## Commodity Special Feature: Section 1

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### Commodity Market Developments
- Primary commodity prices increased between February and August 2024, driven by natural gas, precious metal, and beverage prices.
- Oil:
  - Oil traded in a range of $75 to $90 a barrel between February and August, averaging $83 a barrel.
  - Deep production cuts by OPEC+ totaled 5.86 million barrels per day (mb/d).
  - Non-OPEC+ strong output growth led by Canada, Guyana, and the United States.
  - Russian oil has been trading above the Group of Seven price cap for most of the past year—but at a $15–$20 discount to Brent.
  - Futures markets suggest prices will rise by 0.9 percent year over year to average $81.3 a barrel in 2024 and then fall to $67.0 in 2029.
  - Risks: upside from escalation in the Middle East or prolonged OPEC+ cuts; downside from weaker oil demand in China, the United States, Japan, and other advanced economies, and a rise in OPEC+ production to regain market share.
- Natural gas:
  - TTF (Europe) prices rose 26.4 percent between February and August to $10.2 a million British thermal units (MMBtu).
  - Asian liquefied natural gas prices increased by 49.8 percent.
  - US Henry Hub prices rose by 16.8 percent.
  - Futures: TTF prices to average $10.4/MMBtu in 2024, decreasing to $8.2/MMBtu in 2029; Henry Hub prices may rise from $2.3/MMBtu in 2024 to $3.6/MMBtu in 2029.
  - US export capacity is expected to almost double through 2027 (US Energy Information Administration).
- Metals:
  - IMF metals price index increased by 7.7 percent between February and August 2024.
  - Gold prices surged by 21.9 percent to record highs against the US dollar.
  - Iron ore prices fell by 19.9 percent.
  - Copper prices rose by 8.1 percent; aluminum rose by 7.8 percent; both reached a record nominal high in early July before retrenching starting in July.
- Agriculture:
  - IMF food and beverages price index decreased by 2.4 percent between February and August 2024.
  - Cereal prices declined by 14.3 percent; global grain production forecast to reach a record high over marketing year (MY) 2024–25.
  - Cocoa prices increased by 20.4 percent, peaking at a record high in April; International Cocoa Organization expects an 11 percent decline in global cocoa supply for MY 2023–24.
  - Coffee prices rose by 33.8 percent.
  - Rice prices declined by 7.5 percent.
  - Upside risks: further trade disruptions in the Black Sea and new food export restrictions. Downside risk: larger-than-expected harvests.

### Metals Matter: Economic Relevance and Risks
- Transition to metals:
  - Shift from fossil fuels to metals may render the global economy less oil intensive and more metals intensive.
  - IEA predicts copper demand may grow by a factor of more than 1.5, and oil consumption could decline by 25 percent by 2030 in a net zero emissions scenario.
- Geopolitical concentration and trade restrictions:
  - Metals production is more geographically concentrated than oil; most metals are not easily substitutable.
  - New trade restrictions, including on metals trade, have almost doubled since the start of the war in Ukraine.
  - Trade disruptions could lead to sharp price swings with growing economic impact as energy systems become more reliant on metals.

### Metals Embodied in Investment Goods and Production Networks
- Role in investment goods:
  - Metals like copper and aluminum represent only a small fraction of final consumption expenditure (example: 0.01 percent for metals vs. 2.6 percent for oil and coal products in the United States) but are critical direct intermediate inputs into production of investment goods.
  - Metals represent more than 10 percent of direct input expenditure in US sectors for electrical equipment and machinery.
- Indirect inputs and propagation:
  - Metals are indirect inputs via capital goods (machines used to produce final goods); production network model with flexible prices is used to capture indirect effects.
  - Once indirect components are considered, fabricated metals and machinery have 28 percent and 46 percent shares, respectively, for the United States.
- Contrast with oil:
  - Gas and petroleum products are chiefly used as fuel in transportation and utilities, producing a more immediate effect of oil price shocks on headline inflation.

