Commodities’ well-traveled road to nowhere. Rulers never learn: opinion
(The opinions expressed here are those of the author, a columnist for Reuters.)
(Reuters) – Live and don’t learn. That should be the motto of commodity producers who attempt to push prices higher by trying a variety of methods to restrict supply.
While the call by major producers including Saudi Arabia and Russia to freeze crude oil output at current levels is the headline of the week, it’s merely the latest in a long line of attempts to arrest sliding commodity prices.
In recent years various governments, producer bodies and even companies have tried to influence commodity markets in their favor, mostly with only very limited success.
Thailand tried to push Asian rice prices higher in 2011 by restricting supply in the mistaken belief that this would allow the government to pay for a generous subsidy scheme for farmers.
Not only did the plan fail miserably, with rice prices actually falling after a short-lived boost, it led to democratically elected former prime minister Yingluck Shinawatra being ousted by the military, a massive build-up in rice stockpiles and the loss of Thailand’s status as the top global exporter of the grain.
But the rice experience didn’t stop Thailand from trying to boost the price of natural rubber, with the military government last year buying up supplies from farmers in order to restrict the amount reaching the open market.
Again, the result was only a temporary boost to prices, and this failure followed an earlier attempt by top producers Thailand, Malaysia and Indonesia to agree supply quotas.
Rubber companies in those countries also had a shot at boosting prices, with 10 producers trying to restrict supply into the SICOM exchange in Singapore, one of the main price-setting processes for rubber in Asia.
None of these attempts has done anything to halt the relentless decline in natural rubber prices, with the main SICOM contract trading near lows last seen in late 2008, at the height of the global recession.
The contract is down about 81 percent since the record high reached in early 2011, with the main reason for failure being the inability of producers to stick to supply discipline.
It’s not just attempts to restrict commodity supply that have run into problems, witness Indonesia’s plan to force the beneficiation of minerals prior to export as part of plans to develop its economy.
Indonesia is considering rowing back on rules banning exports of partially processed metal ores, including copper and zinc, as the smelters that should have been built haven’t been constructed, mainly as a result of low commodity prices.
In 2014 Indonesia, the then top exporter of nickel ore and a major supplier of bauxite, banned the export of metal ores to encourage companies to build smelters, resulting in the loss of billions of dollars in export revenues.
While some smelting projects have been completed, many others have been shelved as the economics deteriorated in the face of weak commodity prices.
While Indonesia’s intervention in the market was directly aimed at boosting prices for metals by restricting the supply of ores, what is instructive is that the market simply found ways to exist without Indonesian supply.
Bauxite exports from other producers such as Australia and Malaysia ramped up, as did nickel ore shipments from the Philippines.
All Indonesia achieved was the loss of market share and revenue for relatively small investments in processing plants, many of which will struggle to be competitive.
It’s not only governments that have attempted to lift prices by limiting commodity supply, companies have tried as well.
Glencore has probably been the most aggressive in this regard, announcing cutbacks in the output of some of its commodities, including zinc and coal.
In October last year the London-listed miner announced that 500,000 tonnes of annualized zinc output would be cut, but once again the impact on prices was only temporary.
LME zinc futures did gain some 10 percent in the wake of the announcement, but within a month they were back below the level they were before Glencore’s move.
What all these attempts at boosting prices show is that it’s an incredibly tough ask to exert more than just a fleeting influence on the market.
The common thread is that either not enough supply was taken out of the market, or there wasn’t sufficient discipline among the producers to make it work.
In the current situation of structural oversupply for many commodities, the lesson is that it will take significant and sustained curbs to output that need to be shared by major producers, who have to be determined to stay the course.
The move by top oil producers Saudi Arabia and Russia to freeze output has largely been interpreted as the first step in a broader process to build consensus among all major oil exporters to limit production.
This is no doubt a reasonable analysis, but how fast a wide-ranging agreement can be reached will determine whether oil producers can defy the precedent of their counterparts in rubber, rice, metals and coal.(LAUNCESTON, Australia, Feb 18)