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Energy & Commodities - December 18, 2012

Energy & Commodities - December 18, 2012

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Published by Swedbank AB (publ)
Energy & Commodities - December 18, 2012
Energy & Commodities - December 18, 2012

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Published by: Swedbank AB (publ) on Jan 04, 2013
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Energy & Commodities 
Monthly newsletter from Swedbank’s Economic Research Department by Jörgen Kennemar No. 10 18 December 2012 
Economic Research Department. Swedbank AB. SE-105 34 Stockholm. Phone +46-8-5859 1000.E-mail: ek.sekr@swedbank.se www.swedbank.seLegally responsible publisher: Cecilia Hermansson. +46-8-5859 7720.Magnus Alvesson. +46-8-5859 3341. Jörgen Kennemar. +46-8-5859 7730.
Weak economy continues to pressure commodity prices
Swedbank’s Total Commodity Price Index fell by 2.1% in dollar terms in Novembercompared with the previous month. Even though the global economy hasweakened year-on-year, the total index remains at a high level. During the periodJanuary-November the index fell by an average of 1.3% from a year earlier due tohigh crude prices. Excluding energy commodities, Swedbank’s Commodity PriceIndex has fallen by 17% during the same period and is at the lowest level in overtwo years.
Industrial metals are among the commodities that have been most affected by theslumping economy. Since peaking in early 2011, industrial metals have fallen by just over 25% measured in dollar. Despite that expectations of a turnaround in themetals market have received increased support in the last month, inventoriescontinue to rise, which indicates that underlying demand remains weak.
Quantitative easing from several central banks means increased investmentinterest in commodities at least in the short term, which should drive prices higher.
Swedbank’s Total Commodity Price Index, USD
Swedbank’s Total Commodity Price Index fellbetween October and November by 2.1% in dollarterms, the second consecutive month it declined.Despite the price drop and deteriorating economicconditions in 2012, the index remains at a highlevel. The average for the first eleven months of theyear shows that the total index has fallen by amodest 1.3% compared with the same period lastyear. Excluding energy commodities, Swedbank’sCommodity Price Index has fallen by 17% during
Energy & Commodities 
Monthly newsletter from Swedbank’s Economic Research Department, continued No. 10 18 December 2012 
the same period. Economically sensitive industrialmetals accounted for the biggest price decline in2012, dropping by 15-20% on average, in line withour forecast last fall. Crude and food commoditieshave been less affected by the weaker economy.Oil prices averaged just over US 112 in 2012,largely unchanged from 2011, but slightly higherthan we expected this past fall. Prices of foodcommodities, which rose significantly during thesummer, retreated during the fall due to higher-than-expected production output at the same timethat the threat of trade restrictions on foodcommodities have been taken off the table byseveral agricultural producing countries. Lowerprices on oilseeds in particular have contributed tothe lower food prices. Grain prices have also fallen,though from high levels. For the full-year the priceindex for food commodities is expected to fall by anaverage 5% compared with 2011.
Prices of industrial metals, January 2011=100
Weak global industrial activity and growing metalinventories have pushed metal prices broadly lower.Nickel and aluminum saw the largest average pricedeclines during the year (24% and 16%,respectively). Since the second half of Novembermetal prices have risen at the same time thatChinese industry has reported increased activity, asreflected by the PMI and industrial production. Thedownward trend for iron ore has been broken andsince September prices have pushed higher,although the price level is significantly lower than ayear ago. Increased infrastructure investment inChina is driving expectations of higher metalconsumption in the months ahead. To date,however, they have not reduced the imbalancebetween consumption and production, due to whichthe recent price increase rests on shaky grounds.Inventory data from the London Metal Exchange(LME), among others, point to growing metalinventories, which should restrain prices.
Inventories for non-ferrous metals, millions of tons
Our forecast of a gradual recovery in the globaleconomy during the second half of next year isexpected to lead to a more sustainable rise in metalprices. Inventory cutbacks in industry are likely toend. Instead a buildup of commodity and inputinventories is predicted to satisfy the growingdemand. In addition to rising metal consumption inChina, the recovery in the US housing market willlead to increased metal demand. We anticipate thatthe average price level for non-ferrous metals willrise by 3-4% next year. The biggest price increasepotential is in copper and lead, two product groupswith the tightest supply conditions. A recovery in theChinese steel industry could also push up nickelprices, which have been especially hard hit by lowersteel production growth in China in the last year.The embargo of Iranian oil exports and oilproduction capacity shortages in Libya have notlimited global access to crude. Record-high oilproduction in Saudi Arabia and the US has morethan compensated for the production losses. TheOPEC summit in December won’t lead to anyscheduled production limits in the near future, whichimplies daily oil production of 30 million barrels, withSaudi Arabia accounting for just over one third. USoil production is playing a bigger role in the globalsupply chain. A production volume corresponding to7 million barrels a day is the highest level since1992 and at the same time will put increasedpressure on oil prices if the current production rateis maintained. As long as oil prices stay above USD
Source: LME, Reuters EcoWin 
00010203040506070809101112-75000-50000-2500002500050000750001000001250001500001750002000002250002500000,00,10,20,30,40,50,60,70,80,91,01,11,21,3CopperZincNickel, rightscaleLead
Energy & Commodities 
Monthly newsletter from Swedbank’s Economic Research Department, continued No. 10 18 December 2012 
3 (4)
75 a barrel, there is an economic incentive to raiseproduction in North America.Based on the weak global economy and increasedsupplies, we predict a lower average price in 2013of around USD 106 a barrel. This is a slight upwardrevision from our fall forecast due to growingconsumption in Asia and a lower productionincrease in OPEC countries as a result of capacitylimitations. Geopolitical uncertainty and tension inthe Middle East has maintained the risk premium oncrude, with the risk of major volatility depending onhow the political process in the region develops.
Volatile food prices
To date in 2012 global food prices have fallen indollar terms by an average of 5%, despite asubstantial rise during the summer. The weakeningof the euro against the dollar raised food prices ineuro by just over 2%. The biggest increases duringthe year were in oilseeds and grain, where pricesrose by just over 20% between January andNovember. Exotic beverages (juice, coffee, tea) andsugar were among the commodities where pricesfell by nearly 15-20% during the same period.We feel that the production decline for grain in 2012and shrinking inventories suggest continued highprices at the start of 2013. Not until the second half-year when production increases are pricesexpected to fall.Even if higher food prices generate higherproduction, the global food chain remainsvulnerable to major production disruptions, whichhave led to large price fluctuations in recent years.Climate change is probably a contributing factorwhy the weather has had a greater impact on foodproduction in recent years. Major weather impactsare expected in 2013 as well. This makes it difficultto predict prices. At the same time Chinese foodimports are rising as purchasing power grows andconsumption patterns change. The Chinese goal ofself-sufficiency has become more difficult toachieve due to the growing domestic demand.
Food commodities in USD, annual change (%)
We expect average grain prices in dollar terms torise by 8-10% in 2013. The major productionincreases in sugar, coffee and tea in 2011/12 areexpected to slow prices in 2013 as well. As a wholewe expect food prices to climb by an average ofnext year.The US central bank’s decision in December toexpand its quantitative easing tends to lead toincreased investment interest in commodities, atleast in the short term, at the same time that it couldweaken the US dollar. As a whole this could applyupward pressure on commodity prices in 2013,particularly for gold, but also for crude. Higher oilprices would hurt an already fragile globaleconomy, however.
Jörgen Kennemar 
GrainsSoya beansBeverages, sugarFood total
Source: Reuters EcoWin 

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