The "Commodity Market Outlook" report released by the World Bank recently shows that overall commodity prices will show a downward trend in 2023. It is expected that commodity prices will decrease by 21% compared to last year and remain stable in 2024. In an interview with Economic Daily reporters, multiple experts stated that in the context of continuous downward demand, commodity prices may experience mild fluctuations and decline, but the high inflation pressure facing the global economy cannot be quickly alleviated.
Continuous improvement in supply and demand
Currently, global commodity supply and demand continue to improve. The report shows that since January this year, commodity prices have fallen by 14%, 32% lower than the historical high set in June 2022, which is the largest decline since the outbreak of COVID-19. The report predicts that energy prices will decrease by 26% this year, and the average price of Brent crude oil in US dollars is expected to be $84 per barrel, a 16% decrease from the average price of the previous year. Non energy commodity prices will decrease by 10% in 2023 and 3% in 2024.
Multiple factors will affect the trend of commodity prices. Lian Ping, Chief Economist and Director of the Research Institute of Zhixin Investment, believes that the main factor affecting commodity prices currently is the decline in demand. "The global economic growth rate is slowing down, and the demand for commodities correspondingly decreases, leading to a weakening of prices. The impact of the Ukrainian crisis on the global supply and demand structure of major commodities is gradually diminishing. In addition, the Federal Reserve's tightening monetary policy also has an impact on commodity prices.
The World Bank report also points out that the trend of commodity prices still faces many uncertain factors. For example, oil supply in Russia and OPEC may be lower than expected, tightening credit conditions may hinder the ability of oil or coal companies to increase supply elsewhere, and stricter regulation of fossil fuels may also hinder related investments. Geopolitical concerns are also an important factor affecting commodity prices. In addition, considering the severe impact of drought in Europe on river flow and food production in the summer of 2022, concerns about abnormal weather may also drive up commodity prices.
Guo Chaohui, chief analyst of bulk commodity research of CICC Research Department, said that the recent price trend of bulk commodity market is mainly driven by demand expectations and actual performance. "Weakening global demand has significantly suppressed the formation of commodity prices. The purchasing managers' index (PMI) of European and American manufacturing industries has continued to shrink. Energy demand has been under pressure. Superimposed with risk factors such as the spread of the U.S. and European banking crisis and the U.S. debt ceiling, macro expectations have further deteriorated, suppressed the formation of overseas oil and gas, and the price of gold and other hedging assets has risen." Guo Chaohui believes that in the short term, demand expectations may dominate the trend of oil prices, The currently priced pessimistic expectations may not have been supported by actual data and have been corrected to some extent. If the underlying fundamentals do not deteriorate further in the future, the weak oil price situation may improve.
Inflationary pressure still exists
Despite the downward trend in energy prices, the global high inflation pressure may not be effectively alleviated in the short term. The report shows that the current prices of various commodities are still far above the average level between 2015 and 2019, and this year natural gas prices in Europe will be nearly three times the average price from 2015 to 2019.
The downward trend in commodity prices is beneficial for suppressing inflation, and it is also a concrete manifestation of inflation changes, indicating that inflation pressure is decreasing. "Lian Ping pointed out that in the next stage, due to the low growth rate of the world economy, weakened demand, geopolitical conflicts and weakened influence, prices may continue to decline. However, from the perspective of the entire year 2023, the global price and inflation levels are still relatively high.
The decline in commodity prices can help reduce overall global inflation. However, central banks need to remain vigilant because a wide range of factors, including weaker than expected oil supply, increased geopolitical tensions, or adverse weather conditions, can push up prices, leading to a resurgence of inflationary pressures, "said Aihan Gauss, Deputy Chief Economist and Director of the Forecasting Bureau at the World Bank
"Due to the slowdown of economic growth, the mild winter and the redistribution of commodity trade, the soaring stage of food and energy prices in Ukraine after the crisis has basically ended," said Indmett Gil, chief economist and senior vice president of development economics of the World Bank, But this is not much comfort for consumers in many countries. In real terms, it is still one of the highest periods of food prices in the past 50 years. Governments should avoid imposing trade restrictions and adopt targeted income support plans instead of price controls to protect the poorest
Pang Ming, Chief Economist and Research Director of Jones Lang LaSalle in Greater China, pointed out that recent fluctuations in commodity prices, especially those of bulk commodities and raw materials, mainly reflect supply-demand relations and liquidity issues in the short term. Even though commodity prices have declined and stabilized this year and next, they are still higher than the level before the COVID-19 epidemic, which will continue to put pressure on the overall global inflation level.
Pang Ming stated that from the perspective of long-term structural changes, both the global commodity price center and the long-term inflation center may rise in the future. The main reasons include: firstly, over the past decade, China's production capacity has largely suppressed and mitigated the upward trend of global commodity prices, which is currently changing; Second, over the past 10 years, the global oligopoly in the production and supply of bulk commodities and raw materials has gradually emerged, and the supply of related capital expenditure has been relatively limited, which will continue to increase the price rigidity of commodities in short supply; Thirdly, the green transformation trend of global low-carbon emission reduction means that the cost of carbon reduction will be reflected in the costs and prices of various commodities on a global scale; Fourthly, the tolerance of monetary policies in developed economies towards inflation levels has increased, resulting in delayed or insufficient responses to potential inflationary pressures in the future; Fifth, the pulse like impact and accumulation of risk aversion caused by factors such as rising geopolitical risks, interference with globalization and international trade, and potential slowdown in world economic growth.
Food security needs attention
Among various categories of commodities, the trend of agricultural product prices, especially grain prices, is worth paying attention to. For the nearly 350 million people facing food insecurity worldwide, the impact of the decline in food prices is minimal. The report shows that although grain prices are expected to decline by 8% in 2023, they will still be at the second highest level since 1975. The rise in food prices has exacerbated food insecurity and had a serious impact on the impoverished population in many developing economies.
Data shows that as of February this year, global food prices have risen by 20%, the highest level in the past 20 years. Fertilizer prices are expected to decline by 37% in 2023, the largest annual decline since 1974, but still close to the peak during the food crisis from 2008 to 2009.
The global food price index for April, released by the Food and Agriculture Organization of the United Nations, was 127.2 points, up 0.6% month on month, marking the first increase in 12 months. Maximo Torrero, Chief Economist of the Food and Agriculture Organization of the United Nations, said that as the economy recovers from a severe slowdown, demand will increase, providing an upward momentum for food prices. The rise in rice prices is extremely worrying. In addition, it is necessary to renew the Black Sea grain export agreement to avoid a surge in wheat and corn prices.
Overall, the world's food shortage has not significantly improved. The impact of the food issue on developing countries, especially those that are relatively poor, is fatal. The Ukrainian crisis has brought great resistance to global food supply, the implementation of the Black Sea food export agreement is variable, and climate change is unpredictable, all of which have brought uncertainty to global food prices. If food supply cannot be fundamentally guaranteed, food shortages in the least developed countries may reappear Lian Ping said.
