Chapter 3: Fragmentation and Commodity Markets: Vulnerabilities and Risks
Russia’s invasion of Ukraine caused major commodity markets to fragment, and geopolitical tensions could make matters worse. Chapter 3 examines how further disruptions in commodity trade could affect commodity prices, economic activity, and the energy transition. The chapter reaches four conclusions. First, commodities are particularly vulnerable to fragmentation due to concentrated production, hard-to-substitute consumption, and their critical role for technologies. Second, further fragmentation would cause large swings in commodity prices and more volatility. Third, commodity trade disruptions would have highly uneven impacts across countries, though global losses appear moderate given offsetting effects across countries. Low-income countries would bear a disproportionate share of the economic cost, due to their high reliance on agricultural imports. Fourth, fragmented minerals markets would make the energy transition more costly, reducing investment in renewables and electric vehicles by one-third by 2030 in an illustrative scenario. A green corridor agreement could guarantee the international flow of critical minerals. Similar agreements for essential food commodities could stabilize agricultural markets. Such agreements would safeguard the global goals of averting climate change and food insecurity.
