Author: Andrew Pedler

Force Majeure

Force Majeure

  • Force majeure’ has been recently raised as a consequence of disruptions to trade resulting from travel and other restrictions declared, attempting to constrain the spread of Coronavirus, and is likely to be invoked more in coming months: 
    • A number of important contractual issues need to be considered by buyers, suppliers, ship operators, charterers and brokers.
      • For example, how safe is the planned load or discharge port?
      • A second consideration relates to the quarantine and how that will impact on off-hire, laytime and demurrage.
      • A third consideration is what the declaration of force majeure means in practical terms.  Given the recent declaration by the WHO, force majeure provisions are likely to be “increasingly relied upon and invoked by an affected party”.  Indeed, the China Council for the Promotion of International Trade (CCPIT) has announced that it will offer “force majeure certificates” to businesses in China affected by the Coronavirus outbreak. 
        • However, whether a party can successfully invoke force majeure and/or rely on the CCPIT certificates, will depend on the governing law of the contract and the terms of the relevant clause.
          • “As a matter of English law, force majeure is a creature of contract,” it says. “Generally, a party who seeks to rely on a force majeure clause bears the burden of demonstrating the following:
            • It could not perform its obligations due to the relevant event.
            • The inability to perform was beyond its control.
            • There were no reasonable steps the party could have taken to avoid the event or its consequences.” 
          • Examples of circumstances that might require a force majeure are war, strike, riot, piracy and Act of God.  A force majeure clause does not, however, excuse a party from its negligence or failure to perform under conditions that are ordinary or expected. 
          • In the absence of a force majeure clause, parties to a contract are left to the mercy of the narrow common law contract doctrines of “impracticability” and “frustration of purpose,” which rarely result in excuse of performance. 
Force Majeure

Commodity Review 20190816 by Andrew Pedler – Now available

USA – Housing Starts, Industrial Production, Electricity End-Use, Bond Yields

Matau’s Comments:  

  • USA   is slowing!  Data this week reinforces last week’s OECD CLI implications.
  • Base metal inventories continue to remain tight.   Most prices are in the ‘nose of pinch-point graphs.  Pinchpoint positions are mostly less than 1 week’s consumption.   However sentiment (geopolitical) continues to drive prices over fundamentals.  
  • Several metals (Ni & Co this week)  are showing signs that reduced supply is likely to lead to higher prices.
  • Outlook is for ‘not enough’ new mine supply in coming years (the next decade), for several key commodities. 

The theme of the Resources Rising Stars conference at the Gold Coast earlier this year is appropriate:  “Pick the stock, not the market”.



*Copper  Codelco optimistic about long term price for Cu.  Short term prices pressured by growth concerns.

*Cobalt  Co price is up on news that Glencore is shutting its large DRC mine.

*Nickel  Philippines’ largest exporter of ‘high’ grade Ni laterite ore is to shut upon depletion of its Reserves.

*Zinc & Lead  ORN calling for ongoing need for more Zn & Cu production.  Nyrstar Pb smelter stopped again.

*Tin  Trump acknowledges that tariffs increase domestic prices.  Delays new tariffs till after Christmas.

Aluminium  Beijing announced additional import scrap quotas.

*Gold  Gold price gains as faith in Central Banks is about to be tested again.

Platinum & Palladium  Progress … of sorts … being made in wage negotiations with AMCU..

*Oil  .Russia & China have stuck by Venezuela, though that may change.

Coal  A weaker CNY, a safety campaign, shipment restrictions, though premium HCC is preferred.

Iron Ore  Beijing’s stimulus restraint driven by low infrastructure spend, impacting prices.

Shipping  Baltic indices, Cape, Panamax & Handymax up this week.


Port Hedland – Iron Ore shipments:  Shipments down in July after a bumper June effort.

USA – Electricity End-Use:  Total demand slowing, mostly in residential demand.

USA – Bond Yields:  A historical review + Current 10yr-2yr curves ‘almost’ inverted.  10yr-3mo is!

USA – Industrial Production – Capacity Utilisation: Really slow IP growth.  Cap Util is sub optimal.

USA – Housing Starts:  House starts almost stalled.

Force Majeure

Some markets are capitulating … too much uncertainty to make decisions.

Contango is when forward prices (3mo fwd) are higher than cash (spot) prices, i.e. the market is more confident of supply now than into the future.  Backwardation is the reverse, when cash prices > fwd prices, i.e. markets are more worried about (prepared to pay more for) near term supply than future supply.

