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The Great Deceleration
The emerging-market slowdown is not the beginning of a bust. But it is a turning-point for the world economy Jul 27th 2013 WHEN a champion sprinter falls short of his best speeds, it takes a while to determine whether he is temporarily on poor form or has permanently lost his edge. The same is true with emerging markets, the world economy’s 21st-century sprinters. After a decade of surging growth, in which they led a global boom and then helped pull the world economy forwards in the face of the financial crisis, the emerging giants have slowed sharply. China will be lucky if it manages to hit its official target of 7.5% growth in 2013, a far cry from the double-digit rates that the country had come to expect in the 2000s. Growth in India (around 5%), Brazil and Russia (around 2.5%) is barely half what it was at the height of the boom. Collectively, emerging markets may (just) match last year’s pace of 5%. That sounds fast compared with the sluggish rich world, but it is the slowest emerging-economy expansion in a decade, barring 2009 when the rich world slumped. This marks the end of the dramatic first phase of the emerging-market era, which saw such economies jump from 38% of world output to 50% (measured at purchasing-power parity, or PPP) over the past decade. Over the next ten years emerging economies will still rise, but more gradually. The immediate effect of this deceleration should be manageable. But the longer-term impact on the world economy will be profound. Running out of puff In the past, periods of emerging-market boom have tended to be followed by busts (which helps explain why so few poor countries have become rich ones). A determined pessimist can find reasons to fret today, pointing in particular to the risks of an even more drastic deceleration in China or of a sudden global monetary tightening. But this time a broad emerging-market bust looks unlikely. China is in the midst of a precarious shift from investment-led growth to a more balanced, consumption-based model. Its investment surge has prompted plenty of bad debt. But the central government has the fiscal strength both to absorb losses and to stimulate the economy if necessary. That is a luxury few emerging economies have ever had. It makes disaster much less likely. And with rich-world economies still feeble, there is little chance that monetary conditions will suddenly tighten. Even if they did, most emerging economies have better defences than ever before, with flexible exchange rates, large stashes of foreign-exchange reserves and relatively less debt (much of it in domestic currency). That’s the good news. The bad news is that the days of record-breaking speed are over. China’s turbocharged investment and export model has run out of puff. Because its population is ageing fast, the country will have fewer workers, and because it is more prosperous, it has less room for catch-up growth. Ten years ago China’s per person GDP measured at PPP was 8% of America’s; now it is 18%. China will keep on catching up, but at a slower clip. That will hold back other emerging giants. Russia’s burst of speed was propelled by a surge in energy prices driven by Chinese growth. Brazil sprinted ahead with the help of a boom in commodities and domestic credit; its current combination of stubborn inflation and slow growth shows that its underlying economic speed limit is a lot lower than most people thought. The same is true of India, where near-double-digit annual rises in GDP led politicians, and many investors, to confuse the potential for rapid catch-up (a young, poor population) with its inevitability. India’s growth rate could be pushed up again, but not without radical reforms—and almost certainly not to the peak pace of the 2000s. Many laps ahead The Great Deceleration means that booming emerging economies will no longer make up for weakness in rich countries. Without a stronger recovery in America or Japan, or a revival in the euro area, the world economy is unlikely to grow much faster than today’s lacklustre pace of 3%. Things will feel rather sluggish. It will also become increasingly clear how unusual the past decade was (see article ). It was dominated by the scale of China’s boom, which was peculiarly disruptive not just as a result of the country’s immense size, but also because of its surge in exports, thirst for commodities and build-up of foreign-exchange reserves. In future, more balanced growth from a broader array of countries will cause smaller ripples around the world. After China and India, the ten next-biggest emerging economies, from Indonesia to Thailand, have a smaller combined population than China alone. Growth will be broader and less reliant on the BRICs (as Goldman Sachs dubbed Brazil, Russia, India and China). Corporate strategists who assumed that emerging economies were on a straight line of ultra-quick growth will need to revisit their spreadsheets; in some years a rejuvenated, shale-gas-fired America may be a sprightlier bet than some of the BRICs. But the biggest challenge will be for politicians in the emerging world, whose performance will propel—or retard—growth. So far China’s seem the most alert and committed to reform. Vladimir Putin’s Russia, by contrast, is a dozy resource-based kleptocracy whose customers are shifting to shale gas. India has demography on its side, but both it and Brazil need to recover their reformist zeal—or disappoint the rising middle classes who recently took to the streets in Delhi and São Paulo. There may also be a change in the economic mood music. In the 1990s “the Washington consensus” preached (sometimes arrogantly) economic liberalisation and democracy to the emerging world. For the past few years, with China surging, Wall Street crunched, Washington in gridlock and the euro zone committing suicide, the old liberal verities have been questioned: state capitalism and authoritarian modernisation have been in vogue. “The Beijing consensus” provided an excuse for both autocrats and democrats to abandon liberal reforms. The need for growth may revive interest in them, and the West may even recover a little of its self-confidence. From the print edition: Leaders Continue reading
