Commodity Prices to Drop?

The IMF's latest semi-annual economic outlook contains a good chapter on non-fuel commodity prices.  It's a good exercise in microeconomics, useful for both students and business leaders who are impacted by commodity prices.  The basic story: demand growth is strong.  China accounts for a lot of demand growth--about 50% in the case of aluminum.  Supply growth takes a good bit of time in metals, but not very long in agricultural goods.  So we've seen pronounced price increases in metals, but not in ag.  (Oil, though not explicitly the topic of the chapter, used frequently as a point of comparison.)

Outlook: price declines in metals, but not so much in agricultural commodities.

My own addition: same story applies to oil.

Business Strategy Implications:  Both producers and users of metals should anticipate falling prices.  Commodity prices are typically more volatile than consumer prices.  And metals production is capital intensive, implying several year lead times to bring new production on line.  But when the production comes, it comes big time.  So plan for cheaper prices.

Comments

[russell]

The 2003 part II has an interesting discussion on asset versus equity bubbles.

[cvarkogirl]

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