A handbook of primary commodities in the global economy

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A Handbook of Primary Commodities
in the Global Economy

The 2010s have been a dramatic period for most primary commodity markets. Producers suffered heavily as prices fell in response to new supply
facilities going into production, juxtaposed with disappointing demand
evolution from China in particular, marking the end of the most powerful
and enduring commodity boom since the Second World War. This book
is a guide to the primary commodity universe, a crucial part of the world
economy. In the present updated edition, Marian Radetzki and Linda
Wårell introduce and explain pertinent issues surrounding international
commodity markets, including the importance of fossil fuel markets
among commodities, price formation, price trends, the shift in primary
­commodity consumption toward Asia, the increasing reliance on commodity exchanges, the new relaxed attitude toward depletion, cartel
action, and the revival of nationalism and state ownership. This is a comprehensive and easily accessible read of use to a variety of specialists, academics, as well as practitioners who need to broaden their outlook, but
also to those with a general interest in the primary commodities universe.
Marian Radetzki

is Professor of Economics at Luleå University of
Technology, Sweden. He has authored more than two dozen books, the
most recent being The Price of Oil, with Cambridge University Press,
and has undertaken consulting assignments for industry, governments and
international organizations such as the World Bank and the UNDP.
Linda Wårell

is Associate Professor of Economics at Luleå University of
Technology, Sweden. She is the Editor-in-Chief of Mineral Economics, a
multidisciplinary journal focusing on economic and policy issues in the

mineral industries, and has published numerous studies on competition
and public policy questions, predominantly in the minerals industry.

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A Handbook of Primary
Commodities in the
Global Economy
Second Edition
Marian Radetzki and Linda Wårell

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education, learning and research at the highest international levels of excellence.
www.cambridge.org
Information on this title: www.cambridge.org/9781107129801
DOI: 10.1017/9781316416945
© Marian Radetzki and Linda Wårell 2017
This publication is in copyright. Subject to statutory exception
and to the provisions of relevant collective licensing agreements,

no reproduction of any part may take place without the written
permission of Cambridge University Press.
First edition first published 2008
Second edition first 2017
A catalogue record for this publication is available from the British Library
Library of Congress Cataloging-in-Publication Data
Names: Radetzki, Marian, author. | Wårell, Linda, author.
Title: A handbook of primary commodities in the global economy / Marian
Radetzki and Linda Wårell.
Description: Second edition. | Cambridge, United Kingdom : Cambridge
University Press, 2017. | Includes bibliographical references and index.
Identifiers: LCCN 2016032815 | ISBN 9781107129801 (hardback)
Subjects: LCSH: Primary commodities. | Commercial policy. | Primary
commodities—Prices.
Classification: LCC HF1040.7 .R332 2017 | DDC 338/.02—dc23
LC record available at />ISBN 978-1-107-12980-1 Hardback
Cambridge University Press has no responsibility for the persistence or
accuracy of URLs for external or third-party internet websites referred to
in this publication, and does not guarantee that any content on such
websites is, or will remain, accurate or appropriate.


Contents

List of Figures

vi

List of Tables

vii

Acknowledgments

ix

Introduction

1

1 The Historical Framework7
2 The Geography of Commodity Production and Trade28
3 Comparative Advantage and Trade Policy Distortions56
4 Fossil Fuels71
5 Price Formation and Price Trends in Commodities88
6 Commodity Booms113
7 The Commodity Exchanges, Commodity Investments,
and Speculation128
8 Threats of Resource Depletion and Sustainability
of the Extractive Industries157
9 Fears Regarding and Measures to Assure Supply Security179
10 Producer Cartels in International Commodity Markets198
11 Public Ownership of Commodity Production219
12

The Monoeconomies: Issues Raised by Heavy
Dependence on Commodity Production and Exports245

