Commodities, Technology and Summits

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By David Skilling*

Vladimir Putin once said that whoever controlled artificial intelligence would control the world. Maybe so, but it won’t be Russia. John McCain’s description of Russia is more apt: “It’s a gas station run by a mafia pretending to be a country‘. The direct global economic impact of Russia’s invasion of Ukraine is largely transmitted through energy and other commodities.

Technology is widely believed to dominate the dominant apexes of the global economy, such as tech giants from the United States and China (Amazon, Google, Alibaba and many others). And over the past two years, vaccine innovation has been at the heart of economic and health outcomes. More generally, some have argued we are in an intangible economy where assets like brands, ideas and relationships matter more than physical capital.

Tech indexes have soared in recent decades, and economies with strong technological capabilities have performed well, from Silicon Valley to Israel and Taiwan. And thanks to Covid, investment in digital and other technologies has accelerated in many advanced economies. It is plausible that this increased investment will support a productivity revival.

National economic policy is often focused on building technological advantage, from the United States and China to smaller economies like Singapore and the Netherlands. And China, the EU and the US are increasingly focusing on building strategic autonomy in advanced technology sectors.

The tangible economy

But the experience of the last two years, reinforced by the impact of the Russian invasion of Ukraine, shows that the world has not dematerialized. The physical flows of goods and the supply chains that support them matter. High-tech businesses cannot function if supporting physical supply chains do not work: for example, this week Dutch semiconductor technology company ASML reported major supply chain constraints on its output.

The strong global economic recovery thanks to Covid, coupled with the rotation of consumer spending towards goods (and away from locally produced services), has led to strong growth in trade in goods – and pressures on global supply chains. Shipping costs have increased and there have been global delays in shipping goods. And now the Covid lockdowns in China are causing further disruptions to global supply chains.

This is leading companies and countries to think a lot more about supply chain resilience, from building inventory and supplier diversification to re/near-shoring activity.

Countries and companies are also exposed to the supply and prices of energy, food and other raw materials. Global commodity prices, from energy and agriculture to industrial metals, have risen much faster than the tech-heavy Nasdaq index over the past two years – and particularly since the Russian invasion of Ukraine.

Oil and gas prices have risen sharply. Although advanced economies are consuming far less energy than during the oil shocks of the 1970s, this will continue to cause economic hardship for businesses and households, as the IMF’s World Economic Outlook noted this week. Countries that have energy independence will have an advantage; the United States has an advantage over Europe, for example, because of its domestic energy resources.

Over time, renewables and green hydrogen offer the potential for greater resilience to these shocks. Many countries are stepping up their plans for renewable energy generation over the next decade and beyond, in part to reduce external exposures (e.g. to Russian gas) as well as to meet net zero commitments.

Geopolitics will be reshaped by these new networks of energy flows, with the centrality of oil exporters diminishing as countries develop (or import) renewable energy. In turn, however, renewable energy will require access to industrial metals such as copper and lithium. Few advanced economies have direct reserves of these metals; the need to procure these inputs creates new exposures (and the prices of these industrial metals have risen sharply).

Food security has also become a major issue. Global food prices are at record highs and are expected to remain at this level for some time. The loss of supply of wheat and other agricultural products from Ukraine and Russia is already causing major disruption, especially in exposed markets such as Lebanon and Egypt.

High food prices are a frequent cause of political instability in emerging markets, as seen in Sri Lanka and elsewhere in recent weeks. In the future, climate change will likely lead to additional pressure on food supply: droughts/floods, reduced yields, etc.

These higher food and energy prices have been a major contributor to higher inflation around the world, necessitating higher interest rates.

The ability to secure a reliable supply of energy, food and basic commodities, as well as access to well-functioning supply chains, will be an important aspect of national resilience and economic performance. Global markets have worked well for some time to support efficient flows of goods and raw materials. But a combination of geopolitical tensions, a fragmented global economy, the transition to net zero, as well as trade incentives around production, are creating structural pressures.

let’s get physical

Countries and companies that can combine technological/innovative leadership with security of supply of critical flows of raw materials and goods will perform better. And especially when these attributes are associated with strong institutions, a structural lever for national success.

The global economy may have important properties of weightlessness – with more economic value coming from intangible assets – but the important questions of physical flows and raw materials remain vital. Geography is not dead.

Indeed, being a commodity exporter is a good place to be right now. Commodity currencies (AUD, NZD, NOK, CAD) have outperformed the flying USD this year; commodity-importing currencies lagged (JPY, KRW, TWD, euro). And from Norway to Australia (and sadly to Russia), trade surpluses of commodity-exporting countries have exploded in recent months.

In an optimistic scenario, post-war Ukraine could leverage its dominant global position in a range of key commodities, as well as its technological capabilities, European integration and strengthened institutions, to converge towards European per capita income.

But although raw materials are not a declining industry, countries and companies cannot rely on raw materials alone. Massive disruption is happening: renewable energy will replace oil and gas over time, and new technologies (vertical farming, plant-based foods and precision fermentation) will disrupt food production. Innovation is also likely to change the demand for industrial metals (eg around batteries). Commodity exporters must not be complacent. Companies and countries must be active at the intersection of technology and raw materials.

As is often the case, small advanced economies lead due to their large external exposures. Singapore, for example, is investing heavily in food innovation to boost its self-sufficiency (including regulatory approval of lab-grown foods), exploring options for nuclear energy and importing solar power from Australia, is a world leader in the field of water (desalination, recycled water), and is working to strengthen its supply chains.

Countries have not given full attention to their exposure to the physical world in recent decades, in part due to the relatively benign global environment. But that is changing. Even major advanced economies will need to ensure resilient supply chains, security of supply for key commodities and invest in innovation around food, water and energy, to guarantee a position on the dominant heights.


*David Skilling (@dskilling) is director of economic consultancy Landfall Strategy Group. You can sign up to receive David Skilling’s notes by email here.

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