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The Dynamics of the Price of Raw Materials and Industrial Strategies in African Producer Countries: What are the Challenges?

Yves Jégourel and Philippe Chalmin
Translated by Andrew Brown
This article is a translation of:
Dynamique du prix des matières premières et stratégies industrielles des pays producteurs africains : quels enjeux ?


Obviously, the fall in the price of raw materials observed since 2014 is not good news for producer countries, especially those in Africa. While some people are already invoking the ‘natural resource curse’ to explain the economic and political fragility that can result from excessive variability in the price of commodities, it should be borne in mind that the trajectory of these countries is in no way predetermined, but depends largely on the macroeconomic context in which they operate, as well as on the quality of the policies implemented to counter the negative effects of this instability. In a difficult context which will probably persist, despite the rebound observed in 2016, producer countries will need to cope with many challenges to maintain a positive trajectory tending towards greater economic diversification.

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1. Introduction

1 After registering a considerable increase from the early 2000s onwards, the price of raw materials experienced a first jolt in the wake of the 2008 financial crisis. Then, after having slowly slipped, in 2014 prices started to fall in a particularly dramatic way. Minus 15 per cent, minus 25 per cent, minus 50 per cent: 2015 was a dark year for almost all commodities, in the wake of 2014 (Graph 1). The price of iron ore collapsed by more than 65 per cent on a monthly basis over this period, that of copper by 25 per cent. Meanwhile, West Texas Intermediate, the US oil benchmark, fell by just under 27 per cent. This depreciation had serious consequences for producer companies and international trading companies, as well as for producer countries. The former saw their profits melt and the latter had to contend with weaker growth and rising external debt following the collapse of their export earnings. The growth in real gross domestic product (GDP) in sub-Saharan African countries had reached 6.8 per cent over the 2004-2008 period (IMF, 2016), but fell to 3.4 per cent in 2015. The auspices in 2016 were much more favourable since almost all non-renewable raw materials experienced a significant rebound. However, economic and political uncertainties persisted: it is the instability of prices, much more than their actual level, which is problematic.

Graph 1: development of the price of raw materials (2000-2016)

Graph 1: development of the price of raw materials (2000-2016)

Key: blue : Energy ; red : Agriculture ; green : Industrial ores and metals ; purple : Precious metals. Monthly indices, base 100 in 2010

  • 1 Monthly information notes published by the World Bank showing the main commodity prices, available (...)

Source: World Bank (The Pink Sheets)1

2 In this changing macroeconomic context, it would be wrong to limit ourselves to a simplistic analysis of the situation of producer countries, especially African. From Ethiopia and Côte d’Ivoire, which posted a growth rate of more than 7 per cent in 2015, to Equatorial Guinea and Sierra Leone, whose economic activity has collapsed (see Table 1), dependence on the commodities sector varies considerably from one African nation to another and, with it, macroeconomic performance.

Table 1: The diversity of macroeconomic performances in sub-Saharan Africa: GDP growth rate of the five best and five worst students









Côte d’Ivoire

































































Equatorial Guinea








South Sudan








Source: World bank (The Pink Sheets)

3 So, while what has come to be known as the ‘Dutch Syndrome’ and the ‘natural resource curse’ are realities, they are not necessarily inevitable. Three fundamental reasons explain these differences in trajectory. First of all, the commodities do not constitute a homogeneous whole, either in terms of their valuation on international markets or in terms of the very structure of the markets in which they are traded. The nature of the products (agricultural, mineral, energy), their relative quality and rarity, the level of exposure to competition from other producer countries, the degree of geographic distance from the main consumer centres and the existence of a financial market for pricing are all essential variables which partly determine the dependency ratio that a nation maintains with the raw materials it produces. Next, various environments - macroeconomic, political, social and demographic - must be taken into account. For a country, a fall in the price of raw materials can have very different consequences depending on the degree of diversification of its economy, its debt ratio, the dynamism of its internal consumption, and the relevance of the macroeconomic policies (monetary, foreign exchange and budgetary) implemented to limit their impact. In addition, a national economy can be more resilient if the country can call on so-called ‘stabilization’ sovereign funds aimed at capitalizing revenues from the exploitation of national mineral or energy resources in anticipation of lean times.

