December 11, 2013
Countries dependent on export of raw materialsWednesday, July 10, 2013
Latin America suffering from high commodity prices
By Rodrigo Herrera
It is well known that in an economy what goes up eventually comes down someday. And the possibility that the rise in commodity prices (raw materials) generated by a strong demand from China is coming to an end has Latin American economies on tenterhooks.
Commodities account for three quarters of exports in Latin American economies, according to the World Bank (WB), the International Monetary Fund (IMF) and the central banks of Latin America. And the last decade saw a great rise in China’s enormous appetite for these materials.
The Chinese economy, however, has demostrated a downward trend since late 2011, when the Gross Domestic Product (GDP) grew by 9.29 per cent, after reaching 10.44 per cent in 2010. The prediction is 7.75 per cent for 2013, according to the IMF.
The future prices of metals are “tied to what happens with China, which consumes more than 40 per cent of all metals,” according to the IMF. “The growth of China’s demand for metals is expected to be moderate, due to the fact that the economy is moving toward services.”
However, an element that must be taken into account when analyzing what might happen with commodities is participation with speculative investments in that market.
In other words, the height of the prices is not tied exclusively to the demand generated by the growth of economies such as China, but is largely fuelled by the availability and liquidity of investment funds.
Investors have so much liquidity thanks to the monetary policies of the US Federal Reserve (FED), the Bank of England, the European Central Bank and, more recently, the Bank of Japan, that part of most speculative portfolios consist of commodities.
They buy gold, silver, copper and food products like soya and raw materials such as cotton, among others.
When it comes to copper, for example, data revealed in a report by the Chilean Copper Commission of the Ministry of Mining (Cochilco) indicates that China is responsible for 20 percent of global copper demand and 40 percent of Chilean copper demand.
Such is the pressure on the market, whether real or speculative demand, that the price of copper has exceeded by more than 10 times, its historic price. From 39 cents a pound on average between 1980 and 2011, it rose to average US$3.99 in the last 10 years.
But there is no reason for the boom to be permanent. We see that China’s economy is receding and investor participation in the market shows evidence of withdrawal.
The price of copper has fallen in the past six months 15.66 per cent. One day after the announcement by the FED, that this year it may reduce its monetary expansion policy, the price of copper on the New York Stock Exchange fell 2.57 percent.
Meanwhile gold, the king of commodities, also shows a downward trend. Between January and July 7 2013 the precious metal fell 27.3 percent to close at US$1,217.55.
Dangerous for latin america
A continuous and profound fall in the prices of raw materials would be very dangerous for Latin American economies, which depend on those exports. In Argentina, for example, 66 per cent of its exports are commodities, in Brazil 64 per cent, Colombia 77 per cent, Chile 89 per cent, Ecuador 90 per cent, Peru 86 per cent and Venezuela 98 per cent.
During the last decade, essentially marked by the growth of the Chinese economy with annual GDP increases of over 10 percent, commodities have experienced a boom in prices.
The continued and rapid Chinese GDP growth has generated increased consumption of food, energy, raw materials and other goods. At the rate of demand, came an increase in imports of copper, iron, aluminum, oil, natural gas, wood, cotton and soja, to name just a few commodities purchased by the Asian economy worldwide.
Governments have been engaged in spending the surplus from higher prices and very little has been done in terms of productive investment and the diversification of exports.
The giant of the region, Brazil, accumulated a deficit of US$39.6 billion during the first five months of 2013, 90 per cent higher than in the same period of 2012 and equivalent to three thirds of the total deficit of 2012.
Whatever they say, a continued deficit in the current account means export efforts and high prices of what is sold abroad are worth little, if the country becomes a net exporter of foreign exchange by way of imports.
No one knows when the commodity boom will end, but what is known is that a decade has gone by with high prices for raw materials and Latin America continues to export the same things and spend the profits, without investing enough in diversification.