PRI81484 v1 Report No. 814/84 Price Prospects for Major Primary Commodities (In Five Volumes) Volume I: Summary and Implications September 1984 Commodity Studies & Projections Division Economic Analysis & Projections Department Economics and R('search Staff FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Notes and Definitions --Commodity market-price descriptions are shown on inside of back cover. --Dollars are United States dollars unless otherwise specified. --ALL tons refer to metric tons (1,000 kilograms) unless otherwise noted. --Differences may occur between data in detailed and summary tables as a result of rounding. Abbreviations and Symbols TONS ::: metric tons LB : : : pounds CUM '=' cubic meters NA not available KG = kilograms .. /--/ ::: no data Economic Classifications Industrial Countries'" North America ··· includes Canada, United States. EEC-9 ··· includes Belgium-Luxembourg, Denmark, France, Federal Republic of Germany, Ireland, Italy, Netherlands, United Kingdom. Other Western Europe ··· includes Austria, Finland, Iceland, Liechtenstein, Norway, Spain, Sweden, Switzerland. Asia and Oceania ·.· includes Japan, Australia, New Zealand. Centrally Planned Economies USSR Eastern Europe ··· includes Albania, Bulgaria, CzechosLovakia, German Democratic Republic, Hungary, Poland, Romania. Developing Countries'" Southern Europe ··· includes Cyprus, Greece, Israel, Malta, Portugal, Yugoslavia, Turkey. Africa .·. includes South Africa. Latin America and the Caribbean ·.· includes Cuba. Oceania ... excludes Australia and New Zealand. Asia .·· excludes Japan; includes China, Democratic Kampuchea, People's Democratic Republic of Korea, Lao People's Democratic Republic, Mongolia. Viet Nam. ~ Also includes American Samoa. Guam, Pacific slands, Puerto Rico, US Virgin [slands ~i[h North America; 3ermuda, Channel IsLands, Faeroe Islands. Falkland IsLands, French Guiana, French PoLynesia, Gibraltar, Greenland, IsLe of Man, Martinique, New Caledonia, Reunion with EEC-9. FOR OFFICIAL USE ONLY PRICE PROSPECTS FOR MAJOR PRIMARY COMMODITIES Report No. 814/84 VOLUME I: SUMMARY AND IMPLICATIONS This document has a restricted distribution and may be used by recipients only in the performance of their offICial duties. Its contents may not otherwise be disclosed without World Bank authorization. PRICE PROSPECTS FOR MAJOR PRIMARY COMMODITIES SUMMARY AND IMPLICATIONS Table of Contents Pref ace ··..·.....·...·.................··.··.·...·........... i Summary ······.····················.························· i i SECTION I: COMMODITY MARKETS IN 1982-84 ························ 1 II: ASSUMPTIONS UNDERLYING THE PRIMARY COMMODITY FORECASTS ·········································· 16 III: THE SHORT-TERM PRICE OUTLOOK: 1984-86 ············· 21 IV: THE LONG-TERM PRICE OUTLOOK: 1990-95 ·············· 31 V: COMPARISON WITH THE 1982 PRICE FORECASTS ··········· 35 VI: SOME IMPORTANT QUALIFICATIONS TO THE PRICE FORECASTS ·········································· 39 VII: FORECASTS OF CONSUMPTION, PRODUCTION AND TRADE TRENDS IN NON-FUEL PRIMARY COMMODITIES ············· 43 ANNEX: SPECIAL NOTE ON GRAIN CONSUMPTION PROSPECTS IN DEVELOPING COUNTRIES ···························· 76 List of Tables Table 1. Commodity Price Data ···..·.··.···.··.·.··.. " ···...··.······.····· 4 2. Growth Rates of Gross National Product in Major OECD Countries (Percent) ···..··.·..··.....·.·.·.·····.··.··..·.·. 8 3. OECD Industrial Production Growth: 1980-83 (Percent} ············ 8 4. Changes in the Value of the US Dollar Relative to SDR, ECU, and Major Currencies (Percent Change) ················· 10 5. Assumed Real GOP Growth for Regional Groups, 1984-95 (Percent Per Annum) ·.·..··.....·.........·.·..···.·····...·.·.·· 18 6. Projected Population Growth Rates, 1985-95 (Percent Per Annum} ·.........·...·.......··...····.·.·....·....·...·..·.. 20 7. Commodity Prices and Price Projections in 1983 Constant Dollars ················································ 22 8. Commodity Prices and Price Projections in Current Dollars ······· 23 9. Weighted Index of Commodity Prices (Constant Dollars) ··········· 26 9A. Weighted Index of 33 Commodities (Excluding Energy) (Constant US Dollars} ··········································· 27 10. Weighted Index of Commodity Prices (Current Dollars} ············ 28 lOA. Weighted Index of 33 Commodities (Excluding Energy) (Current US Do11ars) ············································ 29 11. Manufacturing Unit Value Index, 1948-95 ························· 30 12. Forecast Ranges for Metals, Minerals and Coal, Prices in Current Do1lars ·············································· 41 13. Growth of World Consumption of Major Primary Commodities and Consumption Shares of Main Economic Regions, 1964/66-1982 ······· 44 14. Projected World Growth in Consumption of Primary Commodities and Projected Consumption Shares of Main Economic Regions, 1985-95 ·.............·........ " .............··...·..·.·....·.··. 45 15. Growth of World Production of Major Primary Commodities and Production Shares of Main Economic Regions, 1964/66-82 ·········· 54 16. Projected World Growth in Production of Primary Commodities and Projected Production Shares of Main Economic Regions, 1985-95 ·....·.·.·.....................·....·..·..·..........·..· S6 17. Growth of World Exports of Major Primary Commodities and Export Shares of Main Economic Regions, 1964/66-1982 ··················· 63 18. Growth of World Exports of Major Primary Commodities and Projected Export Shares of Main Economic Regions, 1979/81-95 ···· 64 19. Growth of World Imports of Major Primary Commodities and Import Shares of Main Economic Regions, 1964/66-82 ·············· 65 20. Growth of World Imports of Major Primary Commodities and Projected Import Shares of Main Economic Regions, 1979/81-95 ···· 66 List of Charts Chart Page 1. Weighted Index of Commodity Prices Current US Dollars (1977/79=100) ··················.·············· 2 2. Weighted Index of Commodity Prices: 1948-1983 Constant US Dollars (1977/79=100) ·······················.········ 5 3. Quarterly Index of the Ratio of Real Primary Commodity Prices to Real GDP During Economic Recovery ·····················. 7 4. Official Selling Price and Spot Price Movement ·················· l3 Comparison Between Price Forecasts in Report 814/82 and 814/84 (in Constant 1977-79 Dollar Terms) ······················· ]7 5. 33 Commodities (Excluding Energy) ·················.········ 37 6. Petroleum .·.···.········.···········.·..·.···.············ 37 7. Beverages .·....·....·.·..·.·.·.·..··..··.......·........... 31 8. Cereals ·..·.·..·.·...........·..·.·.........·.......·.·.... 37 9. Fats and Oils .·...........................·..........·..... 38 10. Agricultural Raw Materials ········.······.·········.······· 38 11. Timber .·....·.··.····..··..·.·.··.····.·...··.·.·..····.··. 38 12. Metals and Minerals ····.·.······················.·········· 38 PREFACE 1. This volume is part of a five-volume report which reviews the market prospects for the major primary commodities exported by developing countries. Since 1980 this Report has been published each two years. Volume I examines the movements in commodity prices over the past two years and compares the forecasts made two years ago with prices realized in 1982 and 1983. It also describes the macro-economic assumptions which lie behind the forecasts made in this Report. As well, Volume I presents an overview of this set of forecasts of commodity prices, production, consumption and trade for all commodities and for the various country groupings. Volume II covers the commodity-specific discussions on the outlook for production, consumption, trade and prices of food products and fertilizers up to the year 1995. Volume III presents the outlook for agricultural raw materials, while Volume IV covers metals and minerals and Volume V presents the outlook for the energy commodities (oil, coal and natural gas). 2. The forecasts are mainly used in forecasting the balance of payments of countries that borrow from the World Bank Group and in appraising invest- ment projects that include these commodities as inputs or outputs. Because of the multiple purposes they are intended to serve, the price forecasts are presented in current (nominal) as well as 1983 constant dollar (real) terms.l/ Up to 1986 the forecasts are in terms of actual prices expected. For the years 1990 and 1995 the price forecasts are forecasts of the average levels expected for that period. 3. Many commodity prices are highly variable in response to variations in demand and supply. The forecasts are conditional on the various macro- economic and commodity-specific assumptions used--all of which are subject to uncertainty. Bank staff assessments of the likely growth of the world economy to 1995 and of expected rates of inflation over that period have been revised since the 1982 Report. These revisions, together with major changes in the factors likely to affect certain commodity markets, have led to substantial changes in the forecasts for some commodities. Users of the forecasts should keep in mind the underlying assumptions made and the degree of commodity market instability experienced in the past. 1/ Commodity prices have been deflated by the World Bank's Manufacturing Unit Value (MUV) index, and the US GDP deflator. The MUV index is the CIF index of US dollar prices of industrial countries' manufactured exports (SITC 5- 8) to the developing countries and may be regarded as a useful deflator to measure changes in the barter terms of trade of developing countries highly dependent on exports of primary commodities. The US GDP deflator may be a useful deflator to use in circumstances where the US inflation rate is believed to be an appropriate measure of changes in the price or cost level. - 11 - PRICE PROSPECTS POR MAJOR PRIMARY COMMODITIES: SUMMARY Recent History: 1980-84 1. The last peak in commodity prices was in 1980. Beginning in November 1980, there followed the largest cumulative decline (about 28%) and the most protracted length of decline (eight quarters) in commodity prices in the past three decades. In real terms, the 1982 price level (as measured by the World Bank's non-fuel commodity index) was by far the lowest in the post-World War II period. Of the three main commodity groups, the food group was hit hardest. On the one hand, this was the result of reduced demand, including the reduced demand for feedgrains by the livestock industries, and, on the other, the large harvests worldwide (e .g., in grains, sugar and soybeans). The reduced demand for the raw materials--agricu1tura1, metals and minerals, and energy-- led to substantial over-capacity in many of these industries. For some industries, particularly copper and nickel, over-capacity will be a depressant on prices for some time to come. 2. The year 1982 saw the GDP growth of the industrial countries near to zero for the third consecutive year. Unemployment continued to increase and interest rates, particularly for dollar funds, remained high. These phenomena fed into the primary commodity markets in terms of reduced demand for commodities and sharply lower prices. Economic recession in the industrial countries was transmitted to the developing countries through the fall in demand for imports, including primary commodities. Many developing countries experienced large falls in per capita incomes as their debt service problems, exacerbated by high interest rates, compounded the negative impact of falling world import demand on their rates of economic activity. 3. In late 1982, recovery began in commodity prices, 1n company with the start of the recovery in the United States. The Bank IS 33-commodity index shows a 16% increase in nominal prices from October 1982 to May 1984. There is a widesprE~ad belief that this upswing in commodity prices was rather mild. However, if the ratio of the commodity-price index to the US GDP (as a measure of industrial country performance) is plotted for this upswing and compared with the previous four recoveries (1960/61, 1967, 1970/71, 1975/76) it can be seen that this most recent recovery is unusual in that it is the only one for which the ratio is positive for the first four quarters of the recovery. The comparative early strength of the recovery in commodity price was likely due in part to the depth of the price decline during the recession. However, the main contributors to the increase in the index were the effect of the Payment- in-Kind (PIK), or acreage-reduction program in the United States on maize, wheat, soybeans and cotton prices and the impact of weather-reduced production of coconut oil (in the Philippines) and palm oil (in Malaysia) on fats and oils prices. The output-reducing effects of the PIK program were magnified by the severe drought which hit the United States in July-August 1983. - III - 4. Substantial Increases In price were also recorded by raw material commodities (cotton, rubber, copper, aluminum) in response to the pick-l~p in industrial activity (particularly in automobiles and construction). However, since the increase in early 1983, the metals/minerals index has declined steadily--except for a brief rise in March-April 1984 (in August 1984 the metals/minerals index was 6% lower than at the cyclical low point of October 1982). The Increase in metal prices in early 1983 led to reopenings of facilities and increases in capacity utilization rates--particularly in copper, aluminum and nickel--in anticipation of further demand growth and price increases. In the event, production increased much faster than consumption, stocks rose to high levels and prices fell. 5. With the increased prices recorded in the latter part of 1983 in the fats and oils group, primary commodity prices recorded an overall increase of 3.5% in real terms for the year, as measured by the Bank's index. The largest increases were registered by fats and oils (19%), agricultural raw materials (12.2%) and cereals (7.5%). Of the beverages, cocoa and tea also recorded substantial year-on-year increases in real terms. 6. The commodity price index remained stable from August 1983 to May 1984. In the following two months it fell sharply. Without a broad-based improvement in industrial production, demand for many raw materials has been relatively weak. As well as the metals and minerals, prices of raw material commodities such as rubber and timber have fallen back sharply from earlier gains. However, stock levels are being reduced in many of these commodities and there is some response to the pressures for industry rationalization to phase out economically inefficient plants. Increases in interest rates and in the US dollar exchange rate have tended to depress prices in recent months. However, for many agricultural commodities, such as tea, cocoa, grains, fats and oils and cotton, the declines were expected as prices had been pushed up by adverse weather or short-term political events. Short-term Price Forecasts: 1984-86 7. For the future, it seems that because of the stricter monetary control exercised in the past few years, the industrial countries now face lower inflationary tendencies than in the preceding decade. This should be reflected in more stable commodity prices in the future. Of course, agri- cultural prices are always susceptible to supply shocks. Economic growth, and therefore demand for raw materials, should continue in the industrial countries, though financial markets have indicated some reservations about the possible negative implications of continued high dollar interest rates. Moreover, there are still no clear indications of a strong, long-term increase In economic activity in the major Western European countries. Any sharp upturn In demand for the metals/minerals primary commodities, is in any case likely to be short-lived as the excess capacity which exists in most industries can be quickly brought on stream--as witnessed this past year. This is particularly true in the case of copper and aluminum. Primary commodity prices measured in current dollars are expected to show some increase in the period 1984-86. Non-fuel commodity prices, in nominal terms, are forecast to decline by 1.0% in 1984, but to increase by 6.2% in 1985 and by 12.6% in 1986. In real - tV - terms (deflated by the MUV) this means a decline of 4.5% in 1984, a decline of 2.4% in 1985 and an increase of 3.7% in 1986. In large part, the increase in the nominal commodity price index in 1985 and 1986 and the increase in real terms in 1986 is a reflection of the expected recovery of sugar prices (an important component in developing country exports) from the very low levels of 1984. All other food groups are expected to decline in real terms in the 1984- 86 period, while prices of the agricultural raw materials and metals/minerals groups are expected to increase only slightly in real terms over this period. 8. The main strength tn commodity markets in the short term is tn agriculture. For 1984 this largely reflects the price increases tn the beverages and the fats and oils group. In current dollars, the beverage group is expected to record an increase of 15.5% in 1984, with all three components increasing strongly: coffee by 11%, cocoa by 12% and tea by 44%. The beverages have the largest weighting in the Bank's commodity price index since these commodities are particularly important in the exports of the low-income group of developing countries. The prices of the vegetable oils have been declining in recent months and should decline further over the remainder of this year; however, the sharp price increases in the first part of the year will ensure a year-on-year increase of about 17% in 1984. The recovery of Malaysian palm oil and palm kernel oil production, the large South American oilseed harvest and favorable growing condi t ions for the new soybean crop in the Uni ted States were the main bearish factors in the recent price decreases. As expected, cereals prices declined in 1984 as production responded to the price increases of 1983, and as there was somewhat less support for the international grains markets through the US loan rate than in 1983. 9. The constant dollar metals/minerals price index is expected to fall below the 1983 level in the period 1984-86, even to lower levels than in 1982, as a result of the slow growth in industrial activity in Western Europe, further inroads from substitutes, continued over-capacity and continued cost- reducing programs. 10. Given the magnitude of the surplus production capacity in OPEC countries and the capability of non-OPEC producers to increase production, it is anticipated that with the foreseen slow growth in demand for petroleum that petroleum prices should decline in real terms through 1985. Coal prices rose sharply with the second round of petroleum price increases. However, they have declined in the past two years, initially in response to the economlC recession and later in response to the reduction in petroleum prices. The international coal market is likely to see the beginnings of a recovery in late 1984, but the price should not respond very greatly in the short term. Prices should increase in 1985 and 1986 at somewhat less than the rate of growth in the MUV. Long-term Price Forecasts: 1985-95 11. The movements in long-term commodity prices are probably best assessed in terms of constant dollars (current dollar prices are deflated here by the MUV index). The forecasts indicate an increase in non-fuel commodity prices totalling 16% in the period 1985-95 (see Table 3). This would bring the - v - index in constant dollar terms back to a level last seen 1n 1979. 11 The commodi ty groups expected to show the largest gains in real terms are the cereals, sugar and the metals/minerals. Beverages, fats and oils, and timber are expected to decline in real terms. These movements are in large part a result of the present levels of prices. The prices of beverages are at relatively high levels, particularly tea which has been experiencing a boom in prices. Coffee and cocoa prices have been buoyed up by weather-reduced production. Over the long term the basic fundamentals in these markets will reassert themselves. 12. It should be pointed out that the prices being forecast for tea in this Report are significantly higher than the forecasts made two years ago. Expectations of continuing fast increases in consumption, particularly in India (the major producer and exporter), and some pess imi sm about the scope for future production increase have led to these revisions in the outlook for tea. 13. Sugar pnces are at extremely low levels. However, there is little hope of a substantial improvement before late 1985 or even 1986. Prices are expected to increase substantially in real terms by the period 1990-95. The development of prices in this highly-protected market is such that, after a sharp price fall, production does not contract very much in response to the low free market prices because of the domestic policies which insulate production. However, imports are not so insulated and consumption grows under the stimulus of the low prices until stock levels return to normal bounds and prices increase. 14. Because of the large share which rice holds in developing country exports of cereals, the behavior of its price should dominate future cereals price changes as measured by the Bank's index. 2/ Prices of wheat and coarse grains are projected to decline in the long term as supply grows faster than demand. This is partly the result of a continuation of the improvements in yields. Also, it is anticipated that there will be gains from a movement towards more rational pricing policies, by developing countries especially. This liberalization should lead to productivity gains, particularly in such land-rich countries as Argentina, Brazil and Nigeria. On the demand side, the reduction in per capita incomes {because of the recession and the austerity 1/ From Chart 2 it can be seen that the barter terms of trade of primary commodities has trended downwards for the period 1948-83. Any conclusion drawn from this fact should be tempered by the qualification that there is a downwards bias in this trend because of the differential rates of change in the quality of the goods being measured. The quality of primary commodities does not change very much over time while the quality of the manufactured good in the MUV index has changed considerably over this period. 