## COMMODITy SPECIAL FEATURE MaRKET DEvELOPMENTS aND ThE POWER OF PRICES ## Source details **Canonical URL:** [COMMODITy SPECIAL FEATURE MaRKET DEvELOPMENTS aND ThE POWER OF PRICES](https://www.imf.org/-/media/files/publications/weo/2024/april/english/commodityspecialfeature.pdf) ## Other formats - [Markdown version](/-/media/files/publications/weo/2024/april/english/commodityspecialfeature.pdf.md) - [Structured JSON version](/-/media/files/publications/weo/2024/april/english/commodityspecialfeature.pdf.json) --- ### Commodity Market Developments - Oil - Oil prices decreased by 4.2 percent between August 2023 and February 2024, when they stood at a monthly average of $80.70. - After breaking $95 a barrel in late September, prices fell owing to weaker expectations about global demand growth and strong output growth in Iran and non-OPEC countries, led by the United States, Brazil, and Guyana. - OPEC+ output curbs were more than offset by non-OPEC supply growth. - Red Sea tensions led to a 50 percent rise in global freight rates of oil product tankers; prices on the Middle East Gulf to UK route increased by 200 percent from mid-November 2023 to mid-March 2024. - Russian oil to China and India traded mostly above the Group of Seven price cap since the second half of 2023 at a $15–$20 discount (based on Argus data). - Futures markets: oil prices are forecast to slide by 2.5 percent year over year to average $78.60 per barrel in 2024 and to fall to $67.50 in 2029. - Risks to the outlook are balanced: upside from escalation in the Middle East or attacks on Russian infrastructure; downside from a slowdown in Chinese demand and strong non-OPEC supply growth possibly coupled with a rise in OPEC+ supply. - Natural gas - TTF trading hub prices in Europe fell 24.4 percent from August 2023 to $8.10 a million British thermal units (MMBtu) in February 2024. - Asian LNG prices declined by 24.9 percent; US Henry Hub prices decreased by 32.3 percent. - Futures: TTF prices are forecast to average $9.45 in 2024, decreasing to $8.73 in 2029. - Henry Hub prices: average of $2.66 per MMBtu in 2024, rising to $3.63 in 2029 as US export capacity is expected to almost double from 11.4 billion cubic feet a day (bcf/d) to 21.1 bcf/d until 2027. - Drivers: mild weather, low industrial demand in Europe, and ample LNG supplies leading to high storage levels and lower prices. Risks around this outlook are balanced. - Metals and minerals - IMF base metals price index rose by 4.7 percent from August 2023 to February 2024. - Iron ore prices increased by 14.9 percent due to record steel production in China. - Uranium prices rose by 75.3 percent to their highest level since 2007 due to supply disruptions, potential ban on Russian exports, and better prospects for nuclear power. - Gold prices rose by 5.5 percent supported by geopolitical safe-haven demand. - Agricultural commodities and food - IMF food and beverages price index gained 6.0 percent between August 2023 and February 2024. - Cereals prices declined by 7.2 percent; vegetable oils declined by 10.9 percent due to abundant global supplies. - Tropical crops: cocoa up 64.2 percent; coffee up 18.2 percent, with Robusta coffee further pressured by Red Sea tensions that shifted some imports from Asia to Brazil. - Rubber prices jumped 39.8 percent as global output declined in 2023 following a novel leaf disease outbreak in Asia. - Seafood prices surged 25.9 percent as demand outstripped supply growth, partly because of stricter environmental legislation. - Risks to food-price outlook are balanced: upside from further Black Sea trade disruptions and food export restrictions; downside from larger-than-expected harvests. ### The Power of Prices: How Fast Do Commodity Markets Adjust to Shocks? - Motivation and approach - Recent shocks (the pandemic, the war in Ukraine, the conflict in Gaza and Israel) generated large commodity price volatility, destabilizing inflation and complicating fiscal and monetary policy, especially for low-income and commodity-exporting countries. - The extent of price volatility crucially hinges on price elasticities of demand and supply: the lower the elasticities, the more prices react to unexpected changes. - This Special Feature estimates a consistently identified and estimated set of price elasticities of demand and supply across agricultural goods, energy, and metals using a granular instrumental variable approach and an annual cross-country data set from 1960 to 2021. - Identification conditions - Methodology uses idiosyncratic changes in production and consumption in individual countries to identify average global price elasticities; this requires sufficiently large shocks that affect global prices, which occurs when markets are concentrated. - Market concentration - Most commodity markets are highly concentrated, as evidenced by elevated Herfindahl-Hirschman indices (HHIs). Example: palm oil production HHI is 0.4, roughly 80 times higher than the equal-share HHI across 195 countries, indicating idiosyncratic shocks in palm oil production likely