Home / This Week / Cover Stories / Impact of volatile commodity prices on Pakistan economy

Impact of volatile commodity prices on Pakistan economy

During August newly elected government led by Imran Khan’s Pakistan Tehreek-i-Insaf (PTI) will get the control on the formation and implementation of economic policies of Pakistan. Its two top priorities should be boosting foreign exchange reserves for sustainable debt servicing and containing trade deficit by restoring competitiveness of the local manufacturers. Both these priorities hinges on facilitating farmers and industrialists in boosting production and productivity. Since Pakistan imports huge quantities of energy products and nearly 65 percent of its exports comprise of textile and clothing, keeping an eye on the movement of prices of crude oil, cotton and fertilizer is a must.

Global political developments and rising hostility over international trade have heightened caution over global economic growth for the rest of 2018 and onwards. In the United States, the recent fiscal stimuli have boosted growth, while industrial production and GDP data from China, European Union, India and Brazil exhibit moderation. Outcome of trade disputes remain in the spotlight, with the IMF forecasting a decline in the global GDP growth. Policy initiatives, trade actions and retaliatory measures adopted by the US and China may augment fissures for Pakistan market.

The new government is likely to opt for curtailing import and imposing tariffs as part of IMF negotiations. A quick review of movement of prices of commodities price during July offers an opportunity to the new government to revisit its economic policies.

Crude and POL products have the largest share in Pakistan’s import bills and move of prices on either side can prove beneficial or disastrous. The global oil benchmarks have exhibited different movements, exhibiting bizarre trends. The three major oil benchmarks took different directions with WTI gained 4.77%MoM, while Brent and Arab Light posted decline of 1.42% and 0.45% MoM, respectively. The month began with the increase in Russian and Saudi output, as pledged in the last OPEC meeting in June 2018, resulting in decline of prices. However, falling output from Canada countered WTI’s likely slump. Moreover, the decision of US president to impose tariffs on Chinese imports along with resumption in Libyan oil supplies, possible exemptions for countries importing Iranian oil and G20 meeting pointing towards short and medium term downside risks in the global economy exerted further pressure on oil dynamics, especially for Asian and European markets. While there was a decline in the US crude inventories, the increase in rig count lent support to WTI prices. In Pakistan, any increase in crude prices along with depreciation in Pak Rupee value impacts the economy in multiple ways, particularly hike in energy import bill and decline in refineries’ margin.

 

Cement industry is one of the major users of coal. It already faces: 1) growing supply glut and2) erosion in competitive in the global markets. Any hike in coal price will plunge the industry deeper into problems. International coal prices remained on upward trajectory in July, posting an increase of 2%MoM and 31%YoY. Average prices hovered around US$107.4/ton. Monthly price increase was largely driven by strong demand across Asia and China in particular, as an early summer heat-wave spiked electricity demand. Strong demand from China has been supported by hotter than average temperatures with lower hydro power output and limited growth in domestic supply. Higher consumption in India has also been a major driver behind the strong recovery seen in heating commodity this year. Ban on use of coke in some regions, logistical bottlenecks, surging power demand and regulatory changes targeting pollution cuts have all fueled the higher imports by India, which are expected to stay firm throughout the rest of the year. In this regard, uncharacteristically, price of heating commodity exceeded US$105/ton at the end of July 2018, a level last seen in early 2012. Going forward, global coal prices are expected to remain high throughout 2018 owing to increasing demand from China and India along with relatively tight supply.

Pakistan has an agro based economy, but cultivable land is deficient in nutrient contents. To overcome this deficiency farmers have to use different types of fertilizers, urea is used in the largest quantity. After posting 6%MoM in June 2018, urea price registered further increase of almost 10%MoM and hovered around US$284/ton during the month under review. The global urea prices are inching higher as producers have committed most of their cargoes on strong demand from Brazil and Asia. Global supply is expected to reduce further due to re-imposition of sanction on Iran by the US. Increased energy cost, particularly for producers in Europe and China, have significantly increased production cost. Going forward, international urea prices are expected to remain on the higher side during 2018. On the domestic front, local prices are on the upward trajectory and are expected to remain high due to: 1) lower inventory levels and 2) higher landed cost of imported fertilizers.

After rising to 6-year high in June, international cotton prices marginally retreated in July. Overall, prices across the world remained firm on account of renewed buying by China. Domestic prices, however, witnessed significant jump due to short supply resulting from delay in sowing of next cotton crop, shortage of irrigation water. With cotton prices hovering at 6-year high level, China’s decision to include cotton in the proposed items list that could potentially face higher tariffs has added another layer of uncertainty in the current volatile cotton market. Implementation of higher tariffs could reverse the current bullish trend in the cotton market.

Global commodity prices tumbled 7.3 percent in July as compared to June in the fears of trade war among key players that could lead to a sharp global economic downturn. Tighter global monetary policies could add further downward pressure due to higher borrowing costs and heightened volatility in financial and foreign exchange markets, especially in the developing countries. Prices of base metals, mostly used in industries were down sharply in July on fears of a potential global slowdown. Prices of agricultural commodities recorded another drop this month as China shifts away from importing US agricultural products.

Check Also

Pakistan sees huge expansion in cement industry

Pakistan sees huge expansion in cement industry

PSDP, CPEC with private housing schemes likely to push and growth and development of the …

Leave a Reply