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Friday,
April 24, 2020 / 1:27 PM / by World Bank Group / Header Image Credit: Reuters India
Highlights
As countries around the world contend with the health emergency of the COVID-19 pandemic, the economic effects of suspending almost all activity have immediately impacted the world's commodity markets and are likely to continue to affect them for months to come.
The pandemic has affected both demand for and supply of
commodities, , the April edition of the Commodity
Markets Outlook reports. Those effects are direct,
resulting from shutdowns to mitigate the spread of the virus and disruptions to
supply chains, and also indirect, as the global response slows growth and leads
to what is anticipated to be the deepest global recession in decades.
The full impact of the pandemic on commodity markets will
depend on how severe it is, how long it lasts, and how countries and the world
community choose to respond to it. The
pandemic has the potential to lead to permanent changes in the demand and
supply of commodities, and especially to the supply chains that move those
commodities from producers to consumers around the world.
The effects have already been dramatic, particularly for commodities
related to transportation. Oil prices have plunged since January, and prices
reached an historic low in April with some benchmarks trading at negative
levels. Declines reflect a sharp drop in demand and have been exacerbated by
uncertainty around production levels among major oil producers. Due to mitigation efforts that have limited most travel,
oil demand is expected to fall by an unprecedented 9.3 million barrels per day
this year from the 2019 level of 100 million barrels per day.Oil prices are expected to average $35 per barrel in 2020, a sharp
downward revision from the October forecast and a 43 percent drop from the 2019
average of $61 per barrel. Prices for natural rubber and platinum, both heavily
used by the transportation industry, have also tumbled.
Recent efforts by the Organization of the Petroleum Exporters and other
oil producers to cut production in response to the plunge in demand will ease
some of the pressure on oil markets. However, over the longer run, the current
arrangement, to the extent it supports prices, will be subjected to the same
forces-the emergence of new producers, as well as substitution and efficiency
gains-that led to the collapse of previous OPEC arrangements and other
commodity pacts. A section of the report looks at OPEC in the context of the
history of previous coordinated efforts to manage the prices of certain
commodities.
Energy prices overall-which also include natural gas and coal-are
expected to average 40 percent lower in 2020 than in 2019, although a sizeable
rebound is anticipated next year. Natural gas prices have fallen substantially
this year but coal prices have been less affected, since the demand for
electricity has been less affected by mitigation measures.
The halt in economic activity has taken a toll on
industrial commodities such as copper and zinc, and metal prices overall are
expected to fall this year. A deceleration of
economic growth in China-which accounts for half of global metal demand-will
weigh on industrial metal prices. Gold prices, on the other hand, have risen as
buyers have sought safety amid financial market turbulence.
Agriculture prices are less tied to economic growth and have undergone
only minor declines over the first months of the year, with the exception of
rubber which fell sharply, and of rice, which rose due to worsening crop
conditions and some trade restrictions. Overall global agricultural prices are
expected to remain broadly stable in 2020 as production levels and stocks of
most staple foods are at record highs.
Most food markets are well supplied. However, concerns
about food security have escalated as countries announce trade restrictions
that include export bans on certain commodities and engage in excess buying. Similarly, agricultural commodity production,
especially next season, could be affected by disruptions to the trade and
distribution of inputs such as fertilizer, pesticides, and labor. Snags to
supply chains have already affected to the exports from some emerging market
and developing economies of perishable products such as flowers, fruits and
vegetables.
The impact of the COVID-19 pandemic on commodity markets more broadly
may result in longer-term changes. Transport costs may be higher due to
additional border-crossing requirements. Higher trade costs will in particular
affect agriculture and food commodities and textiles. Decisions to stockpile
certain commodities could affect trade flows and have an effect on global
prices.
Commodity-dependent emerging market and developing
economies will be among the most vulnerable to the economic impacts of the
pandemic. In addition to the health and
human toll they face, and the effects of the global economic downturn, reduced
demand for exports and disruption of supply chains will take a toll on the
economies of these countries.
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