Russia's 2022 invasion of Ukraine has fragmented major commodity markets
JORGE ALVARETH, MEHDI BENATIGIA ANDALOUSI, MARTY STIRMER
Russia's invasion of Ukraine in 2022 has fragmented major commodity markets.
Commodities, especially Minerals, which are key to the green transition, as well as some highly traded agricultural commodities, are particularly vulnerable in the event of greater geo-economic fragmentation, as indicated in the IMF's latest World Economic Outlook report.
Further fragmentation would potentially cause volatility in highly volatile commodity markets. Although the long-term global GDP loss of nearly 0.3% would remain relatively moderate thanks to compensation from producing and consuming countries, low-income and other more vulnerable countries would bear a comparatively greater burden.
< p>In our indicative simulations, they could suffer long-term GDP losses of 1.2% on average, which losses are attributed to the disruption of agricultural imports. Meanwhile, in some states the economic hit could exceed 2%, heightening food security concerns. The reason is that low-income countries are particularly dependent on food imports to feed their population.
The aforementioned adverse effects are partly due to the high concentration of commodity production, which is largely related to the region's natural resource advantage. The three largest mineral suppliers, for example, account for about 70% of global mineral production on average. Building up mining and processing capacity can take years, resulting in a slow response to price cues. At the same time, some goods, such as food and energy, play a central role in household consumption, while many minerals are key inputs for vital technologies and manufacturing.
This combination of concentrated supply and widespread demand leads to extensive trade in goods, making many states primarily dependent on imports from numerous suppliers. This makes commodities more vulnerable if trade restrictions are placed.
Our research shows that the fragmentation of global commodity markets into two hypothetical geopolitical blocs, based on a March 2022 UN General Assembly vote demanding Russia end the war in Ukraine, could lead to significant volatility of prices.
It could also cause large price differentials across blocs, particularly minerals critical to the green transition and highly traded agricultural goods. Prices would also be more volatile in a fragmented world.
Segmented markets ensure smaller buffers to absorb future shocks to commodities, such as poor harvests or extreme weather events. Furthermore, even a single commodity producer changing geopolitical camp could cause serious price volatility. On top of that, the fragmentation of the commodity market would cause obstacles to the global energy transition.
Achieving the zero-pollution goals heralds that the demand for minerals will increase several times in the coming years. Meeting this demand requires a rapid expansion of supply. Since economically viable deposits are concentrated in a few countries, trade is necessary to secure access to these resources. Fragmented markets could complicate matters.
* Mr. Jorge Alvarez, Mehdi Benatilla Andalusi and Marty Stirmer are economists in the IMF's Research Department. The article is published on the IMF blog.
