TIMnovate

Global Crisis/Innovation Blog

Commodity Price Collapse: Why Commodity Prices Are Becoming the New Las Vegas

By Shlomo Maital

 Silver: Definitely not a gold mine for investors  

On Thursday May 5, a startling decline occurred in the prices of commodities, fulfilling a short-term prophecy made by Goldman Sachs last month.  Goldman Sachs’ chief commodity trader closed out long positions in April, causing ridicule and laughter. Turns out he was right, showing the huge advantages of strong independent thinking.

      The price of oil plunged, with Brent crude losing $12 yesterday, or 10 per cent, to trade at around $109 a barrel.    Silver, just a few days ago trading at around $50, is now back down to $35, having suffered its steepest crash since the 1980s. (Since 29 April, silver has crashed 23.3 per cent).   London Mercantile Exchange tin is down 9.8 per cent, palladium has lost 10.4 per cent, gold lost 4.5 per cent and brent crude 9.1 per cent.  In the US last night, the price of a barrel of oil was back below $100.  

 What in the world is going on?  The explanation seems fairly straightforward.  US and global economies are slowing.  And commodity prices, which are always a play on excess liquidity (money) and future inflation, have suddenly done a U-turn, when that inflation seems unlikely to occur.  According to Pulitzer Prize winning columnist Dave Leonhardt (NYT):

     For the second straight year, the recovery seems to be at risk of stalling. The economy grew at an annual rate of only 1.8 percent last quarter — eerily similar to the 1.7 percent growth last spring, just when job growth started slowing down. Fully 80 percent of people say the economy is in fairly bad or very bad shape, according to a New York Times/CBS Poll last month. More people say it’s getting worse than getting better, the opposite of a few months ago.   …The typical financial crisis has caused unemployment to rise for almost five years, according to historical work by the economists Carmen Reinhart and Kenneth Rogoff.  We are well ahead of that timetable, thanks to aggressive action by the Fed, the Obama administration and, in its final months, the Bush administration. But our working assumption should be that this recovery will remain at risk for a long time.

    In the American and global economies, we are going to be riding a seesaw for years to come.  News will alternate between optimism (inflation) and pessimism (deflation), and commodity prices will become highly variable.  Ironically, this variability itself will attract new players, because potential profit (and loss) rises in direct proportion with variance.  In the Black-Scholes option pricing equation, the higher the variance of the asset price, the higher the option price.  Look for commodity prices to become the new Las Vegas.   

Innovation Blog

Back to the Future II —  Jason Pontin: Futuristic Renewable Energy is Here!

By Shlomo Maital

Jason Pontin is editor and publisher of MIT Technology Review, a magazine that tracks new technologies and has some 2.6 m. readers worldwide.  Here is his take on near-future advances in renewable energy, as presented to the MIT Enterprise Forum of Israel annual event, May 5, Tel Aviv:

    “Carbon is the current product of the energy industry.  Heat and light are byproducts.  This will stop.  Each year, 1,366 watts of solar energy strike every squ. meter on the earth.  Yet today solar energy supplies only 1 % of US energy needs.  The largest solar project in the U.S. is Exelon Solar City in Chicago. (Sunny Chicago? Related to the fact it is President Obama’s city, and the project was funded by stimulus package money, or 80% of the total $60 m. cost).  There are 32,292 solar panels, covering 41 acres, generating 10 megawatts, enough for 1,500 homes.  It costs $6/kilowatt to build – far too high to be profitable. All such solar energy programs are heavily subsidized.

    “We need breakthroughs!  Here are five blue-sky energy technologies that could provide such breakthroughs.  They focus on new ways to generate, transport and store solar or nuclear energy:

• Plasmonic Solar:  These are thin-film solar panels, developed by Harry Atwater at Caltech (California Institute of Technology).  [According to Wikipedia:  Plasmonic solar cells (PSC) are a class of photovoltaic devices that convert light into electricity by using plasmons. PSCs are a type of thin-film SC which are typically 1-2μm thick. They can use substrates which are cheaper than silicon, such as glass, plastic or steel. The biggest problem for thin film solar cells is that they don’t absorb as much light as the current solar cells. ]
• Artificial photosynthesis [Dan Nocera, MIT]:   Research is being done into finding catalysts that can convert water, carbon dioxide, and sunlight to carbohydrates.  This is a way of storing energy, a crucial element of capturing solar power.  Nature does this with ease – it is called photosynthesis.  Inventors are trying to replicate it.  The cobalt catalyst from MIT’s  Dr. Dan Nocera of MIT is  “providing strong results.”