References

277

Index

297

v

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Figures

1.1 Share of primary sector in GDP in 201310
1.2 Intensity of steel use in South Korea 1970–201312
1.3 Regional natural gas prices 2003–14, $/mBTU17
1.4 Baltic Dry Index, 1999–201518
4.1 Indexes of commodity prices in constant money,
1970–72 = 10075
4.2 US natural gas and oil production (MBOE/D)82
5.1 Short-run price determination89
5.2 Long-run price determination90
5.3 World copper variable costs in 2004 and 2007,
nominal US$K/ton93
6.1 Commodity price indices in constant
US$ 1948–2014. 2000 = 100114
6.2 Quarterly commodity price indices in constant
US$ 2003Q1–2015Q1. 2005 = 100118
6.3 Annual growth of GDP (%)124
8.1 US oil reserve prices 1982–2003, constant (2003)

US$/bl164
8.2 Oil resources and cost of exploitation, 2008 US$/bl168
10.1 Maximization of profit and maximization of revenue199
11.1 Proven oil reserves by company, 2010, billion barrels222
12.1 Price stabilization with variable demand253
12.2 Price stabilization with variable supply253

vi


Tables

1.1 Share of agriculture, mining, and utilities in
GDP (%).9
1.2 Value in US$ per kg, at prices in 201411
2.1 Global exports by commodity group over 40 years33
2.2 Global export value for individual primary
commodities, annual averages (billion dollars)35
2.3 World production and exports of selected primary
commodities, 201337
2.4 Commodity and total goods trade by region,
annual average 2011–13 (billion dollars)39
2.5 Share of world exports for selected countries
and commodities in 2011–13 (%)42
2.6 Country share of world exports of oil
in 2011–13 (%)44
2.7 Consumption developments for four important
industrial commodities in four regions48
2.8 Commercial energy at the primary stage: ratio
of production to consumption50

2A.1 World exports volume and value54
3.1 An illustration of tariff escalation: Nominal
versus effective tariff rates68
3.2 Tariff escalation in high-income OECD
countries (%)68
4.1 Global primary energy consumption by source72
4.2 The importance of fossil fuels in 2013: Their
share in world trade and in global GDP74
4.3 Resource curse and oil production81
4.4 Speculative non-US shale impact. 2015–35 (MBDOE)85
5.1 Average operating costs in the nonsocialist
world copper industry, and LME copper prices.
Constant 2005 $/lb.95
vii

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viii

Tables

6.1 Growth patterns during three booms (%)115
6.2 Peaks in constant dollar commodity price indices
during three booms117
6.3 Growth patterns during the third boom (%)122
7.1 Futures and options volume, 2001–14
(million contracts)129
7.2 The major exchanges 2014 ranked by number
of futures and options contracts combined131

8.1 Proven reserves and R/P ratios for four minerals160
8.2 Operating cash costs for three metals165
9.1 Oil prices and the macroeconomy185
10.1 The price elasticities of demand for output
from a cartel (EDC) which controls 60%
of world supply (M = 0.6)201
10.2 Five leading corporations’ share of global production207
10.3 Bauxite output among leading producers
in the nonsocialist world (NSW)209
10.4 OPEC and world oil output (MBD)216
11.1 State-controlled share in mining
(% of world production)224
11.2 Zambian copper industry performance239
12.1 The monoeconomies: leading nonfuel
commodity accounting for 40% or more
of total exports in 2013–14247
12.2 The oil monoeconomies: oil and oil products
accounting for more than 80% of total exports
in 2013–14248


Acknowledgments

Work on this edition of the Handbook has been undertaken while we
were both associated with the Economics Division at Luleå University
of Technology. We are grateful to our colleagues for the intellectual
stimulation that enthused us and continuously fertilized our effort. Our
research assistant, Andreas Gustafsson, did an invaluable job in updating the wealth of statistics that constitute the foundation upon which
the book rests. Special thanks are due to Jan-Olof Edberg, chairman
of Insamlingsstiftelsen Naturresursernas Ekonomi, a Swedish research

foundation, for financially supporting the work. Finally, we wish to
convey our deep appreciation for the support and encouragement for
the project received from Chris Harrison, Phil Good, and Matt Lloyd
at Cambridge University Press, and to their staff for efficiently handling all the practicalities through the production process.

