Home > Economics - General > Two graphs that explain a lot

Two graphs that explain a lot

September 26th, 2014

I could talk forever about these graphs (from IndexMundi), and may do so in the future. For now, I’ll just note that these are nominal prices. The US CPI has roughly doubled since 1989



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  1. Troy Prideaux
    September 26th, 2014 at 10:27 | #1

    I’m going to officially give the 1st spike in the 1st chart a name – “Mt Tinkler”. The 2nd chart in particular is amazing. As if there’s only been one mining boom within the last 25 years?

  2. Ikonoclast
    September 26th, 2014 at 12:00 | #2

    I hope you are not going to say it proves Julian Simon was right. ๐Ÿ˜‰

    The full reality is a lot more complex than coal and iron prices. We had a boom which collapsed with the GFC of 2007-08. The coal price seems to be consistent with that scenario plus a dead-cat bounce in 2010-2011. Yet, iron ore prices did not behave in the same fashion. They held and rose through the GFC and the dead-cat bounce “recovery” of about 2011. I assume that China was able to drive world iron ore prices with its high demand generated by domestic fiscal stimulus but was not able to drive world thermal coal prices. China buys around two-thirds of the world’s iron ore whereas it only accounts for about 16% to 20% of all coal coal imports (thermal and coking coal combined). That would account for the difference in their ability to drive iron ore prices but not coal prices.

    The EU has not experienced a sustained recovery since the GFC. Growth figures are as follows;

    2009 = -4.4 %
    2010 = 2.4 %
    2011 = 1.6 %
    2012 = -0.7 %
    2013 = -0.4%

    The EU failed to make up the GFC losses in 2010/11 and has gone backwards since.

    The recovery in the US has been very uneven and the lower 80% approximately have lost wealth.

    US Typical Household Net Worth:

    2003 = $87,900
    2013 = $56,000

    Most of the US “recovery” is going to the super-rich 1% and the financial sector.

    The flat performance of the West (indeed the depression-like performance of some countries in the UE) is consistent with bad economic management or with hitting the limits to growth. So which is it? I think it is quite a bit of both. The Limits to Growth are not near enough to hobble world growth but they are impinging enough to hobble one region (EU) when another region (China) competes heavily for the remaining exhaustible stocks.

    Certainly, we are at a critical time when the right investments in clean energy and other sustainable practices could keep us growing (for a while) and/or move growth to qualititative growth rather than quantitative growth. But bad investments in the wrong infrastructure or not enough investment overall (both happening) are an enormous drag on our productivity and continue much of the environmental damage unabated.

    In the short term, high exploration and production costs, as is now happening for oil, cannot be recouped by high prices for oil, because the consumers are suffering recession or flat economic conditions and cannot pay these high prices. Demand falls. With iron and coal the current story may be different. Prices are weakening due to poorer demand relatively and/or increased buyer power. There may also be temporary over-supply promoted by the earlier boom. Coal prices also seem to be dropping due to oversupply. Cheap natural gas might also be driving thermal coal prices down.

    Limits to growth will impact via Liebig’s Law of the Minimum. Growth is controlled not by the total amount of resources available, but by the scarcest resource (limiting factor). Currently, we are in overshoot, at least so far as can be determined by the best footprint analysis known to science so far. Overshoot can persist while natural stocks are being run down just as I can live beyond my income until my savings are exhausted. Once natural stocks are exhausted then only natural flows (and natural waste sinks) can sustain us. If these (by this stage damaged) natural flows and natural sinks can only sustain a half or a quarter of us then we are in a dieback situation.

    It is difficult to discern what is now or what is going to be the scarcest resource as a limiting factor. I had thought for quite a while it would be energy but some supplies of energy are more or less ubiquitous and self-renewing, as it were, on earth: namely solar, wind, hydro and even some biomass power. Water (as fresh potable water, irrigation water and water for industrial processes all being available in the right places at the right times) is going to be a serious limiting factor in some regions. Food will be a limiting factor too but we need to indentify the more basic factor(s) which will limit food. In some regions it will be water availability and transport issues which limit local food availability. The LTG crisis will take on regional (regionally diverse) characteristics.

