Energy & Commodities, No.3, 14 March 2011

Energy & Commodities
Monthly newsletter from Swedbank’s Economic Research Department
by Jörgen Kennemar No. 3 • 14 March 2011

Commodity prices reach new heights with risk of price fall
• The global economy is being put to the test as commodity prices rise broadly.
In February Swedbank’s Total Commodity Price Index rose for the eighth
consecutive month. Compared with February of 2010, the index has climbed
by 35.8% in USD, with food commodities accounting for the biggest increase.
Excluding energy, the index has risen to a higher level than in 2008, when
commodity prices reached record levels.
• Expectations of a continued strong economic recovery and shrinking
inventories have driven metal prices broadly higher despite high oil prices.
There is a risk they could fall, however, if oil remains at today's high level or
rises further.
• The impact of the disastrous earthquake in Japan is difficult to assess, but in
the short term it could lead to lower copper and aluminium prices if the
Japanese auto and electronics industries are forced to significantly reduce
production. While Japan has succeeded over the years in reducing its oil
dependency, it is still the third largest importer in the world. To meet its
energy needs after shutting down several nuclear power plants, Japan may
have to substantially increase its oil imports, which would raise prices. In the
long term commodity prices could face further pressure once reconstruction
begins.
Swedbank’s Total Commodity Price Index in USD, 2005=100

250
Total index Food
225
Total excl energy commodities
200

175
Index

150

125

100 Metals

75
05 06 07 08 09 10 11
Source: Swedbank

Economic Research Department. Swedbank AB. SE-105 34 Stockholm. Phone +46-8-5859 1000.
E-mail: ek.sekr@swedbank.se www.swedbank.se
Legally responsible publisher: Cecilia Hermansson. +46-8-5859 7720.
Magnus Alvesson. +46-8-5859 3341. Jörgen Kennemar. +46-8-5859 7730.


Swedbank’s Total Commodity Price Index rose also risen substantially, but are still below the
by an average of 4.4% in USD in February previous peak two and a half years ago. Other
compared with the previous month. It was the agricultural products such as cotton have also
eighth consecutive monthly increase, with the reached record highs this year, which is raising
index reaching its highest level since commodity costs for the textile industry.
September 2008. In euro, the price increase
was slightly lower, at 2.2%. The krona’s The substantial price rise is being driven by
appreciation against the dollar means that lower supplies of foods and other agricultural
commodity prices gained a more modest 0.6% commodities due to poor harvests, though also
in SEK between January and February. because of growing demand around the world.
Excluding energy, the index is higher than two This has led to declining inventory levels.
and a half years ago. That supply restrictions Demand is also affected by efforts by several
are becoming more common is a sign of countries to build up their inventories to slow
insufficient production capacity as the domestic inflation pressures and reduce the
economy improves. The global financial crisis risk of social tensions. This is cutting into
may have delayed new investments in supplies on the global market, causing prices
commodity industries. Low interest rates and to rise. High oil prices also tend to raise food
unconventional measures taken by central prices, since oil is an important input good in
banks, like buying government debt to agricultural production. We think food prices
stimulate the economy, have created greater could rise even more in the months ahead due
liquidity in financial markets and may have to higher oil prices and shrinking inventories.
added fuel to the commodity price rise in the Not until the second half of 2011 is it likely that
last year. To ensure access to commodities prices could fall from today's high levels,
and reduce price volatility, investments will be provided that production rises sharply and
needed to expand future production capacity. It inventories recover. Experience from the food
is also important that commodities are crisis in 2008 shows that high prices often lead
consumed more efficiently, especially by to higher production. At the same time
emerging economies, which account for a available acreage for food production is
growing share of consumption. The current increasing. Further production disruptions such
National People's Congress in Beijing is as bad weather, high oil prices and export
planning several measures to reduce embargoes in several large net exporters
commodity consumption and raise efficiency. increase the risk that food prices could
While this may eventually reduce China's continue higher.
vulnerability, in the short term it will not
alleviate the problem that supply is rising more Oil price shock threatens the global
slowly than demand. economy
The global economic rebound and cold winter
Food prices noted the largest price increase in
pushed oil prices above USD 100 a barrel
Swedbank’s Commodity Price Index in
even before the political turbulence in North
February, and since the start of the year have
Africa began in late January. Global
risen by nearly 11% on average in USD, more
consumption rose by 3.3% in 2010 to 87.8
than crude and metals. After increasing by just
billion barrels a day, or 1.7 billion barrels more
over 50% since last summer, Swedbank’s
than the last peak in 2008. Most of the
Price Index for food commodities is higher than
increase is coming from outside the OECD, led
during the food crisis in 2008. This applies to
by Asia excluding Japan. This trend has
coffee, sugar, beverages and several grains
strengthened in recent years as OECD
such as barley and corn. Wheat prices have
countries have reduced their consumption. The


