News Column

The Swiss commodities connection in African poverty

July 6, 2014

Are mispricing and the opacity of commodities trading in Switzerland contributing to Africa's underdevelopment?

The world's poorest continent remains heavily dependent on natural resources and so is extremely vulnerable to manipulations in the price of the commodities it extracts and exports, with very real consequences for its economies.

Switzerland is a global hub for trade in commodities, and so exerts a significant influence on Africa's development.

But critics say the way commodities are traded through the country is shrouded in opacity and this ultimately deprives developing regions such as Africa of revenue.

The Swiss government last week took steps that it says will bring more transparency to its lucrative commodities trading sector, but the problem is deep-seated.

For example, a 2010 study by Christian Aid showed that as Zambia's copper production soared in the 2000s, Switzerland came to account for more than half of the southern African country's exports of the commodity. But the price of Swiss re-exports of the copper was far higher than that received in Zambia.

In 2008, the study estimated, Zambia's GDP would have been 80 per cent higher if the copper leaving its borders in that year alone had received the same price as Switzerland. It's a pattern of trade mispricing that has persisted, critics say.

A study in January by the Centre for Global Development, a trade and aid think tank, estimated that developing countries may be losing between $8 billion and $120 billion a year because of mispricing of commodities in Switzerland.

That report analysed 244 jurisdictions, including virtually all sub-Saharan countries, and almost 2,600 commodity categories, and found that the average price of commodity exports to Switzerland was lower than to other jurisdictions.

The difference here cost developing countries about $8 billion annually, according to the report. But it found Switzerland also declared higher re-export prices for those same commodities and this difference was as high as $120 billion.

Depressed platinum

The Swiss impact varies from commodity to commodity. As for platinum, it looks to be a case of depressing prices that has consequences for the continent's most advanced economy, South Africa, which accounts for 70 per cent of global supplies of the metal.

Reuters has reported that vaults in the Zurich Freilager, or freezone, may hold around 20 per cent of the total stocks of platinum in London and Zurich, the world's two main storage centres for the metal. This may explain the muted reaction of spot prices to a five-month platinum mining strike in South Africa. That stoppage, which ended last week, hit 40 per cent of global production of the precious metal.

"A platinum price rise would have benefited South Africa's economy ultimately, at least to the extent that South Africa's export prices and related declarations for profit tax and royalties reflect actual market prices," said Alex Cobham of the Centre for Global Development.

He said there were two ways in which prices might have been depressed during the strike.

"If Switzerland's freezones contain major but uncertain platinum holdings then the market price may not reflect the true nature of supply and demand," he said.

Tracking the Swiss connections is not always easy. Metals sent to the freezones, for example, are not recorded by Swiss customs because of their tax-exempt status.

In other cases, commodities such as copper will be recorded as destined for Switzerland but instead go to a Swiss-based trading house and onwards to, say, China.

The Centre for Global Development study found that from 2007 to 2010, 99.8 per cent of Zambia's exports to Switzerland 27.7 per cent of all its exports were not recorded as entering Switzerland.

For mineral-rich Burkina Faso, a west African gold producer, 100 per cent of its exports to Switzerland over this period, accounting for 15 per cent of all exports, also "vanished".

This all adds to the levels of opacity associated with Switzerland, and the companies involved have not come under the kind of international pressure for disclosure that has been exerted on the country's famously secretive banks.

For more stories on investments and markets, please see HispanicBusiness' Finance Channel

Source: Khaleej Times (United Arab Emirates)

Story Tools Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters