It is no coincidence that the recent boom in commodities prices beginning in early in 2002 followed China’s accession to the World Trade Organization in late 2001. China quickly assumed the role as the world’s major manufacturing center and became a huge source of global demand for primary commodities. With surging demand for commodities coming from China, commodity-exporting countries reaped in massive benefits and commodity producers, believing China’s robust growth would continue indefinitely, invested in projects to increase their commodity export capacity.
But in recent years, as that new capacity has become available, China has begun to slow, creating a potent mix of abundant supply and weakening demand in commodity markets. In 2011, commodity prices started to fall and they have now reached their lowest levels since the 2008 global financial crisis. While the decline in commodity prices hurts net commodity-exporting countries, it does provide some relief to net commodity-importing countries. Below is a sample of winners and losers amongst some major global economies. (To read more, see: An Overview of Commodities Trading).
Brazil's top exports, as of 2013, were iron, soybeans, crude petroleum, and raw sugar. During the commodities boom, Brazil became a major destination for capital investment. But that boom has busted, and money is drying up, putting downward pressure on the country’s currency, which is serving to fuel inflation. Despite growing at a pace of 7.6% in 2010, Brazil grew at a pace of just 0.1% last year.
The surge in commodities prices beginning in the early 2000’s saw an oil boom in the province of Alberta. The boom then had positive spill-over effects in the rest of the economy. But, the recent downturn in oil prices over the past year has weakened the currency to its lowest level in 11 years. (To read more, see: Commodity Prices and Currency Movements).
Russia’s net exports of primary commodities between 2010 and 2013 comprised 17.4% of its GDP. Russia’s major exports include refined petroleum, petroleum gas, coal briquettes, and raw aluminum. Most significantly, crude petroleum represented 35.2% of total exports in 2013.
The commodity price rout, like in Brazil, is serving to weaken Russia’s currency, causing rising inflation. Moreover, low commodity prices have put strains on the government's budget, which relies on oil and gas for almost half of its budget revenues. The country’s woes are exacerbated by economic sanctions over the Ukraine crisis. The economy grew just 0.6% last year and had recently been enduring its first recession in six years.
The United States
From 2010 to 2013, the U.S. was a net importer of primary commodities. Despite exporting $101 billion worth of refined petroleum in 2013, the U.S. imported $76.3 billion worth of refined petroleum and $259 billion worth of crude petroleum, making it a net beneficiary of falling oil prices.
While some U.S. commodity producers will feel the pinch of lower prices, consumers and producers that use commodities as inputs will benefit. While oil has been a major input, its importance is waning as net oil imports comprise only about 20% of total consumption this year, which would be the lowest proportion since 1968.
Between 2010 and 2013 India was a net commodity importer at an average of 5.4% of GDP. Three of the countries top imports include crude petroleum, gold, and coal briquettes. Together, crude petroleum and gold comprised just over 40% of India’s total imports in 2013.
Cheaper oil has brought down India’s energy prices helping to bring inflation down from over 10% in 2013 to 6.5% last year. The fall in commodity prices will also help to reduce the country's budget and current account deficits.
China’s slowing economy, which has been targeted as a major reason for the recent commodity price rout, is likely to benefit from the fallen prices. As the world’s second-largest net importer of oil, for each $1 decline in oil prices China saves about $2.1 billion annually, according to data from 2013. Perhaps the prices will help boost consumer spending, helping the country make the transition to consumer-led growth.
The Bottom Line
While weaker demand from China has sent commodity prices tumbling downward, the effects are not all bad. Net exporters of commodities will be hurt the most by decreases in revenue, but net importers of commodities will benefit from cheaper goods.