Energy & CommoditiesMonthly newsletter from Swedbank’s Economic Research Departmentby Jörgen Kennemar No. 5 • 16 May 2011 Reduced risk appetite and uncertain global outlook pressure commodity prices • The price drop in the commodity market in May is a sign of increased concerns about the global economy as economic policies are tightened, especially in emerging economies led by China. Growing investor interest in commodities stimulated by low interest rates and a higher risk appetite is also increasing the risk of greater price corrections when global conditions change or investor interest in commodities slackens. • The market for base metals is seeing increased supply at the same time that metal consumption is growing at a weaker pace, because of which metal inventories continue to rise in 2011. Copper inventories are now at the highest level since last summer, while inventory levels for zinc are at the highest level since 2004. Provided that Chinese consumption does not increase, the growing metal inventories will lead to lower prices. In the case of precious metals there is still room for price increases, though from lower levels due to increased inflation concerns and the major fiscal imbalances in the EMU countries and the US.In recent days commodity markets have seen Renewed concerns about fiscal conditions inprices drop after they had risen substantially for Greece and the risk that they spread to othernearly a year. The price of crude has fallen by more vulnerable economies within the EMU are pushingthan 10% since the end of April, when Brent oil was the euro lower at the same time that the dollar rises.trading at over USD 125 per barrel, a larger decline A dollar appreciation of nearly 5% against the euroin absolute terms than when the global financial since the end of April means that commodity pricescrisis intensified in fall 2008. Base and precious have fallen in USD. Despite fiscal austerity inmetal prices have also fallen broadly. The price of Greece in the last year, it has proven too little tosilver declined in USD terms by over 25% since the slow the country’s rapidly growing debt, because ofend of April after having risen by over 50% from the which additional rescue loans may be needed fromstart of the year, a rate of increase that was not the IMF/EU, which provided a 110 billion eurosustainable. The rapid reversal in global commodity bailout last year. The need for more emergencymarkets is probably driven more by financial flows loans has arisen at a time when the EMU countriesthan fundamental factors, similar to the price are becoming more resistant to finance their debt-correction in the commodity markets in spring 2010, laden neighbours. A more cautious stance by thewhen the sovereign debt crisis in the EMU countries European Central Bank, which suggests that thewas first brought to light. The growing inflow of next rate hike will be put off until July, is alsovolatile investment capital to commodity markets in weakening the euro against the dollar, which at thethe last year and a higher risk appetite among time of writing had returned to the level of aroundfinancial investors, stimulated by the low interest 1.43 from early April 2011 after having previouslyrates, are increasing the risk of greater price traded around USD 1.48 per euro.corrections when economic conditions change orinvestors lose interest in commodities. The US economy is facing a rapidly growing budget deficit and a national debt that is nearing 100% of Economic Research Department. Swedbank AB. SE-105 34 Stockholm. Phone +46-8-5859 1000. E-mail: email@example.com www.swedbank.se Legally responsible publisher: Cecilia Hermansson. +46-8-5859 7720. Magnus Alvesson. +46-8-5859 3341. Jörgen Kennemar. +46-8-5859 7730.