Last Friday, after Trump’s decision to tax / tariff all imports from China, markets appear to have capitulated in frustration, at trying to determine what direction the market(s) will move next.  We have seen previously that when a base metal (Cu, Zn, Pb, Ni, Sn, Al) market cannot figure out the direction of the market, that the prices (cash & 3mo fwd) move to parity (cash = 3mo fwd).   I cannot recall seeing all six base metals markets heading so close to parity as they have last Friday.  Such convergence is very unusual.

For some further detail see this week’s commodity review Commodity Review – 02 August 2019  .

EV revolution could stall due to mineral shortages

EV revolution could stall due to mineral shortages

An article from Petroleum Economist  (italics are Matau Advisory’s emphasis) is below.


Note that the article’s assumptions are that by 2050, 100% of cars in UK will be electric.  My limited imagination suggests that is a big ask.  Thus the required increase in demand for critical commodities will appear dramatic.

Note also that BHP and BP assume that EVs may achieve 40% of market share by 2040. 

Matau’s thinking is that with the time constraints on discovery, evaluation, permitting, construction and commissioning of new projects being approximately 6-10 years (with the average skewed to the longer term), that supply of the critical commodities, (lithium, cobalt, graphite, nickel, copper, manganese) to battery factories at the very high forecast growth rates (+20% p.a. for ~ 10 years from 2020) will seriously constrain growth rates, to likely less than 10% p.a., based on current new mine production growth rates, and even that supply growth rate will be a challenge.  i.e. that the EV uptake will be limited by supply of critical materials. 

It is not so much the political stability of the jurisdiction, rather the process from discovery to delivery (anywhere in the world).

That commodity supply thematic also applies if enthusiasts want to displace Li-ion batteries with a different battery construction that may include say vanadium, zinc-air, et al. 

There may be scope for new technology to improve recoveries of some of the key elements from existing operations, though these technologies have yet to be identified and or applied. 

This article refers to the logistics for delivery of power supply for EV’s to the UK.  Many other countries have lower population densities, spread over larger areas, which suggests to Matau that the greatest uptakes are likely to be within major cities.  Also many large cities have created their own (polluted / photo-chemical smog) microclimates that a high level of EV uptake could alleviate, including examples such as Los Angeles.

Matau applauds the development and adoption of EV’s though considers that careful thought and management of expectations is required.



EV revolution could stall due to mineral shortages

More planning is required to ensure adequate supply, researchers say

A potential shortage of minerals needed to produce the billions of batteries required to power electric vehicles (EVs) risks slowing down the transition from internal combustion engines (ICEs) to cleaner forms of transport, according to a team of UK-based scientists.

Researchers working on the Security of Supply of Mineral Resources (SOS Minerals) multi-institution research programme, partly funded by the UK government, have crunched the numbers and come up with some daunting-looking headline figures.

They looked at the amount of minerals required to make all cars and vans in the UK electric by 2050—based on the current UK fleet size of some 31.5mn vehicles—and for all new sales to be purely battery electric by 2035.  Both are recommendations contained in a report by the parliamentary Committee on Climate Change (CCC).  In early June, these were being considered for adoption by the UK government, whose current pledge is limited to eliminating ICE sales by 2040.

The team concluded that just to meet these UK targets, assuming the vehicles use next-generation NMC 811 batteries, would require just under two times the world’s total annual cobalt production, nearly all world production of neodymium, three quarters of the world’s lithium production and at least half of the world’s copper production, based on 2018 data.

Just ensuring that EVs meet UK demand for new cars and vans from 2035, would require the UK to import the equivalent of European industry’s entire cobalt consumption, according to a letter sent to the CCC in early June.  It was signed by Richard Herrington, head of the Earth Sciences department at London’s Natural History Museum, and other scientists involved in the SOS Minerals programme.

Scaling that up to a global level would, of course, be an even a greater challenge.  By 2050, some forecasts predict, there will be at least 2bn cars on the world’s roads.  Herrington estimates that if all of those were to be EVs, annual production of neodymium and dysprosium would need to increase by 70% and stay at that level until 2050.  On the same basis, annual copper output would need to more than double and cobalt output would need to increase by at least 3.5 times to meet global demand.

Herrington told Petroleum Economist that increasing minerals production to meet the envisaged increase in the EV fleet—as well as for the additional renewable energy and storage infrastructure required to power the fleet and extract the minerals—would be challenging but not impossible.

