TWN Info Service on UN Sustainable Development (Apr15/04)
15 April 2015
Third World Network

Addressing challenges and opportunities of commodities trade
Published in SUNS #8002 dated 15 April 2015

Geneva, 14 Apr (Kanaga Raja) -- The sixth annual Global Commodities Forum of the UN Conference on Trade and Development (UNCTAD) got underway on Monday with the two-day session expected to examine, amongst others, trends in commodities markets over the past year, in particular the recent dramatic fall in oil prices and that of other commodities, and its impact on developing countries and other stakeholders.

According to an UNCTAD press release, from the recent highs of approximately $100 per barrel in June 2014, oil prices have dropped to less than $50 in early 2015.

In addition to the fall in oil prices, movements among other commodity prices have been generally down by 10 to 50 per cent from their 10-year averages. For example, iron ore prices were down 50 per cent and rubber prices down 37 per cent from their 10-year averages, said UNCTAD.

"These price trends are of particular concern to commodity-dependent developing countries, which rely heavily on the income from their commodity exports," it added.

The themes that will be addressed during the two-day session (13-14 April) include prospects for transparency-themed governance reform in the Swiss commodity trading sector; policy space for resource-rich developing countries in the trade of raw materials; new dynamics in international agricultural commodity trade policies; the prospects for renewables in a lower-carbon energy mix; and the end of the super-cycle?: implications for development and terms of trade.

In his opening statement at the Forum on Monday, Dr Mukhisa Kituyi, Secretary-General of UNCTAD, said that one cannot escape the challenges that have arisen with the dramatic decline in the prices of commodities, particularly that of petroleum.

The super-cycle of prices of commodities was particularly high about five years ago, but since then there has been a very substantial decline - about a 14 per cent fall in prices of commodities across the board, he said. But in just the last seven months or so there has been a 50 per cent decline in the price of petroleum.

Highlighting some policy challenges, Dr Kituyi recalled UNCTAD's Least Developed Country (LDC) report of last year, which had posed a question for developing countries. "If you are not creating decent jobs during the boom years, what will you do when the bust comes?"

Many of the commodity-dependent countries particularly the petroleum-dependent countries are having to deal with that today, he said.

He also raised the question of governance reforms in commodities trade (one of the key issues to be addressed in the forum).

The Secretary-General said that this theme is long overdue, particularly since the traditional secretiveness in commodities trading, particularly in this town (Geneva), has been outstripped by the challenges and growing significance of this phenomenon, both to the traders, to governments and to the international community as a whole.

He also pointed to the centrality of agriculture in commodities, saying that this remains particularly important for developing countries today.

He noted that this forum comes a few months before the work programme for the WTO tenth ministerial conference, to be held in Nairobi, Kenya this December, is concluded in Geneva.

[According to a WTO General Council (GC) decision of November 2014, apart from decisions on the Trade Facilitation Agreement, permanent solution to the food security issue by December 2015 and translating the Bali ‘best endeavour' decisions into binding commitments, the WTO is to prepare and agree by July 2015 a clearly defined work programme on the remaining Doha Development Agenda (DDA) issues. See SUNS #7923, #7925 and #7927 in November-December 2014 for GC decisions and reports on the meeting, and SUNS #7998 of 9 April 2015, for the latest assessment of the state of play at the WTO.]

One of the lessons brought forward from Bali (ninth ministerial conference in 2013), Dr. Kituyi said, was that when the single undertaking has not worked, partial solutions to the Doha Round can incrementally contribute to the road towards completing the round.

For commodities-dependent countries, particularly the agriculture-commodity countries, a successful completion of the agricultural agenda of the Doha Round is critically important.

"And yet, as we all know, the dynamics of multilateral trade rules-making has slowed down and that slowness has been reinforced by the growing popularity of plurilateral negotiations, whether trans-Atlantic or trans-Pacific."

While not taking away anything from the importance of these mega-plurilaterals, for commodity-dependent developing countries, a multilateral solution to the outstanding questions of the agriculture negotiations remains extremely important, the Secretary-General underlined.

Dr Kituyi's opening statement was followed by statements from Mr Rene Bautz, Chairman of the World Energy Council-Global Gas Centre, and CEO of Gaznat; Mr Yi Xiaozhun, WTO Deputy Director-General; and Ambassador Triyono Wibowo of Indonesia.

Mr Bautz highlighted recent developments in the energy sector particularly the recent drastic drop in the price of oil.

WTO Deputy Director-General Yi, citing some important trends that took place in the last decade, pointed to the rapid economic and trade growth observed in many developing countries combined with deeper regional integration.

He also highlighted the growing importance of agriculture and non-agriculture commodity exports underpinned by strong demand from emerging developing economies, several episodes of price spikes and commodity price volatility and more recently the decline in oil prices.

He further pointed to the spread of quality and safety standards as well as costly certification schemes, the emergence of global value chains, and higher environmental risks associated with intensive exploitation of natural resources.

As these dynamic forces have unfolded, affecting financial markets, and food or energy supplies and prices, WTO members have consistently renewed their confidence in a well-functioning multilateral trading system.

According to Yi, the Doha Development Agenda (DDA) negotiations reached a significant milestone with the December 2013 Bali ministerial conference.

The next critical meeting will be the tenth ministerial conference in Nairobi, he said, adding that progress on the DDA can deliver significant results for developing countries, in particular in the agriculture sector which stands at the heart of the round.

