Tuesday, June 24, 2008

Worldwide Inflation Fears Intensify as China Raises Iron Ore Prices By 96%

Chinese steelmakers agreed to pay Rio Tinto up to 96.5% more for their iron ore supplies this year.  This was on the heels of China's unexpected increase in gasoline and diesel prices by 17% on Friday.  Although these drastic measures will drive up costs for cars and machinery, they should reign in demand for energy use.  Proving once again that our government officials fail to read the paper, Congress believes that speculators are responsible for high energy prices and is contemplating putting strict limits on trading in energy futures by investment banks, pension funds and other financial investors.  How regulating energy speculation is going to curb China's demand for energy as its economy continues to fire on all cylinders mystifies me.  More useful legislation would be to force the Chinese to buy all of GM and Ford's surplus SUV's, Hummers, and F-150's.  After all, GM is so flummoxed by its inability to sell Hummers that it has actually stooped to hiring Citigroup to advise it on what to do with the failing division.  While Citigroup could certainly use the investment banking fees for the simple job of telling GM to shutter or sell the division, perhaps it can also convince GM to buy a leveraged loan or two in the deal.
Forcing the Chinese to buy US cars would help fulfill their insatiable demand while assisting GM and Ford to unload their bloated inventories of gas guzzlers that US consumers no longer desire.  Although my suggestion to Congress may seem absurd, it makes about as much sense as suing OPEC and banning speculation, which were their ideas, not mine.
In domestic inflation news, Dow Chemical is raising prices by 25% to pass through its surging costs for energy and raw materials.  This follows a 20% price hike that began June 1st.  Dow's price increase were caused by "the continuing relentless rise in the cost of energy and hydrocarbon feedstocks."  Now that one of the largest chemical manufacturers in the world is raising prices as if it were a Vietnamese rice importer, can the Fed continue to avoid the "volatile" food and energy component of the CPI report?  Unfortunately, I think they will, but it is a dangerous economic proposition. 

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