IfW Press Release May 4, 2007

AIECE - European Business Cycle Institutes

AIECE Working Group on Commodity Prices:
Raw material about to reach their peaks

“World Commodity Prices 2006–2008”, a report prepared by the AIECE Working Group on Commodities, is based on the analysis of 29 raw material prices and markets. 

According to the report, the world economic outlook continues to be exceptionally robust. The average growth in 2004–2008 is expected to be around 5 percent, the strongest since the early 1970s before the two first oil crises. In the next two years the average annual growth rate is forecast to remain around the same level. This is in sharp contrast to the long-term annual average growth rate of less than 4 percent and is up from the already high 4.5 percent recorded during the 5-year period from 2002 to 2006.

Strong global growth has increase demand for energy and industrial commodities with a speed well exceeding expectations. High prices have boosted supply, but compared to demand growth the rise has been sluggish. Inventories of many industrial raw materials have declined to critically low levels, which has triggered strong price rises. Low inventories have raised the volatility of commodity prices substantially, which together with negative co-variation with some financial instruments has made them especially attractive to financial investors.

The extraordinarily strong demand-driven rise of average commodity prices in 2003–2007 is expected to end, but prices are likely to stay on a high level. The total HWWA index reached an all-time-high already in the third quarter last year, whereas the non-energy commodities index is projected to peak in the second quarter of this year. Prices of crude oil and many industrial commodities like iron ore and several non-ferrous metals have reached their all-time highs.

The timing of the peaks differs greatly depending on the specific features of the commodity markets. Oil prices peaked in July, while nickel, lead, tin, steel scrap and iron ore prices are expected to reach their peaks this spring. The huge price rises, in many cases to new all-time-highs; usually well above their earlier peaks is explained by demand shocks caused by the unexpectedly strong and long-lasting rise of commodity-intensive production in developing countries in general and in China in particular. In many cases supply disruptions have added to the price rise.

Price rises have been substantial in all commodity groups. The rises of energy and metals prises are, however, most marked and they have been connected to the global economic growth. In case of oil geopolitics has also a strong impact on the price. The Commodity Group expects the prices to have peaked already in most cases as the demand is cooling and market tightness easing, while supply continues to increase attracted by very high historical price levels. The price changes may be very substantial in some cases, but in general commodities are expected to remain expensive in the next two years, if no major negative demand shock takes place. Prices are supported by the strong albeit diminishing global industrial and GDP growth, which maintains strong demand growth.

World commodity prices as measured by HWWA index in US dollar terms are likely to decline by 1 percent in 2007 and 2008 following a 21 percent increase in 2006. Prices of non-energy commodities are forecast to rise by 12 percent this year. Next year they will decline by 3 percent. The price of crude oil is expected to decline from the high level seen in April and early May this year. The average price of crude oil is expected to decrease by six percent in 2007 and rise by one percent in 2008.

Aggregate Development 2005-2008

Real Prices of Raw Materials
HWWA index, 2000=100

AIECE (“Association d’Instituts Européens de Conjoncture Économique” or ”Association of European Business Cycle Institutes”) is made of 44 government or non-government institutes from 21 countries. The Working Group on Commodity Prices undertakes raw material price forecasts twice a year. There are ten member institutes in the group:

BIPE Bureau d’Information et de Prévisions Économiques, Issy-les-Moulineaux
Coe-Rexecode Centre d’Observation Economique et de Recherches Pour l’Expansion de l’Economie et le Développement des Entreprises, Paris
ETLA Research Institute of the Finnish Economy, Helsinki
GKI Economic Research Co., Budapest 
HWWI Hamburg Institute of International Economics, Hamburg
IfW Kiel Institute for the World Economy, Kiel
IKCHZ Foreign Trade Research Institute, Warsaw 
INSEE Institut National de la Statistique et des Etudes Économiques, Paris
Prometeia Prometeia S.p.A., Bologna
SKEP Chamber of Commerce and Industry of Slovenia, Ljubljana

The report “World Commodity Prices 2006 - 2008” compiled by Paavo Suni, ETLA, Helsinki, does not represent the view of the AIECE and not necessarily the view of the single members of the group. The report is based on discussions and raw material price forecasts made by the commodity group’s representatives of the member institutes.

For more information please contact:

Paavo Suni, paavo.suni@etla.fi.

To purchase a PDF copy of the report from our website, please contact the secretariat at ETLA, Mr. Paavo Suni, Commodity Group Chairman, at paavo.suni@etla.fi.