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IMF warns China at risk if commodity markets see further fragmentation

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With the global commodity market becoming more fragmented since the outbreak of the Ukraine war, China may suffer more than the West if the trend further intensifies, the International Monetary Fund has warned.

Geopolitics-driven breakdowns in food, energy and mineral supplies could lead to more price volatility, threaten food security and make the clean energy transition more costly, the IMF said on Tuesday.

“Commodity markets are an important channel through which geopolitical fragmentation can affect the economy,” the organisation said in a portion of its coming World Economic Outlook.

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Commodities’ highly concentrated and difficult-to-relocate production, hard-to-substitute consumption and critical role as inputs for manufacturing and technologies underpin their vulnerability in the event of fragmentation, the report concluded.

Russia’s invasion of Ukraine and subsequent Western sanctions have disrupted global trade in energy, food and fertiliser, resulting in soaring commodity prices and inflation pressure for many countries.

“While most commodity prices have since normalised, geopolitical tensions signal that more severe fragmentation of commodity trade is a major risk,” the report said.

Many countries are ramping up efforts to reshore commodity supply chains for national security and geopolitical reasons, including those for critical minerals for clean energy technologies, semiconductors and defence, it added.

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China restricts critical metal exports following Western semiconductor curbs in latest trade war

China restricts critical metal exports following Western semiconductor curbs in latest trade war

The IMF laid out a hypothetical scenario where the whole world is divided into two isolated trade blocs – one comprising the 143 countries that voted for Russia to withdraw from Ukraine at the October 2022 UN General Assembly, led by the United States and Europe, and one with the remaining 40 countries, including China and Russia. In such a situation, the latter bloc could be more affected economically, the organisation said.

The world’s second-largest economy and a major exporter of industrial goods, China heavily relies on imports for a wide range of commodities, from food to fuel.

In the hypothetical bloc with China and Russia, the price of mined minerals critical for the green transition such as cobalt, lithium, copper and nickel, would rise substantially, the report said. Production of these minerals would be concentrated in a few countries in the other bloc, and China would be the biggest consumer.

Such a degree of fragmentation would result in a drop in global investment in renewables and electric vehicles by 2030, as much as 30 per cent lower than what is needed for a green transition.

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Similarly, while more than 80 per cent of production of soybean and palm oil would occur in the other bloc, most consumption would take place in China.

For lower-income countries, whose economies are more reliant on agricultural trade, this level of fragmentation could lead to an average 1.2 per cent loss in long-term economic output. This could amount to more than 2 per cent of GDP for some countries, the IMF said.

“Commodity market fragmentation could deliver a sizeable economic blow in an already challenging environment of slow global growth, tight financial conditions and high debt in many vulnerable countries,” the report said.

“At the very least, agreements on a ‘green corridor’ for critical minerals and a ‘food corridor’ would safeguard the global goals of averting climate change and food insecurity.”

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