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p. 28 of 36 BACK | NEXT Foreword 1. Developing Asia and the world II. Economic trends and prospects in developing Asia III. Developing Asia's imprint on global commodity markets Introduction Commodity price drivers Commodity prices: Short and long views Developing Asia’s imprint on global commodity markets The outlook for commodity demand, trade, and prices to 2015 Conclusions Appendix Statistical notes and tables ADO forecasting performance for GDP growth and inflation

Asian Development Outlook 2006 Update : III. Developing Asia's imprint on global commodity markets

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Introduction

Since 2001, primary commodity prices have surged. In nominal terms, the International Monetary Fund overall index has more than doubled, driven by strong energy and base metal prices. Energy prices rose by about 20.5% on average each year during 2001–2005, on significant increases in oil and natural gas. In the same period, base metal prices accelerated, helping push up prices of nonenergy commodities by 9.2% annually. Although base metal prices have eased from their May 2006 peak, the broad picture for primary commodities remains intact. Soaring prices can be traced, on the one hand, to robust global demand and, on the other, to restraints on supply stemming largely from chronic underinvestment in earlier years, particularly in energy and metal sectors. But other factors have also played an important role.

As developing Asia’s weight in the global economy has become larger, its leverage on global commodity price dynamics has increased. Although the region is still small compared with the United States or European Union in terms of overall economic mass, it is rapid growth that implies a disproportionate impact on short- and medium-term movements in global demand. For example, the global commodity price upswing in the early 1990s and the subsequent fall in commodity prices in the late 1990s correlate with rapid growth in developing Asia in the first half of the 1990s, which was then punctured in 1997 by Asia’s financial crisis. Again, starting in 2001, rising global commodity prices have been linked to a period of strong expansion in developing Asia.

Allied to rapid growth are deep structural changes that stimulate developing Asia’s appetite for commodities. Industrialization and urbanization tend to intensify resource demands, although improvements in productivity and efficiency in end use also occur. In the same vein, rising affluence increases the demand for goods that place large indirect demands on resources. For example, dietary habits tend to switch from grains toward higher protein foods and growing automobile ownership entails not just additional demand for petroleum but also for base metals, plastics, and rubber, which are used as intermediate inputs in the production of cars. These trends are set to accelerate as income levels, led by the People’s Republic of China (PRC) and then India, reach thresholds that put within reach of hundreds of millions of consumers what were once considered “luxury” goods.

The analysis presented in this part of ADO 2006 Update suggests that over the long term, developing Asia is likely to drive up the real prices of many commodities in global markets. For some commodities, this could mark a reversal of historical price trends. But the factors now pushing up prices cannot adequately account for the boom in global commodity prices that began in late 2001, and that is yet to come to a definitive halt (let alone reverse). As the short-term factors that have driven prices up and above trend dissipate, it is possible that by 2015 many commodity prices may be cheaper in real terms than they are now. Nevertheless, they will still be significantly above the levels seen at the beginning of the millennium, and may well continue to drift up well beyond 2015.

In the next section, Commodity price drivers, the broad factors that influence commodity price dynamics are set out. Evidence is presented that supports the view that developing Asia has come to play an increasingly important role in influencing commodity price movements. Following this, Commodity prices: Short and long views explains the factors responsible for the recent boom in commodity prices, and places them in context of price movements over the past quarter century. Evidence is presented that is consistent with the view that rising oil prices themselves have helped hike up the price of other commodities. Also, factors such as short-run constraints on supply, political uncertainty, and easy global liquidity may, in addition to global growth, have been important in driving global commodity prices higher since 2001.

Subsequently, Developing Asia’s imprint on global commodity markets looks ahead at the possible influence of continuing fast growth in developing Asia on longer-term price trends, on commodity demand, and on trade. A model-based analysis helps quantify the influence of developing Asia on global commodity demands. Simulations suggest an important role for policy in influencing outcomes.

A concluding section takes up some policy issues that warrant careful consideration. The agenda is long and difficult, and priorities will differ across countries. Some of the challenges that are linked to developing Asia’s hunger for commodities include raising agricultural productivity and ensuring better alignment between environmental and economic interests. Commodities are also an arena in which rivalry and security issues are never far away. Indeed, energy security issues are often tightly bound to national security concerns.

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