Commodity Markets Overview - January 2014
With the exception of energy, all the key commodity price indices declined significantly in 2013 (figure 1). Fertilizer prices led the decline, down 17.4 percent from 2012, followed by precious metals (down almost 17 percent), agriculture (-7.2 percent), and metals (-5.5 percent). Crude oil prices (World Bank average), which have been remarkably stable during the past three years, averaged $104/barrel (bbl) during 2013, marginally lower than the $105/bbl average of 2012. Most non-energy commodity prices, notably grains, followed a downward path during 2013 (figure 2).
In the baseline scenario, which assumes no macroeconomic shocks or supply disruptions, oil prices are expected to average $103/bbl in 2014, just 1 percent lower than the 2013 average (table 1). Natural gas prices in the US are expected to increase due to stronger demand from energy intensive industries that are moving to the U.S. to take advantage of the “energy dividend”. On the other hand, EU natural gas and Japanese LNG prices will moderate due to weaker demand (both prices are tied to the price of oil). Coal prices are expected to increase as well as—more coal is being used for electricity generation due to substitution away from nuclear power.
Agricultural prices are projected to decline a further 2.5 percent in 2014 under the assumption that the existing improved crop conditions will continue for the rest of the year. Specifically, prices of food and beverages are expected to drop by 3.7 and 2.0 percent—raw material prices will not change much. Metal prices will decline an additional 1.7 percent in 2014 as new supplies are expected to come on board while there are no expectations of a surge in demand. Fertilizer prices are expected to decline almost 12 percent in 2014, on top of the 17.4 percent decline in 2013, mostly due to new fertilizer plants coming on stream in the U.S., in turn a response to low natural gas prices. Similarly, precious metals are expected to decline more than 13 percent in 2014 as institutional investors increasingly consider them less attractive “safe haven” alternatives.
There are a number of risks to the baseline forecasts. Downside risks include weak oil demand if growth prospects in emerging economies (where most of the demand growth is taking place) deteriorate sharply. Over the long term, demand for oil could be dampened further if substitution between oil and natural gas intensifies. On the upside, a key risk remains a major oil supply disruption in the Gulf, which could add as much as $50 to the price of oil. However, the severity and duration of the outcome depends on a number of factors, including policy actions regarding emergency reserves, demand curtailment and OPEC’s response. Yet, the price risks in the oil market are weighed mostly on the downside as the probability of an oil supply disruption is much lower now for 2014 than it was a year ago for 2013.
Another source of uncertainty in the medium- and long-term outlook is how OPEC, notably Saudi Arabia, reacts to changing global demand and supply conditions as well as how fast other key players (mainly Iraq, Iran, and Libya) will reach earlier output levels. Since 2004, when oil prices exceeded $35/bbl (the upper limit of the range deemed “appropriate” by OPEC at the time), the Organization has responded to subsequent price weakneses by reducing supplies. But it has also increased supplies when prices exceed the $100-110 range for an extended period of time—as it did last year following output reductions by Iraq and Libya. Indeed, with few exceptions, the $100-110 range has been maintained during the past three years. However, as non-OPEC supplies (notably unconventional oil) come on stream and substitution by other types of energy intensifies, such an approach may not be sustainable.
Price risks on metals depend on new supplies coming on stream and growth of China’s economy. Metal prices have declined 30 percent since their early 2011 highs, but have been relatively stable during the past three quarters. Last year’s declines reflected moderate demand growth and strong supply response, the latter a result of increased investment of the past few years which was induced by high prices. The prospects of the metal market depend crucially on Chinese demand, as the country accounts for almost 45 percent of global metal consumption. However, if robust supply trends continue and weaker-than-expected demand growth materializes, metal prices may decline more than the baseline presented in this outlook, with significant negative consequences for metal exporters (and benefits for metals importers).
In agricultural commodity markets the key risk is weather. According to the global crop outlook assessment released by the U.S. Department of Agriculture on January 11, 2014, the global maize market will be better supplied in the current 2013/14 season—production and stocks are expected to increase by 12 and 20.5 percent, respectively. Wheat will improve as well (production and stocks up 8.6 and 5.3 percent), but still below historical standards. Price risks for rice are on the downside, especially in view of a well-supplied market and the large public stocks held by Thailand. Indeed, when the Thai government announced the release of stocks last September, rice prices came under pressure. Edible oil and oilseed markets have limited upside risks as well. The marginal price increase of the edible oil price index during 2013Q4 (up 4.7 percent from 2013Q2) reflected idiosyncratic factors of some markets rather than a broad-based trend. The global output of 17 major edible oils is expected to reach 196.3 million tons during 2013/14, up from last season’s 187.6 million tons.
Other risks for agricultural markets are mostly on the downside as well. For example, the risk of trade policies impacting agricultural prices is low as evidenced by the absence of any export restrictions during 2011-13, despite several spikes in prices (notably maize and wheat). Finally, production of biofuels experienced a third year of little (or no) growth, as policy makers increasingly realize that the environmental and energy independence benefits from biofuels may not outweigh the costs.