Talking its book, IMF forsees plunge in metals prices but no speculation

IMF Warns on Commodity Price Boom

By Krishna Guha and Kevin Morrison
Financial Times, London
Wednesday, September 6, 2006

http://www.ft.com/cms/s/e2259676-3dda-11db-bd60-0000779e2340.html

The commodity price boom over the last three years is unsustainable and will result in sharp price declines by the end of the decade, the International Monetary Fund has warned.

However, the fund is not predicting an immediate price collapse and its chief economist, Raghuram Rajan, said on Wednesday that metal prices were fairly valued.

Higher commodity prices have boosted the economies of resource-rich nations in the Middle East, South America, Africa, as well as Canada and Australia, but have added to the import bill in consuming countries in North America, Europe and Asia.

"The real annual average price of aluminium and copper will decline from current levels by 35 and 57 percent respectively by 2010," the IMF said in its World Economic Outlook, the analytical chapters of which were released on Wednesday.

The IMF also dismissed suggestions that increased investor interest in commodity markets had been a significant factor in higher oil and metal prices.

It said that in the oil market there had been no persistent increase in the number of futures contracts bought by speculators who had taken the view of higher prices. In the copper market there had been a fall in the net long position, reflecting moves by investors to buy futures with a view for higher prices.

The IMF said the metals' price declines would be a result of current high prices damping demand, and the expansion of mine and smelter production over the next five years.

For copper this would equate to a price of about $3,450 a tonne, from Wednesday’s price of $8,050, the result of an 80 percent gain so far this year. But the predicted fall would leave the price at a level well above the long-term average price of about $2,000. Aluminium was trading at $2,640 a tonne on Wednesday. The IMF's forecast equates to a fall to about $1,700 a tonne, leaving it slightly above its long-term average.

The World Economic Outlook also examines Asia's spectacular economic growth, and the relationship between financial systems and growth in advanced economies. The IMF finds that Asia's growth has been largely driven by increases in labour productivity, stemming from better education, more capital equipment and rapid increases in total factor productivity -- the effectiveness with which an economy utilises all its inputs.

Mr. Rajan said the Asian productivity surge helped explain why global demand for commodities was strong, but emerging market investment and inflation rates remained reasonably healthy.

The IMF study on financial systems, meanwhile, found that arms-length financial systems, characterised by the securitisation of debt via financial markets, were better at reallocating resources in response to technological change and globalisation than systems based on relationship banking.

"The relatively slow growth of productivity in much of the eurozone could, in part, be attributed to the nature of the financial system prevalent there," Mr Rajan said.

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Metals Price Rises Not Speculative, IMF Says

By Gary Duncan
The Times, London
Thursday, September 7, 2006

http://business.timesonline.co.uk/article/0,,16849-2345961,00.html

Soaring prices of commodity metals from aluminium to zinc are not being driven by profit-hungry speculators but by buoyant demand fuelled by booming global growth, the International Monetary Fund said yesterday.

Challenging the popular concern that speculators have lain behind much of the surge in commodity prices since the beginning of the decade, the IMF said its own assessment showed there was virtually no evidence to support the claim.

The conclusion came as the Fund also predicted that metals prices -- which have climbed by 180 percent in real terms since 2002 -- will retreat from their recent highs.

It said that substantial increases in supply of key metals, as new sources were exploited, would trigger drops in prices. This was despite its expectation that the world’s appetite for metal will continue to grow rapidly, boosted by the rapid growth of Asian economies led by China.

The IMF estimated that consumption of copper and aluminium would, for example, rise by 5.6 percent and 4.8 percent respectively over the remaining years of this decade, with China contributing about half of future demand growth.

However, the Fund was able to conclude that, even given this strong demand growth, the real annual average price of aluminium will drop from present levels by 25 percent by 2010, while the price of copper would drop by 57 percent.

While it said that "considerable uncertainty" surrounded these projections, similar trends were shown by prices in metals futures markets.

The IMF's analysis, in an early chapter from its twice-yearly World Economic Outlook, said that the jump in metals prices seen in recent years was not too dissimilar from the pattern seen during similar periods of booming global economic activity.

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