ix

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Introduction

Background
The antecedent to the present work is Marian Radetzki’s book,
A Guide to Primary Commodities in the World Economy, published
by Blackwell in 1990. In that book Radetzki presented the gist of what
he had learnt during twenty five years of active study and research on
international primary commodity markets. The timing of that publication was clearly inopportune. Although the book received positive reviews, it aroused only limited attention. Through the 1980s and
1990s, primary commodity markets were in the doldrums. Supply conditions for most commodities were quite relaxed most of the time, and
prices remained suppressed. The advanced economies were in a process of dematerialization, where declining volumes of raw materials
were needed per unit of value added. This suppressed demand growth
and reduced the significance of commodities in their macroeconomies.
In these circumstances, security of supply assumed a low priority for
users. Producers struggled with excess capacity and weak profitability. Speculators’ interest was muted by the relative market calmness
and declining prices. Noncommercial investors like pension funds and
mutual funds had little incentive to engage in longer term commodity
placements. These actors, instead, directed their capital flows to fields
like information technology and sophisticated services, where markets
appeared to provide a better profit potential.

Against this background, interest in commodities dwindled among
public policymakers and media, but also in the academic community. Researchers found more fertile ground for their efforts in other
sectors of the economy, while students’ attention went elsewhere.
Commodities were simply not a rewarding career area.
This situation changed dramatically a few years into the present
century, when the most powerful and unusually enduring commodity

1

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2

Introduction

boom began. Prices of most commodities in all categories, fuels as well
as minerals, food products, and agricultural raw materials, exploded.
Existing production capacity, dilapidated by years of negligence due
to low prices, could simply not satisfy the speedy demand expansion
resulting from spectacular economic advances in the emerging world,
with China in the vanguard, passing through an especially commodityintensive phase of their economic development. Earlier attitudes
of complacency among consumers were replaced by worries about
security of supply, with the realization that ample availability of commodities is indispensable, and that even prosperous dematerializing
economies cannot survive without safe raw material inputs. Producers
of commodities, in contrast, experienced an unexpected and extraordinary profit surge. Investments in capacity growth were stimulated by
the high prices, to the extent of exhausting the immediate availability
of investment inputs.
The rising commodity prices galvanized the managers of hedge funds,
pension funds, and other capital portfolios to invest in commodities,

both as a means of diversification and for the prospect of significant
profit opportunities. Speculators also reentered the commodity markets
on a large scale.
From 2005 onwards, primary commodities became truly hot stuff,
with current events in the commodity markets regularly displayed on
the first pages of newspapers and magazines, and figuring prominently
on TV screens. 2008, in the midst of the commodity boom, was then
a highly opportune time to see a second edition of Radetzki’s book,
this time titled A Handbook of Primary Commodities in the Global
Economy, and published by Cambridge University Press (the first edition
for this new publisher).
The exceptional prices of most commodities persisted for a few
more years after the book’s publication, the constant price indexes for
each major category reaching a peak in 2011. Substantial price falls
have since been recorded, as massive new capacity, whose establishment was triggered by the boom, went into production, while at the
same time the explosive global demand expansion was suppressed by
a sizable downward adjustment in the economic growth pace of China
and several other emerging economies. In consequence, by January
2015 the price index of all primary commodities was 40% below the
peak of four years earlier.


An Opportune Time to Publish

3

January 2015 was also the time when Cambridge University Press
approached Radetzki about a new edition of the Handbook. 2017,
the planned publication date for this edition, may have been slightly
less exhilarating than 2008, but there is little doubt that a number of

exciting stories worthy of sharing with a wider audience have emerged
since the previous edition, and many of them are included in the present
expanded opus. To mention just a few: The dominant role of China
as commodity consumer has only recently been fully acknowledged;
price transparency has been greatly improved by the relentless progress
of commodity exchanges; resource nationalism has been on the rise,
stimulated by the high prices of past years; and the emergence of shale
oil and shale gas has given a new perspective to fuels markets and on
sustainability and depletion.
There is dual authorship this time. Radetzki, having reached an
impressive age, invited Linda Wårell, a knowledgeable and versatile
colleague professor at Luleå, to share the workload, and her acceptance
has undoubtedly contributed to a broadened and refreshed treatment
of the problems.

