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Commodities and Energy - February 2014

Commodities and Energy - February 2014

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Published by Swedbank AB (publ)
Commodities and Energy - February 2014
Commodities and Energy - February 2014

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Published by: Swedbank AB (publ) on Mar 03, 2014
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Strategy and Macro Research
 Large Corporates & Institutions
1 of 6
 26 februari 2014
Commodities and Energy
Broad commodity price drop
 emerging markets are a concern
Swedbank’s Total Commodity Price Index
 fell 2.6 in dollar terms in January compared with December, putting it at the lowest level since June 2013. The decline was broad-based, with oil and coal prices the biggest contributor to the decline. Food prices fell 1 in dollar terms in January and in the last year have dropped by 13.6 . Industrial metals went against the stream, with prices rising an average of 0.4 in dollar terms compared with December. Production cutbacks and lower investment in commodity industries have impacted metal inventories, which have begun to shrink, especially copper. Weaker-than-expected growth in emerging markets is increasing the need for further production cutbacks in the mining industry. Weaker US data and a lower risk appetite in the financial market have pushed gold prices higher by nearly 12 since the beginning of the year. A stronger US economy and the Federal Reserve
s path to taper its bond buying this year are expected to gradually raise international interest rates, however, which will hamper gold prices through the rest of 2014.
Swedbank’s Total Commodity P
rice Index, USD
Swedbank’s Total Commodity Price Index
 fell 2.6% in dollar terms in January compared with December, reaching the lowest level since June 2013. Energy commodities, which weigh heavily in the index, fell 2.9% on average. But excluding energy commodities, the index still fell 1.2%. Oil and coal were less expensive in January, but there is a big difference between the two commodities. Since 2011 the price of coal has trended lower, while oil prices are largely unchanged. One reason for the stable oil prices, despite weaker growth in emerging markets, is a tighter market. In Saudi Arabia, the largest OPEC producer, production has been slashed since the third quarter of last year. Political turmoil in several oil-producing states has also limited supplies. Seasonal variations and the cold winter in North America in particular have helped to lift consumption. The IEA estimates that more than 90% of the increase in global consumption comes from outside the OECD. We expect that slower growth in emerging markets will more clearly impact prices going forward. Measures to increase supply through new technology and investments in the oil sector indicate greater access to oil, especially in North America, where production is expected to continue to rise. OPEC
Source: Swedbank 
   I  n   d  e  x
Total excl energy commoditiesMetalsTotal index
2 (6)
countries also have good reason to raise their production levels, mainly countries where political turmoil or sanctions have limited production. In Libya, production has accelerated and is expected to further increase, although there is far to go before reaching previous levels. Higher production from Iran would also raise global supplies. At the same time this is a challenge for OPEC and its production quotas. We expect oil prices to fall from today's levels to around USD 105 a barrel by the end of the year. The coal market is still struggling with faster growth in production than consumption. The imbalances tend to increase in the short term when growth in emerging markets slows, unless production is reduced more than it already has. As an energy source, coal still accounts for a significant share of electricity production in emerging markets.
Coal and crude oil prices, 2010=100 Metal prices bottom out, but emerging markets are a concern
The major price decline in industrial metals is probably behind us, provided that the slowdown in emerging markets doesn't become worse than expected. Industrial metal prices rose for the second month in a row, but with big differences between metals. In January aluminum had the weakest price trend, declining 1.6% compared with December. The price of zinc rose 2.3%, while copper and nickel increased weakly between months.
Metal price trend 2013-2014, January 2013=100
A common denominator for industrial metals is low price levels, where nickel, lead and copper are between 10-20% lower than January 2013. A sluggish global industrial sector and large inventories have forced commodity producers to cut production or postpone planned capacity increases. We remain convinced that metal prices have bottomed out and will turn higher later in 2014 as goods production adapts to lower global demand. Production cutbacks in the mining industry have impacted metal inventories, which have begun to shrink, especially copper, where inventories are their lowest in nearly a year. Although zinc levels have fallen slightly, inventories remain at high levels, which is also true of aluminum and nickel, where they continued to grow in January.
Industrial metal inventories, millions of tons
The critical factor for metal prices going forward is what happens in emerging markets, especially China. A Purchasing Managers Index (PMI) below 50 for the second consecutive month suggests that the Chinese economy is continuing to slow, which would increase the need for further cutbacks in mining production. At the same time there is a consolidation underway in the Chinese steel industry, which tends to reduce steel production. Steel production fell in January, though the Chinese New Year's celebration may have had a constraining effect.
Gold prices in USD and 10-year US government bond (inverted scale) Reduced risk appetite lifts gold prices, but only temporarily
The price drop for precious metals has slowed and an upswing has been seen in the last month. Weaker US data and a reduced risk appetite in the financial market have pushed long-term bond yields lower after they initially rose when the US central bank began scaling back its bond buying in December. Investor interest in precious metals has
Source:Reuters EcoWin
   I  n   d  e  x  :   2   0   1   0  =   1   0   0
Crude Oil, brent
 Copper  Lead Nickel Zinc Aluminium Iron ore and steel scrap Non-Ferrous Metals
Source:Swedbank,Reuters EcoWin
   1   J  a  n  u  a  r  y   2   0   1   3  =   1   0   0
Source: LME, Reuters EcoWin
   T  o  n   (  m  e   t  r   i  c   )
   T  o  n   (  m  e   t  r   i  c   )   (  m   i   l   l   i  o  n  s   )
0,00,10,20,30,40,50,60,70,80,91,01,11,21,3Copper ZinNickel, right scaleLead 
Gold price in USD, left axis 10-year long-term bonds, inverted scale, r-axis
Source: Reuters EcoWin
   P  e  r  c  e  n   t
   U   S   D   /   O  u  n  c  e   (   t  r  o  y   )
3 (6)
returned, but we expect this is temporary. A stronger US economy and the Federal Reserve
s path to taper bond purchases in 2014 are expected to lead to gradually higher international interest rates, which will hamper gold prices. Weaker growth in the largest gold-consuming economies, China and India, should also keep a cap on prices. Silver
increased industrial applications could be a positive factor for prices going forward. The strong growth in solar cells, where silver is an important input good due to its high conductivity, is raising demand. Prices of food commodities fell by 1% between December and January, with grains and vegetables oils becoming less expensive, while beverages such as coffee rose in price. Frost in Brazil is considered a factor behind the upswing in coffee prices after they had been cut in half since peaking in 2011. We expect food prices to remain under pressure in coming quarters. This is especially true of grain, where last year's substantial production and rising inventories are keeping prices in check. The forecast is also supported by the US
Department of Agriculture’s latest official
estimate of US grain production in 2014/15. One caveat always applies to food commodities, however
 weather conditions that quickly impact supply.
Food and agricultural commodities, index 2010=100
s Commodity Price Index is based on the composition of Swedish commodity imports, with crude oil carrying the heaviest weight in the index. The weights in the Commodity Price Index are shown below for each main group.
Food 6.9  Agricultural commodities 9.6 Non-ferrous metals 10.5 Ferrous ore/scrap 3.7 Crude oil 66.3 Coal 3.0 Total 100.0
Macro analysis
 Jörgen Kennemar
Phone: +46 8 700 9804 e-mail:  jorgen.kennemar@swedbank.se 
Grains Agriculture commodities Food commodities
   2   0   1   0  =   1   0   0

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