Commodity Price Cycles Research Articles

Commodity Price Cycles: The Perils of Mismanaging the Boom

Commodity-exporting countries have significantly benefited from the commodity price boom of recent years. At the current juncture, however, uncertain global economic prospects have raised questions about their vulnerability to a sharp fall in commodity prices and the policies that can shield it from such a shock. To address these questions, this paper takes a long term (4 decade) view at emerging markets' commodity dependence, the history of commodity price busts and the role of policies in mitigating or amplifying their economic impact. The paper highlights the stark difference in trends between Latin America - one of the most vulnerable regions given its high, and rising, commodity dependence - and emerging Asia - which has evolved from being a net exporter to a net importer of commodities in the last 40 years. We find evidence, however, that while commodity dependence is an important ingredient, a country's ultimate degree of vulnerability to commodity price shocks is to a great extent determined by the flexibility and quality of its policy framework. Policies in the run-up of sharp terms-of-trade drops - especially when those are preceded by booms - play a particularly important role. Limited exchange rate flexibility, a weak external position, and loose fiscal policy tend to amplify the negative effects of these shocks on domestic output. Financial dollarization also appears to act as a shock amplifier.

Commodity Price Cycles: The Perils of Mismanaging the Boom

Commodity Price Cycles: The Perils of Mismanaging the Boom

Boom-Bust Cycle, Asymmetrical Fiscal Response and the Dutch Disease

We examine the behavior of expenditure policy during boom-bust in commodity price cycles, and its implication for real exchange rate movements. To do so, we introduce a Dutch disease model with downward rigidities in government spending to revenue shock. This model leads to a decoupling between real exchange rate and commodity price movement during busts. We test our model's theoretical predictions and underlying assumptions using panel data for 32 oil-producing countries over the period 1992 to 2009. Results are threefold. First, we find that change in current spending have a stronger impact on the change in real exchange rate compared to capital spending. Second, we find that current spending is downwardly sticky, but increases in boom time, and conversely for capital spending. Third, we find limited evidence that fiscal rules have helped reduce the degree of responsiveness of current spending during booms. In contrast, we find evidence that fiscal rules are associated with a significant reduction in capital expenditure during busts while responsiveness to boosts is more muted. This raises concerns about potential adverse consequences of this asymmetry on economic performance in oil-producing countries.

Boom-Bust Cycle, Asymmetrical Fiscal Response and the Dutch Disease

We examine the behavior of expenditure policy during boom-bust in commodity price cycles, and its implication for real exchange rate movements. To do so, we introduce a Dutch disease model with downward rigidities in government spending to revenue shock. This model leads to a decoupling between real exchange rate and commodity price movement during busts. We test our model's theoretical predictions and underlying assumptions using panel data for 32 oil-producing countries over the period 1992 to 2009. Results are threefold. First, we find that change in current spending have a stronger impact on the change in real exchange rate compared to capital spending. Second, we find that current spending is downwardly sticky, but increases in boom time, and conversely for capital spending. Third, we find limited evidence that fiscal rules have helped reduce the degree of responsiveness of current spending during booms. In contrast, we find evidence that fiscal rules are associated with a significant reduction in capital expenditure during busts while responsiveness to boosts is more muted. This raises concerns about potential adverse consequences of this asymmetry on economic performance in oil-producing countries.

Cycle Phase Identification and Factors Influencing the Agricultural Commodity Price Cycle in China: Evidence from Cereal Prices

Abstract Agricultural commodity prices in China have undergone substantial fluctuation with the recent commodity boom and global financial crisis, which have revealed some special characteristics of cyclical change under China's transitional economy. First, this paper identifies phases of the price cycle variation using the Bry-Boschan algorithm based on price data for cereals in China. Then, the factors influencing the duration of the price cycle are analysed using survival analysis models, and the average duration of cyclical change is also measured. Finally, conclusions and closing remarks are presented for policy-makers who wish to avoid agricultural commodity price risks and improve agricultural early warning systems.

Commodity Terms of Trade: The History of Booms and Busts

We compile a historical dataset covering nearly 40 years of booms and busts in the commodity terms of trade of over 150 countries. We discuss the characteristics of these events and their effects on macroeconomic performance and, in particular, compare the most recent commodity-price cycle with its historical precedents.

