IMF bearish on prices of raw materials

Financial Times

The International Monetary Fund has warned of “downside” price risks for non-oil commodities as global demand growth slows and supply conditions improve. The stabilisation of commodities prices and slowing demand is expected to keep inflationary pressures subdued, allowing central banks in emerging economies to start cutting interest rates and, over time, stimulate economic growth.The IMF’s outlook for commodities prices in early 2012 is a further downgrade of its view of the natural resources sector. Last September, the fund said the risks for raw materials prices were “more balanced” than in early 2011, when it cautioned about the potential for price rises.

The view contrasts with that of some of the largest commodities trading houses and banks, which have a neutral-to-bullish take on commodities markets, particularly for metals. The price of copper, seen as an indicator of economic activity, has risen 10.5 per cent since the start of the year to trade at $8,360 a tonne, its highest since September.

The IMF has beefed up its analysis of commodities during the past five years and is closely watched by participants. It was one of the few international bodies to predict that the 2008-09 financial crisis would only interrupt the upward trend in commodities prices rather than put an end to it.

The IMF said it expected non-oil commodities prices to drop 14 per cent in 2012 from last year’s average level. “For non-oil commodities, improving supply conditions and slowing global demand are expected to cause further price declines,” it said in an update of its World Economic Outlook. On oil, the IMF said prices would ease marginally in 2012, despite less favourable prospects for global activity, as geopolitical risks were likely to remain elevated. The impact on oil of “concerns about an Iran-related oil supply shock, or an actual disruption, would be large, given limited inventory and spare capacity buffers, as well as the still tight physical market conditions expected throughout 2012”.

The fund’s forecasts on global growth are used by the International Energy Agency as a basis for its forecast on oil demand growth. As such, the IEA was likely to mark down its predictions for global oil consumption when it published its forecast in early February, said analysts.

The warning comes as the IMF cut its forecast for global economic growth to 3.3 per cent this year, down from a projection of 4 per cent in September.

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