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Russia and commodity prices in the new IMF report

By Dieter Wermuth, Chief Economist, Wermuth Asset Management

According to the International Monetary Fund, Russia’s real GDP will expand by 3.7 % y/y in 2012, and by 3.8% next year. Growth continues to be revised down in response to the slowdown of world output. It seems that the new medium term growth rate is in the order of 4%, compared to 7% in the five oil boom years before the onset of the Great OECD Recession. The real GDP of advanced economies is expected to increase by only 1.3 and 1.5% y/y in 2012 and 2013 which means Russia’s economic catching-up process is alive and well, certainly from a macro perspective.

The World Economic Outlook contains a special feature on commodity markets. Here are some highlights that are relevant for Russia:

- Futures markets suggest the price of the Brent crude oil variety will fall to a little less than $100 by 2015, but risks are tilted to the upside because of ongoing geopolitical risks and potential supply disruptions, plus expectations of stimulus in China, the US and the euro area. This is very good news for Russian policy makers who are more downbeat about the oil price outlook.

- Short-term supply constraints will keep food prices elevated but in the medium term the current food spike will subside in the absence in the absence of major additional disruptions to supply and resulting trade restrictions. Even so, the level of corn, wheat and soybean prices will remain significantly above pre-2008 levels.

- As to metals prices, the IMF agrees with markets which expect some rebound after the sharp declines in recent quarters. They obviously anticipate a pickup in global economic activity in the fourth quarter of this year, most notably a positive impact from stimulus measures in China, the world’s largest buyer of metals. (I do not see this yet!)

- There is a comprehensive table that shows how commodity prices have moved since 2005, a pre-bubble year: most of them have increased a lot in those seven years, especially iron ore (396%) and tin (178%). Most of them have doubled, a significantly stronger increase than that of global nominal GDP. They are thus fairly expensive: food 71%, metals 94%, crude 94%, natural gas 78%, coal 98%. Some commodities are cheaper than in 2005: olive oil -48%, lamb -38%, shrimps -17%, softwood (Russia’s main timber product) -12% and natural gas in the US -74% (does not bode well for Russian gas prices): these rates are signs of oversupply.

- The world’s oil production has reached 91mb/d; since 2007 it has increased at an average annual rate of 0.9% – this includes the year 2009 when output declined by 1.5%. There is no sign of peak oil yet. At 10.7mb/d Russia is the second largest oil producer, behind Saudi Arabia (11.4) and ahead of the US (8.9), Iran (3.8), Canada (3.8), the North Sea (3.3) and the “Other Former Soviet Union” (3.0). On the consumption side, the US is leading the pack by a large distance (18.9mb/d), followed by the euro area (9.8) and China (9.4). The Commonwealth of Independent States produces 13.7m barrels, but consumes only 4.5m barrels.