The Economics of Biofuels: Three Drivers
Jim Lane They’re known as the three E’s: emissions, energy security and economic development. But how do they contribute to the economics of biofuels? And how do those economics compare to the economics of crude? The financing of biofuels is founded, to put it as simply as possible, upon the economics of substitution. On the one hand, there’s the price of energy currently locked inside biomass; on the other hand, the price of energy currently locked inside crude oil. The monetary rationale for biofuels is a version of vive la difference. To give a simple example, if renewable sugars are trading at 15 cents per pound, and crude oil is trading at 35 cents a pound — there’s an opportunity for converting sugar to fuels if the refining cost leaves a profit margin worth the agricultural and market risks. Oh, there are enough complicating factors left over to keep a hive of economists busy for a year. There’s the differential in the energy value of, say, ethanol, compared to gasoline or diesel. The impact of losing mass when you blow off the oxygen to turn a sugar into a hydrocarbon. The impact of bioenergy demand on raw biomass prices. The value of co-products from biomass or oil refining. And so on, practically ad infinitum. It takes an advanced degree and a whole bunch of Tylenol to figure it all out. But at the end of the day, the point where substitution makes economic sense is going to correlate back to the price of crude. No matter what the hoped-for margins are, or the opex of a biorefinery, or the capex — it all starts with the barrel. The oil price: 54.40 or fight In looking at the world of cost — an obscuring factor is that oil is generally quoted in a cost per barrel (42 US gallons), while biomass is generally quoted in a price per metric or US ton. To simplify, we have converted everything to US cents per pound. Plus, we’ve used constant dollars, so that you don’t have to constantly factor out inflation. Today, the cost of Brent Crude oil is 35.88 cents per pound, and the IEA forecasts that price will increase to 54.40 cents by 2040. So, here’s the good news or the bad news. If your biomass refining process at scale can beat that price — fully loaded for the raw inputs, capex, opex and margins — you’re going to find a lot of friends in the fuel markets. Barriers? Even if your technology pencils out, there are the “3 Bewares “. 1. Beware ! The technology has not yet reached scale. It may well not have fully de-risked itself, either – being somewhere in the path between concept and scale. 2. Beware ! Qualified investors have more attractive options. No matter how attractive 10 percent returns might be to many investors, they weren’t sufficiently attractive to Chevron in evaluating their own solvent liquefaction technology — compared to 17 percent average corporate returns on capital, primarily from oil & gas exploration. 3. Beware ! Policy and market risk frighten away investors. It could be that the requisite fuel requires a blending mandate to be assured of a market — mandates which may well be unstable. Or they may require flex-fuel vehicles, which may not be in wide supply. And so on. If those barriers are addressed either by your technology (for example, by reaching scale, or producing drop-in fuels that negate the infrastructure risk) — then you may well have the basic economics to compete dollar-for-dollar with crude oil, and win. It’s 54.40 or fight, though. Any technology that can’t compete with crude oil on price — must enter in to the more esoteric and unstable world of what is usually described as the 3 E’s of biofuels – emissions, energy security and economic development. The carbon price Whatever your take on the stability or wisdom of carbon prices, they have arrived in key markets such as Australia and the EU, and particularly in the EU there’s no reason to suppose they are going away any time soon. What’s the value of carbon today? Well, again, we have the problem of carbon credits being generally quoted in euros per metric ton of CO2 avoided. An 8 euro per tonne carbon price works out to 0.65 cents per pound of biofuel — if you assume that an advanced biofuel reduces carbon emissions by 50 percent in a complete lifecycle. That’s not much of an add-on or game-changer — one of the reasons why biofuels developers generally don’t take them into account when developing technology) the other reason is policy instability). But, according to the UK government, carbon prices will begin to bite much more sharply in the next few decades. In fact, by 2040, the UK is projecting a carbon price of 12.27 cents per pound. If you accept their projections — and many may be skeptical — that could raise your threshold “break-even” point with crude oil from 54.40 cents per pound to 66.67 cents, by 2040. That would be of material help. The energy security price Now, what about energy security? What’s the price of avoiding the unrest that being short on fuels brings? Well, there are estimates all over the map. One line of thinking assigns the cost of the US Firth Fleet to the cost of oil — since the Fifth Fleet generally guards the Straits of Hormuz and is dedicated to assuring a flow of oil out of the Gulf. Another, more conservative approach is to assign the cost of fossil energy subsidies as a cost of energy security. Generally, the subsidies are paid out to keep national populations content in a world of unstable and high energy prices — and to keep national economies producing. Those can be thought of as costs associated with being short on energy, or energy insecure. Fortunately, the IEA has been tracking fossil energy subsidies — and it comes out to 3.70 cents per pound, if you assume that half of fossil energy subsidies go to fuel (the IEA says that it is “more than half” and leaves it at that), and that about 80 percent of the barrel goes to fuels (as opposed to chemicals and other co-products). So, if you like to factor in energy security, you might start there, which brings your 2040 target price up to 70.37 cents per pound. Economic development The University of Wisconsin estimates that a biofuels refinery generates $1.82 in statewide economic activity for every $1 in sales. Now, “economic multipliers” can