affect global prices. - Drivers of global fluctuations - Country-specific idiosyncratic shocks are substantial drivers of global production and consumption fluctuations, but common factors are on average stronger drivers. - Common factors have increased particularly for industrial commodities’ output over the past decade and have grown in importance for consumption of both food and industrial commodities—potentially linked to global supply chains and more synchronized global business cycles. ### Commodity Shocks: Common versus Idiosyncratic Factors - Food commodities - Idiosyncratic shocks in production are generally larger than those in consumption for food commodities, consistent with country-specific events (droughts, flooding, pests) affecting local yields. - Industrial commodities - Common factors have gained importance in industrial commodity output and consumption, reflecting globalized supply chains and synchronized demand conditions. ### Commodities Are Mostly Inelastic (Key Elasticity Findings) - General summary - Commodity demand and supply are generally price inelastic, with important differences across commodity types and within groups. - Supply elasticities - Metals: - Copper and zinc: supply elasticity close to zero. - Metals generally exhibit the lowest supply elasticities. - Agriculture: - Cereals: supply elasticity about 0.6 (a 10 percent price increase raises output by 6 percent within a year). - Annual crops have higher short-term supply elasticities than perennial crops. - Perennial crops (coffee, palm oil, cocoa): smaller short-term supply elasticities because new trees take years to produce fruit (example lead times: typically two years for palm oil and five years for cocoa). - Energy: - Supply elasticities of energy commodities tend to be between those for minerals and agricultural commodities. - Demand elasticities - Agricultural goods: - Rice: price elasticity of demand close to zero, likely reflecting limited international trade (about 10 percent of output) and typical price subsidization in Asia. - Tea, cotton, and wheat: demand elasticities above 0.4. - Energy and fossil fuels: - Crude oil and coal: demand elasticities below 0.2, consistent with short-term fuel-switching difficulties. - Metals: - Copper and zinc: demand elasticities close to zero. - Lead and tin: demand elasticities between 0.2 and 0.3. - Commodity-specific characteristics (substitutability, downstream uses, and efficiency measures) largely determine demand elasticities across commodities. ### Supply and Demand Become More Responsive over Time - Dynamic responses - Supply and demand become more responsive over time as markets adjust to shocks, but long-term multipliers differ across commodities and horizons. - Agricultural commodities: - Supply responses are generally flat over a five-year horizon. - Perennial crops (coffee, cocoa, rubber) show a statistically significant peak in supply response about two to three years after a shock. - Demand multipliers for most agricultural commodities do not become larger over time. - Metals and energy: - Supply elasticities for most metals and energy are upward sloping over time; copper shows a statistically significant upward slope. - Metals show the largest increases in demand multipliers over longer horizons. - Overall, agricultural goods tend to be more responsive to shocks initially than minerals and energy, and agricultural commodities show smaller increases in responsiveness after a couple of years, whereas mineral commodities become more responsive over time. ### Conclusions and Policy Implications - Main conclusions - Commodity demand and supply are generally price inelastic, with metals being particularly inelastic and agricultural perennial crops showing low short-term supply responsiveness. - Energy commodities’ elasticities lie between those for agricultural commodities and those for metals. - Supply and demand of mineral and energy commodities become more elastic over time. - Policy implications - Countries exposed to commodity markets with relatively low elasticities, especially metals, should build fiscal buffers and monetary policy space to prepare for the larger impact of possible shocks. ### Elasticities, subsidies, and price volatility (Section 2) - Elasticities ultimately reflect adjustments made by final consumers and producers. - Replacing energy and agricultural subsidies with targeted transfers would help increase the demand and supply elasticities of many commodities and could reduce their price volatility. ### Role of international trade (Section 2) - International trade can play a prominent role in smoothing out commodity shocks and buffer against their economic impact (see Albrizio and others 2022, 2023; and Alvarez and others 2023). ### Geopolitical context and critical minerals (Section 2) - Trade smoothing will be even more relevant in the context of increasing geopolitical tensions and trade fragmentation as well as in the case of critical minerals for the energy transition. *Source: IMF staff analysis in the Special Feature “Market Developments and the Power of Prices,” based on Bogmans and others (2024).