4 The macroeconomic effects of volatile commodity prices are considerable, but so far they appear to be receiving only moderate political and media attention internationally. There are of course concerns about the effects of Chinese steel dumping on European and American industries.

5 The macroeconomic and geopolitical consequences - both positive and negative - of changes in the price of crude oil have also been analyzed many times, but the scope of these concerns remains mainly national. However, at the G20 summit held in Pittsburg in 2009, political decision-makers accused speculation of being partly responsible for the soaring prices of raw materials at that precise moment and launched a project aimed at better regulating the financial markets for raw materials. In 2011, the agriculture ministers of the G20 countries therefore agreed to moderate speculation - in particular on agricultural raw materials - and, consequently, to limit the price volatility with which it is often associated (Cashin and McDermott, 2002; Baffes and Haniotis, 2010). The objective was to increase the transparency of the financial markets for raw materials so as to better distinguish speculative transactions from those covered by risk hedging. At the present time, there is no longer any instrument capable of countering, at the international level, the macroeconomic consequences of a fall in prices, in particular for African producer countries. While the issue is very complex, a number of strategies can nevertheless be envisaged. The purpose of this article is not only to report on these strategies, but also to discuss their relative effectiveness.

6 This article first presents the determinants of the dynamics of the price of raw materials. It then offers an analysis of the macroeconomic consequences of falling prices, as well as the macroeconomic and industrial policies which are intended to limit the most severe repercussions of price volatility.

2. From peaks to the abyss: another look at the frustrated dynamics of the price of ‘financialised’ raw materials

7 The years leading up to the 2008 financial crisis saw commodity prices soar over the long term, to the point that some market observers and practitioners were quick to speak of a new era characterised by a ‘super-cycle of raw materials’. A barrel of Brent oil saw its price rise from 25 dollars in January 2000 to more than 105 dollars at the beginning of 2014. It was not the only commodity to follow this upward trajectory: whether we are talking about copper, iron ore, tin, lead or nickel, the price of all base metals - with the notable exception of aluminium - increased by around 300 per cent over the same period. This increase did not affect industrial raw materials alone. Agricultural products also followed suit, such as arabica coffee, the price of which was close to 5 dollars per kilo that same year, whereas fourteen years earlier it had hovered at around 2 dollars.

8 These jolts are certainly nothing new. Economic history has lost count of episodes in which raw materials - individually or as a whole - have undergone an alternation of upward and downward phases of varying length which have influenced the industrial strategies of producing and consuming companies as much as the politics of nations (Chalmin, 2007). The outbreak of the First World War, for example, stimulated the demand for aluminium – used to make aircraft and ammunition - to the point of creating a shortage. The price of white metal increased threefold between 1914 and 1916 before collapsing in the 1920s to levels lower than those recorded at the beginning of the century. These fluctuations are not specific to metals. Soft commodities have also experienced very significant price variations: the price of arabica coffee went from 0.88 dollars per kilo in 1969 to more than 5 dollars in 1977, before falling below 2 dollars in 1992. Ditto for sugar, the price of which increased eightfold between 1970 and 1974, and then fell to a quarter between 1974 and 1978. When it is moderate, this volatility can be considered as inherent in the market for agricultural raw materials: their production is highly dependent on climatic conditions which, when they are favourable, most often cause an increase in the quantities placed on the market and therefore a fall in prices. Conversely, the spectre of scarcity can arise at any time under the effect of drought, floods, large-scale diseases affecting plants or livestock, embargoes or geopolitical tensions. Demand, on the other hand, can quickly suffer from depressed economic growth that automatically alters the demand for industrial products and energy. These variations only assume their real importance through the magnitude of their economic and political impact on each country.

