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IMF predicts further rise in commodity prices

Babajide Komolafe
International Monetary Fund (IMF) has predicted  further increase in the prices of commodities in 2010. “Commodity prices were surprisingly buoyant in 2009, and are expected to increase further in 2010 as world activity expands after the global crisis”, said Thomas Helbling of the Fund’s research department.

This implies increased revenues and more prospect for economic growth for Nigeria and other African countries that depend of commodity export for most of their  foreign exchange earnings.

“At the outset of 2009, the sharp declines in prices of the previous year seemed to foretell the usual misery for commodity markets during and after a global downturn. In the end, however, prices rebounded relatively soon and staged a strong rally from the second quarter of 2009—despite generally high inventories after the weakening of demand in the global recession of 2008-09”, he said in the IMF Survey Margazine.

“This commodity price rally at the early stage of the recovery in global industrial production (and ahead of global economic growth) contrasts with past experience. After previous global industrial downturns, prices typically continued to fall or rose at very modest rates, far below the increases recorded this year.

The IMF’s commodity price index, for example, rose by over 40 percent in the eight  months since global industrial production reached a trough in February 2009. In contrast, after earlier downturns, it rose by only five percent on average over the eight months after a trough . However, commodity prices also fell faster and by larger magnitudes in the second half of 2008 than in previous recessions.
What explains the early rally in commodity prices?

As for prices of risky assets more generally, the initial impetus came from the perception that the worst of the global recession was over and that the wide-ranging public intervention had succeeded in lowering uncertainty and systemic risks in the financial sector. Against this backdrop of an expected improvement in near-term outlook, commodity markets benefited from the increased incentives to hold inventories.

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

Looking ahead into 2010, prices of many commodities are likely to increase further. The demand side should generally be the main source of upward pressure, as global activity is widely expected to expand at a faster pace.

With inventories remaining above average for many commodities and substantial spare capacity in many commodity sectors, the upward pressure is likely to remain moderate for some time, unless much stronger-than-expected global growth or other surprises lead to a rapid drawdown of these buffers.

Commodity price prospects also depend on global macroeconomic conditions more broadly, including price developments for internationally traded goods and services more generally. Information about expected future spot prices derived from key commodity futures options confirms that investors anticipate higher prices in 2010, but the probability of anothe commodity price spike wouldseem remote over the near term.Looking at commodity price prospects from a longer-term perspective highlights how prices are expected to remain high by historical standards.

The effects of the crisis have been to reduce 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, withsome need to tap higher-costsources.


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