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Daily Telegraph: Flamebait: I’m afraid Chavez has struck a nerve

By Keith Woolcock (Filed: 01/06/2006)

The truth, poet Wallace Stevens wrote, depends upon a walk around the lake. Lakes are thin on the ground in London but, over the past few weeks, as markets pitch and slide, I have, on several occasions, taken the Northern Line to Hampstead. Once there, I head to my favourite duck pond in the hope that truth might find me.

One thought keeps nagging me as I pick my way around the discarded beer cans and the odd syringe, which have a habit of intruding into paradise these days. It is an observation once made by the historian Niall Ferguson. He pointed out that markets are not that good at taking account of the really big shifts in world affairs. I think he might be on to something. If you did a straw poll among investors today I would guess that you’d find them pretty evenly split into two camps. There are those who think the market is sliding because global growth is poised to slow and, as a result, corporate profits will shrink. Then there are those who are scared witless by the prospect of inflation, or even stagflation.

As I pace around my apology for a lake, these worries pale into insignificance compared with some of the other issues I see out there. I can’t help feeling that we are at, or close to a turning point, which goes beyond the normal concerns of a stock market watcher. Over the past 20 or so years, the West has surfed the wave of globalisation with great success. As a result, corporate profits in America and Europe are at, or close to, all time highs as a proportion of gross national product. But now geopolitics is shuffling centre stage again. Geopolitics and globalisation are not happy bedfellows.

If you sit atop a global corporate, the villain of the hour is Hugo Chavez, Venezuela’s populist president. He is determined that his government will take a much larger cut of the profits generated from his country’s oil reserves. And his message has begun to spread. The new Bolivian government wasted no time in whistling a similar tune. While in Peru, presidential candidate Ollanta Humala has called for the nationalisation of the country’s mining and natural gas industries.

Chavez might be a villain in the West, but he has touched a nerve. One of the darker aspects of globalisation is that many of the world’s weaker countries are having their physical assets plundered for a song by Western corporates. The worm, it seems is turning. Each week comes fresh news that a growing number of the world’s politically weak but resource rich countries are prepared to play their joker card – a windfall tax, or even nationalisation, in order to exploit their natural resources.

Let me give you a few recent examples that were not widely reported in the press. On May 12 Mongolian lawmakers approved a windfall tax on minerals mined in the country. The tax, starting at 68pc, will be triggered when copper reaches a price of $2,600 a metric ton, or when gold reaches $500 an ounce. There was next to no warning that this tax was coming and some Western miners have complained that it was passed with “inexplicable haste”.

Tanzania is considering changing its mining laws because it is thought that the government is getting too little revenue from the mining of the gemstone Tanzanite.

I have deliberately chosen two exotic examples of Chavez’s influence because you are probably already familiar with the antics of Vladimir Putin in Russia. Over the past year he has shown himself increasingly capable of using his country’s oil and gas reserves as counters in a political game.

There will be more of this kind of thing. One particular hotspot I will be watching carefully is Nigeria. Today, Nigeria is the fifth largest exporter of oil to the US. Within 10 years, US energy officials predict Nigeria, together with the Gulf of Guinea, will provide 25pc of the country’s crude.

During the past 25 years Nigeria has earned $300bn (£160bn) in oil revenues, but per capita income has dropped from $1,000 to $390 and more than two thirds of the population live below the poverty line. As a result, some have described Nigeria as the largest failed state on Earth and the reports of kidnappings and terrorism often aimed at global oil companies, such as Shell, is a clear warning that Nigeria could soon become front page news for all the wrong reasons.

Another problem, which is threatening the apparently inevitable progress towards globalisation is an old Flamebait favourite – food. Recently, Stewart Wells, president of Canada’s National Farmers Union, wrote an open letter to Kofi Annan, the UN secretary-general, detailing his worries about global food supply. He points out that in 1999-2000 the world had 116 days’ worth of food in storage. This has fallen to 69 days but he quotes an estimate made by the US Department of Agriculture that it will fall to 57 days this year.

Mr Wells said that the last time we saw numbers this low was in the 1970s. The problem this time is that there is less land to farm and crop yields are considerably higher due to the more intensive use of fertilisers combined with the improvements that have been made with the breeding of crops. He shares the worry I expressed here on April 20 that the world might be heading towards a food crisis.

Mr Wells makes the point that we probably need to get back to more localised production of food. In other words, he feels that globalisation and the impact it is having on the climate have added significant risk to the food chain.

I fear that, when we look back on 2006, we will see that it marked a watershed at which the world was revealed to be a riskier and dangerous place than most hedge fund managers realised. While stockbrokers and fund managers worry about corporate profits and inflation the very fabric of modern life is being unpicked.

• Keith Woolcock is a director of WestHall Capital, an independent research stockbroker

This is Keith Woolcock’s last Flamebait. Read Edmond Warner’s new column starting next Thursday

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