BAKU, Azerbaijan, Oct.12
By Leman Zeynalova – Trend:
Higher energy prices raise the costs of production for all commodities that depend on energy as inputs, Trend reports with reference to Capital Economics, UK-based research and consulting company.
The precise association between energy prices and other commodity prices, however, depends on both the energy intensity of production and the similarity of underlying demand drivers, reads the latest report released by the company.
“Energy accounts for a large part of the production costs of most agricultural commodities. These take the form of 1) fuel such as gasoline, which is used in the planting, fertilising and harvesting of crops, as well as the subsequent transportation, 2) chemicals such as pesticides, which are produced using petroleum products, and 3) fertilisers such as nitrogen fertiliser, which is produced from natural gas. In general, energy costs account for around half of all production costs for farmers in the US, although there is variation depending on the crop, with wheat being particularly energy-intensive,” said Capital Economics.
What’s more, rising energy costs can put upward pressure on some agricultural commodity prices because they raise the cost of substitutes, according to the analysts of Capital Economics.
“For example, higher oil prices push up the cost of synthetic rubber and man-made fabrics, such as polyester, which could prompt higher demand and prices for natural rubber and cotton, respectively. Similarly, if oil prices are higher, it incentivises substitution with biofuels, although most countries blend biofuels with gasoline so outright substitution is not possible.
The metals sector is also a heavy user of energy, accounting for 10 percent of global energy usage (2011). Steel production alone accounts for 6.5 percent of that total usage, due to the high volume of steel produced. Like agricultural commodities, the energy required to produce and distribute industrial metals forms a similarly high (and sometimes much higher) proportion of total production costs. Comparing mean global energy costs of production, the energy intensity of precious metals output is higher than that of industrial metals, although precious metals miners are compensated by much higher prices.”
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