Monthly newsletter from Swedbank’s Economic Research Department, continued

No. 3 • 14 March 2011

growing dependency on oil in emerging days. Uncertainty about future oil supplies is
economies will continue in the years ahead as growing at a time when the global economy is
buying power rises and a larger middle class getting stronger. The International Energy
takes shape. Agency (IEA) is predicting that global oil
consumption will increase by 1.5 million barrels
Oil production climbed by 2.5% in 2010 to 83.7 a day in 2011, which corresponds to Libya's
billion barrels a day, with OPEC generating previous oil production volume. Oil futures
nearly half the increase, while production suggest that high prices will persist in 2011,
volume in OECD countries as a whole was with a price of around USD 115 dollar a barrel
unchanged. Although demand grew faster than for delivery in December, before falling to USD
supply, supplies remain good, as indicated by 110 for delivery in late 2012. The price picture
the OECD’s inventories, which are above their could change quickly if the political situation
historical average for the period 2005-2009. It stabilises, which could drop prices to USD 100,
is noteworthy, however, that price of Northern which we think is more reasonable considering
European oil (Brent crude) is significantly fundamentals in the oil market. Uncertainty is
higher (USD 15 more at the time of writing) great, however, so we cannot rule out
than North American (WTI crude), which is significantly higher oil prices if political
priced in the US market. In addition to quality concerns in the region continue.
differences – WTI contains less sulphur than
Northern European oil – the big price Although the global economy is less
difference is due to major regional imbalances, dependent on oil than during previous oil price
with a lower supply of Brent crude in Europe shocks, a substantial rise in prices will
and a growing surplus of WTI in the US. adversely affect growth. The rule of thumb is
that if the price of oil rises by 10%, global
Crude oil consumption, millions barrels/day growth will slow by 0.2% in the first year and
50.0
0.4% in the second. Our assumption of a year-
47.5 on-year increase of 25% in oil prices in 2011
45.0
means growth could slow even more, i.e.,
42.5
Barrel/Day (millions)

40.0 upwards of one percentage point over a two-
37.5 year period, which would also affect
35.0

32.5
commodity demand. It is important, however,
30.0 to qualify how higher oil prices affect global
27.5 economy – whether through increased demand
25.0
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 or supply shortages, the latter of which would
OECD Total Non-OECD
Source: Reuters EcoWin
probably have a greater negative impact.

When the political conflict in the Middle East Oil futures for Brent crude
spread to Libya in February, it caused growing 120
concerns about future oil supplies from OPEC,
110
which accounts for one third of global
production, and oil prices rose to slightly over 100

USD 115 a barrel from USD 103 in early 90

February. Despite the Libyan oil production 80
represents only 2% of the global total, the
70
problem is uncertainty whether political
developments in the region could jeopardize 60
jan feb mar apr maj jun jul aug sep okt nov dec jan feb mar

supplies from major producers such as Saudi Spot price
10
Brent Crude Futures Dec 2011 Brent Crude Futures Dec 2012
11
Source: Reuters EcoWin