    It now seems likely that an over-arching limit on growth will be the climate system. Global warming and major perturbations in weather patterns look likely to have large negative impacts on food supply, water supply and the continuing creation, existence and maintenance of a proportion of global infrastructure. De-carbonisation is not yet proceeding at anywhere near the pace which would limit average global temperature increase to 2 degrees C or less. Indeed, CO2 emissions are still rising. And the scientific consensus is that even 2 degrees C warming will be very damaging.

    No simple story of “coal prices are falling and this is good news”* makes any sense unless it can be put in the context of the story that total CO2 emissions are falling. Only when total emissions are falling and falling relatively rapidly can we be genuinely hopeful.

    * Note: I am not saying JQ is saying this. I am just, as it were, forestalling any attempt by anyone to misinterpret this one piece of not very important data out of context.

  3. sunshine
    September 26th, 2014 at 13:44 | #3

    Was the spike in coal ,oil and food prices that occured prior to the GFC unrelated to it ?

  4. September 26th, 2014 at 14:07 | #4

    While it is very difficult to be certain, the world may be at peak iron ore. And just to be clear, that is peak iron ore extraction. We’re not in any actual danger of running out of iron ore any time soon. All developed countries pass through a period where they used large amounts of new steel to industrialise and then once they had built enough modern infrastructure they switched to relying on recycled steel to meet their needs. After 30 years of rapid industrialisation China may be at this point. While India and other countries certainly could increase their steel use, it may not be enough to offset declines in China and other nations.

    And the future may simply be a less steel intensive world. Autonomous cars may only be 5 or 6 years away (notice the use of the word may) and low cost self driving taxis may replace most private car ownership. (Again, note the may.) This would greatly reduce the total number of vehicles that would be required, while at the same time increase the return from using materials lighter than steel. It may not take long for carbon fibre and other materials to replace a lot of steel use in vehicles.

    Just to be clear, peak iron ore may still be a decade or more away if China maintains a high level of steel use and India, Nigeria, etc. pick up any slack, but it could be now. I’d like to see the opinon of someone better informed about this than me.

  5. September 26th, 2014 at 14:27 | #5

    Sunshine, short answer – yes. The run up in oil, coal, etc. prices was unrelated to the GFC. If in 2007 you had said the increase in commodity prices were about to lead to a recession no one would have batted an eyelid. Well, almost no one. There were still loonies out there who were saying this time it would be different. But it was a common concern that the world was due for a recession. But that’s a recession, not a Greater Depression. There was nothing about a run up in oil, etc. prices in 2007 that required Britain to have a greater economic slump than in the Great Depression. (As measured by economic downturn, not people freezing to death under bridges, although that still happened.) That required two things: (1) The GFC where people realized that a lot of investments were no good and they thus had less money than they thought they did, and (2) A massively incompetent response to this, so massively stupid that Australia was really the only developed country that got it right. And just in case this makes you think Australians are smarter than average, I will point out that we are now ruled, and I do mean ruled, by people who apparently think Australia’s perfectly correct response was exactly the wrong thing to do. I have a suspicion that Joe Hockey may realise that he is part of a gang of idiots, but I don’t have a high opinion of his skills either and this may just be wishful thinking on my part.

  6. Hermit
    September 26th, 2014 at 15:28 | #6

    Even if we did want more steel then restraints on carbon may hinder production. In theory we could use hydrogen at $7 a kg to reduce iron ore whereas we currently use metallurgical coke that might cost 20c per kg. A year or so ago a scrap metal dealer was giving $305 a tonne to ABN holders who brought it in by truck over the weighbridge. Later they advertised on TV you didn’t need an ABN come in with utes and trailers and enjoy the free sausage sizzle as well as cash for scrap.

    That’s two thorny problems for the very low carbon world if we ever get there ..steel making and jet fuel.

  7. sam
    September 26th, 2014 at 16:18 | #7

    Reducing capacity is about the number of mols of substance, not the mass. That $7 dollars of H2 buys you 6 times more mols than the 20c of coking coal.

