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MacroDev Panorama
From the Covid pandemic to global supply shortages, inflation, and the war in Ukraine, the world is lurching from one crisis to another. This has not only had a major impact on commodity prices, but it is bad news for the low-carbon transition. The recently published third issue of the “MacroDev Panorama” periodical examines the surge in commodity prices observed since mid-2020 and its impact on developing countries.

At a time when emerging and developing countries are still reeling from the Covid-19 pandemic, escalation of the war between Ukraine and Russia is affecting the food supply in distant developing countries and threatening the tentative recovery observed in 2021. MacroDev Panorama, an AFD periodical, examines macroeconomic and socioeconomic issues. This issue takes up five points in particular.

Macroeconomics and Development
September 2022
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1Widespread rise in commodity prices since mid-2020

By summer 2020, the upward trend in commodity prices had offset the steep declines observed since the beginning of the Covid-19 crisis. Between July 2020 and December 2021, the energy price index of the World Bank surged 132%. Likewise, the indices for metals and food products rose 58% and 44% respectively. 

Russia’s invasion of Ukraine has amplified this trend, with disruptions in supply chains and implementation of international sanctions against Russia contributing to increases of 43% in energy prices and 25% in food prices between January and May 2022.

In two years, oil prices have increased 4-fold, coal prices 7-fold, and European gas nearly 19-fold. Wheat prices, which had already increased significantly in 2021, doubled again over the first five months of 2022. Meanwhile, the prices of lithium, cobalt, and nickel—metals crucial for electric battery production—also doubled.
2Putting price variations into perspective

Despite the spectacular upward trend in commodity prices, their variations should be viewed from the perspective of constant prices or real value, correcting for inflation.
In nominal terms, oil prices (without the impact of inflation) haven’t experienced such a surge since the 1973 energy crisis and food prices since the 2008-2009 crisis.

But, in real terms, only European gas and coal have broken their 2008 records (+50% and +30% respectively). Oil remains 40% lower than its real peak in 2008, and wheat and copper are 70% and 31% lower respectively than their peaks in 1973-1974.

3Macroeconomic consequences

Unsurprisingly, the big winners will be hydrocarbon exporters: Angola, Indonesia, Chad, the Gulf States, Venezuela, the Congo, and Azerbaijan. The IMF is expecting current account surpluses in those countries to exceed 10% of their GDP, or even more (Congo 26%, Azerbaijan 37 %).

In contrast, the export earnings of countries that produce industrial metals, such as Chile (copper and lithium), Peru (copper and zinc) and the Philippines (nickel) won’t be enough to compensate for the extra costs of imports. Meanwhile, the big losers of the current crisis will be, as is often the case, the small island countries already hit by the Covid-19 crisis.

Video: Watch the MacroDev webinar that aired on 22 September

Another direct effect of the rise in commodity prices is runaway inflation, which is common in both the EDCs and the advanced economies. Inflation rates have reached levels not seen in Europe and the United States for decades. This inflationary crisis is expected to affect practically all the world’s economies. The IMF has revised its global inflation forecast upwards, from 3.8% to 7.4%, leading to higher interest rates across the board and stirring up fears of sociopolitical turmoil linked to loss in purchasing power.

4Threats to food security

Russia and Ukraine are two of the world’s largest exporters of wheat, corn, barley, rapeseed, and sunflower oil. FAO estimates that their ongoing conflict will lead a drop of 20% to 30% in Ukraine’s cereal production for the 2022-2023 season.

Several North African and Middle Eastern countries that rely on Ukraine for more than 50% of their wheat supply are thus facing high risks of shortages. Dependence on fertilizer imports from Russia is expected to further amplify the supply shock, as it will lead to reduced local agricultural production.

In response, several countries have implemented export restrictions to protect domestic stocks. But these could turn out counterproductive: by putting a strain on world supply, restrictions will automatically increase prices and contribute even more to the inflation they are supposed to buffer.

Nonetheless, threats to food security should be put into perspective. Indeed, the share of wheat in the diet of most Emerging and Developing Countries is not more than 15%, and it can be substituted with other food products to lessen the impact of price shocks.

5Impact on the energy transition

The current crisis is however an opportunity for countries to rethink their modes of consumption and raw-material supply, with the goal of accelerating their low-carbon transition. For example, the countries now making windfall profits could leverage their surpluses to foster their low-carbon transition. And those overly reliant on external resources could take advantage of the economic situation to invest massively in renewable energies, thereby reducing their dependence.

Yet this forces countries to face a profound paradox: the low-carbon transition requires massive use of raw materials, whose prices are already under pressure. Indeed, huge amounts of raw materials—especially the so-called transition metals of cobalt, copper, lithium, nickel, and rare metals—are needed to put this transition into motion. For example, the International Energy Agency (IEA) estimates that, to reach goals in the fight against climate change by 2040, lithium consumption will have to grow 40-fold and nickel and cobalt consumption 20-fold.

In addition, many countries are going to live through a period of tighter public budget resources and limited private investment capacity, especially—but not only—in the countries dependent on external resources whose costs are rising. This will severely limit their capacity to engage in this capital-intensive transition.

The current situation of crisis and climate emergency means that coordinated international action is needed more than ever. One first step in this direction could be the IEA’s new mandate, announced in 2022, to provide support for the low-carbon transition.