Introduction: Globalization–Poverty Channels and Case Studies from Sub-Saharan Africa

In 2004 the United Nations University World Institute for Development Economics Research (UNU-WIDER) embarked on a large-scale research project on the ‘Impact of Globalization on the World’s Poor’ co-directed by Machiko Nissanke and Erik Thorbecke. The first conference was essentially conceptual in nature, meant to understand better the various mechanisms and channels through which globalization affects the poor either directly or indirectly. The other three conferences focused on each of the major regions of the developing world: Asia, Africa and Latin America. Theobjectivesofthisintroductionarethreefold:first,toreviewbrieflyhow the forces of globalization influence poverty in general; second, to describe and discuss the main transmission channels and mechanisms; and third to analyze the impact of globalization on Africa and present an overview of the six Africa case studies included in this issue. 1. The Impact of Globalization on the World’s Poor Globalization provides a strong potential for a major reduction in poverty in the developing world because it creates an environment conducive to fastereconomicgrowthandtransmissionofknowledge. 1 However,structural factors and policies within the world economy and national economies have impeded the full transmission of the benefits of the various channels of globalization for poverty reduction. In particular sub-Saharan Africa (SSA) hasbeenrelativelylessaffectedbytheforcesofglobalizationthanotherparts of the world. World income distribution continues to be very unequal and many poor countries particularly in Africa are stagnating. Moreover, there is much empirical evidence that openness contributes to more within-country

Private Equity, Energy, and Resources: How the Leopard Has Changed Its Spots

Guest editorial In recent months, private equity groups increasingly have signaled their intent to be material players in the ongoing consolidation in the global economies of energy and natural resources. The appeal of cash flow and increasing multiples in the sector have, for the present, eliminated doubts and fears that private equity has held on the vagaries of commodities prices. This is seemingly the case across myriad commodities including base and precious metals, alternative energy, and oil. Somewhat surprisingly, private equity also appears to be taking its first cautious steps across emerging and developing technology plays in biofuels and biomass and into such areas as coal to liquids. This increased appetite for investment and development across the sector is arguably a departure for private equity and may signify a paradigm shift in risk tolerance and investment strategy. Traditionally, private equity groups have been acquisitive from the standpoint of securing opportunities for value creation. This is often demonstrated most visibly in situations in which a private equity firm is presented with an opportunity to invest in superior management opportunities and, in particular, situations where capital availability had been constrained. Private equity, however, has been somewhat reluctant to direct its investment toward commodity plays, especially mining and energy, given the perception that commodity-price volatility and industry operating costs made for a difficult investment scenario. Private equity has seen the commodity play as being fundamentally at odds with its accepted investment approach—to undertake investment, restructure business opportunities, enhance operations, and exit or refinance the opportunity across a short to medium time frame. The exit strategy for private equity within the constraints imposed by commodity-price cycles always has been difficult to balance. This is a direct consequence of the fact that an investment in a mining company or an oil play is often a longer-term play across the commodity-price cycle, which is an investment during the extended period of mine or oilfield exploration, development, and extraction. This requires patience and a long-term view on the investment and risk/return profile, which deviates from current private equity investment strategies. Unprecedented Consolidation What has caused this changed behavior and increased sector commitment? The answer, in one word, is consolidation. Across the energy sector, which includes mining, oil and gas, alternative energy, alternative fuels, and utilities, for the past several years there has been an unprecedented wave of consolidation activity in a flight to quality. Many of the world's larger energy companies have diversified their commodity and geographic footprint in an effort to derive market strength and economies of scale. Growth through the current commodities-price cycle has been directed through acquisition, as opposed to exploration and development; in many cases, this growth has been supported against a backdrop of sustained higher cash flows and commodity prices. Global energy companies have leveraged this cash position into accelerated growth.

Commodity price cycles and heterogeneous speculators: a STAR–GARCH model

We propose an empirical commodity market model with heterogeneous speculators. While the power of trend-extrapolating chartists is constant over time, the symmetric impact of stabilizing fundamentalists adjusts endogenously according to market circumstances: Using monthly data for various commodities such as cotton, sugar or zinc, our STAR–GARCH model indicates that their influence positively depends on the distance between the commodity price and its long-run equilibrium value. Fundamentalists seem to become more and more convinced that mean reversion will set in as the mispricing enlarges. Commodity price cycles may thus emerge due to the nonlinear interplay between different trader types.

Optimal Exchange Rate Policy for a Small Oil-Exporting Country: A Dynamic General Equilibrium Perspective

This paper investigates the choice of optimal exchange rate regime for an oil-exporting small open economy, a case relevant to a large number of primary-commodity economies, in which the terms-of-trade are driven by world commodity price cycle. The new Keynesian small open economy model is extended to include three countries, a small commodity-exporting country (Home) and two large foreign countries. The sources of uncertainty are random monetary (demand), productivity (real), and oil-price (supply) shocks. Despite the nonexistence of a traded sector (other than crude-oil exports) in this primary-commodity economy, the welfare analyses show that flexible exchange rate regimes can reduce terms-of-trade and consumption volatility given certain caveats about pricing-schemes. The analyses also suggest that a basket peg is more welfare-improving compared to a unilateral peg. Further, the variance of the currency in which oil-price is denominated came as an important determinant in welfare analyses. These conclusions have important policy implication, particularly for the Gulf Cooperation Council (GCC) countries as they consider alternative monetary arrangements.

Booms and Slumps in World Commodity Prices

This paper examines the duration and magnitude of commodity-price cycles. It finds that for most commodities, price slumps last longer than price booms. How far prices fall in a slump is found to be slightly larger than how far they rebound in a subsequent boom. There is little evidence of a consistent `shape` to commodity-price cycles. For all commodities, the probability of an end to a slump in prices is independent of the time already spent in the slump, and for most commodities, the probability of an end to a boom in prices is independent of the time already spent in the boom.

