1.1 Primary Commodities in the Economic Development Process

For the purpose of the present section, we derive our definition of primary commodities from the national accounts to equal the value of output from the primary sector, comprising agriculture (including hunting, forestry, and fishing), mining, and utilities. These are the activities that supply unprocessed raw materials of agricultural and mineral origin, along with fuels, electricity, and potable water, for use by other sectors of the economy. An alternative and somewhat wider definition, derived from foreign trade statistics, appears to be more appropriate for most of the subject treatment in the rest of the book. This is further discussed in Chapter 2.

The significance of primary commodities in a national economy is reduced in the process of economic development. Long historical series to vindicate this statement are hard to come by, given that national accounts were not prepared prior to the twentieth century and reconstructions of the more distant past lack common standards. Simon Kuznets (Reference Kuznets1966) presents the following assessments of the shares of agriculture and mining (but not utilities) in GDP in selected countries over extended periods of time. The contraction in the primary share emerges starkly from his figures:

Data on a more systematic basis did not become available until the late 1930s, and in Table 1.1 time series (including utilities from 1975 and onwards) for selected countries for which these series are reasonably complete are presented. As in the numbers provided by Kuznets, the primary share exhibits a dramatic decline as the economies develop over time. The table additionally reveals far lower primary shares for rich, advanced countries, such as Italy, Japan, South Korea, and the USA, compared to poorer ones, such as India, Thailand, and Turkey, for the ultimate year. Norway stands out as an exception, explained further below.

A closer look behind the figures of Table 1.1 shows that in most cases agriculture predominated the primary sector during most of the twentieth century. In Kuznets’ assessments, for instance, the agricultural sector exceeded four-fifths of the primary total for the initial year, except for Australia, where the share was more than three-fifths. Because of its dominance, agriculture also dominates the recorded reduction of the primary share over time. The decline in the smaller initial share accounted for by mining, is much less accentuated. In some cases (Italy, USA) that share appears to have remained relatively stable through the economic development process (Kuznets, Reference Kuznets1966). In recent years we note that mining and utilities have come to dominate the primary sector. This can mainly be explained by the exceptionally high demand for many mining and utilities products since the turn of the century. Chapter 2 discusses this in more detail.

Concurrent cross-section data confirm the findings derived from the time series, i.e., there is a strong reverse correlation between the level of economic development, measured by GDP per capita, and the share of the primary sector in the economy. Figure 1.1 provides a demonstration. The data show unambiguously that the dominant pattern is a decline in the primary share of the economy as nations develop. In rich market economies the primary sector seldom exceeds 10% of GDP. Exceptions to this finding require mention, and Norway is an illustrative example. Its primary share has shown no decline over time in Table 1.1, and the country represents the extreme outlier position in Figure 1.1, combining a very high income level with an equally high primary sector share. The traditional importance of fishing in the country's economy explains the high weight of the primary sector until the 1960s. The subsequent development of offshore oil and gas has made Norway exceedingly rich, while expanding the primary share even more. Other exceptions to mention are Australia, Canada, and New Zealand: prosperous countries with an abundant export-oriented agriculture and a rich mineral endowment, where the primary sector accounts for more than 10% of overall national value added. When studying the share of the primary sector over time for these economies, a moderate increase in the primary share is noted since about 2005. This corresponds to the rapid increase in primary commodity prices witnessed during this time period.

Figure 1.1 Share of primary sector in GDP in 2013.

Note: 40 countries selected to assure a wide spread in per capita GDP. Primary sector defined as agriculture, hunting, forestry, fishing, mining, and utilities.

Source: United Nations Statistics Division on the Internet: http://unstats.un.org/unsd/snaama/dnllist.asp.

The general finding that the primary sector exhibits declining importance as economies develop is not particularly surprising. Simply expressed (and abstracting from the possibilities offered by foreign trade), a key element in the economic development process is rising productivity, which permits the domestic satisfaction of raw materials needs with ever lesser factor inputs. Labor and capital can then be switched to the secondary sector, i.e., production of manufactures whose sophistication typically increases over time. As manufactures demand, too, is eventually saturated, the factors of production can migrate again, now to the service sector. The overall economy expands, but the secondary and tertiary sectors more so than the primary one, leaving the latter with a declining share of the total.

