Mining Activity Declines Dramatically
One largely unnoticed detail of Friday's industrial production report was that mining activity is now decreasing dramatically. "Industrial production" of course leads most people to think of manufacturing, but that is only one component (albeit the most important one). But in fact, "industrial production" also consists of mining and utilities (power production).
Of these 3 components, utilities have so far fared the best. Until a few months ago, mining also performed a lot better than manufacturing. But since November 2008, mining has declined by 9.1%, even more than the 7.8% drop in manufacturing. During the latest 3 months, the difference is even greater, 3.6% for manufacturing and 6.9% for mining.
This is of course a lagged effect of great commodity price sell-off in late 2008. While for example Copper is up more than 60% since its late 2008 low of $1.25 per pound, it is still about 50% lower than the peak of more than $4 per pound level that we saw a year ago. This means that the incentive for extracting copper and most other commodities is much smaller than a year ago. And for that reason, commodity producers are investing a lot less in new capacity, and in increasingly many cases, they don't even find it profitable to utilize all existing capacity.
That will have a distinctive stagflationary effect-it will lower growth while at the same time contributing to higher future price inflation.
Of these 3 components, utilities have so far fared the best. Until a few months ago, mining also performed a lot better than manufacturing. But since November 2008, mining has declined by 9.1%, even more than the 7.8% drop in manufacturing. During the latest 3 months, the difference is even greater, 3.6% for manufacturing and 6.9% for mining.
This is of course a lagged effect of great commodity price sell-off in late 2008. While for example Copper is up more than 60% since its late 2008 low of $1.25 per pound, it is still about 50% lower than the peak of more than $4 per pound level that we saw a year ago. This means that the incentive for extracting copper and most other commodities is much smaller than a year ago. And for that reason, commodity producers are investing a lot less in new capacity, and in increasingly many cases, they don't even find it profitable to utilize all existing capacity.
That will have a distinctive stagflationary effect-it will lower growth while at the same time contributing to higher future price inflation.
posted by stefankarlsson at 10:37 PM
1 Comments:
I'd be curious how this drop in mining is having an affect with individuals. For example, the Caterpillar shop in Grand Junction quite some time ago had all sorts of leased equipment sitting unused after being returned. This obviously has knock on effects in the local community. But I'm wondering how it's affected some far away places. For example, we've all seen the stories about the Canadians living in Nova Scotia, PEI, and other places flying out to Alberta for 2-week-long shifts. Or the folks Wyoming was targeting in Michigan to move out to help ease the skilled labor shortage in the gas fields.
Anyway, thanks for point this out. I didn't know that those manufacturing numbers actual include a lot more than just manufacturing.
Post a Comment
<< Home