Transcript World commodity prices and markets

Sixth form Conference
27th June 2006
World Commodity Prices
and Markets
Dr Wyn Morgan
Question: what links Chinese economic policy
with a crime committed in Sinfin in June?
http://news.bbc.co.uk/1/hi/england/derbyshire/5011174.stm
Answer: the price of copper. Why?
China is growing rapidly and demanding
commodities such as copper, thus prices have
risen sharply
Criminals see prices rising and try to “supply”
some from a community centre!
Figure 1: Copper Prices $/tonne (July ’05-June ’06)
Source: BBC
Figure 2
China's primary imports from world and from Africa, by major commodity group,
average annual rate of growth, 1994–2003
per cent
60
50
40
30
20
10
0
Total primary
commodities
Food
Agricultural raw
materials
World
Source: COMTRADE.
Africa
Fuels
Ores and Metals
Outline
1. Commodities defined
2. The main features of commodity markets
3. Price behaviour
4. Policies for commodity markets
5. Conclusions/questions
1. Commodities Defined
“A commodity is something that hurts
when you drop it on your big toe, or smells
bad if you leave it out in the sun too long”
(Barron’s 27th June 1983)
Primary commodities are “natural” and have
not been processed into other products
What types of internationally traded primary
commodities are there?
Food/Beverages
Coffee, cocoa, sugar, wheat, maize, rice,
bananas, beef
Minerals and Metals
Tin, copper, zinc, nickel, iron ore, aluminium
Agricultural Raw Materials
Rubber, cotton, tobacco, oilseeds, soybeans,
oils (palm, groundnut)
Fuels
Oil, gas and coal
2. What are the Main Features
of Commodity Markets?
Major share of world trade
•23% including fuels
•14% excluding fuels
•Many countries export & import (see Table 1)
•Most DMEs net importers (except Australia
and Canada)
Demand – generally stable
•Necessities (e.g. food)
Low degree of substitution
Low income elasticity for food
•Inputs into manufacturing production:
Copper in construction or palladium
for mobile phones
Some substitution (e.g. rubber)
Supply – can be volatile
•Not just developing countries (see Table 2)
•Time period for supply means short run is a
long time and elasticity low e.g.:
Minerals need new mines
Coffee bushes need 7 years to mature
•Effect of shocks
Permanent - new processes
Temporary - weather
http://business.timesonline.co.uk/article/0,,9065-2236557.html
Graph 1: Commodity Market with Supply Shock
S2
Price
S1
P2
S3
P1
P3
D
Q2 Q1 Q3
Quantity
Graph 2: Commodity Market with a Demand Shift
Price
S
P2
P1
D1
Q1 Q2
D2
Quantity
3. Price Behaviour
Commodity prices exhibit two main features:
1. A high degree of volatility (see Table 3)
arising mostly from supply volatility
2. Downward trend relative to manufactured
goods
2000Q3
1999Q1
1997Q3
1996Q1
1994Q3
1993Q1
1991Q3
1990Q1
1988Q3
1987Q1
1985Q3
1984Q1
1982Q3
1981Q1
1979Q3
1978Q1
1976Q3
1975Q1
1973Q3
1972Q1
1970Q3
1969Q1
1967Q3
1966Q1
1964Q3
1963Q1
1961Q3
1960Q1
1958Q3
1957Q1
Figure 3: Nominal Quarterly Commodity Prices (1957Q1 = 100)
350.0
300.0
250.0
200.0
150.0
100.0
50.0
0.0
2000Q4
1999Q3
1998Q2
1997Q1
1995Q4
1994Q3
1993Q2
1992Q1
1990Q4
1989Q3
1988Q2
1987Q1
1985Q4
1984Q3
1983Q2
1982Q1
1980Q4
1979Q3
1978Q2
1977Q1
1975Q4
1974Q3
1973Q2
1972Q1
1970Q4
1969Q3
1968Q2
1967Q1
1965Q4
1964Q3
1963Q2
1962Q1
1960Q4
1959Q3
1958Q2
1957Q1
Figure 4: Real Commodity Prices (Deflated by US Price Index)
450
400
350
300
250
200
150
100
2001Q4
2001Q1
2000Q2
1999Q3
1998Q4
1998Q1
1997Q2
1996Q3
1995Q4
1995Q1
1994Q2
1993Q3
1992Q4
1992Q1
1991Q2
1990Q3
1989Q4
1989Q1
1988Q2
1987Q3
1986Q4
1986Q1
1985Q2
1984Q3
1983Q4
1983Q1
1982Q2
1981Q3
1980Q4
1980Q1
Figure 5: Nominal Quarterly Commodity Prices (1957Q1 = 100)
300.0
280.0
260.0
240.0
220.0
200.0
Commodity Price Index
180.0
160.0
19
80
Q
19 4
81
Q
19 3
82
Q
19 2
83
Q
19 1
83
Q
19 4
84
Q
19 3
85
Q
19 2
86
Q
19 1
86
Q
19 4
87
Q
19 3
88
Q
19 2
89
Q
19 1
89
Q
19 4
90
Q
19 3
91
Q
19 2
92
Q
19 1
92
Q
19 4
93
Q
19 3
94
Q
19 2
95
Q
19 1
95
Q
19 4
96
Q
19 3
97
Q
19 2
98
Q
19 1
98
Q
19 4
99
Q
20 3
00
Q
20 2
01
Q
20 1
01
Q4
Figure 6: Real Commodity Prices 1980-2000 (Deflated by US Price Index)
300
280
260
240
220
200
180
160
140
Do these features represent a problem?
Volatility
•Input price volatility
Labour and capital costs known, other
inputs not – what happens?
Who pays for this? Inflation effects?
•Selling price volatility
Producer income unknown
Investment difficulties
Downward Trend
•LDC producers rely on export revenues
•Need manufactured goods for growth
•Try to produce more to increase revenues:
Y = PQ
Increase Q to offset fall in P but this
causes P to fall!
•Problem of dependence on a few
commodities for export earnings (see Table 4)
4. Policies for Commodity
Markets
What do countries want?
•DMEs want good supplies but with stable
and “fair” (low??) prices
•LDCs want increased export earnings but
want them to be stable (high prices??)
How can these be reconciled?
By “managing” the market
International Commodity Agreements
•Buyers and sellers control supply to keep
prices in a stable range
•Supply controlled by production limits,
export quotas, buffer stocks etc
Graph 3: Price Bands in a Commodity Market
Price
S
Pu
Pe
PL
D
Qe
Quantity
International Commodity Agreements
•Buyers and sellers control supply to keep
prices in a stable range
•Supply controlled by production limits, export
quotas, buffer stocks etc
•Existed for a number of commodities: sugar,
coffee, cocoa, rubber, tin
•All collapsed due to disagreements between
the two sides
One-sided interventions
•Supply control by producers (cartels)
e.g. OPEC
Controls supply by quotas and can
increase prices (see 1973/4 on Figure 1)
•Protection of domestic producers
e.g. Common Agricultural Policy
Use tariffs and artificial prices to raise
incomes for EU farmers
Impact on world markets significant
Other Policy Issues in Commodity Markets
•Development and growth concerns
•Diversification of production in LDCs
•Inflation in DMEs
•Environmental concerns
•Technological change and its effects
•Market power and prices
•Risk management
5. Conclusions/Questions
• Commodities are important for both LDCs
and DMEs
• Commodity markets have stable demand but
potentially volatile supply
• Prices can be volatile in short run and
downward trending in the long run
• Intervention can affect prices but what are
the welfare implications of such policies?