  8. Ikonoclast
    September 26th, 2014 at 16:39 | #8


    Actually steel making is not much of an issue I discovered. In another post about steel making, I quoted statistics which illustrated that coking coal for steel making is actually a fairly small use, relatively speaking, of coal compared to thermal coal for power. And of course oil use is bigger again. Natural gas use is big too but preferable to thermal coal use IF and ONLY IF it replaces coal use.

    Our priorities for de-carbonising, on the power generation side of the equation, are in order;

    (1) Phase out out ALL thermal coal globally use by about 2030 (one would hope).
    (2) Phase out oil use beginning right now with unconventional heavy oil and tar sands first.
    (3) Phase out natural gas use after the other two.

    There should be a toal global ban on building all new coal mines, oil wells, gas wells and plants which burn such fuels, this total ban commencing immediately for all projects still in planning, feasibilty or twinkle in a billionaire’s eye stage.

  9. rog
    September 26th, 2014 at 16:45 | #9

    Graph looks better in AUD.

    The talk is that most mines on the east coast are running at a loss but tonnages are high so govts are getting their royalties.

  10. September 26th, 2014 at 16:47 | #10

    But carbon will form CO2 while hydrogen will form H2O, so a mole of H2 will only reduce half as much O as a mole of C. But it’s not really relevant. But before I mention why, I’d like to congratulate Hermit on using a reasonable price for hydrogen produced by electrolysis. I was quite surprised. Coke though is only about 13 cents a kilogram at the moment, but 20 cents is close enough. Anyway, no one will bother to pay an extra seven or so dollars to make steel without emitting CO2 when CO2 can be removed from the atmosphere and sequested for probably less than 40 cents per kilogram of coke used.

  11. rog
    September 26th, 2014 at 16:48 | #11

    Coking coal is used for steel making, it gets a better price than thermal and the talk is that the collapse in coking has meant that it has been sold as thermal.

  12. September 26th, 2014 at 16:50 | #12

    Hermit, in a low carbon world there would probably be plenty of oil available to make jet fuel.

  13. sam
    September 26th, 2014 at 16:51 | #13

    @Ronald Brak
    Excellent points, both. But Hermit’s calculation is still out by a factor of 3, even if I was out by 2.

  14. September 26th, 2014 at 16:53 | #14

    Rog, the floating dollar should tend to help even things out, but coal and iron ore importers are going to care more about the price in USD than AUD.

  15. rog
    September 26th, 2014 at 17:08 | #15

    @Ronald Brak I was wondering how large companies view their investment in light of a falling AUD but I think that they are big enough to taken care of that. But yes, contracts are in USD.

  16. September 26th, 2014 at 18:00 | #16

    Actually, Sam, now that I think about it, I presume a considerable amount of CO would be emitted from a typical blast furnace, reducing carbons effectiveness at reducing iron. But just how hydrogen would be used to reduce iron I don’t know. I had a nuclear nutboy once tell me that charcoal was no good for reducing iron because of its low mechancal strength and therefore nuclear produced hydrogen was better for steel making. Hydrogen’s complete and utter lack of mechanical strength appeared not to worry him.

  17. Doug
    September 26th, 2014 at 18:10 | #17

    the implications of the first graph for Campbell Newman’s dream of a coal driven empire are substantial.

  18. BilB
    September 26th, 2014 at 18:19 | #18

    If this was a Cat thread, there would be only one reason for the surge……corn ethanol and renewable energy.

  19. Ivor
    September 26th, 2014 at 18:42 | #19

    Would these (nominal) charts look similar if there was no US$ QE and counter plays by financial intermediaries?

    I doubt it.

  20. September 26th, 2014 at 19:12 | #20

    Ivor, if the prices aren’t the result of demand and are instead speculation, then there would be a build up or running down of inventories. And while things like copper and even aluminium can be stored at fairly low cost, iron ore is quite bulky and the cost of loading of loading it onto a local train or barge is prohibitive. As a result people can easily see how much inventory of iron ore a blast furnace has as it’s all just piled up next to it. Coal is similar with the added danger of being a fire hazard. So if changes in prices were the result of speculation it should be pretty obvious in the build up or running down of inventories.

