Turkey’s role in helping tame the commodity volatility for the G-20 renewed growth MEHMET ÖĞÜTÇÜ (Written several years back, but still relevant today) When I received an invitation from the Turkish Industry and Business Association (TUSİAD) to chair the G-20 Business Conference in Istanbul on commodity volatility and its impact on the world economy, I did not quite realise why Turkey was picked as a venue for such an initiative. At the end of the discussion, it became clear that Turkey, a major G-20 emerging country and an important commodity importer, was a critical player in addressing the volatility issue for G-20 economies embarked upon the journey to achieve the rapid growth and prosperity. Need for a mindset change There was a call by senior business leaders for considering a change in mindset, and indeed a “revolutionary thought process” in our traditional approach to commodity volatility as it fundamentally affects our business survival and political future. The global community should focus on innovative solutions, since the commodity markets are extremely complex and affects all businesses and individuals throughout the value chain. During this process, the business community should continuously assist and guide the policymakers to find these innovative and proactive solutions. We recognise that excessive volatility in commodity prices, particularly those for food and energy, poses new risks and uncertainties for the ongoing recovery, as well as the prospects for investments to increase supply side capacities. Need for a global solution The unprecedented nature of the present situation in the global commodity economy means that no institution or group of interests holds all the keys to a solution. While some lessons can be drawn from previous commodity price boom and bust cycles and their repercussions on the world economy, the present problems are to a large extent unique. It is therefore important to involve as many interested parties and stakeholders as possible in the process of identifying trends and defining the actions. Here the business community plays a critical role and our discussions provided “food for thought” into how G-20 governments should develop better global solutions for exporting and importing countries as well as important commodity producers, traders and financiers without disrupting the market mechanism and leaving the poor to the whims of the market fundamentals only. Other views • Long-term upward trend in commodity prices starting from early 2000s and recent increase in volatility after the global crisis has to be evaluated separately; • Increasing global demand mostly stemming from Emerging Asia seems to be the major reason of the long-term upward trend in commodity prices; • New supply can take a decade to realise and constraints on new supply will add to already tight markets; • Uncertainty about the global recovery process is one of the key aspects of the volatility, and any positive and negative news about global growth would be directly reflected into commodity prices; • High regulation, barriers to investment and trade and price subsidies, especially in the agricultural commodities, would eventually distort the market mechanism and increase the price volatility; • Commodities are traded in a global market, but policies and regulations are implemented nationally. In absence of policy coordination, this is also reflected into the markets as more volatility. Proposed actions The representatives of B-20 business community agreed to communicate the following messages and actions to the B-20 Business Summit as well as to the G-20 Heads of Government Summit, which will take place in Cannes this year in November: Market fundamentals matter more than speculation There is little evidence to support the theory that financial speculation on commodity markets has been a major cause of the increase in prices. At this stage, the available evidence suggests that fundamental factors are the foremost determinants of commodity prices while speculators also play a role, albeit a secondary one. One of the most significant fundamentals has been the shift in the composition of global growth over this period, as emerging market economies have come to prominence as the engines of world growth. Since these emerging market economies are generally at a relatively commodity-intensive stage of development, there has been a corresponding shift in global demand towards commodities as these countries industrialise and expand their infrastructure. G-20 governments should focus more on improving the market fundamentals, rather than on financial speculators, who in fact enable producers to hedge their price risk, which they would otherwise have to hold expensive capital against. Increased transparency and long-termism There is a converge of views that excessive price fluctuations foster uncertainty and disrupt the forecasting abilities of the various economic stakeholders. This uncertainty is exacerbated by the lack of transparency in commodities markets, which in turn makes prices more volatile. The lack of reliable international data concerning supply and demand trends on commodities markets hampers price formation and increases volatility. Improved information about the level of commodities stocks would also represent a real step forward. Information asymmetries should be removed in order to have more efficient markets. Thus, collecting and disseminating timely and accurate information on supply, demand and storage flows have to be one of the top priorities of the policymakers. Policy coordination should also be sustained along the supply chain. International Energy Forum’s JODI and FAO’s AMIS are initiatives worth supporting in this context, and should be expanded to other commodities. This will help all market participants and policymakers to develop a fact-based consensus on the sources and implications of price volatility. There was also a call on developed G-20 countries as well as relevant international organisations to provide technical assistance to countries, which want to improve their statistical reporting systems and data collection and dissemination mechanisms. We encouraged them to take a long-term view as to the future supply, demand, inventories and price formation. Correlation between commodities Commodities prices, more so than stocks or currencies are vastly inter-dependent; that is to say the price of one commodity depends heavily on the prices of other commodities as their production and transportation often require the use of, or are in some way intrinsically linked to, other commodities. For commodities traded internationally, the strengths of producers and consumers currencies can also affect the prices of the commodities. Therefore, G-20 governments should have a better understanding of different commodity markets so as to develop policies in an integrated fashion. Design an enforceable regulatory framework to cope with market abuse There is no harmonised regulation for the commodity markets. , and some of them do not We call on stepping up efforts to have a basic set of rules governing market abuses and price manipulations for both commodity and financial markets. But an across-the-board over-regulation will stifle the markets. Therefore, enforceable regulations should target the market abusers including financial and proprietary deals in certain commodities to make sure that markets function effectively. Ensure level playing field for commodities Increasing the possible number of players participating in physical markets enables the efficient allocation of resources, and reduces global supply-demand imbalances. G-20 governments should effectively enforce WTO rules for the countries introducing new regulations controlling raw materials exports and imports, thus ensuring long- term efficient and stable regulatory rules to stimulate investment and trade flows. Foster demand management schemes and efficient use of resources Efficient use of raw materials is an important policy issue to limit the increase in commodity consumption. G-20 governments should remove price subsidies (to the extent political and social realities allow) that distort efficient consumption patterns. Improvement of business climate, policy and institutional framework Increasing commodities supply and inventories is key to curb the price volatility. This means channeling massive funds of investment in energy, food and metals along the value chain. Investors will take action only if host governments create a conducive business environment. G-20 governments should persist in their efforts to help build appropriate policy, legal and institutional frameworks. Social fairness for the less fortunate Rising commodity prices and volatility, particularly for fuel and food, have placed millions at risk of malnutrition and hunger and are exacerbating social tensions worldwide. Market-based mechanisms will not solve the problems suffered by the less fortunate segments of the society due to commodity market volatility unless they are complimented by stronger hedging instruments as well as development and social policies. G-20 governments should design special policies in order to ensure sustainable supply of basic materials to the most vulnerable portion of the global community. Last but not least G20 leaders should deal with these issues and enhance closer cooperation with the business community. Since the underlying fundamentals and the implementation process of the necessary policies are long-lasting phenomena, it is highly recommended to keep this issue on the G20 agenda beyond the French Presidency. Turkey and Turkish business community have expressed willingness to follow up efforts in this critical area under the G-20 and ICC/WEF umbrellas, determined to play a leading role on addressing the world’s commodity and raw materials volatility problem.
Posted on: Fri, 01 Nov 2013 16:52:59 +0000
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