• Software defined Thermal Solar.  In this technology, towers collect energy from mirrors. The mirrors are costly. Bill Gross (inventor of the original Google ad  interest-related model) is the pioneer of this method; “his eSolar’s proprietary sun-tracking software coordinates the movement of 24,000  1 meter-square mirrors per 1 tower using optical sensors to adjust and calibrate the mirrors in real time. This allows for a high density of reflective material which enables the development of modular concentrating solar thermal (CSP) power plants in 46 megawatt (MW) units on   parcels of land, resulting in a land-to-power ratio of 4 acres (16,000 m²) per 1 megawatt”.  [This implies that 62.5 sq. miles (or a desert area of 8 miles by 8 miles) of reflectors could supply all of Israel’s electricity needs. ]

• Liquid Batteries:  [Don Sadoway, MIT];  One of the biggest challenges currently facing large-scale solar energy technology is finding an effective way to store the energy, which is essential for using the electricity at night or on cloudy days.  The primitive storage method today is to pump water up a hill during the daylight hours.  In 2009, Sadoway proposed a liquid metal battery that could be used in stationary energy storage systems.   “No one had been able to get their arms around the problem of energy storage on a massive scale for the power grid,” says Sadoway. “We’re literally looking at a battery capable of storing the grid.”
• Superconducting DC transmission:   [Phil Harris, Tres Amigas].  Thomas Edison once observed that electricity is a way of TRANSPORTING energy, not creating it.  How can solar power be easily and quickly transported? Tres Amigas has the answer.  “The Tres Amigas renewable energy market hub will be a multi-mile, triangular electricity pathway of Superconductor Electricity Pipelines capable of transferring and balancing many gigawatts of renewable power between the three Interconnections.  Similar to highway rotaries used for traffic flow control, multiple power transmission lines from each of the Interconnections will feed power into and out of the Tres Amigas SuperStation through multiple AC/DC converters, each connected by DC superconductor cables.  Tres Amigas, which will be a balancing authority, will help ensure the efficient and reliable flow of power from multiple renewable generation sources in all three power grids to customers across a wide area of the U.S., Canada and Mexico.”
• And: a sixth, still-distant but amazing dream:  Nathan Myrhvold’s Travelling Wave Reactor:  from wiki: “A traveling-wave reactor, or TWR, is a type of conceptual nuclear reactor that can convert fertile material into fissile fuel as it runs using the process of nuclear transmutation.   Once started, TWR’s reach a state after which they can achieve very high fuel utilization while using no enriched uranium and no reprocessing, instead burning fuel made from depleted uranium, natural uranium, thorium, spent fuel removed from light water reactors, or some combination of these materials.   TWRs could theoretically run, self-sustained, for decades without refueling or removing any used fuel from the reactor.” Former Microsoft guru Myrhvold is putting his own fortune into this, and plans to build a TWR in China.

Innovation Blog

Back to the Future:   “Where we’re going, we don’t need roads”

By Shlomo Maital

Doc’s Back to the Future DELOREAN car

              Marty McFly: Doc, we better back up. We don’t have enough road to get up to 88 (mph).

             Dr. Emmett Brown: Roads? Where we’re going, we don’t need roads.

     In the hit movie Back to the Future (1985), Marty McFly (Michael J. Fox) goes back to the future with Doc and sees flying taxis, 3D ads (a shark), and many other inventions. Some have come true. Some have not.  President Ronald Reagan adopted Doc Brown’s statement about roads. 

  At the annual event of the MIT Enterprise Forum of Israel, titled  Back to the Future 2015, held today, May 5, several farsighted experts gave their vision of the near-term future. Here are excerpts of what they said:

   The first speaker was Zeev Efrat, CEO, Frost & Sullivan (Israel branch), a global business  consulting firm.  He identified four key megatrends that experts defined a decade ago, in 2000:  Emerging China; the Internet explosion; Information Revolution; and Outsourcing.  All powerfully affected the decade 2000-2009.   The megatrends that will dominate the near-term future, according to Efrat, are:

* urbanization: A megacity is a city with over 10 m. people; a mega-region has over 15 m. people;  By 2025, half of all megacities will be in developing countries.  Life in cities will be dominated by an integration of smart+energy+plan.  Smart: ICT will be everywhere in cities, making them ‘smart’ (traffic management, power management, etc.).  Energy will be green. And planning will be highly sophisticated. Some 40 global mega-cities will be “smart”, in this sense, by 2020; over half of them will be in Europe and in North America.