2/ The Bank's index is weighted by developing countries' pr1mary commodity export values. See Table 9 for details. - vi - programs introduced to cope with debt-servicing difficulties} will mean a slower growth than previously anticipated in demand for grains by developing countries. Rice prices are presently at low levels, even though stocks are at a historical low. This anomaly is due to the fact that there have been no large production shortfalls in any of the major importing countries in recent years and the rice market reflects some complacency. However, rice has been trading well below its historical ratio with the wheat price and it is expected that the price will return to a more traditional trading range. The rice market is a very thin trading market and is susceptible to small changes in product ion in any of the major importers or exporters. Hence, the rice price forecasts must be regarded as being very uncertain, with the likelihood of yearly prices falling in a wide range around the forecast trend prices. 15. Under the assumption of a return to reasonably good rates of economic growth in most countries, demand for raw materials should increase--though lower rates of growth in consumption are being forecast than two years ago. Widely-held opinions about the prospects for most of the metals and minerals commodities have changed markedly in the past two years (with the possible exception of aluminum). Metals such as copper, tin and steel, are under considerable threat of competition from synthetics or are adversely affected by environmental policies (e.g., banning of lead additives in gasoline, taxes to reduce pollution from smelting activities). Moreover, the existence of surplus capacity is widespread. This is the result of poor demand growth since 1974 and perhaps excess optimism about demand prospects. The earlier pessimism about the future outlook for supplies of exhaustible resources certainly stimulated investment in exploration and exploitation, as well as accelerating the search for substitutes and means of conservation. The success of the search for new sources of supply and substitutes now shows up in the highly competitive prices which rule in these markets. As a result of these pressures and the impact of' the recession, there have been marked reductions in the cost of production of existing and potential facilities and substantial material conservation in production. 16. Because it will take some time for the surplus capacity to be overtaken by demand, prices for the metals and minerals are not anticipated to increase in real terms until the period 1990-95. The long-run prices now being forecast are on average about 20% lower than those forecast in 1982, for the reasons enumerated above. 17. For the longer term, petroleum prices will be determined not only by the production policies of OPEC but also by a mix of other factors such as: (i) the exhaustible nature of oil resources; (ii) the enormous cost of proving reserves of oil; (iii) the price which consuming countries are prepared to pay to enhance their security of supply; and (iv) the cost of back-stop technologies. The availability of sizable supplies from non-OPEC exporters will mean that the revival of OPEC's production will be moderate through the end of the present decade, but growing more quickly beyond 1990. The intensity of energy use will continue to decline in all sectors, with oil use in sectors other than transportation being substituted for by other fuels. Within the transportation sector there is no substantial competitor for oil in sight wi thin the next 15-20 years. Measured in terms of 1983 constant dollars, - vii - petroleum prices are forecast to increase from $29.5 per barrel 1n 1990 (cnly marginally above the 1983 price) to $36.1 per barrel in 1995. Forecasts of Future Developments in Consumption, Production and Trade 18. The pattern of consumption of non-fuel primary commodities over the past 20 years reflects an increasing share of world consumption by the developing countries. This shift in consumption shares has been most rapid in metals and minerals, fertilizers and the agricultural raw materials such as cotton, jute, rubber, tobacco, and sawlogs and veneer logs. These changes reflect the increasing industrialization of the developing countries and the increased requirements for processing and construction. They also reflect the higher population and income growth rates in these countries. These changes are expected to continue. Developing countries are also projected to increase their share of total commercial energy consumption while the share of industrial countries is expected to decline almost proportionately. This is a reflect ion of the different trends in economic growth expected during the period and the anticipated sharper decline in energy intensity of production in industrial countries. 19. Production of non-fuel primary commodities has also been shifting from the industrial countries to the developing countries, with the shares of the centrally planned economies remaining nearly constant. The largest shifts in production have occurred in metals and minerals, fertilizers and agricultural raw materials. Moderate changes of a similar kind are projected for the future. For example, aluminum production is projected to continue to shift from the industrial countries and the centrally planned economies to the developing countries. By 1995,25% of the world's aluminum production is expected to be concentrated in the developing countries compared with 20% in 1985. Smaller shifts in the same direction are expected for iron ore, nickel, zinc, lead and manganese ore. Over the period 1985-95, the share of fertilizer production in developing countries is expected to increase from 28% to 35%. This is a reflection of the fact that the economics of fertilizer production has shifted markedly in favor of the countries endowed with cheap sources of fertilizer raw materials--particularly natural gas and phosphate rock. 20. A similar trend in the sources of production is projected for energy commodities, particularly petroleum. Supported by their enormous reserves, the USSR and the developing countries are expected to produce a larger share of the world's natural gas output. However, the industrial countries are expected to retain their existing share of the global supplies of coal during the projection period. 21. The developing countries' share of world imports is projected to grow 1n almost all commodities, reflecting both increased processing of raw materials and increased consumption. The most rapid growth will occur in agricultural non-food items such as cotton, jute, rubber and tobacco. While the growth in imports of many food i terns such as beef, coarse grains and beverages will be particularly rapid, those of rice and wheat will remain almost unchanged as a share of the global total. Imports of fertilizers by - viii - developing countries are projected to remain static as requirements are increasingly satisfied by domestic production. Imports of certain metals and minerals by developing countries will also increase as a share of the world total. 22. The centrally planned economies are expected to show little overall change in their imports as a share of world total. The largest percentage decrease is expected to occur in rubber (as it is substituted for by synthetic rubber). Imports of most metals and minerals are anticipated to increase over the forecast period, except for copper and zinc. The expected increase in imports of iron ore from nearly 6% of the world total in 1979-81 to around 18% of the total 1n 1995 1S notable. Centrally planned economies are also projected to increase their share of fats and oils imports. 23. Exports of the non-fuel primary commodities by the developing countries are projected to show less overall change over the projection period than imports. Fertilizer exports are anticipated to show the most rapid change, increasing from 10% of the world total in 1979-81 to above 26% in 1995. The industrial countries' share of fertilizer exports is projected to decline from around 67% in 1979-81 to 49% in 1995. 24. Among the industrial countries, Western Europe and Japan will continue to depend heavily on imports of energy, although intraregional trade will account for the bulk of these imports. For the industrial region as a whole, net energy imports are projected to remain at around one-quarter of total energy consumption throughout the projection period; the bulk of net oil imports will be sourced in OPEC countries; gas imports will come from the OPEC countries and the USSR; Australia, Canada, Norway and the United Kingdom will remain the few net energy exporters of the industrial region. After an initial period during which exports of energy from the centrally planned economies are expected to rise, a declining trend is anticipated to set in toward the end of the 1980s and early 1990s with the export compos1tlon changing from a heavy bias in favor of oil in the early period to natural gas by 1995. 25. Petroleum will remain the predominant fuel traded in the interna- tional market, though its share is anticipated to drop from around 80% in 1982 to 70% in 1995. OPEC's share of the international energy trade is projected to decrease in the short term until the mid-1980s and then increase gradually to reach around 45% in 1995 (up from about 43% in 1982). I. COMMODITY MARKETS IN 1982-84 1. The prices of most primary commodities in international markets started to recover in early 1983 from their recession-bound levels of the preceding year. Year-on-year the index of non-fuel primary commodity prices in current dollars gained 3.6% in 1983. 11 However, for the fourth quarter of 1983 the index was 15.9% higher than for the same quarter of 1982. It was in the second and third quarters of 1983 that most of the price increases took place. The recovery in prices has stalled since that time with the index showing little change during the first quarter of 1984 and subsequently heading downward sharply in the period June-August (Chart 1). As of August 1984, the index was about 20% below its level at the start of the recession in early 1981 and about 4% above the level reached at the bottom of the recession in October 1982. 2. In terms of broad commodity groups, the 1983-84 recovery in primary commodity prices was largely the result of increases in agricultural commodity prices, both food and non-food, stemming from temporary changes in supply conditions. The prices of metals and minerals increased by an average of 3.5% in the first half of 1983 (led by aluminum, nickel and copped but subse- quently declined to end the year at a level lower than at the end of 1982. Among the agricultural primary commodities, fats and oils led the way with a 60% increase between the fourth quarters of 1982 and 1983, and the prices continued to increase into 1984. 21 During the same period, agricultural raw materials commodity prices increas;d by 23.2%, beverages by 16.9%, and cereals by 20.5%. The price indexes for these commodity groups declined slightly in the first quarter of 1984, except for slight increases in beverage prices. All commodity groups have declined sharply since May, with the sharpest declines in the fats and oils, agricultural raw materials and timber. The run-up of tea prices over the past year has been equally as striking as that of vegetable oils, doubling in a year by January 1984. While fats and oil prices have fallen sharply with the return to normal harvests, tea prices have been supported at their high levels by the restrictions on tea exports from India. Cocoa prices steadily improved until January of this year to record a 59% gain between the last quarter of 1982 and the first quarter 1984, while coffee prices had relatively small increases. Natural rubber and cotton prices increased by as much as 43% and 34%, respectively, during 1983 compared with their 1982 year-end levels, but they have also fallen back lately. Among the 11 The World Bank Index of Primary Commodity Prices comprises 33 non-fuel primary commodities that are traded internationally. The prices are aggregated by using the average 1977-79 export values of developing countries as weights. 21 Prices of all vegetable oils (palm, coconut, groundnut and soybean oils) approximately doubled between 1982 and mid-1984; meal products did not increase as much. CHART 1: WEIGHTED INDEX OF COMMODITY PRICES CURRENT US DOLLARS (1917/79=100) 250 150 240- 140 230- 1--- PETROLEUM· 1.30 220- 120 210- 110~ .3.3 COMMODITIES 200- 100 190- 90 180- 80 170 70 J M M J S N J M M J S N J M M J S J M M J S N J M M J S N J M M J S 1982 1983 1984 1982 1983 1984 N 7 *AVERAGE OPEC PRIC£ 150 · i 150 · i 140 140 1.30 METALS &: MINERALS 130 120 120 <> ,. ~ - .... " ~ ···· 110 -I TOTAL FOOD 110 100 100 90 90 NON-FOODS 80 80 70 , , iii' iii $ , : i $ i i i 1 , i i ' , 'i i $ , 70' iii; i i 1 i 'i i 'i i' i " i! i i ' , J M M J S N J M M J S N J M M J S JM M J S N J M M J S N J M M J S 1982 1983 1984 198,2 1983 1984 - 3 - cereals, maize and grain sorghum led the upswing wi th increases of 42% and 22%, respectively, between the last quarter of 1982 and the first quarter of 1984. The sugar price almost doubled during 1983 but subsequently declined to the lowest level in the last ten years (Table 1). 3. The prices of non-fuel primary commodities recorded post-World War II record lows in 1982, in terms of constant 1983 dollars (Chart 2). 1/ The terms of trade of primary commodities vis-a-vis manufactured goods was 10% lower in 1982 than in 1978, the lowest--Po[n~o that time. The non-fuel primary commodity price index in constant dollars increased by 6.8% in 1983. This percentage increase was larger than the increase measured in current terms because of the decline in the dollar-denominated export prices of manufactured goods 1n 1983. 4. The behavior of primary commodity prices during the 1983-84 economic recovery has been peculiar in that increases in commodity prices were larger and took place earlier in the recovery phase than in previous economic recoveries (Chart 3). The current dollar index of non-fuel primary commodity prices increased by 15% in the first five quarters after the onset of economic recovery in 1983 in the United States, while US GDP increased by 14% during this period. In the earlier recoveries examined, primary commodity prices increased at lower rates than did the US GDP :iuring the early phase of the recovery. It can be argued that the pattern shown in the previous recoveries represents the normal relationship because it usually takes substantial increases in demand to absorb the excess capaci ty and stocks accumulated during the recession period. 5. Although US GDP growth has been remarkable during the past year and a half, most of the other industrial countries failed to do as well (Table 2). Many Western European countries remain in the doldrums, and Japan is only now showing signs of sustained recovery. Many developing countries have had to impose austerity measures to cope with their external debt problems, resulting in low or even negative economic growth. Overall, the 1983-84 recovery has so far been local ized and relat i vely mild and its impact on the demand for pr1mary commodities has remained limited. 6. Recovery of industrial production has been rather lopsided, with spectacular growth in the steel and automobile sectors in the second half of 1983 (Table 3). Again, in 1983 US industrial production increased much faster (at 6.5% p.a.) than in other industrial countries. The main beneficiary from the strong performance of the automobile industry has been the natural rubber industry where relatively stable supplies were confronted with suddenly increased demand. The International Natural Rubber Organization (INRO) opted to hold ontcl its large buffer stock even at prices higher than the "may sell II 1/ The price index in current dollars is deflated by the World Bank's Manufacturing Unit Value (MUV) Index, which is the CIF index of US dollar pr1ces of manufactured exports of industrial countries to developing countries. - 4 - TABLE 1: COMMODITY PRICE DATA ------------------------------------------------------------------------------------------------------------ ACTUAL PRICES (QUARTERLY) (MONTHLY) -----_..__... (ANNUAL AVERAGES) ---------AVERAGES-------- ------------ % CHANGE ----------- OCT":DEC JAN-MAR AUG JAN-DEC JAN-MAR 84/ AUG 841 COMMODITY UNIT 1982 1983 1982 1984 1984 1983/82 OCT-DEC 82 JAN 84 -----------------------------~------------------------------------------------------------------------------ *PETROLEUM $/BBL 33.2 29.1 33.2 28.5 28.5 -12.3 -14.2 0.0 BEVERAGES ------ COCOA tim 173.6 212.0 160.2 255.2 221.4 22.1 59.3 -15.6 COFFEE t/KG 308.5 290.2 303.5 321.2 320.3 -5.9 5.8 1.5 TEA tIm 193.2 232.8 203.8 389.2 297.2 20.5 91.0 -30.6 CEREALS ------ RICE $/MT 292.9 276.9 259.6 252.9 272.0 -5.5 -2.6 5.6 GRN SORGHUM $/MT 108.5 128.8 106.6 128.7 107.2 18.7 20.7 -17 .2 MAIZE $/MT 109.3 136.0 100.0 142.0 138.8 24.4 42.0 -2.2 WHEAT $/MT 166.5 169.5 163.7 175.7 157.6 1.8 7.3 -10.9 FATS & OILS ------- PALM OIL $/MT 445.1 501.4 364.3 865.0 562.0 12.6 137.4 -35.8 COCONUT OIL $/MT 464.4 729.9 417.0 1116.7 1079.0 57.2 167.8 0.9 *SOYBEAN OIL $/MT 447.3 526.9 406.0 693.7 679.0 17 .8 70.9 -1.9 SOYBEANS $/MT 244.6 281.6 225.7 304.0 261.0 15.1 34.7 -14.4 OTHER FOODS ---------- BEEF tim 239.0 244.0 248.0 232.7 215.9 2.1 -6.2 -4.6 SUGAR lim 18.6 18.7 13.8 14.7 8.9 0.5 6.5 -42.1 BANANAS $/MT 374.3 428.8 323.3 390.6 339.6 14.6 20.8 -0.6 ORAN:;ES $/MT 384.6 373.2 371.1 257~1 507.9 -3.0 -30.7 89.6 AGRIC .· NON-FOODS ---------------- COTTON tim 159.7 185.4 153.4 193.6 166.5 16.1 26.2 -13.8 JUTE $/MT 285.8 302.2 265.6 397.3 545.0 5.7 49.6 39.7 *WOOL tlKG 392.6 363.8 347.3 388.5 349.4 -7.3 11.9 -7.6 RUBBER lIKG 100.2 123.8 93.2 127.6 102.6 23.6 36.9 -19.3 LOGS (LAUAN) $/CK 145.2 135.2 141.4 177 .8 145.7 E -6.9 25.7 0.5 METALS & MINERALS ----------------- COPPER $/MT 1480.4 1591.9 1459.3 1435.6 1337.5 7.5 -1.6 -2.8 TIN tlKG 1282.6 1298.8 1213.0 1227.4 1230.2 1.3 1.2 1.5 NICKEL IF $/MT 5132.1 4801.9 3936.7 4823.7 4887.6 -6.4 22.5 0.8 LEAD lIKG 54.6 42.5 46.9 42.1 46.7 -22.2 -10.2 17.6 ZINC tlKG 74.5 76.4 71.0 99.9 83.4 2.6 40.7 -12.9 ALUMINUM /F $/MT 1061.1 1495.1 1023.3 1629.0 1249.2 40.9 59.2 -25.2 *SILVER t/TOZ 794.7 1144.1 997.9 898.7 761.3 44.0 -9.9 -7.0 IRON ORE $/MT 25.9 24.0 25.4 23.3 21.4 E -7.3 -8.3 -4.9 MANGANE SE ORE $/MT 164 .1 151.8 160.4 143.2 143.2 -7.5 -10.7 0.0 PHOSPHATE ROCK $/MT 42.4 36.9 40.0 37.5 38.5 -13.0 -6.2 1.3 SELECTED PRICE INDICES (1977/79-100) ------------------------------------ AGRIC. FOOD 84.6 88.7 76.7 94.2 82.9 4.8 22.8 -12.7 AGRIC. NON-FOOD (EX-LOGS) 100.8 113.2 96.8 118.2 104.0 12.3 22.1 -11.7 METALS & MINERALS 109.4 108.6 106.6 105.8 101.8 -0.7 -0.8 -1.6 33 SELECTED COMMODITIES** 94.7 98.2 88.7 102.0 92.4 3.7 15.0 -9.1 (EX-PETROLEUM) ······· ___····· ·· ~_._. ····· _ ··· __ ··· __ ._ ·· ___ · ·_____·· _ ···· _._ ···· __ · __ w·· _._._ ···· _ ·· __ · __ ····· _. __ . _ . ~ _.~ * - NOT INCLUDED IN INDEX E - ESTIMATE F · FREE MARKET *~: THE 33 COMMODITY-INDEX INCLUDES COMMODITIES SHOWN ABOVE PLUS COPRA, GROUNDNUT OIL, GROUNDNUT MEAL, SOYBEAN MEAL, TOBACCO AND BAUXITE. THE ASTERISKED ITEMS. HOWEVER, ARE NOT INCLUDED. CHART 2: WEIGHTED INDEX OF COMMODITY PRICES: 1948-1983 CONSTANT US DOLLARS (1977/79=100) 240 180 200 160 160 140 120 120 PETROLEUM· 80 100 40 80 0 60 48 52 56 60 64 68 72 76 80 48 52 56 60 64 68 72 76 80 I.n *AVERAGE OPEC PRICE 200 180~ I 290 -. 250~ .' , 160 NON-FOODS 140 210 120 170 130 100 80 90r METALS & MINERALS 60 , ' i , i ' i ; i ' , iii , , i ' , iii' iii iii iii i i j , 50 48 52 56 60 64 68 72 76 80 48 52 56 60 64 68 72 76 80 - 6 - level. Although the construction industry grew only at about 4.5% in 1983 for the OECD as a whole, the recovery of the housing and construction industry in the United States has been stronger. The impact of this differential growth on timber prices has been a rise in softwood prices, which comprises the bulk of demand in the US market, but relative dormancy of hardwood prices which are more directly influenced by demand in Japan and Western Europe. 7. Overall, the demand-side impetus to the prices of even those primary commodities sensitive to income changes does not appear to have been of great significance, except perhaps for rubber. This is well illustrated by the lack- luster performance of the metals and minerals prices so far. Note that this pattern is in line with past behavior of primary commodity prices during the early phase of economic recovery (see Chart 3). 8. Indeed, the unusually strong increase 1n the index of non-fuel primary commodity prices in 1983, despite the relatively weak economic recovery, can be explained for the most part by the supply-side shocks that affected agricultural prices. Adverse weather was the most important factor among them, but changes in government policies and civil disturbances 1n several developing countries also contributed to the price rise. It is generally a difficult matter to delineate the impact of supply disruptions on prices from that of other factors. However, the following commodity-by- commodity account of supply developments clearly conveys their importance in shaping the performance of commodity prices in 1983 and the first half of 1984. 