The World in 2008

By Professor Philippe Chalmin, University of Paris Dauphine

The first days of 2008 were filled with news of both records and troubling facts. Oil reached $100 a barrel in New York, gold prices rose to $900 an ounce and prices of commodities, ranging from soybeans and cobalt to corn and platinum, reached record levels. On the whole, commodity prices have reached their highest levels ever at current prices and, in constant dollar prices, are nearly as high as during the 1974 crisis.

In economic terms, the recent weeks have been filled by bad news. The so-called “sub prime crisis” is far from over. Housing markets in the US are still declining and everybody is frantically searching for the $250 to $400 billions lost by the world’s financial industry. The extent of this amount points to a true crisis in liquidity and a lack of confidence in even the best financial names. Economic activity is slowing throughout the US and Europe and the chances of a recession are growing daily.

Nevertheless, world economic forecasts remain at pretty high levels, with around 4% growth projected for 2008. This is, of course, not only due to the emerging economies of China and India, but also commodity-producing countries such as Russia and Brazil. The big question is whether the western economic turmoil will have much impact on those countries and especially on China? With the Olympic Games in Beijing in August 2008, any adjustment would need to be postponed at least to 2009 or later (after the World Expo in Shanghai in 2010!).

What does this mean for commodity prices in 2008? Under “normal” geopolitical and climatic conditions, we should see lower prices both for energy and for agricultural products. My forecast for the average Brent price is $70 a barrel. For most non-ferrous metals, peak prices seem something of the past, as shown by nickel, zinc and lead.

Copper will be probably one of the most interesting commodities to watch in 2008. With demand slowing in Europe and the U.S., everything will depend on the firmness of Asian – and especially Chinese – demand.

But one thing that is sure for copper, as well as for other commodities and the dollar itself, is that volatility will be very high in 2008 and anything can happen in a world where, from Pakistan to Congo, from Iran to Sudan, peace is definitely a scarce commodity.