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p. 31 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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Developing Asia’s imprint on global commodity markets

Growth, structural change, and commodity demand

Developing Asia is likely to make an even larger imprint on world commodity markets as it continues to grow. As people move off farms and into cities and factories, commodity demand will ramp up. Modernizing and extending developing Asia’s infrastructure will also make heavy demands on commodities.

There are different ways to look at the impact of growth on the likely trajectory of commodity demand. One way is through a historical lens. By weaving together information on demand for different countries at different points in the income ladder, it may be possible to get a glimpse of the future. As no data on physical quantities of domestic consumption are available, Figure 3.16 combines information on per capita physical imports of copper, iron, and petroleum for four Asian countries at widely differing income levels (PRC, India, Japan, and Korea). Differences in the “intercepts” of the country scatter-plots reflect differences in affluence as well as different economic structures, including resource endowments, but do not detract significantly from the overall pattern.

These pictures suggest a similar development path in which physical commodity demand follows a “logistic” or “S-shaped” pattern as income grows. At low income levels, commodity demand is small and grows only slowly. At this stage, most countries would be primarily agrarian, with manufacturing activity concentrated on materials—particularly agro-material—processing. But as income per capita continues to grow, an inflexion point is eventually reached at which the demand for mineral ores and energy commodities takes off. It is difficult to be precise about the level of income at which this inflexion point occurs, but for the three commodities shown, it is somewhere in a range of $5,000–10,000 per capita, measured in purchasing power parity (PPP) terms. In this income range, economies are typically not only growing quickly but are also rapidly industrializing.

The move from the countryside to the towns is also picking up tempo, and as affluence increases so too does the demand for income-elastic durable goods, such as motor vehicles, which themselves place large direct and indirect demand on commodities. Eventually, the demand for commodities dissipates and may plateau. At high levels of income, the processes of industrialization and urbanization are largely complete, and services and high-technology activities, both of which tend to be low in terms of their commodity intensity, occupy prime place. Affluence possibly also increases the demand for goods such as environmental quality, and conservation is more of a concern.

If the past is a good guide to the future and if developing Asia grows quickly, this stylized account of the phases through which commodity demand passes suggests that developing Asia will exert a strong pull on global commodity demand for some time to come. Per capita income in the PRC, measured in PPP terms, is now close to $6,000 and is rising quickly. Although India is further behind, its rate of income growth has accelerated, and there are ambitions to lift growth higher still.

Table 3.1, which shows the top 10 commodity imports in 1984 and 2004, together with their global shares, illustrates how rapid income growth in the PRC changed the complexion of its import commodity demand, away from agriculture, food, and raw materials, toward energy and metals. It also illustrates how, even at comparatively low income levels, processes of fast growth and structural change in the PRC have made a large impression on global commodity markets. Today, the PRC consumes nearly 8% of the world’s crude oil, over 20% of aluminum, copper, steel, and zinc, about 40% of iron ore and coal, and imports an increasing share of the world’s agricultural food commodities.

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