9. Damage to cocoa trees from drought and brush fires in West Africa, dry weather in Brazil and Ecuador, and political and economic instability in Ghana--a major cocoa producer--explain most of the 38% increase in cocoa prices between the last quarter of 1982 and August 1984. The rapid increase in vegetable oil prices began with typhoon and drought damage to the coconut crop in the Philippines which drove up the price of coconut oil. This was exacerbated by the Indonesian ban on coconut oil and copra exports and civil disturbances in Sri Lanka which caused extensive damage to its coconut mills. The availability of palm oil as a substitute was reduced by the impact of dry weather and the "weevil-stressed" palms on palm oil production in Malaysia. Reports of widespread, weather-related damage to sugar plant ings led to a doubling of the sugar price in the first half of 1983, but the large carryover stocks and subsequently improved production estimates brought down the sugar price well below its level before the increase. 1/ 10. In an effort to reduce its large coarse grains stocks, the United States introduced the Payment-in-Kind (PIK) acreage reduction program that eventually reduced the 1983 acreage planted for maize, other coarse grains, cotton, soybean and other crops by 80 million acres. The drought that followed 1/ The behavior of the sugar pnce has been an important element in the movement of the non-fuel primary commodity price index, because of its volatility and high weight (11%) in the index. - 7 - CHART 3: QUARTERLY INDEX OF THE RATIO OF REAL PRIMARY COMMODITY PRICES TO REAL GDP DURING ECONOMIC RECOVERY* (LAST QUARTER PRECEDING RECOVERY = 100) 1~.01--------------------------------------r 130.0 /. 1975/76 RECOVERY 1' . ~/' 120.0 l2J.0 . · l1D.C / · 110.0 1983 RECOVERY . / \ --------~ " y / ......._"y 1967~COVERY ./ . 100.0 __ .... ,____. 100.0 .. .-. .... ...... '/ , . : , ".... , 1 9 7 0 / 7 1 RECOVERY .. ,.,................ .-.. . . .t, ........ ......... . . " ~......: . . '" . . . -. ---· -t· ............. --....,,!!- - - ---- ----- 90.0 ......... .. 90.0 "- ... ----.... ., . ~ ......... · 1960/61 RECOVERY m.o~--~--~--~--~--~--~--~--~--~ 80.0 I II III IV I II III IV I II *GDP of the United States deflated by the US GDP deflator is used as an indicator of global economic recovery. The weighted index of 33 non-fuel primary commodity prices is deflated by the US GDP deflator to arrive at the primary commodity price index in real terms. - 8 - TABLE 2: GROWTH RATES OF GROSS NATIONAL PRODUCT IN MAJOR OECD COUNTRIES (PERCENT) 1980 1981 1982 1983 IA 1ST HALF 2ND HALF UNITED STATES -0.3 2.6 -1.9 1.4 5.3 OTHER INDUSTRIAL COUNTRIES CANADA 1.0 3.4 -4.4 0.7 6.0 UNITED KINGDOM -2.3 -1.0 2.2 3.7 3.2 FRANCE 1.1 0.3 1.8 0.8 0.7 GERMANY 1.9 -0.4 -1.1 0.4 2.1 ITALY 3.9 0.2 -0.4 -3.0 0.7 JAPAN 4.8 4.0 3.3 2.7 3.4 WEIGHTED AVERAGE OF OTHER INDUSTRIAL COUNTRIES 7B 2.1 1.2 1.0 1.2 1.5 ------------------------------------------------------------------------------ IA GROWTH RATES OVER CORRESPONDING PERIODS OF 1982. IB WEIGHTED BY 1981 GNP EVALUATED AT CURRENT PRICES AND EXCHANGE RATES. SOURCE: IMF, INTERNATIONAL FINANCIAL STATISTICS, DATA FILE. TABLE 3: OECD INDUSTRIAL PRODUCTION GROWTH: 1980-83 (PERCENT) 1980 1981 1982 1983 IA 1ST HALF 2ND HALF TOTAL INDUSTRY (ISIC 2+3+4) 0.0 0.2 -3.9 -1.0 7.1 MANUFACTURING (ISIC 3) -0.8 -0.2 4.0 -1.4 6.9 CONSTRUCTION -5.0 -4.0 -6.3 2.0 6.9 STEEL -8.5 -1.5 -16.4 -9.9 16.4 AUTOMOBILES -7.9 -4.3 -3.7 9.3 15.7 IA GROWTH RATES OVER CORRESPONDING PERIODS OF 1982. SOURCE: OECD, MAIN ECONOMIC INDICATORS, VARIOUS ISSUES. - 9 - in the summer of 1983 further reduced the US output of these crops. These developments account for a large part of the 47% increase in the price of maize by the third quarter of 1983 compared with the last quarter of 1982. Other increases registered over the same period were 24% increase for grain sorghum, 33% for cotton, and 41% for soybeans. The increase in the soybean price also contributed to the price rise in the vegetable oils complex by increasing the cost of soybean oil. 11. Two major features of the primary commodity markets during the last 18 months were the significant reductions in stocks and the rationalizations of various industries by improving the efficiency of existing operations and the closure of economically inefficient ones. The US stockpi 1e of coarse grains virtually disappeared in the wake of the PIK program and the 1983 drought, while stocks of other agricultural commodities have been reduced by lesser degrees. The sugar industry is a major exception. Stocks were already at record-high levels in 1982/83, and with 1983/84 production again in excess of consumption, stocks have risen even further. Idling and permanent closures of mine capacity of minerals and metals, together with recent increases in demand, have led to sizable reductions in stocks of copper, aluminum, steel and tin. However, the metals and minerals industries are still plagued by excessive capacities that can easily inundate moderate improvements in demand. 12. Apart from the supply and demand fundamentals, the impact on commodity prices of changes and the expectation of changes in key monetary variables--money supply, interest rates and exchange rates--cannot be over- looked. High interest rates can depress commodity prices directly by increasing the cost of holding stocks and indirectly, among other things, by lowering the expectation of economic growth and by increasing the value of the currency relative to other currencies with lower interest rates. 13. It is difficult to think of a period other than the latest period of recession and recovery in which the behavior of the money supply and interest rates was of such overriding importance. The decline in US interest rates from the middle of 1982 not only assisted the US economic recovery in 1983, but also led to the expectation of a sustained and wider-based recovery as the US recovery progressed. However, interest rates began to increase again in late 1983. The volatility of interest rates during the last two years and associated changes in the expectations about economic activity has contributed to a widening of the ampl itude of fluctuations in industrial raw material prices (metals, minerals and non-food agricultural products). 14. The international reserves of the market economy countries (total reserves minus gold) contracted in 1982 and then expanded by 10% in 1983-- mostly as a result of expansion in industrial countries; growth in money supply in industrial countries (measured by currency in circulation and demand deposits known as Ml) also slowed down to 6.6% in 1982, but accelerated to 9.7% in 1983. Variations in the growth rate of domestic money supplies, of international reserves and of interest rates have affected the level of economic activity, and ultimately the prices of primary commodities 1n international markets. - 10 - 15. Of all the manifestations of monetary changes, perhaps most important for commodity prices has been the continuous appreciation of the US dollar vis-a-vis other major currencies. The value of the US dollar measured in terms ~Special Drawing Rights (SDRs) is now 28% higher than it was in 1980; it is 69% higher against the European Currency Unit (ECU), and 46% higher in relation to a trade-weighted basket of major currencies (Table 4). This large exchange rate adjustment took place at a time when the inflation rate in the United States was not significantly different from that of most other major industrial countries. 16. When other things remain constant, an appreciation of the US dollar is equivalent to an increase in the price of the commodi ty in terms of the currencies that depreciated in value relative to the dollar. Demand for the commodity in those countries that experienced a depreciation of their currencies vis-a-vis the dollar diminishes at the same dollar price, which will eventually- depress the dollar price itself. In a country exporting primary commodities, an appreciation of the US dollar could mean an increase in the local-currency price of the commodity, and hence an increase in its export supply at the same dollar price, which will also eventually exert downward pressure on the dollar price itself. TABLE 4: CHANGES IN THE VALUE OF THE US DOLLAR RELATIVE TO SDR, ECU, AND MAJOR CURRENCIES IA (PERCENT CHANGE) SEPTEMBER 1980 1981 1982 1983 1984 IB SDR -0.7 10.4 6.8 3.3 6.9 ECU 10.1 20.7 12.1 17 .0 6.2 MAJOR CURRENCIES Ic 0.2 12.6 11.7 5.8 12.7 IA PERIOD AVERAGES EXCEPT ECU WHICH IS BASED ON END OF PERIOD RATES. IB PERCENT CHANGE BETWEEN 1983 AVERAGES OR END OF 1983 RATE AND AUGUST 1984. I C IMF' S EFFECTIVE EXCHANGE RATE INDEX THAT COMBINES THE EXCHANGE RATES BETWEEN THE US DOLLAR AND OTHER MAJOR CURRENCIES WITH WEIGHTS DERIVED FROM THE IMF'S MULTILATERAL EXCHANGE RATE MODEL (MERM). SOURCE: IMF, INTERNATIONAL FINANCIAL STATISTICS, DATA FILE. - 11 - 17. It is difficult to measure the impact of the appreciation of the dollar on commodity prices. Because of factors such as differential inflation rates, taxes and subsidies, and above all the large trade weight of the United States, a one percent appreciation of the dollar should result in less than a one percent decline in the dollar price of an internationally traded commodity when other market conditions remain unchanged. !/ 18. There is, nevertheless, no doubt that the appreciation of the US dollar has had a major impact on the decline in the dollar prices of primary commodities since 1980. Between 1980 and April 1984, the index of non-fuel primary commodity prices in US dollars fell by 27%, but this is equivalent to an increase of 32% in terms of ECUs, or an increase of 9% in terms of a basket of major currencies included in the IMF's trade-weighted index. As inflation (measured by the consumer price index) in OECD Europe during this period was approximately 40%, the rise in commodity prices in terms of current ECUs would have meant a decline in terms of constant ECUs. However, this decline is much smaller than the decline in the index of non-fuel commodity prices in terms of constant US dollars, using the MUV as the deflator. One of the reasons for this discrepancy could be that the export prices of manufactured exports are less sensitive to the fluctuations in the value of the dollar than are the primary commodities. Although there are plausible reasons why this may be the case, it still remains only a hypothesis. 19. The recent years of economic recession and recovery have provided a severe test of the effectiveness of the few existing international commodity organizations. The International Tin Council (ITC) made a visible contribution toward a recovery in tin prices in early 1983 by imposing export quotas in the preceding year that led to a reduction in production by 20%. The export quota system under the International Coffee Agreement (ICA) also helped in maintaining coffee prices in 1983. However, coffee stocks held by the ICA continued to increase. Renegotiation meetings of the International Sugar Organization were unsuccessful in producing a new Agreement. The discussions over an international agreement for tea remain stalled, with the sticking point being the export quota shares to be allocated to each exporting country. While tea prices remain high there will be little enthusiasm on the part of 11 Results of econometric studies differ substantially on this point. Chu and Morrison found that the elasticity of non-fuel commodity prices with respect to the exchange rate is approximately equal to unity; i.e., a one percent appreciation of the US dollar relative to other major currencies has resulted in a one percent decline in the dollar price of non-fuel primary commodities during the 1972-82 period. The results for subgroups of commodi ties vary widely, however. See Ke-Young Chu. and Thomas K. Morrison, "The 1981-82 Recession and Non-Oil Primary Commodity Prices: An Econometric Approach," IMF, September 1983. Grilli and Yang, on the other hand, found that the elasticity is much smaller than unity, in the range of 0.2 to 0.3; see E. Grilli and M. Yang, "Real and Monetary Determinants of Non-Oil Primary Commodity Price Movements" (World Bank Working Paper No. 1981-6, December 1981). - 12 - producing countries to negotiate an agreement. Negotiation sessions for the renewal of the International Cocoa Agreement will begin in October 1984. The Cocoa Buffer Stock Manager played almost no role in the cocoa market over the past year--apart from holding onto existing stocks--as the cocoa price was within the Agreement price range during that period. 20. Since the March 1983 restructuring of OPEC petroleum prices and production, in which OPEC members agreed to lower the price of the marker crude to $29 per barrel and to limit their combined output to 17.5 million barrels per day (bId), the pricing regime has shown a remarkable degree of stabi lity despite several unsettling circumstances. The spot price for the marker crude oil remained at slightly below the official selling price (OSP) for most of the period, but OPEC was able to arrest its downfall to levels substantially below the OSP (Chart 4). It is now increasingly evident that it takes considerably more than the attacks on tankers in the Persian Gulf to rejuvenate petroleum prices. This obvious lack of concern by a market that has traditionally been extremely sensitive to events in the Middle East is due to the fact that the world petroleum industry is, at present, equipped with excess supply capacity of at least 8-10 million bId. Nevertheless, an enlargement of the conflict in the Persian Gulf could have a serious impact on oil prices. 21. The succession of events that led to the March 1983 OPEC Agreement provides an indication of OPEC behavior under adverse market conditions. The decision of the British National Oil Corporation towards the end of February to lower the price of North Sea light crudes by $3 per barrel triggered a chain reaction. Nigeria responded immediately by slashing the price of its light crudes by $5.50 per barrel--undercutting North Sea oil prices by $0.50 per barrel. This was the first time that an OPEC member had taken a unilateral pricing action of such magnitude. By the first week of March 1983, the price of Marker Crude in the spot market had plunged to below $28 per barrel, and OPBC members realized that, in view of the heavy drawdown on inventories in industrial countries (about 4-5 million barrels per day) and the seasonal reduction in demand, a collapse of oil prices may be imminent. OPEC oil production had dropped, by that time, to 13 million bId. Instead of engaging in a price war, OPEC has shown the capability to agree on a pricing and prOduction regime involving a price reduction, and subsequently adhere to the principles of the agreement despite difficult domestic economic problems in some of its member countries. 22. As the summer driving season approached and seasonal stock drawdown came to a close, the demand for OPEC oil exports increased substantially in the second quarter of 1983, close to the production ceiling agreed upon in March 1983. An important contributing factor in this increase was the faster- than-anticipated economic recovery in the United States. As US economic recovery accelerated, the demand for petroleum products reversed its downward trend in June showing an increase of 1.5 percent compared to the corresponding period in 1982. A relatively steep increase in the consumption of jet fuels during the first half of 1983 led to an increase of imports of lighter crudes in the United States. As a consequence, the price for North Sea Brent crude (marker crude for North Sea oil) began to rise in spot markets, and exceeded CHART 4: OFFICIAL SELLING PRICE AND SPOT PRICE MOVEMENT 34 0 Arabian Light Marker Crude 35 -, Official Selling Price 30 ;::;-"=...-:::. _ _ _ -_-..... ____ ~ ..1_-.=---------------- 1"'........... .....~ 25 Spot Price I-" IoN 20 15 10 5 Jan Feb Mar April May June July Aug Sept Oct Nov Dec Jan Feb Mar April May June July Aug 1983 1984 - 14 - the OSP level of OPEC for comparable crude oil by mid-June. This trend continued through July and early August; North Sea and African crudes as well as many other crude oils were traded in the spot markets above the OSPs. 23. Market balance once again turned around by September 1983 because production quotas were being exceeded by an increasing number of OPEC members (combined output was by then running around 18.8 million bid) at a time of a continuing soft demand. The increase in OPEC production would not have caused a softening of prices had the stock increases in preparation for the coming winter been as large as in previous years. Instead, stock accumulation was progressing at a much slower pace than before because of lower total demand, high stockholding costs, and the knowledge of the large supply availabilities. OPEC's policy, at this juncture, was basically defensive in that it maintained the production ceiling while issuing strong reminders to its members about their individual and collective responsibilities. However, the slide in spot market crude oil prices that had started in September of 1983 continued unabated through the early part of December 1983. The strength of the US economic recovery notwithstanding, the perception was growing that the soft market would eventually exert sufficient pressure on the OPEC prlclng structure to lead to a reduction in oil prices. The severity of the winter, notably in the United States, helped increase demand for petroleum products-- thus averting a price collapse. 24. As spring of 1984 approached and OPEC countries continued to produce at levels in excess of the combined ceiling, there was a general anticipation that considerable downward pressure could again build up on petroleum prices during the second quarter of 1984, in line with the seasonal downturn in demand. 25. The downward pressure did not materialize, however, until late in May 1984. The specter of the Iran-Iraq war escalating seriously appears to have slowed down the seasonal destocking process, limiting stock drawdown to just over two million bid during the first quarter of 1984 compared with twice that amount a year ago. Allowing for the stock drawdown in the first quarter, it is estimated that stocks were replenished at a rate of about 2 million bid during the second quarter; they grew to about 5 billion barrels by the end of June 1984. In the event, OPEC production continued at around 17.5 million bid during May and 18.0 million bid during June, setting the stage for the sharp prlce decline in July. 26. Despite these market developments, the July 1984 OPEC Conference managed to steer away from confrontation. The Conference marginally increased Nigeria's quota, reaffirmed its production and prlclng structure, and appointed delegations to visit OPEC and non-OPEC producing countries to shore up support for the pricing regime. 27. Market sentiment began to change at the beginning of August when OPEC members gave assurances not to exceed their quotas, and Iran and Saudi Arabia reportedly were aiming at lowering their production levels. Preliminary August figures indicate that OPEC production has fallen below the combined ceiling of 17.5 million bid. The market has also received support from the clear - 15 - intention shown by the British government to adhere to the current prlclng structure. With the Iran-Iraq conflict waning, the focus is now shifting to the prospects for the post-war period with likely claims by at least Iraq for an increased quota. 28. The remarkable calm with which the market has faced recent events indicates that circumstances have changed dramatically from those prevailing in previous market disruptions. At the core of this indifference lies the fact that not only a major part of any shortfall can be suppl ied from existing stocks and the strategic petroleum reserves in several consuming countries, but also there is large excess production capacity around the world and in regions outside the Persian Gulf. - 16 - II. ASSUMPTIONS UNDERLYING THE PRIMARY COMMODITY FORECASTS A Brief Overview of the World Economy, 1960-1983 !I 29. Primary commodities can be divided into categories of food, agricultural raw materials, minerals and metals, and energy. Except for the food commodities, the d.emand for primary commodities are derived from, and determined basically by, the level of industrial activity. Hence the perfor- mance of commodity markets can best be understood in the context of the behavior of the proximate and ultimate demand determinants--namely, the levels of investment and production actlvlty, and per capita GOP, respectively. Relatively speaking, prices of the non-food commodities and prices of their substitutes may be considered subordinate determinants. With a high proportion of the raw materials being initially consumed in the industrial countries, it is logical that market developments for these commodities primarily follow from changes in demand conditions initiated in the industrial countries. Consequently, a brief review of the background leading to the 1983 economic recovery in the industrial countries wi 11 place the recent commodi ty market developments in perspective and highlight those determinants about which assumptions have been made and which underlie the price projections presented here. 30. To analyze the forces underlying the behavior of macroeconomic indicators, it is useful to distinguish three periods--1961-1973, 1973-1980 and 1980-82. Throughout the 19609 rapid growth in the industrial countries induced expansion in the supply of raw materials. This helped fuel the equally impressive growth of many developing countries. 31. By the early 1970s, despite continuous growth, the international economy was showing various signs of tensions, whose manifestations included accelerated inflation and the abandonment of the fixed exchange rate gold dollar standard. The oil price increase in late 1973 exacerbated these existing problems since it meant a transfer of about 2% of the industrial countries' GDP to the oil-exporting countries while simultaneously affecting the profitability of the capital-intensive industries. 