The free fall in industrial commodities is likely to continue in 2009 with the average raw material price index expected to decline 41 per cent this year, the latest forecast by Economist Intelligence Unit (EIU), said.
In 2010, however, the London-based research agency expects a limited rebound in the prices of most of the industrial raw materials. Although the global economy will remain weak, investors will become more optimistic about longer term prospects.
Commodity stocks will be low, partly because of cutbacks to production enacted in 2009. Furthermore, investment in raw materials industries will be at a low level, partly owing to lack of available financing in late 2008 and in 2009, creating some concerns about future supply and the risk of shortages once demand starts to grow more strongly, the report adds.
Industrial commodities, especially base metals began to weaken in the second quarter of 2008 in the wake of the financial crisis and its negative implications for global aggregate demand, but went into freefall in the second half of the year and particularly in the final quarter. The EIU report forecast base metals index to fall 47 per cent this year while fibres and rubber indices may slump 10 per cent and 44 per cent respectively.
The falling property markets and consumer demand in the OECD (Organisation for Economic Co-operation and Development) countries - with particularly negative consequences for the auto and consumer electronics sectors - have left base metal prices looking particularly vulnerable.
However, prices also suffered as financial investors fled the market, selling commodity investments in order to cover losses elsewhere. Average base metal prices are expected to witness a modest recovery of 12 per cent in 2010, assuming some nascent signs of recovery in demand and a continued low level of global stocks.
| ON THE PATH TO RECOVERY Price forecast summary (US$ index = 100, % change y-o-y) | ||||||
| Year | % change | |||||
| 2008 | 2009* | 2010* | 2008 | 2009* | 2010* | |
| WCF | 199.5 | 134.9 | 140.8 | 12.7 | -32.4 | 4.3 |
| IRM | 179.0 | 105.3 | 117.7 | -5.3 | -41.1 | 11.7 |
| Base Metals | 202.0 | 107.0 | 121.4 | -9.1 | -47.1 | 13.5 |
| Fibres | 97.2 | 87.6 | 95.0 | 2.3 | -9.9 | 8.5 |
| Rubber | 276.9 | 155.7 | 168.1 | 14.2 | -43.8 | 8.0 |
| Crude oil | 434.8 | 156.9 | 224.1 | 33.4 | -63.9 | 42.9 |
| *Forecast | ||||||
EIU report estimates crude oil prices to decline 64 per cent this year despite relatively low stocks. This offered little price support, as market participants priced in a contraction in demand in 2009 amid signs that many OECD countries would be in recession and emerging market growth was set to slow significantly.
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Crude oil prices in 2009 declined to an average of just $35 per barrel for brent ($37 per barrel for West Texas Intermediate (WTI), also known as Texas Light Sweet).
The industrial raw materials (IRM) index accounts for about 44 per cent of the EIU’s world commodity forecasts (WCF) index, the remainder being accounted for by soft commodities.
The prices of soft commodities are also expected to be weak in 2009 but they are not so closely linked to the business cycle and thus the WCF index is expected to fall by 32 per cent in 2009.
Demand for natural rubber will also fall as a result of the downturn in the global auto sector as well as the improvement in the price competitiveness of synthetic rubber (owing to lower international oil prices).