Sunday, 13 January 2008

Water - the really really important resource

This is a brilliant article, and in case the link is lost, here's a copy:

Why this rainy country should bother about water

Colin James's NZ Herald column for 8 January 2008

This month's scare is oil, a resource. The long-range scare is climate change, an environmental issue. But bigger than oil and more proximate than climate change is water.

Water is a resource issue and an environmental issue -- and potentially a cause of conflict.

In our pluvial country water is not top-of-mind. There are occasional droughts and less water is expected in the east this century. Some catchments are overallocated or badly managed. But, with political will (so far lacking), we can easily manage.

Water is top-of-mind in Australia, which appears to be turning drier and can grow less wheat, fewer animals and fewer grapes and will have to get drinking water from the sea. But that is manageable and might even deliver exportable technologies, management techniques and skills.
Water is becoming scarce in some Rockies regions in the United States. But that can be fixed by people moving state.

In east and south Asia water is not easily fixed and it's getting serious. Well over 2 billion people live there. If water goes wrong there, it could be rough for all of us.

India's rapid recent population growth owes much to the "green revolution" -- new strains of rice and other crops -- which has in part depended on liberal use of water.

Much of that water -- one estimate is two-thirds -- comes from underground. The International Water Management Institute estimates that two-fifths more water is extracted each year than is replenished by rainfall.

So bores are going deeper -- up to 40 times deeper. At some point they will run dry. In some states the area of irrigated land is already contracting.

There are mitigating options: harvesting monsoon rain and storing it in ponds so water seeps back into underground aquifers instead of running out to sea; diverting rivers. But pond storage has limits (and the monsoons are less predictable) and diverting rivers denies water to downstream users, notably in Bangladesh, which is not good for peaceful neighbourly relations.

Other south Asian and south-east Asian countries have also begun to over-use underground water.

So has China, most spectacularly in the north.

China's breakneck industrialisation is legendary, as is now its pollution, affecting Japan, western United States and even on occasion Europe.

China's industry gobbles coal, oil and raw materials -- and water. The cotton in a single t-shirt takes 25 bathtubs of water, according to the New Scientist. And industry pours polluted water back into the waterways.

One result of overuse and pollution is toxic fish exports, now causing China problems with importing countries. Another is that streams and even rivers run dry. A third is that farmers, manufacturers and cities have been extracting underground water far faster than it is replenished.

Edicts from Beijing to limit the numbers of bores and the amount extracted are routinely ignored, not only by the users but also by provincial and city authorities. So are pollution controls.

The potential end-result is, as in India, insufficient food. Already in parts of China's north fewer crops are grown because water is lacking.

Couple that with greater affluence as Asia's middle classes expand and you get higher food prices, notably of grains. You can feel that in the price of bread: wheat prices have zoomed.

You can afford that extra. But in a poor-country household grain, particularly rice, is a large part of the budget. And the world price of rice has doubled in the past two years.

The implications are obvious. Moreover, the world population is projected to grow from the present 6 billion-plus to a peak of 9 billion. What will they eat? Will large numbers starve? And if they starve will they starve peacefully or turn to violence? And, if violence, will our rainy, food-rich country be totally unaffected?

Go back to China. To alleviate the water shortage in the north, where 60 per cent of the supply comes from diminishing underground aquifers, China is building three huge diversion channels to siphon around 50 trillion litres a year from the Yangtze basin.

Elsewhere China aims to maximise the use of its rivers within its borders. That will in many cases reduce flows to other countries, in an arc from India through south-east Asia to Russia. The Mekong, for example, is a lifeblood, not just as water but in fish protein, to the populations in several south-east Asian countries.

China uses "soft power" (diplomacy, aid, investment, trade) with great skill to placate south-east Asians.

But will soft power always suffice? China is fast developing its military capability and has a long imperial history. When pessimists talk of resource wars, water is potentially a bigger bother than fossil fuels and metals. Water is life. There is no substitute.

So when it rains, count your blessings and pray for brilliant technical and political initiatives in countries where mighty thirsts are draining reserves.
And ask if you really need that next 25-bathtub t-shirt.

Saturday, 12 January 2008

Commodities surge higher

Gold
Gold has lifted to test $880.20 a troy ounce in US trading, helped by new investor inflows at the start of the year, rising oil prices and concerns over the outlook for the dollar. Gold has also found support from the increase in geopolitical tensions after US naval ships in the Strait of Hormuz came close to firing on five Iranian boats, which reportedly threatened them at the weekend.

In China, trading in gold futures is due to begin on the Shanghai Futures Exchange on Wednesday. “This is the biggest event in the market since the launch of the gold exchange traded funds as a [Shanghai] gold future will allow leveraged investment from Chinese investors and speculators,” said John Reade of UBS. “We could see a few million ounces of gold bought via futures over the course of the next few months, but it is entirely possible that interest will exceed this.”