32. The 1973-1980 period was thus one in which the industrial countries had to contend with inflation and higher energy prices, and slowed down income growth and rlslng unemployment. While nominal interest rates rose, real interest rates remained low and, at times, negative. 33. The 1980-82 period was characterized by considerable disinflation, even though the 1982 average inflation rate remained higher than that of the 1960s. Severe monetary tightening and increased real interest rates characterized this period. II This section draws heavily on Chapter 2 of World Development Report 1984. - 17 - 34. During 1980-82, international trade declined both among the indus- trial countries and between these and the developing countries. This gave rise to further trade protection pressures. The United States, which had a large and growing budget deficit and high interest rates, experienced large capital inflows. The value of the US dollar appreciated sharply and exacerbated the downward pressure on the dollar prices of commodities. 35. Of the developing countries, the three hardest hit groups of count des are: - (a) those in Lat in America wi th cons iderab1e external debt involvement; (b) the oil-exporting countries which have been forced to adjust investment and consumption outlays in accordance with the lowered oil revenues; and (c) the countries of sub-Sahara Africa where the negative impact of political instability and severe financial constraints was aggravated by two consecutive drought years. In general, the smaller semi-industrialized and more outward-looking economies of East Asia that are less reliant on primary commodity exports were relatively less affected. 36. These recent events in the industrial and developing countries form the basis for the short-term growth assumptions presented below for the different groups of countries. Assumptions for the Short-Term Outlook 37. Projected short-term income growth in the industrial and developing countries is forecast as summarized in Table 5. 1/ A basic assumption underlying the forecasts is that both the United States and the other industrial countries will continue to maintain their present fiscal and monetary policies. In the circumstances, the rate of expansion of investment and of overall de~and will likely fall in 1985. The rate of inflation in US dollar terms for all industrial countries is also projected to be higher than that measured in national currencies. Inflation in the industrial countries in 1983, as measured by the GDP deflator in national currencies, was 5.2%. This rate is projected to fall further to 4% during 1984-85. The US dollar-based inflation is likely to be about 2.1% in 1984 and 5.4% in 1985. Of course, all aspects of these projections, but more particularly those relating to prices and monetary and financial developments, are fraught with uncertainty. 38. For 1982 and 1983 estimated GDP growth in the developing countries, in real terms, was 1.9% and 1.0%, respectively. The projected 3.6% and 4.5% GDP growth rate for the developing countries for 1984 and 1985 respectively represent a considerable improvement over the GDP of recent years. This improvement in outlook for the developing countries implies a transmission of growth from the industrial countries to developing countries through an increase ln the demand for their exports of primary commodities and manufactures. 1/ These forecasts were developed in conjunction with the development of the "high" and "low" growth scenarios for world outlook described in World Development Report 1984. The assumptions described here, both short-term and long-term, can be regarded as a "central case lt outlook for the world economy. - 18 - TABLE 5: ASSUMED REAL GDP GROWTH FOR REGIONAL GROUPS, 1984-1995 (PERCENT PER ANNUM) REGIONS 1984 1985 1986 1987-1995 Industrial Countries 4.1 2.8 3.3 3.3 Centrally Planned 3.5 3.5 3.5 3.5 Developing Countries 3.6(1.0) 4.5(1.9) 5.1(2.5) 5.1(2.6) Middle Income oil Importers 2.7(0.3) 3.7(1.3) 5.3(2.9) 5.4(3.1) of which: Major Exporters of Manufactures 2.6(1.0) 3.7(2.1) 5.7(4.3) 5.8(4.4) Middle Income Oil Exporters 3.3(0.6) 4.9(2.2) 5.0(2.3) 5.0(2.4) Low Income Asia 5.7(3.6) 5.5(3.4) 4.9(2.5) 4.9{3.0) Low Income Africa 2.5(-0.3) 2.9{0.1) 3.0(0.2) 3.1(0.1) SOURCE: WORLD BANK, ECONOMIC ANALYSIS AND PROJECTIONS DEPARTMENT, GLOBAL ANALYSIS DIVISION. NOTE: FIGURES WITHIN PARENTHESES REFER TO PER CAPITA REAL GDP. 39. Nevertheless, the developing countries are expected to continue to face severe financial constraints. In general, they are unlikely, within the short term, to regain the growth rates of the 1970s. Only the low-income Asian countries are expected to grow at 5.6% throughout 1984 and 1985--as compared to the 5.3% growth achieved during the 1980-1983 period. Much of this expected growth will be due to the sustained growth in China and India. In contrast, the low-income African countries are expected to make little or no improve- ments in their per capita GDP. Assumptions for the Long-Term Outlook 40. The outlook for 1984 and 1985 presented above forms the basis for the assumptions concerning the outlook for the long term, the 1986-95 period. When projecting events of a decade and beyond it is clear that allowance must be made for the susceptibility of the numerous macroeconomic variables to random shocks. Hence, in evaluating the long-term outlook two extreme scenarios were delineated from which the base or central case scenario was derived. - 19 - 41. The high-growth case rests on the assumptions of successful macro- economic policies in the industrial countries and sound economic management in the developing countries. Such an outcome would yield a high rate of growth of output alongside falling inflation and unemployment. Correspondingly, real interest rates would also decline, thereby encouraging investment. World trade would increase, and the increased demand for primary commodities would lead to improved commodity prices which, while alleviating the financial constraints of the developing countries, would also improve their credit standing. This would faci li tate further borrowings for investment purposes, thereby generating growth in the developing countries. 42. Conversely, the low-growth case is predicated on an unfortunate combinat ion of macroeconomic pol icies. Poor macroeconomic management by the industrial countries would lead to low growth, a deterioration of the inter- national economy and further instability in the system. It would foster a return to high inflation and the persi stence of high unemployment rates. Protectionist sentiments would then likely become stronger, particularly with regard to manufactured goods. This would render more difficult the developing countries I efforts to industrialize. The consequent slow growth of primary commodity and manufactured goods exports from the developing countries would worsen their debt-service ratios. In the face of such an unfavorable global environment, the developing debtor countries would be likely to resume inward- looking policies. These typically would reduce incentives for efficiency, thus worsening resource allocation. The net effect would be further dowm.ard pressures on international trade and global economic growth. 43. The long-term central case scenario assumes that industrial countries grow at 3.3% per annum in real terms. The real interest rate is assumed to be 3% while the Manufacturing Unit Value (MUV) index averages 7% p.a. over this period and the US$ inflation rate is 6% p.a. Higher growth and reduced unemployment in the industrial countries would 801 so tend to reduce protec- tionist sentiments and induce higher imports from the developing count ries which would thus be better able to service their external debts and in turn expand their imports and incomes. 44. Of the key macroeconomic variables, the assumpt ions concerning the long-term energy and population developments are critical. The long-term behavior of fuel prices, especially oil, is important because of the fuel- oriented structure of the world economy. In brief, no significant price increases are expected for fuels in the period through 1986, but the real price of petroleum should start to increase again in the 1987-95 period. The price increases are likely to be modest initially, at about 2% annually during 1985-90 but to increase at about 4% annually during 1990-95--thus averaging about 3% for the decade. A more detailed discussion of the long term outlook for fuels is given in Section IV. 45. The question of popUlation growth is especially relevant to the developing countries. Regrettably, the outlook for lower population growth in many of the developing countries during the coming decade remains dim, with annual growth for all developing countries of about 2.5% persisting to 1995. Projected population growth rates for the various developing regions are given in Table 6. - 20 - 46. The long-term, central-case GDP growth assumptions made for the various regions of the world are presented above in Table 5. The developing countries are assumed to average 5.1% p.a. over this period. The greatest improvement in performance is expected from the middle-income oil importers. Little improvement in performance is expected from the low-income countries of Africa. TABLE 6: PROJECTED POPULATION GROWTH RATES, 1985-95 (PERCENT PER ANNUM) REGIONS 1985 1986 1987-1995 All Developing Countries 2.6 2.6 2.5 Low Income Asia 2.1 2.1 1.9 Low Income Africa 2.8 2.8 3.0 Middle Income oil Importers 2.4 2.4 2.3 of which: Major Exporters of Manufacturers 1.6 1.4 1.4 Middle Income Oil Exporters 2.7 2.7 2.6 Centrally Planned Economies 0.9 0.9 0.6 SOURCE: WORLD BANK, ECONOMIC ANALYSIS AND PROJECTIONS DEPARTMENT. 47. The primary commodity price forecasts made on the basis of these short- and long-term macroeconomic assumptions are summarized in the following two sections. - 21 - III. THE SHORT-TERM PRICE OUTLOOK: 1984-86 48. The individual commodity price projections are shown in constant and current dollars in Tables 7 and 8, respectively. Weighted price indexes for commodity groups and subgroups are shown in constant and current dollars in Tables 9 and 10, respectively. 11 The MUV index for the period 1948-95 is shown in Table 11. Primary commodity prices in aggregate are expected to show a small decline in 1984 and then to increase in the period 1985-86. The 33- commodity index (excluding petroleum) is forecast to increase in current dollar terms by 6.2% in 1985 and by 12.6% in 1986 (see Table 10). In constant dollar terms (deflated by the MUV index) these forecasts show almost no increase over the period 1984-86 (see Table 9). 49. The main strength in the short-term outlook is in agriculture. For 1984 this largely reflects the increases in the beverages and the fats and oils. The beverage group is expected to show an increase of 15.5% in 1984 in current dollars (see Table 10), with all three components recording strong increases: coffee up 10.7%; cocoa up 12.3%; and tea up 43.8% (see Tabl e 8). The beverages have the largest weighting in the Bank's commodity price index and these commodities are particularly important in the exports of the low- income group of developing countries. For the 1985-86 period, the coffee price is forecast to rise in current dollars while cocoa and tea prices are forecast to fall slightly. The recent high prices for vegetable oils were the result of the severe drought which occurred at the same time that the Payment-in-Kind (PIK) program for acreage reduction was being implemented in the United States. Malaysian palm oil output was also sharply reduced in 1983, as was copra output from the Philippines (the main producer and exporter). Vegetable oil prices are expected to decline in 1985 and 1986 as Malaysian palm oil output recovers and prOduction of other oilseeds return to normal. Prices for cereals (excluding rice) are expected to fall in 1984 as production responds to the price increases of 1983. 50. The main strength in the commodity price index in the period 1985-86 is expected to come from the price recovery in sugar (one of the commodities in the "Other Food" category in Tables 9 and 10) and cotton and rubber ("Non- Food" category). Large stocks of sugar and the failure to negotiate a new International Sugar Agreement (ISA) are among the causes of the sharp decline in sugar prices during 1984. It does not look as though there will be much in the way of a recovery in sugar prices before 1985. With production being held under control as a result of the present very low levels of world prices and 11 Tables 9A and lOA present the 33-commodi ty index of Tables 9 and 10 weighted in terms of the vaLue of exports for African, Latin American and Asian countries, as weLl as for industrial countries and the world. The differences in the composltlon of exports by the developing country regions show up sharply in the changes in the indices over the period 1985-95. - 22 - TABLE 7: COMMODITY PRICES A1m PRICE PROJE:CTIONS IN 1983 CONSTANT DOLLARS IA ------------------------ACTUAL---------------------------- -----SHOI / / ~ .... (::l d .... .... '. / ~/ ~ .\./ . /' I:) " , ,- /' g _/ I:) XC) wd ~ !~ (\ 0 ~ ~- 1::) REPORT 814/84 - ~ ~ ... " ..... ;~ 0 8 .... . q § '''': ~ 'r/ '0= V \ J\ Report 814/:f~ o / ,.,-- '" .- .... ~ 0 g 1 ". ~' 0 · I " · Q (::l1 o 00 rrrrrrrrrrrrrrrrrrrrrTTTTTTTrTTT 814 84 0 " ort TTTTT¥TT 00 Q is 51 5i 57 60 63 66 69 72 75 78 81 Si 87 90 95 c-rrrrrrrrrrrrrrrrrrrrrrTTTTTrrTTrrTTTTTTTTTTTTTT .C is 51 5i 57 60 63 66 69 72 75 78 61 8i 87' 90 95 YI~AR YE:AR W --.t C) CHART 7: BEVERAGES 'J o CHART 8: CEREALS 0:;) -g ..... il!- --------------------------------------------~ C) 'J .., C:l ..... g .... } ' ~~'~ ~~ (::l 'J d .... ('\I 'J .... ':'\I . A (:) 'J x8 8 .... ~~i '\ ~ _RT'~~2 ~ ~g W- !;~ (::l "'- ....... (:;) . 'J d ....... \< ()) PORT 814/,84 ':0 /\ -------j.'J ~~ (::l ,. d ~---1~ d- ID .;0 ,::> --....-"" .::> l" -"" _ (:)-1 REPORT 814/82 d mORT 814/84 .". .... (~ 0:;) 0:;) 0:;) d d Ji~ (::l ('\I-~rrrrrrrrrrrrrrrrrrrrrrTTTTTTTTTTTTTTTTTTTTTT · .:-.1 w-rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrTTTTTTTTTTTTT i8 51 5i 57 60 63 66 69 "2 75 78 m Hi 67 9(1 93 i8 51 5i 57 60 63 66 69 72 75 18 81 8i 87 90 9!i YEI1R YE:AR COMPARISON BETWEEN PRICE FORECASTS IN REPORT 814/82 AND 814/84 (IN CONSTANT 1977-79 DOLLAR TERMS) o CHART 9: FATS AND OILS 0 a CHART 10: AGRICULTURAL RAW MATERIALS 0 8~------------" ------------- - :iT-------------~---------- a -T~ .., - o a .., a ~ - a 0 i o a ~ ~ - ~ o - ~ o ~~ a 0 ci ~~ 0 'REPORT 814/8J ~ - R o ~q ~ z0 - 0 · .. ~8 g .... 8 - ~ J\f\ R,,,,,,, ')4182 - ~ __ a o ~ ~ a § ", l\j\ 'I .. ...-- t 0 § ei ~~PORT ~ =~r,.,.,..,.,-rTTT~T~~""" ,J~ g . g Q 814/84 C! 0 ~_rrrrrrrrrrrrrrrrrrrrrrrrrrrTTrTTTTTTTTTTTTTTT~~ g 48 51 54 57 60 63 66 69 72 75 78 81 &I: f!l 90 93 4B 51 54 57 60 63 66 69 72 75 76 61 54 B7 00 !:J3 YE:AR YE:AR w 00 o CHART 11: TIMBER a Cl CHART 12: METALS AND MINERALS o g------------------------------------------ - ~ o -------------REPORT 814/8v:r~ a Cl - :5 o f / - R o lJ( \;" 1 I \" /" ,_-t~ La - ~ o - >i3 o Iii REP~RT 814/84 -g ... ci - ... .::i / ><- ~- t.J Cl o -,.. REPORT 814/82 Ze ...... . Q ..-- ~. '"- 0 ~- r~ fiI il - W. __ . .-t§ / 0 o o i a si ~ Cl I \/"" REPORT 814/84 o ~Jliiii 54 48 51 rilill illl IrrrrrrlrillliiITTTTTTTTTTTTTTf~l~ 57 60 63 66 69 72 7S 7B 61 &I: f!l 90 93 fiI +rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrTTTTTTTTTTTTTT iB 51 54 57 60 63 66 69 72 75 78 81 54 87' 00 93 i YE:AR YE:AR - 39 - VI. SOME IMPORTANT QUALIFICATIONS TO THE PRICE FORECASTS 73. The price forecasts presented in this volume and in the companion volumes are conditional in nature. That is, they rest on the assumptions made about the future economic environment as well as the forces at work within each industry, such as substitution and productivity growth. Expectations about events in a future period change as we move through time. For this reason this forecasting exercise is conducted every two years on the basis of a revised set of assumptions about the future prospects of the world economy. 74. The forecasts are positive rather than normative in nature, in the sense elaborated below. They are· based on the most likely assumptions con- cerning government policies affecting production, consumption and trade of primary commodities, market structures, and demand and supply conditions. They indicate, therefore, what is thought likely to happen, given a set of predetermined conditions affecting the demand, supply and trade of commodities, rather than what would happen if certain desired policy changes would occur. These forecasts necessarily involve considerably more judgment on the part of analysts in setting out the market conditions that are most likely to occur (e.g., in the field of price support and trade policies> than would be involved in normative forecasts. Given the use of the price forecasts in project and country policy analysis by the operational departments of the World Bank Group, trying to forecast what is most likely to happen, as opposed to what would happen if desirable policy and market structure changes were to take place, becomes inescapable. 75. For the most part, the forecasts of consumption, production, trade and price were made within the framework of the Division's global econometric models for the individual commodities. Forecasts of GDP, inflation rates and population are prepared elsewhere within the World Bank and these variables are introduced as exogenous variables to the models. Individual country pro- jections of consumption, production and trade for each commodity were discussed with Operations staff working on those countries. After such discussions the models were rerun, constraining the projections where it was thought desirable in the light of these discussions or on the basis of judgments formed using other information. In general, therefore, the models are used as tools to facilitate consistency of frameworks and scenarios for deriving price projections. For most of the metals/minerals commodities, the long-run forecasts were based on long-run marginal cost models. The estimates of long-run cost curves were arrived at by a combination of engineering, geological and economic information that made the maximum possible use of cost information available within the Bank. For these and other commodities for which the Division does not have global econometric or mathematical programming model s, a simple comparat i ve-stat ic equil ibrium model of production and consumption, disaggregated by region and country, was used as a consistency framework within which to make the projections. 76. Apart from the possibility that the key assumptions behind the price forecasts may not eventuate, users of these forecasts should bear in mind that the long-term forecasts, i.e., for 1990 and 1995, are trend or average prices. Actual year-to-year prices may well vary substantially from these levels. - 40 - Trend prices are provided for use in project analysis because the expected mean price is the appropriate price to use. The literature on public decision- making under uncertainty was recently reviewed by the Division to see if the form in which it provides price forecasts is the appropriate one. 1/ Some analysts have argued, for example, that a single point forecast IS not adequate and suggest instead a probability distribution forecast. After reviewing the extensive literature, we arrived at the conclusion that public project decisions generally should not be influenced by the expected variance around the expected mean price (or costs). This conclusion supports prevalent practice. 77. All projects are risky but, in the public domain, risks of individual projects will be shared by the large number of members of the society. Hence, while individuals may be averse to risk in their private decision-making, society is neutral. Under these circumstances, the relevant criterion for public projects is the maximization of the mean or expected present value of net benefits. 78. This general conclusion may be changed under exceptional circumstances, in particular in the case of exceptionally large (relative to the size of the economy) projects where the income stream from the project is highly correlated with national income. Another case where formal accounting for uncertainty may be important or desirable is for projects with socially uninsurable risks to significantly disadvantaged groups that would suffer unacceptably in the event of unfavorably uncertain events. 79. Because mining projects are among the most likely kinds of projects where the criterion of "largeness" and correlation of the project income stream with national income is most likely to be fulfilled, the Division has elicited probability distributions for the metals and minerals price forecasts. The probability distributions were generated by sampling the Division's analysts as well as analysts from the Mining and Non-Ferrous Metals Division (ElS) who worked closely on the preparation of the forecasts. The opinions of the analysts were sampled within the framework of a triangular distribution, and the individual distributions were aggregated for each commodity on the basis of a predetermined weighting system. Analysts were asked to provide price forecasts for each year under "worst possible," "most likely" and "best possible" scenarios. The derived probability distributions are presented in Table 12 in the form of the means, the ranges and the coeffi- cients of variation. It is hoped that these distributions will provide a useful input for analysts wishing to undertake risk analysis. 2/ 1/ J · R· An d e r son, ,; .F. ; .o-;: r,. .:e,. .:c;. ;a; .;s;. ;t.;. . .,.in.,.