Today, the world is facing natural disasters on an unprecedented scale: more than 255 million people were affected by natural disasters globally each year, on average, between 1994 and 2003. During the same period, these disasters claimed an average of 58,000 lives annually,with a range of 10,000 to 123,000 casualties. In the year 2003, 1 in 25 people worldwide was affected by natural disaster. Then, the Indian Ocean Tsunami in 2004; Hurricane Katrina 2005 in the USA; the Yogyakarta Earthquake in Indonesia in 2006; Sichuan earthquake in China in 2007; Cyclone Nargis in Myanmar in 2008, the Haiti Earthquake; Chilean Earthquake and Pakistan in 2010. Now, the floods in Queensland. This one is different – where many disasters have a local impact, this one is having a far reaching global significance – a “butterfly effect” that should help to transform global thinking on commodity based logistics and supply chains in a fundamental way. That does not mean that it will …

Rising tides don't raise all boats

Coal is the world’s forgotten fossil fuel but, with coal supplies meeting 40 per cent of global energy needs and demands far outstripping supplies; coal is the new black gold. Queensland has the largest coal reserves in Australia with 34 mines generating 120 million tonnes or, 75 per cent of Australian coal exports. That is roughly 15 per cent of global output. This coal is top class thermal quality with less than 15 per cent ash. In fact, China relies on it to bump up the energy quotient for its steel mills and, with output on the rise this becomes increasingly important.

China uses coal for a staggering 78 per cent of its energy needs and, with air pollution from coal fired plants responsible for an estimated 400,000 to 750,000 premature deaths a year, it is seen as a key environmental priority. In recent years, China has closed over 10,000 mines and has plans to shut down a further 1,000. This means a serious reduction in coal exports – a drop of 80 million tonnes represents 12 per cent of global coal exports – this has seen a dramatic shift to coal imports. A Citigroup Report on Chinese coal imports published in November 2010 made it clear: “Net imports should rise from (an estimated) 143 million tonnes in 2010 to 233 million tonnes in 2011. Demand surplus expands; and both domestic price and international price should rally.”

China is not alone. India, with coal meeting 70 per cent of its energy needs – is increasing imports from around 30 million in 2008 to 60 million as soon as possible. By the way, India produces well over 400 million tonnes of its own coal but most of this is low quality with a high shale content – useful for power plants and steel mills and this adds yet another premium to Queensland coal. Then, there’s Japan which has seen a run on its coal reserves as an earthquake damaged a nuclear power station in 2007 and, a serious issue with the decline of Chinese coal exports – Japan’s traditional source. So, the outlook for coal is clear – more needed.  Suddenly, the media is full of flooding in Queensland. Make no mistake about it, this is a human tragedy with a global economic sting in the tail. Look no further than the price per tonne for prime thermal coal. On 29th October 2004, global price of thermal coal was $53.90. This week, this price has risen to $240 and could reach $300.

Queensland is not all about coal. In fact, global wheat and sugar markets will suffer from the dislocation of production as world demand continues to climb and supply loses Queensland’s significant capacity. In fact, Queensland is but one area affected by the wider La Ninya* phenomenon which has drenched countries from Australia to Colombia to Indonesia and concerns mount that this could impact the US growing season – the world’s largest exporter of agricultural commodities.

Commodities analysts worldwide have been forced to consider meteorological bulletins as well as supply and demand forecasts. In the past six months alone, this weather system has triggered a surge in thermal coal by 32 per cent; rubber by 42 per cent and Arabica coffee by 75 per cent. It is feared that the dry spell in Argentina and Southern Brazil could threaten the soya bean and corn crops in these countries which together, according to a Report in the Financial Times (06/01/11) account for 45 per cent and 26 per cent of global exports respectively. Given the reductions in capacity elsewhere, this will send suppliers to reserves – and there is not much left. The same FT article highlights the hike in prices for key commodities since January 2010. It makes for sobering reading – Rubber, up 78.8 per cent; Corn, up 42 per cent; Soyabeans, 32.6 per cent; Iron Ore, 43.4 per cent.

In all of this, there is the very real threat posed by Financial speculators as the incentives to migrate from financial instruments (sub-prime mortgages) and move to commodities gathers momentum. As global population grows from 6 to 9 billion by 2050; food production will have to climb by 60 to 70 per cent to meet increased demand and these speculators could be ready for a set of bonuses that will make previous bull markets look tame.

