Wednesday, March 20, 2013

The fate of Commodity Exports: Key Determinants

Commodities exports are highly susceptible to sharp changes in demand and supply. Spiky price changes remain a constant feature since the market is hardly in control of far reaching socio-economic and political developments in the producing and consuming nations. Real or perceived changes in demand and supply sources could lead to sudden rise or fall in commodity prices. Threats of unrests in the Middle East, which supplies up to 30 percent in global crude oil; or prospects of an economic slowdown in the US, China and Europe for example which are the major crude oil consumers, could exert dramatic upward or downward pressure on the price of crude oil. The same is the true for most other commodity exports and interestingly, the timing or scale of these influential market factors are ever difficult to direct.

In July 2011, Consensus Economics, a leading macro-economic analysis firm carried out a survey (‘Factors Affecting Commodity Prices’)which asked experts to compare and rate the differing degrees of sensitivity with which the prices of different commodities respond to a range of influences at every point in time in the global market. The rating was on a scale of 0-10, with 0 indicating ‘no influence’ and 10 signifying ‘very strong influence’. The outcome of the survey shows some of the key factors that determine the price of key commodities in the global market.

In this survey, most of the respondents identified ‘Demand/business cycle’ as an influential factor in the price of several commodities, with rating averaging about 6.8 out of 10 in total. For aluminum, copper, steel and palladium, respondents ranked this particular determinant 8 out of 10. The influence of Government trade policies, was expects year end 2012 growth of around .5 percent, its weakest growth in about five years.

Highly export dependent, the Chinese economy has been hit by troubles in the euro zone, the US and others, which has dampened exports and investment in flows. The company is also struggling with a bust in its hitherto bubbling property market.For the net exporters, while the prices of some of the most essential commodities, especially agricultural and energy products have remained relatively favourable since the euro zone debt crisis, the magic has not been due to a strengthening in demand but to production and supply fears and the activities of speculators. These ‘satisfactory’ price level (at around $100 per barrel) explain, for example, why OPEC has left crude oil production figures unchanged since the beginning of the year.

But for how long will the ‘satisfactory’ price levels of these and other commodities be sustained, given the slowing economic fortunes In   China?  For commodity export dependent countries, any bad news from their biggest market, China, is indeed bad news.

Experts opine that China will be the main determining factor of future of commodity demand and price; first, for the size f the economy which is now the second largest after the United States; and for its stage of socio-economic development which creates strong demand for commodities. Also, the sheer size of its population-about 1.3 billion people with a rapidly growing middle class makes it the key consumption market to watch.

A report published n the wall street journal (“As China Goes, So Go commodities’ by Liam Pleven; December 14, 2011) places the direction of global commodities demand and prices at the door steps of a China. “You want to know where the global commodities markets are heading in the coming years? Then it’s probably best that you remember a single word: China”

According to the report, no single factor is likely to have a more far-reaching impact on commodities markets over the next few years than the direction of the Chinese economy. If China maintains its traditional full speed growth, demand for the prices of commodities will remain bullish. If the current marginal slowdown is sustained, say at between 7-9 percent, commodities will also experience relative market stability. But if the Chinese economy experiences a hard landing, say, to the region of 4-5 percent, so will the commodities market, Particularly vulnerable are commodities highly consumed by China, including crude oil, copper, steel, coal, among others. 

more likely scenarios in the view of most experts is a moderation in the economic expansion of China, rather than a hard landing, which is good news for commodity exporters.

Another good news for African commodity exporters is that several other ‘Chinas’ are in the offing. Emerging markets such as India, Brazil, Indonesia, Russia and Turkey have the potential, like China, to boost global demand for commodities in the coming years. 

Other potential factors that could determine the future of commodity market include the outlook for technological evolutions, including bio-fuel technology; developments in financial markets; new investments in commodities production; exchange rates dynamics (especially in relation to the US dollar); growth in global population, employments in major commodity export zones; natural factors including climate change and its impacts, among others.

Culled from Zenith economic quarterly July 2012 and written by Eunice Sampson

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