The war, if prolonged, could spike higher food prices
THE WORLD Bank’s latest Commodity Markets Outlook report has indicated that the war in Ukraine has dealt a major shock to commodity markets, altering global patterns of trade, production, and consumption in ways that will keep prices at historically high levels through to the end of 2024.
It said the increase in energy prices, over the past two years, has been the largest since the 1973 oil crisis adding price increases for food commodities, of which Russia and Ukraine are large producers, and fertilisers, which rely on natural gas as a production input, have been the largest since 2008.
“Overall, this amounts to the largest commodity shock we’ve experienced since the 1970s. As was the case then, the shock is being aggravated by a surge in restrictions in trade of food, fuel and fertilisers,” said Indermit Gill, the World Bank’s Vice President for Equitable Growth, Finance, and Institutions.
Energy prices are expected to rise more than 50 percent in 2022 before easing in 2023 and 2024. Non-energy prices, including agriculture and metals, are projected to increase almost 20 percent in 2022 and will also moderate in the following years. Nevertheless, commodity prices are expected to remain well above the most recent five-year average. In the event of a prolonged war, or additional sanctions on Russia, prices could be even higher and more volatile than currently projected, the report said.
Because of war-related trade and production disruptions, the price of Brent crude oil is expected to average $100 a barrel in 2022, its highest level since 2013 and an increase of more than 40 percent compared to 2021. Prices are expected to moderate to $92 in 2023 — well above the five-year average of $60 a barrel. Natural-gas prices (European) are expected to be twice as high in 2022 as they were in 2021, while coal prices are expected to be 80 percent higher, with both prices at all-time highs.
“Commodity markets are experiencing one of the largest supply shocks in decades because of the war in Ukraine,” said Ayhan Kose, Director of the World Bank’s Prospects Group, which produces the Outlook report. “The resulting increase in food and energy prices is taking a significant human and economic toll—and it will likely stall progress in reducing poverty. Higher commodity prices exacerbate already elevated inflationary pressures around the world.”
It continued that wheat prices are forecast to increase more than 40 percent, reaching an all-time high in nominal terms this year. This will put pressure on developing economies that rely on wheat imports, especially from Russia and Ukraine. Metal prices are projected to increase by 16 percent in 2022 before easing in 2023 but will remain at elevated levels.
“Commodity markets are under tremendous pressure, with some commodity prices reaching all-time highs in nominal terms,” said John Baffes, Senior Economist in the World Bank’s Prospects Group.
The report’s Special Focus section offers an in-depth exploration of the war’s impact on commodity markets. It also examines how commodity markets responded to similar shocks in the past. The analysis finds that the war’s impact could be longer-lasting than previous shocks for at least two reasons.
First, there is less room now to substitute the most affected energy commodities for other fossil fuels—because price increases have been broad-based across all fuels. Second, the increase in prices of some commodities is also driving up prices of other commodities—high natural-gas prices have raised fertiliser prices, putting upward pressure on agricultural prices.
In the near-term, higher prices threaten to disrupt or delay the transition to cleaner forms of energy.