Volatility drivers on the metal market and exposure of producing countries
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ORIGINAL ARTICLE
Volatility drivers on the metal market and exposure of producing countries Sven Renner 1,2
&
Friedrich W. Wellmer 3
Received: 10 April 2019 / Accepted: 18 June 2019 # The Author(s) 2019
Abstract The paper focuses on minor metals and coupled elements and aspires to understand individual incidents of imbalance on the mineral markets during the last 100 years and gain insight into the acting dynamics—those dynamics are commodity-specific but remain largely unchanged in their nature to date—and to identify the factors in play. The conclusions allow for a critical analysis of the widespread security-of-supply narrative of industrialized countries. They point at a market that is mostly a buyers’ market, in which prices and their volatility are largely dictated by shifting demand patterns and much less by supply constraints. Neither high country concentration nor poor governance seem to have a substantial or lasting impact on market balance. Short-term market imbalances are generally neutralized by a dynamic reaction on the demand side via substitution, efficiency gains or technological change. The paper also assesses the impact of those quickly shifting demand patterns and the related price volatilities on producing countries. It shows how mineral price volatilities can expose developing countries’ economies to significant economic risk, if their economy is heavily dependent on mineral production. Two cases that illustrate country exposure are explored in detail—the saltpeter crisis in Chile and the tin crisis in Bolivia. Both led to state bankruptcy. The paper concludes with an attempt to quantify economic exposure of producing countries to price volatilities of specific metals and suggests policies that adapt to the characteristic challenges of highly volatile demand. Keywords Minerals . Metals . Volatility . Raw materials . Substitution . Low-income countries JEL classification O11 . O13 . O14 . O23 . O25 . O33 . O38 . Q31 . Q32 . Q33 . Q34 . Q38
Introduction In contrast to manufactured products, mineral raw materials do not have unique selling points. They are traded globally, be it via bilateral agreements or in commodities future exchanges
Friedrich W. Wellmer is the former president of the German Federal Institute for Geosciences and Natural Resources. Electronic supplementary material The online version of this article (https://doi.org/10.1007/s13563-019-00200-8) contains supplementary material, which is available to authorized users. * Sven Renner [email protected] 1
The World Bank, 1818 H St NW, Washington, DC 20433, USA
2
University of Dundee, Nethergate, Dundee DD1 4HN, UK
3
Hannover, Germany
as is the case for base metals on the London Metal Exchange (LME) or crude oil on the International Petroleum Exchange, against one or several standards based on their physical and chemical specifications. The significant decline of transportation costs and increased vessel capacity since the industrial revolution has led to a truly globalized market for mineral commodities, in which in
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