With this perspective, the path of economic development can be seen as a process of dematerialization. Since all material inputs originate in the primary sector, and since this sector accounts for a shrinking share of the total, it follows that each dollar's addition to GDP will carry a material weight that declines over time. Table 1.2 illustrates what is involved. It presents the value in US$ (2014) per kilogram of a set of goods and services, listed in ascending order. The higher the value, the less primary material inputs will be needed per dollar value represented by the items. The essence of economic development is to move the center of the economy's gravity down the list, toward goods with ever higher value per kilogram. In consequence, the raw materials input needs will grow more slowly than the overall economy as countries grow richer. Material savings will be further boosted by technological progress, which is typically weight-reducing. It is conceivable that the need for primary materials inputs could stagnate, and plausibly even shrink, as growing rich economies become increasingly dematerialized. This finding can easily be depicted using data on primary commodity consumption and economic growth.

Figure 1.2 presents steel demand as a fraction of total GDP at different stages of economic development in South Korea between 1970 and 2013. The figure clearly illustrates that when the economy initially expands, the share of primary commodities in GDP increases as a result of investments in infrastructure, roads, houses, factories, cars, and household appliances. When the economy becomes richer and the industry sector more advanced, this increase in primary consumption levels out and eventually starts to decline. Previous studies confirm that most of the developed countries have reached the income level where commodity consumption starts to decline, but this is not the case for the current emerging economies (see, e.g., Wårell, Reference Wårell2014a).

Figure 1.2 Intensity of steel use in South Korea 1970–2013

Source: United Nations Statistics Division on the Internet: http://unstats.un.org/unsd/snaama/dnllist.asp. World Steel Association (annual a).

It is easy to become complacent about the role and importance of the primary sector when its share of the economic activity settles at no more than a few percentage points, as is the case in many advanced nations. Complacency may be in place so long as commodity markets function smoothly and existing needs can be satisfied without serious hurdles. Since the dawn of the present century this complacency has been put in serious doubt, as rapid demand from emerging economies, such as China and India, has led to a strong boom in primary commodities markets. Income levels in China have been increasing at an unprecedented pace, and the infrastructure needed to support the expanding urban population has required large amounts of resources. The rapid demand has fueled sharp increases in prices for primary commodities, as supply has struggled to keep up with the exceptional demand evolution.

More specifically, during the past 20 years the demand for products that contain so-called rare earth metals, such as mobile phones, computer memories, rechargeable batteries, and fluorescent lighting (to name a few), have exploded. Since economically exploitable resources of rare earth metals are limited and geographically concentrated, it is not surprising that widespread fears of supply shortages have been voiced by users.

At the same time, it needs pointing out that sophisticated modern economies have become masters of substitutability, permitting them to function without a particular material. But the ability to substitute will be of no help against a general constraint on supply for raw materials in aggregate, for it is overwhelmingly clear that not even the most modern economy can function without assured raw materials availability. The population will die if food supplies fail. The manufacturing sector is critically dependent on raw materials inputs, even if the volumes needed have shrunk impressively compared to the value of manufactured output. The service sector may require quite insignificant inputs of raw materials, but it clearly cannot function if these supplies fail. Primary commodities are indispensable, just like an ordinarily inconspicuous glass of water that acquires an immense value in the desert. This is easily forgotten, given the economic insignificance of raw materials in “normal” times when their availability is taken for granted.

1.2 Declining Transport Costs and the Emergence of Global Commodity Markets

Prior to the mid-nineteenth century, freight rates on long hauls were prohibitively high, except for goods with very high unit prices. In consequence, global commodity trade at the time was small in volume and consisted in the main of highly valued luxuries like coffee, cocoa, spices, and precious or semi-precious metals, imported predominantly to industrializing Europe (Landes, Reference Landes and Matthews1980). The main subsequent changes in transport technology and transport costs for bulk materials, it seems, occurred in two spurts. The first took place in the latter half of the nineteenth century; the second began in the 1950s, but its effects came to fruition only in the 1970s. Each involved the globalization of numerous additional markets for commodities, which until then had had no more than a local or regional reach. Globalization involves not only trade flows across oceans and between continents, but also, importantly, a convergence of prices across regional markets.

