1. 1 UNCTAD Virtual Institute Training Course on Commodities Geneva, 15 February 2010 Rouben Indjikian, Chief, CPIOS Special Unit on Commodities, UNCTAD Fundamentals, non-fundamentals & instability of commodity markets

2. 2 The Modern Commodity Economy The Recent Commodity Boom and Bust: cyclicality and correlations The Role of Fundamental Factors The Role of non- Fundamental Factors Approaches to instability: from supply management to risk management What’s next? Introduction

3. 3 The Modern Commodity Economy Much lower shares of primary commodity sector in GDP, but still a big number of commodity dependent economies. The commodity price boom of current decade increased the share of commodities in world trade and increased the import bills of many countries. The bust reversed it. Commodity price volatility increased and commodity and economic cycles closely related. From commodity buffer stock management to commodity risk management: what’s next?

4. 4 The Commodity Boom and Bust The recent long commodity price boom was driven by strong demand and amplified by structural rigidities in supply. Price and trading arrangements played their role and at its peak the boom reflected also the excesses of speculation. The bust started due to financial crisis exploded in the West and was short and spectacular due to the spill over of the economic crisis to the rest of the world. The bust transmitted the economic crisis to commodity exporting countries.

5. 5 Commodity Price Indices ( Jan 2002- Dec 2009, monthly basis)

6. 6 Commodity cycles & price correlations Various commodity price indexes were quite correlated in both the recent long price boom and short bust cycles Low demand and supply side elasticities constrain their adjustment to short-term price fluctuations Speculation, political risks and other news as non- fundamental factors affecting the markets Multilateral trade rules, trade barriers and problems of fair competition The impact of economic and financial crises Demand from China & other emerging economies

7. 7 The Role of Fundamentals BOOM Increased demand due to the growth in the world economy and especially China Low short-term price elasticity of demand permitted maintain the latter in spite of excessive increases in prices Inelastic supply and its structural rigidities also pushed the costs and prices. Whether futures market a part of fundamentals? BUST Demand is getting destroyed due to economic crisis and problems of banks while supply is already there

8. 8 The Role of Non-Fundamentals Role of commodity exchanges and futures markets Leveraging and de-leveraging due to abrupt inflows and outflows of new classes of speculative capital (index funds) to and from commodity sector, reflecting the economic upturn and downturn, Export restrictions and subsidies Political risks, climate events and others.

9. 9 Perennial problem of instability: from proposals to manage supply to risk management techniques In 1970s and 1980s of the last century UNCTAD and other institutions were proposing international cooperative arrangements in the form of commodity buffer stocks to manage the instability commodity prices. From the second half of 1980s the development of futures markets and commodity exchanges became a part of global trends in expansion of hedging and other derivatives techniques. The success of hedging and price risk management on micro level overlooked the systemic risk of asset bubbles on macro-level.

10. 10 What’s Next? IMPROVING EXISTING ARRAGEMENTS Better information sharing in and regulations of commodity exchanges and OTC markets Back to genuine price discovery Better forecasting of demand and information on investment in commodity supply chain, i.e. potential supply AND INTRODUCING NEW ONES Considering target zones limiting the commodity price fluctuations Combining supply and stock management on macro-level with risk management on micro-level

11. 11 Thank you for your attention rouben.indjikian@unctad.org Tel: + 4122 917 5838 Fax: +4122 917 0509