Various Documents considered by the Committee - European Scrutiny Committee Contents

7 Commodity markets and raw materials



COM(11) 25

Commission Communication: Tackling the challenges in commodity markets and on raw materials

Legal base
Document originated2 February 2011
Deposited in Parliament4 February 2011
DepartmentBusiness, Innovation and Skills
Basis of considerationEM of 28 February 2011
Previous Committee ReportNone, but see footnotes
To be discussed in Council10-11 March 2011
Committee's assessmentPolitically important
Committee's decisionCleared


7.1 According to the Commission, commodity markets have shown unprecedented volatility in recent years, with prices in all major areas, such as energy, metals and minerals, and agriculture and food, having increased sharply in 2007 to reach a peak in 2008, and then, after declining from the second half of 2008, regaining an upward trend since the summer of 2009. It ascribes these movements to changes in global supply and demand patterns, and in particular to a major surge in demand as a result of strong economic growth, most notably in emerging countries such as China.

7.2 It adds that price movements have been exacerbated by various structural problems in the relevant supply and distribution chains; that these developments have occurred at a time when the competitiveness of European industry requires efficient and secure access to raw materials; and that they are also related to policies in financial markets, development, trade, industry and external relations. It observes that this has led to the Commission taking a number of steps, such as the initiative on raw materials,[34] and on food prices and the security of food supply,[35] as well as a range of measures to improve the regulation, integrity and transparency of both financial and energy markets. It has now sought in this Communication to present an overview of what has been achieved, and of the next steps required, which it says should be seen as part of the Europe 2020 strategy and as closely linked to the flagship initiative for a resource efficient Europe,[36] and to the work in this area of the G20.

The current document


7.3 The Commission says that, in addition to such fundamentals as changes in global economic conditions and increased demand from emerging market economies, other factors have included supply shortfalls and monetary policy, various ad hoc policy interventions, exports restrictions and border measures, the increased use of agricultural land for renewable energy production, and structural problems. At the same time, it notes that each commodity market functions differently, and the impact in some areas of the trading of derivatives. It then looks in more detail at the developments in physical markets, and at the relationship between these and associated financial markets.

Physical markets

7.4 The Commission addresses three distinct areas, as follows:

—  Energy markets

It points out that the oil and petroleum markets are integrated, liquid and global, have been driven by both economic fundamentals and geopolitical considerations, and have seen significant developments in terms of financial and derivative investment instruments and trading technologies. It says that the gas market is increasingly influenced by the development of non-conventional sources, and that, although it has traditionally been based on long-term over-the-counter (OTC) contracts, the proliferation of Liquefied Natural Gas (LNG) has led to it being traded increasingly on a commoditized global and liquid market. It regards electricity as the least global energy market due to the difficulty of transporting it over long distances as a result of non-storability and energy loss, though it says that both the electricity and gas markets within the EU are increasingly integrated as a result of the single market.

—  Agriculture and food supply

The Commission notes that most agricultural commodities are subject to strong seasonal production patterns, and that supply cannot always adjust rapidly to changes in price or demand: in addition, markets are characterised by such structural factors as demographic growth, pressure on agricultural land, and climatic impacts. However, it says that the recent volatility of prices has been unprecedented, both within the EU and internationally, and on both spot and futures markets; and it also points out that successive reforms of the Common Agricultural Policy (CAP) have led to a greater exposure to market developments, resulting in some cases in the use of futures markets to hedge risks, and to a greater trade in options and OTC derivatives. This in turn raises issues of security of food supply and the need for increased market transparency (the first of these having been identified as one of the main drivers for future reform of the CAP).

More generally, the Commission notes the serious impact which excessive price volatility has on the supply of food to importing developing countries, and the delay which often occurs between increases in world prices and domestic supply responses. It also points out that various studies have concluded that agricultural commodity prices are expected to stay higher than their historical averages at least for the foreseeable future; that price volatility is expected to remain high, albeit with the cause and duration remaining uncertain; and that the level of input prices for agriculture is also expected to remain at an historically high level. However, it cautions that this will not necessarily result in higher farm incomes if margins are squeezed by increased costs.