An Opportune Time to Publish
The recently ended drama of the commodity boom and the ensuing
spectacular price falls have maintained a strong interest in the primary
commodities universe among public policymakers, captains of industry, and scholars, amongst many others. The contribution of the primary resource industries to GDP may be small, but there is now a clear
perception that primary commodity supplies are indispensable to progress, despite decades of dematerialization and increasing dominance
of the service sector in the rich world. Despite a growth deceleration,
the emerging world continues to expand speedily through development phases of high commodity intensity, and this assures continued
steady commodity demand growth. The publication of a broad-based
book on primary commodity markets in the international economy,
therefore, appears appropriate and important. This is especially so
since, to our knowledge, no such book has been published since 1990,
when Radetzki’s old opus first appeared.
The text which follows provides a comprehensive overview of pertinent issues relating to primary commodities in the global economy.

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4

Introduction

The basic structure of earlier editions has been retained because we
believe that it continues to be valid and appropriate. Major components
in that structure cover:
• The geography of commodity production and trade;
• The distortions of production location and comparative advantage
caused by protectionist trade policies;
• The institutions of price formation; the causes of short-run price instability and long-run price trends; the role of commodity exchanges;
• Fears of and measures to ensure the importers’ supply security;
• Prospects for successful monopolistic producer collusion;
• Trends in and implications of public ownership;
• Issues raised by a very high national dependence on commodity
production and exports.
So much has changed over the past decade that a mere updating
of the old text was completely inadequate. All the above themes have
therefore been thoroughly rewritten.
New portions have been added providing further detail to cover what
was formerly overlooked or to explore newly emerging phenomena.
The additions comprise:
• A completely new chapter on fossil fuels, to reflect the great importance of fossil markets among commodities;
• The geographical shift of the center of gravity in the world economy
and in primary commodity consumption from the prosperous OECD
nations toward the populous developing Asia;
• The changing directions of the global trade flows, with developing
countries greatly expanding their exports of manufactures and losing

their dominance as net exporters of raw materials;
• The recent role played by China and India as consumers of imported
primary commodities;
• The increasing reliance on commodity exchanges, providing valuable
opportunities for stabilizing hedging, but at the same time widening
the scope for speculative activity and financial investment in commodity
markets;
• The new and more relaxed attitude toward depletion, where peak
oil or peak gold and peak copper have lost their urgency;
• The revival during the 2000s decade of the popularity of nationalization and state ownership in some resource-rich countries and
industries.


5

The Readership

The subject of primary commodities in the global economy is vast,
and not all its aspects can be treated within the confines of a single tome.
Our focus is on the economics of commodity production and trade in
a somewhat narrow sense, while issues related to, e.g., employment,
skill creation in the sector, or regional development do not receive any
detailed attention in the following chapters.

The Readership
The subject treatment is firmly based on standard economic theory
and economic logic. But we have consciously avoided technical jargon
and algebra. Readers with only basic training in economics should
therefore find the text fully accessible.
Despite the omissions mentioned above, the book offers a comprehensive survey of the commodity world in the international economy, and we are aiming at a broad readership. While experts in a

particular aspect of that world will probably not gain any substantive
new insights in their specialization, we are convinced that reading this
book will provide them with a valuable context from which to pursue
further work in their chosen field.
The categories of readers that should find the book of interest
comprise:
• Students in economics, finance, business administration and
related disciplines, with an interest in primary commodity markets.
Researchers who have chosen a specific commodity or a specific
commodity-related issue as their area of specialization, who desire a
snapshot overview of the entire commodity economics field;
• Executives responsible for marketing or investment decisions in
firms that produce and export primary commodities;
• Executives responsible for purchase management strategies and
their execution in firms whose production relies heavily on raw
materials inputs;
• Members of the financial community with an interest in primary
commodities for the purpose of speculation or as an object for financial investment. Such individuals would be found on the commodity
exchanges and in organizations that manage capital portfolios, like
hedge funds, pension funds and mutual funds, but also in financial
institutions, e.g., investment banks, that develop and market instruments for commodity placements;

