Economic Research Forum (ERF)

Shifting commodity markets in a globalised world

817
Commodity markets have been on a rollercoaster ride in the first two decades of the twenty-first century. A new book, summarised in this column, examines the long-term forces of technology, geography, demography and policy that influence these markets, and how their interplay sends price signals to producers and consumers.

In a nutshell

The ‘super cycle’ in commodities began in the early 2000s with a decade-long increase in prices, as rapid urbanisation and a strong surge in infra¬structure spending, especially in China, boosted demand for nearly all commodities.

Prices then began to decline, in part due to short-term factors such as the global financial crisis.

But longer-term issues – including technology, geography, demography and policy – were important to both the rise and fall in prices.

We have tracked developments in energy, metals and food markets since the early 2000s, which saw the beginning of a ‘super cycle’ in commodities. The super cycle was first marked by a decade-long increase in commodity prices, as rapid urbanisation and a strong surge in infra¬structure spending, especially in China, boosted demand for nearly all commodities. Then prices began to decline, in part due to short-term factors such as the global financial crisis.

But longer-term issues were important to both the rise and fall in prices. In a new book (Arezki and Matsumoto, 2018), we focus on those long-term issues, examining the relative importance of technology, geography, demography and policy in each commodity mar¬ket, and discussing how their interplay sends price signals to producers and consumers, who in turn adjust their behaviour.

Technology

Macroeconomists often assume that technological innovations are largely driven by outside forces unrelated to markets. But we document how energy innovations are not exogenous and are directly affected by prices and vice versa.

When oil, natural gas or fossil fuels become scarce, prices increase. The increase stimulates innovation and the adoption of new technologies and techniques for the recovery and use of these resources. Conversely, when commodities are abundant, prices fall, and the pace of innovation and adoption of new technologies slows.

Deepwater extraction of oil and high-efficiency vehicles were innovations that emerged during periods of high oil prices. The development of hydraulic fracturing (fracking) to recover natural gas from shale rock formations was triggered by high prices during the 2000s, but led in turn to significant price declines that fostered an increase in the use of natural gas in manufacturing and power generation.

A more general decline in fossil fuel prices led to an increase in European power plants fuelled by cheap coal from the United States. The collapse in oil prices that started in 2014 also resulted in higher sales of gas-guzzling vehicles in the United States.

Geography

At the heart of international trade in commodities are differences in resource endowments among countries. Natural resources are materials or substances that occur in nature and can be used for economic gain, and include reserves of fossil fuels, minerals, fisheries and forests. Temperate weather, fertile land and access to water – which are important to agriculture – may also be considered natural resources.

A country’s geology and natural resources are largely predetermined, but its ability to explore and exploit its endowments depends on institutional factors such as its business environment. Recent discoveries of major mineral deposits in Latin America and sub-Saharan Africa occurred following a lessening of the state’s role in the economy and the growth of the private sector.

Moreover, the geography of trade in commodities changed supply and demand. For example, in recent years, the supply of metals moved from the northern hemisphere (primarily advanced economies) to the southern hemi¬sphere (largely emerging markets), as reserves in the north were depleted and new exploration opportunities appeared in the south.

At the same time, the growth of large emerging markets, such as India and China, contributed to a rapid increase in global con¬sumption that helped set off the recent commodities super cycle and shifted demand for commodities from the western hemisphere and Europe to Asia.

Demography

The size and age distribution of a country’s population are closely linked to its rate of economic development, which in turn, affects the size and structure of the population. In general, economic development reduces family size and increases the share of older people in the total population.

This demo¬graphic transition also causes changes in where people live because of migration from rural to urban areas. These demographic and economic transitions have important implications for agriculture and the demand for food products, but they also influence metals and energy markets because demand for housing and transport services grows.

Policy

Government policies and regulations may counter or enhance market forces. For example, the sharp rise in shale oil production in the United States was triggered by a 2005 law (the Energy Policy Act) exempting the hydraulic fracturing industry, which makes heavy use of chemicals, from safe drinking water standards. The exemption – combined with a period of high oil prices driven by a rapid increase in demand from large emerging market econ¬omies – helped spur innovation in hydraulic fracturing techniques.

Export and import tariffs, subsidies, quotas and other trade policy instruments have significant effects on global food markets and serious distributional consequences by making food too expensive for some people.

