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 the end of 2024, the World Bank’s latest ‘Commodity Markets Outlook’ report shows.

The increase in energy prices over the past two years has been the largest since the 1973 oil crisis, the report indicates.

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.

“These developments have started to raise the spectre of stagflation. Policymakers should take every opportunity to increase economic growth at home and avoid actions that will bring harm to the global economy,” says World Bank equitable growth, finance and institutions VP Indermit Gill.

Energy prices are expected to rise more than 50% this year before easing in 2023 and 2024.

Non-energy prices, including agriculture and metals, are projected to increase by almost 20% and will also moderate in the coming years.

However, 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 World Bank warns.

Owing to war-related trade and production disruptions, the price of Brent crude oil is expected to average $100/bl this year, its highest level since 2013 and an increase of more than 40% compared with 2021.

Prices are expected to moderate to $92/bl in 2023 – well above the five-year average of $60/bl.

Natural gas prices (European) are expected to be twice as high this year as they were in 2021, while coal prices are expected to be 80% higher, with both prices at all-time highs.

Wheat prices are forecast to increase more than 40%, reaching an all-time high in nominal terms this year. That will put pressure on developing economies that rely on wheat imports, especially from Russia and Ukraine, the report points out.

Metal prices are projected to increase by 16% this year before easing in 2023 but will remain at elevated levels.

SPECIAL FOCUS
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.

Firstly, 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.

Secondly, 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 addition, policy responses so far have focused more on tax cuts and subsidies – which often exacerbate supply shortfalls and price pressures – than on long-term measures to reduce demand and encourage alternative sources of supply.

The war is also leading to more costly patterns of trade that could result in longer-lasting inflation. It is expected to cause a major diversion of trade in energy. For example, some countries are now seeking coal supplies from more remote locations.

At the same time, some major coal importers could step up imports from Russia while reducing demand from other large exporters. This diversion will likely be more costly, the report notes, because it involves greater transportation distances – and coal is bulky and expensive to transport. Similar diversions are occurring with natural gas and oil.

In the near term, higher prices threaten to disrupt or delay the transition to cleaner forms of energy. Several countries have announced plans to increase production of fossil fuels.

High metal prices are also driving up the cost of renewable energy, which depends on metals such as aluminium and battery-grade nickel.

The report urges policymakers to act promptly to minimise harm to their citizens, as well as to the global economy.

It calls for targeted safety-net programs such as cash transfers, school feeding programs, and public work programs, rather than food and fuel subsidies.

A key priority should be to invest in energy efficiency, including weatherisation of buildings. It also calls on countries to accelerate the development of zero-carbon sources of energy such as renewables.