2.1. A cyclical price dynamics

9 Obviously, understanding the dynamics of the price of raw materials requires looking at both the determinants of supply and those of demand. The surge in prices observed between 2000 and 2010 was mainly due to strong demand from emerging countries, foremost among them China which, during this period, needed to ensure its industrial development and thus required volumes of raw materials which greatly exceeded its production capacities, however considerable. Supply had to adjust in order to make up for this deficit. Since production capacities were limited to a time t, it was necessary to invest both in production tools and in infrastructure, in particular transport infrastructure. In the oil sector, companies multiplied exploratory investments and new deposits were identified, especially in Africa - for example in Mozambique, Senegal and Uganda (Augé, 2015). The giants of the mineral resources sector opened new mines - notably BHP Billiton, Rio Tinto, Vale, Anglo-American and FMG. A sine qua non condition for the international exchange of these commodities, many ships - bulk carriers, container ships and tankers - were built.

  • 2 Hedging is a financial strategy based on the use of financial derivatives in order to manage the pr (...)

10 But this considerable rise in prices cannot be explained by so-called ‘real’ factors alone. Financial determinants, including speculation, played an important role. To understand this, it must be remembered that almost all raw materials are listed on the stock exchange. The so-called ‘commodity derivatives’ markets, orchestrated in particular by the Chicago Mercantile Exchange (CME), the International Continental Exchange (ICE) and the London Metal Exchange (LME), lie at the heart of the functioning of the agricultural, mineral and energy sectors. They fulfil three essential functions: (i) the dissemination of a public price, accessible to all and free of charge, which can serve as a reference point when concluding commercial contracts; (ii) the improvement of material storage strategies (Tomek and Gray, 1970); and (iii) optimizing price risk management strategies (Ederington, 1979). These financial markets nonetheless have the inevitable consequence of favouring the development of speculation which - although improving the liquidity of these markets and making it possible to combat what is commonly called the asymmetry of hedging2 (Gray, 1961, 1966) - can help to destabilise prices in the short and medium term. Before the 2008 crisis, a particular form of speculation developed by relying on exchanged traded funds (ETF), or listed index funds, aimed at providing investors who subscribe to them with details of the financial performance of the raw materials market. Is this the root cause of soaring prices or just a secondary vector? Empirical studies do not provide any unambiguous answer to this question (De Meo, 2013) as this seems so far-reaching and contextual. It seems certain, however, that the enthusiasm of investors for the raw materials sector - perceived as being not only profitable, but also de-correlated from other economic sectors - is one of the elements explaining the significant rise in prices... and their sudden collapse, followed by the dramatic rebound observed for most mineral resources in 2016. This is shown by the fact that copper saw its price increase by more than 28 per cent between 24 October and 28 November 2016, under the effect of a speculative frenzy caused by statements made by the new US President Donald Trump in favour of boosting infrastructure spending.

2.2 The weight of financialization

  • 3 Note here that speculation is not based solely on these financial mechanisms, even if the latter ar (...)
  • 4 Except in the very specific case of Chinese producers of aluminium and steel who had become world l (...)

11 We cannot, in this debate, confuse the notions of speculation and financialization, as the former is in reality just one of the consequences of the latter.3 In general, financialization is understood to mean the increased role of the financial markets in the functioning of commodity sectors (Working, 1953; Gray, 1966). This development has resulted in the development of commodity-backed derivatives markets, but also in the financing of mining and oil companies by issuing shares, whether listed or not. This last dimension is a primary explanatory factor in the raw materials cycle. Let us remember, to begin with, the obvious point that, on the market, the supply of commodities is almost exclusively determined by investment decisions taken several years previously, whether in agricultural products, ores and metals or energy. Thus, the rise in commodity prices thus not only has its roots in cyclical factors but also in the underinvestment in production capacity that was observed in the late 1990s and early 2000s. One study (Aune et al, 2010) suggests that the financing constraints that international oil groups had to face during this period led to a reduction in their investment efforts and created de facto the conditions for a future imbalance between supply and demand a few years later. It is here that this other facet of the financialization of the raw materials sector, linked to the issue of the financing of producer companies in particular, reveals its full significance. Listed for the most part in international financial centres, these companies have indeed had to face not only the disaffection of investors who at the time favoured the sector of new information and communications technologies (NICT), but have also had to deal with increased requirements in terms of the financial profitability of their own shareholders. The financial crisis of 1997 exacerbated these constraints by causing the price of a barrel of oil to drop, to around 10 dollars the following year. With the drop in profitability also came that of the stock market valuation, which increased the likelihood of a takeover bid, whether friendly... or hostile. These majors then had to abide by strict budgetary and financial discipline: the exploratory investment expenditure of the twelve companies studied was reduced by almost 40 per cent between 1998 and 2003, even though the price of oil was in real terms doubled. When emerging countries started to require more crude oil a few years later, ‘supply shortages’ were inevitable. Although no study has confirmed the relevance of this reasoning in the case of mining groups, there is little doubt4 that similar mechanisms have influenced the development of the price of ores and metals.

