’s business culture. Restaurants usually offer private banquet rooms, some with lounge areas, flat-screen televisions and private bathrooms. Tables are often set with specific glasses for beer, wine or baijiu, the fiery Chinese liquor that lubricates nearly every banqueting experience.
A banquet is considered a mandatory exercise for welcoming guests on official business. Hosts will lose face if a guest is perceived to be uncomfortable or having less than a jolly time. By this same logic, one way to ensure good feelings and build rapport is for everyone to drink. And, often, drink very heavily.
“It’s like a form of communication between people,” offered Zhu Xiaojun, general manager of Jigongshan Baijiu, a distillery in Xinyang. “It would be disrespectful to not drink with a guest.”
Many of the growing number of foreign business executives in China would probably welcome some disrespect. Baijiu is distilled from sorghum and other grains, has the clarity of vodka or gin but contains far higher alcohol levels than most spirits. It is served in shots and its taste has been compared with rubbing alcohol or diesel fuel. Toasting is customary and can sometimes take on the bonhomie of hazing.
“When there are six people and you see three bottles of baijiu waiting on the buffet table, start eating and start eating fast,” said one American businessmen in describing his survival strategy. He said he once faced baijiu at consecutive banquets for lunch, dinner and breakfast.
Banquet war stories are legion. Tim Clissold, author of “Mr. China,” a memoir about doing business in China, described an evening banquet with a Chinese mayor that featured course after course of exotic food: cow’s lung soaked in chili sauce, goose stomachs, fish lips with celery, goat’s feet tendons in wheat noodles, ox forehead, turtle casserole and, finally, deer’s penis. Round after round of baijiu toasts followed until the banquet ended and Clissold staggered from the table.
“I’ve never met anybody, even at the heights of alcoholic derangement, prepared to admit that they actually liked the taste,” Clissold wrote of baijiu. “After drinking it, most people screw up their faces in an involuntary expression of pain and some even yell out.”
Baijiu does usually enliven conversation. In 1974, Henry Kissinger played host in New York to Deng Xiaoping and commented on the powers of Maotai, the most famous brand of baijiu.
“I think if we drink enough Maotai we can solve anything,” Kissinger said.
“Then when I go back to China, I must increase production of it,” Deng responded.
Today, baijiu remains a major player in China’s alcohol market, but nationwide production has steadily declined as rising prosperity has brought more alcoholic choices, like wines, beers and other spirits. A younger generation of business executives in cities like Beijing and Shanghai is more likely to eschew baijiu. Many prefer the golf course to the banquet table as a setting for doing business.
At the Jigongshan Baijiu distillery in Xinyang, Zhu said baijiu was a tough business with more and more brands competing for a slowly declining number of customers. He estimated that the Xinyang crackdown had cost him about 20 percent of his sales. Zhu described officials as an important segment of his customer base but remained hopeful.
“Most people can adjust their drinking to drink more at night,” he suggested. “Maybe two bottles instead of one. Or they can drink more on the weekends.”
Wang believes that his crackdown will not just save money and improve work performance but also liberate government officials from unwanted cultural expectations. He said many bureaucrats considered lunchtime drinking an onerous obligation. “A lot of people agree with the decision,” said one city official, Shi, who refused to provide his full name. “They felt obligated to drink at these lunches. If they didn’t, they would be accused of not treating their guests warmly.
“But,” he added, “it was tiring.”
Meanwhile, the inebriation inspections have become news media sensations. Three special alcohol SWAT teams make random checks on the city’s 120,000 officials and civil servants. Offenders are usually reprimanded or shamed by accounts in local newspapers and television reports. In January, a reporter from China’s state television network, CCTV, followed Li’s team and filmed him catching an inebriated ranking official. Li fired him.
Last week, Li, 60, took a reporter from The New York Times on a surprise visit to the Middle Court and the city’s construction commission. He said violators were quick with excuses: a good friend in town; a special family occasion; even a shot or two on doctor’s orders.
“I say, ‘We don’t care,’ “ Li said.
At the construction commission, a startled secretary said, “Who are you?” when Li’s team burst into one office. At the Middle Court, several offices were locked and empty, leaving open the possibility that their inhabitants were off drinking and not planning to return.
At the end of the day, Li’s team tested about 20 cadres and nary a one tested positive. He made only one exception when a roomful of older men shooed him away.
“We’re old bosses,” one of them said, explaining why they were not subjected to the test. “We’re retired.”
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