AnalysisEMBARGOED: NOT FOR NEWSWIRE TRANSMISSION, POSTING ON WEBSITES, OR ANY OTHER MEDIA USE UNTIL JANUARY 26, 2016, 10:00AM EST (1500 GMT) EMBARGOED: NOT FOR NEWSWIRE TRANSMISSION, POSTING ON WEBSITES, OR ANY OTHER MEDIA USE UNTIL JANUARY 26, 2016, 10:00AM EST (1500 GMT)The Role of Substitution in Commodity DemandCommodity Markets OutlookA World Bank ReportOctOCTOBER 2019Aprworldbank/commoditiesOCTOBER 2019 Commodity Markets Outlook © 2019 International Bank for Reconstruction and Development / World Bank 1818 H Street NW, Washington, DC 20433 Telephone: 202-473-1000; Internet: worldbank Some rights reserved This work is a product of the staff of the World Bank with external contributions. The findings, interpretations, and con-clusions expressed in this work do not necessarily reflect the views of the World Bank, its Board of Executive Directors, or the governments they represent. The maps were produced by the Map Design Unit of the World Bank. 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The cutoff date for the data used in this report was October 25, 2019. iii Table of Contents Figures Acknowledgments . v Executive Summary . 1 Special Focus: The Role of Substitution in Commodity Demand . 5 Commodity Market Developments and Outlook . 17 Energy . 19 Agriculture . 25 Fertilizers . 30 Metals and Minerals . 31 Precious Metals . 33 Box S.F.1 Innovation, disruptive technologies, and substitution among commodities . 9 Box 1 Oil market implications of the strike on Saudi Aramco facilities. 22 Appendix A: Historical commodity prices and price forecasts. 35 Appendix B: Supply-Demand balances. 43 Appendix C: Description of price and technical notes . 75 Figure 1 Commodity market developments . 2 Figure SF.1 Commodity prices and consumption . 8 Figure Box SF.1 Broad-based substitution across commodities . 10 Figure SF.2 Innovation and substitution across commodity groups . 12 Figure SF.3 Own and cross-price elasticity estimates . 13 Figure 2 Developments in oil prices and consumption. 19 Figure 3 Crude oil production . 20 Figure 4 Oil market outlook . 21 Figure Box 1.1 Conflict-driven oil supply disruptions and oil prices . 23 Figure 5 Natural gas and coal developments . 24 Figure 6 Agricultural price developments . 25 Figure 7 Supply conditions for grains and edible oils . 26 Figure 8 Supply conditions and price volatility . 27 Figure 9 Beverage commodity market developments . 28 Figure 10 Agricultural raw materials market developments . 29 Figure 11 Fertilizer market developments. 30 Figure 12 Metals and minerals market developments. 31 Figure 13 Precious metals market developments . 33 iv Tables Table 1 Nominal price indexes and forecast revisions . 3 Appendix Table SF.1 Parameter estimates for energy . 14 Appendix Table SF.2 Parameter estimates for metals. 14 Table A.1 Commodity prices . 37 Table A.2 Commodity prices forecasts in nominal U.S. dollars . 39 Table A.3 Commodity prices forecasts in constant U.S. dollars (2010=100) . 40 Table A.4 Commodity price index forecasts (2010=100) . 41 v Many people contributed to the report. John Baffes, Peter Nagle, and Alain Kabundi authored the Special Focus on the role of substitution in commodity demand. Peter Nagle authored the section on energy. John Baffes authored the section on agriculture. Wee Chian Koh authored the sections on metals, precious metals, and fertilizers. Jinxin Wu managed the reports database. The design and production of the report was managed by Maria Hazel Macadangdang and Adriana Maximiliano. Graeme Littler produced the accompanying website. Betty Dow, Justin Damien Guenette, Graeme Littler, Shane Streifel, and Franz Ulrich Ruch reviewed the report. Alejandra Viveros and Mark Felsenthal managed communications. Staff of the Translation and Interpretation Services unit provided translations of dissemination materials. The World Banks Commodity Markets Outlook is published twice a year, in April and October. The report provides detailed market analysis for major commodity groups, including energy, agriculture, fertilizers, metals, and precious metals. Price forecasts to 2030 for 46 commodities are presented, together with historical price data. The report also contains production, consumption, and trade statistics for major commodities. Commodity price data updates are published separately at the beginning of each month. The report and data can be accessed at: worldbank/commodities For inquiries and correspondence, email at: commoditiesworldbank Acknowledgments This World Bank Group Report is a product of the Prospects Group in the Equitable Growth, Finance, and Institutions Vice Presidency. The report was managed by John Baffes under the general guidance of Ayhan Kose and Franziska Ohnsorge. EXECUTIVE SUMMARY COMMODITY MARKETS OUTLOOK | OCTOBER 2019 1 Recent trends Prices of almost 60 percent of commodities fell in the third quarter of 2019 amid mounting concerns about slowing global growth. This was a marked turnaround relative to the April Commodity Markets Outlook report, when a series of commodity-specific supply shocks boosted prices of many commodities, including