  21. September 26th, 2014 at 20:03 | #21

    @Ronald Brak
    Where will the price of electrolysed hydrogen go in the long run? One key factor is that in a high-renewables world, the peak capacity of both wind and solar generation will greatly exceed electricity demand, at different times. This can only be avoided by assuming can-openers: really cheap EGS geothermal or really cheap grid storage, cheap enough for seasonal balancing, not just daily or weekly. These don’t look good bets, especially not the storage. So the surplus electricity will be given away for the cost of transmission. The cost of electrolysed hydrogen will probably shrink to close to the cost of capital in the conversion plant.
    The well-known objections to using hydrogen in fuel-cell vehicles – the round trip losses and the distribution infrastructure – don’t hold for steelmaking. You would build the electrolyser and storage tanks right next to the steelworks.

  22. September 26th, 2014 at 21:43 | #22

    @James Wimberley
    James, if electricity is free then very low capital cost equipment can be used to generate hydrogen. This equipment wouldn’t be efficient, but if electricity was free this wouldn’t matter. Storage is a bit more tricky and would add to the expense, but probably wouldn’t be a huge problem. So with free electricity hydrogen should be very cheap. But, if electricity is free it could reduce the cost of atmospheric capture of CO2, so that is something to be considered.

    Also, if we have reached or soon will reach peak iron ore extraction it may be cheaper to keep using the old Bessemer iron ore smelters and pay to remove and sequester the CO2 released than to invest in new hydrogen infrastructure or other methods. And with increasing numbers of electric cars and decreasing costs of energy storage, there may not be much in the way of periods of free electricity. Maybe electricity will always cost at least a cent a kilowatt-hour and that makes hydrogen kind of costly. Maybe 66 cents a kilogram at one cent a kilowatt-hour. Perhaps double that with other costs. So we’re looking at maybe $1,300 for a tonne of hydrogen. I figure it will cost less than $400 to remove and sequester from the atmosphere the CO2 released from using a tonne of coke.

  23. September 26th, 2014 at 21:46 | #23

    Actually, if electricity is free we could just heat iron ore until it is really, really hot and the oxygen will come out by itself.

  24. Hermit
    September 26th, 2014 at 23:08 | #24

    Electricity that would otherwise be curtailed as it exceeds realtime demand is not ‘free’. It is extremely expensive if it is largely fixed cost not related to working output. Suppose windpower never fell below 2% of rated capacity so we build 50 MW to cover every 1 MW needed. Instead of $100 per Mwh it now costs $5,000 as it is ‘burning’ interest and depreciation from overcapitalisation.

    I agree three times as many moles of hydrogen are needed to reduce Fe2O3 to metal compared to carbon. It is claimed that pressurised alkaline electrolysers using grid electricity will produce hydrogen at $6.90 a kg. Some claim using high temperature pebble bed nuclear reactors directly will get this down to $2. They’re still working on algae that make hydrogen slowly. I suspect cheap hydrogen is the key to synthetic fuels we will need for planes and long haul trucks. That’s why think we are in big strife when oil runs out which will be clearly on the horizon after the US fracking boom nosedives 2016-2018.

  25. Ikonoclast
    September 27th, 2014 at 07:17 | #25

    We need to keep steel making in perspective. I admit I am the mug who raised this issue which has turned out to be a slight distraction from the main game.

    Where do JUST our fossil fuel related carbon dioxide emissions come from? (There are other sources of anthropogenic emissions.) In 2010 the numbers for fossil fuel related carbon dioxide emissions were as follows.

    Electricity and heat generation sector produced 41%.
    Transportation sector produced 22%.
    Industrial sector produced 20%.
    Residential produced 6%.
    Other uses produced 10%.

    Note: 1% missing due to rounding errors.
    Source: CO2 Emissions from Fuel Combustion (2012), International Energy Agency.

    Cement production produces the most carbon dioxide amongst all the industrial processes. Steel making is also significant. But the percentages above show that the electricity and heat generation is the big fossil fuel CO2 producing sector that needs action first and then transport needs action. Then comes the industrial processes where cement making is a primary concern before steel making.