12 The very sharp drop in the price of raw materials observed since 2014 also has multiple origins which are linked, in a quasi-symmetry with the cycle’s ascending phase, with problems of excess supply as much as of slowing demand. If the price of raw materials fell sharply in the aftermath of the 2008 crisis, it was only to bounce back all the more resiliently the following year, and it was not until 2014 that prices really collapsed. If we go beyond the cyclical explanations specific to each commodity, the origin of the problem lies further back with, this time, an overinvestment in a period of price increases. Thus, it is the investment behaviour of different companies and producer countries that is largely responsible for the excessive cyclicality of the price of commodities. Petrol (through gas and shale oil), as well as iron ore, steel and aluminium, prawns, and pineapple: these diverse examples all attest to this state of affairs in recent years.

13 This overinvestment is not necessarily part of a strategy that producers (countries or companies) can avoid, because they are often confronted with the well-known principle of the ‘prisoner’s dilemma’. This is due to a number of almost permanent non-cooperative balances between the operators in a particular sector. The drop in prices obviously penalises these companies. It weighs heavily on their bottom line and most often forces them to engage in ‘balance sheet consolidation’ policies aimed at limiting their level of debt by asset disposals and investment deferrals. In these circumstances, any coordinated response that aims to restrict supply in order to support prices faces at least two obstacles. First, the rules of international trade very strongly limit the possibilities of implementing collusive strategies. Then, and more fundamentally, producers, whether countries or companies, very rarely have the same vision of what a remunerative price is, because their production costs and their schedules are not the same. So they have very little reason to act in concert. Leaving aside the geopolitical issue, the inability of the Organization of the Petroleum Exporting Countries (OPEC) to agree on a strategy to bring crude oil prices back up between 2014 and 2016 is an illustration of this dilemma. Iron ore, which saw mining groups engage in a price war even though prices had already fallen sharply, is another.

14 African countries have been no exception to this international state of affairs. Like all producer countries, they have been drawn into the maelstrom of the cyclicality of the price of raw materials. Under the effect of collapsing prices, mining and oil groups cut off funding for a significant fraction of the exploratory activities launched in previous years and temporarily suspended the exploitation of certain less profitable sites. So, in autumn 2015, the giant Glencore decided to shut down the Mopani copper mines in Zambia and their equivalents in Kamoto in the Democratic Republic of Congo (DRC), with the aim of modernizing them and waiting for prices to rise again. In the copper province of Katanga, the layoffs caused by the sluggishness of the copper market also created significant social and political tensions, in a context of marked uncertainty about the conduct of the presidential elections. In the Republic of Guinea, Rio Tinto withdrew from the Simandou site, the world’s largest untapped iron ore deposit. In the same country, the revival of the bauxite to alumina processing industry remains on hold, even though this ambition has been at the top of the political agenda for many years. In this regard, it is clear that the dynamic aimed at promoting the local processing of raw materials produced in Africa so as to reduce the continent’s excessive vulnerability to price variability is now coming up against the quest for profitability on the part of international groups, often essential partners in the context of this transformation. Once again, these different examples show that we cannot generalise about the effects of price variability on the economies of African countries. One common element nevertheless emerges: the African countries which showed the greatest resilience at the time of the price collapse were those which were able to adopt, during the upward phase of the super-cycle, cautious investment strategies in production and processing capacities, infrastructure strengthening and support for private demand.