### Cross-Country Exposure to Metals and Oil
- Exposure measures:
  - Production-side exposure uses value-added shares; consumption-side exposure uses final consumption expenditure shares to gauge CPI impact.
  - Consumption exposure indicates percent increase in CPI following a 10 percent negative supply shock that results in about a 15 percent increase in metals prices and a 16 percent increase in oil prices on average across countries.
- Key cross-country findings:
  - Heterogeneity in production exposure is starker than in consumption exposure.
  - Metals are more relevant than oil in production in 7 of the top 25 countries; but by consumption aggregation only 3 countries display larger exposure to metals than to oil.
  - Median CPI exposure is three times larger for oil than for metals.
  - Significant cross-country differences in metals exposure: median country metals exposure is 0.03; 90th percentile exposure is five times the 10th percentile.
  - Example: a 10 percent supply-driven increase in metals prices would generate a 0.36 percentage point increase in China’s CPI, compared with a 0.1 percentage point increase for the United States (network model).

### Impact of Metal Supply Shocks on Inflation (Empirical Results)
- Methodology:
  - Uses a small open economy production network model and local projections instrumental variables (LP-IV) methods.
  - Balanced panel of 39 countries from 1996 to 2019.
  - Instruments: copper supply shocks from Baumeister, Ohnsorge, and Verduzco-Bustos (2024) and oil supply shocks from Baumeister and Hamilton (2019).
- Short-run (12-month) effects:
  - A 10 percent increase in copper prices raises both headline and core inflation by about 0.2 percentage point within 12 months (panel average).
  - Oil price shocks show substantial effect on headline inflation, but not on core inflation.
  - Heterogeneity by network exposure:
    - High exposure countries: 10 percent increase in prices → headline (core) inflation increases by 0.5 (0.3) percentage point for copper and 0.7 (0.1) percentage point for oil.
    - Low exposure countries: 10 percent increase in prices → headline (core) inflation increases by 0.1 (0.2) percentage point for copper and 0.5 (0.1) percentage point for oil.
- Long-run (48-month) effects:
  - A 10 percent increase in copper prices leads to a cumulative 0.5 percentage point increase over 48 months in core inflation for countries with high network exposure to metals.
  - A 10 percent increase in oil prices does not cause any significant increase in core inflation over the long term.
- Interpretation:
  - Empirical results underscore delayed and persistent effects of metals prices on inflation through production networks’ long-lasting effects on marginal costs via the cost of capital.

### Conclusions and Policy Implications (extract)
- Primary metals play a major role as intermediate inputs for investment goods in production networks.

*Source: IMF World Economic Outlook: Policy Pivot, Rising Threats — Commodity Special Feature, Section 1.*

### Section 2

### Effects of metal versus oil supply shocks on inflation
- Metal supply shocks can have significant, persistent effects on both core and headline inflation.
- Oil supply shocks affect mostly headline inflation and are typically “looked through” by central banks, provided these shocks are not excessively large.
- As the energy system transitions away from fossil fuels, the traditional approach of looking through oil price shocks may not work well for major fluctuations in metals prices.

### Implications for monetary policy
- Monetary authorities may eventually need to react to metal supply shocks because these shocks have a more persistent effect on core inflation.
- Central banks must be prepared for a potentially more metals-intensive global economy in which metals price shocks could become increasingly more relevant.
- The impact of metals price shocks on inflation may initially appear subtle but could prove to be quite persistent.

### Persistence and comparative magnitudes
- The persistence of the copper and oil price shocks is roughly similar. However, copper price shocks have a stronger 48-month effect on copper prices than oil supply shocks have on oil prices.
- Copper represents 30 percent of the IMF’s trade-weighted base metals index; therefore, estimates are a lower bound in the case of a supply shock that increases base metals prices by 10 percent, as this effect is expected to be three times greater.
- Supply shocks to metals markets are more dispersed than those for oil markets because they typically do not hit each of the metals markets at the same time. This has so far made the magnitude of supply shocks for the aggregate primary metals sector smaller than that for the petroleum sector.

### Empirical evidence (impulse responses)
- The figure shows impulse responses to a 10 percent increase in the prices of copper (left side) and oil (right side) for countries with a high (90th percentile) and low (10th percentile) network exposure to metals and oil.
- Panels:
  - 1. 12 Months — shows 12-month responses.
  - 2. 48 Months — shows 48-month responses.
- “High” and “Low” indicate the 90th and 10th percentiles of network exposure to metals (for copper shock) and oil (for oil shock).
- Blue and red squares are the response for headline consumer price index (CPI) and core CPI. Whiskers indicate the 90 percent confidence intervals.