In the latter half of the nineteenth century, the application of steam power to transport revolutionized the economics of moving goods on land as well as across oceans. A large group of raw materials produced at increasing distances from the coast in overseas territories became economically accessible to the world's industrial centers as overland transport by oxen, horses, and camels was switched to railways, and as metal steamships replaced wooden sailing vessels. This becomes dramatically evident in Paul Bairoch's (Reference Bairoch1965) numbers for the cost of shipping cotton and wheat from New York to Liverpool in constant (1910–14) dollars per ton:

Shipping costs are akin to tariff barriers. Little trade will typically take place when the transport charges account for a dominant share of the delivered price. Trade will be encouraged as this share declines.

The evolution of cereals imports into (western) Europe provides a vivid illustration of the evolving impact of transport cost decline on the widening of production sources. Odessa's short-run glory as a leading European port in the mid-1800s was based on booming shipping of Russian and Ukrainian rye and wheat to Western Europe. Much of this trade was lost in the 1870s, first because of a flood of steam-shipped American wheat after the end of the US Civil War, and then the extension of Russian railways which took over the transport of remaining Russian cereals exports (The Economist, 2004, Dec 16). At the same time, new rail connections from the prairies around Chicago to New York made the US cereals even more competitive in Europe. The bulk transport revolution continued during the following decades. Between 1880 and 1910, the transatlantic shipping cost declined from 18% to 8% of the price of wheat in the USA (Bairoch, Reference Bairoch1965).

The 1880s also saw the introduction of refrigerated ships, permitting long-distance transport of meat and fruit. The globalization of the markets for many food products speeded up European industrialization by assuring cheaper food supplies to the growing numbers of urban industrial workers. But it involved painful adjustments for European farmers, who lost out in many food products, and agricultural raw materials like cotton and wool to overseas supplies. The impact was profound: In the 1850s, two-thirds of British bread consumption was based on domestic cereals; by the 1880s that proportion had shrunk to 20% (Dillard, Reference Dillard1967).

The second spurt in transport technology was far more specific, and it was importantly triggered by the Suez crisis in the mid-1950s. The shipping industry's response to the canal closure was to opt for specialized huge bulk carriers, along with the concomitant loading and unloading facilities in the harbors, to permit economic transport of low-value products like iron ore, steam coal, bauxite, and oil across vastly extended distances. The impact of the effort began to be felt only in the 1970s. The result was a further dramatic decline in the cost of shipping, particularly accentuated for the truly extended transoceanic transport routes.

Between 1960 and 1988, the average size of the bulk carrier fleet had more than doubled. In 1960, virtually all internationally traded iron ore and coal was shipped in vessels of less than 40,000 dwt, but this proportion had declined to 10% or less by 1988. Carriers in excess of 100,000 dwt did not exist in 1960, but by the latter year they accounted for 70% of iron ore and 40% of coal shipments (Lundgren, Reference Lundgren1996). Recent developments in the world bulk carrier fleet market point toward a continued increase in average ship sizes, as carriers in excess of 160,000 dwt account for the major share of dry bulk shipments. In 11 years, between 2004 and 2014, the average size per ship of the bulk carrier fleet almost doubled (UNCTAD, 2014).

The economic impact of the new bulk transport technology was very substantial, and especially so for the mining industries. Many European miners faced problems akin to those experienced by farmers 120 years earlier. Freight rates for Brazilian iron ore to Europe declined from $24 per ton in 1960 to $7 in the early 1990s. At the same time, the much smaller shipping costs for iron ore from Narvik in Norway to Germany were reduced from $8 to $4. The geographic protection afforded to the Swedish supplies shipped through Narvik thus shrank from $16 to only $3 (Lundgren, Reference Lundgren1996). The freight rate as a proportion of total price for US coal in Western Europe was reduced from more than 30% to less than 15% in the 30-year period. The consequence was a rapid evolution of global markets for these low-cost products. Long-distance maritime iron ore trade rose from 23% of world production in 1960 to 36% in 1990, and for coal from 2% to 9% (Lundgren, Reference Lundgren1996). These shares continue to grow. In 2013, transoceanic trade in coal accounted for 17% of global output (IEA, 2014a).

