Turkey’s role in taming commodity volatility
by Mehmet Öğütçü*

At the end of the discussion, it became clear that Turkey, a major G-20 emerging country and an important commodity importer, is a critical player in addressing the volatility issue for G-20 economies embarking upon the journey to rapid growth and prosperity. There has been a call from senior business leaders to consider a change in mindset and indeed to revolutionize our thought process, moving away from the traditional approach to commodity volatility because it fundamentally affects business survival and the political future. The global community should focus on innovative solutions because commodity markets are extremely complex and affect all businesses and individuals throughout the economic chain. The business community should continuously assist and guide policymakers to find innovative and proactive solutions. Excessive volatility in commodity prices, especially food and energy commodities, poses risks and uncertainties for the ongoing recovery, as well as for potential investment to increase the capacity of the supply side.

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 effects 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 appropriate action. The business community plays a critical role in this, and our discussions at the conference provided food for thought about how G-20 governments can develop better global solutions for exporting and importing countries as well as important commodity producers, traders and financiers without disrupting market mechanisms and leaving the poor at the mercy of the market. Some of our thoughts were as follows:

There has been a long-term upward trend in commodity prices starting from the early 2000s, and the recent increase in volatility after the global crisis should be evaluated separately.

 The increasing global demand, mostly stemming from emerging Asia, seems to be the major reason for the long-term upward trend in commodity prices.

 New supply sources can take a decade to realize, 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 or negative news about global growth will be directly reflected in commodity prices.

 High regulation and barriers to investment and trade and price subsidies, especially in the agricultural commodities, could eventually distort the market mechanism and increase price volatility.

Commodities are traded in a global market, but policies and regulations are implemented at the national level. In the absence of policy coordination, this is also reflected in the markets as increased volatility.

Proposed action

The representatives of the G-20 business community attending the İstanbul conference agreed to communicate the following messages and proposals for action to the G-20 business summit as well as to the summit of the heads of G-20 governments, which will take place in Cannes in November:

 Market fundamentals matter more than speculation

There is little evidence to support the theory that financial speculation in 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 industrialize and expand their infrastructure.

G-20 governments should focus more on improving market fundamentals rather than on financial speculators, who in fact enable producers to hedge their price risk, against which they would otherwise have to hold expensive capital.

 Increased transparency and a long-term view

There is agreement in the community 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 in commodities markets hampers price formation and increases volatility. Better information about the levels of commodities stocks would represent a real step forward.

Asymmetries in available information should be eliminated to improve market efficiency. Collecting and disseminating timely and accurate information on supply, demand and storage flows must be a top priority for policymakers. Policy coordination should also be maintained along the supply chain. The International Energy Forum’s Joint Organizations’ Data Initiative (JODI), created in order to address the lack of transparency in the oil market, is an initiative worth supporting in this context and should be expanded to other commodities. This will help all market participants and policymakers develop a fact-based consensus on the sources and implications of price volatility.

We should also call on developed G-20 countries and relevant international organizations to provide technical assistance to countries which want to improve their statistical reporting systems and data collection and dissemination mechanisms. We encourage them to take a long-term view on the future of supply, demand, inventories and price formation.

 Correlation between commodities

Commodities prices, more than stocks or currencies, are vastly interdependent; 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

No harmonized regulation exists for the commodities markets. We would like to see stepped-up efforts to create a basic set of rules governing market abuses and price manipulation for both commodity and financial markets. But across-the-board regulation will stifle the markets. Therefore, enforceable regulations should target 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 and demand imbalances. G-20 governments should effectively enforce World Trade Organization (WTO) rules for the member countries, introducing new regulations to control 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 the 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 curbing price volatility. This means channeling massive funds of investment in energy, food and metals along the value chain. Investors will become involved only if host governments create an environment conducive to business. 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 in society caused by 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 to ensure a 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 engage in 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 that this issue remain on the G20 agenda beyond the French presidency. Turkey and the Turkish business community have expressed their willingness to follow up with efforts in this critical area under the G-20 and ICC/WEF umbrellas and are determined to play a leading role in addressing the world’s commodity and raw materials volatility problem.