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End of gloom for commodities? 6 Jan 2000
COUNTRY BRIEFING
FROM THE ECONOMIST INTELLIGENCE UNIT
In 1999 there was a significant difference between price trends in soft and industrial commodity markets. While most industrial commodity prices strengthened throughout 1999, soft commodity prices were on a sharp downward trend. This is not too surprising, as improving global conditions throughout 1999 lifted industrial prices, which are largely demand-driven, but left supply-driven soft commodity prices largely unchanged.
The EIU's soft commodity index (FFB) is estimated to have declined by a huge 18.4% in 1999, as overproduction in the face of lacklustre demand led to a sharp fall in prices across most soft commodity groups. In particular, the Brazilian devaluation in January 1999 led to a surge in exports of sugar, coffee and soybeans, sending prices to historical lows. The performance of industrial commodities in 1999 has been less uniform. Oil prices, for example, have increased almost threefold from below $10/b in early 1999 to over $27/b in late 1999. Base metal prices also rose steadily throughout 1999, albeit from historical lows, while fibre and rubber prices weakened. The overall effect of these diverging trends was a 4.9% decline in the EIU's industrial commodity price index (IRM) in 1999.
A similar dichotomy between soft and industrial commodities is forecast for 2000. Stronger economic growth, as growth in Asia recovers, will boost prospects for demand-driven commodities. Thus, the recovery in industrial raw material prices will gather pace in 2000, while soft commodity markets will continue to be plagued by oversupply. In general industrial commodity prices will rise by nearly 14% in 2000, led by a 22.7% rise in rubber prices. It is worth noting that the recovery in rubber prices will begin from a very low base. Other winners in 2000 include base metals, led by copper (17.4%), aluminium (15.4%) and nickel (11.2%), and fibres, where a turn around in the textile cycle will allow a price recovery to get underway. Although oil prices will on average be some 13% higher in 2000 than in 1999, prices will trend down throughout the year, from about $25/b in early 2000 to about $16-18/b in the second half of the year, as OPEC production is stepped up.
In contrast, soft commodity markets will remain depressed in 2000, as production again exceeds consumption in the beverage, oilseed and sugar markets, while high stocks allow only a modest recovery in grain prices. However, the decline in soft commodity prices will be small, at about 2.3%, compared to the sharp declines in 1998 and 1999. The main losers in 2000 can be found within the beverage (cocoa, coffee and tea) market, where rapidly expanding coffee output will dwarf consumption and tea production will resume its climb to new highs. Nevertheless, sugar prices will buck the trend in other soft commodity markets, recovering by some 11% in 2000. Although the sugar market will remain oversupplied in 2000, the 29% price decline in 1999 was overdone and some retrenchment can be expected.
SOURCE: World Commodity Forecasts
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