The market for natural gas is the most recent to be subjected to the forces of globalization. Gas is an extremely bulky product (prices in the range of $0.1–0.2/m³) with transport costs constituting a very high proportion of delivered price. Until at least the 1980s, transport by pipe was the completely dominant delivery mode. The lowest-cost gas sources had a limited geographical reach because the transport cost was proportional to distance, and higher for piping under the sea. Three regional markets developed around the main consumption centers, viz., North America and Europe (including Russia), both predominantly supplied by pipe from internal sources, and Japan, Korea, and Taiwan (and more recently also China), supplied exclusively by liquid natural gas (LNG)Footnote ¹ from Australia, Indonesia, and Malaysia. Each of the three markets was, by and large, isolated from the others, with prices evolving along separate levels and patterns. Until the mid-1990s, the East Asian market recorded prices that were twice the level in the USA and 50% higher than in Europe (BP, annual, 2006) primarily because of the high cost of liquefaction and shipping.

Since then, however, prices in the three markets have been affected by two major, but highly opposing, developments. First, the prices became equalized for a few years, as a consequence of a combination of rising prices of piped supply and substantial cost reductions in LNG production and transport technology. These developments stimulated a rapid growth of additional LNG sources, providing an extended web of long-distance supply routes and causing prices to converge. Second, the development of US shale gas production has had a profound impact on natural gas prices, especially in the USA (Aguilera and Radetzki, Reference Aguilera and Radetzki2014). Figure 1.3 illustrates the development of natural gas prices in the three markets from 2003 to 2014, and it pictures both the period of converging prices and the clear pattern of divergence from about 2008. The main cause of the divergence is the production of shale gas in the USA, which has mainly put pressure on national natural gas prices. This development will be further elaborated upon in Chapter 4. However, the recent developments clearly illustrate that the natural gas market still can be characterized as regional rather than international. In 2013, 31% of global natural gas production was traded internationally, about a third of which was as LNG (BP, annual, 2014).Footnote ²

Figure 1.3 Regional natural gas prices 2003–14, $/mBTU

Source: BP (annual); IMF (biannual, 2015).

Successive technological revolutions have gradually reduced the transport costs of bulk commodities by a total of almost 90% between the 1870s and 1990s (Lundgren, Reference Lundgren1996). In Figure 1.4 recent developments of transport costs for bulk commodities are depicted, and it is evident from the figure that, despite a sharp increase during the height of the commodity boom, there is no rise between the end of the 1990s and 2014. This, in turn, has increased the number of globally traded primary commodities, from selected high-priced luxuries before 1850 to encompass virtually all products with perceptible value in the most recent decades. Even waste, e.g., metal scrap or rejects from forestry and agriculture, or packaging material after use, valued as sources of energy extraction or of recycling, are increasingly subject to international trade. Chinese stone for garden decoration is being successfully marketed in Europe. An important repercussion of the globalization of primary commodity markets has been a growing dependence of the world's manufacturing centers, initially Europe, then Japan and the USA, and most recently China, on imported supply. We will return to this subject in Chapter 2.

Some recent developments in maritime transportation require mentioning. Before the financial crisis in 2008, as the world economy was still at the height of the boom, the available shipping capacity was not enough to meet the increasing import demand, especially from China. The situation in the maritime transportation market was thus one of significant shortage, leading to a sharp increase in shipping costs, especially to important ports in China, as is depicted in Figure 1.4. This development resembled the situation at the time in many commodity markets, where producers ultimately failed to satisfy accelerating demand, resulting in exploding commodity prices (discussed further in Chapter 5). The implications of the shipping boom were sometimes far-reaching. For instance, Wårell (Reference Wårell2014b) stresses that the increase in transportation costs in 2007–08 was a major cause of the breakdown of the iron ore pricing system.

