Editor's Letter - Speculating on Speculation

Scrap recyclers are among those in the global business community trying to determine the size of the role that speculation has played in the high commodity prices of this decade.

At the Bureau of International Recycling World Recycling Convention earlier this year in Monte Carlo, London Metal Exchange Chief Executive Martin Abbott said that while funds managers and other investors who don’t physically handle metals may have put a great deal of money into commodities, their affect on pricing has only been to increase it by perhaps 10 percent.

Another speaker at that convention, University of Paris Dauphine economics professor Philippe Chalmin, leads a team of researchers who analyze the broad spectrum of commodities each year for an annual yearbook.

By his team’s measure, 2007 was an extraordinary year, "We haven’t seen an economic climate like this since the 1970s," Chalmin says in the forward to his team’s 650-page World Commodities Yearbook (available in the original French and in English on the Web at www.cercle-cyclope.com). "Practically every market we’ve looked at posted record [price] levels at one time or another in 2007 or 2008."

If there is more volatility, will it be because of genuine supply-and-demand reasons, or because of investment fund activity?

In addition to China’s economic boom, "The increasing power of speculation in the broad sense was another notable feature of 2007," write Chalmin and his co-authors.

They identify some $145 billion in institutional investing in commodities made in 2007, noting that hedge funds and other less traceable methods may bring the total to $200 billion.

Chalmin then asks and answers his own question, "But can speculation be held responsible for the state of the markets in 2007? Absolutely not. These are markets that in truth are ruled by material realities. Speculation is really only the foam at the crest of the wave."

Ferrous scrap recyclers have been experiencing the power of this wave in the summer of 2008. After scrap prices soared in June and July, a sharp drop in demand gave recyclers reasons to adjust that were very much caused by on-the-ground circumstances, not by funds managers.

History has shown that speculation can be a powerful force in the economy, and particularly in the commodities market, so the role of institutions with deep pockets should not be minimized.

The drama in the commodities market perhaps centers on whether investment fund managers will be able to pull some strings in their favor or whether they become actors in a play that is beyond their control.