TWN Info Service on WTO and Trade Issues (Apr18/20)
30 April 2018
Third World Network

United Nations:  Challenges and opportunities in commodity markets
Published in SUNS #8671 dated 27 April 2018

Geneva, 26 Apr (Kanaga Raja) -  The volatility on international commodity markets over the past decade highlights the importance of diversification and strengthening domestic value addition through structural transformation for commodity-dependent developing countries, the UN Conference on Trade and Development (UNCTAD) has said.

This is one of the main conclusions in an UNCTAD Secretariat Note prepared for the tenth session of the multi- year expert meeting on commodities and development, taking place here from 25 to 26 April.

Among its other findings, UNCTAD said that commodity markets displayed diverse patterns in 2017. While prices of minerals, ores and metals increased, in particular during the second half of the year, prices of food commodities and agricultural raw materials decreased significantly.

Overall, commodity prices remained significantly below their peak values of 2011, said UNCTAD.

In opening remarks at the expert meeting on 25 April, Ms Isabelle Durant, the Deputy Secretary-General of UNCTAD, pointed out that 67% of developing countries depend on commodities or on a handful of raw materials. This means 91 out of 135 countries.

That is a very significant percentage and unfortunately it has not changed much for the better over the last two decades, she said, adding that if you look at the Least Developed Countries (LDCs), this percentage is even higher - 80% of LDCs are (commodity) dependent.

"I therefore think that this meeting ... is very important and is something that should be the object of our close focus and I hope that it will lead to something of a turning point in how we deal with this question of dependency on commodities," she told the participants.

Ms Durant noted that this (commodity dependency) makes countries very vulnerable to price fluctuations and price collapses.

"How can we deal with the challenge of the Sustainable Development Goals (SDGs) when the fluctuation in the prices of raw materials have an impact on food security and on poverty indicators in developing countries," she asked.

Highlighting the importance of policies to deal with the negative effects of commodity dependency, the deputy head of UNCTAD said that otherwise these countries are simply not going to be able to enjoy their potential for development.

She underlined that diversification is crucial when it comes to countries that are dependent on commodities.

In this regard, she highlighted the need for investment in education, and the need to bolster institutions and infrastructure.

You also need an appropriate fiscal policy that needs to be sustainable and soundly managed and assessed. You also need to make sure that you have monetary policy which is also stable and which promotes growth, said Ms Durant.

DEVELOPMENTS IN KEY COMMODITY MARKETS

According to the UNCTAD Secretariat Note, "Recent developments, challenges and opportunities in commodity markets," overall, commodity prices remained significantly lower than at the peak of the last commodity boom in the 2000 s.

While commodity prices increased across the board in 2016, the picture in 2017 was much more complex, it said.

On the one hand, the prices of minerals, ores and metals significantly increased in 2017, driven by strong demand and concerns over supply for some base metals . On the other, the upward trend in prices of food and agricultural raw materials that began in 2016 reversed in 2017.

On energy markets, the most notable development in 2017 was the rise of the price of oil to a two-year high, triggered by supply cuts agreed to by major Organization of the Petroleum Exporting Countries and non-member producers, first in December 2016 and extended subsequently in May 2017 and again in November 2017.

UNCTAD noted that commodity price fluctuations have been moderate in the past five years. The last time the UNCTAD non-oil nominal commodity price index recorded a monthly swing of more than 5 per cent was in October 2011. However, individual commodities have experienced substantial price fluctuations.

The UNCTAD food price index reached its lowest value in seven years, at 191.1 points, in January 2016. Over the following six months, the index trended upward mainly due to El Nino-related adverse weather conditions that caused output shortfalls and uncertainties.

Since mid-2016, food prices have been fluctuating around a downward trend. All sub-indices of the UNCTAD food price index saw marked losses between January and November 2017, with tropical beverages experiencing the sharpest drop, at -8.8 per cent.

Grain prices have been generally trending downward since 2012, mainly due t o strong production and increasing stocks.

The 2016/17 season marked a record production of wheat and maize, leading to the largest-ever recorded global supply of grains. As a consequence, the price of maize (yellow No. 3) reached its lowest level in more than a decade, at $15 6 per ton in November 2017.

The price of wheat (hard red winter No. 2) stood at $191 per ton in April 2 017, down 4.5 per cent year-on-year, but thereafter climbed to $233 per ton in July 2017 due to concerns over drought affecting yields in Canada and the United States of America.

In November 2017, the price of wheat stood at $221 per ton, 8.9 per cent higher than in January 2017.

