Addis Fortune (Addis Ababa)

Ethiopia: Global Commodity Market Projections for 2013

The global economy is still struggling with financial crisis. What began in 2008, in the form of a housing sector malaise in the United States did not stop there. It spread to Europe and emerging economies, such as China and India.

At the core of the crisis laysEuropewith many of its countries heavily indebted and facing an expanding gulf of budget deficit. Countries such asGreece,ItalyandSpainare spending each day under the risk of sovereign defaults. Their survival is ensured by the ultimate care they receive from the European Central Bank (ECB) and the lone national creditor,Germany. With the monetary union facing holes of different sizes, in different directions, the need for enhanced fiscal union is becoming clear. Yet, political squabbling and structural issues, including budgetary sovereignty, are holding further fiscal federalism back.

Despite the better standing of theUnited States, with gross domestic product (GDP) growth estimated to reach two percent in 2013, a dream case for the falteringEurope, unemployment remains high. The risk of a 'fiscal cliff', a reduction in budget deficit to be achieved by increases in tax revenue and reduction in public spending, remains high. A new law to realise the cliff is tabled to the legislature with a lag to decide over it, creating market uncertainty.

ChinaandIndia, the emerging Asian giants, are also facing a slowdown. A decline in demand for their exports, in North America andEurope, has forced governments to redirect economic policy towards the home front. Yet, an undeveloped consumption culture and lower income hampers growth in aggregate local consumption. Public investments in infrastructure and direct incentives could not manage to create a demand equivalent to the loss from export decline. Borrowing by regional governments and heavily indebted financial institutions are also putting a huge burden over the economies of these emerging countries.

This changing global economic dynamics has progressively diffused to other regions of the world, includingAfrica.Ethiopia, one of the fastest growing countries of the world, seems to feel the heat, in its own way. A dwindling export market, a relatively slow growing remittance and costly import are stretching the wallets of the nation. In view of the pertinent global economic challenges, the just-starting year, 2013, will indeed be a year of reckoning for the East African nation.

In a way to help see the development of the price of major export and import commodities in 2013, Fortune has compiled the annual average price projections for 10 major commodities. The price projections take the different global risks and opportunities in to account, not to mention the variability that might happen with time and space. Under the price graph of each of the commodities, a brief description of the developments is included so that decision-makers using the prices can be informed about the broader context. Excerpts:

GOLD

The year 2013 seems to be another year of boom for gold. A global economy that is becoming increasingly sensitive to risk and investors looking for possible frontiers to hedge risk seem to provide a boost for the value of gold in the international market. The average price of the commodity, largely considered as a risk hedger, is expected to show an increment of a little over 15 dollars a gram. Average price for 2013 is projected to be 52.8 dollars per gram, a significant rise from a price tag of 51.3 dollars in 2012. A comparison of the average price, with a base year of 2008, shows that the commodity has seen a price rise of over 100pc, in six years. The constant increase in the price of gold is, certainly, a showcase to the deep-seated economic uncertainty around the globe. Such a projection is good news forEthiopia, which is witnessing an increase in volume of gold export. The nation, which has exported 11tn of gold in 2010/11 to eventually reap revenues of 461 million dollars, has elevated its export by one tonne in 2011/12. Due to the rise in average global prices for gold, the revenues of 2011/12 have grown to 606.4 million dollars.

What would rightly show the disproportion in the increment of price and export volume is the annual change; whereas the former witnessed a 30.4pc change, the latter has experienced only 10.4pc change. With expected gold price on the rise, Ethiopian policy makers would have to take advantage of the situation by creating a conducive export regime for exporters and encouraging them to export more. Exploration activities ought to also be the other frontier of policy involvement.

COTTON

The upcoming year is going to be a disappointing one for the many cotton farmers ofEthiopia, who had been disappointed by the subsequent decline in cotton prices, globally. Another year of declining prices is on the horizon. From its high of 1,930 dollars per metric tonne in 2011, cotton price would decline to a three-year low of 1,694 dollars a metric tonne in 2013.