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6

Introduction

• Government officials in nations heavily dependent on primary commodity production and exports – Chile, Peru, Botswana, Ghana,

Mongolia, and Papua New Guinea provide examples, but there are
many more. Government officials in countries that rely heavily on
commodity imports ought to have an equally strong interest in the
analyses presented below. The latter country group would comprise
China, the EU, Japan, and the USA;
• Finally, the book should find many additional readers among the
broad general public concerned about rising prices and the future
availability of commodities.


1

The Historical Framework

This introductory chapter provides a historical framework for world
commodity markets. It considers four major themes. The first theme
reviews the significance of primary commodities in the overall economy at different stages of economic development. The second tracks
the long-run decline in bulk transport costs, and explores the implications of this decline for the establishment of markets with a global
reach for an increasing group of raw materials. The third theme focuses
on the twentieth century. It demonstrates the greatly expanded role
of public intervention and control in primary commodity production
and trade from the early 1930s until the late 1970s, and the subsequent retreat of government involvement in favor of market forces.
The fourth treats the recent strong growth in emerging economies,
which has had – and continues to have – a profound impact on the
world commodity markets. This theme is only briefly introduced in
the present chapter, as many of the remaining chapters will further
elaborate on the subject.

1.1  Primary Commodities in the Economic
Development Process

For the purpose of the present section, we derive our definition of
primary commodities from the national accounts to equal the value
of output from the primary sector, comprising agriculture (including
hunting, forestry, and fishing), mining, and utilities. These are the
activities that supply unprocessed raw materials of agricultural and
mineral origin, along with fuels, electricity, and potable water, for use
by other sectors of the economy. An alternative and somewhat wider
definition, derived from foreign trade statistics, appears to be more
appropriate for most of the subject treatment in the rest of the book.
This is further discussed in Chapter 2.

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8

The Historical Framework

The significance of primary commodities in a national economy is
reduced in the process of economic development. Long historical series
to vindicate this statement are hard to come by, given that national
accounts were not prepared prior to the twentieth century and reconstructions of the more distant past lack common standards. Simon
Kuznets (1966) presents the following assessments of the shares of
agriculture and mining (but not utilities) in GDP in selected countries
over extended periods of time. The contraction in the primary share
emerges starkly from his figures:
Australia
Italy

UK
USA

c:a 1860
c:a 1860
c:a 1905
c:a 1870

36%
55%
41%
22%

c:a 1940
c:a 1950
c:a 1950
c:a 1960

26%
26%
13%
5%

Data on a more systematic basis did not become available until the
late 1930s, and in Table 1.1 time series (including utilities from 1975
and onwards) for selected countries for which these series are reasonably complete are presented. As in the numbers provided by Kuznets,
the primary share exhibits a dramatic decline as the economies develop
over time. The table additionally reveals far lower primary shares for
rich, advanced countries, such as Italy, Japan, South Korea, and the
USA, compared to poorer ones, such as India, Thailand, and Turkey,

for the ultimate year. Norway stands out as an exception, explained
further below.
A closer look behind the figures of Table 1.1 shows that in most
cases agriculture predominated the primary sector during most of the
twentieth century. In Kuznets’ assessments, for instance, the agricultural sector exceeded four-fifths of the primary total for the initial
year, except for Australia, where the share was more than three-fifths.
Because of its dominance, agriculture also dominates the recorded
reduction of the primary share over time. The decline in the smaller
initial share accounted for by mining, is much less accentuated. In some
cases (Italy, USA) that share appears to have remained relatively stable
through the economic development process (Kuznets, 1966). In recent
years we note that mining and utilities have come to dominate the
primary sector. This can mainly be explained by the exceptionally high
demand for many mining and utilities products since the turn of the
century. Chapter 2 discusses this in more detail.