-gSL<.,---,~U~n='c='e_r-:-t;;.;a;;;..i_n'::Ctc-y"-::_a:='n--::d:---:P_u..;;.b_l--::i::-'c'---..;;.P_r;;.;0--tJ·Le.;;,..c.;;,..t"':-_A+p".,p~r:-=-a'-'i,...:s;;.;a:...;;..l · Division Working Paper No. 1983-4, World Bank, Economic Analysis and Projections Department, July 1983. 2/ The Division would be pleased to receive responses regarding the useful- ness of presenting the price forecasts in this form. - 41 - _____ ~~_~_.~s_~ ___________._____..____.__________._.__________________.___________________..___._.________________ TABLE 12: FORECAST RANGES FOR METALS, MINERALS AND COAL, PRICES IN CURRENT DOLLARS Copper ($/mt) Copper (t/lb) Low Mean High CV IA Low Mean High CV 1985 1,295.20 1,550.00 1,915.25 6.28 1985 58.75 70.30 86.88 6.28 1986 1,468.81 1,764.00 2,094.37 5.80 1986 66.63 80.01 95.00 5.80 1990 1,758.17 2,602.00 2,948.65 5.93 1990 79.75 118.03 133.75 5.93 1995 2,177.04 3,792.00 4,354.09 5.84 1995 98.75 172.00 197.50 5.84 Tin .po FATS '" OILS - SOYBEAN OIL 6.6 71.7 72.8 64.3 65.7 1.4 1.5 1.2 1.1 26.9 25.7 34.5 33.2 - PALM OIL 8.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 100.0 100.0 100.0 100.0 - COCONUT OIL 1.8 1.1 1.3 1.1 0.9 0.0 0.0 0.0 0.0 98.9 98.7 98.9 91.9 ~QE!~Y1rQg~_~Q~=fQQ~~ COTTON 1.6 25.4 18.9 21.8 18.9 16.7 17.6 19.1 19.8 57.9 63.5 59.1 61.3 JUTE 0.4 0.0 0.0 0.0 0.0 1.2 1.6 1.3 1.5 98.8 98.4 98.7 98.5 RUBBER 3.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 100.0 100.0 100.0 100.0 TOBACCO 1.9 35.6 32.5 28.6 2';.0 10.6 10.7 10.2 8.8 53.8 56.9 61.2 66.2 ~~!~~~_~_~!~§~~~~ /B ALUMINUM 6.2 74.3 72.0 66.0 60.2 20.7 20.0 18.4 20.3 5.0 8.0 15.6 19.5 COPPER 3.2 50.2 49.0 42.2 38.8 IS.A 17.2 20.3 20.9 34.0 33.8 37.5 40.3 IRON ORE 2.7 44.0 41..5 33.11 27.6 27.1 27.2 2R.6 32.2 28.9 31.3 37.6 40.2 LEAD 2.6 53.5 57.7 55.0 55.0 19.9 19.5 20.5 21.2 26.6 22.8 24.5 23.9 MANGANESE ORE 2.3 3.7 6.9 9.2 7.5 38.5 33.5 33.6 36.7 57.fl 59.5 57.2 55.8 NICKEL .~ .5 69.4 68.3 52.8 46.0 22.8 21.9 23.9 31.3 7.8 9.8 23.4 22.7 TIN 1.1 1.5.2 14.2 9.3 fl.9 5.8 5.2 8.2 8.4 79.0 80.6 82.5 82.7 ZINC 4.6 63.0 61.8 55.4 54.6 17.7 19.5 22.3 21.7 1'1.3 18.7 22.3 23.7 f~~~!Q~b_!!g!!~!~§~~ /C 6.9 68.3 61.0 47.4 41.8 21.6 27.3 29.7 32.0 10.1 11.7 22.9 26.2 --------------.~--------------------------------------------------------------------------------------------------------------------------------------------- iA LEAST SQUARES TREND GROWTH RATES FOR WORLD PRODUCTION. IB INCLULDES ORE AND METALS. Ic INCLUDES NITROGEN, POTASH AND PHOSPHATES. SOURCE: WORLD BANK, ECONOMIC ANALYSIS AND PROJECTIONS DEPARTMENT. - 55 - total while their share had fallen to 42% by 1982. Over this period the share of the centrally planned economies grew from 21% to 32% while and the develop- ing countries' share grew from 10% to 26%. 127. Forecasts of changes in the shares of production of non-fuel pr1mary commodities for the years 1985, 1990 and 1995 are shown in Table 16. The regional shares of metals and minerals production are projected to remain nearly stable over the forecast period. One exception is tin production, where the production share is projected to increase slightly in the industrial countries and decrease in the developing countries as tin production expands in Canada and declines in Bolivia and Malaysia. Aluminum production is projected to continue to shift from the industrial countries and the centrally planned economies to the developing countries. By 1995, 25% of the world's aluminum production is expected to be concentrated in the developing countries compared with 20% in 1985. Small shifts in production in the same direction are expected for iron ore, nickel, zinc, lead and manganese ore. 128. Fertilizer production is projected to continue to shift towards the developing countries and away from the industrial countries. By 1995, production will be nearly equally distributed with 35% of world fertilizer production in the developing countries and the industrial countries and 30% in the centrally planned economies. This development is a reflection of the fact that the economics of fertilizer production has shifted markedly in favor of countries endowed with cheap sources of fertilizer raw materials--particularly natural gas or phosphate rock resources. 129. Moderate changes in agricultural production patterns are projected for the forecast period. Wheat production in the developing countries will 1ncrease from 40% of the world's production in 1985 to 44% by 1995. The emphasis on sugar production will continue to move from the industrial countries to the developing countries although the rate of movement will be relatively slow. A slight increase in intensity of agricultural non-food production shares in the developing countries is also projected over the forecast period with cotton, tobacco and sawn logs and veneer logs all increasing their share of production in the developing countries. 130. Agricul tural Production. The share of agricultural production from the developing countries has increased in recent years as increased fertilizer use, investment in irrigation and improved varieties have boosted developing country production. Increasing concentration of highly labor-intensive crops such as citrus, cotton and tobacco is also occurring 1n the developing countries because of low wages. Protectionist policies in certain industrial countries and expansionary policies 1n developing countries have also contributed to production shifts. 131. Foodstuffs. World wheat production grew at an annual rate of 3.7% p.a. during the decade of~ 1960s, 3.1% p.a. during the 1970s and 1S projected to grow at 2.4% during the 1980s. The developing countries are projected to increase production at the rate of 3.5% p.a. over the 1985-95 period compared to 4.8% p.a. during the 1970s. The centrally planned economies will struggle to overcome the production problems which plagues them during I TABLE 16: PROJECTED WORLD GROWTH IN PRODUCTION or PRIMARY COMMODITIES AND PROJECTED PRODUCTION SHARES OF MAIN ECONOMIC REGIONS, 1985-95 I COMMODITIES RATE OF GROWTH IA ill97apg -----------------------------------PRODUCTION SHARES------------------------------------ INDUSTRIAL COUNTRIES 1985----1990----1995 CENTRALLY PLANNED ECONOMIES 1985--------1990-------1995 DEVELOPING COUNTRIES T985-----I990-----T99~ -------------------------------------------------------------------------------------------------------------------------------------------- l f !2~!!!!!~ BEVERAGES COcOA-BEANS COFFEE (% P.A.) 0.6 1.0 ---------------------------------------(%)---------------------------------------------- 0.0 0.3 0.0 0.3 0.0 0.3 0.0 0.0 0.0 0.0 0.0 0.0 100.0 99.7 100.0 99.7 100.0 99.7 l TEA 2.7 4.9 4.6 4.2 7.4 8.0 7.7 87.7 87.4 88.1 CEREALS roARsE-GRAINS 1.5 45.1 46.3 47.0 18.7 18.0 17.8 36.2 35.7 35.2 RICE 2.6 5.9 5.7 5.7 0.7 0.9 0.9 93.4 93.4 93.4 WHEAT 2.4 34.2 35.0 35.1 25.8 23.1 21.3 40.0 41.9 43.6 OTHER FOODSTUFFS BEEF&-vEiL----- 1.6 44.8 44.8 43.6 19.1 19.3 20.2 36.1 35.9 36.2 ORANGES & TANGERINES 2.9 36.0 37.8 35.8 0.6 0.6 0.7 63.4 61.6 63.5 LEMONS & LIMES 3.0 41.3 41.3 42.0 0.0 0.0 0.0 58.7 58.7 58.0 \J1 SUGAR 2.5 25.4 25.6 24.2 14.3 13.5 12.0 60.3 60.9 63.8 0\ FATS & OILS I - SOYBEAN OIL 3.8 61.8 59.9 60.0 1.2 1.2 1.2 37.0 38.9 38.8 - PALM OIL 5.4 0.0 0.0 0.0 0.0 0.0 0.0 100.0 100.0 100.0 - COCONUT OIL 1.6 1.0 1.0 1.0 0.0 0.0 0.0 99.0 99.0 99.0 ~-RICYb~_!Q!=!QQ~~ COTTON 1.7 17.7 17.1 16.8 18.0 17.6 17.1 64.3 65.3 66.1 JUTE 1.3 0.0 0.0 0.0 1.3 1.2 1.1 98.7 98.8 98.9 RUBBER 2.7 0.0 0.0 0.0 0.0 0.0 0.0 100.0 100.0 100.0 TOBACCO 2.1 27.7 25.1 23.2 9.4 8.9 8.2 62.9 66.0 68.6 SAWLOGS & VENEER LOGS 0.6 27.1 26.8 2".1 13.8 12.7 11.7 59.1 60.5 63.2 METALS & MINERALS IB --ALuMlNijM------- 1.9 59.3 58.2 56.8 20.3 19.4 18.6 20.4 22.4 24.6 COPPER 1.5 37.8 32.9 33.6 21.5 28.7 22.6 40.7 38.4 43.8 IRON ORE 0.7 32.0 29.4 27.9 30.7 30.7 30.3 37.3 39.9 41.8 LEAD 1.6 53.8 52.3 50.6 20.8 21.8 22.3 25.4 25.9 27.1 MANGANESE ORE 0.5 9.4 9.5 9.5 33.2 33.2 33.0 57.4 57.3 57.5 NICKEL 1.1 44.8 44.0 42.9 28.0 26.2 24.4 27.2 29.8 32.7 TIN -0.4 8.5 10.5 11.3 8.3 8.1 8.1 83.2 81.4 80.6 ZINC 2.2 54.1 53.6 53.0 22.1 21.7 21.3 23.8 24.7 25.7 Qtl§~I£~_!§!Ilb~§!§ Ic 3.0 40.1 37.0 35.0 31.0 31.0 30.6 28.9 32.0 34.4 -----------------------------------------------------------------------------------------------------------------------,----~ IA END POINTS OF GROWTa RATE FOR WORLD PRODUCTION. /B INCLUDES ORE AND METALS. Ic INCLUDES NITgOGEN, POTASH AND PHOSPHATES. SOURCE: WORLD BANK. ECONOMIC ANALYSIS AND PROJECTIONS DEPARTMENT. - 57 - the last half of the 1970s, and are projected to increase production at the rate of .7% p.a. over the 1985-95 period. The growth of production in the industrial countries will slow to 2.8% p.a. over the 1985-95 period from the faster rates of the previous decade in response to the slower growth in the export market. 132. World coarse grain production is projected to grow at 2.0% p.a. over the 1985-95 period compared with 3.1% p.a. during the 1960s and 2.5% p.a. during the 1970s. The slower growth in the 1980s relative to the 1970s is due to a decrease in real prices compared to the 1970s, unfavorable coarse grain prices relative to wheat and lower world trade levels due to the lingering effects of the world recession. Growth for the developing countries is projected to average 1.8% p.a. over the 1985-95 period compared to 2.4% p.a. in the industrial countries and 1.5% for the centrally planned economies. 133. World rice production is projected to grow at 2.7% p.a. over the 1985-95 period compared with 2.8% over the 1961-82 period. The growth of production has been assisted in recent years by the spread of high-yielding rice varieties. These trends will continue during the 1980s as more countries adopt the high-yielding varieties. However, by the 1990s, a number of countries will be near the saturation level in the use of high-yielding varieties. Countries which exceeded 50% of their total area planted to high- yielding varieties in 1979 include the Philippines, Malaysia, Indonesia, Sri Lanka, Pakistan and South Korea. 134. Production of fats and oils is projected to grow at an average annual rate of 3% over the 1985-95 period compared with a historical growth rate of 3.9% over the 1961-82 period. A major portion of the vegetable oil supply will come from soybean crushed for meal. The supply of soybean oil is projected to grow at 4.6% p.a. during the 1985-95 period. The United States and Brazil continue to dominate soybean production although a number of other countries such as Argentina and Paraguay will increase their market share. India is also expected to increase soybean production in line with its policy of increased self-sufficiency in oilseeds. Palm oil is projected to grow at 3.9% p.a. over the 1985-95 period, with palm oil output from the major producer and exporter, Malaysia projected to grow at 4.5% p.a. Production from Indonesia, the second largest producer, is expected to more than double by 1995 with a projected growth rate of 7.% p.a. over the 1985-95 period. 135. The 1985-95 growth rate of world beef and veal production is projected to be 2.2% p.a. compared with a 2.3% p.a. growth rate over the 1961- 82 period. Production will be encouraged by the lower grain prices over the decade of the 1980s; however, competition for the consumer dollar will continue to be strong from other meats, particularly poultry and pork. 136. Substantial productivity gains obtained in both poultry and pork production have not been duplicated in beef production. This has led to increasing prices for beef relative to poultry and pork and to a declining share of beef consumption in the world market. Although research is underway to increase the productivity of beef through twinning and embryo transplants the prospects of a major change in beef productivity appear remote. This suggests that the share of beef will continue to decline. - 58 - 137. The most rapid growth in sugar production is projected to be in the developing countries where production is expected to increase at the rate of 3.5% p.a. over the 1985-95 period. Asia is projected to produce 27% of the world's production by 1995 compared with 18% over the 1979-81 period. Over the same period the industrial countries will likely see a decline in world production from 29% in 1979-81 to 23% in 1995. Central and South America will maintain approximately a 30% share of world production over the period. 138. Citrus production is expected to grow at 2.9% p.a. between 1980-82 and 1995 compared to 4.5% over the past two decades. The regional shares of production of the various citrus fruits are not expected to change signifi- cantly over the forecast period. Production of oranges, tangerines and grapefruits is expected to grow more rapidly in the developing countries than in the industrial countries while production of lemons and limes is expected to grow slightly faster in the industrial countries than in the developing countries. 139. The growth of citrus production is expected to shift geographically over the forecast period. Countries which experienced the most rapid growth in citrus production during the 1960s and 1970s were the United States, Israel, Italy, Greece and Japan. These countries are projected to experience a slower rate of growth in the future due to the expected lower profits for citrus growers and limitations on suitable areas for citrus production. Increased citrus production is expected in Cuba, Cyprus, Egypt, Morrocco, Turkey and Uruguay. Production in this latter group of countries is being aided by government planting and marketing programs. Production in Spain is expected to grow more rapidly after its accession into the EEC in 1986. 140. Beverages. World ~ production is projected to grow at 1.9% p.a. over the 1985-95 period compared with a 1.3% p.a. for the 1961-82 period. Production is solely concentrated in the developing countries with Africa and South America accounting for the largest share of production. For the forecast period, Brazil and the Ivory Coast will continue to remain the largest producers of cocoa beans, however, Malaysia is projected to increase production nearly five-fold over the 1979-81 to 1995 period. The current high prices may also encourage a number of countries to undertake production expansion programs. Likely candidates for expansion include the Philippines, Indonesia and Colombia. 141. World coffee production is projected to grow at an annual rate of 1.0% p.a. over the 1985-95 period. This relatively slow growth in production is likely because of the impact of the current large supplies and an attempt by a number of countries to diversify out of coffee production. Events in Brazil will continue to be the most important influences on world coffee markets. Trees planted in the last seven years are still maturing and Brazil's production is expected to reach 32 million bags by 1995. Diversification out of coffee is projected for Colombia, which currently has stocks in excess of one year's production. Honduras and Mexico are also projected to diversify out of coffee with production remaining near current levels over the next decade. The longer term production trends for coffee suggest that Central America's production will stagnate as low returns encourage diversification into other - 59 - commodities. Africa has less opportunity for diversification and coffee production will continue to expand in this region. 142. liJor1d production of tea is projected to grow at 2.8% p.a. over the 1985-95 period compared with a-:3.2% p.a. growth rate over the 1961-82 period. Production is concentrated almost exclusively in the developing countries with Asia representing the major producer. India and China are expected to remain the largest producers, with African production expected to increase signifi- cantly. Kenya is projected to nearly double production over the 1979-81 to 1995 period. Argentina is also projected to show a significant percentage increase, however, production will remain relatively small in both Africa and Latin America. 143. Future world tea production is expected to come primarily from increased yields since prospects for the opening of new tea areas in existing producing countries are limited. India and Sri Lanka, two of the largest producers, have not increased area over the last five years. The potential for further increases in Kenya also appears limited. The USSR and China have been increasing production rapidly in recent years and future growth appears likely. 144. Agricultural Raw Materials. liJor1d production of rubber over the 1985- 95 period is projected to grow at 3% p.a. compared with a 1961-82 growth rate of 3.4% p.a. Production in Malaysia, the world's largest producer, is projected to grow slowly over the 1985-95 period with a growth rate of 0.5% p.a. compared to a 1961-82 growth rate of 3.9% p.a. This slower growth rate is caused by the diversification policy being pursued since the early 1960s which has led to a decline in rubber area. Further extensive diversification out of rubber seems unlikely as oil palm has already claimed the more productive areas. Indonesia, which is the second largest producer of natural rubber, is projected to increase production at 5% p.a. over the 1985-95 period. Indonesia has the largest area under rubber of the major producing countries although much of this rubber is unfarmed or "sleeping" rubber ·. By 1995, Indonesia's production is projected to equal that of Malaysia. The third largest rubber producer, Thailand, is projected to increase rubber production by 5.6% p.a. over the 1985-95 period. Thailand's projected rapid growth is primarily due to the World Bank-assisted replanting program which has been very successful. China is projected to increase rubber production at the rate of 6.6% p.a. over the 1985-95 period while India is projected to increase production at the rate of 5.9% p.a. Africa is also projected to increase rubber production and over the 1985-95 period it is expected to have a 2.7% p.a. growth rate. 145. liJorld cotton production is projected to grow at 1.6% p.a. over the 1985-95 period. This compares with 1.6% over the 1961-82 period and a slower 1.2% over the 1970-82 period. Production will continue to be concentrated in the developing countries. By 1995, 66% of world production will be concentrated in the developing countries compared with 59% during the 1979-81 period. China will remain the world largest producer with 45% of world production in 1995. India will be second with 28.6% followed by the USSR with 17% and the United States with 16%. The growth rate of production in the developing countries is projected to be 1.8% p.a. over the 1985-95 period - 60 - followed by a slower 1.1% growth rate in the industrial countries and 1.0% growth rate in the centrally planned economies. Among the major producers, India and China will continue to have the most rapid growth rates with a 2.2% p.a. and 2.1% p.a. growth rate, respectively. 146. World cotton production has been shifting from the industrial countries to the developing countries for a number of years. This trend will continue and Asia will hold an increasingly larger share of production. The growth rate projected for Asia over the 1985-95 period is 2.1% p.a. compared with 1.8% p.a. for all developing countries. Africa is expected to increase cotton production at 1.9% p.a. during this period. However, African production will remain relatively small as a percentage of the world total. The slowest growing region will remain the centrally planned economies which is primarily dominated by the USSR. The USSR's productin should level off at near 3 million metric tons, after increasing from 2 million metric tons in the early 1960s. 147. Bangladesh and India are expected to continue to remain the largest source of jute fiber and goods for exports over the projection period. Expansion of jute production in China slowed during the 1970s and is projected to grow at moderate rates over the forecast period. In the major producing countries, increases are expected to result largely from increased yields with small changes in area harvested. 148. Production of tobacco leaf is expected to reach 6.5 million tons in 1990 and 7.2 million tons in 1995. This implies an average annual growth rate of 2% p.a. over the 1980-95 period. Production in the industrial countries is projected to average only 0.2% p.a. over the 1985-95 period while the develop- ing countries are projected to increase production at 2.9% p.a. The rapid increase in production in the developing countries will increase their share of world production to around 68% by the mid-1990s--up from 61% during the 1979-81 period. Most of this increase in production will be utilized domes- tically but net exports to the industrial countries and the centrally planned economies are also expected to increase. Production in the centrally planned economies has increased only moderately during the past decade and this trend is expected to continue. A significant development in tobacco production in recent years has been the shift from dark to light tobaccos. This trend is expected to continue and to confine future increases in production to light tobaccos, especially flue-cured and burley leaf. Oriental leaf production is expected to continue to increase but dark tobacco output may well decline. 149. Metals and Minerals. The growth of world production of metals and minerals is projected to remain below historical leveli for the 1985-95 period. Substantial excess capacity exists and is projected to remain into the 1990s for most metals and minerals as the continued slow growth of demand restrains product ion. Most of the increase in production over the 1985-95 period will come from higher utilization of existing mines and refineries rather than from new plants and mines. 150. Substantial excess capacity existed in copper production at the end of 1982 following the severe recession. It is estimated that US mine closures and cutbacks reached close to 40% of the country's nominal mine capacity by " - 61 - the end of 1982. Substantial cutbacks were also observed in Canada, the Philippines and Australia. Despite the expectation of ample capacity over the next several years, a number of countries are projected to increase capacity before 1990. 