be all over the map — but this is a conservative estimate, on the whole — we’ve seen multipliers well north of 2.0 used in biofuels economics. So, what does that mean? It means that a local biorefinery is going to be worth far more in overall economic impact than just the fuel it sells — and, accordingly, a nation, state, county or town has benefits that range above the direct profits, wages and equipment sales that go into our cents per pound calculation. Making that refinery valuable to the community in terms of economic impact even if it doesn’t generate a profit. Now, that’s a controversial benefit to work into the fuel price equation — because biorefineries are not going to be running at a loss simply because they generate overall benefit to the community. That is, unless they are owned by the community — in the same way that the NFL’s Green Bay Packers are owned by local investors, who have been able to maintain a competitive football team in a relatively small market and in 2011 sold $64 million in stock to local investors who know that “the redemption price is minimal, no dividends are ever paid, [and] the stock cannot appreciate in value.” If you assign all that value into the enterprise — you get some pretty high “break-even” points — 73.22 cents per pound this year, and 128.07 cents per pound in 2040 (in constant dollars). Economic activity is not the same as margin — but it wouldn’t be unfair to assign some 10 percent of that impact as a value-add. We’ve done that in our chart below. But individual investors, policymakers and technology developers will make their own choices on what to count. The bottom line For sure, it’s 54.40 or fight. Above the strict break-even with crude oil prices — that is, if your capex, opex, raw inputs and margin add up to more than 35.88 cents per pound today, or 54.40 cents per pound in 2040 — you’ll have a dogfight on your hands getting traction in the fuel markets. How much you want — or need to — lean on the impacts of emissions, energy security and economic development — well, it’s a tough call. In the case of economic development — what’s good for Iowa may not make you popular in Texas. What is good for the plant employee may not translate into a desire for In the case of carbon pricing — fickle friends you will find. Nevertheless there is value in avoiding emissions, generating energy security and stimulating local economic impact. Especially the latter — though it is felt most intensely quite close to the plant, and your offtake contracting would be most successful if it also was kept local. It may push you out to the higher-margin, lower-volume worlds of chemicals, fragrances, flavors, feed, lubricants and nutraceuticals. That’s where a lot of ventures working with algae and corn and cane sugars are generally heading now — though not all. There’s good reason to do so. Today, the price of cane sugar is running in the 15 cents per pound range, and corn starch is running in that region as well. But other forms of biomass look for more affordable — KiOR projects wood biomass in the 3 cent per pound range, as do POET-DSM and other makers of cellulosic ethanol from wheat straw and corn stover. The conversion rates are lower, the capex can be daunting, and there are limits to the ethanol market that are being tested now that pertain to the lack of flex-fuel vehicles — but you can see where the fuel arguments apply. Disclosure: None. Continue reading
Impact Investor and Advocate Discusses Sustainable Farming and the Mitigation of Climate Change
Philippe van den Bossche, an impact investor and advocate, discusses how sustainable farming practices can mitigate climate change. New York, NY (PRWEB) July 24, 2013 On July 24, impact investor and advocate of sustainable agriculture, Philippe van den Bossche, discusses how sustainable farming can lessen climate change . According to a July 17, 2013 article published on TreeHugger.com, entitled, “More research shows sustainable agriculture can mitigate climate change,” one third of greenhouse gasses being produced by humans in the past ten years can be attributed to poor crop cultivation, animal production and deforestation. However, new research is showing that improving crop yields – growing more food in a set amount of space – could reduce the emissions we release into the atmosphere by “12 percent per calorie.” The study, published in the journal Environmental Research Letters, found that “sustainable farming approaches can accomplish both goals of reducing emissions and providing more food.” Hugo Valin, an IIASA researcher who led the study, elaborates: “The most efficient way to ensure sustainable intensification on the crop side is to rely on practices and technologies that are not more fertilizer-demanding, such as new varieties, improved rotations, integrated crop-livestock practices, and precision farming.” United Nations Special Rapporteur, Olivier De Schutter, recently told the UN Rights Council about the impact that “small-scale” sustainable agriculture can have on food production and the possibility of alleviating poverty in certain developing nations. “To feed 9 billion people in 2050, we urgently need to adopt the most efficient farming techniques available. Today’s scientific evidence demonstrates that agro ecological methods outperform the use of chemical fertilizers in boosting food production where the hungry live especially in unfavorable environments.” Philippe van den Bossche, an impact investor and advocate for sustainable agriculture, comments on the recent findings: “Today’s conventional farming practices saturate farmlands with toxic pesticides and fertilizers, strip soil of nutrients and contribute to desertification. Utilizing sustainable, organic agriculture is one way to get our environment back into a healthy state.” Philippe van den Bossche is an impact entrepreneur, impact investor and Chairman/ Owner of Advancing Eco Agriculture (AEA), a leading organic agricultural consulting and manufacturing company located in Middlefield, Ohio. AEA provides consulting services and specialty nutritional materials to farms throughout the United States and Canada. Mr. van den Bossche is an advocate for organic farming and agriculture. ##### Continue reading
