Slump unlikely to bring down prices to 1990s level

Written by Commodities Bureau | New Delhi | Updated: Jan 6 2009, 05:14am hrs
The unprecedented demand destruction seen in the later half of 2008 that almost halved global commodity prices from their June and July peaks does not necessarily mean that prices will fall all the way back to the 1990s level this year, neither it implies that prices will return to their recent highs when demand recovers because oil and metal markets will take time to build machines and train engineers required to explore new resources, a recent World Bank Report on 'Global Economic Prospects' said.

The report, which dealt extensively on the volatility in global commodity prices in 2008, its impact on world economies and the scenario going forward, said that although metal prices have dropped by around 40% from their recent peaks, it is still two-and-half-time higher than they were in 1990s, which clearly means that these prices are high enough to ensure that sufficient further supply will be forthcoming in the medium-term. "In the long-run, metals demand should slow as Chinese metals intensities first stabilise and then fall because of lower investment rates and higher share of services in Chinese GDP," the report said.

On agriculture, it said that slower production growth should slow demand for food, while productivity growth should be sufficient to ensure future supply at the global level. It said yields declined among many of the countries that benefited from the 'Green Revolution' and unless they step up investment in infrastructure and research and development and remain open to new technologies, agriculture productivity growth might decline.

The World Bank report says that failure to make investments to boost agriculture may see many of them becoming increasingly dependent on import of expensive food items.

Putting a strong emphasis on the need for technological advancement in agriculture, the report said that technology would determine the availability of oil reserves and costs of extraction, the price levels at which different oil substitutes became profitable, the potential for economising on scarce oil and metals and the likelihood of rapid increases in crop yields.

The report concludes that the supply is likely to increase rapidly to meet anticipated increases in demand at prices that are lower that the current levels.