Figure 1.4 Baltic Dry Index, 1999–2015

Note: The index base year is 1985 (1,000 points) and is compiled from 20 key dry bulk routes measured on a time charter basis. The index covers dry bulk carriers carrying commodities such as iron ore, coal, and grain.

Source: London Baltic Exchange data.

Transportation costs peaked in 2008, but after the financial crisis there was an abrupt turnaround. This is evident in the Baltic Dry Index, which dropped dramatically from about 10,000 points in Q2 2008 to about 1,000 points in Q4 2008 – indeed a remarkable collapse. In 2015, almost seven years after the financial crisis, world trade has not yet recovered to precrisis levels (aside from a temporary rebound in 2010). Maritime freight rates continue to be low and volatile, largely due to the current over-capacity in the global merchant fleet, built up excessively during the preceding boom. In fact, the Baltic Dry Index is currently at an all-time low (Q1 2015), mainly explained by over-capacity rather than a major slowdown in demand (The Economist, 2015a, Mar 10).

1.3 The 50-year Wave of Public Intervention and Control in the Primary Commodity Markets

There has been a clear and strong 50-year wave of far-reaching public and political intervention in primary commodity markets, beginning in the early 1930s. Since the late 1970s, the wave has been waning, with market forces assuming increasing roles in shaping commodity market developments. Before studying the content and consequences of the wave, it may initially be instructive to ask what brought about the government involvement in the first place. For if we look further back in time, say to the beginning of the twentieth century, it is clear that governments were hardly involved at all.

We see four major and two subordinate factors explaining and/or motivating the deep public intervention in global primary commodity production and trade. The 1930s depression led to a price collapse for many primary materials, so deep that it warranted public intervention to rescue the farmers and miners, mainly in the rich world. The Second World War created havoc in many supply lines, which was so worrisome that governments thought it opportune to take action aimed at restoring order. The breakup of colonial empires established numerous independent nations, many of which had economies dominated by raw materials production. Their governments thought it imperative to gain control over the commodity sector, especially in minerals and energy, where ownership had traditionally rested in colonial or other foreign hands. The fourth factor had ideological connotations. The second and third quarters of the twentieth century were a period characterized by strong beliefs in collective action as a means to come to grips with the numerous purported fallacies of the market system (Skidelsky, Reference Skidelsky1996).

The subordinate factors comprise (a) the ascendancy of the Soviet Union to prominence in the international economy, and its interventions in international commodity trade and (b) the worries and concerns raised by the emergent import dependence of the USA on an increasing number of raw materials. Sometimes, one factor worked in isolation in prompting public action. Quite often, several of these factors worked in combination and reinforced each other in complex ways in encouraging state intervention in the commodities field.

In the 1930s depression, falling prices triggered several public involvements. The governments of Canada and the USA interfered jointly in the wheat markets to cut supply from abroad to save their farmers from further price falls. Cuba collaborated with Java in launching export quotas in sugar. The colonial administrations of Malaya and Ceylon instituted export restrictions on rubber, but this scheme met resistance from consuming interests in the USA, and soon collapsed (Rowe, Reference Rowe1965).

In the 1945–65 period, with the scarcities and price spikes of the Second World War and the Korean conflict fresh in the memory, commodity agreements were launched by the governments of exporting and importing countries to keep prices within bands that both groups would find acceptable. Export controls, sometimes combined with buffer stock operations, were the instruments used. The markets for sugar, wheat, coffee, and tin were interfered with in this manner, but after some time the efforts disintegrated, usually due to internal tensions, and sometimes also because they failed to deliver the desired results (Radetzki, Reference Radetzki1970).