Energy & Commodities Monthly newsletter from Swedbank’s Economic Research Department, continued No. 5 • 16 May 2011GDP. This raises the question of how the budget Inventory levels for metals, millions of tonsdeficit will be financed once the US central bank 1.0 225000(the Federal Reserve) stops buying US Treasuries 0.9 200000(quantitative easing) after June 2011, as expected. 0.8 Nickel, right sca 175000The drawdown of liquidity means that less liquidity 0.7 150000 Ton (metric) (millions)can flow to global commodity markets, which could 0.6 Copper 125000 Ton (metric) 100000put downward pressure on prices. Political disunity 0.5 Zink 75000 0.4in the US with respect to fiscal consolidation and 0.3 50000the risk of a credit rating downgrade means that the 0.2 25000appreciation of the dollar since the beginning of 0.1 Lead 0May still rests on shaky ground. As a result, the risk 0.0 00 01 02 03 04 05 06 07 08 09 10 11 -25000of another decline in the dollar cannot be Source: LME, Reuters EcoWindiscounted, which would push commodity priceshigher in USD. Uncertainty about the strength of the global economy has grown in the financial markets as economic policies gradually become less expansive in both OECD countries and emerging economies.Industrial metals pressured by rising This is reflected in the purchasing managers indexes in China, the EMU countries and the US,inventories and growing economic which have fallen in recent months. The substantialconcerns decline in production in Japan following the earthquake disaster in March has probablyLast years average increase of 22% in the price of contributed to lower metal prices. A shrinking risknon-ferrous metals has been followed this year by appetite for cyclical metals is also a factor in theconsiderably more modest price gains. Between price decline for the majority of base metals.January and April 2011, i.e., before the turbulencein the global commodity markets began in May, Future metal prices will be largely dependent,Swedbank’s metal price index had risen by nearly however, on developments in the Chinese5% in USD terms. At the same time growing metal economy, which accounts for the large part ofinventories show that demand has slowed. Copper global metal consumption growth. During the springinventories rose in April for the fourth consecutive commodity imports to China have risen at a slowermonth and are now at the highest level since June rate than last year, which indicates that economicof last year. This is a directly contrary to previous austerity implemented by government authorities inprojections that copper supplies would reach the past year to avoid an overheating are beginningcritically low levels at some point in 2011. to have an impact. As a result, lower commodity consumption in China suggests lower global metalThe price of copper, which reached a record-high prices going forward.USD 10 000 per ton in February, has thereforefallen more than other metals in recent months. The Metal Prices and Global Production (PMI)price is now below USD 9 000 for the first timesince December. Zinc is the base metal with the 65 130largest imbalances, and inventory levels are at their 60 120highest since 2004. It is also the metal with the 55 110weakest price trend this year, along with nickel. 50 100 Index IndexAluminium has been most resistant to price 45 90 40 80fluctuations, which is partly because rising energy 35 70costs are the largest cost component in its 30 60production. 25 50 jan apr jul okt jan apr jul okt jan apr jul okt jan apr 08 09 10 11 Price Index for Non-ferrous Metals, USD (Right-Scale) Global, Manufacturing Sector, Output, PMI (Left Scale) Source: Reuters EcoWin 2 (4)