*Sources: Baumeister and Hamilton 2019; Baumeister, Ohnsorge, and Verduzco-Bustos 2024; and IMF staff calculations.*

### Section 1

### Commodity Special Feature: Section 1

### Commodity Market Developments
- Primary commodity prices increased between February and August 2024, driven by natural gas, precious metal, and beverage prices.
- Oil:
  - Oil traded in a range of $75 to $90 a barrel between February and August, averaging $83 a barrel.
  - Deep production cuts by OPEC+ totaled 5.86 million barrels per day (mb/d).
  - Non-OPEC+ strong output growth led by Canada, Guyana, and the United States.
  - Russian oil has been trading above the Group of Seven price cap for most of the past year—but at a $15–$20 discount to Brent.
  - Futures markets suggest prices will rise by 0.9 percent year over year to average $81.3 a barrel in 2024 and then fall to $67.0 in 2029.
  - Risks: upside from escalation in the Middle East or prolonged OPEC+ cuts; downside from weaker oil demand in China, the United States, Japan, and other advanced economies, and a rise in OPEC+ production to regain market share.
- Natural gas:
  - TTF (Europe) prices rose 26.4 percent between February and August to $10.2 a million British thermal units (MMBtu).
  - Asian liquefied natural gas prices increased by 49.8 percent.
  - US Henry Hub prices rose by 16.8 percent.
  - Futures: TTF prices to average $10.4/MMBtu in 2024, decreasing to $8.2/MMBtu in 2029; Henry Hub prices may rise from $2.3/MMBtu in 2024 to $3.6/MMBtu in 2029.
  - US export capacity is expected to almost double through 2027 (US Energy Information Administration).
- Metals:
  - IMF metals price index increased by 7.7 percent between February and August 2024.
  - Gold prices surged by 21.9 percent to record highs against the US dollar.
  - Iron ore prices fell by 19.9 percent.
  - Copper prices rose by 8.1 percent; aluminum rose by 7.8 percent; both reached a record nominal high in early July before retrenching starting in July.
- Agriculture:
  - IMF food and beverages price index decreased by 2.4 percent between February and August 2024.
  - Cereal prices declined by 14.3 percent; global grain production forecast to reach a record high over marketing year (MY) 2024–25.
  - Cocoa prices increased by 20.4 percent, peaking at a record high in April; International Cocoa Organization expects an 11 percent decline in global cocoa supply for MY 2023–24.
  - Coffee prices rose by 33.8 percent.
  - Rice prices declined by 7.5 percent.
  - Upside risks: further trade disruptions in the Black Sea and new food export restrictions. Downside risk: larger-than-expected harvests.

### Metals Matter: Economic Relevance and Risks
- Transition to metals:
  - Shift from fossil fuels to metals may render the global economy less oil intensive and more metals intensive.
  - IEA predicts copper demand may grow by a factor of more than 1.5, and oil consumption could decline by 25 percent by 2030 in a net zero emissions scenario.
- Geopolitical concentration and trade restrictions:
  - Metals production is more geographically concentrated than oil; most metals are not easily substitutable.
  - New trade restrictions, including on metals trade, have almost doubled since the start of the war in Ukraine.
  - Trade disruptions could lead to sharp price swings with growing economic impact as energy systems become more reliant on metals.

### Metals Embodied in Investment Goods and Production Networks
- Role in investment goods:
  - Metals like copper and aluminum represent only a small fraction of final consumption expenditure (example: 0.01 percent for metals vs. 2.6 percent for oil and coal products in the United States) but are critical direct intermediate inputs into production of investment goods.
  - Metals represent more than 10 percent of direct input expenditure in US sectors for electrical equipment and machinery.
- Indirect inputs and propagation:
  - Metals are indirect inputs via capital goods (machines used to produce final goods); production network model with flexible prices is used to capture indirect effects.
  - Once indirect components are considered, fabricated metals and machinery have 28 percent and 46 percent shares, respectively, for the United States.
- Contrast with oil:
  - Gas and petroleum products are chiefly used as fuel in transportation and utilities, producing a more immediate effect of oil price shocks on headline inflation.

### Cross-Country Exposure to Metals and Oil
- Exposure measures:
  - Production-side exposure uses value-added shares; consumption-side exposure uses final consumption expenditure shares to gauge CPI impact.
  - Consumption exposure indicates percent increase in CPI following a 10 percent negative supply shock that results in about a 15 percent increase in metals prices and a 16 percent increase in oil prices on average across countries.
- Key cross-country findings:
  - Heterogeneity in production exposure is starker than in consumption exposure.
  - Metals are more relevant than oil in production in 7 of the top 25 countries; but by consumption aggregation only 3 countries display larger exposure to metals than to oil.
  - Median CPI exposure is three times larger for oil than for metals.
  - Significant cross-country differences in metals exposure: median country metals exposure is 0.03; 90th percentile exposure is five times the 10th percentile.
  - Example: a 10 percent supply-driven increase in metals prices would generate a 0.36 percentage point increase in China’s CPI, compared with a 0.1 percentage point increase for the United States (network model).