—  Raw materials

The Commission notes that raw materials (including metallic minerals, industrial minerals, construction materials, wood and natural rubber) are traded globally, the key distinction being between those which are traded on stock exchanges, and those (including many of the EU's critical raw materials, such as cobalt, and rare earths) which are not, and for which the market is both smaller and less transparent. It adds that global metal and mineral markets generally follow a cyclical pattern, based on supply and demand, but that there was a major rise in demand between 2002 and 2008, reflected in unprecedentedly high price levels. It also says that a growing concern arises over the effect, particularly on the least developed countries, of measures, such as export restrictions, imposed by certain countries in order to give privileged access to their own industries.

Interdependence of commodities and related financial markets

7.5 The Commission says that, although commodity derivatives allow producers and users to hedge risks, they are increasingly seen purely as financial instruments, and that investment flows into these markets have grown significantly in recent years, with the various commodity and financial markets becoming increasingly intertwined. It observes that reliable information on market fundamentals is necessary for transparent and orderly price formation, and that prices of commodity futures often serve as benchmarks in relation to retail prices for energy and food, meaning that commodity and derivative markets cannot be regarded in isolation from each other. However, it says that identifying causation flows is a complex issue, and that further work is needed to acquire a better understanding, adding that, in the meantime, the need for a greater degree of transparency and reporting is already clear, in order to allow investors to make informed decisions and allow any abuses to be identified.


Physical markets

7.6 The Commission notes its willingness to ensure the orderly functioning of energy markets as evidenced by its recent proposal[37] to establish clear rules prohibiting abuse on wholesale electricity and gas markets, which it says will provide a good model for addressing the challenges resulting from the growing interdependence of commodity and related financial markets. It adds that the proposed Regulation[38] on Energy Market Integrity and Transparency will enable the identification of instances of market abuse in traded wholesale markets for electricity and gas, and will prohibit insider dealing and market manipulation.

7.7 As regards agriculture and food supply, it observes that, whilst there is (for a variety of reasons) no single and simple solution to the problems identified, one key area of work is the improvement of market information, where the amount available contrasts strongly with that for other commodities, but where its quality and timeliness could be improved, and it notes that a High Level Forum for a better functioning Food Supply Chain has been established to address the transmission of price developments. The Commission also notes that food price "spikes" have highlighted the under-investment in agriculture in many developing countries, and that EU development policy has both recognised the need to reverse this situation and, as indicated in the corresponding Green Paper,[39] can play an important part in reducing price volatility. It also draws attention to the policy framework it has adopted on food security.[40]

7.8 In the case of financial markets, the Commission says that there is broad agreement on the need to increase the integrity and transparency of the commodity derivatives market, and that it has, in line with G20 principles and conclusions, launched a number of initiatives. These include a proposed Regulation[41] on OTC derivatives trading, and the Alternative Investment Fund Management Directive,[42] the reviews this spring of the Market Abuse Directive (2003/6/EC) and the Markets in Financial Instruments Directive (2004/39/EC), and Regulation (EU) No. 1095/2010 creating the European Securities Markets Authority (ESMA).

Interaction between physical and financial commodities markets

7.9 The Commission says that, whilst these measures will help to ensure that increasing investment flows are more transparent and less able to distort the functioning of commodity markets, it acknowledges that a better understanding of the relationship between physical and commodities markets is needed. It will therefore carry out a further analysis of developments and support similar efforts under way at global level, and promote further improvements in the transparency and accessibility of information on physical commodity markets.


7.10 The Commission says that, leaving aside price volatility, the physical supply of raw materials remains essential, and that its Raw Materials Initiative established an integrated strategy, based on three pillars — ensuring a level playing field as regards access to resources in third countries, fostering a sustainable supply of raw materials from European sources, and boosting resource efficiency. It notes that an element in that strategy involves the need for it to be anchored in wider policies towards third countries, such as human rights, good governance, conflict-resolution, non-proliferation and regional stability.

