Commodities: Diversifying exports, upgrading quality key to less volatility
Published in SUNS # 8555 dated 18 October 2017 

Geneva, 17 Oct (Kanaga Raja) - The volatility of international commodity markets in the past decade highlights the importance of structural transformation for commodity-dependent developing countries, characterized by a high level of concentration of their export earnings, the UN Conference on Trade and Development (UNCTAD) has said.

"This poses a number of risks to long-term growth and development prospects," UNCTAD added.

This is one of the main messages highlighted in a Secretariat Note prepared for the ninth session of its multi-year expert meeting on commodities and development, which took place here from 12-13 October.

"Diversification and quality upgrading are crucial to reduce the risk of negative impacts of external variability induced by the high export concentration in commodity-dependent developing countries. A more diversified export structure means more stability in public revenue and generally less macroeconomic volatility," it said.

Policies to support export diversification and quality upgrading need to address country-specific challenges and bottlenecks in order to successfully contribute to structural transformation.

In this regard, said UNCTAD, commodity-dependent developing countries may consider measures that stimulate private sector initiative and investment, which are key drivers for the emergence of new products and industries.

According to UNCTAD, such measures include stabilization of the macroeconomic environment; improvement of the business environment, including access to finance; and investment in human capital and infrastructure.

Furthermore, policies that support the creation of linkages between commodity and non-commodity sectors can also contribute to diversification.

Finally, strategies for industrial diversification should focus on the inclusion of women, who face gender-specific challenges, including in access to land and credit, and social norms that constrain their effective participation.

In some opening remarks at the expert meeting on 12 October, Ms Isabelle Durant, the Deputy Secretary-General of UNCTAD, noted that most developing countries depend vitally on commodity exports, with 91 out of 135 developing countries being in this group, i.e. two out of three developing countries (see below on main findings of a separate UNCTAD report on commodity dependence).

This figure continues to be on the rise rather than dropping, she said.

Since the end of the last commodity price boom in 2011, the drop in prices has significantly jeopardised these countries that are dependent on export of commodities. The volatility of the international commodity markets over the past decade highlights the importance of diversifying economies and having industrial development which are essential to reduce this vulnerability to the uncertain changes in commodity prices, as well as to have more harmonious development, said Ms Durant.

She said green energy sources could play an extremely important role. "Renewable energies offer us significant potential and they should account for 60% of the growth of the global energy matrix by 2021."

It becomes an essential ingredient of a country's energy security, mainly countries that don't have fossil fuels which could turn out to be an advantage rather than a disadvantage, she added.

Mr Janvier D. Nkurunziza, Chief of the Commodity Research and Analysis Section (CRAS) at UNCTAD's Special Unit on Commodities, presented at the meeting the main findings in the Secretariat Note on "Recent developments and new challenges in commodity markets and policy options for commodity-based inclusive growth and sustainable development."

He highlighted amongst others how the markets have been trending in the last year and a half, what the prospects are for the near term, and the policy implications that can be drawn from these trends.


According to the UNCTAD Secretariat Note, after reaching the bottom of a five-year slump at the beginning of 2016, commodity prices trended upward until early 2017.

The UNCTAD non-oil nominal commodity price index reached 218.8 points in February 2017, constituting an increase of 20.4 per cent from its value in January 2016 of 181.8 points.

However, the latest data available show that commodity prices are again receding, and the index stood at 205.2 points in April 2017.

"Overall, commodity prices remain significantly lower than at the peak of the last commodity boom."

The recovery of commodity prices in 2016 was mainly driven by supply constraints and output uncertainties, which particularly affected metals and agricultural commodity prices.

El Nino-related adverse weather conditions caused output shortfalls for agricultural commodities such as palm oil, rice and coffee. The supply of minerals, ores and metals was limited by the constriction of nickel, copper and zinc mine production. After supply conditions for several agricultural commodities and metals eased, the upward trend in commodity prices appeared to have come to a halt in early 2017.

In January 2016, the UNCTAD food price index reached its lowest value in seven years, at 191.1 points. In 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 declining, with brief upward swings in January and February 2017. All sub-indices saw marked losses in January-April 2017, with vegetable oilseeds and oils experiencing the sharpest drop, at -13.6 per cent.

According to UNCTAD, grain prices have been generally trending downward since 2012, mainly due to strong production and increasing stocks. The 2016/2017 season marked a record production of wheat and maize, leading to the largest-ever recorded global supply of grains.

