Commodity chaos deepens as China LNG buyer invokes force majeure
SINGAPORE: The turmoil engulfing global commodity markets deepened as China’s biggest buyer of liquefied natural gas (LNG) told suppliers it won’t honour some contracts because of the coronavirus.
In a dramatic and rare step, China National Offshore Oil Corp (CNOOC) declared what’s known as force majeure, meaning it won’t take delivery of some LNG cargoes, because the virus is constraining its ability to import the fuel. It’s among the first known cases of the legal clause being invoked in commodity contracts as a result of the epidemic.
While global markets bounce back from initial fears over the impact of the virus, CNOOC’s move shows the fallout is only deepening in the world of raw materials, which is dominated by China’s enormous appetite. Beijing’s efforts to contain the disease by shutting down swathes of the country and restricting travel are disrupting supply chains and hammering demand in the world’s biggest consumer.
The impact is reverberating around the world. Copper buyers are requesting Chilean miners postpone shipments because of port shutdowns while China’s biggest oil refiner, Sinopec Group, is likely to ask Saudi Arabia to reduce supplies of crude oil next month. Soybeans from Brazil and the United States are being held up on arrival in eastern China and Indonesian palm oil shipments are also being delayed.
For LNG, CNOOC’s force majeure hurts a market already buffeted by rising US supplies and weak demand after a mild winter in Europe and Asia. Even before Chinese buyers walked away from supply contracts, spot prices have fallen to a record low, crippling the profitability of energy giants like Royal Dutch Shell Plc and Exxon Mobil Corp.
CNOOC sent the force majeure notice to suppliers including Shell and Total SA, according to people familiar with the matter, who asked not to be identified because the matter is confidential. Shell declined to comment while Total’s press office didn’t respond to a request for comment. The French company’s chief executive said he hadn’t received the force majeure notice.
China said last week that it would offer support to companies seeking to declare force majeure on international contracts. The clause allows a company to opt out of obligations without legal recourse because of reasons beyond its control.
CNOOC isn’t the only Chinese LNG buyer affected. The country’s largest oil and gas firm, PetroChina Co, was forced to delay discharge timings for multiple cargoes because it can’t get enough workers to its Rudong, Dalian and Caofeidian LNG terminals to run them at full capacity. The company hasn’t invoked force majeure because of the delays. — Bloomberg
This is hardly the only reason why GDP is an inadequate measure of human wellbeing. It also ignores people’s need for respect, dignity, liberty, health, rule of law, community, and a clean environment. But even if all of these other democratic “goods” were satisfied, GDP still would fail as a metric of progress, purely in terms of income alone.
Building on work by the economists Thomas Piketty, Emmanuel Saez, and Gabriel Zucman, the Center for Equitable Growth has proposed “GDP 2.0,” a metric that would complement existing aggregate GDP reports by disaggregating the income growth of different cross sections of the population (such as income quintiles). Providing this kind of distributional picture regularly would require increased coordination among government departments, as well as some conventions on, for example, how to use tax data to complement the usual national accounts. But conventions are also needed for existing national income accounting.
Provided that distributional data are routinely available, one could compute a growth rate based on the weighted average across each decile of the income distribution, with equal weighting for population, as in the example above. Individuals would still be weighed by their incomes within each group (which is why it would be preferable to use deciles rather than quintiles), but the final product would be much closer than current methods to the “democratic” ideal.
One of the main advantages of GDP growth is that it is expressed with a single number, whereas other performance indicators either are presented within dashboards comprising multiple metrics or aggregated in essentially arbitrary ways. The implicit use of income shares as aggregation weights is perfectly appropriate for macroeconomic analysis and is not arbitrary. The problem arises when GDP becomes a proxy for progress. What we can measure easily and communicate elegantly inevitably determines what we will focus on as a matter of policy. As the Stiglitz-Sen-Fitoussi report put it, “What we measure affects what we do.”
Publishing a democratic metric like the growth rate of GDP 2.0 is no pipedream. A GDP growth rate using equal weights for each decile of the population would also produce a single number to complement the usual growth rate. True, it still would not capture the substantial differences within the top decile in many countries where the top 1% have been gaining disproportionately compared to everyone else. And we still would need other metrics to measure performance in dimensions other than income. But as a single figure published alongside GDP growth, it could go a long way toward changing the dominant conversation about economic performance.