Despite the strengthening of the global economy, the prices of most industrial commodities have been declining (figure 7). While it is still too early to be certain, the declines appear to result from both increased supply and increased substitution on the demand side induced by the high prices of the past several years.
Commodity prices have been falling despite stronger growth, due to increase supply
Source: World Bank
Since 2000, capital expenditures by major firms in oil and metals markets have quintupled (figure 8). Overall, they increased an average of 15 percent annually since 2005 in the case of oil and 20 percent in the case of metals. The impact of increased supply is most visible in energy markets (figure 9), where higher prices have made technologies economically viable and spurred large increases in North American oil and natural gas production and large increases in African oil production (see the Commodity Annex for a more complete discussion). Recent developments have also been influenced by the recovery of production in Middle East countries such as Libya and Iraq.
Capital expenditure in the resource sector is up 5-fold since 2000, putting pressure on prices
Source: World Bank, Bloomberg
Increased supplies have opened up arbitrage opportunities
Source: World Bank, Datastream
Similarly, the coming on stream of new projects in Latin America (Chile, Peru), Africa (Zambia, Democratic Republic of Congo), and Asia (China, Mongolia) have placed substantial downward pressure on metals prices even as sales have strengthened. But demand suppression has also been at work. Global demand for refined metals increased 4.5 percent in 2012 (9.9 percent in China), but metal demand by Organization For Economic Cooperation and Development (OECD) member countries fell by 3.9 percent in 2012.
The combination of increased supply and weak demand has yielded a buildup in global stocks. For example, combined copper stocks at the major metals exchanges are up 46 percent since 2012. Aluminum stocks, which have been rising since end-2010, increased 8 during the past 12 months.
Expectations are that prices will continue to ease over the medium term. The World Bank forecast, which calls for the price of a barrel of oil to ease to $102 in 2013, and to $101 in 2015, reflects a technical assumption that oil prices will slowly decline between now and 2025 to a level consistent with the real cost of producing a barrel of oil from the Canadian tar sands using today’s technology (the Canadian tar sands are among the most abundant and most expensive to produce sources of crude oil). Metals prices are expected to decline in real terms by 3.7 and 1.4 percent in 2013 and 2014, respectively, reflecting increased supply and a gradual reduction in the metals intensity of developing-country (especially Chinese) growth (see Commodity Annex for more details). Food prices are also projected to decline (7.7, 6.0, and 5.5 percent over 2013–15), reflecting a gradual improvement in supply conditions and reduced production costs due to lower energy and fertilizer prices.