## Raw Materials that Rule

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### Definition and importance
- Commodities are “the raw material of civilization—the lifeblood of the world economy.”
- By definition a commodity “is, by definition, something without a distinguishing identity.”
- Commodities enable seamless global trade by being uniform and interchangeable, “ensuring that people across the world can access the raw materials they need, regardless of where they live.”
- Rising importance as the world moves toward cleaner energy, expands digital infrastructure, and rebuilds defense capabilities, creating new geopolitical tensions.

### Hard and soft commodities
- Hard commodities: “things we dig out of the ground, such as oil, copper, iron, or gold.”
- Soft commodities: “those we raise from the soil, like wheat, coffee, cotton, or cocoa.”
- Example of embedded commodities: “The phone in your hand, for example, contains about 42 different minerals: Congolese cobalt, Peruvian copper, Australian iron ore, and a dizzying number of rare earths, sourced mainly from China.”
- Energy inputs for electricity include “oil, gas, coal, and uranium—or the critical minerals embedded in solar panels and wind turbines.”

### Historical market institutions and risk management
- Early organized risk management: Chicago Board of Trade (CBOT) founded in 1848 to create a standardized marketplace for locking in prices with futures contracts.
- Functions of futures markets:
  - Allow farmers to “ensure a given delivery price on their production months ahead.”
  - Enable easier contracting of loans for “irrigation, seeds, fertilizers, and pesticides,” improving yields and protecting crops.
- Other major exchanges cited: New York Mercantile Exchange (NYMEX) for energy products and the London Metal Exchange (LME) for base metals.
- Global financial contracts and exchanges “freed commodity trade from the constraints of physical and often local markets,” allowing producers to hedge risks and merchants to scale operations across continents.

### Futures, options, and financialization
- Shift in trading focus: trading “increasingly revolved not around barrels, bushels, or ingots, but around the contracts tied to them.”
- Derivatives evolution: “Futures, options, and other derivatives—originally designed as insurance tools—became assets in their own right.”
- Market participants attracted: speculators, hedge funds, and high-frequency traders.
- Leverage effect: these instruments “require only a fraction of the underlying asset’s value as collateral,” amplifying risk and reward and pulling commodities into global finance.
- Observable market event: “The surge and ensuing sharp correction in gold prices in October–November 2025 illustrate this dynamic vividly.”

### Price dynamics and forecasting challenges
- Supply-side rigidity: “Drilling wells, digging mines, and planting crops all take time, capital, and decades of planning.”
- Demand-side inelasticities: “Buyers cannot easily substitute one raw material for another”; examples: refineries process specific grades of crude oil; factories cannot redesign production lines overnight.
- Result: when demand shifts or shocks disrupt supply, “prices tend to move quickly and by a lot.”
- Supercycle example: China’s entry into global trading and infrastructure boom in the early 2000s caused simultaneous surges in prices for oil, metals, and agricultural commodities—the “commodity supercycle.”
- Sectoral divergence example during COVID-19: “China’s lockdowns caused steel demand to collapse. Yet prices for iron ore…continued to rise” because major mines in Africa and Brazil shut down or slowed production, tightening supply as demand weakened.
- Forecasting implication: “It’s not enough to track the global economy. Forecasting requires a clear grasp of the distinctive dynamics of each market with all its quirks.”

### Geopolitical rifts and strategic competition
- Historical role: Empires and naval fleets historically fought to secure access to sugar, spices, rubber, oil, and other strategic supplies; borders were “often carved around resource basins.”
- Contemporary strategic minerals: “Lithium, cobalt, and rare earths today command the same strategic importance that oil and steel once held.”
- Geopolitical effects:
  - Countries rich in critical minerals “are gaining influence.”
  - Countries without them are pursuing “alliances, investment deals, and redesigned supply chains” to secure long-term access.
  - Policy tools in use include export controls, sanctions, and “reshoring” targeting strategic minerals for military, industrial, and technological strength.
- Quoted assessment: “The world’s growing dependence on critical commodities has created a fresh set of geopolitical fault lines.”

### Enduring centrality and outlook
- Commodities remain “at the intersection of economics, politics, and technology.”
- As the energy transition accelerates, digitalization deepens, and geopolitical rivalry intensifies, “the role of commodities will grow only more central.”
- Concluding view: “Their control shaped the global economy of the past, and it might shape the global order of the future.”

*jean-marc natal is chief of the IMF’s Commodities Unit.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2026/06/b2b.pdf_