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Commodities, oil to stay high says BIS

London, June 30, 2008

More expensive tastes in food and an insatiable economic thirst for oil in fast growing emerging markets are likely to keep commodity prices high, the Bank for International Settlement (BIS) said.

Government subsidies for energy and biofuels were further boosting demand while curbs on the use of land for agriculture in some industrialised countries put a lid on production, the BIS said in its annual report published on Monday.

'In the short run, slower growth in the United States will tend to reverse some of the recent spikes in commodity prices or at least dampen any further increases,' said the BIS, which acts as a central bank to its member central banks.

'However, commodity prices will be supported to the extent that the rapid growth in emerging economies, and in particular China, can be sustained,' the report said.

'Over the medium term, some of the structural demand factors ... such as the continuing economic transformation of China and India, seem likely to persist,' the organisation said.

Soaring food, fuel and energy prices have sent inflation spiralling globally and sparked protests in many countries.

Corn prices, for example, have climbed steeply this year and hit record highs last week as the worst floods in 15 years in the US Midwest damaged crop prospects. Wheat prices scaled all-time peaks in late February, though they have since fallen back on prospects for a record global crop this year.

Oil prices are also at record highs above $140 per barrel.

A key factor in the persistent growth in demand -- and prices -- was the rapid industrialisation of countries such as China and India, the BIS said. Global demand for oil, for example, grew on average by about 1.6 percent a year this decade, while Chinese demand grew at a rate of 6.7 percent.

'As a result, the share of China in global oil demand now exceeds that of Japan and Korea combined and is approaching that of OECD Pacific countries.'    

Rapid growth in emerging markets also played a key role in surging demand for food commodities, the BIS said. 'Rising per capita incomes, notably in China, have increased the demand for cereals, particularly for grain-fed livestock.'    

Meanwhile urbanisation reduced the acreage devoted to farming and higher oil and gas prices also raised the cost of both fertilisers and transport.

The BIS said some government policies were also pushing up prices. 'Subsidies for biofuel production increased the demand for maize and soybeans, which in turn raised the prices of other food crops by diverting production away from them,' it said. - -Reuters




Tags: Commodities | BIS |

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