The Perils of Cheap Money By Jim Jubak At http://money.msn.com/investing/the-perils-of-cheap-money Supplyand demand for major commodities are out of whack, thanks to easy moneypolicies . And that creates opportunities for savvy investors. 1. There is no free lunch. 2. So, yes, the flood of cash from the world's central banks preventedthe crash of the world financial system in the dark days after the collapseof Lehman Brothers and the near collapse of AmericaInternational Group and Citigroup . And, yes, European CentralBank President Mario Draghi's promise to do anything necessaryto save the euro has headed off the collapse of the market for Italian andSpanish government bonds . And yes, the huge stimulus thrown at China'seconomy prevented a hard landing , where the nation's growth rate mighthave slipped below 7%. And, yes, the Federal Reserve 's promise to keep interestrates at essentially 0% has revived, finally, the U.S. housing sector. 3. But we're still counting up the costs. 4. Sometimes the price is obvious: In China it produced a real estatebubble that has littered the landscape with ghost cities of apartmentsowned by speculators. 5. Sometimes the price is obvious but delayed: Someday the bill willcome due in higher inflation , higher interest rates and weakercurrencies. 6. And sometimes the price is just not all that obvious. That's the caseright now in the commodities sector, where a global policy of cheap money has turned a modest slump into what looks likely to be a long, deep, depression in the worst-hit sectors, such as natural gas, coal and maybe even iron ore. 7. How is cheap money related to what is already a punishing recession formajor commodity sectors? Let me explain. 8. Because if you buy my explanation of the cheap money/commodityrecession connection, I think you’ll wind up rethinking your strategy andtimetable for investing in commodity stocks. Boom and bust 9. Let's begin with the mismatch between what I'm calling the commoditydepression and the slowdown in global growth. Certainly the slowdown inChina's economy -- the driver for the global market in commodities, fromthermal coal to copper to iron ore -- should lead to a drop in commodity pricesfrom their peaks. 10. A China growing at 10.4% in 2010, thanks to the country's post-globalfinancial crisis stimulus efforts (let alone a China growing at the 12%or 14% annual rate before the financial crisis), would consume more coal, ironore, copper, oil, etc. than a China growing at 7.8%, as the country's economydid in 2012. 11. Take a look at iron ore, for example. China's steel mills are theworld's largest consumer of iron ore (accounting for 60% of global iron oreimports), and it makes sense that demand from China would slow as China'sgrowth rate hovers near 8% rather 10% or 12%. In fact, Goldman Sachs projectsthat China's imports of iron ore in 2013 will grow at the slowest rate in thepast three years. 12. But do note that China's demand for imports of iron ore is still projectedto grow in 2013 -- by 4%. And global demand for iron ore imports is expected togrow by 8% this year. 13. Iron ore prices,however, have already retreated 6% this year. And the consensus among analystssurveyed by Bloomberg projects that iron ore prices will fall an additional 34%to finish the year near $90 ametric ton. (Iron ore sold for about $155 a metric ton at its local peak at the end ofFebruary 2013.) 14. That may not even be the worst news. Iron ore prices could continue toretreat through 2014 and perhaps until 2018, according to MorganStanley . That would produce a slump that mirrors the nine-year boomthat saw iron ore prices climb sevenfold from the late '90s, when the price was$15 to $20 a metricton. Prices down, demand up 15. Projections for a huge decline in price by the end of this year and inthe years ahead don't make much sense if you look just at the demand side ofthe market, however. 16. Demand from China for imports will climb 4% in 2013 and yet the priceof iron ore will not just slide lower, but plunge? Global demand will climb by8% but prices will fall an additional 34% in 2013? 17. Ahh, take a look at the supply side. Those same projections that sayglobal demand will rise by 8% in 2013 also call for a 9.1% increase in seabornesupply (the standard term for global iron ore imports since iron ore travelsfrom mine to customer by sea). 18. And that's just the beginning of a trend that has supply growthoutstripping demand growth as new iron ore capacity comes on line. MorganStanley projects that the global iron ore market will move into surplus in 2014 and that the surplus will continue to grow through 2018. That's won'tbe good for prices. 19. This basic story -- slowing but still solid growth in demandoverwhelmed by a big increase in supply -- isn't limited to iron ore. The sameholds -- with individual wrinkles for specific commodity markets -- forcommodities as diverse as natural gas, thermal coal and copper. 20. Copper ,for example, is projected to move into a global surplus in 2013 as demand risesby 5.3% but supply rises by 6.8% to 8%, according to analysts. 21. That will take copper to a projected surplus of supply over demand of330,000 tons in 2013 from a deficit of 95,000 tons in 2012 and 132,000tons in 2011. Copper for delivery in three months closed at $7,958 a ton on April 3. The average price for2013, according to Goldman Sachs, will be $8,458 a ton before falling to $7,250 a ton in 2014. 22. This pattern of boom to bust and then back (commodity investors hope)to boom is typical of the commodities sector. High prices lead producers toincrease their capital budgets and invest in new capacity. But it takes so longto find and develop these resources that the result is often over-investment in new capacity, as every mining company invests in new capacity that thenyields a temporary surplus in the sector, driving down prices. Reading Comprehension Decide whether the followingstatements are true (T) or false (F). 1. Efforts by the world’s central banks have saved the world financialsystem after the 2008 financial crisis. 2. The author believes that thanks to the central banks’ efforts, theworld has now struggled itself out of the financial crisis. 3. Among other things, the author is especially concerned with the damageby cheap money on the commodities sectors. 4. China ’sstimulus efforts have sustained China ’sgrowth rate at above 10% in 2010 but even this rate is a recession whencompared with the boom before 2008. 5. Demand for iron ore becomes weaker and the price goes down because of China ’s slowergrowth rate. 6. Growth in demand will be slightly stronger than growth in supply iniron ore and other natural resources and thus the prices will go upslightly. The Perils of Cheap Money.docx