Booms and slumps in world commodity prices

This paper examines the duration and magnitude of cycles in world commodity prices. Cycles are a dominant feature of commodity prices, and dealing with the economic consequences of booms and slumps in prices continues to be one of the most challenging issues facing policymakers in commodity-exporting developing countries. We find that there is an asymmetry in commodity price cycles, as price slumps last longer than price booms. How far prices fall in a slump is found to be slightly larger than how far they tend to rebound in a subsequent boom. In addition, for most commodities, the probability of an end to a slump (boom) in prices is independent of the time already spent in the slump (boom).

Why Do Petroleum Risk Assessment?

Introduction The answer to the question could become painfully obvious in the upcoming months. Your job and your company's health, even its survival, depend on it. For proof, consider the industry's current situation. Some companies did not survive 1998 and even more will not survive 1999 if low oil prices and potentially lower gas prices continue. However, not all companies will cease operations. Companies who considered the possibility of low prices in their past investment decisions and took steps to mitigate the associated financial risk will not suffer to as great a degree as those who didn't. They may even prosper as the financial plight of some companies produces bargain acquisitions for others. Most people intuitively understand the importance of assessing financial risk when the investment is so large that failure immediately jeopardizes the company, but few recognize that a series of "small," unprofitable investments can be just as crippling to financial health. The industry routinely performs exhaustive studies for international investments that involve large dry hole costs, but it does not regularly assess the risks associated with domestic exploration. The industry pays even less attention to the financial risks of development even though it is the most travelled road to bankruptcy. Going broke by discovering and producing uneconomic oil is less spectacular and takes longer than via the dry hole route, but either way the final destination is the same. Economists call low prices a "market reaction" to an oversupply situation and tell us that it is a predictable part of the commodity price cycle. As an oil industry professional, your reaction should be no more than to adjust the investment portfolio and company operations accordingly. Like it or not, professionals in the oil industry get paid to consistently increase the value of the company irrespective of what the price of oil and gas are doing. The investment community's expectation is consistent for professionals in all industries. Bankers deal with interest rate fluctuations; manufacturers and retailers with varying pricing and consumer demand. In fact, bankers post record profits when interest rates are low. And bank loans have no upside potential. That's quite a contrast to the oil industry, isn't it? Market Cycles and Petroleum Investment So how does an oil professional cope with and profit from these market cycles? The economist's answer is by substituting equity financing during the periods when it is available at a lower cost than debt financing. A company's ongoing source of investment capital is its internal cash flow. Equity and loans are onetime sources of capital that are used to supplement internal cash flow as required for specific investments, but the market is fickle. The investment community is generally eager to put capital in the oil business when prices are high and reluctant when prices are low. The market equity that was obtained and invested over the last few years of high prices should be generating substantial additional cash flow by now, with at least 15 - 20% hurdle rates of return even at the low end of the price scale.

Booms and Slumps in World Commodity Prices

This paper examines the duration and magnitude of cycles in commodity prices. We find that for the majority of commodities, price slumps last longer than price booms. How far prices fall in a slump is found to be slightly larger than how far they tend to rebound in a subsequent boom. We also find little evidence of a consistent `shape' to cycles in commodity prices. For all commodities, the probability of an end to a slump in prices is independent of the time already spent in the slump, and for most commodities, the probability of an end to a boom in prices is independent of the time already spent in the boom.

Booms and Slumps in World Commodity Prices

This paper examines the duration and magnitude of commodity-price cycles. It finds that for most commodities, price slumps last longer than price booms. How far prices fall in a slump is found to be slightly larger than how far they rebound in a subsequent boom. There is little evidence of a consistent ‘shape’ to commodity-price cycles. For all commodities, the probability of an end to a slump in prices is independent of the time already spent in the slump, and for most commodities, the probability of an end to a boom in prices is independent of the time already spent in the boom.

The Commodity-Price Cycle and Regional Economic Performance in Canada

Cette etude tente de fournir une interpretation de l'evolution economique regionale depuis le debut des annees 1970. Comme il est mentionne dans le titre, nous croyons que les variations des termes de l'echange, lesquelles sont souvent reliees aux changements dans les prix des matieres premieres, expliquent une partie importante de l'evolution economique des differentes regions du Canada.

Cycles in natural-resource commodity prices: An analysis of the frequency domain

A model is derived that relates price cycles to investment behavior in the mineral industries and predicts that these cycles will be roughly twice as long as the investment period (the period between the investment decision and the project completion). Spectral techniques are used to estimate the principal cycles in metal and fuel prices. For the metals, the estimated cycle lengths reinforce the model predictions. However, no significant cycles are found in the prices of the fuels. The lead-lag relationships between prices of different commodities are also investigated and are found to be significant for those that are jointly produced.