The Hindu Business Line : Commodity prices to remain strong, forecasts IMF

Mumbai April 23 There will be no relief from high commodity prices anytime soon. Following last year's trend, world commodity prices are expected to continue to remain strong this year, International Monetary Fund (IMF) forecast in its latest Global Economic Outlook 2007 - Spillovers and Cycles in the Global Economy.

Last year, commodity markets witnessed phenomenal surges driven mainly by rising metals prices and strengthening agricultural prices. In the first quarter of 2007, metals prices fluctuated, but generally remained strong, while agricultural prices continued rise, albeit slowly.

The strength of foods and metals prices should carry forward (into 2007), IMF forecast.

Looking forward, while copper and zinc prices are likely to weaken as new capacity comes on line, nickel, tin and uranium still face more serious supply constraints, and therefore, higher possibility of upward price movements. Over the longer term, all base metals prices should weaken from their current highs as output continues to catch up with demand, although higher long-term production costs (wages, fuel costs, equipment costs) are likely to keep prices above historical averages, the report observed.

Other commodities

On agricultural commodities, the report pointed out that rising demand for bio-fuels will likely cause the prices of corn (maize) and soyabean oil to rise further, and to move more closely with the price of crude oil, as has been the case with sugar.

For this year, US Department of Agriculture is estimating a record corn crop, as planting area expands from last year at the expense of soyabean and cotton.

Still, demand fuelled by the increase in domestic ethanol production capacity is expected to outpace the production rise.

Higher prices of corn and soyabean will also likely push up the price of partial substitutes such as wheat and rice, and other edible oils, and exert upward pressure on meat, dairy and poultry prices by raising animal rearing cots, given the predominant use of corn and soyameal as feedstock, particularly in the US.

High crude oil prices could also raise corn production costs as corn is more energy intensive than soyabean in production, the report remarked.

Biofuel production

Recent proposals to increase biofuel production in the US and Europe will likely put additional upward pressure on corn, wheat and edible oil prices.

The Government mandate to raise biofuels consumption (mainly, bioethanol in the US and biodiesel in Europe) by targeting minimum usage levels will mean need to divert more of the traditional food crops for fuel purposes.

Notwithstanding the current euphoria over biofuels and huge investments that are flowing into capacity creation, IMF has cautioned that promoting biofuel use to unsustainable levels under current technology would turn out to be problematic. Long-term prospects of biofuels depend heavily on how quickly and efficiently second-generation substitutes (such as plant waste) can be adopted, the report said.

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