International Commodity Prices have Declined Further

According to the United Nations Development Programme (UNDP) 2016 African Economic Outlook Report, commodity prices, which started to edge down in 2013, fell sharply during the second half of 2014. The decline continued during 2015 and the beginning of 2016.

Between mid-2014 and January 2016 the oil price declined by more than 70 percent and is presently at its lowest level in 13 years, almost 30 percent lower than at its lowest level during the 2008/09 global recession. The main reason for the plunging prices is global oversupply. With new suppliers coming on stream, demand has not kept pace with supply but is restrained by slower economic growth in industrial and emerging countries, including China. Slowing demand from China and other countries also reduced copper prices to their lowest level in more than seven years.

Prices of other commodities, such as iron ore and gold, and export prices of some agricultural products, notably cotton, also declined, with gold price recovering recently. The decline of coffee prices was more moderate and the price of cocoa remained high in 2015. The AEO 2016 economic forecast for Africa is based on the assumption that the price of oil and other commodities will stabilize and slowly recover.

But given current low levels, average prices will still be lower in 2016 than in 2015, and will only increase in 2017. Assuming an average oil price level of USD 37 per barrel in 2016 and USD 48 per barrel in 2017, oil prices will decline by 27 percent in 2016 before rising by around 30 percent in 2017. However, given the uncertainties affecting the global economy in general and oil and commodity markets in particular, these assumptions involve significant risks, with downside risks probably more significant than upside risks.

Africa’s main commodity exporters are heavily affected by these price declines. In some countries production in extractive industries has continued to increase, thus boosting GDP, while in others production has been cut. The low price levels also weigh against profits and can have adverse effects on investment and exploration, thus reducing growth potential.

In several African countries, revenues from oil and non-oil commodity exports are the main source of finance for both import demand and, through tax revenues, government expenditure. These countries now have to cope with weaker current accounts and exchange rates and additional fiscal pressures.

However, lower oil prices also have beneficial effects as they reduce costs for heating, transport and production in energy-intensive sectors. Import prices of basic foodstuffs also continued to decline in 2015. Taken together with lower energy prices, this decline mitigates inflationary pressures, increases the purchasing power of households, tends to boost domestic demand and could also alleviate poverty. Commodity prices can affect Africa’s economic growth through various channels.

The overall effect depends on the size of oil and non-oil commodity exports and oil and food imports. Analysis by the African Development Bank shows that, in the short term, the growth impact (per percentage price change) through the export channel is largest for oil prices, followed by metal prices and export prices of agricultural products. However, over the longer term, the latter have the largest impact on growth in exporting countries.

According to this analysis, the average commodity price increase between 2010 and 2014 explains about 30 percent of growth in Africa’s commodity-exporting countries. However, this implies that if commodity prices remain at current low levels, growth prospects for Africa’s commodity-exporting countries would remain weaker than in AEO projections, which assume a gradual recovery of commodity prices during 2016/17.