IMF projects further rise in Copper prices

IMF projects further rise in Copper prices
By Chiwoyu Sinyangwe
Tue 05 Jan. 2010, 04:01 CAT

COPPER prices are this year expected to trade above the current US $7, 000 per tonne level as the International Monetary Fund (IMF) predicts buoyant commodity prices, rallying on expanding world activity after the global crisis.

The latest projections from IMF come in the wake of growing pressure on the government to restore the abolished 2008 mining fiscal regime that could have helped the country to increase revenues from the vast mining sector.

“Commodity prices were surprisingly buoyant in 2009, and are expected to increase further in 2010 as world activity expands after the global crisis,” a recent study from the IMF Research Department has revealed.

“Looking at commodity price prospects from a longer-term perspective highlights how prices are expected to remain high by historical standards. The effects of the crisis have been to reduce prices somewhat below their 2008 peaks, but demand is expected to continue rising at a solid pace as industrialisation continues in emerging and developing economies.

Accommodating this demand will eventually require further capacity expansion in many commodity sectors, with some need to tap higher-cost sources.”

IMF together with the World Bank have been urging the government to further raise mining taxes and that the country should not have abolished the windfall tax this year.

According to the IMF Research Department headed by Thomas Helbling, commodity price prospects also depended on global macroeconomic conditions more broadly, including price developments for internationally traded goods and services more generally.

“Looking ahead into 2010, prices of many commodities are likely to increase further. The demand side should generally be the main source of upward pressure, as global activity is widely expected to expand at a faster pace,” IMF stated.

“With inventories remaining above average for many commodities and substantial spare capacity in many commodity sectors, the upward pressure is likely to remain moderate for some time, unless much stronger-than-expected global growth or other surprises lead to a rapid drawdown of these buffers…Information about expected future spot prices derived from key commodity futures options confirms that investors anticipate higher prices in 2010, but the probability of another commodity price spike would seem remote over the near term.”

The IMF also reviewed the overall performance of the commodities market, stating that at the outset of 2009, sharp declines in prices of the previous year seemed to foretell the usual misery for commodity markets during and after a global downturn.

The Breton Wood Institute however stated that prices, however, rebounded relatively soon and staged a strong rally from the second quarter of 2009 despite generally high inventories after the weakening of demand in the global recession of 2008-09.

"This commodity price rally at the early stage of the recovery in global industrial production (and ahead of global economic growth) contrasts with past experience. After previous global industrial downturns, prices typically continued to fall or rose at very modest rates, far below the increases recorded this year,” IMF stated.

“The IMF’s commodity price index, for example, rose by over 40 per cent in the eight months since global industrial production reached a trough in February 2009. In contrast, after earlier downturns, it rose by only five percent on average over the eight months after a trough. However, commodity prices also fell faster and by larger magnitudes in the second half of 2008 than in previous recessions.”

IMF explained the early rally in commodity prices saying the initial impetus came from the perception that the worst of the global recession was over and that the wide-ranging public intervention had succeeded in lowering uncertainty and systemic risks in the financial sector, a move that has helped in the recovery of prices of risky assets.

“Against this backdrop of an expected improvement in near-term outlook, commodity markets benefited from the increased incentives to hold inventories,” the analysis read in part. “At the same time, improving financial conditions provided for increased credit availability for inventory financing at more normal costs while rising inflows into commodity funds likely facilitated the hedging of inventory positions. The additional forward-looking demand for inventories, and some stabilization in stock buildups as end-user demand bottomed out, allowed for easier absorption of the continued excess supply (current supply minus current end-user consumption). Downward pressure on spot prices in turn eased as a result.”

IMF stated that additional impetus last year came from the buoyant recovery in emerging Asia and, as the year progressed, stronger-than-expected global activity more generally.

It added that the growing evidence of a relatively favorable economic performance in many emerging and developing economies had a strong impact on commodity prices, as commodity demand prospects increasingly depend on growth in these economies, given the steady rise in their market shares.

“Moreover, commodity demand in these economies is more income elastic than in advanced economies,” stated IMF. “Within these broad trends, the magnitudes of price increases in 2009 have varied considerably across commodities. Fuel and metals prices rose by much more than prices of food or agricultural raw materials. The variation in prices changes has reflected the usual differences in the cyclical sensitivity of demand across commodities, but also commodity-specific factors.”

Meanwhile, the pressure for the government to increase mining taxes has been growing with University of Zambia (UNZA) senior mining economics and engineering lecturer Dr Mathias Mpande saying the country should scrap the tax breaks in order to raise more revenue following a rally in metals prices in 2009.

“The colonial government used mining to create industrialisation elsewhere and we cannot continue mining in that pattern. The revival of mining is being based on the false concept that the state does not tax the mines,” Mpande said.

Mpande said apart from the lengthy tax breaks, mining companies were paying lower power tariffs to the state power utility, Zesco Limited, compared with other industry.