Global Trends by Martin Khor

Monday 4 February 2008

Boom in commodities – but will it last?

There is a boom in prices of commodities, benefiting countries like Malaysia as revenues of palm oil, rubber and petroleum jump.  A UNCTAD seminar last week examined the commodity situation and asked whether the boom will last.


Until recently, there was an atmosphere of despair when the issue of commodities was discussed.  The prices for raw materials and agricultural commodities have traditionally fallen, bringing despair to poor producers and increasing the debt of commodity-dependent developing countries.

But something has happened in the past few years that brings hope – the demand and` prices of most commodities have shot up, raising export revenues and incomes of farmers.

In Malaysia, for example, there has been a boom in palm oil and rubber prices, increasing the incomes of Felda settlers as well as the big plantation companies.  And on top of this are the record levels of oil prices.

Are these high commodity prices only a temporary phenomenon, that will disappear with the downturn in the business cycle?  Or will they last this time around?

These and other questions were discussed last week at a dialogue on commodities held in Geneva by the UN Conference on Trade and Development (UNCTAD).

Opening the meeting, UNCTAD Secretary-General Dr. Supachai Panitchpakdi said: “It is difficult to imagine a more auspicious moment for a breakthrough in commodity policy,” he said.  “We should try our utmost to grasp the opportunity.”

Supachai said commodity prices have risen strongly since 2002 since their sharp fall in 1997-2002.  The oil price rose from its 1999 low to $100 per barrel early this year, while UNCTAD’s price index for non-fuel commodities rose 114% since 2002 (with metal and mineral prices rising 265%, agricultural raw materials by 78% and tropical beverages by 66%).

The price increases are due to new demand growth in Asia, especially China.  If developing countries’ growth continues, the current commodity boom may mark the beginning of a changed commodities economy in the 21st century, and it is high time to identify policies to ensure the boom is a true engine for development. 

A note issued by UNCTAD highlighted these points:

-- The recent rapidly growing demand for commodities will likely continue in the medium to long term, due to expected growth of developing countries, especially in Asia.

-- The rise in oil prices has resulted in exporting countries struggling to make best use of the benefits, while importers are concerned about the impact on the poor and on economic growth.

-- Mineral and metal prices have risen, with some at historical high levels, and increased revenue has opened up diversification opportunities but also macroeconomic challenges. 

-- On agricultural products, the increase in prices is positive for exporting developing countries, but has caused concerns for those importing food, with the jump in food prices causing insecurity and riots in some countries.

-- Commodity dependent countries should diversify production and exports by adding value or shifting to higher value products, but there are increasing technical barriers especially food standards.

In recent years, rapid growth in Asia, particularly China, has spurred demand for commodities, said UNCTAD. Rapidly growing demand will likely continue in the medium to long term, given demographic factors and industrialization trajectories of developing countries.

On OIL AND GAS, UNCTAD notes that the current price increases have had limited effect so far on global inflation and growth, but may become a brake on growth.

Accordingly, sustainable energy strategies should be devised, also taking account of climate change, including through optimization of fossil fuel use and developing  renewable energy sources.

Biofuels hold the potential of improving national and local energy security, but the environmental and food security issues must be addressed.

On MINERALS AND METALS, the note says that the prices have risen, in several cases, to record levels. The revenue increases have opened up possibilities for broader based, diversified development.

Mineral dependent countries often need to deal with macro-economic challenges arising from large export surges, including a tendency towards higher inflation and for the real exchange rate to appreciate.  This may make a country's other exports less competitive internationally markets and damage other sectors.

The very high profits of mining companies have focused attention on the distribution of revenue between companies and governments, as well as between national governments and local communities in mining areas.

On AGRICULTURAL COMMODITIES, the UNCTAD note says the recent price boom is good news, but the record is mixed. 

While countries exporting vegetable oilseeds and oils, cereals, dairy products and some meat products have seen their terms of trade improve over the past few years, some of those exporting tropical agricultural products have seen the prices of their exports outpaced by those of their imports.

UNCTAD notes that in agricultural markets, periods of high prices tend to be short-lived compared to periods of low prices. An issue is how to cope with the eventual "bust" phase, which inevitably will come, in the price cycle.

Commodity dependent countries need to diversify production and exports by adding value or shifting to higher value products.  But this is hindered by the increasing use of 

food safety standards that block imports from developing countries.

The UNCTAD meeting discussed in detail the prospects of various commodity categories and the experiences of countries, including Malaysia.

Generally the mood was upbeat.  But the big questions remained throughout – can commodity prices finally “decouple” from a slowdown in the world economy? Will the new demand from China offset the expected fall in demand from the US, Europe and Japan?