7.11 More specifically, it looks at:

—  Identifying critical raw materials

The Commission has identified 14 critical raw materials at EU level, alongside an approach to defining "criticality", based on the risk of shortages and importance for the value chain. In particular, it draws attention to the rare earths which are essential for many technological processes, but where China accounted for 97% of world production in 2009, and to the need to update regularly the list of such materials.

—  EU trade strategy for raw materials

The Commission draws attention to a number of achievements in this area, notably the inclusion of disciplines on export restrictions in both bilateral and multilateral negotiations, the question of enforcement (including the World Trade Organisation (WTO) dispute settlement mechanism), and the raising of raw materials issues in bilateral dialogues and in the OECD.

—  Development instruments

The Commission says that actions concerned with good governance have been launched under the European Development Fund, the EU-Africa Infrastructure Fund (through lending by the European Investment Bank), and the Seventh Framework Programme for Research and Development. In addition, country-specific technical assistance has been provided.

—  Research, innovation and skills opportunities

The Commission says that the EU has taken steps to improve its knowledge base on important raw materials, and to stimulate the extractive industry to deliver new products. Funding has also been provided for intelligent mining technologies, and on the substitution of critical raw materials, with the relevant European Technology Platforms[43] being important drivers of new research.

—  Implementation of Natura 2000 legislation

The Commission says that it has developed guidelines on managing the competing objectives on environmental protection and developing extractive industries, as well as guidance on good practice for developing wood resources whilst ensuring sustainable forest management.

—  Resource efficiency and improved recycling

The Commission says that the sustainable use of natural resources is increasingly being mainstreamed into EU policy initiatives promoting growth and competitiveness, and that it has since 2008 worked to prevent the illegal export or dumping of waste by Member States, and to regulate the stream of waste from electrical and electronic equipment.


7.12 The Commission says that, whilst significant progress has been made in implementing the Raw Materials Initiative, further improvements are necessary. It therefore intends to explore the potential for targeted actions, notably in relation to recycling, and for a stockpiling programme of raw materials, of the kind set out for oil in Council Directive 2009/119/EC. It also proposes to identify priority actions on critical raw materials, and to regularly update the list of such materials every three years.

Supply of raw materials from global markets

7.13 The Commission says that it will pursue an active "raw materials diplomacy" involving strategic partnerships and policy dialogues. As regards the supply of raw materials, it suggests that, whilst sustainable mining can contribute to sustainable development, many developing countries, especially in Africa, have been unable to achieve this because of governance problems, and that the EU, through its development policies, can play a crucial role. It says that it will therefore consider this further in the context of its Green Paper on the future of EU development policy, and will encourage partner governments to develop comprehensive reform programmes. It also points out that in 2010 it agreed with the African Union Commission to establish bilateral cooperation on raw materials and development issues, focussing on three areas — governance, investment and geological knowledge/skills — and that, together with the European investment Bank and other development financing institutions, it is continuing to assess how to promote the most appropriate infrastructure, and to target links between the extractive industry and local industry.

7.14 The Commission also looks at the EU's trade strategy for raw materials. It says that this should continue to develop bilateral thematic dialogues with all relevant partners, further embed issues such as export restrictions and investment in EU trade negotiations, seek to monitor export restrictions which hamper the sustainable supply of raw materials, encourage the inclusion of non-members in OECD work on raw materials, and use competition policy to ensure that the supply of raw materials is not distorted.

Sustainable supply within the EU

7.15 The Commission recalls that the Europe 2020 strategy underlines the need to promote technologies which increase investment in natural assets, but that the development of extractive industries is often hindered by a heavy regulatory framework and competition with other land uses. It also points out that regulation in this area falls principally to Member States, with the Commission itself acting mainly as a facilitator for the exchange of best practice. However, it adds that extraction in the EU must occur in safe conditions, and that, in promoting investment, it is particularly important for Member States to define a National Minerals Policy, to set up a land use planning policy, and to put in place a clear and understandable process to authorise minerals exploration and extraction. It therefore proposes to assess with the Member States the feasibility of monitoring their actions in these areas, including the development of indicators.

