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Commodity prices will rise in 2010, predicts IMF

As global economic activity expands after the financial crisis, commodity prices will rise further, driven by demand, says the International Monetary Fund.

The prices of commodities and risky assets in general rose last year in an early rally, with the initial impetus coming from the perception that the worst of the global recession was over, says the IMF in its Outlook for 2010.

Following wide-ranging public intervention, uncertainty and systemic risks in the financial sector were also perceived as lower.

This improvement in the near-term outlook helped commodity markets to benefit from increased incentives to hold inventories. Financial conditions improved, and credit availability for inventory financing rebounded to “more normal costs”.

In the longer-term, the IMF expects commodity prices to remain high by historical standards.

“The effects of the crisis have been to reduce prices somewhat below their 2008 peaks,” the IMF says. “[However], demand is expected to continue rising at a solid pace, as industrialisation continues in emerging and developing economies.”

In order to meet this demand, further capacity expansion in many commodity sectors is necessary. The IMF says this will result in a need to tap higher-cost sources.

Contrary to previous recovery periods, commodity prices have already risen considerably. The IMF’s commodity price index, for example, rose by over 40 per cent in the eight months since February last year, when global industrial production reached a low. After earlier downturns, however, the average rise over eight months after a low was 5 per cent.

Inventories remain above average for many commodities and there is substantial spare capacity in many commodity sectors, the IMF says. Unless the world economy grows much stronger than expected or experiences “other surprises”, this upward pressure is likely to remain moderate.

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