    Of course, decisions prioritising for change will be based on a combination of considerations. The size of the problem and the relative ease of the solution should both be considered. If we have a 10% problem that is tough to tackle and a 9% problem that is easy to fix then we would fix the 9% problem first. On the other hand, a 41% problem just cannot be ignored and we need to find ways to achieve inroads into that post haste.

    Of course, the above percentages relate only to fossil fuel use and do not represent the totality of anthrpogenic CO2 emissions. Other activities, like land use changes, including agriculture and deforestation, have been a very significant constributer.

  26. Pete Moran
    September 27th, 2014 at 08:38 | #26

    I’m not an economist, but I find JQ extremely accessible.

    Those two graphs are astounding.

    I see huge spending (I won’t say investment) by Govt in infrastructure that will almost certainly have to be abandoned because the boom price makes what-should-have-been marginal projects viable.

    Who, in infrastructure/treasury/Govt-audit departments will admit mistakes here?

  27. Hermit
    September 27th, 2014 at 13:19 | #27

    I think the biggest blunder in years was approving the construction of three LNG processing ‘trains’ on Curtis Island at Gladstone. We need all the current east coast gas production and more for ourselves. NSW is tipped to see business closures as early as 2016 due gas prices moving to export parity. I believe a local glass manufacturer has closed in anticipation of higher prices. An Australian owned ammonia plant is to be built in the US not here.

    Apologists for this decision assure us it only takes more drilling be it conventional, fracked shale or CSG. They must have taken Norman Lindsay’s ‘The Magic Pudding’ to heart whereby whatever is extracted is just as easily replaced. If you look at farmer protests against CSG drilling in northern NSW it’s hard to see drilling getting any easier as the years go by. My guess is the decision makers will be flogged with a lettuce leaf when it all goes bad.

  28. September 27th, 2014 at 22:46 | #28

    “Electricity that would otherwise be curtailed as it exceeds realtime demand is not โ€˜freeโ€™. It is extremely expensive if it is largely fixed cost not related to working output.” Partly true, only. The wholesale price is determined by short-run marginal costs and demand. It’s already gone negative in Germany recently at times of high renewable output (like August 17), combining with must-run coal plants to create a glut. The unsustainable part of this is as you say the return on capital. Nobody is sorry for the coal plant owners today, but a similar problem will arise at very high penetrations of wind and solar. To give investors an adequate return, pricing for 24-hour service will have to shift to capacity payments. Our hypothetical steel electrolysis consumers will be on a deeply interruptible tariff, with a low or zero capacity component. So I think I’m right to equate this to “next to nothing”.

    We really do need analyses of 90% and 95% renewables scenarios for electricity. Making the last little bit of consumption all-renewable will be very expensive, compared to other pathways to emissions reduction. It may make sense to have the reserve largely gas, and offset the small amount of use by reafforestation or the like.

  29. iain
    September 28th, 2014 at 11:05 | #29

    Not a lot to see here, basically reflects Chinese demand for our two major export earners.

    For coal – high energy, low sulphur, low ash – will be further subject to this demand, over the next 5-10 years, by CCP decree. No matter what renewable fantasists believe.

    For iron ore – it will depend on how well stability in China holds up in the face of a surplus 30 million men of marrying age who *must* own an apartment, and the replacement rate of apartments that last no more than 15-20 years, and the undesirability of any apartment older than 5-10 years, for said demographic.

  30. September 28th, 2014 at 12:26 | #30

    Iain, most coal pollution in Chinese cities comes from domestic, business, and industrial use of coal, not electricity generation. All else equal, taking coal from these areas and burning it in power stations would reduce pollution in cities. And this is basically what China is doing. Coal for heating, cooking, and industry is being replaced by electricity, LPG, natural gas, insulation and other efficiencies. Overall this reduces coal consumption and so reduces the need to import coal.

    And Iain, even if China knocks down apartment blocks as soon as they are competed, the steel rebar in the concrete will still be there and will be reused. It won’t have had time to rust away and they won’t throw it out and purchase iron ore from Australia to make new steel to replace it.