“[The ambition] is laudable, and it could be plausible.  but it needs greater thought as to where those materials might come from,” he said.

Many of the rare earths and other minerals used for batteries are mined in politically unstable parts of the world, such as parts of sub-Saharan Africa.  Herrington believes they could be sourced closer to the main EV markets, providing greater security of supply, as well as boosting overall production.  That includes Europe, where, for example, more cobalt could be recovered from copper mines than is currently the case, if new technologies were deployed, he said.

The increase in renewable energy infrastructure needed to provide power for EVs would also consume more metals and minerals.  Wind turbines require a lot of steel, while solar panel installations consume several scarce minerals, such as high purity silicon, indium, tellurium and gallium.  Extracting the minerals themselves is also a power-hungry process, adding to demand.

Then there are the transmission lines needed to connect them to the grid.  Herrington notes that a power station requires fewer copper-based cables than hooking up the hundreds of wind turbines required to produce the same amount of power.

“You could be more aggressive with carbon capture and still continue with hydrocarbons to generate power,” he said.

However, given the faltering progress of efforts to get carbon capture and storage moving in the UK and elsewhere in the world, for now, this technology seems unlikely to be able to play more than a bit part in efforts to allow coal and gas to play a long-term role in the energy sector.

Herrington does not believe the potential minerals supply crunch necessarily means the world will have to use more oil for longer in the transport sector.

“I don’t think we have to.  We just have to make sure that we gear up, so that the alternatives are available in the quantities that we want,” he said.




What Is GDP in China?

Below is a recent article by Michael Pettis (economics professor) of Peking University Beijing.   His articles are usually insightful.

Matau Advisory has recently been asked what GDP is actually made up of.    The article below, by Michael Pettis, succinctly describes the meaning of GDP and the three main ways that it is, in practise, (poorly) defined by its usage today, the third being uniquely Chinese.

Of the observations Pettis makes below, Matau has seen and reported some of the effects, as set out in the Commodity Review 25 January where Matau reported on selected items of China’s Industry and Energy Output data.   Positive growth for industrial and energy output is seen in relatively few segments, including Electricity (all segments), consumer items like Colour TVs, air conditioners, PV Cells, Li-ion batteries, et al and strong growth in Freight data (Commodity Review – 1 February).

Matau’s preference has long been to observe Industrial Production (output of products, not services et al), and production data included in IP, as measures that are directly related to consumption of commodities, in preference to monitoring GDP, as a guide to demand for commodities.    Pettis’ comments reinforces Matau’s view that IP and segments are appropriate data to monitor.

Following Pettis’ analysis, China’s GDP has slowed (over a few years), more than public reports indicate;  and Matau’s observations of China’s ‘Output of Industry and Energy’ shows that China’s industrial output has also slowed during the past 18 months.




What Is GDP in China?

  • Michael Pettis   Peking University in Beijing
        • China Financial Markets
        • Carnegie Endowment for International Peace

Analysts are increasingly skeptical that China’s very high reported GDP growth rate provides a meaningful picture of the economy’s health.   There are, however, at least three very different ways that reported GDP can fail to reflect the underlying economy.

  • January 16, 2019

Comments (39)

The Chinese economy is not growing at 6.5 percent.   It is probably growing by less than half of that.   Not everyone agrees that the rate is that low, of course, but there is nonetheless a running debate about what is really happening in the Chinese economy and whether or not the country’s reported GDP growth is accurate.

The reason for the widespread skepticism is the disconnect between the official data and perceptions on the ground.   According to the National Bureau of Statistics, China’s economic growth in every quarter last year exceeded 6.5 percent.   While that is much lower than the heady growth rates China has experienced for most of the past forty years, it is still, by most measures, a very brisk rate of growth.

And yet, when you speak to Chinese businesses, economists, or analysts, it is hard to find any economic sector enjoying decent growth.   Almost everyone is complaining bitterly about terribly difficult conditions, rising bankruptcies, a collapsing stock market, and dashed expectations.   In my eighteen years in China, I have never seen this level of financial worry and unhappiness.

These concerns have even breached academia.   One of my students told me yesterday that there was a huge increase last semester on the university website in the number of students selling their belongings because they are hard up for cash.   They are selling their phones, computers, clothing, and lots of other possessions.   He said the amount of selling is noticeably higher than last year, enough so that everyone is talking about it.   And he indicated that this is apparently happening at other schools too.   It seems that the poor and middle-class kids are squeezed for cash because they are getting much less money from home than they have in the past.