Energy & Commodities Monthly newsletter from Swedbank’s Economic Research Department, continued No. 5 • 16 May 2011Lower crude prices as global oil Oil futures for Brent Crude, in USDconsumption downshifts 130 120That speculation has affected oil prices was clearly 110evident at the start of 2011, when prices climbedconsiderably faster than global industrial 100production, as was the case in 2008. In May prices 90stopped rising, however. Increased uncertainty 80about the growth prospects in China, where 70economic policies are being tightened, and the 60negative impact of high oil prices on global growth jan feb mar apr maj jun 10 jul aug sep okt nov dec jan feb mar 11 apr majwere probably decisive factors behind the major Spot price Brent Crude Futures Dec 2011 Brent Crude Futures Dec 2012 Source: Reuters EcoWinprice decline for crude. Profit taking by financialinvestors is also a likely explanation. The rise in oil Investor interest in precious metalsprices was exacerbated when Libyan production remainsshut down in February and fears grew that oilsupplies could be at risk if political developments in Gold and silver prices have trended higher since fallthe Middle East worsened. 2008, though with less price fluctuation. Silver posted the biggest increase in terms of percent. AsIn its latest forecast this month, the International a result, the price ratio relative to gold fell in April toEnergy Agency (IEA) projected that global oil the lowest level since 1980. Fears of higherconsumption would increase less than previously inflation, expectations of continued expansiveanticipated in 2011. High oil prices are the main monetary policies and concerns about the fiscalreason that oil consumption around the world is situations in the US and EMU are contributing toexpected to rise at a slower rate, with the exception increased investor interest in precious metals. Inof emerging economies such as China, where early May the price of silver fell substantially,subsidies on oil products are high. A lower increase however, although gold also lost strength.in consumption and a stronger dollar mean thatSwedbank’s oil price projection of USD 105 per The factors that previously pushed prices higher stillbarrel in 2011 is not unlikely. The price of oil futures remain, although investor interest may have cooledfor delivery in December 2011 has fallen to USD because of the appreciation of the dollar, at the109, lower than the current spot price of USD 114 same time that there is uncertainty how the phase-at the time of writing. But as long as geopolitical out of QE2 by the Fed will affect the price picture forrisks remain in the Middle East, there will be a risk precious metals. Growing concerns about higherpremium on crude, even if the size of the premium inflation and huge fiscal imbalances still suggestvaries periodically with a risk that oil prices could rising gold prices.rise once again. 3 (4)
Energy & Commodities Monthly newsletter from Swedbank’s Economic Research Department, continued No. 5 • 16 May 2011Swedbank Commodity Index - US$ - Swedbank Commodity Index - SKr -Basis 2000 = 1oo 16-05-11 Basis 2000 = 1oo 16-05-11 2.2011 3.2011 4.2011 2.2011 3.2011 4.2011Total index 341,3 365,8 389,4 Total index 238,6 252,1 262,4 Per cent change month ago 4,4 7,2 6,4 Per cent change month ago 0,6 5,7 4,1 Per cent change year ago 35,8 38,3 35,6 Per cent change year ago 20,3 22,4 16,9Total index exclusive energy 318,9 314,5 332,9 Total index exclusive energy 222,9 216,7 224,3 Per cent change month ago 3,3 -1,4 5,8 Per cent change month ago -0,4 -2,8 3,5 Per cent change year ago 47,6 40,8 30,6 Per cent change year ago 30,7 24,7 12,6 Food, tropical beverages 317,6 307,9 320,0 Food, tropical beverages 222,0 212,2 215,6 Per cent change month ago 5,0 -3,1 3,9 Per cent change month ago 1,2 -4,4 1,6 Per cent change year ago 45,6 48,0 55,0 Per cent change year ago 29,0 31,0 33,7 Cereals 314,5 313,8 310,5 Cereals 219,8 216,2 209,3 Per cent change month ago 6,7 -0,2 -1,1 Per cent change month ago 2,9 -1,6 -3,2 Per cent change year ago 67,6 69,1 73,8 Per cent change year ago 48,4 49,7 49,8 Tropical beverages and tobacco 337,8 326,3 349,1 Tropical beverages and tobacco 236,1 224,9 235,3 Per cent change month ago 6,6 -3,4 7,0 Per cent change month ago 2,7 -4,8 4,6 Per cent change year ago 38,8 44,6 57,1 Per cent change year ago 23,0 28,1 35,5 Coffee 215,2 223,6 229,9 Coffee 150,4 154,1 154,9 Per cent change month ago 9,3 3,9 2,8 Per cent change month ago 5,4 2,4 0,5 Per cent change year ago 74,4 78,5 81,2 Per cent change year ago 54,5 58,0 56,2 Oilseeds and oil 276,1 264,1 263,1 Oilseeds and oil 193,0 182,0 177,3 Per cent change month ago -0,1 -4,3 -0,4 Per cent change month ago -3,7 -5,7 -2,6 Per cent change year ago 50,2 42,8 38,2 Per cent change year ago 33,0 26,5 19,2 