The International Monetary Fund (IMF) has forecast higher commodity prices in the wake of revival in global demand, led by emerging markets. This is true for metals, crude oil and agri commodities. In all three segments, prices are expected to gradually move up.
Crude oil prices, according to the IMF’s World Economic Outlook report, released last week, would depend on producers’ readiness to tap their spare capacity amidst increasing demand as economic recovery expands.
Commodity prices, especially resource commodities, have been on an upswing. In the current calendar year, iron ore and nickel prices are up over 40 per cent, coal 10 per cent and steel 22-26 per cent. Crude oil and petrochemicals are also up about 10 per cent since January. Within the emerging markets, China’s imports of commodities continues to be high.
“In March this year, China’s imports of copper, oil and coal hit their second highest levels ever. The level of platinum imports beat its previous all-time high by a considerable margin. There has also been healthy rebound in imports of agricultural commodities like soybean and cotton in China,” according to Barclays.
| GAINING MOMENTUM | |||
| Commodity | 4-Jan-10 | 23-Apr-10 | % chg |
| Nickel | 18855.00 | 26800.00 | 42.14 |
| Iron Ore-China | 135.00 | 189.50 | 40.37 |
| Steel HR Coil | 549.00 | 696.00 | 26.78 |
| Steel CR Coil | 661.00 | 809.00 | 22.39 |
| Coal fob-South Africa | 84.45 | 93.50 | 10.72 |
| London Silver ($/ounce) | 16.89 | 18.33 | 8.53 |
| Brent crude ($/bbl) | 80.30 | 86.18 | 7.32 |
| London Gold ($/ounce) | 1097.32 | 1157.60 | 5.49 |
| Copper | 7464.00 | 7660.00 | 2.63 |
| Aluminium | 2225.50 | 2265.50 | 1.80 |
| Lead | 2451.50 | 2253.50 | -8.08 |
| Zinc | 2575.00 | 2355.50 | -8.52 |
| Source: Bloomberg ($/tonne) | |||
The IMF report said apart from the demand for commodities from emerging nations, investment inflows into commodity-related assets rose sharply during 2009, reflecting the continued relative attractiveness of this asset class. “According to estimates by market participants, commodity-related assets under management reached $257 billion at the end of 2009, only slightly below their all-time peak in 2008,” said the report.
“Upward price pressures from a further strengthening of demand will continue as global growth accelerates,” said the report. “Such pressures, however, will likely be moderated by high spare capacity and supply responses to the price rebound.”
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Data from the US commodity futures regulator, the Commodities Futures Trading Commission (CFTC), also suggest that investors and hedgers anticipate future price increases to be gradual and see little probability of another commodity price spike.
Some upside price risks remain, particularly if the global recovery continues to be more buoyant than expected. Other risk factors include heightened geopolitical tensions, major supply disruptions, abrupt increases in desired inventory stocks and an unexpected depreciation of the US dollar.
Over the medium term, commodity prices are projected to remain high by historical standards. “Growing commodities prices reflect the strength in economies and growth. The good thing in such a scenario is that as long as there is demand from high-growth economies, companies will be able to pass on the incremental cost due to raw material price hikes to user industry and consumers. Some inflation would be a given as a cost of growth,” said Kalpana Jain, Senior Director, Deloitte Touche Tohmatsu India Private Ltd.
Barclays Capital said in its report that most countries’ policy makers see ‘growing signs of companies passing on higher commodity prices to ultimate consumers’. This shows confidence to pass on the increase and some inflation seems tolerable.
Going by this thinking, Barclays said, “We do not expect major shifts in language from the Fed and ECB (meaning no further tightening) at their forthcoming meetings, but monetary authorities in Asia and South America are likely to continue tightening gradually.” It concludes that the rising business confidence across regions and synchronised economic recovery would keep commodity prices stronger.
According to the IMF, ‘with global demand growth in agriculture commodities likely to remain high, this suggests that food commodity markets may remain relatively tight and that, in the absence of continued unanticipated increases in supply, the risk to real food prices remains tilted toward the upside’.
The moderating factor in emerging market demand will be tightening of monetary policy by the respective central banks.