This isn’t what you’d expect to hear from an economy growing at more than 6.5 percent.   So what does it mean exactly to say that China’s GDP is growing at that pace?

It turns out that there are three completely different sets of problems that affect how China’s GDP growth statistics should be interpreted.   Analysts must keep these three problems straight and make sure that they don’t confuse matters by conflating these separate issues.

What Does GDP Measure?

The first set of problems relates to the meaning of GDP itself.   This challenge affects not just China but the rest of the world as well.   This is especially true for advanced economies with substantial technology and service sectors that employ technology whose value may be substantially understated by an inability to count it accurately.

GDP is typically assumed to measure the creation of real economic value.   If a country’s GDP rises by 5 percent over the course of a year, for example, this is interpreted to mean that the amount of wealth the country produced in the last year is 5 percent greater than in the previous year.   In other words, it would be assumed that the country’s ability to service debt would have increased by 5 percent, which means roughly the same thing.

But there is no way to truly measure a country’s creation of real economic value, as GDP is just a proxy for whatever it is thought to measure.   Economists have agreed which measurements go into calculating GDP, and the resulting sum is referred to as a country’s aggregate GDP, or the value of everything produced locally in that economy.

Of course, not all value-creating activities are counted when GDP is measured.   For instance, if you teach your friend Spanish for free, you add to the wealth of the economy, but you do not add to GDP.   By contrast, if he does pay you, the country’s GDP does increase by the amount of money you are paid, even though you are adding exactly the same value to the economy itself whether he pays you or not.   In addition, not all measured activity actually creates value: building a bridge to nowhere, for example, creates exactly the same increase in GDP as building a much-needed bridge.

No proxy of economic value is perfect, of course, but there are real questions about whether GDP is imperfect to the point of being useless as a proxy.   Does GDP really do a good job of capturing all the value creation in an economy?   While this is a serious problem everywhere, it may be even more of a problem in China because of the huge amount of investment in nonproductive activities that is counted in China’s GDP data even though this investment does not add to the country’s wealth or its debt-servicing capacity.

How Accurate Are China’s GDP Statistics?

The second set of problems has to do with how carefully and faithfully Chinese statisticians at the National Bureau of Statistics are calculating the agreed-upon elements that go into measuring GDP.   Do they tend to collect the data in the way that introduces mistakes that are systematically biased (upward, to show higher than actual GDP, I would assume)?   Or are they actually lying to please their political bosses?

I am pretty sure that China’s economic data collection is distorted in ways that smooth out volatility, but otherwise I assume, at least until very recently, that the National Bureau of Statistics has followed generally accepted rules for calculating GDP more or less correctly.   I don’t have a high level of confidence in my assumption though:  as I pointed out earlier, it is hard to find any sector of the Chinese economy that is behaving the way you’d expect a country growing at more than 6.5 percent to behave.   Furthermore, especially in recent years, it has been hard to reconcile other economic proxies with the GDP numbers.   (See, for example, this article by Johns Hopkins University economists Bob Barbera and Yinghao Hu, which itself refers to a satellite imaging study.)

What is more, people whose work I greatly respect, like Anne Stevenson-Yang of J Capital, seem very much to doubt the data and argue that China’s actual growth rate is much lower than the posted numbers, largely because the data is falsified at some level of the collection process.   But whatever the case may be, if there is indeed a substantial discrepancy between what the statisticians actually measure and what they are claiming to measure, it is very hard to make predictions about how long the overstatement will continue and how much of an adjustment it will eventually undergo.

Is GDP Measured as an Output or an Input?

The third set of problems with GDP occurs in a very limited number of cases globally (today, China is the main example).   But the implications are much greater.   This has to do with whether GDP is even being used as a proxy for economic activity.   In China, reported GDP does not tell observers about the economy’s performance; rather, it tells people how rapidly Beijing thinks it can impose the necessary adjustments on the Chinese economy.   This is because GDP means something different in China than it does in most other major economies.

In any economic system, GDP is supposed to be a measure of output, and in most countries that is exactly what it measures, however messily.   The economy does what it does, in other words, and at the end of a given time period, statisticians measure the things economists agree to include in the relevant calculations, and they express the change over time as the scale of GDP growth for that period.

This is not what happens in China, where GDP is actually an input determined annually as the country’s GDP growth target.   The growth target of a given time period is decided well ahead of time, and to achieve it, various entities, including local governments, engage in the requisite amount of activity, usually funded by debt.   As long as China has debt capacity, and as long as it can postpone the writing down of nonproductive assets, Beijing can achieve any growth target it desires.