At the base of the decline lays the significant cut in production by major global textile producers, largely based inChina. Constriction in the demand side pushes down the rate of growth of orders at the producers, which, in turn, results in low cotton purchase. This eventually has translated in to low cotton prices. The years between 2008 and 2011 were relatively better days for the commodity, as price rose from its base year (2008) price of 1,097 dollars, to 1,930 dollars in 2011.

At stake forEthiopia, a net importer of cotton, is export revenue. In the years 2011 and 2012, the nation has exported 25tn and 183tn of cotton, with annual export revenue standing at 36,000 dollars and 317,000 dollars, respectively. This translates in to a volume and value changes of 632pc and 780pc, respectively.

The eventual decline in price projected for 2013 will indeed be disappointing for the many cotton farmers in low-landEthiopia. In contrast, it will bring smiles to the faces of textile producers. Policy makers, on the other hand, will be expected to make a good balance of the situation. Expected from them, then, is a policy measure that will support the losers and retain the winners.

COFFEE

Coffee, considered the golden crop in Ethiopia, renowned as its birthplace, is projected to see a sharp decline in price in 2013. Its price, which had been relatively flat, between 2011 and 2012 will have its largest annual decline in 2013.

The time after the financial crisis has been a relatively better one for the commodity, as prices were increasing constantly, despite some variability. At the base year of the global financial crisis, a tonne of coffee was selling at 2,700 dollars, which, after three years, reached to 5,500 dollars.

Projections for the year 2013 show that 3,800 dollars per tonne is the average trading value for the commodity that is often considered as a truly global commodity. Rising unemployment, a declining actual demand in relation to lowering relative income, better harvest expectations in major producers, including Brasil, the topmost grower of the crop, and production constraints such as disease, are attributed to be the causes for the decline.

With the major global consumers of coffee,Japan and Europe, struggling with economic stagnation, the upcoming year is going to be the toughest one for all the value chain players of coffee. No doubt that the burden would be heavier at the lower rungs of the value chain where Ethiopia resides.

Official Ethiopian statistics show the expectations embroiled in the developments. In 2010/11, the country has exported 196,118tn of coffee, earning 841.6 million dollars. The numbers have changed in the last year, with exported volume standing at 169,387tn, and earnings being 832.9 million dollars. No doubt that 2013 is going to be tough for policy makers who often attach high expectations with coffee. If anything, the projections show that it is time to think about other alternatives.

FERTILISER - DAP

One key import product in most developing countries, including Ethiopia, is fertiliser, with Di-Ammonium Phosphate (DAP) regarded as the most popular fertiliser. Yet, its price always remains higher than the other leading fertiliser, UREA. The upcoming year, 2013, will be yet another year of bliss for buyers of fertiliser as it brings a reduction in average annual price of the commodity.

The decline of the commodity up until 2008 was indeed sharp, by any standard. The decline in price went from 966 dollars a metric tonne, in 2008, to 500 dollars a metric tonne in 2010. A rise follows, then, as price of a ton of the commodity jumped to 617 dollars in the year after. What followed was disappointing for producers of the commodity, whereas buyers seem to be enjoying. Price of the commodity has declined to 543 dollars a metric tonne, and are projected to arrive at an average of 530 dollars per metric tonne.

This would obviously have an uplifting effect onEthiopia, a net importer of the product, which continues to spend a substantial amount of capital on it. In 2010/11, the country imported 291,280tn of UREA at a cost of 201.3 million dollars. The import swelled to 328,000tn in 2011/12, costing the nation 226.3 million dollars. Average annual increment in value and volume of import of the product stands at 12pc.

The decline in price has to translate in to early procurement orders, for any risk within the year could push prices up. Having enough stock of the commodity could also serve as a buffer for eventualities. Anything that could not translate into real price reduction at retail level would not have any effect in the agricultural system of the nation, and hence Ethiopian policy makers ought to make sure that such a trickle down of price can be realised.

FERTILISER - UREA

More popular than DAP by Ethiopian farmers, as a supplement to their largely rain fed agriculture is UREA, a nitrogen fertiliser. Often sold at a lower price than DAP, the commodity will see a decline in price in 2013. And it will be just one swing of the largely variable price of the commodity.

The last five years have seen a swift rise and fall in the price of the commodity. It was in 2008 that fertiliser prices witnessed its ever highest price, 466.6 dollars per metric ton. The year after was shocked with a sharp decline in price, to 245 dollars per metric ton.