oil. The current deteriorating macroeconomic envi-ronment, including a sharp slowdown in manufacturing and goods trade, has weighed heavily on commodity demand. Energy prices fell more than 8 percent (q/q) in the third quarter, with similar declines across all three energy commodities (Figure 1). Crude oil prices averaged $60/bbl in the third quarter, 8 percent weaker than in the previous quarter. The fall in prices occurred despite an attack on Saudi Arabias oil infrastructure, which triggered the largest one-day price rise in Brent crude oil since 1988 (the year when Brent crude futures began trading on futures exchanges). The spike unwound rapidly as market participants concluded that the impact would not be long-lasting. Also, on the supply side, growth in the United States has been much weaker than the record pace of 2018, and OPEC and its partners have agreed to continue with their production cuts. While oil production growth has slowed, the weakness in demand has been more severe. Demand growth expectations have been repeatedly revised downward and are now around 1 percent, or 1 million barrels per daythe weakest growth rate since 2012. Coal and natural Almost all major commodity price indexes fell in the third quarter of 2019, led by energy, which declined more than 8 percent (q/q). Trade tensions and weakness in global trade, manufacturing, and output growth are weighing on commodity demand. In line with subdued global growth prospects, most price forecasts have been revised down. Crude oil prices are forecast to average $60/bbl in 2019 and $58/bbl in 2020a sharp downward revision since April. Amid heightened risks of a sharper-than-expected global downturn, the likelihood of a further slowdown in oil demand, and therefore lower oil prices, has risen. Non-energy prices are projected to fall in 2019 before stabilizing in 2020, although metals prices are forecast to be lower next year. A Special Focus examines the role of innovation and substitution in commodity consumption. It shows that, historically, demand surges have been accompanied by investment and innovation, in turn causing substitution both within commodity groups (for example, from coal to natural gas for energy) and across commodity groups (such as between paper, metal, and plastic in packaging). Executive Summary gas prices have also continued to weaken, amid ample supply. Most non-energy prices fell in the third quarter of 2019. Base metals and ore prices fell 2 percent, largely reflecting concerns about demand and trade tensions. Iron ore prices fell sharply as supply bottlenecks resulting from the Vale dam accident in Brazil eased. Nickel prices, as an exception to the broader base metals price weakness, surged after Indonesia (the worlds largest nickel ore producer) announced a ban on nickel exports from the start of 2020. Precious metal prices surged in response to trade tensions and monetary policy loosening in advanced economies. Most agricultural commodity prices fell in the third quarter, as production expectations were revised upward and global stocks of key grains, notably rice and wheat, remained at multi-year highs. An exception was soybeans, whose prices rose on news that China had restarted purchasing U.S. cropsas a result of trade tensions, China had switched soybean purchases from the United States to alternative suppliers, and also to substitute commodities (see Special Focus for the role of substitution). Outlook and risks Energy prices are expected to average almost 15 percent lower in 2019 than in 2018 (a substantial downward revision from April) and continue to decline in 2020 (Table 1). Non-energy prices are projected to decline 5 percent in 2019 (a smaller downward revision from April) and stabilize in EXECUTIVE SUMMARY COMMODITY MARKETS OUTLOOK | OCTOBER 2019 2 2020. The outlook for commodity prices, especially oil and metals, is vulnerable to a larger-than-expected slowdown in global growth, particularly in EMDEs. Oil prices are projected to average $60/bbl in 2019 and are forecast to weaken to $58/bbl in 2020, $7/bbl lower than the previous forecast. The downward revision reflects the weaker outlook for global growth and therefore for oil demand. On the supply side, although U.S. production increases have been modest in 2019, they are expected to rise substantially by 2020 as new pipelines come into operation. The forecast assumes that production cuts by OPEC and its partners will be sustained into 2020. Risks to the oil price outlook are to the downside. Oil consumption growth is expected to increase slightly next year at a level usually associated with global downturns. If economic growth deteriorates further, oil demand could be substantially weaker. Conversely, the recent attack on Saudi Arabias oil processing facilities serves as a reminder that geopolitical events remain a major risk that could drive up oil prices, despite the short-lived impact of the recent attack. Metal prices are projected to fall 5 percent in 2019 and are forecast to fall further in 2020, as slowing global demand weighs heavily on the market. Risks to this ou