While still far below record pre-crisis peaks, commodity prices are slowly recovering from their dramatic decline. Weak demand growth and low capacity utilization will moderate the rebound over the next year or two, but low investment now may establish conditions for another price boom in the longer term. While rising prices will impact budgets in major commodity export and import nations, the effect on inflation will likely be minimal.
Commodity Prices Pummeled by Crisis
During the crisis, oil, metals, and food prices fell from historic peaks as industrial activity collapsed.
- Crude oil prices reached a historic peak of more than $132 per barrel in July 2008. In hindsight, the abnormally high price served as a leading indicator of the coming crisis. By December 2008, crude oil prices had plummeted to $41 a barrel, a decline of nearly 70 percent in only six months.
- Other commodity prices followed a similar path: Metal and mineral prices dropped 52.4 percent in February 2009 from April 2008 peaks; food prices, which had also reached unprecedented highs in 2008, fell nearly 40 percent from June through December of that year.
- OECD demand for oil fell nearly 5 percent from the first quarter of 2008 to the first quarter of 2009, depressing prices. Non-OECD demand declined 1.3 percent during the same period after a 3 percent contraction in the fourth quarter of 2008 outweighed growth during the previous three quarters.
Prices Are Starting to Recover
Though they have yet to reach pre-crisis levels, prices are now recovering as demand strengthens and trade levels increase.
- Crude oil topped $77 per barrel in October 2009, well below the pre-crisis peak, but above the $64 five-year average. Food prices were up 17 percent from December 2008 through September 2009.
- As China restocked its metals inventory, imports of copper jumped nearly 70 percent in the first half of 2009 from a year ago. This demand increased global metal prices 84 percent from February lows in August.
- Oil demand in non-OECD countries rose 4.4 percent (q/q) in the second quarter of 2009. Though OECD demand fell 4.7 percent (q/q) in the second quarter of 2009, it is projected to turn positive in the third quarter.
- World trade levels began to grow in June, rising 1.8 percent in the three months to August compared to the previous three months.
- The U.S. dollar has fallen 14.3 percent since March 2009, contributing to higher commodity prices denominated in dollars.
Projected Growth in Demand Will Slightly Boost Commodity Prices
The strong recovery in Asia and other emerging markets is already contributing to increased demand while the slower recovery in the United States and Europe is expected to add momentum in coming months. Overall global growth in demand, however, will be moderate, with little surge in prices expected.
- The International Energy Agency expects global oil demand to recover only partially and grow 1.7 percent in 2010, driven largely by demand from non-OECD countries. Cambridge Energy Research Associates projects world demand will increase from 83.8 million barrels per day (mbd) this year to 89.1 mbd in 2014, above the 86.5 mbd peak reached in 2007.
- Though metals prices have plateaued since August, when Chinese restocking cooled, demand is projected to rise again, with the World Bank expecting restocking to occur elsewhere in 2010.
- Asia and other emerging markets, which are leading the recovery, will contribute significantly to commodity demand. Their share of the oil market rose from 45.8 percent in 2002 to 51.8 percent in 2008 while their share of the copper market increased from 49.8 percent to 59.2 percent in that same period.
- The Institute for Supply Management’s U.S. manufacturing index rose to 55.7 in October, its highest level since April 2006. Readings above 50 signify expansion. The United States economy expanded by an annual rate of 3.5 percent in the third quarter, according the Bureau for Economic Analysis’ preliminary estimate.
- European manufacturing grew for the first time in seventeen months in October, as the Markit manufacturing index rose from 49.3 to 50.7.
- Agricultural markets are likely to remain well supplied, as stocks begin to return to normal levels. The World Bank anticipates average agricultural prices to fall 21 percent from 2008 levels in 2009, but prices in 2010 are expected to remain broadly stable.
Mild Risks of a Price Hike Ahead
While excess capacity and large inventories will likely prevent a sustained price surge in the short term, speculative pressures and cutbacks in investments may present greater risks in the medium to long-term.
- Current spare oil capacity is estimated at 6.5 mbd in August, twice the average level of the past decade.
- However, decreased petroleum product demand, dwindling refinery margins and comparatively high construction costs have hampered refinery projects globally. Just as the pre-crisis price surge contributed to oversupply now, the recent price collapse and subsequent extended fall in investment will likely lead to undersupply—and high prices—in the future.
- Speculative pressures on crude oil, which subsided during the current downturn, may fuel price spikes as risk appetites rise on further hopes of global recovery.
- Concerns about the adequacy of global food supply have subsided. The U.S. Department of Agriculture expects stocks for key grains to increase by almost 3 percent in the coming season, reaching levels comparable to those last seen in the early part of the decade, when prices were low.
Repercussions of Rising Commodity Prices
As commodity prices rise, the trade balances of commodity exporters—particularly oil exporting nations—will recover. However, slack demand and abundant supply will restrain broader inflation in the near term.
- The current account balance of GCC states, which the IMF projects to decline from $282 billion in 2008 to $56 billion in 2009, is expected to expand to approximately $150 billion in 2010 as oil prices recover. At the same time, major commodity importers will have to adjust to higher import prices.
- Sluggish production in advanced economies will help counter the inflationary pressures of rising commodity prices. The IMF predicts 2010 inflation in these countries to be a modest 1.1 percent.
Looking Ahead
UK manufacturing and industrial production will be released Thursday, November 5. The U.S. unemployment rate will be released Friday, November 6.
This analysis was produced by the editorial staff of the International Economic Bulletin, including Shimelse Ali, Vera Eidelman, Bennett Stancil, and Uri Dadush.
