IMF Survey: Commodity Prices Buoyant in Year of Crisis, Recovery

IMF News, December 30, 2009

Source details

Canonical URL: IMF Survey: Commodity Prices Buoyant in Year of Crisis, Recovery

Commodity prices were surprisingly buoyant in 2009, and are expected to increase further in 2010 as world activity expands after the global crisis.
Prices rebounded despite high inventories from weak demand during recession.
Price impetus came from perception that worst of global recession was over.
Rising demand will require extra capacity in many commodity sectors, with some need to tap higher-cost sources.

The IMF’s commodity price index rose by over 40 percent in the 8 months since global industrial production reached a trough in February 2009.
By contrast, after earlier downturns, the index rose by only 5 percent on average over the 8 months after a trough.
Commodity prices also fell faster and by larger magnitudes in the second half of 2008 than in previous recessions.
Initial impetus:
- Perception that the worst of the global recession was over.
- Wide-ranging public intervention succeeded in lowering uncertainty and systemic risks in the financial sector.
- Increased incentives to hold inventories under an expected improvement in the near-term outlook.

Improving financial conditions provided increased credit availability for inventory financing at more normal costs.
Rising inflows into commodity funds likely facilitated hedging of inventory positions.
The additional forward-looking demand for inventories, and some stabilization in stock buildups as end-user demand bottomed out, allowed easier absorption of continued excess supply (current supply minus current end-user consumption).
Downward pressure on spot prices eased as a result.

Further into 2009, buoyant recovery in emerging Asia and stronger-than-expected global activity provided additional impetus to prices.
Growing evidence of relatively favorable economic performance in many emerging and developing economies had a strong impact on commodity prices, given the steady rise in their market shares.
Commodity demand in emerging and developing economies is more income elastic than in advanced economies.

Fuel and metals prices rose by much more than prices of food or agricultural raw materials.
Commodity-specific factors:
- Oil: supported by recovery expectations and Organization of Petroleum Exporting Countries supply cuts.
- Metals: buoyed by restocking in China and some supply restraint.
- Food crops: favorable harvest outcomes led to weakening of prices of some major food crops in the second half of 2009.

Prices of many commodities are likely to increase further in 2010.
Main upward pressure: demand-side as global activity is widely expected to expand at a faster pace.
Inventories and spare capacity:
- Inventories remain above average for many commodities.
- Substantial spare capacity in many commodity sectors is likely to keep upward pressure moderate for some time, unless much stronger-than-expected global growth or other surprises lead to a rapid drawdown of these buffers.
Information from key commodity futures options confirms that investors anticipate higher prices in 2010, but the probability of another commodity price spike would seem remote over the near term.

Prices are expected to remain high by historical standards.
The crisis reduced prices somewhat below their 2008 peaks, but demand is expected to continue rising at a solid pace as industrialization continues in emerging and developing economies.
Accommodating this demand will eventually require further capacity expansion in many commodity sectors, with some need to tap higher-cost sources.

Source: IMF Survey: Commodity Prices Buoyant in Year of Crisis, Recovery (December 30, 2009) — IMF Research Department, Thomas Helbling