In the fourth quarter of 2008 and the first quarter of 2009 commodity prices, as measured by the dollar-based HWWI index, fell sharply from their record-high levels, rebounding strongly in the following two quarters. Prices are expected to stabilise in the remainder of 2009 and are thereafter likely to follow a moderately rising trend until mid-2011 as industrialised countries slowly recover from their deepest recession since the 1930s. The main driver of the prices will be growing demand from developing countries, in particular from China.

These are the main results of the AICE-Report “World Commodity Prices 2009 until mid-2011,” prepared by the AIECE* Working Group on Commodities and published on Thursday.

The report says world market prices for raw materials have increased strongly since the beginning of 2009, when they bottomed out, having collapsed as a consequence of the most severe world recession since the 1930s. From April to October they rebounded by more than 40 per cent.

At least five factors account for this rise. Firstly and most importantly there was a huge increase in Chinese demand, triggered by the stimulus plan focusing on public investment and a build-up of commodity stocks. Raw materials used for construction, like energy and metals, have been primarily affected. Secondly, cuts in production of some raw materials have also brought about upward pressure on prices. In particular, the Chinese government has shut down uncompetitive and perilous firms. Thirdly, upward revision of expectations pushed up prices that were undershooting because of the extremely bearish sentiment in the first quarter of 2009.

Fourthly, the rise in production costs, especially in agriculture, was transmitted to prices. Finally, the weakening dollar put downward pressure on producers’ domestic currency profits, contributing to rising prices. These factors were especially evident in the oil market. Oil prices - - oil represents more than half of the HWWI index total  -- have risen more than commodity prices on average (by more than 50 per cent), as a result of lower supply from OPEC and a thirst for energy in China.

In the fourth quarter of 2009 the rise of commodity prices is expected to come to a halt as the market will become more balanced, not the least as a result of easing Chinese imports. In 2010 prices should start increasing again, although only moderately, because the advanced countries’ economies will be recovering slowly.

Despite of the rebound in world raw material prices in 2009, in dollar-terms the annual average of the HWWI index is forecast to remain 35 per cent lower than the 2008 record figure, and increase in 2010 by 20 per cent.

This pattern of price development is expected to apply to all commodities, even though it will be particularly pronounced in the case of oil. In 2009 energy prices are expected to remain on average 38 per cent lower than in 2008 and to gain 25 per cent in 2010.

For non-energy raw material prices, the aggregate change is expected to be smaller - - an average decrease by 23 per cent in 2009 and a 12 per cent rise in 2010. By subgroups the development of the non-energy raw material prices is expected to be rather heterogeneous in 2010. While non-ferrous metal prices are forecast to rise by as much as oil prices, oilseed and vegetable oil prices, for instance, are expected to decrease further, adding to the downward correction that already affected them and cereal prices in the third quarter of 2009.

Commodity prices in real terms, deflated with manufacturers’ export prices, bottomed out in the beginning of 2009. However, this bottom price was still relatively high historically, equivalent to the 2005 level and almost twice as high as prices prevailing in the 1990s. This weak price reaction to a severe recession can be partly explained by a permanent upward shift in demand in the commodity markets due to the strong economic growth in China. As a result the equilibrium price of many, especially industry-related, commodities seems to have risen.

AIECE comprises ten European economic institutes.

To purchase a PDF copy of the report, contact the secretariat at the Finnish institute ETLA, Paavo Suni, Chairman of the Commodity Group, email: paavo.suni@etla.fi