Queensland should be a wake-up call for the global economy. In the wider context of free markets, Amartya Sen et al (Gray, False Dawn; Bakshi, Bazaars, Conversations & Freedom; Reinart, Rich Countries, Poor Countries; Bateman, Why doesn’t microfinance work; Beattie, False Economy; Jackson, Prosperity without Growth; Chang, Kicking away the ladder; Cassidy, How markets fail; Lynn, Cornered and, The End of the Line; Lancaster, Whoops; Soros, Crisis of Capitalism; Canuto & Giugale; The Day After Tomorrow; Polanyi, the Great Transformation) have cautioned that the market could make a bad situation worse and that speculators could aggravate the price hikes triggered by emergencies such as these – to the detriment of democracy; not just the household budget. Free Market fundamentalism and the assertion that there is no alternative to free markets, as Soros has argued, is seen as a root cause of the Financial crisis and, with the average share on the New York Stock Exchange being owned for no more than 7 months, the notion of unfettered markets opens itself to further scrutiny.  As Greenspan made clear to a Congressional Committee at the time – the 2008 financial crisis demonstrated that the free market that had run the global economy for decades was flawed.

It is important to point out that most of the above observers are pro-capitalist but object to any mention of TINA – There Is No Alternative – to the inherently monopolistic and speculative tendencies inherent in the species of capitalism that has grown out of innovative financial instruments. The point at issue is the gap between rich and poor and the need to address it. It is expensive to be poor; the amount they spend on food is already high and will nor survive the knock on effect of commodity price hikes that will have the same impact over time as rising tides or drought conditions are having now – calamitous.

As Queensland deals with the local impact and the global economy wakes up to the backlash of this sudden and hugely significant drop in Queensland’s productive capacity in key commodities we should remind ourselves of a subtle message for western markets made by the Chinese Premier, Wen Jiabao, in a recent interview with CNN. Asked about hobbies, he spoke of his delight in reading books on Chinese and foreign history because “history is like a mirror”. Warming to the theme, he professed admiration for the Theory of Moral Sentiments by Adam Smith – this is the book he wrote before the Wealth of Nations and, in which he makes plain the need for an ethical dimension to all economic decisions. In other words, self-interest is not the one best way. Interestingly, the early Confucian scholar Mencius argued that violating the right to food and material well-being is a greater crime than denying political rights. Humility and compassion, not flamboyance and egoism, are the cherished virtues. A sobering thought in so many ways.

Allow commodity prices to go the way of sub-prime markets and the risks will not be easy to hide in some arcane mathematical formula. Make no mistake about it, people’s livelihoods will pay for that wave of bonuses and, the consequences could be dire. This should give those in favour of unregulated Globalisation – a free flow of goods, capital and people; a rising tide to raise all boats – pause for thought. Trade and globalisation are not a zero sum game. Contrast much of recent behaviours with that of the Norwegian Sovereign Wealth Fund.

Those in the developed world have to be ready and willing to allow of alternatives to the economic monologue of the past few decades. And this is as true of logistics as it is of economics. It is time to move from ever better (for whom?); cheaper (do we factor in the true environmental cost?) and faster (is this the race to the bottom?) supply chains to more inclusive exchange – transformational logistics. We are moving from a capitalism that champions innovation and entrepreneurial energy to make things on the ground to one that makes its money on speculating on force majeure and all our futures – using the most vulnerable as monopoly money. This is NOT what Adam Smith meant at all – but it does re-affirm economics as the dismal science.

In terms of Logistics and Supply Chains, we have to seek to uphold values as well as value. This is the profits, planet and people triple bottom line. As Eric Schmidt, CEO of Google puts it in today’s FT:”In this global era our real enemies are inflexibility, proprietary systems and “walled gardens” that let the elite in but leave the rest of the world out”. When it falls, rain falls on us all. We cannot delude ourselves that we can dodge the raindrops as others get wet.

* FT Note (06/01/11) – La Ninya is a recurring climatic event caused by a decrease of the water temperature in the tropical Pacific. Alternatively known as El Viejo, the old man, it is the opposite phenomenon to El Ninyo, the little boy, that refers to an increase in the tropical Pacific’s water temperature. The phenomenon occurs in a loose cycle of three to five years and the intensity varies greatly. As Bill Patzert, an oceanographer at NASA puts it – “this one is the real deal”.