Arabia, Iran and Iraq, which supply 40% of
OPEC’s total production. Available production Tighter supply of metals
capacity in OPEC countries of 4-6 million
The price trend for metals is continuing, and in
barrels a day can keep prices in check. Part of
February prices rose by 4.2% in USD from the
this capacity is replacing Libya's production,
which has dropped substantially in recent previous month. Nickel accounted for the

3 (6)

Monthly newsletter from Swedbank’s Economic Research Department, continued

No. 3 • 14 March 2011

largest increase (10.3%), followed by zinc medium-term goal of authorities there. In total,
(32%) and copper (3.2%). Lead fell the most in steel production is expected to rise by 5% this
price in the last month. Supply conditions for year.
many metals have tightened as demand
outpaces production. This is especially true of The powerful earthquake in Japan could have
copper, tin and iron ore, where prices are at an impact on global metal prices, even though
record highs and inventories are expected to the affected region accounts for only about 2%
reach critically low levels in 2011, even if of the country's GDP. The Japanese auto and
actual inventory data do not show it yet. The electronics industries will face serious
increase in copper inventories since December production and delivery disruptions, which
has not prevented prices from rising. should reduce aluminium and copper
Expectations of further economic expansion in consumption. Another uncertainty affecting
Asia, capacities shortages and lower ore Japanese industry is the risk of an energy
quality in existing mines are also contributing shortage after several nuclear power
to rising prices. International experts predict an generators have been shut down following the
increase in copper consumption of around explosion in Fukushima and for safety reasons.
4.5% in 2011, while production is expected to Since the oil crisis in the 1970s, when oil
gain just over 1%. Aluminium, nickel and zinc supplied two thirds of the country's electricity
inventories are not as constrained, so price production, a large share has been replaced by
increases for these metals are expected to be nuclear power. The earthquake and damage to
lower. The chances of further increases in buildings and infrastructure could also limit the
metal prices will decline if oil prices remain supply of steel on the global market if a larger
high. share of the 100 million tons Japan produces
were used domestically instead of exported.
Inventory levels for metals, millions of tons
Jörgen Kennemar
1.0 225000

0.9 200000
Nickel, right scal
0.8 175000

0.7 150000
Ton (metric) (millions)

0.6 Copper 125000
Ton (metric)

0.5 Zink 100000

0.4 75000

0.3 50000

0.2 25000

0.1 0
Lead
0.0 -25000
00 01 02 03 04 05 06 07 08 09 10 11
Source: LME, Reuters EcoWin

Global steel production increased by as much
as 15% in 2010, with China accounting for
44%, followed by Japan at 8%. Production
volume of over 1.4 billion tons last year was a
record high, which is driving iron ore prices
higher. At the same time the supply of iron ore
in the global market has been hurt by lower
exports from India (the world's third largest
exporter after Australia and Brazil), due to
rising domestic demand and export
restrictions. Spot prices of iron ore, which now
serve as a guide for quarterly prices,
consistently point higher in the next quarter.
Estimates of a further increase in Chinese
steel production would indicate high iron ore
prices, despite that China’s expansion is
expected to slow slightly in 2011, which is the

4 (6)