Investment demand for gold has been rising steadily with holdings in streetTRACKS, the largest gold exchange traded fund, increasing to a record high of 639.35 tonnes on Monday.But analysts remain concerned that price volatility will have a negative effect on jewellery demand.

“There is a growing dichotomy in the gold market between investment demand, which is robust, and consumer demand for gold, which is contracting in most regions,” said James Steel, precious metals analyst at HSBC.

Oil
Crude oil prices rose on talk of an attack on oil facilities, which are being threatened by militants in Nigeria, the world’s eighth largest crude exporter. After dropping by $2.82 in the previous session, Nymex February West Texas Intermediate rebounded $1.24 to $96.33 a barrel. ICE February Brent added $1.15 at $95.54 a barrel.

Metals
Copper jumped 5.8 per cent to $7,310 a tonne, helped by falling inventories in China, which is leading to supply concerns and market speculation that imports will have to increase to meet strong domestic demand. Other base metals followed copper higher. Zinc gained 3.6 per cent to $2,580 a tonne on talk that China’s zinc production declined in the second half of 2007. Nickel rose 2.6 per cent to $28,950 a tonne while lead added 3.1 per cent at $2,670 a tonne. Dealers said some players had bought in anticipation of prices rallying as a result of the commodity index re-weightings that take place this week. Dealers said that in the absence of a clearer improvement in fundamentals, base metals could run into profit taking once reweighting of the indexes is complete.

Food Groups
Coffee prices were little moved by forecasts for a sharp increase in the Brazilian coffee harvest in 2008-09. Conab, the Brazilian government agency, is forecasting a crop of 41.3m-44.2m 60kg bags, up from a harvest of 33.74m bags in 2007-08. Conab’s forecasts are more conservative than market estimates, which range from 44m to 50m bags. Liffe March robusta coffee rose $15 to $1,966 a tonne.

Huge growth in investor interest in commodities was underlined by a record breaking performance for trading volumes in robusta coffee, cocoa, sugar, feed wheat, milling wheat and rapeseed on Liffe last year. Liffe said that the volume of all commodity products (futures and options) rose 30 per cent to a record 12.78m in 2007.

The Financial Times

With all this demand going on, hard to see commodity currencies like the NZD and the AUD taking a look lower for very long, if at all. -KT

Saturday, 29 December 2007

RBNZ Intervention disappears

The Reserve Bank of New Zealand (RBNZ) said on Friday it sold a net NZ$14 million ($10.8 million) of New Zealand dollars on the spot foreign exchange market during November.

The figure compares with a net NZ$10 million sold in October.

Back in June, the RBNZ sold a net NZ$736 million when it intervened on foreign exchange markets for the first time since the New Zealand dollar was floated 22 years ago to limit the rise in the kiwi. The figures are not a direct and complete indication of the amount spent on intervention and include liabilities of the New Zealand government's Debt Management Office.

Data from the central bank also showed its net short currency position - a figure which the RBNZ has said better reflects its currency dealings - rose to NZ$2.48 billion from NZ$2.4 billion in October.

Given that they began intervening at 0.7620 on 11 June 2007, their average is probably around 0.7700. So they are breaking even at present.

Lets hope they have learned, that it is best to let the markets find their own level.
What that true level is, nobody knows, least of all a central bank.

Friday, 28 December 2007

NZD/AUD

Toying with selling NZD and buying AUD at these levels.
If we see a move over 0.8900 will begin to build a short position.

NZD/USD and NZD/JPY

Both these pairs look to trade higher yet.
So have added to long NZD/USD position at 0.7700 and added to long NZD/JPY position at 88.00.
NZD/USD should have a test of 0.8000 in the weeks ahead.
NZD/JPY should have a test of 91.00 in the weeks ahead.

Will review if 0.7400 NZD/USD and 84.00 NZD/JPY are broken on the downside.

Thursday, 27 December 2007

Saturday, 1 December 2007

NZD/JPY Trade - Still in there!

This trade has had it's share of surprises. Have added to it and reduced it as the markets have fluctuated.

The sub prime mess and the impact on the US economy has scared off a lot of the carry trade interest. So the NZD/JPY goes down and at one point was around 78.00 again.

But high NZD yields have driven the cross back up to 91.00 as well, so this cross has traded in a wide range over the last few months and is now back to the level it was when I last commented on it and am still in profit.

Am still of the view that the NZD/USD will breach 0.8000 again this year.
The NZD/JPY will also test higher, target is around 100, but probably next year.
Will look to acquire more on moves into the 80.00- 82.00 area.