Commodity price shocks, growing inflation and a fragmented energy transition are among the greatest risks to global trade in 2022, fresh research by the World Economic Forum (WEF) finds.
The 2022 edition of the forum’s annual Global Risks Report, published this week, draws on predictions made a year ago over price instability in the commodities trading market. It says critical concerns flagged then “are already emerging” in reality.
“At the time of writing, commodity prices had increased nearly 30% since end of 2020,” the report says. “They could remain volatile because of growing tensions between Europe and Russia, China’s energy shortage, continued supply chain disruptions, and transition challenges from disinvestment in fossil fuel reserves.”
World Bank research published in October last year found natural gas and coal prices reached record highs during 2021, while average crude oil prices increased by around 70%.
The impact on the commodities trading market is already apparent. Larger traders, which can use their access to financial markets to benefit from price volatility, have posted record profits, while smaller and mid-sized firms are struggling to obtain trade finance facilities from lenders.
The WEF report says this trend now risks slowing countries’ recovery from the economic effects of the pandemic. With demand for materials outstripping supply, and with ports and shipping lanes still suffering disruption due to virus containment measures, it says inflation could continue to accelerate.
“This will dampen consumer sentiment – which has been fundamental for recovery – and will increase the risk of central bank interest rate rises,” it says.
Speaking at a press conference accompanying the launch of the report, WEF president Børge Brende said these challenges are not expected to disappear in the short term.
“We do believe that they will continue also this year, we know there’s huge inflationary pressure, and we also know that due to the response to the crisis, there is a looming debt crisis in the world that also reduces fiscal ammunition among governments.”
The World Trade Organization (WTO) warned last month that supply chain disruption contributed to an 0.8% drop in world goods trade volumes in the third quarter of 2021 – ending a run of four consecutive quarters of strong expansion.
However, though trade volumes have dropped, the WTO says the overall value of those trade flows continued to increase “as export and import prices rose sharply”.
“Trade values were boosted by primary commodities including fuels, prices of which more than doubled between the third quarter of 2020 and the third quarter of 2021,” it says.
At the same time, a squeeze on container availability and concern over labour shortages in certain markets mean shipping costs are expected to remain high.
These issues could also have a knock-on effect on countries’ efforts to decarbonise their economies and transition to green energy, said Peter Giger, group chief risk officer at Zurich Insurance Group, speaking at the report launch.
“Tight supply chains, rising commodity prices, inflation and increased levels of public debt… make it even more challenging for nations to start implementing transition policies that will have material impact on their economies and citizens,” he said.
“It is hard to see how any transition of this scale can be anything but disruptive and disorderly, especially if greenwashing or stalling on commitments delay the transition.”
The WEF report says differences in political will, economic structure and technological or financial capabilities inevitably mean national transition programmes “will move at different paces”.
As a result, companies in countries that are moving more slowly are expected to encounter growing barriers to trade, including a lack of access to finance.
“The heterogeneity of climate action worldwide will be a risk for trade flows in the future, especially for the less-developed economies,” the report says. “By facing narrower access to trade finance, they risk exclusion from the opportunities for orderly climate mitigation and adaption.”
Though the WEF notes countries that move more slowly will be in a position to deploy strategies or technology that have worked well elsewhere, it says domestic companies “will lack competitiveness in this area”.
At the same time, larger companies are expected to pay increasing attention to carbon emissions across their supply chains, a trend that “will increasingly disadvantage exports from laggard countries”.