As a consequence, the wheat price (hard red winter No. 2), at $191 per ton in April 2017, was down 4.5 per cent year-on-year, and down 21.7 per cent in relation to its level in April 2015. The price of maize (yellow No. 3) reached its lowest level in more than seven years, at $158 per ton in April 2017.

In the near future, grain markets are expected to remain fairly stable, subject to favourable weather conditions.

The International Grains Council projects that wheat and maize production in the 2017/2018 season will be 736 and 1,026 million tons, respectively; slightly below the levels in the 2016/2017 season. Strong demand forecast is projected to lead to a moderate reduction of stocks, which could generate a mild increase in grain prices.

The price of cotton (cotton outlook index A) declined by 70.7 per cent, from 230 cents per pound 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. In April 2017, the index was at 87 cents per pound, constituting a 25.6 per cent increase on a year-on-year basis.

The market outlook for cotton tentatively predicts an increase in production as well as a continuation of auctions of stockpiles by the Government of China, which will likely moderate the upward price trend in 2017.

Mineral, ore and metal prices trended downward for almost five years following their peak in early 2011. In February 2011-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 reversed 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 index rose by 37.8 per cent in January 2017. This upward trend ended at the end of the first quarter of 2017 and the index fell by 5.5 per cent, from 254 points in February 2017 to 240 points in April 2017.

The main driver of this downward movement was a sharp decline in iron ore prices due to expectations of lower iron ore demand from China.

The price of iron ore is strongly driven by consumption in China, as the country imports more than two thirds of total seaborne iron ore. 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 in 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, prices for iron ore picked up and almost doubled in January-December 2016, based on recuperating demand from China and a reduction of output in high-cost mines. In April 2017, weakening demand for steel in China and oversupply concerns caused a drop in iron ore prices, to $71 per dry ton. Favourable supply conditions make substantial price increases unlikely in the near future.

Precious metal prices increased significantly in the first half of 2016. In January-July 2016, gold prices increased by 21.9 per cent, from $1,097 per troy ounce to $1,337 per troy ounce. In the same period, the price of silver increased by 41.7 per cent, from 1,411 cents per troy ounce to 1,999 cents per troy ounce.

"Geopolitical and macroeconomic uncertainty due to several factors, including the vote on the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union, and low interest rates in major economies, seem to have stimulated investments in gold and silver, thereby strengthening the price of precious metals in this period," said UNCTAD.

Gold and silver prices decreased in the last quarter of 2016 amid the raising of the policy rate by the Board of Governors of the Federal Reserve System of the United States and a strengthening of the United States dollar.

In April 2017, the prices of gold and silver averaged $1,266 per troy ounce and 1,803 cents per troy ounce, respectively.

"In the near future, further increases in United States policy rates remain a key downside risk to precious metal prices, while upside risks include geopolitical conditions and a potentially weaker United States dollar."

Crude oil prices have been characterized by a high degree of variability in the past decade. In January 2007-May 2017, the average spot price of Brent crude oil (hereafter referred to as the oil price) fluctuated between $133.9 per barrel and $30.8 per barrel.

The lowest price during this period, $30.8 per barrel, was recorded in January 2016 and constituted the lowest value since December 2003. In June 2014-January 2015, the price dropped by 56.7 per cent, from $107.0 per barrel to $48.4 per barrel. The price of oil has, overall, remained at depressed levels since then.

UNCTAD said that the main driver of the price collapse in late 2014 was an oversupply in the market that had its roots in the massive increase of shale oil production in North America, increasing production in other producers not members of the Organization of the Petroleum Exporting Countries and a slowdown in crude oil demand growth. The build-up of large crude oil inventories compounded the supply-demand imbalance.

According to data from the United States Energy Information Administration, global oil production increased from 93.7 million barrels per day in July 2014 to 97.5 million barrels per day in July 2015, with production by non-members of the Organization of the Petroleum Exporting Countries accounting for 46 per cent of the 3.8 million barrels per day increase in global production. Global consumption only increased by 2.6 million barrels per day in the same period, leading to a substantial increase in inventories.