3. Commodity price volatility and macroeconomic stability in Africa: a complex equation

15 The short, medium and long term management of a country’s raw material resources has always been a complex matter. Thus, if the fall in the price of exported commodities is never in principle good news for a producer country, it is not the only factor to take into account. Economic history does not remind us of this often enough, but too high a rise in prices may not be favourable to historic producers. It can indeed encourage new companies, attracted by the prospect of significant profits, to ‘enter’ the market at the risk of breaking the pre-existing supply/demand balances. The surge in coffee prices between 1974 and 1977 (graph 2) thus greatly contributed to the development of the coffee industry in Vietnam, a country which now ranks second in the world in this market behind Brazil and ahead of Indonesia and Colombia. And history can repeat itself. Since 2015, the price of vanilla has been rising and Madagascar now has to defend the influence of its sector against the ‘new’ producer countries - Indonesia, Papua New Guinea and Uganda.

Graph 2: development of the price of coffee (1960-2016)

Graph 2: development of the price of coffee (1960-2016)

Monthly price, in current dollars per kilo

Source: World Bank (The Pink Sheets)

16 From a strict macroeconomic point of view, both the level and the volatility of commodity prices are the source of various phenomena. The first of these, the ‘Dutch syndrome’, appears when capital inflows following the development of non-renewable resources - most often oil or gas - contribute to the rise in the real exchange rate and therefore cause a relative loss of competitiveness in traditional industrial sectors. In this context, the country’s economic diversification declines, and the national economy is weakened at the macroeconomic level. More generally, the phenomenon known as the ‘natural resource curse’ is based on the idea that extractive activities are incompatible with the improvement of a country’s economic performance. We can indeed observe a negative correlation between the level of a country’s exports of non-renewable resources and the level of its economic growth. Frankel (2010) identifies several channels through which this curse can strike: (i) the Dutch syndrome mentioned above; (ii) the volatility of the price of the raw materials used; and (iii) a political regression linked either to the weakening of institutions, or to the development of oligarchic structures. Debates also touch on the - complex - issue of the long-term management of the depletion of non-renewable resources as well as certain renewable resources (e.g. fishery or forest resources) that are subject to excessive depletion. As evidenced, in France in particular, by the question of shale gas, there is no doubt that the environmental aspects linked to the exploitation of raw materials are unavoidable societal issues.

  • 5 Such as those imposed by the United States and European countries on imported steel in order to pro (...)

17 Faced with these different problems, many answers have been put forward in recent decades. In terms of public policies, a distinction must be made between political and economic approaches. If this article is intended to analyze the latter, the importance of political and geopolitical strategies in this area must also be noted. Beyond the familiar questions about OPEC’s ability to act as a cartel or the relevance of the introduction of customs duties aimed at limiting foreign competition on a domestic market,5 it is important to remember the importance of the Extractive Industries Transparency Initiative (EITI) and the certification system for the Kimberley process for the commercialization of diamonds - of which the DRC, Botswana and Angola are important producers. In analyzing economic measures, it seems relevant to distinguish between, on the one hand, those aiming to mitigate the consequences of the instability of the price of raw materials and, on the other, those which, further upstream, are intended to prevent their occurrence.

3.1 Treatment of symptoms...

18 The macroeconomic problems related to the exploitation of non-renewable resources are not a recent discovery and many measures, both political and economic, have been implemented to deal with them, starting at the end of the Second World War. The so-called Havana Agreements, signed in 1948, legitimised measures to protect economies that were heavily dependent on commodities. Since the volatility of commodity prices was at the heart of the problems experienced by their producer countries, it seemed logical, from the 1950s onwards, to try to intervene directly on the markets by means of ‘product agreements’, associating producer and consumer countries in order to keep prices at a stable and profitable level. These agreements marked a significant departure from those concluded before the war - for example on tea (1933) and rubber (1934) - which were generally drawn up by cartels of businesses, few of which were inclined to multilateralism (Hveem, 1976). The effectiveness of these new deals proved uneven across products, and few worked in a sustainable way, to put it mildly. The most effective of them, the tin deal, also failed. Signed in 1954, it aimed at keeping the price of this metal within limits defined by the 22 member countries thanks to buffer stocks. The rise of new producers, Brazil in particular, gradually increased the operating costs of this regulatory mechanism, with the result that the International Tin Council - the body responsible for administering the agreement - declared itself to be insolvent in October 1985 (Eisemann, 1990). The failure of these various measures sounded the death knell for attempts by the producer countries to weaken the dynamics of commodity prices, for several decades. Even the mighty OPEC renounced this ambition. The increasing financialisation of raw materials markets actually made the task impossible.