* ### Section 1 ### COMMODITy SPECIAL FEATURE MaRKET DEvELOPMENTS aND ThE POWER OF PRICES ### Commodity Market Developments - Oil - Oil prices decreased by 4.2 percent between August 2023 and February 2024, when they stood at a monthly average of $80.70. - After breaking $95 a barrel in late September, prices fell owing to weaker expectations about global demand growth and strong output growth in Iran and non-OPEC countries, led by the United States, Brazil, and Guyana. - OPEC+ output curbs were more than offset by non-OPEC supply growth. - Red Sea tensions led to a 50 percent rise in global freight rates of oil product tankers; prices on the Middle East Gulf to UK route increased by 200 percent from mid-November 2023 to mid-March 2024. - Russian oil to China and India traded mostly above the Group of Seven price cap since the second half of 2023 at a $15–$20 discount (based on Argus data). - Futures markets: oil prices are forecast to slide by 2.5 percent year over year to average $78.60 per barrel in 2024 and to fall to $67.50 in 2029. - Risks to the outlook are balanced: upside from escalation in the Middle East or attacks on Russian infrastructure; downside from a slowdown in Chinese demand and strong non-OPEC supply growth possibly coupled with a rise in OPEC+ supply. - Natural gas - TTF trading hub prices in Europe fell 24.4 percent from August 2023 to $8.10 a million British thermal units (MMBtu) in February 2024. - Asian LNG prices declined by 24.9 percent; US Henry Hub prices decreased by 32.3 percent. - Futures: TTF prices are forecast to average $9.45 in 2024, decreasing to $8.73 in 2029. - Henry Hub prices: average of $2.66 per MMBtu in 2024, rising to $3.63 in 2029 as US export capacity is expected to almost double from 11.4 billion cubic feet a day (bcf/d) to 21.1 bcf/d until 2027. - Drivers: mild weather, low industrial demand in Europe, and ample LNG supplies leading to high storage levels and lower prices. Risks around this outlook are balanced. - Metals and minerals - IMF base metals price index rose by 4.7 percent from August 2023 to February 2024. - Iron ore prices increased by 14.9 percent due to record steel production in China. - Uranium prices rose by 75.3 percent to their highest level since 2007 due to supply disruptions, potential ban on Russian exports, and better prospects for nuclear power. - Gold prices rose by 5.5 percent supported by geopolitical safe-haven demand. - Agricultural commodities and food - IMF food and beverages price index gained 6.0 percent between August 2023 and February 2024. - Cereals prices declined by 7.2 percent; vegetable oils declined by 10.9 percent due to abundant global supplies. - Tropical crops: cocoa up 64.2 percent; coffee up 18.2 percent, with Robusta coffee further pressured by Red Sea tensions that shifted some imports from Asia to Brazil. - Rubber prices jumped 39.8 percent as global output declined in 2023 following a novel leaf disease outbreak in Asia. - Seafood prices surged 25.9 percent as demand outstripped supply growth, partly because of stricter environmental legislation. - Risks to food-price outlook are balanced: upside from further Black Sea trade disruptions and food export restrictions; downside from larger-than-expected harvests. ### The Power of Prices: How Fast Do Commodity Markets Adjust to Shocks? - Motivation and approach - Recent shocks (the pandemic, the war in Ukraine, the conflict in Gaza and Israel) generated large commodity price volatility, destabilizing inflation and complicating fiscal and monetary policy, especially for low-income and commodity-exporting countries. - The extent of price volatility crucially hinges on price elasticities of demand and supply: the lower the elasticities, the more prices react to unexpected changes. - This Special Feature estimates a consistently identified and estimated set of price elasticities of demand and supply across agricultural goods, energy, and metals using a granular instrumental variable approach and an annual cross-country data set from 1960 to 2021. - Identification conditions - Methodology uses idiosyncratic changes in production and consumption in individual countries to identify average global price elasticities; this requires sufficiently large shocks that affect global prices, which occurs when markets are concentrated. - Market concentration - Most commodity markets are highly concentrated, as evidenced by elevated Herfindahl-Hirschman indices (HHIs). Example: palm oil production HHI is 0.4, roughly 80 times higher than the equal-share HHI across 195 countries, indicating idiosyncratic shocks in palm oil production likely affect global prices. - Drivers of global fluctuations - Country-specific idiosyncratic shocks are substantial drivers of global production and consumption fluctuations, but common factors are on average stronger drivers. - Common factors have increased particularly for industrial commodities’ output over the past decade and have grown