Falling commodity prices a bane for developing countries

While world attention is focused on plunging oil prices, many other commodities have also seen their values falling sharply over the past year, becoming a bane to commodity-rich developing countries.

Chee Yoke Heong

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COMMODITY prices have slumped to their lowest levels since the global financial crisis, sending shockwaves across many commodity-rich countries in Latin America, Africa and Asia as lower export earnings mean less money for development.

Prices for iron ore dropped 47% in 2014, while copper fell to a five-and-a-half-year low in January 2015 on the back of slower growth in China, oversupply and a stronger US dollar. Palm oil saw its value plummet by 20% in 2014.

Among the countries in Latin America hit hard by the rapid fall in commodity prices are Brazil and Chile, both key exporters of iron ore and copper. Brazil's iron ore was exported for an average of $53 a ton in December 2014, a sharp drop from $100 a year earlier, cutting its export revenue for the commodity by 38%, according to a Bloomberg report.

In Africa, while Nigeria is reeling from the drop in oil prices, Zambia, a key producer of copper, is also hit by falling commodity prices. As the copper price weakened, so too did its currency the kwacha, which depreciated to record lows against the dollar. This affected the government's efforts to narrow its budget deficit amid slowing growth. The International Monetary Fund (IMF) estimated that the Zambian economy grew 5.5% in 2014, its lowest level since 2002, the Financial Times reported. Much is at stake as the mining sector attracts substantial foreign investment at $12.6 billion, employs 90,000 people and contributes about three-quarters of the country's foreign exchange earnings and 25-30% of government revenue.

In South Africa, where raw materials account for roughly 60% of exports, its rand currency hit a six-year low in December 2014 as the country's gold and iron-ore exports declined in value, said the Wall Street Journal.

Prices of agricultural commodities declined by 20% in 2014 due to oversupply and weak global demand. The average price of crude palm oil fell to about $599 in the December 2014 quarter, down from $754 in the March quarter. Major exporters of palm oil include Indonesia and Malaysia. Elsewhere corn, wheat and soybean also came under pressure. Argentina, as a key producer and exporter of soybean, will likely be caught in the downturn.

The most common reason put forward for the slump in commodity prices is the economic slowdown globally, especially in China, one of the world's largest consumers of commodities and a major export destination for many developing countries, which has affected demand for energy, minerals and agricultural products. Indeed, many countries have reported slower growth with GDP forecasts revised downward.

Increased supplies and a stronger dollar - making dollar prices of commodities lower - have also taken their toll.

Another factor involving the market may also be at work, according to Harvard University professor Jeffrey Frankel. He thinks that the end of the US quantitative easing has led speculators to shift away from commodities in the expectation that interest rates will rise in 2015; the result is that future price decrease is brought forward, which led to the selldown last year.

Overall, analysts believe the commodity markets will remain volatile this year, with commodity prices in 2015 expected to trend lower for most part of the year as the same factors that spooked prices last year are expected to continue. As long as crude oil prices remain weak, other commodity prices will also follow.

The economic situation in China is uncertain, with many analysts expecting its growth to fall further, thus dampening the outlook for commodities going forward.

Copper will continue to lag as rising supply and sluggish demand in China will put downward pressure on the commodity, according to Goldman Sachs.

The World Bank estimates that commodity prices will remain weak for most part of 2015, citing, among others, a slowdown in the euro area and emerging economies, a stronger dollar, a well-supplied oil market and increased supplies as factors for the downward trend.

'This year may well see a rare occurrence for world commodities markets - a decline in all nine key commodity price indices,' said a World Bank statement. The Bank's energy, metals and minerals, and agricultural raw materials indices declined more than 35% between 2011 and 2014, and will continue to contract this year.

ANZ Research reportedly foresees a 'volatile' year ahead for the commodity markets and believes that the first half of the year will be weaker but the second half will improve as increased supply discipline and stabilising growth begin to emerge.

On the flipside, some analysts said the soft commodity outlook could be beneficial if it stimulates global growth. Low prices for major industrial inputs such as metal ore and crude oil could keep inflation low and ultimately support consumption demand, a report by Channel News Asia said.

Some have suggested that the low commodity prices might also be a chance for heavily commodity-dependent countries to go beyond commodities and diversify into other growth areas.

Analyst Martyn Davies was quoted by Voice of America as saying: 'Africa has predominantly been this commodity-driven economy where growth is allied to commodity prices. We now see the headwinds of rapidly declining oil prices. What future does that hold out for continental growth? What implications does that have for business? And I think arguably, is Africa then rebalancing away from traditional commodity-driven growth to one that is more balanced, more consumer-driven and new wealth, new value being created, beyond the simplistic business model of non-beneficiated raw materials?'    

It is hoped that such a debate will also take place in other countries in a similar situation.                               

Chee Yoke Heong is a researcher with the Third World Network.

Currencies are falling too! AS developing countries grapple with falling oil and other commodity prices, their currencies are spiralling down as domestic concerns and forces abroad come into play. 'The emerging-market slide reflects worries about outside forces - such as a shift in US monetary policy, or China's efforts to reorient its economy - colliding with domestic political and economic tensions, unsettling investors at home and abroad,' according to the Wall Street Journal (WSJ). A Bloomberg survey of a basket of 20 developing-country currencies showed a drop of 3.3% in February 2015, its lowest since 1999. Brazil's real, Turkey's lira and South Africa's rand slumped to record lows, while the currencies of Mexico and Peru retreated to levels last seen during the 2009 global financial crisis. In Nigeria, investors are dumping the country's stocks and bonds, sending the naira to new lows on worries over the political situation in the country. Concerns about the deterioration of the Brazilian economy coupled with the expectation of higher US interest rates have contributed to the real's 6% fall so far in February, Reuters reports. Many developing countries have fallen out of investors' radar as 'a plunge in commodity prices throttles their economies and darlings from Brazil to China lose their shine,' said Bloomberg. According to WSJ, investors have pulled out $58.7 billion of cash from developing countries in the past year. Those developing countries holding debts in foreign currencies such as the US dollar face an additional risk. With the dollar having strengthened markedly in recent months, the interest and principal of debt taken out in dollars are now significantly more expensive. As a result, these countries' balance of payments has deteriorated, which can lead to a cycle of further weakening of currencies and balance of payments, according to the Global Risk Insights website. - Chee Yoke Heong

*Third World Resurgence No. 293/294, January/February 2015, pp 28-29