The decade after the Second World War involved a painful experience for the USA, as the country became dependent on imports of a widening group of commodities of critical importance in war and peace (Paley, Reference Paley1952). This prompted the government to build strategic stocks, in many cases of very significant size. On occasion, the acquisition of these stocks and their subsequent disposal created serious instability in the commodity markets. In 1962, when the International Tin Agreement held a buffer stock of 51,000 tons, the US government declared that its strategic stock, 350,000 tons, equal to two years’ world production, was 150,000 tons in excess of what was considered US strategic needs. US disposals in 1963–66 amounted to 69,000 tons, adding 10% to global mine supply in these years, obviously complicating the operations of the International Tin Agreement (International Tin Council, annual and monthly). In December 1973, the US Government again declared substantial excess strategic stocks of metals and rubber, and the very sizable sales in the following year contributed to the price collapse in the international market (Cooper and Lawrence, Reference Cooper and Lawrence1975).

The early 1970s also experienced commodity price and export controls in several countries, to assure supplies at low prices to domestic users. In the USA, price ceilings on many commodities were instituted, and export restrictions for metal scrap and soybeans, among others, were introduced to assure domestic availability (Cooper and Lawrence, Reference Cooper and Lawrence1975). The gasoline queues in the USA in 1974 were a direct consequence of the gasoline price caps. The Canadian government, for its part, implemented severe constraints on uranium exports in the mid-1970s, purportedly to assure national needs (Radetzki, Reference Radetzki1981).

Foreign aid became common after numerous nations in Africa and Asia gained independence in the 1950s and 1960s, and since many were heavily dependent on commodity exports, schemes were launched to extend existing commodity agreements by adding elements of foreign assistance. One such extension was the “multilateral contract,” with guarantees by the importing member countries to buy predetermined quantities of the commodity from exporting members at above market prices. Another was “food aid,” under which huge amounts of surplus cereals, edible fats, and other agricultural products were dispatched to developing countries, undoubtedly improving nutritional standards, but at the same time making life harder for Third World farmers (Radetzki, Reference Radetzki1970).

Altruism was certainly not the only motivation for the arrangements. Security of supply was also important. And in the case of the Coffee Agreement, the virtually explicit reason to pay the Latin American producing countries more than the market price was to prevent the spread of noncapitalist political systems on the continent, an important issue at the time (Commodity Yearbook, 1964; Rowe, Reference Rowe1965).

The Soviet Union was also actively intervening in the international commodity markets. It signed a number of “bilateral agreements,” in a few cases involving the entire commodity export of individual developing countries for a number of years to come, in exchange for manufactures, often on a barter basis. These agreements were regularly biased in favor of the commodity exporting nation, and their implicit aim was to gain political influence. Sometimes it did not work so well for the “beneficiaries,” as when the Soviet Union resold large quantities of Cuban sugar and Indian cloth in Western Europe, suppressing prices for the exporters’ sales outside the “agreement” (Radetzki, Reference Radetzki1970).

Despite this courtship of developing countries by capitalist and communist commodity importers, there was a massive wave of nationalizations of foreign-owned resource industries, primarily in the minerals and energy fields, in the 1960s and 1970s. Compensation was meager and sometimes completely absent in these takeovers. The USA and the UK lost most in the process, being the largest foreign direct investors in these sectors. The Soviet Union and Japan did not suffer much from the nationalizations, since their ownership positions were insignificant. The resultant state enterprises in minerals and energy brought in yet another tool for public intervention in primary commodities.

The tide of public intervention and control started to subside in the 1980s. A shift in beliefs played a crucial but by no means exclusive role in this turnaround. Confidence in the ability of markets to solve problems experienced a strong surge as a consequence of the ideological revolution launched by Margaret Thatcher and Ronald Reagan. “Political failure” replaced “market failure” as the main problem to handle, according to the emerging credo.

Far-reaching consequences have followed from this ideological shift. The crumbling of the communist system in the Soviet Union and Eastern Europe is perhaps the most important result. The commodities sector has seen a wholesale privatization of state-owned positions in minerals in all parts of the world, but a contributing explanation to this development was the disappointing performance of state entrepreneurship. In contrast, state ownership continues unabated in the oil industries of developing countries, perhaps because of laxer performance requirements given the persistent high oil prices and oil profits (Chapter 10).