Going forward, grain markets are expected to remain fairly stable, subject to favourable weather conditions. The International Grains Council projects wheat and maize production for the 2017/18 season at 749 million tons and 1,040 million tons, respectively, slightly below the levels in the 2016/17 season.

"Strong demand forecast is projected to lead to a moderate reduction of maize stocks, which could generate a mild price increase, while wheat stocks are expected to increase slightly, despite growing consumption."

Rice markets saw a brief price rally in the second quarter of 2017, when the price of Thai rice increased by 18.7 per cent, from $375 per ton in April to $445 in June, fuelled by heightened import demand and the finalization of the Government's programme to liquidate rice stocks.

Thereafter, the price of Thai rice receded and stood at $390 per ton in Nov ember 2017, 4.8 per cent higher than in January 2017. The market outlook for rice remains calm, with production forecasts only slightly below the record crop of the 2016/17 season.

Sugar markets are forecast to feature a global supply surplus in the 2017/18 season, following two seasons of deficit. Going forward, forecasts of a record global supply suggest that price increases are not to be expected for the upcoming season despite growing demand.

The UNCTAD vegetable oilseeds and oils price index showed a downward trend between August 2011 and September 2015, losing 42.7 per cent of its value during the period. In 2016, this trend somewhat reversed, owing to shortfalls in production of oilseeds such as soybeans in South America and palm oil in South-East Asia, due to adverse weather conditions caused by El Nino.

Forecasts for 2017/18 show increasing demand but also rising total oilseed production, and prices are thus expected to remain fairly stable.

According to UNCTAD, the price of cocoa beans started to trend downward in July 2016 amid predictions of increasing production in West Africa and a forecast supply surplus for the 2016/17 season.

Fuelled by expectations of significant production increases in Cote d'Ivoire and Ghana, and a record supply surplus, the price of cocoa beans averaged 89 cents per pound, its lowest level in almost a decade. The price of cocoa beans remained subdued throughout the second and third quarters of 2017, and thereafter moderately increased to 96 cents per pound in November 2017, based on concerns over excess rain in Cote d'Ivoire that had spread crop diseases.

Overall, the cocoa market is expected to remain in surplus, and cocoa bean prices are therefore unlikely to increase significantly in the near future.

UNCTAD also said that the price of tea is expected to remain volatile in 20 18, as weather-related risks in the main growing regions make supply forecasts difficult.

Prices of agricultural raw materials followed a steep downward trend between the peak of the commodity boom period in 2011 and 2015. For instance, the price of rubber (ribbed smoked sheet No. 3) plummeted from 626 cents per kilogram in February 2011 to 165 cents per kilogram in January 2015, a decrease of 73.6 per cent.

In March 2016, major producers, including Indonesia, Malaysia and Thailand, set in force an export quota scheme, which induced a trend reversal and brought the rubber price up to 223 cents per kilogram in April 2017.

However, rubber prices dropped again thereafter and stood at 160 cents per kilogram in November 2017. In December 2017, the Governments of Indonesia, Malaysia and Thailand decided to withhold exports of 350,000 tons of rubber through 31 March 2018, which can be expected to stabilize prices in the near term.

The price of cotton (cotton outlook index A) declined by 70.7 per cent, from 230 cents per pound at the peak of the last commodity price boom in March 2011 to 67 cents per pound in January 2015. Thereafter, prices remained essentially flat through March 2016 when an upward trend set in.

The cotton outlook index A reached 89 cents per pound in May 2017, which constituted a 26.1 per cent increase on a year-on-year basis, before receding to 80 cents per pound in November 2017.

The International Cotton Advisory Committee predicts global production to increase by 11 per cent to 25.4 million tons in 2017/18, slightly higher than the projected global demand of 25.2 million tons; hence, also taking significant global stocks into consideration, a decrease in the cotton price in 2018 seems likely.

MINERALS, ORES AND METALS

UNCTAD said that mineral, ore and metal prices trended downward for almost five years following their peak in early 2011. Between February 2011 and January 2016, the UNCTAD minerals, ores and metals price index fell from 418 points to 178 points, corresponding to a loss of 57.3 per cent. The downward trend was broken in 2016 with the price index reaching 239 points in December 2016.

This price rally was mainly driven by supply cuts and uncertainties, in particular in the markets for nickel, copper and zinc.