Industrial raw materials 319,3 316,4 336,6 Industrial raw materials 223,2 218,0 226,8 Per cent change month ago 2,8 -0,9 6,4 Per cent change month ago -0,9 -2,3 4,0 Per cent change year ago 48,2 39,0 25,2 Per cent change year ago 31,2 23,0 7,9 Agricultural raw materials 207,0 202,9 210,0 Agricultural raw materials 144,7 139,8 141,5 Per cent change month ago 3,1 -2,0 3,5 Per cent change month ago -0,6 -3,4 1,2 Per cent change year ago 31,3 23,5 23,6 Per cent change year ago 16,3 9,4 6,6 Cotton 185,8 201,0 193,2 Cotton 129,9 138,5 130,2 Per cent change month ago 22,6 8,2 -3,9 Per cent change month ago 18,1 6,7 -6,0 Per cent change year ago 149,4 147,2 137,1 Per cent change year ago 120,9 118,9 104,4 Softwood 144,6 146,8 151,7 Softwood 101,1 101,2 102,2 Per cent change month ago 0,3 1,5 3,3 Per cent change month ago -3,3 0,1 1,1 Per cent change year ago 6,0 4,3 3,8 Per cent change year ago -6,1 -7,7 -10,5 Woodpulp 949,1 964,6 992,3 Woodpulp 663,3 664,7 668,7 Per cent change month ago 0,0 1,6 2,9 Per cent change month ago -3,6 0,2 0,6 Per cent change year ago 13,0 9,9 8,2 Per cent change year ago 0,0 -2,7 -6,7 Non-ferrous metals 300,3 296,4 302,0 Non-ferrous metals 209,9 204,3 203,5 Per cent change month ago 4,2 -1,3 1,9 Per cent change month ago 0,4 -2,7 -0,4 Per cent change year ago 36,7 23,6 19,3 Per cent change year ago 21,1 9,4 2,9 Copper 9867,2 9530,1 9477,0 Copper 6896,3 6567,5 6386,7 Per cent change month ago 3,2 -3,4 -0,6 Per cent change month ago -0,5 -4,8 -2,8 Per cent change year ago 44,4 27,7 22,4 Per cent change year ago 27,9 13,1 5,5 Aluminium 2507,8 2552,2 2668,1 Aluminium 1752,7 1758,8 1798,1 Per cent change month ago 2,8 1,8 4,5 Per cent change month ago -0,9 0,3 2,2 Per cent change year ago 22,7 15,7 15,2 Per cent change year ago 8,7 2,5 -0,7 Lead 2586,2 2623,3 2729,6 Lead 1807,5 1807,8 1839,5 Per cent change month ago -0,5 1,4 4,1 Per cent change month ago -4,1 0,0 1,8 Per cent change year ago 21,3 20,8 20,5 Per cent change year ago 7,5 7,0 3,9 Zinc 2464,7 2348,9 2364,1 Zinc 1722,6 1618,7 1593,2 Per cent change month ago 3,8 -4,7 0,6 Per cent change month ago 0,1 -6,0 -1,6 Per cent change year ago 14,4 3,3 -0,1 Per cent change year ago 1,3 -8,6 -13,8 Nickel 28250,1 26807,4 26340,0 Nickel 19744,4 18473,8 17750,9 Per cent change month ago 10,3 -5,1 -1,7 Per cent change month ago 6,3 -6,4 -3,9 Per cent change year ago 49,7 19,4 1,2 Per cent change year ago 32,6 5,7 -12,7 Iron ore, steel scrap 660,0 662,8 757,6 Iron ore, steel scrap 461,3 456,8 510,6 Per cent change month ago 1,0 0,4 14,3 Per cent change month ago -2,6 -1,0 11,8 Per cent change year ago 87,8 86,4 33,8 Per cent change year ago 66,3 65,1 15,4 Energy raw materials 351,3 388,6 414,5 Energy raw materials 245,5 267,8 279,3 Per cent change month ago 4,8 10,6 6,7 Per cent change month ago 1,0 9,1 4,3 Per cent change year ago 31,6 37,3 37,4 Per cent change year ago 16,6 21,6 18,5 Coking coal 479,3 478,9 471,4 Coking coal 335,0 330,0 317,7 Per cent change month ago -2,3 -0,1 -1,6 Per cent change month ago -5,8 -1,5 -3,7 Per cent change year ago 37,8 36,0 24,7 Per cent change year ago 22,0 20,4 7,6 Crude oil 345,4 384,5 411,9 Crude oil 241,4 265,0 277,6 Per cent change month ago 5,3 11,3 7,1 Per cent change month ago 1,5 9,8 4,8 Per cent change year ago 31,2 37,4 38,2 Per cent change year ago 16,2 21,7 19,1Source : SWEDBANK and HWWA-Institute for Economic Research Hamburg Source : SWEDBANK and HWWA-Institute for Economic Research HamburgSwedbankEconomic 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 preparationSE-105 34 Stockholm, Sweden of the analyses reported in this publication. However, we cannot guarantee the accuracy orPhone +46-8-5859 7740 completeness of the report and cannot be held responsible for any error or omission in firstname.lastname@example.org underlying material or its use. Readers are encouraged to base any (investment) decisionswww.swedbank.se on other material as well. Neither Swedbank nor its employees may be held responsible forLegally responsible publisher losses or damages, direct or indirect, owing to any errors or omissions in Swedbank’sCecilia Hermansson, +46-88-5859 7720 monthly Energy & Commodities newsletter.Magnus Alvesson, +46-8-5859 3341Jörgen Kennemar, +46-8-5859 7730 4 (4)