The institution of international commodity agreements in which governments meddle for whatever objective has completely lost its appeal. Price stabilization is instead attempted with the help of hedging on commodity exchanges, whose futures market services have been greatly extended in time and across commodities since the 1970s. Publicly controlled strategic stocks in advanced countries in the present century are by and large limited to petroleum, and at less than 5% of global annual consumption (IEA, monthly), they represent a trifle of the strategic stock ambitions of earlier decades. Government price controls have not been considered despite more than fourfold price increases for materials such as copper and oil between 2002 and 2008. The market is seen as an adequate instrument for establishing the value of most commodities and for assuring the satisfaction of the most urgent requirements. No queues have been seen at petrol stations or strategic metal warehouses in the rich world of late.

Governments’ abdication from involvement in primary commodity markets has been quite impressive, though it is far from complete. The most important exception relates to the rich world's agricultural policies, which continue to seriously distort the markets for a number of food products (Chapter 3). In 2010–12, farm subsidies represented over 40% of agricultural factor income in the EU. In 2013 the EU negotiated a major reform of its agricultural policy, and many countries (especially the UK) were hoping for large cuts in farm subsidies. Even though farm spending did not increase, the new deal made clear that agricultural subsidies claim the lion's share of the total EU budget, and are expected to do so also in the future (European Commission, 2013). Japan is another rich country with highly distorted agricultural policies, not least considering that it has one of the world's highest tariffs on rice (The Economist, 2013a, Nov 30). However, since 2013 Japan has joined negotiations for the Trans-Pacific Partnership, putting pressure on trade liberalization (Dyck and Arita, Reference Dyck and Arita2014).

OPEC represents the other important remnant of public involvement in international commodity markets. The governments of the cartel's member countries have remained the completely dominant owners of the oil industry (the UAE is an exception). The governments, not their companies, in most cases shape policy in terms of investments, output, and prices, as well as with regard to exploration and the volume and direction of investments. The governments appoint the management, often on political merit, and they also control the financial resources available to their oil industry (for details see Chapter 4). Events in Bolivia, Russia, and Venezuela in the mid-2000 decade suggest that the temptation to nationalize oil and gas remains, especially when prices and profits are high.

Later chapters will have more to say on the market distortions caused by remaining public policy in the commodities field, and on the implications of persistent state ownership in some of the primary resource industries.

Despite these important exceptions, it is reasonable to claim that the era of state interventionism in commodities is well past its peak, and that market forces have been allowed to play a greatly increased role in the international commodity markets since the late 1980s. But one should not be too sure. The recently increasing popularity of state control in some places may be a harbinger of a new wave of nationalistic public intervention in the resource industries after a 30-year withdrawal. However that may be, it is instructive to be aware of the perspective of the 50-year flood of state involvement between 1930 and 1980, followed by an ebb in the most recent decades, as the subject matters of the following chapters evolve.

1.4 Transformation of the Resource Landscape – The Role of Emerging Asia

Since the dawn of the twenty-first century the demand for natural resources has been surging. The main driver for this is the development of large emerging economies in Asia, especially China and India.Footnote ³ Incomes in these countries are rising at a pace that have never been seen before. China and India, whose population together is about 2.5 billion, have been doubling their real per capita income levels every 12 and 16 years, respectively. This can be compared to the UK, which doubled its real per capita income level during the entire Industrial Revolution, which lasted for 150 years (Madison, Reference Maddison2007). Considering this exceptional rise in income levels for such large populations, the effect on the world economy from the emerging economies in Asia can therefore be seen as transforming the entire resource landscape.

Demand for primary commodities (energy, minerals, and agricultural products) by emerging economies increases especially quickly during the period when they are in the resource-intensive phase of their economic development, as discussed in relation to Figure 1.2. The impact on demand for primary commodities from China and India is particularly strong, given their exceptional population size and pace of growth. It is expected that in the coming years large proportions of the population in these economies will enter the middle class. The demand for cars, refrigerators, heating and cooling systems, and other residential appliances is expected to intensify. Large amounts of resources are also required for infrastructure as their urban populations expand. More energy will be needed to accomplish growth in the household, commercial, and industrial sectors. Demand for agricultural products (both food and nonfood) is also expected to increase to satisfy the higher nutritional standards of the growing middle class.

