Worst may be over for commodities
Washington, May 5 (IPS) - The sharp price declines suffered by most commodities since the advent of the Asian financial crisis in 1997 may have bottomed out but their recovery is likely to be "slow and faltering," according to the World Bank.
Still, further price declines, particularly for metals, cannot be ruled out, says the Bank's quarterly publication 'Global Commodity Markets' - released here Wednesday.
Real prices for key commodities - including copper, rubber, aluminium, cotton, and sugar - currently are near 30-year lows, the result of a deadly combination of weak demand, large stockpiles, and slow global economic growth, the report reveals. Many developing countries rely on commodity exports to keep their fragile economies afloat and, as overseas development assistance has fallen over the past decade, their dependence on commodity exports has increased.
The decline in commodity prices hit Latin America especially hard in the past quarter, according to the report. The average price for its non-energy export commodities fell 10%, compared to a global average of 5%. For all developing-country exports, the average was 7.4%.
The price index for non-energy export commodities from sub- Saharan Africa also fell sharply from December to March - 7.5%, according to the report which cited a 13.8% drop in cocoa prices; 12.6% in robusta coffee, and 25% in sugar, the report said.
The Bank blames the plunge in coffee and sugar prices on the 40% devaluation of the Brazilian real in January. Brazil is the world's biggest exporter of both commodities, and its devaluation affected exporters worldwide.
Exporters in East Asia also suffered an overall 7.3% decline due to lower vegetable oil prices, especially of palm oil, which was down 25%.
South Asian exporters fared somewhat better, but still saw their prices fall 6%, with tea prices down by more than twice that, due to increased supplies and lower exports to Russia, which was hit hard by the Asian crisis.
In the past quarter, prices began to rebound with oil prices rallying sharply last month after a major production-cutting accord was reached between the members of the Organisation of Petroleum-Exporting Countries (OPEC) and other, non-OPEC oil- exporting nations.
"The sharp declines in most commodity prices are probably over, with the recent price reductions now comparable to previous declines," the report says.
Still the predicted weakness in the global economy will make a quick rebound unlikely, as existing stockpiles will be drawn down only very slowly.
The global economy is likely to grow only 1.8% in 1999, with developing countries experiencing even slower growth at about 1.5%, according to the report.
The Bank estimates that stronger growth will only begin in 2002 and is likely to run at a global average of 3.1% per year during the following five years. It hopes that growth for developing countries over the same period will exceed five percent.
Before any recovery can be sustained, stocks which have been built up over the past 18 months, will have to be reduced, the Bank says.
For example, sugar production last year exceeded consumption for the fourth consecutive year, and stocks are near record levels. The result has been a decline in raw sugar prices.
Metal stocks also are at near record levels. Copper stocks on the London Metals Exchange are the highest ever recorded and copper producers in both Chile and Peru actually have increased their production and capacity. "Large surplus capacity could lead to additional price declines," warns the report.
Aluminium production is also on course for another surplus this year.
Stocks will only be brought down by increased demand, and that, in turn, is dependent on rising growth rates, according to the report.
The good news on that front is "clear signs" of recovery in South Korea and Thailand, continued strong performance by the US economy, and the adoption by Japan of a fiscal stimulus package that could bring it out of a very long recession.
The bad news, according to the Bank, is that world industrial production fell by one percent in the fourth quarter in 1998 compared to the previous year, that the crisis in Brazil is "severe," and that Europe's growth appears to be faltering while Japan is still "mired in deep recession."
Total terms of trade - the price fetched by their exports versus the price which they must pay for their imports - for lower- and middle-income developing countries fell by 5.7% for all of 1998 with the greatest declines suffered by major oil exporters, since the price for crude oil fell 32% over the year.
However, the terms of trade for sub-Saharan Africa fell almost 10% for the year, while Latin America and the Caribbean's terms of trade fell 4.9%, and East Asia's 1.5%. For the year, only South Asia showed an improvement, of 5.6%.
Even the longer-term outlook for some commodities does not look very strong, according to the report.
It predicts stagnating real prices for tea, coffee, cocoa, bananas, sugar, and copper from 2000 to 2010, gradual declines over the same period for coconut, palm and soybean oil, and gold.
The forecast is better in other areas, however, with gradual increases in prices for cotton, rubber, tropical timber, and aluminium. (IPS)
The above article by the Inter Press Service appeared in the South-North Development Monitor(SUNS).
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