Commodities: Sharp fall in December ends weak year

Commodity Prices Snapshot: Sharp fall in December ends weakest year since 2008

Global commodity prices fell sharply in December, led by another large decline in oil prices. Our indicator suggests the IMF commodity price index is likely to have fallen by a very sharp -14% in December. This would take the full-year decline in commodity prices to -30%, the largest fall since 2008. Oil prices fell by -21% in December, to be -42% lower through the year. Metals prices also fell in the month, capping off a very weak year. Grain prices generally rose during the month, but remained down through the year. Overall, commodity prices are down by -42% from their 2011 peak, but remain +50% higher than their 1990s average in real terms.

Commodity prices fell for the sixth consecutive month in December, with the final month of the year delivering the sharpest monthly since late 2008 (-14% m-o-m). By far the biggest driver of the fall was a sharp decline in oil prices. The average of the Brent, WTI and Dubai oil price fell by a very sharp -21%. The fall in oil prices partly reflected a decision by OPEC, which met on 27 November, not to cut production quotas.

For the year as a whole, commodity prices fell by the most since 2008. Our estimates suggest that the IMF commodity price index is likely to show that commodity prices fell by -30% through 2014 (they fell by -37% through 2008). For the year as a whole, our estimates suggest that around 90% of the decline in the IMF index was due to the fall in oil prices (which partly reflects the heavy weight that oil has in the index).

In December, more prices fell than rose. Metals prices generally fell, with the sharpest decline in iron ore prices (-6%) as supply continues to ramp up in the face of slowing demand growth. Copper, lead, nickel and aluminium prices also fell solidly during the month. Energy prices fell across the board, with natural gas prices declining by -17% in the month and uranium prices also falling, following a number of months of rising prices. Across the food commodities, grain prices generally rose, led by a wheat (+8%), maize (+6%) and barley (+5%). Meat prices generally fell, as did the prices of sugar and coffee.

For the year as a whole, the weakest performer was iron ore, with prices down by -49%, followed by oil prices, which declined by -42%. The strongest performers were the prices of coffee (+56%), barley (+26%) and beef (+24%). Of the 34 commodities in our proxy for the IMF index, only 11 commodities registered price increases through 2014.

Australia's commodity price index fell by -3.6% in USD terms in December to be -25% lower over the 2014 as a whole. The largest contributor to the decline was the fall in oil and iron ore prices during the month. The impact of the fall in December on local incomes will have been partly offset by an even larger decline the AUD during the month, with the commodity price index rising by 1% in AUD terms. However, the index was still down by a sharp -19% through the year in AUD terms, which is a large negative shock for the Australian economy to absorb.

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