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Commodities Continue Their Relentless Surge

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Commodities Continue Their Relentless Surge

The world is experiencing what is known as a commodities “super-cycle”. Just what this means for Africa is a complex subject.

With few exceptions, the prices of most metals and mineral commodities – as well as the “softs” that include cotton and food crops – continue to soar. And oil, on the back of increasing nervousness concerning Middle East supplies, is also recording a higher price on an almost daily basis.

On the face of it, this is good for Africa’s producers. But there is another side to this story as those African countries that export basic commodities face a currency problem. It arises as the value of local currencies rise as a direct consequence of higher prices for commodities on international markets. This tends to “price out” Africa’s fragile domestic manufacturing base from global markets.

There is another problem too. Most commodities are sourced in Africa by very large multinational companies (MNCs). These MNCs do pay taxes on their operations to local African governments, but the fact remains that, in the main, it is the value addition that is made to commodities overseas that commands the biggest profits.

The same is true of the trade in commodities, dominated by the world’s biggest banks. Blythe Masters, the commodities chief at JP Morgan, has announced revenues for commodity trading leaping to a record of $2.88bn last year, and although those of both Goldman Sachs and Morgan Stanley lag behind JP Morgan, they are similarly significant.

Africa remains a resource-rich continent. One 2007 study by development economist Ray Bush reported that Africa contained 42% of the world’s bauxite (used to smelt aluminium); 38% of its uranium; 42% of its gold, 73% of its diamonds and around 10% of its oil.

Yet Professor Paul Collier of Oxford University’s Centre for the Study of African Economics, believes these figures may be a radical underestimate. He and his colleagues extrapolated World Bank figures that showed that the world’s rich OECD countries’ sub-soil assets were worth $114,000 for each square kilometre. But the average square kilometre in Africa had only $23,000 of sub-soil assets. He makes the point that the World Bank was not measuring the endowment of the OECD’s and Africa’s sub-soil assets but their known sub-soil assets. He concludes that it is the lack of prospecting that explains Africa’s apparent shortfall.

The softs are a hard market

Similarly, above ground, Africa is endowed with vast tracts of arable land that have yet to be fully exploited. Agriculture accounts for 65% of full-time employment in Africa, 25–30% of its GDP, and over half of export earnings. Net production data shows that there has been substantial growth in production across all regions of Africa, with output more than trebling over 50 years – the greatest growth occurring in north and west Africa.

Nevertheless, the challenges still remain substantial for Africa’s agricultural commodities. With agricultural goods, the continent has long had to struggle with an un-level playing field created by the subsidies paid by the West to their farmers. Food “dumping” by the West is also a problem for African producers. Consequently, the continent remains a net importer of foodstuffs and many countries remain virtually powerless in the face of the rising world prices for commodities such as maize, wheat and soyabeans.

The US Department of Agriculture, which monitors the price that many food commodities trade at, says that in the five years between 1996 and 2011, maize prices rose by more than 100%; the soyabean price by more than 80%; and the wheat price by over 70%.

Increasingly prosperous consumers in emerging markets, including Africa, are also driving up the price of food as they demand more and better quality nutrition, including a greater proportion of meat in their diets – which in turn drives up the price of maize being consumed as feed for livestock.

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