9

1.1  Primary Commodities
Table 1.1 Share of agriculture, mining, and utilities in GDP (%)
1938

1955

1975

1995

Argentina

25

Canada

2003

2013

19

8

9

17

15

19

14

13

10

11

12

India

–

45

42

32

26

22

Italy

28

25

10

6

5

6

Japan

23

24

8

5

4

3

Norway

15

16

11

20

25

28

–

46

29

9

7

5

48

46

29

13

15

16

Turkey

48

43

29

15

15

13

USA

11

7

9

6

4

6

South Korea
Thailand

Source: United Nations (annual) and United Nations Statistics Division on the
Internet: />
Concurrent cross-section data confirm the findings derived from the
time series, i.e., there is a strong reverse correlation between the level
of economic development, measured by GDP per capita, and the share
of the primary sector in the economy. Figure 1.1 provides a demonstration. The data show unambiguously that the dominant pattern is
a decline in the primary share of the economy as nations develop.
In rich market economies the primary sector seldom exceeds 10% of

GDP. Exceptions to this finding require mention, and Norway is an
illustrative example. Its primary share has shown no decline over time
in Table 1.1, and the country represents the extreme outlier position
in Figure 1.1, combining a very high income level with an equally
high primary sector share. The traditional importance of fishing in the
country’s economy explains the high weight of the primary sector until
the 1960s. The subsequent development of offshore oil and gas has
made Norway exceedingly rich, while expanding the primary share
even more. Other exceptions to mention are Australia, Canada, and
New Zealand: prosperous countries with an abundant export-oriented
agriculture and a rich mineral endowment, where the primary sector
accounts for more than 10% of overall national value added. When
studying the share of the primary sector over time for these economies,

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10

The Historical Framework

70%
60%
50%
40%

Norway

30%
20%

10%
0%
0

20 000

40 000

60 000

80 000

100 000

120 000

GDP/capita, USD

Figure 1.1  Share of primary sector in GDP in 2013
Note: 40 countries selected to assure a wide spread in per capita GDP. Primary
sector defined as agriculture, hunting, forestry, fishing, mining, and utilities.
Source: United Nations Statistics Division on the Internet: http://unstats
.un.org/unsd/snaama/dnllist.asp.

a moderate increase in the primary share is noted since about 2005.
This corresponds to the rapid increase in primary commodity prices
witnessed during this time period.
The general finding that the primary sector exhibits declining importance as economies develop is not particularly surprising. Simply
expressed (and abstracting from the possibilities offered by foreign
trade), a key element in the economic development process is rising

productivity, which permits the domestic satisfaction of raw materials
needs with ever lesser factor inputs. Labor and capital can then be
switched to the secondary sector, i.e., production of manufactures
whose sophistication typically increases over time. As manufactures
demand, too, is eventually saturated, the factors of production can
migrate again, now to the service sector. The overall economy expands,
but the secondary and tertiary sectors more so than the primary one,
leaving the latter with a declining share of the total.
With this perspective, the path of economic development can be seen
as a process of dematerialization. Since all material inputs originate
in the primary sector, and since this sector accounts for a shrinking
share of the total, it follows that each dollar’s addition to GDP will
carry a material weight that declines over time. Table 1.2 illustrates
what is involved. It presents the value in US$ (2014) per kilogram


11

1.1  Primary Commodities
Table 1.2 Value in US$ per kg, at prices in 2014
Steam coal

0.07

Iron ore

0.10

Wheat

0.32

Newsprint

0.58

Standard steel

0.70

Crude oil

0.73

Copper

7

Motor car

15

Dish washer

25

Jet ski

30

TV set

80

Playstation 4

150

Videogame

400

Laptop computer

1 000

Large passenger aircraft

1 600

iPhone

5 000

Memory card 128 GB

20 000

Cloud service

Almost ∞

Source: Own computations.

