Logistics and technology are the two new factors that are impacting commodity markets
There are six major drivers of global commodity markets covering energy, metals and agriculture. These are: economic growth; geopolitics; monetary policy; currency; weather; and financial investment/funds.
To the above, we can now add two more drivers. Logistics as the 7th driver and technology as the 8th.
While the first six are self-explanatory, challenges of logistics came to the fore during the last three years when the Covid pandemic struck, soon followed by the Russia-Ukraine war. The world witnessed shipping dislocations and supply chain disruptions, while sanctions forced countries to look for new suppliers and new markets.
Russia and Ukraine are important exporters of oil, gas and coal; metals like palladium, platinum, nickel, enriched uranium, iron ore as well as grains (wheat, barley, maize), vegetable oil and fertilisers.
Logistics challenges immediately impact on the world commodity markets because of their disruptive effect. Technology too has emerged as a driver. Energy transition and decarbonization mean embracing green technologies that will have a significant impact on world commodity market covering fossil fuels and industrial metals.
But technology is a slow driver with its impact felt over time. Movement towards Electric Vehicles (EVs), solar power and so on means that energy transition would be metals intensive while demand for fossil fuels (crude oil, coal) may reduce over time.
We have seen how geopolitical developments have resulted in imposition of sanctions, protectionism, resource nationalism and occasionally, weaponisation of commodities. These developments are changing the global commodity trade landscape.
There is interdependence among nations for sourcing and marketing of goods either as raw material or as finished products. This has fostered substantially liberal trade flows resulting in formation of global value chains. Now, geopolitical events (political instability, war-like situation, strife) have resulted in dislocation of the established value chains. Sanctions have polarized nations, adversely affected settled trade flows and even led to trade controls.
So, countries are forced to diversify their supply sources and destination markets to de-risk trade and ensure continuity. We find redirection of merchandise trade with new origins and new destination markets. We also find countries are forced to compromise. For instance, the rift between China and Australia is settled because neither can afford a stand-off.
Geopolitics has also strengthened cartelisation. We have OPEC + that includes Russia. China has brokered peace between Saudi Arabia and Iran which is a major development, the impact of which may be felt over time.
The adverse effects of geopolitical instabilities have been exacerbated by the recent banking crisis and US debt ceiling issue. After several rate hikes by the US Federal Reserve and other central bankers to tame inflation recession fears have come to the fore.
Clearly, the global policy context is becoming increasingly complex. Countries are forced to take sides. There is a possibility that the world may be fracturing into a US-led bloc and a China-led bloc.
The IMF has flagged the issue of forced polarisation among nations calling it ‘geo-economic fragmentation’.
In all of these, there is one common global challenge that’s climate change. Climate mitigation has to be a global effort. The moot question is: ‘Are we all in it together?’
For green transition, critical raw materials are concentrated in a few countries like China. Resource crunch may impact the pace of transition in India. For instance, India has turned from a net exporter of refined copper until 2018 to the position of a net importer of copper in the last five years. Copper is a critical metal for energy transition and electrification.
Finally, we have to accept that we live in a VUCA world (Volatility, Uncertainty, Complexity and Ambiguity), which will linger for longer. Geopolitical stresses can escalate. But it is for all of us to ensure that such stresses do not derail global cooperation on climate efforts.
If we don’t sail together smartly, we will sink together!!
The writer is a policy commentator and commodities market specialist. The article is based a keynote speech the author recently delivered at an international conference in Dubai . Views expressed are personal
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