Commodities: Little to cheer in outlook for new millennium

Washington, Aug 8 (IPS) -- World commodity prices have hit, or are near, their lows and no swift recovery is in sight, according to the World Bank.

"The recovery of prices isn't expected to be rapid unless the outlook for the global economy improves significantly from the current forecast," the Bank says.

"Large stocks of most commodities preclude a rapid recovery of prices," despite signs that demand is picking up following the 'Asian financial crisis' of 1997-98, according to the agency's latest 'Global Commodity Markets' report.

Third-World oil, metals and agricultural workers can draw only cold comfort from rallying prices because these have been mainly the result of cutbacks in production.

In addition, the Year 2000 (Y2K) computer problem, also known as the 'millennium bug', could disrupt key markets - especially the technologically-intensive energy sector, the quarterly report says.

Excess supplies of crude oil "could be reduced sharply by the end of the year and prices could remain strong", the Bank says, so long as exporters' output-reduction pacts hold in the face of a potential surge in demand as countries seek to stockpile oil in anticipation of Y2K.

Metals prices have rebounded over the past quarter but "stocks are still large and demand hasn't recovered, leaving further price recovery difficult."

Copper prices rose 4.3% over the last quarter as producers began to close high-cost mines and as Asian nations began to place new orders for the metal, which is used in a wide variety of industrial processes and products.

Steel prices rose 3.6% due to reduced trade following anti- dumping complaints by the United States and other countries, against cash-strapped Asian, Russian East European and Latin American producers. Production also was down 5% during the first five months of 1999.

Gold prices continued to fall amid news that the Bank of England would begin selling 25 tons per months from its reserves until March. Plans to sell a portion of International Monetary Fund (IMF) reserves to fund low-cost loans and some debt relief for the poorest countries have begun to have an impact after the period covered by the World Bank report.

Agricultural surpluses continue to grow amid larger-than- expected harvests in the 1998/99 season and projections of more bumper crops in 1999/2000. Income-support programmes designed to make production more market-sensitive among traditionally pampered European, US and wealthy Mexican farmers are having mixed results - mainly encouraging them to produce when prices are high (contributing to carryover stocks) with the promise of compensation should they need to cut output when gluts occur.

Estimates of existing global carryover stocks of grain have been increased, contributing to an 8% fall in prices over the past quarter.

Palm oil prices fell 18.6 percent, dragging down the overall index of fats and oils prices by 8.3% as a result of slightly increased production estimates and Indonesia's decision to lower its palm oil export tax in a bid to boost foreign sales and aid economic recovery at home.

Malaysia was hit by a 12.2% decline in its natural rubber export prices as 1998 global production exceeded expectations by 3.1 percent.

Similar price slumps have hit major sugar and cocoa exporters. Coffee prices were buoyed on expectations that frost would damage Brazilian production. The bad weather never came, and it soon became clear that the country had increased exports while cutting domestic coffee consumption.

Wet weather has dampened production of Southeast Asian logs and sawn wood as demand within the region picks up, stabilising prices. Poor prospects for reduced unemployment in Japan, a major importer of the region's timber products, are likely to keep demand "relatively flat", the Bank says.

Prices for tropical timber from Africa have fallen because of the weak euro, or European currency, sluggish economic growth in Europe, and increased price pressure from Southeast Asian exporters.

Demand for cotton is expected to pick up among East Asia's major importers and in Russia but production also is expected to increase everywhere except China, virtually guaranteeing a continued slide in prices.

This could adversely affect an "ambitious" five-year programme to modernise India's cotton sector - and nearly double yields. The South Asian giant's production this year is expected to rise eight percent. Increases also are expected in West Africa (7%), Argentina (9%), Greece and Uzbekistan (10% each) and Syria (16%).

The report warns that energy markets are the most likely to be hit by the resulting disruptions from the Y2K computer problems.

"Energy supplies are also vulnerable because oil production is the most technologically- intensive of major commodities (with)...embedded microchips used for production, transportation, refining, and distribution".

The Bank warns that "oil-producing countries strapped for cash, such as Russia and Nigeria, may face problems since they lack the resources to fix. Thus, stocks could build at every available point along the supply chain because of fears of computer glitches."

Transportation bottlenecks also could occur. Shipping rates for dry bulk ocean freight already are rising and some of this may be due to increasing imports of good which may be in short supply come Y2K.

If shipping demand and rates continue to rise, "adequate space may not be available to ship commodities and countries which depend on imports of food, fuel, and raw materials may find that they cannot import as expected."

Furthermore, "low-valued commodities may be crowded out by high- valued commodities and manufactures." This would have dire consequences for developing countries, causing "bulky commodities such as grains and tropical timber to be displaced by higher- valued cargo."

"This could lead to not only disruptions of normal shipping schedules but also to wide swings in prices as surpluses build in exporting countries and shortages develop in importing countries," the Bank says.

The above article by the Inter Press Service appeared in the South- North Development Monitor (SUNS) .