Tuesday, October 05, 2021

Two-thirds of developing countries dependent on commodities

Minera Escondida, located in Antofagasta, Chile, is the world's largest copper mine, producing almost 5% of the world's supply of the metal. BHP manages the operation and holds a roughly 58% stake. Other investors include Rio Tinto Plc and Japan's Mitsubishi Corp. BHP is an an Anglo-Australian multinational (it plans to delist in London) mining, metals and petroleum giant.

Be it food production, mining, the lithium that charges our smartphones and the oil that still mainly fuels most of our transport, commodities are an important part of modern life. Two-thirds of developing countries are dependent on commodities and for example, all the 12 countries of South America are dependent. This is defined by the United Nations agency UNCTAD (United Nations Conference on Trade and Development) as a country with more than 60% of its total merchandise exports comprising commodities.

According to UNCTAD’s State of Commodity Dependence 2021, 101 nations are now commodity dependent. Most countries that were dependent on commodities in 2008–2009 remained so in 2018–2019, according to the report, highlighting the persistence of this phenomenon. The agency says that moreover, commodity dependence tends to mainly affect developing countries, with 87 of them being considered commodity dependent in 2018-2019.

Out of the 101 commodity-dependent countries in 2018–2019, 38 relied on agricultural product exports, 32 on mining exports and 31 on fuels.

The fuel dependent countries will likely face falling demand in coming decades as anti-carbon measures become common. Saudi Arabia's commodity exports as a share of merchandise exports in 20182019 was 76%.

Over the past decade the nominal (not inflation adjusted) value of world commodity exports has risen 20% to $4.38tn in 2018-2019 but UNCTAD says that such dependence also means that primary goods, whose prices are highly volatile, drive the economies of an increasing number of countries.

UNCTAD’s free market commodity price index, fell by almost 36% between January 2020 and April 2020 due to the COVID-19-induced economic contraction. The trend then reversed direction, and by July the index had doubled its value.

“To be commodity rich is a double-edged sword. On the one hand, it gives countries the possibility to use it wisely when it allows for economic diversification and to benefit people’s wellbeing. But on the other hand, it is often too heavy to handle and wielded by external powers,” UNCTAD’s new secretary-general, Rebeca Grynspan, said last month at the opening of the Global Commodities Forum 2021.

1993-2021: Refinitiv CoreCommodities CRB total return: Introduced in the 1950s, the CRB index is a basket of 19 commodities that acts as a representative indicator of commodity markets. The index includes energy, agriculture, and metals contracts.

Between 2008–2009 and 2018–2019, 5 main trading partners imported almost 40% of global commodity exports. Their individual shares in total world commodity imports changed between the two periods, yet according to the UN agency 4 trading partners remained the same in both 2008–2009 and 2018–2019, namely China, Germany, Japan and the United States of America. Among the group of the leading 5 commodity importing countries, in 2018–2019, the Netherlands (-0.8 percentage points to 4.5% in 2018–2019) was replaced by India (+1.3 percentage points to 5% in 2018–2019). Among the four countries that were in the group in both 2008–2009 and 2018–2019, only China increased its share of the world total between the two periods (+6.5% to 14%).

UNCTAD says that on average, in developed countries, commodity exports accounted for roughly 23% of total merchandise exports in both 2008–2009 and 2018–2019. In 2008–2009, only four countries (10.5% of the grouping) and in 2018–2019, only 5 countries (13.2%) were commodity dependent. Four of these countries were the same in both periods, namely Australia, Iceland, New Zealand and Norway. In 2018–2019, Greece was added to the grouping, with an average dependency rate of 61.3%, just above the threshold of 60% ─ 33% of Greece's merchandise exports are refined fossil fuels.

Commodity export dependence in Africa and Oceania is particularly noteworthy, with more than three quarters of countries in both regions relying on commodity exports for more than 70% of their total merchandise export revenues, according to the report.

It’s especially high in Middle Africa and Western Africa, where it’s pegged at about 95%. In both these subregions, all countries were commodity dependent in 2018–2019, except the Central African Republic.

In South America, all 12 countries had a level of commodity dependence greater than 60% in 2018–2019, and for three quarters of them, the share of commodity exports out of merchandise exports exceeded 80%.

Central Asia was the subregion with the highest level of commodity dependence in Asia, with an average share of commodity exports out of merchandise exports higher than 85% in 2018–2019. All five countries in the subregion were considered commodity export dependent in 2018-2019.

Corruption

Commodities and corruption are handmaidens, and Bloomberg this year noted that [Although largely unknown beyond the world of commodity trading, companies like Glencore, Vitol and Trafigura have become crucial cogs in the global economy, but face investigations into alleged wrongdoing in countries from Democratic Republic of Congo to Brazil. In their book “The World for Sale,” Bloomberg's Javier Blas and Jack Farchy delve into the characters that make the world of commodity trading tick, with some saying it is "plagued" by corruption.]

"The commodity-traders who feature in 'The World For Sale' are not the kind who yell orders at each other in the ring of the London Metal Exchange, [but instead] the small band of mostly private companies move bulk commodities from there to here. It is a fascinating and revealing story, largely because of where 'there' is: usually a place where many people would prefer not to do business, run by characters they would prefer not to do it with. 

A handful of swashbucklers became billionaires by overcoming such qualms... There are tales in the book of breathtaking trades, such as shipments of rebel oil from war-torn Libya or deals bartered amid the brutal 'aluminium wars' in the Russia of the 1990s... The seeds of a sequel to this gripping book lie somewhere here" ─ The Economist

Commodity super-cycles

The Food and Agricultural Organisation of the United Nations in its Food Index shows that in 60 years the real (inflation-adjusted) data were at 103.8 in 1961 and 121.2 in 2021.

There have been 4 commodity super cycles since 1900 and led by China and India, the real prices of energy and metals more than doubled in five years from 2003 to 2008, while the real price of food commodities increased 75%. According to the McKinsey Global Institute Chinese imports from other developing countries rose from $50bn in 2000 to $727bn in 2017. Although commodities such as oil, iron ore, and soybeans make up 37% of these imports, China also sources a range of other goods, both intermediate and final, from across the developing world. Yet as of 2017, China’s surplus with other developing countries stood at $75bn.

Refinitiv, the data firm, notes that "A weakened dollar, supportive central banks, and government spending on post-pandemic recovery programmes fuel inflationary expectations, and have increased the attractiveness of commodities as a hedge against inflation. From an investor point of view, commodities valuations and their relative performance are low compared with other asset classes, such as equities and the S&P500...While the global economy is undeniably experiencing a post-COVID expansion, many analysts do not expect this boom to be enough to fuel a new commodities supercycle.

Perhaps, what we are facing, is the overlay of several cyclical upswings with the acceleration of a new mega-trend, the transition to a low-carbon economy."