Commodities Remain Expensive

 Press Release November 2, 2010

AIECE - Association of European Business Cycle Institutes
Working Group on Commodity Prices

The development of world market commodity prices has been very dramatic during the 2000s both in nominal and real terms. By autumn 2010 average dollar prices of non-energy commodities almost reached their previous peak in July 2008. The real prices of non-energy commodities declined only temporarily as well. Although activity of financial investors may have contributed to the movements of prices, speculation is not at the heart of the story, according to the assessment of the group. The significant price level shift during the first decade of the 21st century is rather interpreted to largely reflect fundamental factors, particularly the rise of the commodity-intensive Chinese economy. These are the main findings of the report “World Commodity Prices 2010 to mid-2012”, prepared by the AIECE Working Group on Commodities. The report is based on the analysis of 29 raw material prices and markets.

Energy prices rebounded quickly from the lows in recession, but have stayed well below their record highs reached in mid-July 2008. Crude oil prices have fluctuated in the 70-85 USD/tonne range since autumn 2009. Uncertainty about the strength of global economic growth, relatively large inventories, and strong growth in non-OPEC supply to the market are containing price pressures. On the other hand, expected robust demand in Asia, geopolitical risks, and possible OPEC production cuts has an opposite effect. This year, prices of energy raw materials will rise by an average of 27 per cent, following the 37 per cent decline in 2009. In 2011, prices will rise only slightly.

Steel production increased steeply in the first half of 2010. This was followed by a larger-than-expected decline in production during the summer. Consequently, record high iron ore contract prices, which are formulated with a lag, were reached in the third quarter of 2010. The rise in iron ore production will curb upward price movements in 2011. The price of ferrous scrap has fluctuated strongly. Ferrous raw material prices are expected to rise by an average of two-thirds in 2010. Next year, the price will be driven downwards by a rise in the supply of iron ore, while ferrous scrap prices still rise slightly. After the trough base metal prices have on average climbed less than iron ore prices. This year, prices are expected to increase by a little over one-third and stabilise in 2011 seven per cent above their average in 2010.

Agricultural raw material prices will rise this year by an average of 35 per cent and turn slightly downwards next year. Global cotton prices will be boosted in 2010–2011 by growing concerns about declining world stocks. After the surge in wool prices at the end of 2009 and at the beginning of 2010, relatively stable wool production and a moderate increase in consumption should keep wool prices in check. But there is a risk that wool prices increase strongly in the next future, if wool substitutes to greater extent fibres, which are getting more and more expensive, in particular cotton and synthetic fibres. The price of natural rubber reached a record high level in August in the wake of a rebound in car production across the world. In the coming quarters, rubber demand will ease with the end to subsidised car purchases in most countries. With stable production the rise in rubber prices will moderate. Pulp prices, which rose rapidly due to some supply problems and strong Asian demand, are expected to decelerate, but stay on a high level.

The prices of foodstuffs and beverages will rise more moderately than the prices of industrial raw materials. Prices will rise by about 10 per cent this year and slightly more next year. After the downward correction from their very high levels in 2007 and early 2008, grain prices have generally been sluggish until mid-2010 compared to most other commodity prices. However, in July 2010 grain prices started to rise, triggered by sharply reduced production expectations. Initially the drastic increase in world market prices was confined to wheat. Coarse grain prices followed in September and October. Rising prices can be explained by tighter world markets. In case of wheat export restrictions have contributed to the price rise. Price levels are still some way off the peak levels seen in 2008. Nevertheless, there are increasing risks that low-income countries will again have major difficulties in financing necessary grain imports. Sharply rising prices for staple foods could even lead to another food crisis in parts of the developing world.

Upward risks for the prices relate to a stronger-than-expected depreciation of the US dollar, which would raise dollar-denominated commodity prices given strong Asian growth. Another risk is faster-than-expected industrial growth in China supported by successful strengthening Chinese domestic demand. Downward risks relate to a stronger-than-expected weakening of growth in industrialised countries, which would weaken growth prospects also in the commodity-intensive developing countries.

Aggregate development 2008-2011

AIECE (“Association d’Instituts Européens de Conjoncture Économique” or ”Association of European Busines 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 nine member institutes in the group:

The report “World Commodity Prices 2010 until mid-2012,” compiled by Paavo Suni, ETLA Helsinki, does not represent the view of the AIECE and not necessarily the view of the single member 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@etla.fi.

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