Catalog

World trade and commodity prices

World trade expanded rapidly in 2006, in volume terms accelerating to 9.7% from 7.7% in 2005 (according to World Bank estimates). Improved demand conditions in major industrial countries, along with firming consumer spending in Japan and the euro zone, buttressed strong industrial production both for major industrial countries and for developing Asia. Robust export performance from developing Asia also shored up world trade growth. The PRC continues to play a catalytic role in linking regional production chains with final demand from the rest of the world: regional partners' exports to the PRC again rose strongly, where they are processed and reexported to the rest of the world.

With a less buoyant economic performance slated for 2007, world trade growth is projected to moderate to 7.5% in export volume terms (Table 1.2.1). Industrial activity in major industrial countries has eased, with US industrial production slowing markedly. Japan and the euro zone are expected to take up some slack in demand from the anticipated moderation in the US, but much strengthening in private consumption in these two economies seems doubtful.

Even with slowing momentum though, the world economy remains relatively buoyant, given the underlying strength of

the corporate sector and the gradual tightening of the labor market in most countries in the Organisation for Economic Co-operation and Development. Industrial production for the major economies may surprise to the upside if consumer spending gels this year.

The strength of the global economy in 2006 boosted global sales of consumer electronics. Worldwide semiconductor sales set another record ($247.7 billion) in 2006, an increase of 8.9% from the previous year (Figure 1.2.7), while sales in the Asia-Pacific region registered a 13% expansion, driven by strong PRC demand. Although some slackening in economic activity has been seen in major industrial countries, a modest demand-driven expansion is expected in global high-technology industries in 2007. The Semiconductor Industry Association projects global semiconductor sales to grow by about 11% in 2007.

Demand for consumer electronics is partly supported by relentless global competition and falling prices. Dynamic random access memory (DRAM) prices, a proxy for global high-tech prices, have been slipping on fierce global competition and improved production capacity (Figure 1.2.8). Falling prices of popular consumer electronics have started to weigh on profit margins of the world's largest producers. Given the buoyancy of global demand, producers have maintained profits by expanding the volume of sales. But as the US economy, which is the largest market for end products, is expected to slow, further erosion of profits seems inevitable and could precipitate a downturn in the industry cycle.

The Brent crude oil price averaged $65.4 a barrel in 2006, despite a sharp fall in the second half of the year. Global oil prices have declined by more than 20% since the peak of nearly $80 a barrel in early August. The slump was mainly due to softening demand and rising inventories. The latest data on oil production and consumption show moderate increases in global spare capacity and inventory levels, as the supply/demand balance improves, despite lower output from the Organization of the Petroleum Exporting Countries (OPEC). However, underlying demand fundamentals remain strong, with a potential pick up in PRC demand.

On the supply side, periodic disruptions will likely continue given the political situations in major producer economies. The Brent crude oil price is expected to average about $57 a barrel in 2007 based on futures prices adjusted for the cost of carry (Figure 1.2.9). Fundamental tightness, given the supply-demand outlook, suggests upside risks to the outlook, though.

Prices of non-oil commodities have been showing signs of stabilization since mid-2006 (Figure 1.2.10). Driven by double-digit growth in metals prices, non-oil commodity prices posted strong gains in 2006. Strong manufacturing production, particularly in the developing world, continued to support industrial demand, while supply-side difficulties persisted in production of major metals. Prices of zinc, copper, and nickel surged again in 2006 on sharp drawing-down on inventories and supply disruptions, though the combination of improving supply conditions and the prospect of slowing demand were moderating forces in the second half of the year.

Agricultural commodity prices also rallied, but not uniformly. Some agricultural food commodities enjoyed strong gains on weather-related supply shortfalls, declining stocks, and surging demand for biofuels. Sugar prices rose to a record high before moderating in the second half of 2006, while maize and wheat prices also made significant advances. Strong industrial demand bolstered by the PRC drove up prices of agricultural raw materials, including rubber.

After the spectacular rise in 2006, non-oil commodity prices are expected to stabilize. Some metals prices such as copper and zinc moved lower in early 2007 on the slower growth outlook. Although the supply-side constraints in some non-oil commodities are unlikely to disappear overnight, easing demand pressure along with gradual improvement in inventories should limit further price gains. Softer energy prices may also keep a lid on sugar and other oilseeds prices.