Shifting Commodity Markets in a Globalized World Editors Rabah Arezki and Akito Matsumoto I N T E R N A T I O N A L M O N E T A R Y F U N D ©International Monetary Fund. Not for Redistribution ©2017 International Monetary Fund Cover design: IMF Multimedia Services Division Cataloging-in-Publication Data Joint Bank-Fund Library Names: Arezki, Rabah, editor. | Matsumoto, Akito, editor. | International Monetary Fund. Title: Shifting commodity markets in a globalized world / editors, Rabah Arezki and Akito Matsumoto. Description: Washington, DC : International Monetary Fund, [2017] | Includes bibliographical references and index. Identifiers: ISBN 9781484310328 (paper) | ISBN 9781484330715 (ePub) | ISBN 9781484330807 (Mobi) | ISBN 9781484330814 (PDF) Subjects: LCSH: Commodity exchanges | Commodity futures. | Globalization. Classification: LCC HG6046.S485 2017 Disclaimer: The views expressed in this book are those of the authors and do not necessarily represent the views of the International Monetary Fund, its Executive Board, or its management. Recommended citation: Arezki, Rabah, and Akito Matsumoto, eds. 2018. Shifting Commodity Markets in a Globalized World. Washington, DC: International Monetary Fund. ISBN 978-1-48431-032-8 (Paper) 978-1-48433-071-5 (ePub) 978-1-48433-080-7 (Mobipocket) 978-1-48433-081-4 (PDF) Please send orders to: International Monetary Fund, Publication Services P.O. Box 92780, Washington, DC 20090, U.S.A. Tel.: (202) 623-7430 Fax: (202) 623-7201 E-mail: [email protected] Internet: www.elibrary.imf.org www.bookstore.imf.org iii ©International Monetary Fund. Not for Redistribution Contents Preface ��������������������������������������������������������������������������������������������������������������������������������������v 1 Introduction����������������������������������������������������������������������������������������������������������������1 Part 1. Energy Markets 2 Technology and Unconventional Sources in Global Oil Markets �����������5 3 Structural Changes in Natural Gas Markets �������������������������������������������������23 4 The Energy Transition in an Era of Low Fossil Fuel Prices �����������������������37 Part 2. Metal and Food Markets 5 Metal Prices Signal Global Economic Shifts �������������������������������������������������55 6 Food Supplies and Food Security ��������������������������������������������������������������������75 Bibliography �������������������������������������������������������������������������������������������������������������������������95 Index �������������������������������������������������������������������������������������������������������������������������������������101 iii ©International Monetary Fund. Not for Redistribution This page intentionally left blank ©International Monetary Fund. Not for Redistribution Preface Technology, demography, policies, and institutions are some of the forces that affect commodities such as energy resources, metals, and food. This book is based on research in the Commodities Unit of the IMF’s Research Depart- ment and explores the interplay of these various forces across different com- modity markets. These chapters analyze the forces driving commodity mar- kets over the medium term and their interaction with the global economy. Rabah Arezki is the chief economist of the World Bank’s Middle East and North Africa Region and a senior fellow at Harvard’s Kennedy School of Government. He was previously chief of the Commodities Unit in the IMF’s Research Department. He has written on energy, commodities, development, and international economics. He has published widely in peer-reviewed jour- nals and coedited several books. Akito Matsumoto is acting chief of the Commodities Unit in the IMF’s Research Department. He has written on energy, commodities, and interna- tional economics, including for peer-reviewed journals, and has organized several conferences on these issues. He holds a Ph.D. from the University of Wisconsin. v ©International Monetary Fund. Not for Redistribution This page intentionally left blank ©International Monetary Fund. Not for Redistribution CHAPTER 1 Introduction The chapters in this book were prepared by the Commodities Unit of the Research Department of the IMF between 2014 and 2017, a period of great upheaval for global commodity markets. Individual chapters track developments and prospects for energy, metals, and food markets since the early 2000s, the start of what is termed a “commodities supercycle”—the rise of commodity prices over a decade or more as a result of a rapid urbanization and an expansion of infra- structure. The recent commodities supercycle coincides with the growth of large emerging market economies, specifically China and India. This book examines the complex and intertwined set of forces that affect various commodity markets and the complex interplay between these market forces and the broader global economy. Instead of focusing on short-term developments and their immediate causes, this analysis takes a longer view. It examines the relative importance of technology, geography, demography, and policy in each of these commodity mar- kets and how their