Something totally unexpected has happened that can be a major boost to the US economy for at least the rest of the year. The world price of iron ore has doubled, literally overnight. Since the US produces a lot of iron ore this is good news. But wait there’s more; most US steel mills sit idle; the ones still in operation are vertically integrated meaning they mine their own iron ore and the world price of ore doesn‘t matter. The jump in iron means the world price of steel will be at least one third higher and suddenly US steel is competitive again.
The reason for the price jump is the end of a forty year worldwide agreement to set the ore price for the year based on the first supply contract signed each year. This was always a race to the bottom and this was how Japan could buy iron ore and coal, ship them to Japan and ship manufactured goods to the US driving US companies under. Japan is not happy that this system has ended.
The end of this pricing system was caused by another player in the world market that used this same Japanese principle of cut throat economics and did it even better. The Peoples Republic of China who now produces five times the steel that Japan does and is now the big dragon on the block. Why would China change a system that has made them a super power? China can afford to be generous with its trading partners since it has two trillion USD worth of foreign currency reserves. It has also been going around the world and buying up iron mines with surplus USD that it didn’t know what to do with, so the price jump doesn’t cut into them nearly as much as it does Japan.
It also does a favor for China’s new BFF Barrack Obama who will be able to produce the jobs he needs to get Democrats elected in the fall. China is also indicating that they are likely to do away entirely with pegging their currency to the USD. This is not to make you think that all of a sudden The Peoples Republic of China has ceased to be Stalinist regime bent on our destruction, it has not. But the Chinese leadership is pragmatic and thinks in the long term.
China’s senior leaders lived through the Cultural Revolution and understand the inevitable disaster that comes from turning things over to extremist ideology. They doubtless find Obama a breath of fresh air after Bush and don’t want the Neo-cons back in power. China will of course be looking to the long term to take any advantage and their throwing us a bone does not fix any of our real economic problems. This is a tourniquet and not just a band-aid but real surgery will be needed from the next Congress if we are to survive as a democracy. There is now a good chance that we will have “yes we can” instead of “Hell no you can’t”. www.prairie2.com