7.16 The Commission also believes that it is important to further enhance the knowledge base for a raw materials strategy, and it proposes in the short term to explore the scope to increase synergies between national geological surveys. In addition, it intends to promote the work of UNECE on the reporting of reserves and resources at EU level, to continue to support the creation of sectoral skills councils at European level, and to promote research and development in the raw materials value-chain.

Resource efficiency and promoting recycling

7.17 The Commission comments that, as worldwide demand for raw materials increases, greater efforts on recycling will be necessary, and it says that its Europe 2020 flagship initiative on resource efficiency[44] will present in 2011 a roadmap for a resource efficient Europe, setting out the structural and technological changes required to move to a low carbon, resource efficient and climate resilient economy by 2050 through policies which deliver the greatest benefits for growth, jobs and energy security. In particular, it draws attention to the importance of urban waste as a source of metals and minerals for European industry, and says that, although the recycling of such waste has doubled in 10 years, the situation differs greatly between Member States. It therefore believes that the main barriers to recycling — including the leakage of waste to substandard treatment, and inadequate innovation — need to be addressed, along with better implementation and enforcement of existing EU waste legislation and a strengthening of controls over the illegal shipment of waste to third countries.

The Government's view

7.18 In his Explanatory Memorandum of 28 February 2011, the Minister of State for Business and Enterprise at the Department for Business, Innovation and Skills (Mr Mark Prisk) says that the Government broadly supports the Commission's strategy on securing access to raw materials and its aim of removing such practices as export restrictions from the global market. He comments that the continued availability of raw materials is essential to economic growth, and increasingly important due to rising prices driven largely by supply struggling to keep pace with demand, and to Europe's high dependence on imports of key raw materials from a limited number of countries (though he cautions that EU policy can also have a negative impact on those developing countries which are dependent on export income from raw materials). He suggests that the need to ensure open and transparent markets is essential to future European and UK competitiveness, whilst at the same time retaining adherence to the UK Government's development goals, and that the strategy in this Communication will go some way to addressing these issues.

7.19 More generally, the Minister says that much of the Communication is a factual description of processes under way within the Council to examine the interlinked strands of policy relating to raw materials and commodities, with little by way of specific proposals. However, he says that the Government is concerned that it could be seized on by those who argue that tighter regulation of financial markets is needed in order to address high levels of price volatility without the accompanying clear evidence base for individual measures.

7.20 The Minister has commented at some length on specific aspects of the Communication, and his remarks are summarised in the Annex to this chapter.


7.21 Although this is a wide-ranging and lengthy document dealing with an important policy area, it is—as the Government has observed—largely a factual description of the various actions underway within the EU, and contains few, if any, specific proposals. Consequently, although we think it right to draw the Communication to the attention of the House, we see no need for its further consideration, and we are therefore clearing it.

34   (30202) 16053/08: see HC 19-ii (2008-09), chapter 14 (17 December 2008). Back

35   (31095) 15330/09: see HC 5-iv (2009-10), chapter 11 (15 December 2009). Back

36   (32473) 5869/11: see section 4. Back

37   (32170) 16096/10: see HC 428-xi (2010-11), chapter 2 (15 December 2010). Back

38   (32345) 17825/10: see HC 428-xiii (2010-11), chapter 3 (19 January 2011). Back

39   (32174) 16146/10: HC 428-xi (2010-11), chapter 18 (15 December 2010). Back

40   (31470) 8246/10: see HC 428-i (2010-11), chapter 45 (8 September 2010). Back

41   (31958) 13917/10: HC 428-iv (2010-11), chapter 4 (20 October 2010). Back

42   (30624) 9494/09: see HC 19-xviii (2008-09), chapter 9 (3 June 2009). Back

43   On Sustainable Mineral Resources and Forest-Based Sector Technology. Back

44   See footnote 3. Back

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