* convergence:  In the late 1970’s, MIT Professor Nicholas Negroponte identified three converging industries: entertainment, publishing, computers.  Now Efrat identifies another three converging industries:  Energy, IT and automation.  This convergence will lead to a wave of mergers, as companies seek to build competencies in all three disparate technologies. 

* social trends: Gen Y.   There will be growing personalization of all goods and services.  Generation Y, the dominant generation, will seek goods that cater to values, beliefs, interest and lifestyle.  This generation, aged 15-34, will dominate – there will be 2.56 b. people in this age bracket, out of a total global population of 7.56 b. people by 2020, and 61 per cent, six of every 10, will be from Asia!  The middle class will also dominate.  By 2020  52 percent of the global 7.56 b. population will be defined as ‘middle class’. 

    Some other trends Efrat identified, in only 20 minutes!:

• Technology: some 900 satellites will be launched in 2011-20. 
• World War III will be an information cyberwar; it has already begun.
• 2020 will be a virtual world, where reality and virtual unite; this will feature in shopping, surgery (practice), entertainment, business conferences, and others. The interface between real and virtual will be highly fluid.
•  Innovation to zero: There will be zero waste, with 100% recycling, and no emissions, in cars, factories, homes.
• E-mobility: 40 m. electric vehicles will be sold worldwide in 2020 (in one year), 30 m. cars and 10 m. two-wheelers.  The related industry will have new components: new OEM’s, along with utilities, integrators, charging stations, govt. and battery manufacturers.  Commercial vehicles will also become E-mobile, with 300,000 such vehicles by 2020. 
• From illness to wellness:  Focus shifts from curing illness to preserving wellness. Without this trend, health costs will soar by 2050 to 20-30 per cent of GDP (13 per cent already in the U.S.).  The theme becomes: Live well, stay health.  From fat to fit.

    Innovators, identify the megatrend that excites and energizes you.  Then, identify a micro need (a well-defined group with an unmet need) within this megatrend. Finally, build your innovation around it. 

      In the next blog, I will report on another speaker, Jason Portin (editor and publisher of MIT Technology Review), who reviewed startling futuristic developments in the realm of renewable energy.

Innovation Blog

From “Made in China” to  “Owned by China”: Or What Can You Buy with Two Trillion Dollars?

By Shlomo Maital

 $1 b. in cash: now picture 2,000 piles

You have to hand it to the Chinese.  They have a multi-stage long-run business strategy for China Inc. that is working to perfection.  It is amazing that a group of former Communists have applied ‘modified free market’ strategy far better than the American blueblood capitalists, and have created an economy whose size will overtake America’s far sooner than we believed or expected. 

   Here is the simple version of the two-stage strategy ‘rocket’ China created.

   Stage One.  Attract huge resources from abroad, to create enormous state-of-the-art manufacturing capability, to generate a huge export surplus.  Use the export surplus to accumulate enormous financial assets (mainly US Treasuries).

  Stage Two.  Use the pile of American dollars (growing daily, now equal to $2.5 trillion) to buy equity interests in companies and real productive assets around the world, to acquire control of resources, brands, and competitive advantage.  Note: For only $1.5 b., Lenovo bought IBM’s Think Pad and leveraged it into near-market leadership in laptops.  The transition from Think Pad to Lenovo branding was flawless and powerful. 

   Writing in the Global NYT,  David Barboza says “flush with capital from its trade surpluses, China is spreading its newfound riches to every corner of the world..over the next decade, China could invest as much as $2 trillion to acquire overseas companies, plants or property”.  The shift is amazing, Barboza says; a decade ago, China’s yearly equity investments abroad averaged only $2 b. a year, an inconsequential sum.

    Just as we saw an almost panicky rush by global companies to shift production to China, we will now see a similar stampede by nations to vie for China’s money, by selling off national assets.

   How much of that equity investment abroad will go to America?  Very little, Barboza thinks.  The study he cites suggests that because of political rivalry, America will benefit little from the Chinese direct investment.   I hear a note of regret – alas, America will not ‘benefit’ from selling off its assets to China.   For a nation that chants “USA USA, We’re Number One”, President Obama’s declared passion for welcoming Chinese equity investment, implicitly accepting “We’re #2—and we don’t even try harder” is impossible to understand. 

    As a business, China is exceptionally well run. Can’t say the same for America.

* David Barboza, “China’s cash goes global, but maybe not to US”, Global NYT May 4/011, p. 14.