Home 
Publications Catalog Online Publications Document
Asian Development Outlook 2006 Update : III. Developing Asia's imprint on global commodity markets
The outlook for commodity demand, trade, and prices to 2015
A key set of assumptions in the model relates to reserves of oil, gas, and coal. In Table 3.2, estimates of the ratios of proven and unproven energy reserves to annual production ratios are shown for each region featured in the model. These numbers are expressed in years. So, for example, the model assumes that there are 45 years of proven crude oil reserves for the world. However, there may be up to another 77 years of as yet unproven reserves. For each country, the fraction of unproven reserves that may be converted to proven in each year is set out in the “conversion rate” columns. No conversion rate assumptions are needed for coal, as proven reserves are measured in centuries, rather than decades.
In the base year, 2001, developing Asia makes a much greater impression on global agricultural, oil, and mineral markets than is suggested by its income weight. For agricultural commodities, the explanation lies in comparatively low income levels that lead to specialization in agricultural commodity production and in secondary processing, to comparatively large shares of food in total consumption expenditure, and to high population concentrations. The base-year share of global demand for energy is about twice as large as the income share. Although developing Asia is not specialized in highly energy-intensive activities, it is a comparatively energy-inefficient region and this lifts demand. Mineral ore demand also outweighs income. This largely reflects intensive consumption of metals by industry, as well as for infrastructure investment and construction of fixed structures. 
However, of more interest are the dynamics of commodity demand. Given developing Asia’s faster growth, its share of global income must obviously increase. Between 2001 and 2015, a nearly 4 percentage point premium on growth drives a wedge between marginal and initial income weights. Developing Asia accounts for 27% of the total expansion of global demand (again measured at market exchange rates), which is larger by a factor of 2.6 than its initial income weight. But more striking still is developing Asia’s contribution to the expansion of global commodity demand. Notwithstanding its small initial income share, developing Asia contributes over 60% of the expansion in commodity demand, even having allowed for significant improvements in end-use efficiency (see the appendix) and long-run income elasticities of demand that are generally less than one. The growth in commodity demand is most pronounced for energy and mineral ores (largely used in metal production), but the share of agricultural commodities also grows as Asia’s share in the global population increases. 
Figure 3.18 shows what these changes imply for commodity structure of imports over 2001–2015. For all commodities, other than fisheries products and coal, import dependence increases, with oil showing the largest increase. By 2015, more than 70% of the region’s oil needs (excluding the net oil exporters in Central Asia) will be met by imports. Imports of mineral ores increase, but less so. What effects do these largely Asian-driven changes in commodity demand have on commodity prices? Table 3.3 (data column 2) summarizes the accompanying estimates of commodity prices in 2015. These are expressed in index form (2005 = 100). All price indexes are deflated by the world consumer price index, which is held constant through the simulation, and so are real prices: the cost of commodities measured against the global consumption basket. Table 3.4 (data column 2) provides a conversion to price levels for energy products. Note that in this table these have been expressed in constant 2005 prices, to ease comparison with other independent price estimates (below). Starting from 2001 as a base, a striking feature of these calculations is that they suggest a rising trend for (most) real commodity prices—notwithstanding assumed improvements in productivity and efficiency of resource use. On average, there is assumed to be about a 19% improvement in energy and mineral efficiency by 2015. Even some agricultural commodity prices, which historically have trended down, edge up. Limited endowments and low productivity growth cause the prices of fisheries and forestry commodities to rise sharply. From the 2001 base, the prices of “other crops,” including fruits, vegetables, and sugar cane and beet, increase marginally. But not all prices rise. The price of livestock and most crop products trend down, due to fast productivity growth in the case of livestock and a particularly low income elasticity of demand in the case of crops. In mining sectors, global prices also rise. 
Of particular interest are the model computations for the price of crude oil. Figure 3.19 shows the trajectory over 2001–2015. The trend calculated by the model shows the real cost (in 2005 prices) of crude oil rising from about $28 per barrel in 2001 to $43 per barrel in 2015, a rise of 53%. Barring critical supply disruptions, the International Energy Agency (2005) and Energy Information Administration (2006) forecast a price range for crude oil of $35–50 per barrel (in 2004 prices) by 2015. 
