By Dr. Michael Akerib November 2020

Introduction

Commodities are an important factor in the world economy as it is estimated that two billion people live from their production and trade. Nearly 100 countries are economically dependent on income from commodity production and export, making the swings in prices a key element in the income and development of these countries.

Economic impact

The price of commodities has stagnated since the twentieth century compared to the evolution of prices of industrial products and this was instrumental in allowing economic growth in the 20th century. While there is a silver lining for it by reducing inflation, the negative aspect is the lower-income for producers of the commodities and the countries in which they are produced. Large swaths of the population of developing countries are employed in agriculture and their income is therefore directly impacted.

Commodity prices are substantially more volatile than the prices of industrial products and this translates into the inability of countries depending on their exports to develop long-term financial plans and therefore obtain loans on international markets. This also thwarts their ability to import technology and equipment to increase the competitiveness of agricultural production.

The natural resource curse

For two centuries now, the concept of a natural resource curse has been put forward. It purports that countries with natural resources perform economically worse than those countries which are not endowed with these resources. They are also more corrupt and do not contribute to a reduction in poverty. Riches from natural resources, the natural resource curse, also leads to corruption, political instability, coups, revolutions, and civil wars. This is particularly true of developing countries, and developing countries are big producers of commodities and very often most of their exports are of only one commodity making them extremely vulnerable to market changes at which time the population sinks into poverty. This, in turn, leads countries to lower prices to increase exports starting thus a vicious circle.

Democratic countries, however, fare better due to more solid institutions. They are able to take advantage of labour demand that extractive industries require, they encourage local corporations to become preferred suppliers, and can profit from social infrastructure the foreign companies may have committed to building while negotiating production contracts.

The impact of the COVID pandemic

Supply and demand for commodity markets have been affected by the pandemic, with demand essentially collapsing. This is no surprise as the various lockdowns have led to a major recession probably the worst this century. The supply chains have been disrupted with a move to onshoring for strategic reasons. Major demand changes are possible as consumers become increasingly conscious of climatic warming and the reduction of biodiversity.

It is uncertain if people will start traveling as intensively as before and this would affect energy prices considerably.

Transport costs are increasing, in part because of stricter border controls. However, if teleworking increases as against the situation pre-pandemic, less transport will be required and this directly affects the price of oil.

If agricultural products have suffered less, and prices of precious metals have risen as they are used as safe investments, energy, and generally products used by the transport industry have seen dramatic drops. Stockpiling along the value chain is expected and they will undoubtedly impact prices.

The population of developing countries, particularly those importing considerable amounts of foodstuffs, will face dire moments and localized famines may ensue.

Conclusion

The long-term impact of the pandemic on commodity prices is difficult to forecast. Changes in consumer behavior with an increased concern about the environment will be a determining factor and reverse the trend to a major depletion of reserves. The search for new deposits may no longer be a priority for energy companies. However, this is unlikely to help developing countries relying on commodity exports. Let us hope it will lead them to convert to more sustainable development paths.