Riding a Wave
| Author | Thomas Helbling, Valerie Mercer-Blackman, and Kevin Cheng |
| Position | Advisor/Senior Economist/Economist in the IMF's Research Department |
| Pages | 10-15 |
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COMMODITY markets have been booming. Prices of many commodities-especially those of oil, nickel, tin, corn, and wheat- have reached record highs in recent months despite credit market turbulence and slowing activity in many major advanced economies (see Chart 1). the current boom has also been more broad based and longer lasting than is usual, and it contrasts noticeably with the 1980s and 1990s, when most commodity prices were on a downward trend. that said, despite the apparent reversal of the downward trend, inflation-adjusted prices of many commodities are still well below the levels seen in the 1960s and 1970s.
The price boom has brought a sea change to the commodities landscape. Commodity-exporting countries have benefited from rapidly growing export revenue. In fact, a number of analysts see high commodity prices as an important reason for the buoyant growth in many emerging and developing economies. At the same time, investment in the commodities sector has accelerated after a long period of lackluster performance. And, in financial markets, commodities are now an established part of the wider class of alternative assets. At the same time, commodity importers and consumers have begun to feel the pinch from higher commodity prices, with widespread concern about the impact on the poor in emerging and developing economies.
Although buoyant global growth in recent years is only one of the reasons for high prices, forecasts of slower global activity in 2008-09 have prompted concerns about prospects for commodity markets. Against this backdrop, the IMF recently undertook a study to better understand what is behind the commodities boom and its likely macroeconomic impact around the globe. It found that the current commodities boom reflects many cyclical and structural factors. It also found that, although the impact of this largely demand-driven boom on the global economy has been limited so far, higher commodity prices have begun to pose inflation risks and may lead to external financing challenges for some countries, particularly low-income net commodity importers.
Why are commodity prices so high? Besides commodity-specific factors-such as geopolitical risks, weather conditions, and crop infestations-the current price boom is driven by demand and supply forces that reinforce each other amid supportive financial conditions.
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First, emerging economies have driven demand for various commodities-a trend that is likely to continue. Annual increases in the global consumption of major commodity groups during 2001-07 were larger than they had been during the 1980s and 1990s (see Chart 2). And although buoyant global growth was a key contributor, it was reinforced by a combination of strong per capita income growth, rapid industrialization, higher commodity intensity of growth, and rapid population growth in some major emerging economies (notably China, India, and in the Middle East). All of these factors have contributed to the rapid pace at which demand has grown in recent years.
In the oil market, demand from China, India, and the Middle East accounted for more than 56 percent of the growth in oil consumption during 2001-07. this growth was driven partly by the increasing vehicle ownership associated with higher per capita incomes. Passenger car sales in China, for example, increased more than fivefold during 2001-07 (see "Picture this" in this issue). At the same time, industrialization and urbanization in emerging markets, particularly in China, have boosted demand for fuel-based electricity. As a result, prices of other fuels-particularly coal, which is crucial for power generation-have also rapidly gone up in recent months.
In some instances, soaring fuel demand in certain emerging economies has also reflected policy factors, particularly domestic end-user prices that are delinked from world market prices and thus increasingly subsidized, especially in oil-exporting economies. And the International Energy Agency has projected that oil consumption growth in emerging and developing economies would continue to outstrip such growth in advanced economies-increasing by about 3!/2 percent a year during 2007-12, compared with the latter's 1 percent.
Chart 1. Record prices
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Emerging economies are also playing a key role in the boom in nonfuel commodity markets. In particular, China's industrialization and urbanization have galvanized consumption of base metals. During 2000-06, for example, China alone accounted for about 90 percent of the increase in the world consumption of copper, which is indispensable for construction. Also, as emerging economies become more affluent, they are not only consuming more food but shifting their Page 12 diet toward high-protein foods such as meat, seafood, edible oils, and fruits and vegetables. In 2006, China accounted for one-fifth of global consumption of wheat, corn, rice, and soybeans. In fact, China is now the world's largest importer of soybeans in the world, consuming about 40 percent of the world's soybean exports.
Second, biofuels have boosted the demand for specific food...
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