Asia's Imprint on Global Commodity Markets1

1. Asian Development Bank (2006).

Abstract

Dynamic growth patterns of developing Asia will continue to make strong impressions in world commodity markets. Driven by rapid income growth and economic development, developing Asia has surfaced as a major demand force behind the price dynamics of primary commodities. The region's economic growth and development has been tightly associated with rapid industrialization, urbanization, and massive infrastructure investments, which are all resource‐intensive. These trends are set to intensify as Asia's mammoth economies emerge. The paper provides an overview of Asian influence in world commodity markets and examines its changing patterns. It also attempts to quantify the impact of the rapidly growing Asian economy on long‐term resource utilization, using a General Equilibrium Model for Asian Trade to project regional growth scenarios. The model captures long‐run equilibrium tendencies in product and factor markets for the use of natural resources. The estimated results point to fundamental changes in market dynamics for a broad range of primary commodities.

Acknowledgements

The authors are grateful for valuable assistance from Lea Sumulong and wish to acknowledge helpful comments from Frank Harrigan and the Division staff.

Notes

1. Asian Development Bank (2006).

2. The IMF overall commodity price index covers a total of 41 commodities. The overall price index is divided into energy (47.8%) and non‐energy (52.2%) subindexes. The components of the non‐energy subindex are food and beverages (food [21.7%] and beverages [3.1%]) and industrial inputs (agricultural raw materials [11.3%] and metals [16.1%]). The energy subindex is comprised of prices of crude oil (39.9%), natural gas (4.5%), and coal (3.4%). The weights used for the IMF commodity price indexes are 1995–1997 average world export earnings. Data for its non‐energy subindex start in January 1980. Since its energy subindex begins only in January 1992, crude oil price is used as a substitute for the energy price subindex from 1980 to 1991.

3. Various industry reports claim that a rather long period of relatively low prices and capacity overhang through the 1990s led the mining industry to reduce excess capacity through mergers and restructuring (see Kitco Base Metals 2006 for example). Investment in exploration and development of new mines has been also limited. Even when metal demand started to rise after the Asian crisis, several major producers continued to reduce their inventory overhang rather than add new production capacity, a process that is now becoming more drawn‐out as regulations on environmental concerns tighten.

4. The relationship between the intensity of resource use and income has been established both in theory and empirics. Earlier studies that laid the foundation for the inverted U‐shaped intensity of use curves include Malenbaum (1973), Larson et al. (1986), Bernardini and Galli (1993), and Jänicke et al. (1997). See Cleveland and Ruth (1999) for a survey.

5. United Nations Conference on Trade and Development (2005) reports that sustained rapid growth and rising incomes in Asia have been accompanied by a dramatic shift in the pattern of international trade flows.

6. Boestel et al., 1999.

7. Throughout the modelling analysis in this section, developing Asia includes only East Asia, Southeast Asia, and South Asia. Central Asia and the Pacific are excluded.

8. International Energy Agency (2005) and Energy Information Administration (2006).

9. Lee et al., 1994.

10. Paltsev et al., 2005.