February 27, 2009
• Commodities provide raw materials for processors, food and jobs for families and communities, and export earnings for governments. Commodities are often at the heart of local and sometimes national economies.
• Commodity prices have historically been among the most volatile of international prices. Commodity price volatility is a big problem for producers as well as commodity-dependent countries.
• With 95 of the 141 developing countries deriving at least half their exports earnings from commodities, the volatility of commodity prices (prices can rise or fall by 50 per cent in a single year) makes sound fiscal planning in these countries extremely difficult.
• Volatile commodity prices are also a big problem for companies, who are faced with major changes to their cost structures as well as unstable supply markets.
• The rampant volatility in the world’s commodity markets over the past several months has not been seen in 30 years.
2. Challenges for European companies
• Over the last few years demand for raw materials on the international raw material markets has increased drastically. Demand for commodities has soared in fast-growing emerging economies, such as China and India. This has led to large increases in production costs for European companies. In mid-2008, commodity prices were at their highest levels in decades.
• However, prices have not only increased because of market factors. European companies also face higher raw materials costs and difficulties with the supply of raw materials as a result of interventionist practices – such as export restrictions and dual pricing – by emerging country governments and EU and Member State restrictions on access to materials available in Europe.
• In addition to these problems there are a number of other risks which could endanger the supply of raw materials in the future. Some countries outside the EU try to systematically secure their supply of raw materials by building up relationships with raw materials producing countries. As a consequence there is the risk that raw material flows from an increasing number of raw materials producing countries do not reach the raw material markets but go directly to certain raw materials consuming countries. These deals are therefore potentially distorting the international market for raw materials.
3. How to address this challenge?
• The EU should develop a coherent, effective and comprehensive strategy on raw materials which takes into account the broad range of raw materials used by industrial sectors, i.e. metals, agriculture products, forestry products as well as secondary raw materials.
• The strategy should include trade policy, external relations, development cooperation, environment, health and safety, competition as well as research and innovation policies.
• In this context, European companies welcome the Communication on Security of Supply with non-energy Raw Materials presented by Commissioner Verheugen on 5 November 2008. Much will depend on the time and manner in which the proposals put forward in this Communication are implemented.
• An example of how the EU could address this challenge is by working together with resource-holding countries to promote freer and more sustainable development and trade in raw materials.
o EU development policy can support investment in infrastructure and capacity building.
o Partner governments should be encouraged to strengthen authorities and institutions responsible for raw materials and implement an effective and sustainable raw materials policy, investment framework and taxation regime
o International schemes designed to foster good governance, transparency and sustainable management in the exploration and trade of natural resources, such as the Kimberly process, the Extractive Industries Transparency Initiative (EITI) should be promoted.
4. Possible questions
• What is your assessment of the volatile prices for raw materials as well as the extensive government intervention in the market for raw materials?
• How can an EU Strategy for raw materials deliver for European companies?
• Are initiatives such as EITI or the Kimberly process contributing to transparency, better governance and sustainable management in developing countries?
• A sustainable use of raw materials also requires that raw materials are reused and waste production is minimized. What is your company’s strategy?
• How can EU development policy help developing countries with diversifying their economies?
• How does your company manage the risk of volatile commodity prices?
5. Further reading
Boom or Bust: Developing countries’ rough ride on the commodity price rollercoaster
Speeches & Statements
• Peter Mandelson
o The Challenge of Raw Materials, 29 September 2008
• Trade and Raw Materials: Looking Ahead
o Conference on the EU’s Trade Policy and Raw Materials, 29 September 2008
o Brussels eyes natural reserves in raw materials scramble, 5 November 2008
• Report On Business
o A Strange Problem: Rampant Price Volatility, 12 January 2009EBS