In response to falling prices, the Organization of the Petroleum Exporting Countries decided at its ministerial conference on 30 November 2016 to cut production by 1.2 million barrels per day starting in January 2017, with Saudi Arabia implementing the largest production cut, at 486,000 barrels per day. On 25 May 2017, both the Organization of the Petroleum Exporting Countries and non-member producers decided to extend the production cuts, which had been limited to June 2017 in the original agreement, through March 2018.

"The impact of this decision will depend both on the degree of compliance with the agreed production cuts and the extent to which oil producers that are not party to the agreement will step up output," said UNCTAD.

For instance, the United States increased production by 4.7 per cent from 14.71 million barrels per day in January 2017 to 15.4 million barrels per day in May 2017, which offset almost 40 per cent of the production cuts.

While there might be technical and other limitations to further short-term production increases in the United States, the production cut agreed in May 2017 seems unlikely to be substantial enough to drive the oil price up to the levels of early 2014 on its own.

"In addition, inventories remain at high levels, which makes sharp increases in oil prices seem unlikely. In terms of upside risks, expectations of stronger demand growth could support a stronger oil price in the near future."

Coal continues to be the primary fuel for electricity generation at the global level. In addition, coal is a key source of thermal energy for the steel and cement industries. As coal is also responsible for 45 per cent of energy-related carbon emissions, reducing its share in the global energy mix remains a key challenge in the context of climate change mitigation.

According to forecasts by the International Energy Agency, the share of coal in power generation is on a downward trajectory, and is expected to drop from 41 per cent in 2014 to 36 per cent in 2021.

Coal prices fluctuated around a downward trend in early 2014-mid-2016, mainly driven by persistent oversupply and sluggish import demand from China. The reference price, Australian thermal coal, decreased by 36.1 per cent, from $88 per metric ton in January 2014 to $56 per metric ton in June 2016. The price then experienced a sharp increase, up to $111 per metric ton in November 2016, based on tightened supply from Australia and increased import demand from China, where domestic production was cut to reduce oversupply and increase profitability in the coal sector.

After supply conditions improved, mainly due to a partial rollback of production restrictions in China, the price of coal receded to $80 per metric ton in May 2017. In the near future, in the light of ample supply capacity, a further downward movement in the coal price seems likely.

According to UNCTAD, renewable energy sources are now the largest source of global electricity capacity and are expected to account for 60 per cent of global power capacity growth through 2021. Substantial capacity growth in onshore wind and solar photovoltaics contributed to a record growth in renewable electricity capacity in 2015, to 153 gigawatts.

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 renewable energy sources in comparison with fossil fuels. For instance, onshore wind has become one of the cheapest sources of electricity, with a levelized cost of electricity in the range of $0.06 to $0.09 per kilowatt hour in 2014, 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 in 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."


According to the UNCTAD Secretariat Note, commodity price fluctuations lead to fluctuations in capital flows to commodity-dependent developing countries and are therefore linked to the balance of payments. In addition, public revenues in commodity-dependent developing countries are typically closely associated with commodity prices.

In this regard, commodity-dependent developing countries face the constant challenge of managing externally induced stress and volatility through fiscal and monetary policy.

"Countercyclical fiscal policy and precautionary savings can be tools to shield public budgets from the impacts of commodity price volatility and thereby strengthen the continuity of social programmes, infrastructure development and other components of social and economic development plans."

In this context, revenue stabilization funds can help to smooth government expenditures. In addition, stabilization funds can serve as a means to transfer current revenue to future generations and thereby contribute to inter-generational fairness, in particular if commodity revenues are based on exhaustible resources.

However, stabilization funds are only effective if they are well managed and if spending and saving rules are well designed and adhered to.

Commodity dependence is also associated with monetary policy challenges. Exchange rate volatility, inflation and the Dutch disease are phenomena that can threaten broad-based growth and development in commodity- dependent developing countries.

"Maintaining a sound monetary policy framework is crucial to managing these types of macroeconomic risks. This includes an independent central bank with a clear mandate and a focus on stability, to ensure an attractive business and investment climate."

Low fossil fuel prices are not only a source of economic stress for oil and gas-exporting countries, but also an obstacle to the expansion of renewable energy sources. In this context, it is important to ensure a supportive policy environment for renewables, in order that momentum for a transition towards a sustainable global energy architecture can be maintained.

This includes scaling back harmful and costly subsidies for fossil fuels, estimated at $5.3 trillion in 2015. In addition, policies supporting the deployment of renewables, such as by setting targets for the share of renewables in the national energy mix and ensuring access to finance for investment in renewables, remain important, said the Secretariat Note.


