By Yi Wen, Assistant Vice President and Economist, and Maria A. Arias, Research Associate
Inflation is typically described as a persistent increase in the general price level, such as in the consumer price index. One of the most important theories to explain inflation is the monetarist view that, according to Milton Friedman, “Inflation is always and everywhere a monetary phenomenon.”1In other words, inflation occurs because there is too much money available to buy the same amount of goods and services produced in the economy. This view can also be represented by the so-called “quantity theory of money,” which relates the general price level, the total goods and services produced in a given period, the total money supply and the speed (velocity) at which money circulates in the economy in facilitating transactions in the following equation:
MV = PQ
In this equation:
Based on this equation, holding the money velocity constant, if the money supply (M) increases at a faster rate than real economic output (Q), the price level (P) must increase to make up the difference. According to this view, inflation in the U.S. should have been about 31 percent per year between 2008 and 2013, when the money supply grew at an average pace of 33 percent per year and output grew at an average pace just below 2 percent. Why, then, has inflation remained persistently low (below 2 percent) during this period?
The issue has to do with the velocity of money, which has never been constant, as can be seen in the figure below . If for some reason the money velocity declines rapidly during an expansionary monetary policy period, it can offset the increase in money supply and even lead to deflation instead of inflation.
Saudi Aramco, the state-owned oil producer, kept prices for Asian refiners steady for its benchmark Arab Light crude for June-loading cargoes, while raising them for European buyers.
This was seen as a sign that Saudi Aramco wants to keep its oil competitive in Asia, while the increase for Europe reflected rising prices for rival grades in recent weeks.
It's also important to note that the official selling price (OSP) for Arab Light is still at a discount to the regional benchmark Oman/Dubai crude.
The discount for June cargoes was set at 60 cents a barrel, the same as for May.
While the discount has narrowed from $2.30 a barrel for March cargoes, it has been in negative territory for nine straight months.
OSP discounts to the benchmark are still fairly rare, with the last occurrence more than four years ago, so an extended run of discounts show that Saudi Aramco is serious about maintaining its competitive edge, especially in Asia, which accounts for roughly two-thirds of its exports.
DIVERGENCE FROM BRENT-DUBAI SPREAD
Normally the OSP tracks movements in the Brent-Dubai exchange for swaps, which measures the price differential between the main European crude benchmark and its Middle East counterpart.
The one-month exchange for swaps <DUB-EFS-1M> has been holding in a fairly narrow range anchored around $1.60 a barrel since September last year, when I first said that Saudi Arabia was more interested in protecting market share than cutting output to hold up prices.
But while the Brent-Dubai spread has been largely steady, the Saudi OSP has been lowered, breaking the usual correlation between the two, a further sign of Saudi determination to keep their prices competitive.
So, has the tactic worked, and if so, how well?
China is the main buyer of Saudi crude and here the picture is mixed.
In the first three months of the year China imported 12.75 million tonnes of crude from Saudi Arabia, or about 16 percent of its total, according to customs data.
Saudi Arabia increased its volumes by 0.5 percent in the first quarter to about 1.034 million barrels per day (bpd), but this meant it was still surrendering market share as China's overall imports grew by 7.5 percent.
Big gainers in the first quarter were number three supplier Oman, with a 30.8 percent rise in its shipments to China over the same period in 2014, Russia with a 14.3 percent increase and Kuwait with a 47 percent jump.
Iran, China's fifth-biggest supplier in the first quarter, saw its volumes drop 1.9 percent, while second-ranked Angola experienced a 7.5 percent decline.
But Saudi Arabia's modest gain in China imports in the first quarter should be seen against the light of a 7.9 percent decline in 2014 from the previous year.
It could be viewed as a positive that Saudi Arabia has managed to increase volumes to China in the first quarter, thus reversing partially last year's drop.
Investors keeping an eye on companies in the platinum space will no doubt have noticed that Eastern Platinum’s (TSX:ELR) share price is on the rise.
Shares of the company were up 12 percent to $1.96 on Tuesday, and have risen nearly 40 percent so far this year. Since it was announced last November that Eastern Platinum would sell substantially all of its South African assets to China’s Hebei Zhongbo Platinum, the Eastern’s share price has gone up by about 130 percent.
At the time of the announcement, Eastern Platinum CEO Ian Rozier stated that the company would be “extremely well capitalized” following the transaction, while market commentators such as James Fraser of CEO.ca pointed out that the deal could mean as much as $3.25 cash per share for shareholders.
Since then, the company has reached an agreement to buy out its minority interest partners in light of the deal and has seen approval from shareholders and from the Chinese government for the transaction. On April 9th, break fees of US$11.25 million were placed into escrow by each party, as per the terms of the agreement.
On rising prices and insider buying
According to Rozier, it’s that progress towards closing the transaction that’s stoking interest in Eastern Platinum stock.
“Over the last 3 months investors have continually been quantifying the risk of the deal possibly not completing,” he said via email. “However, with shareholder approval, Chinese government approval to do the transaction, and the recently reported payment of the ‘break-fee’ by Hebei Zongbo, I think investors are feeling more confident that the transaction will complete. On the basis that upon completion the stock would have a cash value of over $3.00 per share, the stock is becoming more attractive with time as the risks are reduced.”