Swedbank Commodity Index - US$ - Swedbank Commodity Index - SKr -
Basis 2000 = 1oo 14/03/11 Basis 2000 = 1oo 14/03/11
12.2010 1.2011 2.2011 12.2010 1.2011 2.2011
Total index 314.2 327.1 341.3 Total index 233.6 237.1 238.6
Per cent change month ago 5.8 4.1 4.4 Per cent change month ago 6.1 1.5 0.6
Per cent change year ago 25.0 25.5 35.8 Per cent change year ago 19.7 17.2 20.3
Total index exclusive energy 292.7 308.7 318.9 Total index exclusive energy 217.6 223.8 222.9
Per cent change month ago 3.1 5.5 3.3 Per cent change month ago 3.4 2.8 -0.4
Food, tropical beverages 286.2 302.5 317.6 Food, tropical beverages 212.8 219.3 222.0
Cereals 278.9 294.7 314.5 Cereals 207.4 213.7 219.8
Tropical beverages and tobacco 301.5 317.0 337.8 Tropical beverages and tobacco 224.2 229.8 236.1
Coffee 183.8 196.8 215.2 Coffee 136.7 142.7 150.4
Oilseeds and oil 258.0 276.4 276.1 Oilseeds and oil 191.8 200.4 193.0
Per cent change month ago 4.8 7.1 -0.1 Per cent change month ago 5.1 4.5 -3.7
Industrial raw materials 294.6 310.5 319.3 Industrial raw materials 219.0 225.1 223.2
Agricultural raw materials 193.2 200.8 207.0 Agricultural raw materials 143.6 145.6 144.7
Cotton 140.8 151.6 185.8 Cotton 104.7 109.9 129.9
Softwood 144.6 144.2 144.6 Softwood 107.5 104.5 101.1
Per cent change month ago -3.1 -0.3 0.3 Per cent change month ago -2.9 -2.8 -3.3
Per cent change year ago 3.4 4.0 6.0 Per cent change year ago -0.9 -2.8 -6.1
Woodpulp 949.8 949.0 949.1 Woodpulp 706.2 688.0 663.3
Per cent change month ago -0.7 -0.1 0.0 Per cent change month ago -0.5 -2.6 -3.6
Non-ferrous metals 275.6 288.3 300.3 Non-ferrous metals 204.9 209.0 209.9
Copper 9130.1 9563.7 9867.2 Copper 6788.0 6933.7 6896.3
Aluminium 2347.4 2440.2 2507.8 Aluminium 1745.2 1769.1 1752.7
Lead 2404.9 2600.2 2586.2 Lead 1788.0 1885.1 1807.5
Per cent change year ago 3.5 9.8 21.3 Per cent change year ago -0.9 2.6 7.5
Zinc 2272.7 2373.9 2464.7 Zinc 1689.7 1721.1 1722.6
Per cent change month ago -0.8 4.5 3.8 Per cent change month ago -0.5 1.9 0.1
Per cent change year ago -3.9 -2.5 14.4 Per cent change year ago -8.0 -8.9 1.3
Nickel 24055.5 25609.4 28250.1 Nickel 17884.7 18566.8 19744.4
Iron ore, steel scrap 607.0 653.3 660.0 Iron ore, steel scrap 451.3 473.6 461.3
Energy raw materials 323.8 335.2 351.3 Energy raw materials 240.7 243.0 245.5
Coking coal 454.7 490.5 479.3 Coking coal 338.1 355.6 335.0
Crude oil 317.8 328.1 345.4 Crude oil 236.3 237.9 241.4

Source : SWEDBANK and HWWA-Institute for Economic Research Hamburg Source : SWEDBANK and HWWA-Institute for Economic Research Hamburg

Swedbank
Economic Research Department Swedbank’s monthly Energy & Commodities newsletter is published as a service to our
customers. We believe that we have used reliable sources and methods in the preparation
SE-105 34 Stockholm, Sweden of the analyses reported in this publication. However, we cannot guarantee the accuracy or
Phone +46-8-5859 7740 completeness of the report and cannot be held responsible for any error or omission in the
ek.sekr@swedbank.se underlying material or its use. Readers are encouraged to base any (investment) decisions
www.swedbank.se on other material as well. Neither Swedbank nor its employees may be held responsible for
Legally responsible publisher losses or damages, direct or indirect, owing to any errors or omissions in Swedbank’s
Cecilia Hermansson, +46-88-5859 7720 monthly Energy & Commodities newsletter.
Magnus Alvesson, +46-8-5859 3341
Jörgen Kennemar, +46-8-5859 7730


Energy & Commodities, No.3, 14 March 2011

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Energy & Commodities, No.3, 14 March 2011