Singapore – Organiser of last week’s World Rubber Summit 2021, the International Rubber Study Group (IRSG) has published an interview with John Baffes, senior economist, World Bank, a keynote speaker at the event.
IRSG: Continued recovery in commodity prices in Q1 2021, majority above the pre-pandemic level, is indicative of a strong rebound in economic activities, especially in infrastructure and automotive industry. Do you think this surge in commodity prices are sustainable in the near term, given the global macroeconomic perspectives linked to the pandemic resurgence?
John Baffes: Commodities that are linked to the global economic activity were impacted the most during Covid because the lockdowns had a major impact on mobility, and thus transport. Indeed, three commodities that are linked to transport suffered major price declined during covid-19, but also experienced remarkable recoveries when the lockdowns were eased and vaccination efforts (at least, in some countries) expanded more than initially anticipated.
The three commodities are: Oil, two thirds of which goes for transport fuel; Natural rubber, also two thirds goes to tire manufacturing; Platinum, half of which is used in catalytic converters, also by the auto industry.
IRSG: Decarbonisation efforts pushing green recovery is likely more metal-intensive and such low-carbon technology demands more metal usage. With rapid growth in EVs in China, Europe and acceleration in the US, are rubber prices expected to track trends in copper and other base metals?
John Baffes: Indeed, two major changes in terms of commodity use are:
(i) Less use of fossil fuels – the immediate impact will be on coal, followed by oil, which will depend in the diffusion of EV technology, and natural gas, often considered the energy-transition fuel, the consumption of which is expected to increase initially and then decline.
(ii) More use of other commodities, including some metals, which are used intensively either in EVs or they are related to the generation of renewable energy, such as wind mills and solar panels.
Although copper, nickel and some rare earth metals are often mentioned as the “gainers”, it is too early to declare “winners” because experience has shown that technology may alter the mix.
Increased use of biofuels may also induce increase consumption of some food commodities, such as sugarcane and maize – for the production of ethanol – and some edible oils for the production of biodiesel.
Rubber [market trends] – both consumption and prices – are likely to follow the path of the global economic activity, not necessarily the pace of energy-transition. However, to the extent that natural rubber can be linked to environmental benefits, its consumption could also increase.
IRSG: What are the possible causes and consequences of metal-price shocks across countries and consumers/exporters?
John Baffes: The 2020 global recession triggered by the COVID-19 pandemic delivered a major shock to commodity markets. Although they have since rebounded, oil prices fell by 60% between pre-pandemic levels and their trough in April and metal prices fell by 16%.
These sharp moves in prices can have significant macroeconomic impacts for commodity exporters, with many emerging market and developing economies highly reliant on metals, especially copper and aluminium, for export revenue.
Metal-price shocks appear to have asymmetric impacts, with price increases associated with small, temporary expansions in activity, but price declines associated with more pronounced growth slowdowns and fiscal and export revenue losses.
These results highlight the importance of counter-cyclical policy measures when responding to commodity price changes.
IRSG: Do you expect the regional shift in infrastructure and energy efficient vehicles’ stimulus impact medium/long-term trend of the US dollar? What is the likely impact of that on grower prices of commodity exporting countries?
John Baffes: There is a strong negative correlation between the US dollar and most primary commodity markets, especially the ones that are heavily traded at an international level—natural rubber being one of them.
The dollar fell almost 10% against a broad index of currencies between April 2020 and January 2021.
That lowered commodity prices in domestic currencies (compared to dollar terms), which induced supply contractions and demand increases, depending on the degree of the relevant currency movement for particular commodities.
When the US dollar reversed course recently, most agricultural commodity prices followed suit.