  31. September 28th, 2014 at 21:49 | #31

    iain: China is already cutting coal consumption, absolutely. It will also protect domestic coal producers at the expense of imports. The recent Chinese announcement of limits on ash was basically a “get lost” declaration to Australian coal exporters.

    Iron ore is different, as China is structurally dependent on imports. But Chinese pig iron production has flatlined, leading a general decarbonisation of growth (see chart reproduced in my first link). Australia will continue to export iron ore, at just above the cost of production, but you can forget about growth.

  32. September 29th, 2014 at 13:17 | #32

    @James Wimberley
    James, I thought the new restrictions on the quality of coal imported to the Pearl and Yangzte Deltas were a big no thanks to imported cheap but nasty Indonesian and Phillippine lignite. Indonesia supplies 97% of China’s lignite imports and the Phillippines 3%. Indonesia is near the Pearl Delta while the Phillippines is closer to the Yangtze Delta. However, I don’t actually know just where in China their lignite is shipped to. It is possible it goes somewhere else. Lignite will basically always produce more ash per joule of heat or kilowatt-hour of electricity generated. However, lignite’s high water content can make it appear to have less ash per tonne than black coal but this is a water based lie. I presume China is not stupid enough to overlook this fact, but there may always be more going on here than meets the eye.

    Anyway, China will have to import Australian coal for some time to prevent inversions killing vast numbers of people as the London inversion did in 1952. Or rather, I should say killing vaster numbers of people than bad smog conditions already do. Chinese domestic coal, while extensive, is basically crud, so Australian imports will be some of the last to go, but go it will, for as you’ve mentioned, James, China really doesn’t like importing Australian coal and they now have better alternatives which they are putting in place.

  33. Hermit
    September 29th, 2014 at 14:12 | #33

    @James Wimberley
    I’m not sure if capacity payments are necessary. It used to be one good deed deserved another now it seems one subsidy deserves another. Some say have no subsidies at all and let the market work it out. In the last year I believe NEM prices have varied between -$40 and +$12,500 per Mwh. If we had variable time of use retail electricity pricing then backup sources could get high prices in heatwaves and cold snaps so they wouldn’t need standby payments. Tough if you’re a pensioner in a fibro home when it’s over 40C at 6 pm and the aircon costs say $3 an hour to run.

    I think it would be prudent to assume that after 2030 or so gas will be prohibitively expensive while crazy weather and fires will make forestry difficult.

  34. September 29th, 2014 at 23:00 | #34

    Capacity payments do seem an odd way to go about things. They certainly haven’t gone down well in Western Australia with hundreds of millions of dollars being paid out for no return what-so-evah to the average West Australian. One thing they have resulted in is the construction of a $95 million peak plant that looks like it will never be switched on. Renewables, specifically rooftop solar, destroyed any need for capacity payments, even if there was a good case without it. With home and business energy storage likely to take off in Australia it looks like capacity payments will become even less relevant. And there’s always the option of charging people the spot price of grid electricity plus a (large) percentage to cover distribution. There is an awful lot of underused generating capacity in Australia that will start to get switched on once prices go over 40 cents a kilowatt-hour. And boy, we’ve got a lot of room to go on demand management. Did you know that not once have I been offered a free movie ticket during a summer heatwave? So very wasteful!

  35. derrida derider
    October 1st, 2014 at 16:40 | #35

    Tsk tsk. Check out the y intercept on those charts – these movements are not quite as dramatic as they seem.

  36. John Quiggin
    October 1st, 2014 at 16:56 | #36

    I couldn’t get rid of the intercepts, but they are clearly labelled, and I assumed that my readers are numerate enough to deal with them (surely no one supposes that these commodities were free at the low point. That’s why I warned about the nominal price, but not about the intercept

    Taking account of the intercepts, the movement in coal is not all that dramatic. The real price doesn’t change much from beginning to end, though it spikes a lot in the early 2000s

    But the iron ore price shift is pretty much as dramatic as it looks. It goes from a low of $10 to a high of nearly $200 in the space of a few years.

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