Kharas (Reference Kharas2010) has estimated that the size of the global middle class, defined as people in households with daily per capita incomes (PPP adjusted) between US$10 and US$100, is expected to increase from 1.8 billion people in 2009 to 3.2 billion in 2020. Almost all of this growth stems from China and India. It is fair to assume that emerging Asia will be the leading consumer of primary commodities for many years to come. The geographical shift in primary consumption patterns in the world is further elaborated in Chapter 2.

The commodities boom early in the present century provides further evidence of the transformation of primary commodity markets as a consequence of the rapid economic growth in the emerging Asian giants. World economic growth during the twentieth century mostly took place in parallel with decreasing real resource prices. Even though demand for primary commodities increased substantially, it was easily met by expanded supply. The rise in supply was made possible by productivity increases due to technological developments that also led to lower production costs. In the twenty-first century, much like what occurred in shipping, the unprecedented rate of increase in demand for primary commodities has not been matched by a parallel increase in supply, so prices have been pushed up. The failure of supply to rise in line with demand was caused by the suddenness and strength of the growth in demand, exacerbated by more challenging access to new supply sources augmenting the cost of extraction (Dobbs et al., Reference Dobbs, Oppenheim, Thompson, Mareels, Nyquist and Sanghvi2013). Only in the most recent years (2013 onwards) have signs emerged of commodity markets regaining a better balance. Large investments in new production capacity have matured, while China's economic growth and commodity demand have decelerated. A substantial downward price adjustment has followed. Historically, the role of emerging economies for primary commodity markets has always been important. What was exceptional early in the twenty-first century has been the fact that the emerging economies represented more than a third of the world population, while their growth rates were unprecedented. The result was an explosion in commodity demand and commodity prices. Chapter 5 provides a detailed account of the relationships sketched in the present paragraph.

1.5 Conclusion

The main findings of this historical overview of some aspects of commodity markets are stated below:

1. 1. Economic development almost invariably reduces the role played by commodities in the macroeconomy. Poor, undeveloped economies produce raw materials and consume them after only limited processing. As economies advance, the scope for further and more sophisticated processing increases, as does the scope for the expansion of activities with limited raw material input needs, notably the service sector. But while (with few exceptions) the primary share of GDP shrinks as economies develop, it is essential to keep in mind that commodities are indispensable, and that no society, however economically advanced, can survive without their assured supply.

2. 2. Historically the production and consumption of commodities was basically a national affair. Excepting expensive luxury goods, like coffee and precious metals, commodities were simply too expensive to transport across borders and oceans. The secular fall in transport costs has greatly increased international trade in commodities, making it possible to move production to locations which offer the lowest cost opportunities. In the twenty-first century, imports of commodities throughout the world account for a very sizable share of consumption. This holds even for cheap bulk products like iron ore and natural gas.

3. 3. The 50-year period between 1930 and 1980 was characterized by deep nationalist state intervention in the resource sector. This period was preceded and followed by periods of highly liberal government attitudes, with substantial scope for market forces in commodity production and trade. Recent efforts in some countries to increase the government's grip over natural resources may be a harbinger of a new wave of state involvement, but currently one cannot be sure. The efforts could alternatively be a response to the 2000s commodity boom, and could dissipate as commodity prices fall when the boom comes to an end.

4. 4. Since the dawn of the twenty-first century, income levels in emerging Asia, especially China and India, have increased at an unprecedented pace. Demand for primary commodities generated by emerging Asia is currently dominating world demand, and is expected to continue to grow as increasing proportions of these countries’ population enters the middle class. Despite the recent sharp declines in primary commodity prices, which indicate the end of an unusually strong and extended commodity boom, the demand for primary commodities will remain elevated for many years to come in order to satisfy the needs of the growing middle class in emerging Asia.