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The deepening geopolitical divide since Russia’s invasion of Ukraine has resulted in the fragmentation of commodity markets, which in turn could hinder the transition to clean energy by restricting access to relevant raw materials, the International Monetary Fund (IMF) has warned.
The war has put in reverse the process of commodity market integration that gained traction since the end of the Cold War through trade liberalization and cheaper transportation, as well as technological innovation, the IMF reported in a partial release of its World Economic Outlook on Tuesday. “For the first time since the 1970s, commodities such as crude oil, natural gas, and wheat were broadly used to exert pressure in a major conflict”, the Washington-based lender said in a released chapter of the report scheduled to come out next Tuesday. “Exports were restricted and countersanctions imposed”.
Among the sanctions, the Group of Seven club of leading economies, the European Union and Australia in February agreed price caps of up to $100 a barrel for refined oil products from Russia.
In a blog post accompanying the partial release, the IMF wrote, “Countries have since [the war] restricted trade in commodities, with a more than twofold increase in new policy measures relative to 2021”.
“These disruptions in commodity trade contributed to surging inflation in 2022 in many parts of the world, food insecurity in low-income countries, and slower global growth”, read the chapter.
In the energy transition, the fragmentation of commodity markets, particularly the minerals supply chain, could delay climate ambitions, according to the partial report. “Demand for critical minerals is projected to rise severalfold in a net-zero-carbon-emissions scenario”, the report noted.
“These minerals are highly concentrated geographically, and their elasticities of demand and supply are low, so trade disruptions could add to upward pressure on mineral prices in the bloc where demand exceeds supply after fragmentation”, the report explained. The production of the green transition metals of cobalt, copper, lithium and nickel is concentrated in only three countries, according to the report. These source nations collectively account for nearly 80 percent of global cobalt production, nearly 50 percent for copper, nearly 90 percent for lithium and nearly 70 percent for nickel, the report said.
“But the mineral-rich bloc cannot reap the benefits from oversupply, as refining capacity cannot be scaled up quickly. In the illustrative simulation, fragmentation results in up to 30 percent lower-than-needed investment in renewables and electric vehicles at the global level by 2030”.
The potential impact of further fragmentation sees a “substantially” high rise in prices for the four mined minerals in parts of the world politically closer to China and Russia, the report said. “Production of these minerals would be concentrated in a handful of countries in the US-Europe+ bloc, but they are largely used as inputs in the China-Russia+ bloc”, it said.
However for refined minerals, most of which come from China, Russia and South Africa, similar price surges could be experienced in parts of the globe more allied with the West, the report said.
“Analysis of trade patterns suggests that commodity trade is historically associated with countries’ geopolitical alignment”, it explained. Using a gravity model analysis, the IMF deduced “changes in military alliances because of rising geopolitical tensions could go hand in hand with disruptions of trade flows and fuel fragmentation of commodity trade”.
“While most commodity prices have since normalized, geopolitical tensions signal that more severe fragmentation of commodity trade is a major risk”, the report warned. “Many countries are trying to reshore commodity supply chains for national security, geopolitical, or other reasons. Measures include those for critical minerals for clean energy technologies, semiconductors, and defense (examples of actions are the US Inflation Reduction Act, the European Chips Act, and China’s export restrictions on gallium and germanium)”.
Such policies have resulted in heightened concerns about fragmentation, the report said. “Text mining analysis of earnings calls reveals that prior to the COVID-19 pandemic, firms barely mentioned keywords related to fragmentation, but usage surged after Russia’s invasion of Ukraine”, it said.
In the blog article, the IMF said, “Commodities, particularly minerals critical for the green transition and some highly traded agricultural goods, are especially vulnerable in the event of more severe geoeconomic fragmentation”, with lower-income countries bearing the brunt of the impact.
“While long-term global economic losses of about 0.3 percent would remain relatively modest due to offsetting effects in net producing and consuming countries, low-income and other vulnerable countries would bear the brunt”, the article said. “In our illustrative simulations, they could face long-term gross domestic product losses of 1.2. percent on average, largely stemming from disruptions in agricultural imports. For some countries, losses could exceed 2 percent. This would exacerbate food security concerns, as low-income countries are particularly reliant on food imports to feed their population”.
As a solution, the IMF proposed a global “green corridor” to maintain the flow of critical minerals. It also urged countries to adopt strategies such as “diversifying sources of commodities supply, greater investment in mining, exploration, and critical mineral recycling”, as stated in the article.
“Countries should also consider broader policies that strengthen resilience to shocks, including more robust macroeconomic, structural, and fiscal policy frameworks; ample fiscal and financial buffers; strengthened safety nets; and preparation for sudden disruptions of commodity supplies”, the article said.
To contact the author, email jov.onsat@rigzone.com
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