Referring to the Trade Facilitation Agreement, Yi maintained that once this is implemented, burdensome customs procedures and documentation will be simplified, improving developing country competitiveness and their participation in global value chains, smoothing the movement of perishable agriculture commodities and in the longer run attracting investments and promoting regional trade.

Ambassador Wibowo of Indonesia said that between the year 2000-2013, the prices of commodities tripled surpassing global growth, a condition that presents challenges and opportunities to importers and exporters alike.

To exporting countries, the situation brought profit and big revenues in order to finance their development, and to spur growth and social welfare.

On the other hand, for importing countries, particularly food-commodity importing developing countries, the situation very much affected their ability to finance development programmes.

As with the case for other commodities, the Indonesian envoy said that the fall in oil prices today has both positive and negative impacts.

For oil exporting countries, the low prices will significantly affect their export earnings and may also affect their economic growth and social welfare. For oil importing countries with low income or high populations who have allocated a large amount of their budgets to purchase oil including for the maintenance of affordable prices in the domestic market and reducing poverty, the current fall in oil prices presents a positive impact.

The funds previously allocated for subsidising domestic prices are now available for spending on other economic and social development programmes, he said.

Keeping in mind that one of the challenges in commodities trade is price instability, Ambassador Wibowo said, it will be essential for resource-rich developing countries not to base their economic development policies solely on commodities trade.

On the contrary, it will be beneficial to utilise their resource endowment to transform their economies by developing their industry, be it commodity-based or other industrial sectors.

Resource-rich developing countries should design and implement industrial and other development policies to promote value-addition and economic transformation and to reduce their dependence on producing and exporting unprocessed commodities, he said.

The session also included keynote speeches by Mr Yilmaz Akyuz, Chief Economist of the South Centre, and Mr Phillippe Chalmin, President of the Cyclope market analysis service and professor at Dauphine University in Paris.

Moderating the session, Mr Martin Khor, Executive Director of the South Centre, said: "This is a very timely forum as we may be in the midst of a sea change in the commodities situation, and through that the situation of the global economy. Some of us thought that the commodities problem for developing countries had become a commodities boon but this thinking has changed again especially in the last one year."

The long-term decline of commodity prices had been a big problem, if not the biggest economic problem, for developing countries in the post-World War Two period.

This was also associated with the fluctuation in the demand for commodities and led to a decline in the terms of trade of developing countries, meaning that the more they produced in exports, the less they obtained in imports in volume terms. This was known then as unequal exchange, he said.

He noted that economists such as Raul Prebisch highlighted this problem and that this was picked up by the UN, especially by the leaders of the developing countries. In fact, it was the major factor that led to the formation of UNCTAD itself.

In the past one and a half decades, there was a concept of the commodities super-cycle that somehow the boom-bust cycle had come to an end and that commodities are on a high level and on a permanent basis.

According to Khor, many reasons were put forward for this. But in the past couple of years commodity prices have softened and in the past several months, oil also followed the trend in the fall in commodity prices together with other commodities.

This raises many questions which this forum will address, said Khor. For example, is the super-cycle over? Are we back to the traditional boom-bust phenomenon? What is behind the trend in commodity demand and prices? What are the effects on developing countries?

How can commodity-dependent countries cope in the short-term with the new commodities situation? In the long term, how can countries and the international community cope with the new ‘commodity problematique', he asked.

Mr Akyuz, the former chief economist at UNCTAD and now chief economist at the South Centre, gave a power-point presentation on managing boom-bust cycles in commodity-dependent economies.

He talked about how vulnerable commodity-dependent economies are to the continued downturn in commodity prices, and that this depends on how well they managed the boom.

According to Akyuz, the decade-long commodity boom (super-cycle) appears to be coming to an end. The boom was accompanied by highly favourable global financial conditions. These are also changing in that financial conditions are tightening and will probably get even tighter in the coming years.

He highlighted the similarity with the previous booms of the 1970s-80s. The 70s boom in commodity prices was also associated with extremely favourable financial conditions (recycling of petroleum dollars and low interest rates). Commodity prices collapsed alongside the hike in interest rates in the US (the arrival of Paul Volcker at the Federal Reserve), which led to a debt crisis in Latin America and a "lost decade".

Akyuz said that the outcome this time may not be as bad. Commodity and financial shocks are likely to be less severe than in the early 1980s and the boom has been somewhat better managed than in the 1970s.

Still, the occasion was not used to reduce commodity dependence, and macro-defences built during the boom are inadequate. Therefore, should the downswing persist, the damage can be quite serious for countries with weak fiscal and current account positions, large build-up of external debt and a high degree of commodity dependence.

Among his conclusions, Akyuz pointed out that the recent boom has been managed somewhat better than in the 1970s.

Also, Sub-Saharan Africa has done much better in managing the boom than Latin America, where the current projection for growth in the region is not expected to go above 1 per cent. In Sub-Saharan Africa, it is in the region of 3-4 per cent.

"We are now entering a downturn in the South. We have no fiscal space because we did not build enough fiscal space during the boom," he said, adding further that investment levels seen during the boom can no longer be maintained.

Professor Chalmin, in his power-point presentation titled "What is the new normal in commodity markets?", gave a detailed explanation of the situation in the commodity markets today, as well as highlighting some of the key factors behind these recent developments. +