Commodity Prices Buoyant in Year of Crisis

• Prices have jumped up, despite high stocks because of weak demand in a recession

• The price impulses affect the realization that the hardest world recession behind
• Increasing demand requires additional capacity in many commodity sectors

Commodity prices have managed to stay afloat in 2009, and expected further growth in 2010 due to growth in global activity since the crisis.

In early 2009, a sharp decline in prices last year, it seemed, usually heralds the misery for commodity markets during and after the global recession. In the end, however, prices have jumped in a relatively short time and has had a tremendous rally in the second quarter of 2009, after weakening in demand during a global recession, 2008-2009, despite the relatively high stocks (see Figure 1).

This rally in commodity markets at an early stage of recovery in world industrial production (and in anticipation of global economic growth) in contrast to past experience. After the last global recession prices generally continued to fall or grow very moderate pace, much weaker than this year.

IMF price index for commodities, for example, rose more than 40% for 8 months from the date when the world's industrial output reached a bottom in February 2009. In contrast to these data, after earlier recessions, these figures have grown an average of 5% for 8 months after reaching the bottom (see Figure 2). Nevertheless, commodity prices also fell more rapidly and with greater magnitude in the second half of 2008 than during previous downturns.

What can explain the early rally in commodity prices? As the prices of risky assets in general, the initial impetus was the assumption that the worst global recession is completed and that through a comprehensive social intervention could reduce the uncertainty and systemic risks in the financial sector. Against this background, the expected improvement in the short term commodity markets will be because of the growing desire to retain the stock.

Commodity Funds
At the same time, improving financial conditions that increase the availability of credit to finance purchases at more reasonable prices with an increase in capital inflows into commodity funds, probably contributed to hedge stocks. Additional growing demand for stocks and some stabilization in building inventory for the requirements of end-user has reached the lower limit, allowing you to reduce excess supply (current supply current minus final consumption). Downward pressure on spot prices, in turn, also weakened.

Then in 2009, additional impulses came from the floating recovery in developing Asia, and throughout the year, stronger than expected global activity as a whole. Growing evidence of a relatively favorable economic performance of many emerging and developing economies have had a strong influence on the price of commodities, as well as the prospects for demand for primary commodities are more dependent on economic growth in these countries, given the steady increase in their share of the market. (see table). In addition, demand for commodities in these countries, more confident than in developed economies.

Within these overall trends, the magnitude of price increases in 2009 varied considerably across commodities. Prices for fuels and metals rose much more than the price of food and agricultural raw materials. Spread in the price changes caused by normal differences in cyclical sensitivity of demand for goods, as well as in specific commodity factors.

In particular, the oil markets, prices were supported not only the expectations of recovery, but also a reduction in oil supply countries ekspoterami, while metals prices were supported by popoleniyu stocks in China, as well as some limitations of supply. In contrast, the yield favorable results led to a weakening of prices for some major food crops in 2009.

Prospects for 2010
Looking forward to 2010, prices for many commodities, and probably will continue to increase. The demand side should be the main source of upward pressure, as the global activity is expected to grow faster. From inventory, remaining above the average for many products, and considerable unnecessary spare capacity in many product sectors, upward pressure is likely to remain moderate for some time, until a stronger-than-expected global growth, or other surprises do not lead to a sharp decline in these buffers.

Prospects for commodity prices are also dependent on global macroeconomic conditions in the broader sense, including the dynamics of prices in international markets for goods and services in general.

Information about the expected future spot prices, obtained from the major commodity futures options, indicate that investors expect higher prices in 2010, but the likelihood of another sharp jump in commodity prices in the short term seems unlikely.

Expected continued high prices
Looking at the future value of commodities in the longer term, it is expected that the prices by historical standards will remain high. Implications of the crisis have contributed to lower prices below their peak in 2008, but demand is expected to continue a gradual increase in temperature due to the industrialization of emerging and developing economies. Given these requirements, will require further expansion of capacity in many commodity sectors with the need to absorb the higher cost sources.

IMF