  • 6 Now the Kuweit Investment Authority.

19 The so-called ‘stabilization’ sovereign wealth funds constitute a second line of defence implemented by several countries to combat the consequences of excessive dependence on non-renewable resources (Jégourel, 2015a). The first of these, the Kuweit Investment Office,6 was established in 1953 to limit the macroeconomic impact of volatile oil prices. Instability in the price of raw materials de facto causes irregularities in a nation’s export receipts and tax revenues. Consequently, it compromises the implementation of a national budgetary policy aiming, in particular, to encourage the development of infrastructures relating to transport, energy, education and social welfare, which, as is well known, are the engine of sustainable growth. Based on the principle of capitalizing income accumulated during good times in anticipation of leaner periods, stabilization funds allow a ‘smoothing’ of the state budget which can only be favourable from a macroeconomic perspective. Governed by similar financial mechanisms, the numerous sovereign wealth funds that have proliferated since the early 2000s do not necessarily pursue the same objectives. Some of them favour, through their investment policy, the diversification of their host economy, while others, including the Norwegian fund, aim to effect an intergenerational transfer of resources produced by the exploitation of underground raw materials. The African continent was no stranger to the global dynamic which saw this type of fund become significantly more widespread from the beginning of the 2000s onwards. In 1994, Botswana created the Pula Fund, the first African sovereign wealth fund. Other countries followed suit, including Gabon (1998), Algeria (2000), Libya (2006), Nigeria (2012) and Angola (2012).

20 The establishment of such financial instruments is of course not necessarily a guarantee of success. If we consider sovereign stabilization funds alone, several variables influence their effectiveness, such as the magnitude of the reserves they can draw on, and a management independent of political power that will guarantee compliance with macroeconomic objectives. Lastly, it should be remembered that the reserves and resources for a single commodity vary widely from one producer country to another, which means that their macroeconomic objectives - and their capacity to achieve them - are heterogeneous.

3.2 …in search of remedies: diversification and integration upstream

21 Appearing in the United Kingdom in the 1970s, local content clauses constitute the third important bulwark against the natural resource curse. This time, such clauses target the roots of the problem. The extractive industries, especially mining, have a strong capital content but are traditionally not favourable to the economic and social development of their host country since they create few jobs (Klueh et al, 2007). As a result, the granting of a concession is sometimes subject to the introduction of contractual clauses requiring the beneficiary company to contribute to the growth and development of the host country. The companies concerned can act indirectly through social programs (population training policies, health programs, etc.) or, more directly, by creating an economic ecosystem centred on mining, gas or oil activities and composed of subcontracting companies (business services, catering, etc.) or companies capable of working on the processing and economic enhancement of the material. In other words, concessionaires are forced to make the extractive sector one of the levers of the country’s economic diversification. In Africa, this policy is part of the more general reform of the mining codes that is sought by the Africa Mining Vision, a pan-African initiative implemented in 2008 under the aegis of the United Nations Economic Commission for Africa (UNECA).

22 In addition, in the commodity sectors, the upward periods are traditionally coupled with the development of attempts at ‘horizontal’ integration. Consumer companies seek to buy up production or extraction companies so as to avoid any risk of shortage, while producer countries and companies endeavour to develop downstream of the sector so as to capture a greater share of added value (Jégourel, 2015b). Indeed, the difference between the price of an ore and that of the metal (or finished product) made from it is often considerable. Thus, tonne of bauxite from the Republic of Guinea was trading at almost USD 40 in December 2015 while the price of a tonne of primary aluminium, produced from the processing of bauxite into alumina, was around USD 1,500. In the fertilizer sector, a tonne of phosphate rock was worth less than USD 120 on average in the first half of 2016, while diammonium phosphate traded at three times that price. Raw and processed agricultural products show similar price differences. These differences are explained by the - often high - cost of processing (wages, energy), but also by the magnitude of trade margins. The vertical integration strategy therefore allows the producer countries which adopt it to better develop their resources and take advantage of activities with a higher intensity of skilled labour, which guarantee more robust private internal consumption. Many African countries have embarked on this path: Morocco has drawn up an ambitious program for the production of phosphate fertilizers; Côte d’Ivoire aspires to locally process an increasing share of its cocoa beans; and Gabon hopes to do the same with manganese. In this perspective, producer countries have implemented various policies ranging from the coercive measures initially chosen by Indonesia - a ban on the export of unprocessed ore - to the ‘market’ approach in Morocco which has encouraged the development of a national champion.