The years after that have seen a rise in price, up to a maximum of 417 dollars per metric ton. It is from this that price continues to decline, to go lower than the 400 dollars mark in 2013.

Evidently, such a trend in price is definitive for a commodity that the over 81pc of the farming population depend on. Statistics from the government shows the same.Ethiopiahas imported 410,200tn of UREA at a cost of 245.8 million dollars. The import has gone up to 560,000tn in 2011/12, costing the nation 308.5 million dollars. With import volume to increase, it is obvious that 2013 will bring with it an even higher UREA bill forEthiopia.

Yet, the projected decline in price is something that the nation can hope for. Making use of it would call for an effective procurement plan. And that would be the stake for Ethiopian policy makers in the upcoming year.

CRUDE OIL

If there is anything that always has been at the frontier of both risks and opportunities, it is the market for crude oil. It will be no different in 2013. Yet, global projections show that 2013 will bring a bit of relief to the rather tight market, for prices will witness a marginal reduction.

Crude oil price in 2013 is expected average around 96 dollars a barrel. This would provide net oil importers a rather marginal fiscal relief. Largely, the commodity is typical in the sense that it heavily depends on the political stability of oil producing countries.

But, as it stands, the political stability of Middle Eastern countries is unpredictable. If the trend in the past year is something to go by, then, the political risk in major oil producing countries of the world, fromIrantoSudan, is volatile. Besides, the volatility of both market and price risks in the crude oil market is very high, not to mention the elasticity in price of crude oil.

The resultant impact of the risk developments, at least as the projections go, will be a reduction in price. As net importer of crude oil,Ethiopiawill benefit from the projected reduction in price.

National statistics could rightly show the burden that importation of crude oil imposes on the fiscal regime ofEthiopia. In 2010/11,Ethiopiahas imported 1.9 million metric tonne of crude oil, expending a total of 1.9 billion dollars. This amount has grown to 1.8 million metric tonne, with a total cost of 2.3 billion dollars. The annual increase in value of the product, which is around 7.8pc, is larger than the annual increase in volume, which is around 5.9pc, evidencing the rise in price.

Ethiopian policy makers have to prepare themselves for a marginal fiscal relief, but still be cautious about the buffer stock that is needed to withstand any eventuality.

IRON BAR

A global economic slowdown is affecting every major commodity. And no different are iron bars, an essential input for the construction sector. The demand for iron bars is projected to increase, while supply remains to be suppressed, which eventually pushes prices up.

However, unlike other major commodities, the price of iron bars has remained almost flat for the last six years. It is only in 2010 that a significant slump in iron bar prices has occurred, wherein a tonne of iron bar used to cost, 706 dollars. During the crisis year of 2008, a tonne of iron bar was selling for 778.5 dollars. A peak of 876 dollars a tonne happened in 2009, a time that most countries enacted aggressive economic stimulus packages. So much as most of the stimulus packages, including inChina, focused on infrastructure projects, the demand for the commodity increased, thereby pushing prices up.

Since then prices were between 770 dollars a tonne to 790 dollars a tonne. It is from this average price of the just-ended year that prices are expected to 815 dollars a tonne. Pertaining global economic recovery undertakings are seen to increase demand for iron bar, for most of them focus on infrastructure.

The demand for iron bar is expected to increase, soon. National imports have seen a surge, in actual terms, between the two previous years. In 2010/11, the aggregate volume of iron bar import was 650,000tn, with total import expenditure being 625.3 million dollars. This volume has increased to 842,520tn, costing the nation a total of 752.5 million dollars. A comparative analysis of the increase in value and volume of iron bar import shows that price was indeed a determining factor in the previous year.

Ethiopian policy makers should take the marginal increment seriously. Since any eventuality might push price further, having enough buffer is important. As far as construction contributes a lot for the success of the grand government plan, dubbed the Growth & Transformation Plan (GTP), watching the movements of the iron bar market keenly will be important.

SUGAR

One crucial product in the consumables sector that often had been exposed to price volatilities is sugar. The gap between the global demand and supply of sugar remains to increase very fast in the last six years. Supply had been short of demand, and hence a push in price.

