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Asian Development Outlook 2005 : I. Developing Asia and the world : Overview of economic highlights and prospects
World trade and commodity pricesWorld trade, as measured by world export volume, grew by an estimated 10.2% in 2004, nearly double the 5.5% rate in the previous year. However, the rapid pace of world trade expansion during the first half of 2004 has eased, as a synchronized global economic recovery largely fell apart in the second half. Strong export growth in major industrial countries all but ground to a halt in the third quarter of 2004, as Japan and some of the large euro zone economies slumped amid rising oil prices. Although relatively resilient US demand and robust industrial production in the PRC continue to provide some support to trade dynamics, several factors--including a moderating world economic expansion, slowing global demand for high-tech equipment, and sustained high oil prices--suggest that world trade will slow to 7.4% in 2005. Growth in world trade is likely to settle at about 6% over the medium term, reflecting a slowdown in world economic growth. In the midst of rising economic uncertainty, a cyclical downturn in global high-tech industries has started to weigh on the export performance of many East Asian economies, which are leading producers of high-tech and electronic items. The year-on-year growth rate of worldwide semiconductor sales peaked at 40.5% in June 2004, weakening to 14.6% by year-end. After soaring in the first half, memory chip prices have fallen, as a result of softening demand and improved production capacity following tight supply conditions during the upswing in high-tech industries in the latter half of 2003 and the first half of 2004. Despite the slowing pace of sales into 2005, there are signs that the current slowdown will be relatively mild and short lived. First, inventory buildup during the latest expansion period has been limited by enhanced corporate discipline. Indeed, producers have been quick to trim excess capacity, bringing down capacity utilization rates to 86.0% in the fourth quarter from a peak of 95.4% in the second, according to the Semiconductor Industry Association. Second, a decline in new orders and shipments of semiconductors have been stabilizing since the beginning of 2005 on the back of relatively resilient business capital spending around the world, even as the growth outlook for the world economy has eased. Third, the average price of semiconductors has stabilized since the fourth quarter of 2004, reflecting a relatively benign sales outlook for 2005. In this context, global production and sales of semiconductors will grow modestly in 2005 after 2004's hefty growth, followed by a cyclical upturn as early as 2006. Oil prices surged and remained high at above $40 per barrel for most of the second part of 2004. The price of benchmark Brent crude averaged $38.3 per barrel for 2004, significantly higher than $28.8 in 2003. With tight market conditions and geopolitical uncertainties, any event that could potentially disrupt oil supplies--such as financial troubles at Yukos (a large Russian oil producer); production delays in the Gulf of Mexico due to a hurricane; an oil rig workers' strike in Norway; and ongoing political unrest in Iraq, Nigeria, and Venezuela--unsettled the market. Last October, the price surged and stayed above $50 per barrel for much of that month. Oil market fundamentals have not improved significantly in the early months of 2005, as strong demand and geopolitical uncertainties continue. According to the February estimate by the International Energy Agency (IEA), global oil demand is 84.0 million barrels per day (mb/d) for 2005, or an increase of 1.5 mb/d from 82.5 mb/d in 2004. Strong demand is expected to continue in the US, the PRC, and the rest of developing Asia, while Japan and the euro zone should see a moderation in oil demand in 2005. Spare capacity of the Organization of the Petroleum Exporting Countries (OPEC) members (excluding Iraq, Nigeria, Venezuela, and Indonesia) remains low, according to the IEA. The growth of non-OPEC supplies, including those from the North Sea, the Gulf of Mexico, and the Russian Federation, is expected to be limited after a number of disruptions in 2004. Against this background, global oil prices are projected to stay high, with Brent crude averaging $41 per barrel for 2005. Strong demand from developing Asia, especially the PRC, will likely remain supportive of the high oil prices over the forecast period, with the projected prices averaging $39 in 2006 and $37 in 2007. 
Prices of nonenergy commodities were up by 10.0% in December 2004 compared with 12 months earlier, following an increase of 12.7% during 2003 (Figure 1.7). The price rally since 2002 stretched into the first half of 2004 on strong food and raw material prices. Prices of agricultural food commodities have generally come down since then, following good harvests of grains including maize, rice, and wheat. After the run-up in 2003 due to drought in major producing countries, prices of fats and oils fell by 17.7% in 2004 on strong production of soybeans. Meanwhile, the prices of beverages are picking up. Coffee prices soared in the last quarter of 2004 on expectations of lower production in Brazil for 2005, while political instability in Côte d'Ivoire, the world's largest producer of cocoa, is keeping the cocoa price up. Nevertheless, reflecting relatively benign supply conditions, the prices of agricultural food and beverage products will further stabilize closer to their long-term trend in 2005, declining by 1.0-1.5%. Meanwhile, agricultural raw materials such as rubber and timber sustained strong gains during 2004, reflecting robust industrial demand. Rubber prices (Singapore) rose by 20.4% in December 2004 from the previous year, and timber prices by 9.5%. Cotton prices also appear to be strengthening in early 2005, after hitting a 2.5 year low in December 2004. Prices of metals and minerals continue to rally, increasing by 24.6% in 2004 on the back of strong demand (particularly from the PRC), low inventories, and ongoing weakness in the dollar. Steel production in the PRC, one of the world's largest producers, remains robust (despite the earlier concerns over a hard landing in the sector). Continued strong demand contributed to the largest gains in steel prices among metals. Prices of other metals such as copper, lead, and tin also rose significantly, albeit at a slower pace in the second half of 2004 than in the first. A healthy growth outlook for the PRC in 2005 is positive for the prices of raw materials, particularly metals and minerals. The prices of agricultural raw materials will likely remain strong, although increasing at a much more subdued rate of 1.0-2.0% in 2005, as they will benefit from resilient industrial production in the US and developing Asia. On the grounds of continued--albeit moderate--demand from the PRC, the prices of metals and minerals are also projected to grow at a more modest rate, likely in the range of 4.0-6.0% in 2005. Over the medium term, decelerating world economic growth, including a moderation in the PRC's expansion, suggests further stabilization of prices of nonenergy commodities.
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