Figure 3.19 also makes clear that the model estimate of the real price of crude oil in 2015 is below the average price for 2005, and the average price for the first 6 months of 2006. This is not surprising. Even over a period of years, market prices may diverge significantly from their theoretical equilibrium levels. Market prices are susceptible to macroeconomic fluctuations, weather conditions, political factors that disrupt supplies, speculation, and price-setting behavior by oligopolies (such as OPEC), none of which is captured by the model. But if, in the long run, markets are driven by fundamentals, the present computations suggest that while the price of crude oil may be less expensive in real terms by 2015 than it is today, it will be considerably more expensive than it was at the beginning of the millennium, and in decades past. Beyond 2015, the price may continue to trend up. This scenario is perfectly consistent with nominal prices that are much stickier (Figure 3.19, top line). For example, if for the sake of argument, global consumer price index inflation is set at 2.5% (rather than 0% as assumed in the model calculations) over the period 2001–2015, this translates to $55 per barrel by 2015 in current prices, a little above the average price in 2005. These calculations suggest changes in developing Asia’s terms of trade. Developing Asia is a major exporter of agricultural and manufactured goods and a significant importer of energy and mineral commodities. Figure 3.20 summarizes model estimates of terms-of-trade changes for major countries and subregions of developing Asia. It is notable that the projected terms of trade slide the most in the PRC and India. Their hunger for commodities and their tendency for growth are likely to lower the prices of manufactured and industrial output relative to global commodity prices, particularly of energy and mineral ores.
In the context of the still-extensive use of fuel subsidies in developing Asia (see Box 1.1.1 in Part 1, Developing Asia and the world) another interesting experiment would be to consider the impact of their removal. Beyond the removal of subsidies, higher energy taxes might be warranted to mitigate environmental damage. Removing all energy subsidies in developing Asia and imposing taxes at one third of those in the European Union has a striking impact on results: the model suggests that such a regime change would reduce global oil prices in 2015 by 13% and reduce demands for oil in developing Asia by 44% (compared with what they would be under the status quo—Table 3.3).
|
© 2009 Asian Development Bank Privacy | Terms of Use |
 Top of page |
To sift through the many influences that may come to bear on commodity markets, a formal economic model is helpful. An economic model brings the discipline of theoretical and empirical consistency to the analysis. In this section, the results of experiments are presented that utilize a model of the global economy that identifies 16 “regions,” including 10 in Asia. (Further information about this model, GEMAT, is given in the appendix to this part.) The focus here is on results and, albeit briefly, on the sensitivity of the results to changes in key assumptions. In much, but not all, of what follows, it is assumed that the future is much like the past. In particular, it is assumed that developing Asia grows at or about the rate of the past decade (6.6%), and that the rest of the world moves along a lower trend of about 2.8%. (Scenario details are explained in the appendix.) 
In Figure 3.17, shares of global income and total global commodity demand are shown for the base year, 2001, for developing Asia (which throughout this section excludes Central Asia and the Pacific due to lack of data), an amalgam of the United States, European Union, and Japan, and the rest of the world. Also shown in the figure are the model projections of these same shares in 2015. These shares are calculated at market exchange rates. If PPP shares had been used instead, developing Asia’s weight in the global economy would be 2.3 times as large.
These results, and the calculations that underpin them, make a number of important assumptions that are subject to significant margins of uncertainty. To gauge how robust the numbers are, the model assumptions can be varied (see the appendix for details). For example, it is possible to make different assumptions about the efficiency of energy and mineral ore use. A cumulative 19.0% improvement in efficiency has been assumed in all earlier calculations. But one can imagine a wide range around this number within which actual gains may lie. If, for example, the improvement in energy use is such that by 2015 efficiency increases by another 10%, this reduces the estimate of real oil prices in 2015 by nearly 2%. But if the assumptions that have been made about oil reserves are too optimistic, and perhaps 10% too large, this would add another 7% to oil prices by 2015. 
Back