The Commodity Matrix: What Is The Resource Of Tomorrow, And Who Will Benefit From It?

Tyler Durden's picture

While it is impossible to predict where the S&P will be in 10 years (or even 1), one can safely make some assumptions about what the world will look like in a decade (assuming of course it hasn't blown up by then). It will be hungry, it will be thirsty, it will demand resources, and it will be crowded (and it will certainly have lots and lots of wheelbarrows carrying pieces of paper to and fro the local bakery). Implicitly then, countries which control the production and export of various key natural resources and commodities channels will become increasingly more strategic and important. However, for some economies, such as the Middle East, whose entire export-based welfare is reliant on a core set of commodities, this export-benefit may be a doubled-edged sword, should it lead to militant antagonism by one time friends and outright enemies, and/or complacency leading to lack of revenue stream diversity.  In order to determine who the key resource players in the future will be, we present the below commodity trade matrix which answers two questions: how important is a commodity to a country, and how important is a country to a commodity. As GS notes, those on the riskier side of this equation are economies that are heavily reliant on oil, such as the Middle East or even Russia (which albeit scores better on other hard commodities). On the other hand, food exporters enjoy relatively better diversity in their trade portfolios. We highlight the LatAm economies here, while Canada and the US also look healthy. Will food (and water) be the oil of the future, and will the next resource war be not over black, or even yellow, gold, but, pardon the pun, edible gold?

Some additional observations via Goldman:

Not all countries are blessed with abundant resources, and even among those that are, some countries have benefitted a great deal more than others as a result of the quality of their institutions. Indeed, resource wealth can, and has, tempted institutions to retain the revenues narrowly, rather than distribute  them broadly or develop others parts of the economy. This is the reason why the presence of resources hasn’t historically guaranteed economic success. Australia, Canada, Russia, Brazil and South Africa are countries that have high levels of hard commodities per capita, while Argentina and the US should be added to the list if soft commodities are included.

But what are the resources of the future? We think it very likely that food, water and therefore land, will become increasingly important, tilting the advantage in favour of those capable of feeding the next billion people. As two of the world’s largest populations industrialise (hence producing less of their own food) and become wealthier (and hence hungrier), the way food flows around the world is likely to change significantly. Russia, South Korea, Japan and much of Western Europe are major food importers currently, while Brazil, Argentina, the US, Australia, Thailand and Canada sit on the other end of food trade. Here we have to mention Africa and India as regions with huge potential, but in need of greater institutional support to deliver it.

The current debate on the resources curse (the potential for resource-rich countries to become imbalanced) is also important. Being heavily reliant on a particularly commodity is risky as a result of the possibility of big shifts in the global economy, innovation-led substitutes or new discoveries. It is not implausible, for example, to imagine EM consumers extinguishing their demand for cigarettes just like their health conscious Western brethren did a few decades ago. This puts tobacco-heavy African economies like Zimbabwe at significant risk. Above is a commodity trade matrix to answer two entwined questions: how important is a commodity to a country, and how important is a country to a commodity? As expected, those on the riskier side of this equation are economies that are heavily reliant on oil, such as the Middle East or even Russia (which albeit scores better on other hard commodities). On the other hand, food exporters enjoy relatively better diversity in their trade portfolios. We highlight the LatAm economies here, while Canada and the US also look healthy.

The last question is which countries have succeeded despite resource deficits? Japan and South Korea stand out here, which cements our argument that necessity, in this case driven by constraints, is the mother of innovation.