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Felipe Jaque

Chief Economist, Grupo Security, Chile


China and the Others: The Key Players for Commodity Markets.

Since the irruption of China into several commodity markets in the mid-2000s, copper, among others raw materials, has benefited from a rapid growth of demand, while supply has been struggling to follow the pace. On top of this, which changed the copper market dynamic in a structural manner, recent global trends towards the adoption of more sustainable and greener economic schemes have shown the potential of keeping solid support to this type of materials in the medium and long term. Chile, Peru, and Brazil are the most exposed countries to these markets within the region, where beyond their own means to grow, the global context and terms of trade (export prices versus import prices) are key to ensure a more manageable progress of their economies.

Most of the analysis focuses on this topic year after year, and it is important to understand other factors that play a role in explaining medium term trends in this category of commodity prices. In a previous work where I had the opportunity to participate, we centered our analysis on long term relations between not only real variables, such as demand versus supply forces, but also variables linked to more financial drivers. Based on earlier publications made by mid-1980s, relative demands growth seemed to have a significant weight on commodities, where one can understand the structural role that the global dollar plays in these cases. Our research, mainly focused on copper prices, analyzes this relation. The real exchange rate could strengthen (weaken) the relative demand from a particular country triggered by a more appreciated (depreciated) local currency, helping to boost commodity prices. These gains impact when that country explains a rather high weight on the global demand of a raw material. Thus, beyond the real and standard impulse that come from the Chinese explosive demand in the commodity markets, it is also important to understand that a weaker global dollar boosts that demand on top of the primary effect. And this is not a denomination effect, the one where raw material prices traded in dollar terms tends to be higher with a weaker dollar. This is all about relative demands and the strength consumer countries have on global demand for a commodity whenever they increase their purchasing power.

Moving into the current situation of the global economy, where US continues to show a more than resilient activity and China adds to their classic problem of high indebtedness a particularly complex slowdown of its economy, our region faces a challenging medium term. The first of the factors mentioned above, the real economic variables, is not depicting a favorable scenario for commodity prices, and this is only mitigated by transition towards a greener world. But China, whose economy is not governed by the standard economic policies of the developed world and tends to have a longer-term perspective, might not help to change this landscape.  A more sustainable world, and long-waited India irruption in commodity markets will bring relief; however, China is not easily replaceable in the short run. Not to mention the deglobalization forces arising in the last years.

The second factor, which is related to the global dollar and the way it affects the purchasing power of main consumers in raw material markets, is also a challenge in the medium term. The strength of the US economy, the pace the Federal Reserve is conducting the monetary policy, and how the dollar has been defying historical cycles, put pressure on commodity markets. Strong dollar for long periods is not good news, and although long term cycles eventually occur, after a decade of lacklustre economic performance of our region, all the factors need to be monitored carefully to avoid a new decade of more shades than lights.

With all this on the table, local public policies are a priority for our countries. And these policies should stimulate productivity enhancement in these industries, which is mainly in private-hands decisions, but requires a modern regulatory approach to balance green transition and keeping production strong to benefit from this favorable disruption. Usually, a constructive public-private partnership delivers the best results in these kinds of challenges, taking particularly into account that our region is constantly competing with other emerging economies which are also commodity-driven systems. The opportunity is still open but needs decision and celerity to maximize its benefits.


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