Abstract
Abstract We estimate income elasticities of demand for three energy and six base metal commodities and their group aggregates. The elasticities, which vary with income levels, are estimated using a panel autoregressive distributed lag model covering the period 1965–2017, for up to 63 countries. We report three findings. First, most income elasticities are inversely proportional to income and decline rapidly as income rises. This implies commodity demand growth slows as economies develop, consistent with the dematerialization hypothesis. At median per capita income levels, the elasticity for metals (in aggregate) was 0.9, while that of energy was 0.7. Second, there is significant heterogeneity between commodities, both in terms of income elasticities and in terms of the performance of the model, with larger commodities and group aggregates performing better. Finally, we find evidence of substitution between commodities (e.g. oil/coal, aluminum/copper), estimated by the inclusion of the prices of similar commodities.
Highlights
Demand for industrial commodities surged over the past two decades, notably as a result of strong growth in emerging markets and developing economies (EMDEs)
We find that while income elasticities of demand for energy and metal are close to one at median income levels, they are substantially higher at low income levels but drop rapidly at high income levels
This paper has examined the relationship between commodity demand and per capita income level for energy and metal commodities both at the aggregate and commodity‐ specific levels
Summary
Demand for industrial commodities surged over the past two decades, notably as a result of strong growth in emerging markets and developing economies (EMDEs). The surge in demand was most pronounced in metals, which grew more than 150 percent during this period. This increase was driven by China, whose share of world metals demand reached 50 percent in 2015, up from 10 percent two decades earlier. The overall increase in demand was associated with a price boom; between 2000 and their 2011 peak, real prices of metals nearly doubled while those of energy rose al‐ most 150 percent. Prices of most commodities have since come down in real terms (as of 2020), they have remained much higher than their average in 1985‐2000, a period of relatively low and stable prices (Figure 1)
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