### Impact of Metal Supply Shocks on Inflation (Empirical Results)
- Methodology:
  - Uses a small open economy production network model and local projections instrumental variables (LP-IV) methods.
  - Balanced panel of 39 countries from 1996 to 2019.
  - Instruments: copper supply shocks from Baumeister, Ohnsorge, and Verduzco-Bustos (2024) and oil supply shocks from Baumeister and Hamilton (2019).
- Short-run (12-month) effects:
  - A 10 percent increase in copper prices raises both headline and core inflation by about 0.2 percentage point within 12 months (panel average).
  - Oil price shocks show substantial effect on headline inflation, but not on core inflation.
  - Heterogeneity by network exposure:
    - High exposure countries: 10 percent increase in prices → headline (core) inflation increases by 0.5 (0.3) percentage point for copper and 0.7 (0.1) percentage point for oil.
    - Low exposure countries: 10 percent increase in prices → headline (core) inflation increases by 0.1 (0.2) percentage point for copper and 0.5 (0.1) percentage point for oil.
- Long-run (48-month) effects:
  - A 10 percent increase in copper prices leads to a cumulative 0.5 percentage point increase over 48 months in core inflation for countries with high network exposure to metals.
  - A 10 percent increase in oil prices does not cause any significant increase in core inflation over the long term.
- Interpretation:
  - Empirical results underscore delayed and persistent effects of metals prices on inflation through production networks’ long-lasting effects on marginal costs via the cost of capital.

### Conclusions and Policy Implications (extract)
- Primary metals play a major role as intermediate inputs for investment goods in production networks.

*Source: IMF World Economic Outlook: Policy Pivot, Rising Threats — Commodity Special Feature, Section 1.*

### Section 2

### Section 2

### Effects of metal versus oil supply shocks on inflation
- Metal supply shocks can have significant, persistent effects on both core and headline inflation.
- Oil supply shocks affect mostly headline inflation and are typically “looked through” by central banks, provided these shocks are not excessively large.
- As the energy system transitions away from fossil fuels, the traditional approach of looking through oil price shocks may not work well for major fluctuations in metals prices.

### Implications for monetary policy
- Monetary authorities may eventually need to react to metal supply shocks because these shocks have a more persistent effect on core inflation.
- Central banks must be prepared for a potentially more metals-intensive global economy in which metals price shocks could become increasingly more relevant.
- The impact of metals price shocks on inflation may initially appear subtle but could prove to be quite persistent.

### Persistence and comparative magnitudes
- The persistence of the copper and oil price shocks is roughly similar. However, copper price shocks have a stronger 48-month effect on copper prices than oil supply shocks have on oil prices.
- Copper represents 30 percent of the IMF’s trade-weighted base metals index; therefore, estimates are a lower bound in the case of a supply shock that increases base metals prices by 10 percent, as this effect is expected to be three times greater.
- Supply shocks to metals markets are more dispersed than those for oil markets because they typically do not hit each of the metals markets at the same time. This has so far made the magnitude of supply shocks for the aggregate primary metals sector smaller than that for the petroleum sector.

### Empirical evidence (impulse responses)
- The figure shows impulse responses to a 10 percent increase in the prices of copper (left side) and oil (right side) for countries with a high (90th percentile) and low (10th percentile) network exposure to metals and oil.
- Panels:
  - 1. 12 Months — shows 12-month responses.
  - 2. 48 Months — shows 48-month responses.
- “High” and “Low” indicate the 90th and 10th percentiles of network exposure to metals (for copper shock) and oil (for oil shock).
- Blue and red squares are the response for headline consumer price index (CPI) and core CPI. Whiskers indicate the 90 percent confidence intervals.

*Sources: Baumeister and Hamilton 2019; Baumeister, Ohnsorge, and Verduzco-Bustos 2024; and IMF staff calculations.*

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_Source: https://www.imf.org/-/media/files/publications/weo/2024/october/english/commodityspecialfeature.pdf_