Introduction

Cambridge University Press 978-0-521-88020-6 - A Handbook of Primary Commodities in the Global Economy Marian Radetzki Excerpt More information Introduction Background My book A Guide to Primary Commodities in the World Economy, published by Blackwell in 1990, is the antecedent to the present work. International commodity issues have been the focus of my profes- sional attention ever since the 1960s, and that book, a broad review of the subject, summarized what I had learnt over the preceding decades. I was pleased with the interest that the book generated and with the positive reviews it received, but its publication clearly had an inopportune timing. The decades of the 1980s and 1990s can be characterized as a period of indifference, insofar as raw materials go. Real prices of non- fuel commodities had a clear downward trend from as early as 1974 and until 2002. Despite the efforts of the OPEC cartel, long-run fuel prices experienced a trend decline from 1981 to 1998, with a recovery to somewhat higher levels in the following four years, quite modest in the perspective of what would follow. Through this extended period of doldrums, the supply conditions for most commodities were quite relaxed most of the time. The advanced economies were in a process of dematerialization, where decreasing volumes of raw materials were needed per unit of value added. This suppressed demand growth and reduced the significance of commodities in their macro-economies. While these circumstances prevailed, security of supply assumed a low priority for users. The major problem among producers was to cope with excessive capacity and weak profitability. The speculators’ interest was muted by the relative calmness and declining prices in commodity markets. For the same reason, non-commercial investors like pension funds and mutual funds had little incentive to engage in longer-term placements in commodities. These actors, instead, directed their investments to fields like information technology or sophisticated services, where markets 1 © Cambridge University Press www.cambridge.org Cambridge University Press 978-0-521-88020-6 - A Handbook of Primary Commodities in the Global Economy Marian Radetzki Excerpt More information 2 Introduction appeared to provide a better profit potential. Against this background, interest in commodities dwindled also in the academic com- munity. Researchers found more fertile ground for their efforts in other sectors of the economy, while students lost interest. Commod- ities were simply not a rewarding career area. Circumstances have been radically different in the first decade of the twenty-first century. Between 2002 and 2006, the prices of all fuels and many metals doubled or rose even more. Numerous agricultural raw materials also experienced a sharp price increase. Primary commodities became truly hot stuff, with current events in the commodity markets regularly displayed on the first pages of newspapers and magazines, and figuring prominently on TV screens. Fast global economic expansion provides the major explanation for the demand shock that has pushed up commodity prices. A special role has been played in this context by China and India, two countries with a record-breaking growth that have recently emerged as very sizable commodity importers. Earlier attitudes of commodity complacency among consumers shifted towards worries about security of supply with the realization that commodity supply is indispensable, and that even prosperous dematerializing economies cannot function without safe raw material inputs. This resulted in increased demand for inventories, and efforts to establish priority positions for supply. Heavy users of commodities in the manufacturing sector have seen their profits fall in consequence of the rising prices. This has been particularly true for producers of automobiles and white goods, which are intensive metal users. Producers of primary commodities, in contrast, have experienced an unexpected profit surge. Investments in capacity growth have been stimulated by the high prices, to the extent of exhausting the immediate availability of investment inputs. Capacity expansion has also been restrained by fears among commodity producers of a forthcoming price decline, for serious doubts remain about the widespread claim that a vaguely defined ‘‘structural change’’ will assure the sustainability of high price levels. The rising commodity prices have galvanized the managers of hedge funds, pension funds and other capital portfolios to invest in commodities both as a means of diversification and for the prospect of significant profit opportunities. Persevering low inventories in some markets along with political uncertainties about future supply have © Cambridge University Press www.cambridge.org Cambridge University Press 978-0-521-88020-6 - A Handbook of Primary Commodities in the Global Economy Marian Radetzki Excerpt More information Introduction 3 destabilized prices and attracted speculators to the commodity world. The financial investments and the intensified speculative activity have pushed up prices even further than warranted by commodity market fundamentals. For all the above reasons, primary commodities have come to attract accentuated attention from many quarters, after decades of indifference and neglect. In my view, this situation will remain for some time, because the current commodity boom will prove more durable than its predecessors of 1950–1 and 1973–4. The earlier boom events were short-lived, and collapsed as the world economy went into recession. In mid-2007, as this is being written, no recession is in sight, so the commodity boom is likely to persevere until the ongoing investments in new capacity become productive, and that will take several more years. In the meantime, commodities will remain in the limelight. An opportune time to publish The present, therefore, is a period of strong interest in commodity- related issues, making it an opportune time for launching the publication of a broad-based book on primary commodity markets in the international economy. This is especially so since, to my knowledge, no such book has been published since 1990, when my old opus appeared. The text which follows provides a comprehensive overview of pertinent issues relating to primary commodities in the global economy. The basic structure of the old book has been retained because I believe that it continues to be valid and appropriate. Major components in that structure cover: The geography of commodity production and trade; The distortions of production location and comparative advantage caused by protectionist trade policies; The institutions of price formation; the causes to short-run price instability and long-run price trends; the role of commodity exchanges; Fears for, and measures to ensure, the importers’ supply security; Prospects for successful monopolistic producer collusion; Trends in, and implications of, public ownership; © Cambridge University Press www.cambridge.org Cambridge University Press 978-0-521-88020-6 - A Handbook of Primary Commodities in the Global Economy Marian Radetzki Excerpt More information 4 Introduction Issues raised by a very high national dependence on commodity production and exports. So much has changed over the past twenty years that a mere updating of the old text was completely inadequate. All the above themes have therefore been thoroughly rewritten. New portions have been added to cover what I formerly overlooked or to explore newly emerging phenomena. The additions comprise: A historical framework, covering (a) the declining role of the primary sector in the national economy in the course of economic development; (b) the falling transport costs and the globalization of primary commodity markets; and (c) the pendulum swings between public intervention and free rein of market forces in the commodity industries; The shift of the center of gravity of the world economy and of primary commodity consumption from the prosperous OECD nations towards populous, developing Asia; The changing directions of the global trade flows, with developing countries greatly expanding their exports of manufactures and losing their dominance as net exporters of raw materials; The recent role played by China and India as consumers of imported primary commodities; The increasing reliance on commodity exchanges, providing valuable opportunities for stabilizing hedging, but at the same time widening the scope for speculative activity; The widespread fears, accentuated by the most recent commodity boom, that depletion will compromise human welfare by con- straining the supply of critical materials, prominently manifested by the claims that ‘‘peak oil’’ (and ‘‘peak gold’’ or ‘‘peak copper’’) is impending; The revival during the 2000s decade of the popularity of nationalization and state ownership in some resource-rich countries and industries. The subject of primary commodities in the global economy is vast, and not all its aspects can be treated within the confines of a single tome. The focus is on the economics of commodity production and trade in a somewhat narrow sense, while issues related to, e.g., employment, regional development and the environmental impacts © Cambridge University Press www.cambridge.org Cambridge University Press 978-0-521-88020-6 - A Handbook of Primary Commodities in the Global Economy Marian Radetzki Excerpt More information Introduction 5 of commodity production and trade do not receive any detailed attention in the following chapters.

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