Headlines were replete this week with talk of an imminent slowdown of the global economy. Combined with the pallid recovery of the United States and continued waves of debt crises in Europe, a lull in activity from Brazil to India to China would be trouble indeed.
The signs of a slowdown are in monthly indicators released by every country on the globe. We know these are weak in the United States, from orders of heavy industrial products to services industry surveys to employment trends. And as Rana Foroohar points out in her important piece this week, it may be some time before any of this improves markedly in America.
But now the drumbeat is growing that the global system is sputtering, and people point to everything from falling housing prices in China to unemployment in Europe to interest rates and inflation in Brazil.
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The problem is that the data don’t square with one vital gauge of real-time industrial activity: the price of iron ore. Yes, iron ore, one of the world’s most reliable economic crystal balls.
Almost all statistics are the product of government statistical agencies trying to analyze a dizzying array of data. They do surveys of individuals and business; collate and processes payroll stubs, tax receipts, trade flows and housing sales. Then they adjust all of that data for seasonal factors like weather and holidays; they add in past patterns; make estimates of how many births, or deaths, or new businesses were formed or failed. And then a number is produced. All of these numbers are subject to revision, and almost all are backward looking.
And then there is the price of iron ore – that lumpy, dirty, heavy metal that is the core ingredient of steel, the ingredient without which there is no steel. Iron ore is used to create pig iron, and that in turn is mixed with carbon and often manganese to produce steel. For that reason, it’s been said that iron ore (along with oil) is the key commodity that fuels the global industrial economy.
What makes iron ore such a good gauge of what is actually happening in the global economy in real time is that it is not particularly susceptible to financial manipulation. Oil trades is a complex market where price is constantly skewed not just by supply and demand but also by derivatives and futures that are traded throughout the world. The same is true for many metals such as copper. And unlike other vital inputs into the industrial economy, iron ore is bulky and very difficult to stockpile en masse. You can build up months of supply of copper or even oil, but storage for iron ore would be so immense and costly that it just isn’t feasible.
So if the price of iron ore is going up, it’s because someone needs it now to make steel. And if they are making steel, it’s because they are using steel to build something like a car or a building or railroad tracks. And in the past months, the price of iron ore has been climbing steadily – as it did for most years before 2008 and as it has again since 2009. In fact the price of iron ore is today more than 60% higher than it was a year ago.
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The main buyer, of course, is China, which produces something on the order of 45% of the world’s steel. Property prices might be falling, but China is still building. And India is starting to aggressively spend on infrastructure, and so is Indonesia, and of course Brazil, which needs to upgrade in order to host the upcoming World Cup and then the Olympics.
China buying means that Brazil is booming and Australia too, because the two countries produce much of the world’s high-grade iron ore. And that means that shipbuilding is increasing, which helps South Korea, and then there are all those companies that benefit as well.
Iron ore – dirty and environmentally challenging though it is – is a real-time gauge, a barometer of activity as old as the earth that offers a better read of what is actually happening than many of the complicated but flawed statistics that the best statistical minds of our time can create. It is a clunky, dusty metal that provides translucent clarity about what is going on. That gauge shows only acceleration, and until you see the price of iron ore drop and continue to drop, other signs of a global slowdown will be just so much noise.