151. Aluminum capacity appears adequate to meet demand until at least the late 1980s. The industry is currently operating at 72% of capacity with an increase to 79% projected by 1995. World aluminum production should grow at 2.4% p.a. between 1985-95 with alumina and bauxite production growing at 2.7% p.a. Additional aluminum supplies will come from new capacity in the United States, Canada, Australia, Brazil, India, UAE, Yugoslavia and the USSR. 152. World zinc production is expected to grow at 3.7% p.a. during 1984 and 1985 followed by a growth rate of 2.3% p.a. over the 1985-95 period. Output from the industrial countries and the developing countries is projected to grow at 2.4% p.a. over this period, with growth coming mainly from new projects scheduled for completion in the late 1980s and early 1990s. Over the same period metal output is expected to grow at 2.3% p.a. as existing smelters increase production rates and new smelters come on stream. The degree of integration in the developing countries--from mining to smelters--should increase from a mine/ore prOduction ratio of 62% in 1979-81 to about 77% in 1995. 153. The growth of world lead production is projected to grow at 1.9% p.a. over the 1985-95 period. This-rs-below the 1970-82 growth of 2.1% p.a. and the 1961-82 period of 3.0% p.a., reflecting a continued slow growth of demand for lead. In recent years, a divergence between mining and refining has developed due to the increased recovery of fine lead from secondary materials. Secondary lead refining capacity as a proportion of total capacity (excluding the cen- trally planned economies) has increased from 32% in 1970 to 44% in 1980. Much of the secondary capacity has been built in the United States with 21 secon- dary smelters erected during the decade of the 1970s. The expansion of secon- dary capacity in the United Kingdom has also been important. 154. A recovery of mine output is expected over the 1984-85 period as operating rates continue to increase. In 1983, operating rates at mines (excluding the CPEs) was estimated to be 75% while smelting capacity was esti- mated at 65%. In the long run, world mine output is expected to grow at 1.6% p.a. and metal production at 1.9% p.a. The growth in output is expected to come from higher utilization of capacity of both mines and refineries over the forecast period. 155. Over the 1985-95 period, nickel mine and refinery output is expected to grow at about l.4% p.a. Most of the addi tional output should come from increased utilization of existing plants with only a few new projects expected to come on-stream during that period. By the end of the 1990s, Brazil may expand its mine/refinery production. Yugoslavia is also considering building a mine/refinery during the same period. 156. Tin production is concentrated in the developing countries with Malaysia, Thailand, Indonesia, Bolivia, Zaire, Nigeria and China accounting - 62 - for 74% of world production in 1982. The industrial countries and the centrally planned economies each accounted for 8% of world production. Since 1979, the world tin market has been characterized by overproduction with a resulting increase in tin stocks. A return to normal stock levels is expected by the end of 1986. 157. Asia is projected to continue to be the largest producer of tin ore with a 1995 market share of 61% compared with 63% for the 1979-81 period. Production from South America should remain almost unchanged from the level of the last decade. Production in the centrally planned economies is expected to decrease from the 1979-81 level while the industrial countries should increase production primarily due to higher production from Australia and Canada. 158. Excess capacity has existed in the steel industry since the mid-1970s with the stagnation in demand since that time. In the midst of the recession in 1982, the capacity utilization rate dropped to 50-60%. Overcapacity is expected to remain a fact of life during most of the 1980s and lead to a 13% reduction of present capacity by the end of the 1980s in the industrial countries. Production capacity in the developing countries is expected to grow largely through the expansion of existing plants of scrap or DR-based steel. Capacity is not expected to grow significantly in the centrally planned economies over the balance of the decade. 159. World manganese ore production is expected to grow by 2.8% p.a. over the 1982-85 period and by 1.1% p.a. over the 1985-95 period. Because of recent declines in demand for manganese ore, current capacity substantially exceeds requirements. World reserves appear adequate. South Africa has an estimated 41% of world reserves which are not currently developed. Manganese ore imports are largely focussed in the industrial countries with 72% of imports in 1982 compared with 89% in 1960. Exports primarily come from the developing countries with South Africa providing the largest share of the world market followed by Gabon, Australia, Mexico and Brazil. 160. Current fertilizer capacity and firmly-committed future projects indicate that world supply will slightly exceed projected demand through 1987/88 for phosphates and potash. Nitrogen demand may exceed capacity by that period. The current levels of excess capacity are not large enough to prevent price increase at times of strong demand. The delaying of investments during the last several years led to a tigher medium-term supply/demand balance than previously expected. Trade in Non-Fuel Primary Commodities 161. This section summarizes the forecasts made of trade in primary commodities over the period to 1995, discussing them primarily in terms of changes in export and import shares of the major economic regions. Historical data on export and import shares are presented in Tables 17 and 19, respectively. Projections of changes in export and import shares are presented in Tables 18 and 20, respectively. TABLE 17: GROWTH OF WORLD EXPORTS Of MAJOR PRIMARY COMMODITIES AND EXPORT SHARES OF MAIN ECONOMIC REGIONS, 1964/66-1982 RATE OF --------------------------------------------EXPORT SHARES------------------------------------------------------ GROWTH /A INDUSTRIAL COUNTRIES CENTRALLY PLANNED ECONOMIES DEVELOPING COUNTRIES COMMODITIES 1961=1ir 1964=66---1969=71---1979=81---1982 1964=66---1969=7T---T~79=BT---T~82 1964=66---Y969=7Y---Y979=8Y---T982 ------------------------~------------------------------ ------------------------------------------------------------------------------------------------------ (% P.A.) ----------------------------------------------(%)-------------------------------------------------------------- !QQQ§!!!!!§ BEVERAGES --TEA---- 2.3 4.0 6.7 5.5 5.5 1.7 1.5 1.9 1.8 94.3 91.8 92.6 92.7 CEREALS --COARSE GRAINS 4.9 68.8 68.7 81.2 78.9 6.2 4.1 1.5 2.2 25.0 27.2 17.3 lS.8 RICE 2.6 23.3 34.5 37.8 31.2 0.2 1.2 1.3 1.0 76.5 64.3 60.9 67.S WHEAT 3.6 82.S 82.6 91.5 86.1 7.2 13.6 2.5 2.8 10.0 3.8 6.0 11.1 OTHER FOODS -SEEY-&-VEAL 4.8 47.5 43.4 73.3 71.9 8.1 5.8 7.5 6.0 44.2 50.8 19.2 22.1 ORANGES & TANGERINES 3.0 47.6 42.8 42.7 41.1 0.0 0.0 0.0 0.0 52.4 57.2 57.3 5S.9 LEMONS & LIMES 3.6 78.6 75.1 62.7 59.7 0.2 0.0 0.0 0.0 21.2 24.9 37 .3 40.3 SUGAR 2.5 16.9 18.4 30.3 30.3 10.8 9.5 2.8 3.0 72.3 72.1 66.9 66.7 FATS & OILS - SOYBEAN OIL 9.0 91.5 92.9 75.7 76.3 0.0 0.0 0.0 0.0 8.5 7.1 24.3 23.7 - PALM OIL 10.6 2.6 3.7 3.4 2.5 0.0 0.0 0.0 0.0 97.4 96.3 96.6 97.5 ..., '" ~g~!~Q1I~~_~Q~=~QQQ RUBBER 2.3 1.7 1.4 1.2 1.0 1.1 0.0 0.0 0.0 97.2 98.6 98.8 99.9 COTTON 1.0 25.3 19.1 36.1 34.3 11.8 D.2 19.1 21.3 62.9 67.7 44.6 44.4 TOBACCO 2.4 40.9 41.6 38.9 39.1 10.0 8.2 5.7 4.9 49.1 50.2 55.4 56.0 SAWNLOGS & VENEER LOGS 5.1 7.0 4.4 6.4 6.6 0.4 0.7 0.9 0.9 92.6 94.9 92.7 92.5 METALS & MINERALS/B ----SAUXITE------ 4.0 5.3 14.2 22.0 26.1) 3.1 2.5 2.2 2.7 91.6 83.3 75.S 71.3 COPPER 3.3 34.8 33.7 29.9 27.3 3.7 4.7 7.5 7.4 61.5 61.6 62.6 65.3 IRON ORE 4.5 41.8 43.0 43.2 40.6 ll.6 11.5 9.9 10.1 46.6 45.5 46.9 49.3 LEAD 1.6 43.0 56.7 66.5 66.9 8.0 4.0 0.5 0.2 49.0 39.3 33.0 32 .9 \llANGANESg ORE 2.1 1.2 8.8 13.3 13.2 15.2 13.3 11.9 14.2 83.6 78.0 74.8 72.6 NICKEL 3.2 91.9 82.9 63.7 60.9 1.0 4.8 6.4 10.4 7.1 12.3 29.Q 28.7 TIN 0.5 16.1 14.8 12.9 16.8 0.0 0.0 0.0 0.0 83.9 85.2 87.1 83.2 ZINC 2.9 56.3 65.3 72.7 72.1 5.7 3.7 1.9 1.1 38.0 31.0 25.4 26.S ~tl~tl!£~b_~~B!!b!~~R§ /C 5.Q 76.8 74.5 67.1 61.7 17.7 18.3 22.9 28.6 5.5 7.2 10.0 9.7 -----------------------------------------------------------------------------------------------------------------------~------------------------------------ fA LEAST SQUARE GROWTH RATE FOR WORLD EXPORTS. /B INCLUDES ORES AND METALS. /C INCLUDES PHOSPHATES, NITROGEN, POTASH. SOURCE: WORLD BANK, ECONOMIC ANALYSIS AND PROJECTIONS DEPARTMENT. TABLE 18: GROWTH OF WORLD EXPORTS OF MAJOR PRI~~RY COMMODITIES AND PROJECTED EXPORT SHARES OF MAIN ECONOMIC REGIONS, 1979/81-1995 RATE OF -------------------------------------EXPORT SHARES-------------------------------------- GROWTH /A INDUSTRIAL COUNTRIES CENTRALLY PLANNED ECONOMIES DEVELOPING COUNTRIES COMMODITIES 1985----1996----1995 1985--'------1995-------1995 1985------1990-----1995 1979781=95 -------------------------------------------------------------------------------------------------------------------------------------------- (% P.A.) ---------------------------------------(%)---------------------------------------------- rQQQg!!:E!:~ ~~y§g~Q§~ TEA 1.5 4.9 4.3 3.8 1.8 1.7 1.5 93.3 94.0 94.7 CEREALS COARSE-GRAINS 2.7 77.4 78.Cj 80.0 1.6 1 .4 1.3 21.0 19.7 18.7 RICE 1.8 31.0 34.6 36.2 1.1 0.9 0.8 67.9 64.5 63.0 WHEAT 2.5 87.0 85.1 84.8 2.6 2.7 2.4 10.4 12.2 12 .8 OTHER FOODSTUFFS BEEP-&-VEAL----- 2.8 6Q.6 68.1 70.0 6.7 11.2 11.2 23.7 20.7 18.8 ORANGES & TANGERINES 3.1 44.1 45.5 43.6 0.0 0.0 0.0 55.9 54.5 56.4 U:MONS " LIMES 3.7 63.0 66.9 68.6 0.0 0.0 0.0 37.0 33.1 31.4 SUGAR 1.6 31.4 32.7 34.4 1.4 1.1 0.6 67.2 66.2 65.0 /<'ATS & OILS 0"< - SOYBEAN OIL 4.1 71.4 67.5 68.1 0.0 0.0 0.0 28.6 32.5 31.9 .po - PALM OIL 5.1 2.1 1.6 1.2 0.0 0.0 0.0 97.Q 98.4 98.8 AGRICULTURAL NON-FOOD --RU~~ER------------- 2.2 0.9 0.9 O.Q 0.0 0.0 0.0 99.1 99.1 99.1 COTTON 0.6 34.2 36.7 40.2 18.5 17.6 16.5 47.3 45.7 43.3 TOBACCO 1.9 38.R 38.6 38.6 4.6 3.8 3.3 56.6 57.6 58.1 SAWNLOGS & VENEER LOGS -2.6 8.6 12.1 15.2 1.0 1.1 1.4 QO.4 86.8 83.4 ~§!~1~_~_~!~§~§ /B BAUXITE 1.7 32.1 33.0 23.2 2.0 4.6 7.8 65.9 62.4 69.0 COPPER 1.5 29.0 28.6 29.5 3.1 3.1 3.3 67.9 68.3 67.2 IRON ORE 0.7 39.2 34.3 34.4 15.3 15.4 14.8 45.5 50.3 50.8 LEAD 1.9 66.6 65.9 65.8 0.2 0.4 0.6 33.2 33.7 33.6 MANGANESE ORE 0.9 14.5 16.2 16.0 12.5 12.6 13 .1 73.0 71.2 70.9 NICKEL 0.8 58.1 61.1 60.4 11.2 9.6 7.1 30.7 29.3 32.5 TIN -1.1 14.7 14.6 13.2 0.5 0.5 0.5 84.8 84.9 86.3 ZINC ORE 2.2 70.8 71.3 70.7 3.7 3.7 3.4 25.S 25.0 25.9 Qtl§~lQ~1_f§g!!1!~§RS /C 3.7 56.9 51.7 49.1 26.7 25.6 24.5 16.4 22.7 26.4 --------------------------------------------------------------------------------------------------------------------------------------------- NOTE: NOT ALL p!l.lMARY COMMODITIES SHOWN IN TIlE IMPORT TABLE (TABLE 3) ARE <;HOWN HRRR. COMMODfTIES SllCH AS COFFEE, COCOA, PALM OIL AND COCONUTS ARE GROWN SOLELY OR AL~lOST SOLELY IN DEVELOPING COUNTRIES AND THEIR SHARES OF TOTAL EXPORTS DO NOT CHANGE OVER TIME. /A END POINT GROWTH RATE FOR WORLD EXPORTS. /B INCLUDES ORE Mm METALS. /C INCLUDES PHOSPHATES, NITROGEN. POTASH. SOURCE: WORLD BANK. ECONOMIC ANALYSIS AND PROJECTIONS DEPARTMENT. TABLE 19: GROWTH OF WORLD IMPORTS OF MAJOR PRIMARY COMMODITIES AND IMPORT SHARES OF MAIN ECONOMIC REGIONS, 1964/66-82 ------------------------------------------------------------------------------------------------------------------------------------------------------------ RATE OF ----------------------------------------------IMPORT SHARES------------------------------------------------------ !iliQ!!!H_L!. INDUSTRIAL COUNTRIES CENTRALLY PLANNED ECONOMIES DEVELOPING COUNTRIES COMMODITIES 1961-82 1964=66---i969=71---1979=81---1982 1964=66---1969=71---1979=81---1982 1964=66---1969=71---1979781---1982 -----------------------------------------------------.. ~ ---------------------------------------------------------------------------------~------------------- (% P.A.) ------------------------------------------------------(%)------------------------------------------------------- FOQ!!!iTI!!'!§ BEVE~~E!§ COCOA & COCOA PRODUCTS 1.3 82.5 78.3 74.8 76.6 11.5 15.9 18.2 16.0 6.0 5.8 7.0 7.4 COFFEE 1.5 88.0 86.3 83.5 81.9 5.0 5.9 6.4 6.5 7.0 7.8 10.1 11.6 TEA 2.1 61.9 59.9 46.9 47.2 6.2 6.3 11.1 11.8 31.9 33.8 42.0 41.0 CEREALS --COARSE GRAINS 5.7 81.9 75.2 43.3 43.5 6.9 10.7 27.4 15.2 11.2 14.1 29.4 41.3 RICE 2.2 18.4 9.8 11.0 12.4 7.6 7.4 10.3 6.9 74.0 82.8 78.7 80.7 WHEAT 3.4 26.0 32.0 18.6 16.3 16.7 12.7 22.0 24.5 57.3 55.3 59.4 59.2 OTHER FOODS --iiEEj?-"&-VEAL 5.0 79.0 81.7 63.6 58.6 11.8 7.1 13.8 13.7 9.2 11.2 22.6 27 .7 ORANGES & TANGERINES 2.9 85.0 78.4 68.0 70.0 7.7 11.7 13.9 13.0 7.3 9.9 18.1 17.0 LEMONS & LIMES 3.8 63.1 60.3 54.3 54.4 28.9 31.5 32.5 30.8 8.0 8.2 13.2 14.8 SUGAR 2.3 56.9 58.2 37.6 29.5 14.1 14.7 20.9 28.0 29.0 27 .1 41.5 42.5 0- FATS .& OILS \J1 - SOYBEAN OIL 9.5 65.8 65.6 50.4 48.0 3.2 2.9 6.5 7.1 31.0 31.5 43.1 44.9 - PALM OIL 10.3 74.4 69.2 36.6 29.6 1.0 0.8 4.0 7.'1 24.6 30.0 59.4 62.5 - COCONUT OIL 1.0 83.4 86.7 78.8 79.9 2.8 2.1 5.3 6.7 13.8 11.2 15.9 13.4 AGRICULTURAL NON-FOODS --COTroN------------ 0.'1 48.8 50.5 35.4 38.3 16.1 20.0 15.0 14.7 35.1 2'1.5 49.6 47.0 JUTE 3.3 64.5 60.0 28.4 20.7 8.9 9.4 16.6 21.9 26.6 30.6 54.9 57.4 RUBBER 2.3 63.2 63.3 61.5 62.6 17 .9 16.4 12.8 11.8 18.9 20.3 25.7 25.6 TOBACCO 2.8 71.6 74.4 69.9 70.1\ 16.7 11.6 10.9 10.6 11.7 14.0 19.2 18.6 METALS & MINERALS/B ----SAUXITE------ 4.2 91.'1 89.5 ,86.8 81.4 7.3 8.9 11.9 14.5 0.8 1.6 1.3 4.1 COPPER 3.1 89.5 87.3 81.4 83.6 4.7 5.2 5.0 4.4 5.8 7.5 13.6 12.0 IRON ORE 4.5 86.1 87.1 79.4 73.3 13.1 12.1 14.9 22.1 0.8 0.8 5.7 4.6 LEAD 1.1 84.3 82.1 77.4 77.6 10.6 7.8 10.2 10.7 5.1 10.1 12.4 11.7 MANGANESE ORE 2.1 90.2 90.7 76.4 11.9 9.3 8.3 15.2 18.0 0.5 1.0 8.4 10.1 NICKEL 3.4 90.6 91.4 89.3 88.4 9.4 8.6 7.2 8.6 0.0 0.0 3.5 3.0 TIN 0.2 82.0 79.6 73.0 71.9 6.4 7.7 12.3 12.4 11.6 12.7 14.7 15.7 ZINC 3.5 87.8 85.2 81.6 79.9 3.4 2.8 3.2 3.4 8.8 12.0 15.2 16.7 £~~~!£~_!~!!!~!~~~ /C 8.0 36.3 33.2 39.5 45.9 6.5 6.5 4.2 12.2 57.2 60.3 56.3 41.9 /A LEAST SQUARES GROWTH RATES FOR WORLD IMPORTS. /B INCLUDES ORES AND METALS. /C NITROGEN, POTASH AND PHOSPHATES. SOURCE: WORLD BANK. ECONOMIC ANALYSIS AND PROJECTIONS DEPARTMENT. TABLE 20 GROWTH OF WORLD IMPORTS OF MAJOR PRIMARY COMMODITIES AND PROJECTED IMPORT SHARES OF MAIN ECONOMIC REGIONS, 1979/81-1995 RATE OF --------------------------------------IMPORT SHARES------------------------------------- COMMODITIES 9~Q~!LL~_ INDUSTRIAL COUNTRIES CENTRALLY PLANNED ECONOMIES DEVELOPING COUNTRIES 1979/81-95 1985----Y990----Y995 1985--------Y990-------Y995 1985-----Y990-----Y995 -------------------------------------------------------------------------------------------------------------------------------------------- (% P.A.) ---------------------------------------(%)---------------------------------------------- IQ2~gUF~~ BEVERAGES COCOA-&-COCOA PRODUCTS 2.0 76.4 74.0 71.1 15.9 16.1 17.1 7.7 9.9 11.8 COFFEE 1.6 80.0 79.4 79.2 6.6 7.2 7.5 13.4 13.4 13.3 TEA 1.8 44.8 39.1 35.6 9.5 11.0 12.1 45.7 50.0 52.3 CEggAL~ COARSE GRAINS 2.7 43.7 41.2 38.2 22.9 25.3 26.6 33.4 33.5 35.2 RICE 2.1 13.0 12.4 11.0 8.6 8.8 10.1 78.4 78.8 78.9 WHEAT 2.7 15.7 15.5 13.8 23.3 25.1 25.0 61.0 59.4 61.2 OTHER FOODSTUFFS BEEF-'-VEAL----- 3.1 58.8 53.7 47.5 12.1 12.1 12.4 29.1 34.2 40.1 ORANGES & TANGERINES 3.1 66.3 64.5 61.3 13.6 14.0 13.8 20.1 21.5 24.9 LEMON & LIMES 3.5 52.3 50.2 48.0 34.2 34.2 33.8 13.5 15.6 18.2 <:1' <:1' SUGAR 1.8 28.5 25.9 24.2 24.8 23.3 20.9 46.7 50.8 54.9 FATS & OILS - SOYBEAN OIL 4.0 45.1 42.9 40.8 7.2 8.6 7.7 47.7 48.5 51.5 - PALM OIL 5.2 25.2 22.6 20.7 7.6 8.2 8.7 67.2 69.2 70.6 - COCONUT OIL 1.2 79.7 77 .5 76.8 7.3 7.5 8.2 13.0 15.0 15.0 1991~UL!2~~_~Q~=fQQ~~ COTTON 0.3 36.5 33.7 30.6 15.3 15.9 15.7 48.2 50.4 53.7 JUTE -0.2 16.0 13.0 11.8 20.8 20.4 20.0 63.2 66.6 68.2 RUBBER 2.2 63.5 61.4 62.2 8.6 5.1 3.4 27.9 33.5 34.4 TOBACCO 2.5 69.5 67.8 65.9 10.2 9.3 8.9 20.3 22.9 25.2 ~T~1~_!-~!~ggAL~ /8 BAUXITE 1.8 85.1 85.6 81.5 13.6 13.1 15.3 1.3 1.3 3.2 COPPER 1.4 77 .7 79.3 79.1 4.2 2.6 0.7 18.1 18.1 20.2 IRON ORE 0.7 69.4 67.2 63.1 18.5 18.8 18.5 12.1 14.0 18.4 LEAD 2.4 77 .6 74.7 72.6 10.3 12.2 13.7 12.1 13.1 13.7 MANGANESE ORE 0.9 71.3 68.7 66.7 18.8 19.5 19.8 9.9 ll.8 13.5 NICKEL -0.2 84.7 85.4 86.3 11.4 10.5 9.8 3.9 4.1 3.9 TIN -0.5 71.4 69.4 66.8 13.6 14.0 14.2 15.0 16.6 19.0 ZINC 2.6 82.2 81.4 82.3 3.1 3.3 3.0 14.7 15.3 14.7 ~tl!~!~11_~!I!11~ERS /C 5.0 42.1 39.9 37.1 8.0 6.8 6.3 49.9 53.3 56.6 ------------------------------------------------------------------------------------------------------------------------------------------- A/ END POINTS GROWTH RATE FOR WORLD IMPORTS. S/ INCLUDES ORES AND METALS. C/ INCLUDES PHOSPHATES, NITROGEN AND POTASij. SOURCE: WORLD BANK, ECONOMIC ANALYSIS AND PROJECTIONS DEPARTMENT. - 67 - 162. The developing countries shares of world imports of almost all commodities are projected to grow over the forecast period, reflecting both increased processing of raw materials and increased consumption. The most rapid growth will occur in agricultural raw materials such as cotton, jute, rubber and tobacco. Developing country imports of certain metals and minerals will also increase as a share of world totals. Fertilizer imports are projected to remain nearly constant in the developing countries with increased domestic requirements being provided by local production. 163. A shift of trade between raw and processed products is also occurring as an increasingly larger share of raw materials are processed in the produc- ing countries. This change reflects both an attempt by the developing countries to capture the value-added and employment benefits of processing, and also a shift of demand for the final products. These trends are evident in agricultural raw materials such as rubber, cotton, tobacco and vegetable oils as well as in nearly all metals and minerals mined in developing countries. 164. Foodstuff import shares of the developing countries will increase very moderately over the forecast period with rice and wheat remaining nearly constant as a share of the world total while coarse grain increases. Cocoa, coffee and tea imports by the developing countries are all projected to increase as a share of the world total. Beef imports are projected to show very dramatic increases going from 14.8% of the world total in 1979-81 to 40.1% by 1995. Developing country shares of citrus, sugar and fats and oils are also projected to lncrease. 165. The share of world imports by the industrial countries is projected to decline in almost all commodities. The most rapid declines are expected in beef, citrus fruits and fats and oils. Agricultural raw materials, particularly cotton and jute, will also show declines. Cocoa, coffee and tea imports will decline as the world market increasingly moves towards the developing countries. 166. The import shares of metals and minerals held by the industrial countries are expected to decline in most cases over the forecast period. For instance, iron ore imports by the industrial countries are projected to decrease from 79.4% of the world total in 1979-81 to 63.9% by 1995. This reflects the shifting demand from the industrial to the developing countries. Manganese ore imports by the industrial countries are projected to decline from 76.4% of the world total in 1979-81 to 66.7% in 1995, with offsetting increases in the centrally planned economies and the developing countries. 167. The centrally planned economies are expected to show little overall change in their imports as a share of the world total. The largest percentage decrease is expected to occur in rubber with the centrally planned economies' share expected to fall to 3.1% by 1995. This reflects the move towards self- sufficiency in synthetic rubber production. The CPE's share of copper imports should also show a dramatic decline over the forecast period. 168. Exports of the non-fuel primary commodities by the developing coun- tries are projected to show less overall change over the 1979-81 to 1995 - 68 - period than is projected for imports. Fertilizer exports from developi.ng countries are projected to show the most rapid change of the commoditLes considered with an increase from 10% of the world total in 1979-81 to 26.4% by 1995. Shares of metals and minerals exports held by the developing countries are expected to increase over the forecast period for copper, iron ore, lead, nickel and zinc ore, while decreases are projected for bauxite and manganese ore. 169. Among the metals and minerals, significant decreases 1n the industrial countries market shares are projected for iron ore exports, with a 1979-81 share of 43.2% projected to decline to 34.4% by 1995. The shares of chemical fertilizer exports is projected to drop significantly, from 67.1% to 49.1%, over the same period. The export shares of the centrally planned econo- mies are projected to remain relatively constant with increases projected for beef and veal among the agricultural commodities and bauxite and zinc among the metals and minerals. 170. Trade in Foodstuffs. World imports of rice are projected to grow at 3.3% p.a. over the 1985-95 period. Imports by African countries are projected to grow at the rate of 6.9% p.a. over this period. After rising rapidly during the 1970s, Nigerian imports are projected to stabilize at 650,000 tons. Nigerian rice imports should be curtailed by the lessened availabil i ty of foreign exchange, due to the projected stability of oil prices in the next few years, as well as by reduced import needs following increased domestic production. Egypt should shift from being a net exporter of rice to a net importer. By 1995 Egypt is projected to import nearly 500,000 tons per year. The growth in rice consumption in Egypt has been about 2-3% per year over the last two decades while production has grown at only 1%. Similar trends are expected in the future. 