## FRAGMENTATION AND COMMODITY MARKETS: RISKS AND VULNERABILITIES

## Source details

**Canonical URL:** [FRAGMENTATION AND COMMODITY MARKETS: RISKS AND VULNERABILITIES](https://www.imf.org/-/media/files/oap/oap-home/2023/october-2023-weo-ch3.pdf)

## Other formats

- [Markdown version](/-/media/files/oap/oap-home/2023/october-2023-weo-ch3.pdf.md)
- [Structured JSON version](/-/media/files/oap/oap-home/2023/october-2023-weo-ch3.pdf.json)

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### Questions and key takeaways
- Key research questions:
  - What makes commodity markets vulnerable in the event of fragmentation?
  - Which commodities are most vulnerable to disruptions in international trade?
  - What are the potential economic impacts from commodity market fragmentation?
  - What are the implications for the green transition?
- High-level takeaways:
  - Commodity markets are vulnerable when production is concentrated and tradability is high.
  - Minerals and some agricultural markets exhibit large potential price swings across blocs.
  - Global GDP impacts from fragmentation are modest on aggregate, while Low-Income Countries are most affected.
  - Fragmentation raises the costs of decarbonization and reduces green investment.

### Scope and research design
- Coverage:
  - Focus: 48 commodities across three types: energy, agriculture and minerals.
  - Commodity selection criteria:
    - Among the most largely traded in their category.
    - Identified as critical for the green transition or key technologies by the EU or US.
- Definitions and simulation setup:
  - Geoeconomic fragmentation is defined as any policy-driven reversal of integration.
  - Simulations: hypothetical fragmentation into two blocs along the 2022 UN vote on Ukraine.
  - Research methods combine empirical analysis and model simulations.

### What makes commodities vulnerable to fragmentation
- Structural vulnerability factors:
  - Concentrated production among a few producing countries.
  - High tradability (large share of world production is traded).
- Data points and references:
  - Production and trade measures refer to 2019 for share of world production that is traded and share of top 3 countries in world production.
  - Indices and baselines use 2016-2019 = 100 for All Goods and All Commodities in trade-intervention charts.

### Which commodities are most vulnerable to disruptions in trade
- Groups with large potential price swings:
  - Minerals (both mined and refined) and some agricultural commodities show the widest distribution of price changes by bloc.
- Examples highlighted:
  - Agriculture: palm oil, soybean.
  - Minerals: cobalt, copper, lithium, nickel.
- Price dispersion metric:
  - Defined as the difference between max and min as percent of min price across regions.

### Potential economic impacts from fragmentation
- GDP effects:
  - Simulations indicate modest global GDP impacts in aggregate.
  - Losses in GDP are reported relative to baseline from eliminating trade in groups of commodities across hypothetical blocs.
  - Low-Income Countries are most affected by these GDP losses.
- Aggregation method:
  - Country-level losses are aggregated using weights based on GDP at PPP.

### Implications for the green transition
- Effect on investment and decarbonization:
  - Fragmentation of critical mineral markets makes decarbonization more costly and reduces green investment.
  - Impact metric: change in real investment in renewables and EVs due to fragmentation relative to IEA’s net zero emissions scenario, with integrated copper, nickel, lithium and cobalt markets as the comparator.
  - Country-level variables for these aggregates are weighted using GHG weights.
- Scenario year and baseline:
  - Reported deviations refer to 2030 relative to the integrated markets scenario.
- Critical minerals demand outlook:
  - Demand increases until 2030 are shown relative to 2020 (Index, 2020 = 1): Copper (1.5x), Nickel (2x), Cobalt (2x), Lithium (6x).

### Policy implications
- First best:
  - Prevent fragmentation through multilateral cooperation.
- Second best measures:
  - Increase international data sharing on mineral markets.
  - Pursue measures to build resilience where multilateral cooperation is not feasible (details in the source text).

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_Source: https://www.imf.org/-/media/files/oap/oap-home/2023/october-2023-weo-ch3.pdf_