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Rising commodity prices will aid Latin America in its pandemic recovery, according to the United Nations, as the global economic rebound fuels demand for resources such as metals and minerals.

The majority of countries in Latin America are commodity-dependent – meaning the export of their resources accounts for more than 60% of merchandise export revenue (figure 1).

Being heavily tied to raw materials without adding value to them through manufacturing and processing has not been favourable to the region over the past 10 years. Economies are at the whims of global supply and demand which dictate prices – and following the commodities boom of the 2000s Latin America has largely been on a sluggish growth trajectory.

However, commodity prices have been increasing in the last year, improving the short-term fortunes of resource-reliant countries. According to a report by the United Nations Conference on Trade and Development (UNCTAD), the price of minerals and metals rose by 53.3% since the start of the pandemic and food is up by 27%. Energy prices have increased by 15.6% and doubled with respect to the low levels registered in April 2020.

“Prices of commodities in the precious metals group increased continuously during the pandemic, buoyed by investor demand as a safe asset in the face of expansive monetary policies around the world and the increase in uncertainty due to the Covid-19 pandemic,” reads the August report.

While the change in price of specific commodities differs owing to a confluence of factors, it is clear the global economic rebound from the pandemic has boosted demand for energy and metals, such as copper and iron ore, in particular.

For many commodity exporters in Latin America, price increases have led to a significant rise in commodity export revenues in the first half of 2021 relative to the same period in 2020 and in spite of stagnant or – in some cases – falling export volumes, says the UNCTAD.

Figure 1: Average annual share of commodities in merchandise exports for LatAm countries (%)

“Chile’s export revenue from copper ores and concentrates was 48.8% higher in the first half of 2021 than in the first half of 2020, while exported volumes had only increased by 4.4%. Further, Colombia’s export revenue from petroleum and derivatives increased by 29.9% in the period January to May 2021 with respect to the same period of 2020, while exported volumes were 20.6% lower in 2021.”

It cautions though that such increases negatively impact commodity importers, giving the example of Costa Rica’s cereal import bill which was 34.8% higher in the first five months of 2021 than in the same period last year, while import volumes only rose by 5%.

In general, export volumes in South America increased by 6% in the first quarter of the year compared with the same period in 2020, but they remained slightly lower than Q1 of 2019. Across the board global trade rose by about 10% in Q1 compared with the year before.

UNCTAD states that the immediate priority for countries in the region is to rebuild their economies after the pandemic shock – GDP decreased by 6.6% in 2020 for South America, below the average decline of 2.2% for emerging markets.

“In this context, high commodity prices, if they are persistent, may provide a welcome boost for commodity exporters in the region. However, the recent commodity price hikes and the high level of uncertainty regarding future commodity market developments are a reminder that, over the medium and longer term, it is also important to strengthen domestic institutions and policy frameworks.”

Elsewhere, the International Monetary Fund (IMF) has upgraded its outlook for Latin America in the latest global update published in July. It expects the region to grow by 5.8% this year, up from 4.6% as forecast in its April report.

“The forecast upgrade for Latin America and the Caribbean results mostly from upward revisions in Brazil and Mexico, reflecting better-than-expected first quarter outturns, favourable spill overs to Mexico from the improved outlook for the United States, and booming terms of trade in Brazil,” it says. The IMF upped its forecasts for Brazil by 1.6% to 5.3%, and for Mexico by 1.3% to 6.3%.