171. Rice exports will continue to be supplied primarily by the developing countries with Asia the major source. By 1995, Asia is projected to provide 9.7 million tons--with Thailand supplying 4.5 million tons, Pakistan another 2.2 million tons, Burma 1.3 million tons and China 950,000 tons. The indus- trial countries will provide an additional 6 million tons with the majority of this coming from the United States with 4 million tons and the EEC exporting 1 million tons. 172. The rate of growth of the grain trade (wheat and coarse grains) is projected to slow over the 1985-95 period compared with the 1970s. This slowdown will be due to the lingering effects of the world recession, which have reduced per capita incomes in many importing countries, and by the levelling-off of imports by the centrally planned economies. Developing country exports of wheat and coarse grains will increase as Argentina and South Africa expand exports over the forecast period. Exports from the industrial countries will increase at a slower rate over the 1985-95 period compared to the 1970s. 173. Trade in fats and oils is expected to continue growing rapidly over the projection period. Imports of vegetable oil are projected to grow the most rapidly in the developing countries followed by slower growth in the indus- - 69 - trial countries and the centrally planned economies. Oil meal imports will continue to be dominated by the industrial countries with the EEC accounting for the bulk of world imports. However, the growth of oil meal imports will be most rapid in the developing countries with Asia accounting for nearly all of the imports by the developing countries. 174. Historically, beef imports have been dominated by the industrial countries. This is projected to change somewhat over the forecast period with the developing countries becoming an increasingly larger market followed by the centrally planned economies. The EEC has traditionally been a large beef importer, however, most of this trade is internal. With the entrance of Spain and Portugal into the EEC these trends will likely accelerate, shutting off supplies from outside the community. Asia is projected to be an increasingly important market with imports projected to nearly triple over the forecast period. Rapid growth is also projected for Africa with a 6.1% p.a. growth rate for the 1985-95 period. 175. An increasingly large share of world import demand will be supplied by the EEC through intra-EEC trade. The growth of exports from the developing countries will be a moderate 1.6% p.a. over the 1985-95 period. This slow growth will be largely due to the displacement of export opportunities as the EEC increases its ability to provide for its own needs. Growth of import demand by other countries is not large enough to offset the declining market available in the EEC. 176. The USSR has provided one of the largest and fastest growing markets for beef exports from the developing countries. It became particularly important for Argentina, the principal developing country exporter, after Argentina lost most of its export market to the EEC in the mid-1970s. The prospects for this market are not bright at least in the near term, because of the apparent determination of the USSR to build up its livestock herds-- whether by increased livestock feed production or imports of feedstuffs. 177. Southeast Asia, the Middle East, and the highly income elastic countries of Latin America should provide scope for growth in beef and veal imports. The recession has affected demand in the Middle East; but it should improve as oil prices increase in the years ahead. 178. The growth of world sugar imports are projected to slow over the forecast period with a 1985-95 growth rate of 2.0% p.a. compared with a 2.3% p.a. over the 1961-82 period. Imports by the centrally planned economies and the industrial countries are projected to grow at a moderate rate of 0.3% p.a. and 0.8% p.a., respectively, over the 1985-95 period. Continuing increases in production in the EEC and displacement of sugar by substitute sweeteners in the United States are important factors behind this slow growth. Imports by the developing countries are projected to average 3.4% p.a. over the 1985-95 period compared with 4.4% over the 1961-82 period. 179. World trade in bananas is expected to grow by about 1.7% p.a. over the 1985-95 period compared with 4.8% p.a. in the 1960s and 1.6% p.a. in the 1970s. The industrial countries should remain the largest import market with - 70 - nearly 80% of world trade in the 1985-95 period. However, the growth rate is low. There is good evidence that bananas tend to become an inferior good at high levels of income. The import growth rate for the EEC is only 0.5% over the 1985-95 period. The fastest growing market should be the Middle East. However, its growth will be slower than in the recent past since per capita consumption in some countries has already reached high levels. However, the most rapid growth will take place in the centrally planned economies and developing countries where imports are projected to grow by 5.9% p.a. 180. Bananas are almost exclusively exported by developing countries. In 1982, approximately 81% of banana exports came from Latin America and the Caribbean with 14% from the Philippines. Exports from Ecuador have been stagnating, with its share in world exports declining from 26% in 1961 to 19% in 1982. Over the forecast period, Latin America is projected to remain the major source of exports--accounting for nearly 75% of world trade. The main increases in exports are expected from Ecuador, Colombia and the Philippines as a result of their fast-growing market in the Middle East and the CPEs. Exports from the African and Caribbean countries which rely on the French market will be constrained by the very slow growth expected in that market. 181. Imports of citrus fruits are expected to show the strongest growth in the developing countries, while imports into the industrial countries will grow at a slightly more rapid rate than in the past. Therefore, the market share of the industrial countries is expected to decrease from 69% of world imports in 1982 to 62% in 1995. 182. Orange exports from Cuba, Spain, Italy and Morocco are expected to increase substantially, while those of Israel and South Africa are expected to fall. Exports of lemons and limes from Spain, Turkey, and the United States are expected to rise, while those from Italy and Greece are expected to decline. Cuba and Cyprus should expand substantially their exports of grapefruit. Cuba is continuing with its extensive ci trus planting program begun in the late 1960s. Plans are to expand the area to achieve citrus fruits production of 2.5 million tons in the early 1990s, principally oranges and grapefruit. The exports are intended mainly for Western and Eastern European markets. 183. Trade in Beverages. World coffee trade is projected to grow at 1.5% p.a. over the 1985-95 period--the same rate as over the 1961-82 period. Coffee exports will continue to be dominated by Central and South America with the largest share of exports from Brazil (with exports of 21.3 million bags by 1995) followed by Colombia (with 11.6 million bags by 1995). Exports from Indonesia are expected to grow to 5.2 million bags by 1995 surpassing the Ivory Coast as the third largest exporter. Central and South America will account for 61% of world exports by 1995 compared with 63% over the 1979-81 period. 184. Future world imports will continue to be dominated by the industrial countries. However, both the centrally planned economies and the developing countries should increase market shares but still remain relatively small importers by 1995. - 71 - 185. World trade in tea has been growing at 2% per year for the past 20 years. During this perio~imports by the industrial countries have remained stagnant while the developing countries and the centrally planned economies have increase imports substantially. These trends are projected to continue with the developing countries representing the largest market by 1995. 186. The direction of tea exports has shifted as the United Kingdom has become a less important importer. Exports from India and Sri Lanka have been replaced by exports from China and Kenya. By 1995, China is expected to be the largest tea exporter. This projection is based upon reports of the potential for output increases in China and the likel ihood that the government wi 11 continue to increase production for exports. However, this development is subject to great uncertainty. Some experts believe that the potential for increases in black tea production and exports in China are not great. 187. Exports of cocoa are projected to increase at 1.9% p.a. over the 1985-95 period as compared to 1.2% p.a. growth in 1961-82. Exports will come exclusively from the developing countries and will go primarily to the industrial countries with increasing amounts also going to the centrally planned economies. The largest imports go to Western Europe and to North America among the industrial countries. 188. Agricultural Raw Materials. There has been a trend towards increased processing of raw materials in the producing country. This trend, which is expected to continue, has led to a decline in exports from developing countries since most of the raw materials are produced in the developing countries and now remain in these countries for processing. It has also resulted in a flow of raw materials such as cotton from the industrial countries which produce it to the developing countries where it is processed. 189. Imports of natural rubber by the industrial and developing countries are projected to grow more rapidly over the 1985-95 period than in the past. The growth rate for the developing countries is projected to be 6.2% p.a. over the 1985-95 period compared with 4.5% p.a. over the 1961-82 period. Among the developing countries, China will remain a large importer as domestic production is supplemented with imports. The growth of import demand in all Asian countries will be a rapid 9.7% p.a. over the 1985-95 period reflecting an increase in domestic usage by the major NR producing countries, such as Malaysia, as well as increased imports by major importing countries, such as China, India and South Korea. Much of this increase in demand will eventually be exported as tires and other rubber products to industrial and other developing countries. 190. Exports of natural rubber will continue to come primarily from Asia with Malaysia, Indonesia and Thailand representing the largest source of supply. The growth rate of natural rubber exports from Thailand will be 4.6% over the 1985-95 period compared with 5.5% over the 1961-82 period. With rubber production growing rapidly in Indonesia, the growth of exports from Indonesia are projected to average 4.5% over the 1985-95 period compared with a much slower 1.4% over the 1961-82 period. Malaysia's exports are projected to remain nearly constant with a 0.1% p.a. growth rate, which implies a - 72 - substantial loss in market share for the leading exporter. Exports from Africa are expected to increase at 2.9% p.a. over the 1985-95 period compared with a decline of 0.5% p.a. over the 1961-82 period. This should be the consequence of improved production potential in this region. 191. Cotton exports from the developing countries will remain near the 1979-81 average level of 2.0 million metric tons over the forecast period. This reverses a declining trend dating to 1970. Thi s trend was caused by a rapid expansion in cotton manufacturing in many cotton-producing countries which virtually eliminated the exportable surplus of cotton. An increase in food prices also made cotton production relatively unattractive during the 1970s. 192. Cotton exports from the USSR are projected to remain at 800,000 tons over the 1985-95 period. Production increases will largely be used for domestic consumption. The most rapid growth in cotton exports will come from the United States with a 2.6% p.a. growth rate over the 1985-95 period. This compares with a 1961-82 growth rate of 1.9% p.a. 193. By 1995, the developing countries will account for 54% of world imports-- up from 49% in 1979-81. By 1995, the largest importer is expected to be Korea with imports of 600,000 tons. Korean imports should grow at 4.1% p.a. over the 1985-95 period compared with a 10.2% p.a. over the 1961-82 period. Imports by China are projected to decline from the 1979-81 level of 970,000 tons to 500,000 tons by 1995. Imports by the centrally planned economies are projected to remain relatively constant at between 650,000 and 770,000 metric tons. Imports by the industrial countries are projected to decline over the forecast period because of the continuing shift of cotton manufacturing from the industrial to the developing countries. 194. World exports of jute are projected to grow at a moderate 0.3% p.a. over the 1985-95 period after declining for nearly two decades. Jute products are expected to face less intensive price competition from synthetic fibers after the mid-1980s. Imports by the industrial countries are expected to continue to decline over the forecast period but at a slower rate than his- torically. Raw fiber imports are also projected to continue declining in Eastern Europe but to show modest uptrends in the USSR where domestic production of flax has decreased in recent years. Future demand for jute may be augmented by promising new uses for jute/plastic laminents which have been found technically feasible. 195. Over the forecast period, 60-65% of world exports are expected to be provided by Bangladesh. By 1995, Thailand is expected to supply 17% of the world's total leaving India approximately 5% of the world market. 196. World tobacco trade is expected to grow at 2.7% p.a. over the 1985-95 period compared with a 1961-82 growth of 2.8% p.a. The developing countries are expected to become more and more important as exporters as the industrial countries lose their comparative advantage in this activity. The most rapid export growth among the developing countries will be in South America with Brazil increasing exports at 6.4% p.a. - 73 - 197. Trade in Metals and Minerals. International trade in metals and minerals should continue its trend toward local refining and reduced interna- tional ore shipments. This trend should lead to increased trade in metals between developing and industrial economies. A shift of demand is also occurring in most metals and minerals as the growth of demand in the develop- ing countries exceeds the growth in the industrial countries and centrally planned economies. 198. World trade in alumina is projected to grow at 8.1% p.a. over the 1982-85 period reflecting the recovery from the world recession followed by a 2.2% growth rate over the 1985-95 period. The slowdown in growth reflects increases in local processing of alumina in Australia and some developing countries combined with the decline of the aluminum refining industry in Japan and the stagnation of production in other industrial countries. 199. World trade of refined copper is projected to grow at 1.9% p.a. over the 1985-95 period compared with 2.9% p.a. over the 1961-82 period. Refined copper is projected to represent 58% of total copper trade by 1995 compared with 60% in 1979-81. At that time copper ore is expected to represent 26% of world trade and bli sters wi 11 represent 16% of world trade by 1995. These trends reflect decreases in refined copper trade and increases in blisters and copper ore (concentrates) trade. 200. Imports of refined copper as well as copper ore and copper blisters will continue to be concentrated in the industrial countries over the forecast period. By 1995, nearly 77% of total copper imports are expected to go to the industrial countries. 201. The expected slowdown in international trade in bauxite in the 1985- 95 period reflects the depressing effect on bauxite trade of increased local processing in bauxite producing countries. Australia, Guinea and Jamaica are projected to remain the largest exporters of bauxite over the forecast period. Imports of bauxite will continue to be dominated by the industrial countries with 82% of world imports going to the industrial countries by 1995 compared with 88% in the 1979-81 period. The centrally planned economies are projected to increase their share of the world bauxite imports from 12% to 15% over the forecast period mainly due to the limited bauxite reserves of the USSR. 202. The growth of trade in aluminum will recover slowly following the world recession as many industrial countries which consume aluminum reactivate their idle capacity. Over the 1985-95 period, aluminum trade is expected to grow at 3.3% p.a. which is slightly higher than consumption. By 1995, five countries are expected to account for 50% of aluminum exports. They are: Canada (20%), Australia (18%), the USSR (12%), Brazil (7%) and Venezuela (4%). 203. Future international trade patterns for zinc will reflect the trend in the developing countries to process their own ~entrates locally and the increasing dependence of some industrial countries on metal imports from other industrial and developing countries. Metal imports are projected to grow at 4.3% p.a. over the 1985-95 period while concentrates are expected to grow at 2.1% p.a. Imports by the United States and Japan are both projected to grow - 74 - rapidly over the forecast period. The main suppliers to these countries will continue to be Canada, Australia, Mexico and Peru. 204. In 1982, approximately 15% of lead mine production and 22% of refined lead production were traded internationally. Over the next decade, the inter- national trade in lead concentrate and metals is expected to grow as the industrial countries and the centrally planned economies become increasingly dependent on imports. By 1995, lead concentrates shipments are projected to represent 26% of mine production while refined lead exports are projected to account for 24% of refined production. Most of the increase in lead concen- trates and metals should come from Canada and Oceania. The share of developing country concentrate exports is projected to decrease from 55% in 1982 to 43% in 1995. This trend will be partially offset by an increase from 25% in 1982 to 28% in 1995 in lead metal exports from the developing countries. 205. World import patterns are expected to remain similar to current patterns over the forecast period. Japan, however, should increase lead imports of metal since no new domestic smelters are being planned. The centrally planned economies should become more dependent on imports of both lead concentrate and lead metals over the forecast period. 206. Nickel exports are expected to grow at 5.1% p.a. between 1982 and 1985, reflecting a recovery in the nickel market, and to slow to a 1.9% p.a. growth rate for the 1985-95 period. The growth in the international market is likely to be reflected primarily in refined nickel products since the countries expected to increase production are those countries with vertically integrated nickel industries. No major changes are expected in the interna- tional trade structure for nickel over the forecast period. 207. Trade in steel is not expected to increase significantly over the decade. The current level of excess capacity, sharply decreased demand for steel and increased trade protection are expected to curtail trade among the industrial countries while the developing countries remain faced with external debt problems which sharply reduce their ability to import steel. The cen- trally planned economies are projected to remain largely self-sufficient in steel throughout the balance of the decade. 208. Trade flows of iron ore are projected to change in the forecast period to reflect changes in demand. The share of imports of the industrial countries has been declining in recent years while the developing countries have increased their share of the world market. The centrally planned econo- mies have maintained a constant share over recent periods. Future export flows are projected to reflect the increasing demand in the developing countries and the stagnating demand in the industrial countries. Exports and imports will increasingly take place between developing countries rather than between the industrial countries and the developing countries. 209. In contrast to the trade patterns in manganese ore, the industrial countries are the dominant exporters of ferro-manganese, accounting for 50% of world exports in 1981. The recent devaluation of the currency in Brazil and changes in export duties favor exports of ferro-manganese. This could lead to - 75 - a shift in export patterns with ferro-manganese increasing at the expense of manganese are. 210. World fertilizer exports are projected to increase at 4.1% p.a. between 1985 and 1995 compared with 5.8% p.a. over the 1970-82 period. Fertilizer exports from the developing countries are projected to increase at 10% p.a. during this period. More than 80% of the projected increase in world fertilizer production over the forecast period is expected to take place in the developing countries and in the centrally planned economies. - 76 - ANNEX: SPECIAL NOTE ON GRAIN CONSUMPTION PROSPECTS IN DEVELOPING COUNTRIES Introduction 1. Grain consumption by the developing countries doubled over the 1960- 80 period. 1/ This rate of growth is probably unequalled at any time in history, and- was nearly double the rate of population growth. Countries and regions which experienced the most rapid growth in grain consumption over the period include: Brazi 1 (141%), China (140%), Egypt (137%), Mexico (204%), Thailand (106%), East Asia (101%), Latin America & Caribbean (152%), and North Africa and the Middle East (113%). Table A shows total grain consumption for all major countries and regions for the historical years 1960, 1970, 1980 and projections for 1990. 