Russian nickel champion Norilsk Nickel's shares rose nearly 10 percent on rumors of a Norilsk buyout by RUSAL, Russia's reigning aluminum powerhouse. This would fit a pattern of mergers between huge, Kremlin-backed commodities corporations. The rumored RUSAL-Norilsk metals combine would be on a par with Russia's other two political heavy hitters, Gazprom (primarily natural gas, with some oil) and Rosneft (primarily oil, with some natural gas). It is also logical, considering the vagaries of Kremlin politics. According to Stratfor.com, a business risk consulting firm, Gazprom and Rosneft are in the midst of an unpredictable, behind-the-scenes, winner-take-all battle for control over Russia's oil and natural gas sectors. Bringing in a third power behind the Kremlin throne could provide the check and balance necessary for Gazprom and Rosneft to step back from each other's throats.
As Norilsk shareholders are already well aware, a RUSAL buyout is very bullish for Norilsk's price. However, in the longer term, it will be better for shareholders of private commodities firms such as Alcoa, and traders of commodities in general, due to the snowballing phenomenon of "resource nationalism."
With the exceptions of the United States, Canada and Australia, nations which are rich in mineral resources (USSR/Russia, Venezuela, Bolivia, most of Africa and the Middle East) have counterintuitively underperformed resource-poor counterparts (e.g., Japan, Taiwan, Hong Kong, New Zealand, Ireland, Israel). Service-based markets' main 'natural resource' is the individuals who staff said markets. Individuals subject to state looting (nationalizations, expropriation of private property, high and unnecessary taxation) tend to leave for greener pastures; service-based economies tend towards lighter regulation and freer markets out of self-interest, to keep their main natural resources within the country. Expropriation of private property is not a high return proposition for those who govern service-oriented economies.
Commodities markets are different in that the self-interested individual is not the primary driver of the market. State expropriation has the highest return in commodities markets, because the main natural resource, the commodity itself, cannot retaliate against state expropriation. Thus, the more mineral resources a country has, the higher-return of a proposition it is for the government to expropriate the bulk of the economy (commodities companies) for their own purposes.
State-backed and state-owned commodities combines tend to under-produce over time. Instead of investing in new oil fields or mines, their capital is often pillaged by the state for other political purposes, if not stolen outright. Gazprom, for example, faces plummeting future natural gas output, because its decaying pipelines and infrastructure continue to suffer from chronic underinvestment by the Russian government. Foreign investors, for their part, have been burned more than enough times by Gazprom and the Kremlin to throw more money at Russian commodities.
All this provides a boost to private commodities extractors, who have a much longer-term, more profit-oriented outlook. Unsatisfied commodities demand must be met by these private companies and their more limited reserves, resulting in chronic undersupply and high political risk premia for many commodities. (Oil, for instance, can be profitably extracted and shipped for $32.50 a barrel. But the market price is over 100 percent higher.)
The simultaneous expansion and politicization of Russian commodities giants means that more and more commodities markets will be subject to Moscow's expensively unpredictable political winds. The consumer will lose, but private commodities extractors will recapture some of that deadweight loss in the form of artificially high commodities prices. "All other things being equal," then (which, admittedly, they never are), politicization of commodities provides reason for investors to be bullish on non-state commodities corporations and commodities in general.
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