Materials Risk

A recent report highlights Africa’s growing dependence on commodity exports for economic growth arguing that there needs to be greater focus on adding value. The report argues that far greater benefits could be delivered to the continent as “commodity-based industrialization can provide an engine of growth for the continent, reducing its marginalization in the global economy and enhancing its resilience to shocks.”

The report is particularly pertinent given the recent weakness in commodity prices particularly agricultural commodities, the export of which supports significant employment for many African economies.

Related article: Commodity market snapshot – March 2013

Africa’s reliance on commodity exports has increased significantly since 1995. Its export concentration index (the extent to which the structure of a country’s trade differs from the world average) has risen from 0.24 in 1995 to 0.43 in 2011. In contrast both Asia and Latin America’s index has risen marginally to 0.12-0.13.

In three-quarters of African economies  the share of primary commodities in total exports is 50% or more, while in one-third of economies that share is 90% or more. Concentration doesn’t just exist by sector, but by commodity too. In eight countries, one single commodity accounts for more than 70% of exports. For many though they rely on a combination of soft, hard and energy commodities.

Despite its importance the level of value add, i.e. undertaking processing over an above extracting / growing the underlying commodity is very low in Africa. As an example, the world’s top three cocoa exporters (Côte d’Ivoire, Ghana, Nigeria) have a very low level of value added, typically 10%-20%. In contrast around 54% of Indonesia’s export value came from further processing. The share in Malaysia is even higher at 94%. This relationship holds for many other commodities too.

The benefits of moving up the value chain are two-fold. First capturing a greater proportion of income from the value chain. However this requires competitive processing industries and access to marketing and distribution networks. The diamond industry provides a useful example of the current situation. While much rent accrues at the extraction stage, the retail value of jewel manufactures is more than three times the value of the rough stone. Yet most African producers have traditionally been excluded from any value-adding, forward-processing links, including sorting, valuing and grading.

The second key benefit relates to reducing exposure to volatile commodity prices. Price volatility for unprocessed primary commodities is typically much higher than that for processed commodities. The inherent volatility of primary commodity prices inhibits consumption smoothing and investment planning.

Related article: When should a company like higher raw material prices?