interplay sends price signals to producers and consumers, who in turn adjust their behavior. TECHNOLOGY Macroeconomists often assume that technological innovation is exogenous (driven largely by external factors or forces), but this volume documents how innovation in energy markets is directly affected by prices. When oil, natural gas, or fossil fuels become scarce, prices increase. This stimulates innovation and the adoption of new technologies and techniques for recovery and use of these resources. Conversely, when these commodities are abundant, prices fall, slowing the pace of innovation and the adoption of new techniques. Deepwater extraction and high-efficiency vehicles are innovations developed during periods of high oil prices, as outlined in Chapter 2. Chapter 3 describes how the development of hydraulic fracturing for the recovery of natural gas from shale rock formations led to significant declines in the natural gas prices and a corresponding increase in the use of natural gas in manufacturing and power generation. Chapter 4 describes how a decline in fossil fuel prices led to an increase in the number of coal-fired power plants in Europe and increased the sale of gas-guzzling vehicles. 1 ©International Monetary Fund. Not for Redistribution 2 Introduction GEOGRAPHY At the heart of international trade in commodities are cross-country differences in resource endowments. Natural resources are materials or substances that occur in nature and can be used for economic gain, and so these include not only reserves of hydrocarbons, minerals, fisheries, and forests, but also temperate weather, fertile land, and access to water, which are important to agriculture. A given country’s geology and natural resources are largely predetermined, but its ability to exploit its endowments depends on institutional factors. The discov- ery of major mineral deposits in Latin America and sub-Saharan Africa in recent decades occurred following the liberalization of these economies. This volume documents that the geography of trade in commodities has evolved as a result of shifts in both supply and demand. On the supply side, Chapter 5 documents how the supply of metals has shifted in recent years from the northern hemisphere (primarily advanced economies) to the southern hemi- sphere (largely emerging markets) with the depletion of longstanding reserves and the opening of potential new resources for exploration. On the demand side, the rise of large emerging markets has contributed to a rapid increase in global con- sumption that helped set off the recent commodities supercycle and shift demand for commodities from the western hemisphere and Europe to Asia. DEMOGRAPHY The size and demographic structure of a country’s population are closely linked to its pace of economic development. And economic development, in turn, affects the size and structure of the population—in general to reduce family size and increase the share of older people in the total population. This demo- graphic transition also translates into changes in the geographic distribution of a country’s population, with people migrating from rural to urban areas. These demographic and economic transitions obviously have important implications for the structure of agriculture and the demand for food products, but they also influence demand for metals and energy because of changes in the demand for housing and transportation services. Chapter 6 explores the implications of demography and urbanization for global food markets and food security. POLICY Policies and regulations, including those designed to address environmental concerns and achieve food or energy security, may either counteract or exacerbate market forces, and they play a key role in commodity markets. One example from the energy market is the explosion of shale oil production in the United States, which was the result of a regulatory shock in the United States. Specifically, the Energy Policy Act of 2005 exempted the chemicals used in hydraulic fracturing from safe drinking water standards. This coincided with a period of high oil ©International Monetary Fund. Not for Redistribution Arezki and Matsumoto 3 prices, driven by the rapid increase in demand from large emerging market econ- omies, which helped spur innovation in hydraulic fracturing techniques as described in Chapter 3. Trade policy instruments such as export and import tariffs, subsidies, and quotas have significant effects on global food markets and serious distributional consequences for consumers. Food has been a longstanding sticking point in trade negotiations, despite the fact that food represents a relatively small share of global trade. Tariff and nontariff barriers to trade in agricultural commodities are often motivated by concerns over food sovereignty (that is, preserving domestic production capabilities for key foodstuffs) and protecting the well-being of domestic farmers. All countries continue to have a strong anti-trade bias in the structure of assistance to their agricultural sector, and there are multifaceted dis- tortions to global food markets as described in Chapter 6. ©International Monetary Fund. Not for Redistribution