On a year-on-year basis, the UNCTAD minerals, ores and metals price index gained 37.8 per cent in January 2017. This upward trend was briefly interrupted at the end of the first quarter, but resumed at the beginning of the third quarter. The UNCTAD minerals, ores and metals price index stood at 271 points in November 2017, up 10.1 per cent from 246 points in January 2017.

According to UNCTAD, the price of iron ore is strongly driven by consumption in China, as the country imports more than two thirds of total seaborne iron o re. In particular, steel production in China is an important indicator of the demand for iron ore.

As growth in steel production in China slowed in 2014 and turned negative i n 2015, the price of imported iron ore at the port of Tianjin lost 70.3 per cent of its value, from $136 per dry ton in December 2013 to $40 per dry ton in December 2015. Thereafter, the price of iron ore picked up and almost doubled between January and December 2016, based on recuperating demand from China and reduction of output from high-cost mines.

Weakening demand for steel in China and oversupply concerns caused a drop i n the price of iron ore, to $57 per dry ton in May 2017. The iron ore price was volatile during the second half of 2017 and stood at $64 per dry ton in Nov ember 2017, 21.1 per cent lower than in January 2017.

"Going forward, favourable supply conditions and projections of low growth for steel demand in 2018 make substantial price increases unlikely in the near future."

The price of aluminium fluctuated around an upward trend in 2016 and 2017, based on strong demand growth and closures of aluminium smelters in China. Between January 2016 and November 2017, the London Metal Exchange aluminium price increased by 42.0 per cent, from $1,479 per ton to $2,101 per ton in November 2017.

Looking ahead, a potential deficit in global aluminium markets in 2018 could induce further price increases.

Precious metal prices increased significantly in the first half of 2016, driven by geopolitical and macroeconomic uncertainty and low interest rates in major economies, said UNCTAD.

Gold and silver prices decreased in the last quarter of 2016 amid the Federal Reserve Board of the United States of America raising the policy rate and a strengthening of the United States dollar. In 2017, the price of gold was volatile and stood at $1,282 per troy ounce in November 2017, 7.5 per cent higher than in January 2017.

The price of silver was more volatile than the price of gold in 2017, averaging 1,698 cents per troy ounce in November 2017, only slightly higher than at the beginning of the year.

Going forward, said UNCTAD, further increases in the policy rates of the United States remain a key downside risk to the price of precious metals, while upside risks include geopolitical conditions and potentially a weaker United States dollar.

RENEWABLE ENERGY

According to UNCTAD, the International Energy Agency projects global renewable electricity capacity to expand by over 920 gigawatts between 2017 and 2022, an increase of 43 per cent.

Substantial capacity growth in onshore wind and solar photovoltaics contributed to a record growth in renewable electricity capacity of almost 165 gigawatt s in 2016. For more than a decade, solar photovoltaics showed the highest growth rate in terms of renewable energy consumption followed by wind.

China continues to account for the largest share of global expansion in renewable energy sources, with large additions both in onshore wind and photovoltaic capacity. The capacity for renewables is growing in many countries and regions, including India, the United States and the European Union.

The growing deployment of renewable energy technologies has led to significant reductions in costs, which has enhanced the competitiveness of renewables i n comparison with fossil fuels.

For instance, said UNCTAD, onshore wind has become one of the cheapest sources of electricity with a levelized cost of electricity of $0.07 per kilowatt hour for plants commissioned in 2016, lower than that from coal-fired power plants in member States of the Organization for Economic Cooperation and Development.

"Further potential cost reductions in renewables over the medium term are substantial, with the levelized cost of electricity of solar photovoltaics, concentrated solar power and offshore wind potentially dropping by 59 per cent, 43 per cent and 35 per cent, respectively, by 2025."

KEY POLICY ISSUES

The UNCTAD paper drew attention to several key issues concerning the recent developments in the commodity markets, including promoting inclusive development in commodity-dependent developing countries, ensuring efficient risk management in domestic commodity sector policies, and promoting and benefiting from a transition towards sustainable energy.

It said that there are several direct and indirect linkages between developments in the international commodity markets and the Sustainable Development Goals. For instance, commodity price shocks can impact both food security and poverty indicators in developing countries.

"In this context, it should be noted that the extent to which developments in international commodity markets affects economic and social conditions in developing countries depends on existing policy frameworks."

Policies such as social safety nets can mitigate the negative impact of commodity price shocks on the low-income segments of a population, while redistributive policies are needed to ensure windfall revenue is more widely shared.

The experience of some countries during the commodity boom of the 2000s could be seen as illustrative, said UNCTAD.

