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 High commodity prices lead to global resource boom

08/10/2007 (The Star Online) - THE strong demand for and rising prices of commodities have led to a natural resource boom globally, thus providing windfall gains to producing and exporting countries, experts said.

Malaysian Institute of Economic Research executive director Professor Emeritus Datuk Dr Mohamed Ariff said high commodity prices resulted in high gross domestic product (GDP) growth, strong balance of payments, better terms of trade, and huge external reserves for these countries. 

“The current commodity boom bodes well for countries which use their natural resources wisely to generate growth and development and raise the living standards of their people,” he said.

According to Rating Agency Malaysia Bhd group chief economist Dr Yeah Kim Leng, the dependence on natural resources is evident from the fact that the ratios of non-fuel commodity exports to GDP in 92 countries exceed 5% while 36 countries have ratios of over 10%.

For Malaysia, major non-fuel commodity exports such as palm oil, timber, saw logs, rubber and tin accounted for 6.5% of GDP in 2006 compared with 5.2% in 2000. 

Including crude oil and natural gas, the ratio to GDP rose to 15.9% in 2006 from 12.4% in 2000.

Yeah said the improved terms-of-trade could be likened to a transfer of income from consumer countries to the producers which were largely developing countries. 

“The current resource boom has helped to reduce global income inequalities. 

“In the case of Malaysia, it has narrowed the rural-urban income gap since the agricultural sector is largely rural-based and labour intensive in nature,” he added.

From 2000 to 2006, Malaysia’s income growth as measured by agriculture and mining (largely oil and gas) GDP per capita showed a compounded annual growth of 9.6% to RM5,045 from RM2,905. This is higher than the 6% growth in overall GDP per capita. 

Apart from Malaysia, Indonesia is also a resource rich country that is benefiting from higher commodity prices, especially palm oil.

Indonesia’s palm oil sector is the largest agricultural sector of the economy that has been the catalyst for growth for many decades. In 2006, the agricultural sector contributed 14.1% to Indonesia’s GDP. 

The palm oil sector is the country’s biggest employer with more than 100 million people.

Kuwait Finance House (KFH) global economics and research team noted that Indonesia’s GDP was expected to expand 6% year-on-year (y-o-y) in 2007 versus 5.5% in 2006, underpinned by a rebound in domestic demand. This rebound is a result of a recovery in investment driven by the mining and oil and gas sectors.

Another resource-rich country is Australia, which is renowned for its wheat, wool, cotton, coal, uranium, gold and iron ore industries.

An important sector is the country's mining and minerals processing sector, which has contributed over A$500bil to its wealth over the past 20 years and employs some 320,000 people.

Since 1967, the industry has built 26 towns, 12 ports and additional port bulk handling infrastructure at many existing ports, 25 airfields and over 2,000 km of railway line.

Canada is also one of the world's leading exporters of minerals and mineral products, which accounted for 17.5% of its total domestic exports last year.

The mining and mineral processing industries represented 3.7% of GDP in 2006, contributing C$40bil to the economy. 

In 2005, total direct employment in the industry was over 388,000, or 2.4% of Canada's total employment.

The mining industry provided some of the highest weekly earnings in the economy, averaging almost C$1,100. Weekly earnings in the Canadian economy averaged just over C$700.

The country also has estimated oil reserves of 180 billion barrels and should be able to supply crude oil to the North American market for another 200 years. 

Producing about 2.7 million barrels of oil a day, Canada's oil and gas industry employs about 50,000 people while the oil and gas equipment, technologies, and services industry accounts for 1.5% of the country's GDP.

High oil prices have also benefited the oil-exporting Gulf Cooperation Council (GCC) economies, which experienced substantial increase in export earnings over the past few years. 

KFH, in its latest GCC report on Middle East Bonanza, noted that total export earnings for the GCC region were estimated to have surged to US$445.1bil in 2006, driven mainly by oil exports. 

“Premised on higher oil price and production, we expect GCC’s total exports to trend higher by 15.1% y-o-y to US$512.5bil in 2007, given higher oil earnings,” it said.

Yeah said the current strong demand for natural resources was due to the health of the global economy, particularly the large emerging economies such as Brazil, Russia, China and India which were showing robust growth. 

“The secular rise in both fuel and non-fuel commodity prices is sustainable as long as these economies continue to grow strongly,” he said.

UBS Investment Bank agricultural commodities head Simon Games-Thomas also sees generally higher commodity prices over the long term. 

“We are in a secular bull market for commodities and therefore see, in general, increasing prices for many commodities in the years ahead. This will benefit the major commodity producing and exporting nations,” he said.

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