But this arrangement changes the meaning of GDP.   Reported GDP in China is no longer a measure of economic growth, but rather a measure of political intention.   As any systems theorist knows, input data reveals nothing about the performance of a system.   So when analysts discuss what reported GDP indicates about the health of the Chinese economy, such thinking involves a very basic mistake in systems theory—a systems input can only offer insights about the goals of the operators, never about the performance of the system itself.

In practical terms, this means that once Beijing sets a GDP growth target, local governments are expected to generate enough economic activity to reach that target, and they are able to borrow as much as they need to do so.   If this activity were productive, there wouldn’t be a problem, although it would be an amazing coincidence (or a truly incredible feat of prognostication) for the amount of productive activity truly to equal the growth target.   What would be more likely in that case is that GDP growth would consistently exceed the target, which is indeed what happened until about a decade or so ago.

But if the economic activity isn’t productive, there are two requirements that allow China to set GDP growth as a systems input in a way other countries are unable to do.   First, there must be no hard budget constraints, so as to allow economic entities to persist in value-destroying behaviour year after year.   Second, the resulting bad debt cannot be written down.   Once these two conditions are met—and they are in China’s case—Beijing can set any growth target it likes and, as long as it has the necessary debt capacity, it can achieve that target.

But notice that achieving the target reveals nothing about the country’s real economic growth, for which GDP is supposed to be (however imperfectly) a proxy.   Once GDP growth becomes a systems input, rather than an output, it does not indicate anything about the economy’s health or performance.


There is likely to be no end this year to the discussions about China’s economic growth rate and its relationship to GDP.   By now, observers widely agree that China’s economy is not as strong as the GDP data suggests.   And I suspect that only a handful of the least imaginative resolutely-mainstream economists (and, weirdly enough, this is more likely to be true of foreign than Chinese ones) still believe that China’s economy is as healthy and brisk as would be expected from a country whose GDP is growing at 6.5 percent and is expected to grow next year by more than 6 percent.

The problems facing the Chinese economy, and the worries expressed by Chinese leaders, are so deep that it no longer requires much imagination to figure out that reported GDP in China simply does not represent what we think it represents elsewhere.   Yet some economists have not always understood the implications, and they often seem to refuse to adjust their methodologies to take into account the aforementioned problems with China’s reported GDP data.   Yesterday, for example, I read a report written by an economist that discussed the implications of China’s PPP-adjusted GDP being the biggest in the world.

But any observers that are at all skeptical about the relationship between the Chinese economy and its reported GDP must dismiss the PPP-adjustment as almost complete nonsense.   (I don’t mean that the PPP-adjusted data is less accurate for China than it is for other countries: I mean, quite literally, that it is almost complete nonsense).   Any ratio based on reported GDP figures can only be comparably meaningful for China to the extent that China’s reported GDP numbers have the same relationship to the underlying economy—or to whatever GDP is thought to mean—as corresponding numbers in other countries do.   But surely few observers still believe that.

The point is that if there has been a divergence between China’s reported GDP figures and the country’s underlying economy, there are at least three completely different ways that this discrepancy can manifest itself.   Observers too often confuse the three, however.   For example, I have said many times that I believe that if China’s GDP were to be expressed in a way that is comparable with that of other countries, it would be growing at less than half the current reported growth rate.

A lot of people interpret this to mean that I think Beijing is falsifying the data, but I don’t mean that at all.   In my mind, the biggest problem is that China’s reported GDP is an input into the economic system, not a measured output.   To make China’s GDP figures comparable to those of other countries, the input numbers would have to be adjusted with some relevant output, such as the amount of bad debt that should be (but isn’t) written down in a given time period.   If this amount were subtracted from China’s nominal GDP growth rate, the resulting adjusted growth rate probably would be a lot closer to what economists think of as GDP than the country’s actual reported GDP data is.


Aside from this blog I [Michael Pettis] write a monthly newsletter that covers some of the same topics covered on this blog.   Those who are interested in receiving the newsletter should write to me at, stating affiliation.

Correction: The original version of this article included the sentence “In addition, not all measured activity actually creates value: building , for example, would create exactly the same increase in GDP as building a much-needed bridge.” The phrase “building a bridge to nowhere” was accidentally lost during the process of posting the piece to the website and has been put back in.