Food has been a longstanding sticking point in trade negotiations, even though it represents a relatively small share of global trade. Tariff and non-tariff barriers to trade in agricultural commodities are often motivated by concerns for preserving domestic production capabilities for key foodstuffs and protecting domestic farmers. All countries continue to have a strong anti-trade bias in agricultural policies, which seriously complicates multilateral trade negotiations.

The bottom line

The long-term factors described here have driven the rollercoaster of commodity markets in the first two decades of the twenty-first century. But it is unclear whether as some of these powerful factors ‘normalise’, price volatility will continue.

Further reading

Arezki, Rabah, and Akito Matsumoto (2017) Shifting Commodity Markets in a Globalized World, International Monetary Fund.

 

Most read

EU climate policy: potential effects on the exports of Arab countries

The carbon border adjustment mechanism aims to ensure that Europe’s green objectives are not undermined by the relocation of production to parts of the world with less ambitious climate policies – but it could impose substantial costs on developing countries that export to the European Union. This column examines the potential impact on exporters in the Arab world – and outlines possible policy responses that could mitigate the economic damage.

Financial development, corruption and informality in MENA

Reducing the extent of informality in the Middle East and North Africa would help to promote economic growth. This column reports evidence on how corruption and financial development influence the size of the informal economy in countries across the region. The efficiency of the financial sector in MENA economies reduces the corruption incentive for firms to seek to join and stay in the formal sector.

Green hydrogen production and exports: could MENA countries lead the way?

The Arab region stands at the threshold of a transformative opportunity to become a global leader in green hydrogen production and exports. But as this column explains, achieving this potential will require substantial investments, robust policy frameworks and a commitment to technological innovation.

Climate change threats and how the Arab countries should respond

The Arab region is highly vulnerable to extreme events caused by climate change. This column outlines the threats and explores what can be done to ward off disaster, not least moving away from the extraction of fossil fuels and taking advantage of the opportunities in renewable energy generation. This would both mitigate the potential for further environmental damage and act as a catalyst for more and better jobs, higher incomes and improved social outcomes.

Freedom: the missing piece in analysis of multidimensional wellbeing

Political philosophy has long emphasised the importance of freedom in shaping a meaningful life, yet it is consistently overlooked in assessments of human wellbeing across multiple dimensions. This column focuses on the freedom to express opinions, noting that it is shaped by both formal laws and informal social dynamics, fluctuating with the changing cultural context, particularly in the age of social media. Data on public opinion in Arab countries over the past decade are revealing about how this key freedom is perceived.

Child stunting in Tunisia: an alarming rise

Child stunting in Tunisia seemed to have fallen significantly over the past two decades. But as this column reports, new analysis indicates that the positive trend has now gone dramatically into reverse. Indeed, the evidence is unequivocal: the nutritional health of the country’s youngest citizens is rapidly deteriorating and requires immediate and decisive action.

Exchange rate undervaluation: the impact on participation in world trade

Can currency undervaluation influence participation in world trade through global value chains (GVC)? This column reports new evidence on the positive impact of an undervalued real exchange rate on the involvement of a country’s firms in GVCs. Undervaluation acts as an economy-wide industrial policy, supporting the competitiveness of national exports in foreign markets vis-à-vis those of other countries.

New horizons for economic transformation in the GCC countries

The countries of the Gulf Cooperation Council (GCC) have historically relied on hydrocarbons for economic growth. As this column explains ahead of a high-level ERF policy seminar in Dubai, emerging technologies like artificial intelligence, blockchain and robotics – what some call the fourth industrial revolution – present a unique opportunity for the region to reduce its dependence on oil and make the transition to a knowledge-based economy.

Shifting public trust in governments across the Arab world

The Arab Spring, which began over a decade ago, was driven by popular distrust in governments of the region. The column reports on how public trust has shifted since then, drawing on survey data collected soon after the uprising and ten years later. The findings reveal a dynamic and often fragile landscape of trust in Arab governments from the early 2010s to the early 2020s. Growing distrust across many countries should raise concerns about future political and social instability.

Corruption in Iran: the role of oil rents

How do fluctuations in oil rents influence levels of corruption in Iran? This column reports the findings of new research, which examines the impact of increases in the country’s oil revenues on corruption, including the mechanisms through which the effects occur – higher inflation, greater public spending on the military and the weakness of democratic institutions.




LinkedIn