In this regard, between 2004 and 2010, Zambia, a major exporter of copper, experienced annual average gross domestic product per capita growth of above 5 per cent, driven by the sharp increase in global copper prices.

During the same period, however, official data indicate that the poverty he ad count ratio and the prevalence of undernourishment increased, from 56.7 and 48.5 per cent to 64.1 and 51.7 per cent of the population, respectively.

UNCTAD said that this example demonstrates that there is no automatic process linking commodity price booms with improvements in the living conditions of the poor in commodity-dependent developing countries.

Rather, policies should be adopted to ensure that upward commodity price movements contribute to meeting the Sustainable Development Goals.

UNCTAD also said that when designing national commodity sector policies, the links between international commodity markets and local conditions need to be considered.

In this context, managing risks due to unanticipated commodity price movements is of key importance. Recent developments in the cocoa sector in Cote d'Ivo ire provide important lessons in this regard.

As part of reforms in the cocoa sector a mechanism of forward selling anticipated crop and guaranteed minimum producer prices was introduced. At the beginning of the 2016/17 marketing season, when the international price of cocoa stood at 123 cents per pound, the Government set producer prices at around 85 cents per pound.

However, the price of cocoa thereafter plummeted to 90 cents per pound in July 2017. Many traders who had agreed to buy cocoa in advance defaulted on their contracts as the margin between producer prices and international market prices was not sufficient to make a profit.

Consequently, the livelihoods of many smallholder farmers who depended on cocoa as their main source of income were threatened.

"Equitable risk sharing along the value chain and efficient overall risk management are crucial to avoid excessive hardship in case of unfavourable international commodity price developments," said UNCTAD.

Risk management tools could include insurance mechanisms or stabilization funds. In general, commodity sector policies should aim at ensuring that commodity price movements do not harm the most vulnerable segments of the population.

Low fossil fuel prices represent an obstacle to the expansion of renewables. Particularly in electricity generation, there is direct competition between natural gas and coal, on the one hand, and renewable energy sources such as wind and solar photovoltaics, on the other.

A supportive policy environment is therefore crucial to maintain momentum f or a transition towards sustainable global energy architecture. This includes scaling back harmful and costly subsidies for fossil fuels, which the International Monetary Fund estimated at $5.3 trillion in 2015.

Also, policies supporting the deployment of renewables, such as setting tar gets for the share of renewables in the national energy mix and ensuring access to finance for investments in renewables, remain important, the UNCTAD paper concluded.

DIVERSIFICATION AND VALUE ADDITION

In an accompanying thematic document for the expert meeting titled "Diversification and value addition", UNCTAD outlined the challenges faced by commodity-dependent countries that are vulnerable to volatile commodity export prices.

Based on the classification of 191 countries into different commodity export dependence groups, and the level of concentration of each country's exports , UNCTAD said it found a statistically significant relationship between concentration, the level of development (as proxied by country group) and the type of commodity each country exports.

This indicates that the type of commodity dependence matters for development, it said.

According to the Secretariat Note, there is ample empirical evidence linking the degree of economic and export concentration and diversification with development.

Production tends to become more diversified as income increases until, at a relatively high level of income, concentration starts to increase owing to specialization. Also, economies tend to become more diversified as they move out of early development stages than when they are already developed.

With respect to the relationship between export concentration and economic development, diversification increases as income per capita grows, but after a certain level, diversification decreases again. In addition to income per capita, major determinants of export concentration include a country's size (larger countries are more diversified), distance from major markets (remote countries are less diversified) and market access.

While most empirical studies on the relationship between concentration and development have proxied economic development by the level of income, a negative relationship between concentration in the export of commodities (that is to say, commodity dependence) and the human development index has also been found, it said.

In addition, the strength of the relationship changes with the level of commodity dependence and the type of commodity on which a country depends, and the negative effect is strongest in countries where commodities account for more than 60 percent of total merchandise exports.

Although diversification and value addition are relevant for all commodity-dependent countries, they bear particular importance for countries specializing in the production and export of the most volatile commodities, for example, petroleum, gold, rice, cocoa, coffee and cotton.

Policies designed to address commodity dependence and export concentration must take into account country specificities, including the type of commodity a country is dependent on and the major constraints on diversification, said UNCTAD.

These policies may be grouped into two broad categories: (a) Horizontal policies that aim at generating the overall economy-wide conditions that are needed for diversification and value addition to occur; (b) Targeted policies that are specifically directed at industries, sectors or products in order to promote these objectives