23 But there is a long way to go between the political affirmation of the merits of this strategy and its realization in the economy. Although they need to be measured over the long term, the results of these actions seem uneven from one country to another, for several reasons. The success of this strategy rests in the first place on a certain number of economic prerequisites, over which states may or may not have control. The degree of qualification of the local workforce and the quality of the transport infrastructure (rail and port) enabling the optimization of the marketing of the processed resource are among the key variables in which the public authorities can play a necessary role. For other prerequisites, however, it is not certain that the governments of producer countries hold all the cards. This is evidenced, for example, by the processing of bauxite into alumina - or even more so into aluminium - in the Republic of Guinea. Stakeholders in this sector must have a stable supply of electricity, without selective power cuts, which the country cannot provide despite its considerable hydroelectric potential. The logic of costs is not excluded either, and the principle of comparative advantages plays a part: processing activities are often located where production costs are lowest.

24 Secondly, this integration must be financed, which often requires a partnership between the producer country and international mining or petroleum groups. From this point of view, it is clear that the country’s negotiating power is largely dependent on the price level. While this bargaining power can be high at times of tension, this is often not the case when the market produces a major surplus, as the increasing number of supply sources exacerbates competition between producer countries. Although this needs to be verified empirically and cannot lead to overly general assertions, it is likely that the ability of the host country to impose local content clauses is also dependent on the context in which the market operates. Its bargaining power may also depend on the distance between the zones of production and consumption. Optimizing transport costs, combined with the physical properties of certain minerals which, like bauxite, ‘travel poorly’, naturally favours countries which are geographically close.

25 Diversification of sectors has often been considered from an industrial or sectoral perspective alone. But two other, closely related approaches could also be adopted. As the International Monetary Fund (IMF, 2015) points out, the African countries that suffered the most from the fall in the price of raw materials were for the most part highly dependent on the Chinese market. Nearly 80 per cent of Sierra Leone’s exports, 50 per cent of those from Congo (Brazzaville) and Angola and 40 per cent of those from the DRC and Zambia were, in 2014, destined for China. As China is the prime world importer of many commodities, this dependence is not surprising. However, exporting to more diverse geographic areas makes it easier to withstand both the ups and downs of the global economy and the slowdown in Chinese heavy industries resulting from the gradual change in the country’s economy. This geographic diversification calls for a second, more strategic approach. The commodity sectors are based on physical traders, whose economic role is to reconcile the time and space imperatives of producers and users. Downstream from the former and upstream from the latter, they assume all or part of the risks, in particular those linked to price volatility. The unit margins achieved by these operators are traditionally low when they are not coupled to processing operations, but the volumes they process are, in the biggest cases, considerable. They are therefore very often essential within a sector and it would be important for producer countries, particularly African ones, to strengthen their positioning in this segment. In a context of relatively abundant supply, the strategic importance of these players could indeed be reaffirmed: aiming to source and resell raw materials at the most advantageous market conditions, they are one of the conditions for greater resilience when faced with low and/or volatile prices. The existence of a solid, integrated banking sector with global raw material exchanges is a prerequisite for this.