of a set of goods and services, listed in ascending order. The higher
the value, the less primary material inputs will be needed per dollar
value represented by the items. The essence of economic development
is to move the center of the economy’s gravity down the list, toward
goods with ever higher value per kilogram. In consequence, the raw
materials input needs will grow more slowly than the overall economy
as countries grow richer. Material savings will be further boosted
by technological progress, which is typically weight-reducing. It is conceivable that the need for primary materials inputs could stagnate, and
plausibly even shrink, as growing rich economies become increasingly
dematerialized. This finding can easily be depicted using data on primary
commodity consumption and economic growth.
Figure 1.2 presents steel demand as a fraction of total GDP at
different stages of economic development in South Korea between

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12

The Historical Framework

0.08
0.07
0.06
0.05
0.04

0.03
0.02
0.01
0
0

5 000
10 000
15 000
20 000
GDP/capita, USD at constant prices (2005)

25 000

Figure 1.2  Intensity of steel use in South Korea 1970–2013
Source: United Nations Statistics Division on the Internet: http://unstats
.un.org/unsd/snaama/dnllist.asp. World Steel Association (annual a).

1970 and 2013. The figure clearly illustrates that when the economy
initially expands, the share of primary commodities in GDP increases
as a result of investments in infrastructure, roads, houses, factories,
cars, and household appliances. When the economy becomes richer
and the industry sector more advanced, this increase in primary consumption levels out and eventually starts to decline. Previous studies
confirm that most of the developed countries have reached the income
level where commodity consumption starts to decline, but this is not
the case for the current emerging economies (see, e.g., Wårell, 2014a).
It is easy to become complacent about the role and importance of
the primary sector when its share of the economic activity settles at no
more than a few percentage points, as is the case in many advanced
nations. Complacency may be in place so long as commodity markets

function smoothly and existing needs can be satisfied without serious
hurdles. Since the dawn of the present century this complacency has
been put in serious doubt, as rapid demand from emerging economies, such as China and India, has led to a strong boom in primary
commodities markets. Income levels in China have been increasing at
an unprecedented pace, and the infrastructure needed to support the
expanding urban population has required large amounts of resources.
The rapid demand has fueled sharp increases in prices for primary
commodities, as supply has struggled to keep up with the exceptional
demand evolution.


1.2  Declining Transport Costs

13

More specifically, during the past 20 years the demand for products
that contain so-called rare earth metals, such as mobile phones, computer memories, rechargeable batteries, and fluorescent lighting (to
name a few), have exploded. Since economically exploitable resources
of rare earth metals are limited and geographically concentrated, it is
not surprising that widespread fears of supply shortages have been
voiced by users.
At the same time, it needs pointing out that sophisticated modern
economies have become masters of substitutability, permitting them
to function without a particular material. But the ability to substitute will be of no help against a general constraint on supply for raw
materials in aggregate, for it is overwhelmingly clear that not even the
most modern economy can function without assured raw materials
availability. The population will die if food supplies fail. The manufacturing sector is critically dependent on raw materials inputs, even if
the volumes needed have shrunk impressively compared to the value
of manufactured output. The service sector may require quite insignificant inputs of raw materials, but it clearly cannot function if these
supplies fail. Primary commodities are indispensable, just like an ordinarily inconspicuous glass of water that acquires an immense value

in the desert. This is easily forgotten, given the economic insignificance
of raw materials in “normal” times when their availability is taken
for granted.

1.2  Declining Transport Costs and the Emergence
of Global Commodity Markets
Prior to the mid-nineteenth century, freight rates on long hauls were
prohibitively high, except for goods with very high unit prices. In
consequence, global commodity trade at the time was small in volume and consisted in the main of highly valued luxuries like coffee,
cocoa, spices, and precious or semi-precious metals, imported predominantly to industrializing Europe (Landes, 1980). The main subsequent
changes in transport technology and transport costs for bulk materials, it seems, occurred in two spurts. The first took place in the latter
half of the nineteenth century; the second began in the 1950s, but its
effects came to fruition only in the 1970s. Each involved the globalization of numerous additional markets for commodities, which until
then had had no more than a local or regional reach. Globalization

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