Meanwhile, in a separate report titled "State of Commodity Dependence 2016", UNCTAD said that the value of commodity exports from developing countries rose from US$2.04 trillion in 2009-2010 to US$2.55 trillion in 2014-2015 (an increase of 25 per cent in nominal terms).

In the report launched at the expert meeting on 13 October, UNCTAD said that in 2014-2015, 91 developing countries were considered to be commodity-dependent, increasing from 82 in 2009-2010.

UNCTAD has defined commodity dependence as the ratio (in percentage) of the value of commodity exports to the value of total merchandise exports.

A country is said to belong to the group of commodity-dependent developing countries (CDDCs) when this percentage exceeds 60 per cent.

Furthermore, when this percentage exceeds the threshold of 80 per cent, developing countries are defined as strongly commodity export dependent.

UNCTAD said that as a percentage of total developing countries under review in the report, almost 68 per cent of them were considered to be CDDCs in 2014-2015, compared to 61 per cent in 2009-2010.

In terms of the number of CDDCs by region, Africa is ranked first in 2014-2015 with more than half of the world's CDDCs and 46 countries located in the region, followed by Asia and Oceania (28 countries) and Latin America and the Caribbean (17 countries).

UNCTAD said the increase in the number of CDDCs between 2009-2010 and 2014-2015 has been particularly significant in Africa with seven new countries entering the category in 2014-2015, bringing the total to 46.

Over the same period, two countries entered the category in Asia and Oceania while the number of CDDCs remained stable in Latin America and the Caribbean region.

According to the report, the newcomers in the CDDC category in 2014-2015 (compared to 2009-2010) were: Afghanistan, Cabo Verde, Comoros, Democratic People's Republic of Korea, Eritrea, Liberia, Madagascar, Sao Tome and Principe, Sudan, Suriname and Tuvalu.

As to the distribution of CDDCs by type of commodity exports, UNCTAD said that evidence shows that most CDDCs were mainly exporters of agricultural products in 2014-2015, with 41 per cent of total CDDCs.

This is followed by the group of exporters of fuels (30 per cent), and exporters of minerals, ores and metals, with 23 percent of total CDDCs.

According to UNCTAD, only a small share of CDDCs (6 per cent) showed diversified commodity exports in 2014-2015.

Africa appeared to account for most of the countries dependent on agricultural commodity exports (51 per cent of total CDDCs) as well as exporters of minerals, ores and metals (two thirds), it said.

Most of the fuel exporting countries were mainly located in Asia and Oceania (48 per cent of total CDDCs), and more specifically in Western Asia.

UNCTAD further pointed out that the situation regarding commodity dependence in the context of the Least Developed Countries (LDCs) worsened between 2009-2010 and 2014-2015 with seven additional countries falling into the CDDC category in 2014-2015 (an increase of 20 per cent).

This move led to a total of 40 LDCs being part of the CDDC category in 2014-2015. The growth of commodity dependence for LDCs was particularly significant in Africa, with six new countries in 2014-2015 out of the seven newcomers.

In respect of strong commodity dependence, the situation deteriorated with 61 CDDCs being part of this category in 2014-2015, from 56 in 2009-2010.

The situation mainly deteriorated in Africa and Latin America and the Caribbean, while remaining relatively stable in Asia and Oceania.

The report also found that in 2014-2015, 73 out of the 91 CDDCs relied on a maximum of three commodity exports for more than 60 per cent of their total commodity export value.

Results also showed that in 2014-2015, two main destination markets, the European Union and China accounted for about 25 per cent of total commodity exports from CDDCs in Asia and Oceania, and about a third of CDDC commodity exports from Africa.

The report also noted that CDDCs are predominantly net-food importing countries. About two-thirds of CDDCs have been net-food importers in both the periods 2009-2010 and 2014-2015.

According to UNCTAD, newcomers in the net-food importing developing countries' category in 2014-2015 (compared to 2009-2010) were Burundi, Cameroon, Colombia and Vanuatu.

The value of net food imports in CDDCs increased from US$67.8 billion in 2009-2010 to US$95.2 billion in 2014-2015, an increase of more than 40 per cent.

While the net food import bill followed an upward trend in all developing regions, it has been particularly significant in Africa, with a 80 per cent increase between the two periods, said UNCTAD.