26 It should also be remembered that the sectoral diversification of producer countries fits naturally into an overall context in which the efficiency of past and present macroeconomic policies (fiscal, monetary and exchange) play an essential role. Through the interplay of what are known as autonomous stabilisers, a nation’s budget deficit widens when economic conditions deteriorate: less revenue and/or more spending. Recourse to borrowing is therefore essential, as is the cost of such an operation. In many developing countries, as in many industrialised countries, insufficient domestic savings mean that issuance of securities is required on international bond markets. In other words, international investors become the creditors of the borrower nation and their understanding of the macroeconomic situation is crucial. Thus, an acceptable initial level of debt, a high tax revenue/public expenditure ratio, the business climate, the dynamism of local consumption, and the relevance of the exchange rate policy are all elements that will stimulate the capacity of the country’s borrowing and its resilience when faced with the dramatic changes in supply or demand that it may experience.

4. Conclusion

27 Since the start of the third millennium, the price of raw materials has experienced significant variability. A fraction of this is natural, linked to the processes of adjusting supply and demand in the domestic and export markets. For the rest, it is the expectations of agents and the speculative dynamics of the financial markets that exacerbate the fluctuation of prices both upward and downward. Whatever its origin, this price volatility is not without macroeconomic consequences for producer countries. It also implies greater complexity in the implementation of fiscal policy and the funding of key posts for the economic development of these countries. Many measures have been put in place to combat the harmful effects of too much dependence on raw materials, such as sovereign wealth funds ensuring an inter-temporal smoothing of the state budget and vertical integration strategies allowing a greater capture of the added value resulting from the processing of the product.

28 The sectors and producer countries are so diverse that it is difficult to make a general judgment on the effectiveness of this type of measure. But, in a context where prices should a priori remain permanently low, these countries have and will continue to have considerable challenges to overcome if they are to ensure their economy remains resilient in the face of the upheavals in world markets. To this end, three parameters seem essential: (i) mastery of the budgetary tools thanks to which it is possible to perpetuate the logic of investment in infrastructure and to support the nation’s private consumption without sinking into over-indebtedness; (ii) maintaining and deepening access to international financial markets in order specifically to maintain this investment effort; and (iii) the development of a more strategic vision of the concepts of upstream integration of sectors and diversification of the economy, based on a better understanding of the issues relating to trading entities.

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1 Monthly information notes published by the World Bank showing the main commodity prices, available at (accessed on 27 September 2017).

2 Hedging is a financial strategy based on the use of financial derivatives in order to manage the price risk that arises from the buying, trading and selling of raw materials or other underlying assets, whether real (raw materials), monetary (interest rate, exchange rate) or financial (stocks, bonds, stock market indices, etc.).

3 Note here that speculation is not based solely on these financial mechanisms, even if the latter are still clearly important and allow the most ‘aggressive’ forms of speculation, including short sales. Thus a storage policy aimed at taking advantage of a likely rise in prices can be seen as a form of physical (and not financial) speculation.

4 Except in the very specific case of Chinese producers of aluminium and steel who had become world leaders in the early 1980s.

5 Such as those imposed by the United States and European countries on imported steel in order to protect themselves from competition from Chinese products.

6 Now the Kuweit Investment Authority.

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List of illustrations

Title Graph 1: development of the price of raw materials (2000-2016)
Caption Key: blue : Energy ; red : Agriculture ; green : Industrial ores and metals ; purple : Precious metals. Monthly indices, base 100 in 2010
Credits Source: World Bank (The Pink Sheets)1
File image/png, 500k
Title Graph 2: development of the price of coffee (1960-2016)
Caption Monthly price, in current dollars per kilo
Credits Source: World Bank (The Pink Sheets)
File image/png, 283k
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Cite this article

Electronic reference

Yves Jégourel and Philippe Chalmin, « The Dynamics of the Price of Raw Materials and Industrial Strategies in African Producer Countries: What are the Challenges? », International Development Policy | Revue internationale de politique de développement [Online], 8.1 | 2017, Online since 10 February 2020, connection on 24 February 2020. URL : ; DOI :

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About the authors

Yves Jégourel

Yves Jégourel is a lecturer at the University of Bordeaux. A specialist in raw materials and financial risk management, he is the author of numerous popular and scientific articles, reports and books on these issues.

Philippe Chalmin

Philippe Chalmin is a historian and economist, and a specialist in the raw materials market.

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International Development Policy is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.

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