in importance for consumption of both food and industrial commodities—potentially linked to global supply chains and more synchronized global business cycles. ### Commodity Shocks: Common versus Idiosyncratic Factors - Food commodities - Idiosyncratic shocks in production are generally larger than those in consumption for food commodities, consistent with country-specific events (droughts, flooding, pests) affecting local yields. - Industrial commodities - Common factors have gained importance in industrial commodity output and consumption, reflecting globalized supply chains and synchronized demand conditions. ### Commodities Are Mostly Inelastic (Key Elasticity Findings) - General summary - Commodity demand and supply are generally price inelastic, with important differences across commodity types and within groups. - Supply elasticities - Metals: - Copper and zinc: supply elasticity close to zero. - Metals generally exhibit the lowest supply elasticities. - Agriculture: - Cereals: supply elasticity about 0.6 (a 10 percent price increase raises output by 6 percent within a year). - Annual crops have higher short-term supply elasticities than perennial crops. - Perennial crops (coffee, palm oil, cocoa): smaller short-term supply elasticities because new trees take years to produce fruit (example lead times: typically two years for palm oil and five years for cocoa). - Energy: - Supply elasticities of energy commodities tend to be between those for minerals and agricultural commodities. - Demand elasticities - Agricultural goods: - Rice: price elasticity of demand close to zero, likely reflecting limited international trade (about 10 percent of output) and typical price subsidization in Asia. - Tea, cotton, and wheat: demand elasticities above 0.4. - Energy and fossil fuels: - Crude oil and coal: demand elasticities below 0.2, consistent with short-term fuel-switching difficulties. - Metals: - Copper and zinc: demand elasticities close to zero. - Lead and tin: demand elasticities between 0.2 and 0.3. - Commodity-specific characteristics (substitutability, downstream uses, and efficiency measures) largely determine demand elasticities across commodities. ### Supply and Demand Become More Responsive over Time - Dynamic responses - Supply and demand become more responsive over time as markets adjust to shocks, but long-term multipliers differ across commodities and horizons. - Agricultural commodities: - Supply responses are generally flat over a five-year horizon. - Perennial crops (coffee, cocoa, rubber) show a statistically significant peak in supply response about two to three years after a shock. - Demand multipliers for most agricultural commodities do not become larger over time. - Metals and energy: - Supply elasticities for most metals and energy are upward sloping over time; copper shows a statistically significant upward slope. - Metals show the largest increases in demand multipliers over longer horizons. - Overall, agricultural goods tend to be more responsive to shocks initially than minerals and energy, and agricultural commodities show smaller increases in responsiveness after a couple of years, whereas mineral commodities become more responsive over time. ### Conclusions and Policy Implications - Main conclusions - Commodity demand and supply are generally price inelastic, with metals being particularly inelastic and agricultural perennial crops showing low short-term supply responsiveness. - Energy commodities’ elasticities lie between those for agricultural commodities and those for metals. - Supply and demand of mineral and energy commodities become more elastic over time. - Policy implications - Countries exposed to commodity markets with relatively low elasticities, especially metals, should build fiscal buffers and monetary policy space to prepare for the larger impact of possible shocks. *Source: IMF staff analysis in the Special Feature “Market Developments and the Power of Prices,” based on Bogmans and others (2024).* ### Section 2 ### Section 2 ### Elasticities, subsidies, and price volatility - Elasticities ultimately reflect adjustments made by final consumers and producers. - Replacing energy and agricultural subsidies with targeted transfers would help increase the demand and supply elasticities of many commodities and could reduce their price volatility. ### Role of international trade - International trade can play a prominent role in smoothing out commodity shocks and buffer against their economic impact (see Albrizio and others 2022, 2023; and Alvarez and others 2023). ### Geopolitical context and critical minerals - Trade smoothing will be even more relevant in the context of increasing geopolitical tensions and trade fragmentation as well as in the case of critical minerals for the energy transition. *Source: commodityspecialfeature - Section 2; https://www.imf.org/-/media/files/publications/weo/2024/april/english/commodityspecialfeature.pdf* --- _Source: https://www.imf.org/-/media/files/publications/weo/2024/april/english/commodityspecialfeature.pdf_