Friday, 3 July 2015

Africa must learn to cope with commodity volatility – expert

Africa must learn to cope with commodity volatility – expertThe drop in commodity prices such as minerals and oil on the international market means investors are reluctant to sink their money deep in the ground to extract resources; what should commodity-dependant African countries do? First, avoid another ‘race to the bottom’ where governments give investors overly generous incentives to invest; they should also diversify their economies to cut dependency on commodities, according to Antonio Pedro, the United Nations Economic Commission for Africa director for Eastern African region. In an exclusive interview with The New Times’ Kenneth Agutamba, Pedro discusses how economies can adapt and change with the tunes on the global market.. Excerpts

First, give us an overview to put this discussion in context; we are experiencing low commodity prices internationally, but it’s not a novel experience, what’s the background?

Africa is at crossroads because of its dependence on commodities for export. 2000 to 2008 was a period of historically high commodity prices for the continent, the so-called ‘super cycle.’

Now we are experiencing a down-turn in prices. This might lead to some policy reversals. What’s the point? In the period where we have high commodity prices, we have what we call the ‘sellers’ market’ where those that have the commodities dictate the terms and conditions of the transactions. This is what the super cycle of 2000-2008 was about.

Now we are in the period of ‘buyers’ market’ because commodity prices are low and buyers have the muscle to dictate the terms and conditions. The low commodity prices may push governments into offering more and more incentives to attract investors.

Such a thing happened in the 1980s and 90s, causing what was termed as a ‘race to the bottom.’ It was a beauty contest of sorts among countries, each offering more and more incentives to attract suitors (investors) by reviewing and relaxing their legal and regulatory policies.

The results were bad. These countries’ overall tax base was eroded. So I am afraid that with the current low commodity prices, if we are not vigilant enough, we could witness another race to the bottom.

Petroleum commodities present a paradox of sorts in a sense that although most countries in the region are majorly net importers, some such as Uganda and Kenya were in high gear preparing to become producers when prices of crude started plummeting. Is the turbulence over?

No, not at all. I think we always need to remember that commodity price volatility is a feature of instrument and that we will always have it no matter what.

The issue for countries, therefore, is to understand what to do during times of volatility. So the short answer is that, we will see more volatility because it’s part of the industry.

There’s a bet out there, that the price of crude will never be the same again at more than $100 a barrel. If so, there would be more winners in Africa than losers. Rwanda, for example, is a net importing country of petroleum products...

Of course, if you are an oil import-dependant country such as Rwanda, a reduction in price is a good thing for the balance of payments because the share of dollars paid for oil imports will go down On the other hand, for oil producing countries low prices are not beneficial, especially if a country has deep oil wells that are expensive to drill.

The reasons behind the current low oil prices are; first, we have some oversupply of oil on the market because when prices were high at over $100 a barrel, everyone invested in drilling more wells, exploration of new types of oil and use of new technologies.

Second is the China factor. The decision to change the country’s pattern of growth from one that was export-led to one that’s driven by internal consumption saw its growth cut from double digit to single digit growth. This lowered the demand for oil because China was one of the leading buyers.

These fundamentals have affected the price of oil which at some point went as low as $40. This will gradually correct the market as producers with expensive deposits will gradually ease out due to high cost of production that can’t be sustained given the current low price for a barrel.

This explains why Saudi Arabia, whose production cost is less than $10 a barrel, is an important factor in the correction of the market. Regardless of the low oil prices, Saudi Arabia is making money, which is also why the Organisation of Petroleum Exporting Countries (OPEC) met but failed to agree on cutting supply.Read More...


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