At the lower level of the crisis year in 2008, the price of a tonne of sugar was 380 dollars. The three years since then has seen a sharp rise in price with 2011, the peak year for the price of sugar, witnessing an annual average price of 534 dollars per tonne. Global projections show that 2013 will be another year of decline in price of sugar as compared to 2011, following the decline in 2012 to 450 dollars a tonne with the annual average price projected to be 460 dollars.

This has to do with the an aemic growth in United States, a slowdown in Europe and the related economic slumping inChina. A final result of the economic pandemic has been a decline in aggregate demand for sugar. Hence, another year of stable prices.

This has a lot to say for Ethiopian policy makers. The demand for sugar inEthiopiahas been rising consistently, in the past six years. The nation has been expending huge resource to fill the gap between the demand and the local production by importing. It indeed remains to be a burden on the economy. National statistics show that the total volume of sugar import in 2010/11 was 241,552tn, costing the nation 205.8 million dollars. The volume of import in 2011/12 has increased to 270,654tn, bringing an import bill of 212.4 million dollars.

So much as a significant rise in local production is not expected in the year, Ethiopian policy makers have to be cautious that sugar import does not remain a burden for the fiscal regime of the nation. Planning the procurement ahead could be helpful in avoiding any unforeseen risks.

SESAME

One of the valuable agricultural products, sesame will see another hey year in 2013. As it has been the case since 2008, a year that most agricultural commodities fetched very low prices. Sesame would see a rising price in the coming year. Yet, the increment would only be marginal. Of course, a comparative analysis of the prices with the base year of 2008 will show that the projected price of 2013 is very high.

In 2008, the price of a tonne of sesame was 820 dollars. Global projections show that the price will rove around 1,750 dollars per ton in 2013. Prices have been consistently rising in all the past six year.

The rise in prices has a lot to do with the rise in demand in emergingAsia. A changing diet inAsia, associated with an increase in income, has pushed the demand for sesame seed up. At the core of the global demand lays a rise in demand fromChina.China's import of sesame in the last five years has been rising, astonishingly.

For exporters of the commodity, such asEthiopia, the rise in price means a boost in national revenue and hard currency earning. Specifically forEthiopia, however, the rise in price might have a rebounding effect in volume of total export that has declined between 2011 and 2012.

Total volume of sesame export in 2010/11 was 365,801tn, earning the country 470.6 million dollars. The volume has declined to 250,788tn, whereas the earning declined to 323.8 million dollars.

Certainly, the task for policy makers in the coming year would, then, be to rebound the export and to enhance the national earning. Exploring new markets would be one important frontier that policy makers could tinker with.

FLOWER

The global economic slowdown that continues to bother the policy makers of developed countries remains to lay its shadow on the global flower markets. But, since supply had been severely constrained, price per stem did not fall. It rather continues to rise sharply.

It has been the case since 2008. A stem of flower was sold at 0.45 dollars in 2008. The value has reached 0.83 dollars in 2013.

As compared to the largest price decline of 2010, at 0.4 dollars per stem, the projection for 2013 is around 200pc. And this is indeed a significant incentive for growers. Exporting countries will also be in centivised by the rise. No doubt that the case for Ethiopia, one of the largest flower exporters of the world, would not be any different.

Where the space for global policy makers seems to lay is to enhance demand by providing consumers enough direct incentives. But, as global economic realities indicate, the probability for such an action is very low. The 'fiscal cliff' in the United States and the risk of sovereign default in Europe seems to reduce the policy space for direct incentives.

This means that policy makers inEthiopiaought to be overly cautious about the price developments. It might be difficult to expect a significant rise in export volume. Hence every opportunity for better price ought to be utilised very well.

A glance of the performance of the past two years shows that the volume of export has significantly increased, pushing the value of export earning obtained up. Total volume of flower export in 2010/11 was 41.5 million stems, whereas the value of the export was 175.3 million dollars. The case for 2011/12 involves a total export volume of 1.7 billion stems with a total value of 169.9 million dollars.

So much as the rises in volume and value are disproportional, bringing the right balance to the in congruence should be the focus of Ethiopian policy makers in the coming year.

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