2. Over the decade of the 1980s, grains consumption is projected to grow at 2.4% p.a. in the developing countries (by comparison with 3.6% p.a. in the 1960-80 period), at 1.2% p.a. in the centrally planned economies and at 1.4% p.a. in the industrial countries. Among the developing countries, consumption is projected to grow most rapidly in Indonesia, Mexico and South Africa and least rapidly in Argentina, Thailand, India and Central Africa. Indonesia is projected to increase consumption for the 1980s at 3.1% p.a. based on continued expansion of rice production and increased imports of wheat. Mexico is projected to increase total grain consumption at 3.3% p.a. based on both increased coarse grain production and imports. 3. Total grain consumption is projected to grow at only 0.4% p.a. in Argentina over the decade of the 1980s as increased consumption of grass- produced beef will substitute for grains. Thailand is expected to increase total grain consumption at 1.8% p.a. as rice continues to be replaced by wheat, poultry and meat in the Thai diet. India's total grain consumption is likely to expand at 1.9% p.a. over the decade of the 1980s compared to 2.0% p.a. over the previous decade. The Central African region is projected to increase total grain consumption at 1.9% p.a. during the 1980s, nearly the same rate as during the 1970s. Nigeria is also expected to maintain its growth in grains consumption at 1.9% p.a., based on both increased production and imports. 1/ The primary grains, including wheat, rice and the coarse grains such as maize and sorghum, represent the main source of food for most of the world's population. According to the FAO, 50% of the world's consumption of calories comes from these cereals. Among low income countries, the share is substantially larger (see Food Balance Sheets, FAO, 1980). - 77 - TABLE A: HISTORICAL AND PROJECTED WORLD GRAIN CONSUMPTION: BY COUNTRIES AND REGIONS ACTUAL PROJECTED REGION/COUNTRY 1960----------1970----------1980 --------- 1990 INDUSTRIAL COUNTRIES 294,849 364,418 399,421 466,392 AUSTRALIA 3,953 5,073 7,186 7,874 CANADA 16,333 21,844 23,147 25,101 EEC 92,592 114,265 120,926 136,643 JAPAN 20,600 27,989 35,403 42,677 UNITED STATES 138,977 164,468 170,492 201,180 OTHER 22,390 30,779 42,267 52,317 CENTRALLY PLANNED ECONOMIES 180,398 257,012 321,288 362,572 EASTERN EUROPE 65,772 78,777 111,011 120,333 USSR 114,626 178,235 210,277 242,239 DEVELOPING COUNTRIES 351,317 515,506 714,472 905,248 ARGENTINA 9,329 10,142 10,445 10,915 BRAZIL 14,804 21,771 35,741 44,657 CENTRAL AFRICA 17,297 26,788 32,248 38,730 CHINA 103,100 170,683 247,798 320,662 EAST ASIA 27,283 40,816 54,855 69,046 EGYPT 5,813 9,015 13,782 18,278 INDIA 72 ,606 95,513 115,564 139,117 INDONESIA 13,680 16,763 26,652 36,482 LATIN AMERICA & CARIB. 9,190 16,224 23,173 30,166 MEXICO 7,399 13,097 22,485 31,059 NIGERIA 7,802 9,410 11,572 13,898 NORTH AFRICA & M.E. 28,763 39,009 61,185 76,514 PAKISTAN 7,540 11,810 14,764 18,086 SOUTH AFRICA 4,473 6,882 9,925 13,605 SOUTH ASIA 17,497 19,620 24,502 32,415 THAILAND 4,741 7,963 9,781 11,618 WORLD 826,560 1,136,936 1,435,181 1,734,212 ------------------------------------------------------------------------------ SOURCE: FOREIGN AGRICULTURE SERVICE, USDA (HISTORICAL); WORLD BANK, ECONOMIC ANALYSIS AND PROJECTIONS DEPARTMENT (PROJECTIONS). 4. The rapid consumption increases by the developing countries over the 1960-80 period were possible because of two factors: the "green revolution" and imports. The "green revolution" i.e., the use of improved varieties of wheat and rice, made it possible to increase production dramatically. - 78 - Pakistan, for example, increased wheat yields by 94% between 1960 and 1980. India experienced a similar increase in wheat yields. Net imports of grains increased from 14.0 million tons in 1960 to 20.0 million tons by 1970 and 65.0 million tons by 1980. Of the growth of total grain consumption in the developing countries in the period 1960-70, 96% was due to increased production and 4% was due to net imports. For the decade of the 1970s, 79% of the growth in consumption was due to increased production and 21% was due to net imports. 5. The picture for the decade of the 1980s appears to be somewhat dif- ferent. The source of consumption growth in the 1960s was primarily the green revolution whereby wheat and rice yields expanded very quickly. During the 1970s, imports made possible by rapidly growing incomes played a more important role. During the 1980s, it seems unlikely that either of these factors can propel consumption growth at previous rates. While there are still gains to be made from the adoption of high-yielding wheat and rice varieties, it presently appears that there will not be the breakthroughs of the magnitude experienced in the 1960s. 11 Income growth will probably be unable to sustain the historical consumption-growth rates because of the severe effects of the world recession in the early 1980s. Per capita incomes in 1984 are well below 1980 levels in many countries. Moreover, in many developing countries, the per capita income levels of 1980 are not expected to be reached again until 1985 or 1986. Per capita gross domestic product is shown in Table B for the period 1977-83 for seven large developing countries to illustrate the impact of the 1981-83 recession as well as special problems such as the impact of declining oil prices on Nigeria's per capita GDP. TABLE B: PER CAPITA GDP OF SELECTED DEVELOPING COUNTRIES (1977-83) 1977 1978 1979 1980 1981 1982 1983 ------------------------(CONSTANT 1980 $)------------------------ ARGENTINA 5,520.0 5,241.2 5,521.2 5,495.5 5,115.4 4,810.0 4,773.5 BRAZIL 1,842.1 1,890.0 1,965.2 2,058.9 1,982.4 1,957.4 1,848.3 INDIA 233.1 242.8 225.6 235.0 243.7 244.6 254.7 INDONESIA 422.5 444.6 461.4 495.3 523.5 524.2 534.4 MEXICO 2,373.8 2,399.7 2,547.5 2,685.2 2,821.8 2,735.8 2,539.7 NIGERIA 1,084.1 997.3 1,030.2 1,005.4 923.1 858.8 787.4 PAKISTAN 259.5 271.8 275.0 291.1 304.4 306.4 321.4 SOURCE: WORLD BANK, ECONOMIC ANALYSIS AND PROJECTIONS DEPARTMENT. 11 For the longer term the field of genetic engineering offers the prospect of new, high-yielding varieties and improved pest and disease resistance. - 79 - Prospects for Yield Increases 6. The development and spread of high yielding wheat and rice varieties began in about 1965. The new rice varieties were fertilizer-responsive and photoperiod-insensitive and they were able to produce substantially higher yields (double the yields of traditional varieties in some cases). The high- yielding wheat varieties were semi-dwarf, fertilizer-responsive and adapted to irrigation. These high-yielding varieties have found the most widespread use in Asia. The increase in rice yields during the 1970s of more than 3% p.a. in Bangladesh, Indonesia, South Korea, Pakistan, Thailand, and the Philippines was largely due to the improved rice varieties. The rapid increases in wheat yields in India, Pakistan and Egypt were also largely underpinned by the high-yielding varieties. By 1980, approximately 40% of the rice area in South and Southeast Asia was planted to the high-yielding varieties. An estimate of the wheat area planted to the high-yielding varieties is not available; however, in 1976, India and Pakistan were estimated to have 72% and 75%, respectively, of their wheat area planted to the high-yielding varieties respectively. Prospects for Grain Imports by Developing Countries 7. Grain imports by the developing countries also contributed to the rapid growth of consumption during the last two decades. Of the countries previous identified as doubling consumption in this period, many significantly increased net grain imports. Brazil increased net imports from 1.8 mill ion tons in 1960 to 3.9 million tons in 1980: other countries which had large increase in imports over the same period included China (from 2.2 million tons to 14.2 million tons), East Asia (from 1.0 million tons to 15.7 million tons), Egypt (from 0.8 million tons to 6.3 million tons), Latin America and the Caribbean (from 2.1 million tons to 9.6 million tons), North Africa and the Middle East (from 4.1 million tons to 18.8 million tons). For the developing countries as a whole wheat imports grew by 3.9% p.a. over the 1961-82 period, coarse grain imports by 14.1% p.a. and rice imports by 2.7%. In the newly- industrializing countries of Asia and Latin America the sharp increases in imports, for the coarse grains especially, were generated by the new-found demand for meats, especially pigmeat and poultry meat. 8. For the projection period the growth rates 1.n grains imports are expected to slow down significantly, except for rice (which is a relatively small share of the international grains market). Over the period 1985-95 wheat imports by the developing countries are forecast to grow at 2.3% p.a. and coarse grain imports at 4.0% p.a. The growth rate for rice imports by develop- ing countries is expected to increase to 3.4% p.a. The slowdown in wheat import growth is expected to be the result of slower growth in Asia and Latin America. All major developing country regions are expected to experience a sharp slowing down in the growth of COarse grains imports. This is necessarily a reflection of the move to a much larger base, but it is also the likely result of the reduced incomes and the lessened ability to pay for imports in the developing countries. - 80 - Changes 1n Grain Shares 9. The level of per capita grain consumption depends largely on incomes and prices. However, the preference of consumers for wheat, rice or coarse grains depends on the cultural background as well as on economic factors. Asia, for example, is traditionally a rice-consuming region, while Latin American and African countries depend more on maize as a staple in their diets. Paki stan, Egypt, and North Africa are tradi tionally wheat-consuming countries. 10. As consumer incomes increase, the diet changes to reflect more variety and the substitution of one cereal for another, and eventually, a shift from cereal consumption to meat consumption. For example, as incomes in African countries have increased, the consumption pattern shows an increase in wheat and rice consumption and a decrease in maize consumption. In Asia, additions to income have been used to increase wheat consumption in the form of bread, and to decrease r1ce consumption. 11. A grain such as maize can be an economically inferior or superior good, depending on the income level of the country. It is an inferior good for direct consumption, but as incomes increase it becomes a superior good for use as a livestock feed. In low-income countries, wheat is often a superior cereal to maize for direct human consumption. However, for a high-income consumer wheat is an inferior good compared to poultry or other meats. The typical pattern, therefore, is for per capita coarse grain consumption to decrease and then increase with income growth. For wheat, per capita consumption increases at a decreasing rate as incomes increase and may reach a saturation point or even decline at high income levels. 12. Tables C, 0 and E show the historical and projected shares of rice, wheat and coarse grains in total grain consumption by major countries and regions. Nearly all of the developing countries have been increasing the proportion of wheat in total grain consumption as a substitute for rice or direct coarse grain consumption. These trends are projected to continue for most countries. - 81 - TABLE C: THE SHARE OF RICE IN TOTAL CEREAL CONSUMPTION FOR MAJOR COUNTRIES AND REGIONS /A COUNTRY/REGION 1960 1970 1980 L990 --------------------(%)----------------------- INDUSTRIAL COUNTRIES AUSTRALIA 2.9 2.0 1.6 1.1 CANADA .3 .2 .4 .5 EEC .8 .7 .8 .8 JAPAN 57.8 41.8 28.5 23.9 UNITED STATES .7 .8 1.2 1.4 OTHER INDUSTRIAL 1.6 1.5 1.2 1.1 CENTRALLY PLANNED EASTERN EUROPE .6 .5 .4 .4 USSR .1 .6 1.4 1.4 DEVELOPING COUNTRIES ARGENTINA 1.0 1.5 1.0 .7 BRAZIL 23.8 20.9 17.5 16.0 CENTRAL AFRICA 12.8 12.9 14.2 15.7 CHINA 47.6 43.0 38.0 35.0 EAST ASIA 74.7 69.2 60.2 55.0 EGYPT 13.6 13.6 10.6 10.3 INDIA 48.2 43.5 45.8 44.6 INDONESIA BO.8 82.5 79.7 79.5 LATIN AMERICA & CARIB. 16.7 14.2 16.5 16.5 MEXICO 2.9 2.0 1.6 1.5 NIGERIA 3.1 3.5 10.3 1B.1 NORTH AFRICA & M. EAST 3.6 4.0 4.B 4.B PAKISTAN 13.0 17.1 14.0 13.3 SOUTH AFRICA 1.1 .8 1.1 1.2 SOUTH ASIA 72 .2 73.7 70.0 65.1 THAILAND 99.1 96.3 85.6 77 .5 ------------------------------------------------------._----------------------- SOURCE: FOREIGN AGRICULTUR.E SERVICE, USDA (HISTORICAL); WORLD BANK, ECONOMIC ANALYSIS AND PROJECTIONS DEPARTMENT (PROJECTIONS). /A TOTAL CEREAL INCLUDES WHEAT, RICE AND COARSE GRAINS. - 82 - TABLE D: THE SHARE OF WHEAT IN TOTAL CEREAL CONSUMPTION FOR MAJOR COUNTRIES AND ECONOMIC REGIONS /A ACTUAL PROJECTED COUNTRY/REGION -------------------------------- 1960 1970 1980 -----1990 ---------------------(%)----------------------- INDUSTRIAL COUNTRIES AUSTRALIA 50.1 51.7 49.7 49.6 CANADA 26.1 21.3 22.5 22.6 EEC 40.6 37.3 36.3 35.0 JAPAN 20.3 18.5 17 .2 16.5 UNITED STATES 11.8 13.0 12.4 12.6 OTHER INDUSTRIAL 41.4 30.7 21.8 16.0 CENTRALLY PLANNED EASTERN EUROPE 33.1 38.3 34.4 34.0 USSR 51.4 56.7 50.7 49.0 DEVELOPING COUNTRIES ARGENTINA 35.3 40.0 37.8 35.5 BRAZIL 15.1 16.9 18.6 20.3 CENTRAL AFRICA 8.2 10.7 11.0 13.2 CHINA 22.2 19.2 27.4 32.6 EAST ASIA 7.5 12.4 12.2 13.5 EGYPT 42.8 48.3 54.2 58.3 INDIA 19.6 23.0 29.7 33.7 INDONESIA 1.2 2.4 5.2 6.2 LATIN AMERICA & CARIB. 29.1 35.4 32.7 31.8 MEXICO 16.9 16.0 15.6 16.0 NIGERIA 1.0 4.3 12.3 13.5 NORTH AFRICA & M. EAST 58.0 60.5 59.9 59.8 PAKISTAN 72 .3 70.8 75.9 79.9 SOUTH AFRICA 18.8 18.6 20.1 19.1 SOUTH ASIA 16.0 15.8 21.8 28.0 THAILAND .7 .8 2.1 5.2 ----------------------------------------------------------------------------- SOURCE: FOREIGN AGRICULTURE SERVICE, USPA (HISTORICAL); WORLD BANK, ECONOMIC ANALYSIS AND PROJECTIONS DEPARTMENT (PROJECTIONS). /A TOTAL CEREAL INCLUDES WHEAT, RICE AND COARSE GRAINS. - 83 - TABLE E: THE SHARE OF COARSE GRAIN IN TOTAL CEREAL CONSUMPTION FOR MAJOR COUNTRIES AND ECONOMIC REGIONS /A ACTUAL PROJECTED COUNTRY/REGION 1960 1970 1980 1990 ---------------------(%)---------------------- INDUSTRIAL COUNTRIES AUSTRALIA 49.0 46.8 49.4 49.3 CANADA 73.6 78.5 77 .1 76.9 EEC 58.6 62.0 62.9 64.2 JAPAN 21.9 39.7 54.3 59.6 UNITED STATES 87.5 86.2 86.4 86.1 OTHER 57.0 67.8 77 .0 82.9 CENTRALLY PLANNED EASTERN EUROPE 66.3 61.2 65.2 65.6 USSR 48.5 42.7 47.8 49.6 DEVELOPING COUNTRIES ARGENTINA 63.7 58.5 61.2 63.7 BRAZIL 61.2 62.2 63.9 63.7 CENTRAL AFRICA 79.0 16.4 14.8 11.1 CHINA 30.2 37.8 34.6 30.2 EAST ASIA 17 .8 18.3 27.6 31.5 EGYPT 43.5 38.1 35.2 31.3 INDIA 32.2 33.5 24.5 21.7 INDONESIA 18.0 15.1 15.0 14.3 LATIN AMERICA & CARIB. 54.2 50.4 50.8 51.1 MEXICO 80.1 82.0 82.8 82.5 NIGERIA 95.9 92.1 77 .5 68.4 NORTH AFRICA & M. EAST 38.4 35.5 35.3 35.5 PAKISTAN 14.1 12.2 10.2 8.8 SOUTH AFRICA 80.0 80.6 78.8 19.4 SOUTH ASIA U.8 10.5 8.3 6.9 THAILAND .2 2.9 12.3 11.3 ------------------------------------------------------------------------------ SOURCE: FOREIGN AGRICULTURE SERVICE, USDA (HISTORICAL); WORLD BANK, ECONOMIC ANALYSIS AND PROJECTIONS DEPARTMENT (PROJECTIONS). /A TOTAL CEREAL INCLUDES WHEAT, RICE AND COARSE GRAINS. - 84 - 13. Coarse grain consumption as a proportion of total cereal consumption is decreasing in most developing countries. The exceptions are in Asia where, for example, Thailand, Republic of Korea, Philippines, Malaysia, and Hong Kong are increasing coarse grain consumption quite rapidly for use as livestock and poultry feed. In Thailand, for example, the share of coarse grain consumption increased from 0.2% in 1960 to 12.3% in 1980. Virtually all of the increase has been for poultry and livestock feed. 14. Rice consumption patterns have changed significantly over the 1960-80 period for some countries and, for the most part, these changes are projected to continue. The proportion of rice in the diet has declined substantially in many of the major rice-consuming countries of East Asia. For example, rice comprised 58% of total grain consumption in Japan in 1960, 42% in 1970, 29% in 1980, and is projected to fall to 24% by 1990. Rice comprised 48% of China's total cereal consumption in 1960, 43% in 1970 and 38% in 1980, and is pro- jected to fall to 35% by 1990. Thailand's rice consumption dropped from 99% to 86% of total grain consumption between 1960 and 1980, and is projected to fall to 78% by 1990. 15. The decreasing importance of rice in the traditional rice-consuming countries has been accompanied by an increase in both wheat and coarse grain consumption and in a few cases, such as Japan, by a decrease in rice consump- tion. Coarse grain consumption in Japan increased from 22% to 54% of total cereal consumption between 1960 and 1980, while wheat consumption went from 20% to 17%. For China, the percentages of rice, wheat and coarse grain consumption in 1960 were 48%, 22% and 30%, respectively. In 1980, the figures were 38%, 27% and 35%, respectively. In Thailand, the changes have been attributed primarily to increased coarse grain consumption for livestock feed with a smaller increase in wheat. In Brazil and Egypt, the decreasing importance of rice was accompanied by increased wheat consumption rather than by increased coarse grain consumption. Two dietary changes are taking place. First, wheat is being substituted directly for rice through increased pastry and bread consumption. Second, increased meat consumption is reducing rlce intake and this is being reflected in higher coarse grain consumption. 16. Not all countries have experienced the dramatic dietary changes observed in Japan, Thailand and China over the last two decades. India, Indonesia, Pakistan, and Latin American and Caribbean countries have main- tained rice consumption at a nearly constant level over the 1960-80 period. Whether or not these countries eventually follow the pattern of Japan and Thailand is a major question for future rice production, consumption and prlces. 17. The increases in rice consumption in those several countries and regions which have not been major rice consumers, is much less dramatic, but interesting. In Nigeria, rice consumption has increased from 3.1% to 10.3% of total grain consumption in the period from 1960 to 1980. This change takes the form of substituting both rice and wheat for coarse grain in direct human consumption. North African and the Middle Eastern countries show a smaller increase in rice consumption, from 3.4% to 4.8%, during the 1960-80 period. - 85 - 18. Rice is becoming less unique among the cereals. It is no longer the only cereal consumed by some groups as it was 20 years ago. It may still be the preferred grain in many cultures but some substitution is now evident in the diets of most consumers. In economic terms, the number of substitutes available are increasing and this makes the price elasticity of demand larger. Rice is also becoming more important in the diets of non-traditional consumers and this change has opened up a new source of demand which will probably lead to a more diversified flow of rice throughout the world. Conclusions 19. Two major changes in grain consumption patterns in the developing countries are projected for the next decade. First, the growth of consumption of the primary grains will slow from the rates experienced in the 1960s and 1970s. Secondly, the mix of grains consumed will continue to change, with wheat consumption increasing as a proportion of total grains, and decreased rice and coarse grains consumption shares. Wheat consumption will continue to replace rice for direct consumption although rice will remain the staple for many developing countries. Coarse grain consumption will decrease as a share of total grains consumed in the developing countries as direct consumption shifts to rice and wheat. Some offsetting shifts will occur as some developing countries increase coarse grain feeding for livestock, but these shifts will not be large enought to fully offset the shifts away from direct consumption. 20. The slower projected future growth of grain consumption in the developing countries stems from expectations of both lower production growth rates and lower growth in grain imports. In the period to 1990 production growth rates are expected to fall from levels achieved in the 1960s and 1970s because many countries have already adopted the high-yielding wheat and rice varieties developed in the 1960s and further production gains from this source are becoming more difficult. Slower import growth is projected because of the severe impact on per capita income levels of the result recession and the debt-repayment burden which many of the developing countries bear. COMMODITY DESCRIPTION ENERGY Petroleum, average OPEC price (OPEC government sales weighted by OPEC output) Thermal Coal, (12,000 BTU/lb, < 1.0% sulfur, 12% ash), FOB Piers, Hampton ~oads, 'lorfolk FOOD Coffee (ICO), indicator price, other mild Arabicas, ex-dock New York for prompt 8hipment COCOd (ICCO) , daily average price, New York and London, neares t three future _radi ng months Tea :London Auction), average price received for all teas Sugar (World), ISA daily price, FOB and stowed at greater Caribbean ports Beef (US), imported frozen boneless, 85% visible lean cow meat, FOB port of entry Bananas (Central and South American), first-class quality tropical pack, FOB US ports Oranges (Mediterranean Exporters), EEC indicative import price, CIF Paris CEREALS Rice (Thai), white, milled, 5% broken, government standard, export price, FOB lIangkok Wheat (Canadian), No.1 Western Red Spring (CWRS) , in store, Thunder Bay MaiZE, (US), :'<0.2, yellow, FOB Gulf ports Grain Sorghul11 (US), No.2, Milo yellow, FOB Gulf ports FATS AND JILS Palm Oil (Malaysian), 5% bulk, CIF N.W. Europe Cocorut Oil