7 Commodity markets and raw materials
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5992/11
COM(11) 25
| Commission Communication: Tackling the challenges in commodity markets and on raw materials
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| Legal base | —
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| Document originated | 2 February 2011
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| Deposited in Parliament | 4 February 2011
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| Department | Business, Innovation and Skills
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| Basis of consideration | EM of 28 February 2011
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| Previous Committee Report | None, but see footnotes
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| To be discussed in Council | 10-11 March 2011
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| Committee's assessment | Politically important
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| Committee's decision | Cleared
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Background
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
DEVELOPMENTS IN GLOBAL COMMODITY MARKETS
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.
EU POLICY RESPONSES TO DEVELOPMENTS OF COMMODITY
MARKETS
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.
EUROPEAN RAW MATERIALS INITIATIVE
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.
THE FUTURE OF THE RAW MATERIALS INITIATIVE
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.
Conclusion
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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