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Energy & Commodities - February 14, 2013

Energy & Commodities - February 14, 2013

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Energy & Commodities - February 14, 2013: More expensive crude lifts commodity prices
Energy & Commodities - February 14, 2013: More expensive crude lifts commodity prices

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Energy & Commodities

Monthly newsletter from Swedbank’s Economic Research Department by Jörgen Kennemar No. 2 • February 14, 2013

More expensive crude lifts commodity prices
 Swedbank’s Total Commodity Price Index rose in January by 3.9% in dollar terms, reaching its highest level since September of last year. The increase was driven mainly by higher crude prices. Colder weather and stronger growth in China contributed to the higher oil prices. Oil prices of around USD 120 a barrel are a test of the strength of the global recovery. We expect oil to retreat from today's high levels, however, due to seasonally milder weather and relatively modest global growth.  European steel production is expected to continue to decline in 2013. The biggest contributors to shrinking consumption are low housing construction and declining auto production. Steel production in China is expected to accelerate once again as a result of increased infrastructure investment. This has already clearly had an impact on ferrous and scrap prices, which in January returned to their highest levels in over ten months. Rising inventories suggest, however, that underlying metals demand is shaky. Not until the second half of the year, when end users start increasing their metal purchases, do we expect global demand to strengthen.

Swedbank’s Total Commodity Price Index, USD

Swedbank’s Total Commodity Price Index rose in January by 3.9% in dollar terms compared with December. It was the largest monthly increase since August 2012, but the variation between

commodities is significant. The price rise for nonferrous metals, which was broad-based in December, came to a halt in January, when the price index in dollar terms fell by 0.4%. It was a less

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Energy & Commodities Monthly newsletter from Swedbank’s Economic Research Department, continued No. 2 • February 14, 2013

than consistent picture, however, with aluminum and zinc prices pushed lower, while lead and copper rose slightly. Iron ore and scrap prices increased by no less than 13% in January, reaching their highest levels in over ten months. The Chinese economy played a major role in this, with an increase in government financed infrastructure investment having led to the growing demand. It has also given a boost to the Chinese steel industry, which accounts for nearly half of global iron ore consumption. The recovery in China is one reason why global steel production volume is expected to rise by slightly over 4% this year after having seen production slow in 2012. Chinese steel production is expected to rise by 3.5% this year.

High oil price could hurt the economy
A relatively stable oil price of around USD 110 in recent months has been pushed higher at the start of 2013. In January average prices rose by 4.2% in dollar terms, and the rising trend has continued in February. At the time of writing the price of Brent crude is around USD 120 a barrel, the highest level since April of last year. This is significantly higher than we forecast in the Swedbank Economic Outlook, where we predicted a drop in prices during the first half-year. The price increase in euro terms has been more modest due to the weaker dollar, so the impact on European economies is less severe. Prices have climbed more for Brent crude in 2013 than for US WTI crude. The price differential between the two rose to over USD 20 again.
Brent crude price in USD and price differential Brent-WTI oil

Lower steel use in Europe
In Europe, steel demand will continue to decline, though at a slower rate than last year. Not until 2014 is consumption expected to rise. The biggest reason for the weakness is low housing construction, although the European auto industry is also using less steel. In both of these industries production, and thus steel demand, is expected to fall in 2013. Growing metal inventories are also an indication that underlying demand is still weak, and the risk of a price decline remains until the economy strengthens. Zinc and nickel are the two metals with the largest inventories, but copper stocks have also risen and are at their highest levels since fall 2011.
Metal inventories, millions of tons

Last year's inventory cutbacks are expected to end this year as the global economy gradually improves and manufacturing no longer needs to adjust to weak demand. Eventually demand for raw materials and input goods will increase as industrial production and capacity utilization rise. In US industry, input goods inventories have already shown signs of rising, and growing housing construction suggests that demand for metals from the US market is improving.
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Fundamental factors such as colder weather in the northern hemisphere and higher growth in the Chinese economy are contributing to increased global oil consumption and lower crude inventories. At the same time oil extraction in Saudi Arabia has been held in check after accelerating earlier in under 2012 to the highest level in over 30 years. The reason for the country’s production increase was to avoid overly high prices, which could have put the global recovery in jeopardy. It has also been a way to guarantee oil supplies from the Middle East in connection with the geopolitical uncertainty in the region. The question is what Saudi Arabia will do if today's higher oil prices persist. It still has the capacity to further increase production. A brighter global outlook is expected to lead to a faster increase in oil consumption this year than was earlier forecast. In February OPEC revised its global consumption growth forecast upward, while its production forecast has remained unchanged. Consistently high oil prices increase the risk that the global recovery will be derailed, however. Even if the pain threshold varies between countries and regions, the global economy is still vulnerable to

Energy & Commodities Monthly newsletter from Swedbank’s Economic Research Department, continued No. 2 • February 14, 2013

higher oil prices. Our average price forecast of USD 107.50 a barrel this year appears too low considering the major upswing so far this year. We feel that today's price levels of around USD 120 are temporary. Milder weather in the northern hemisphere in recent months and a continued modest recovery in the global economy are likely to push prices lower. Econometric calculations show that Europe is affected more by higher oil prices than the US. A huge expansion in natural gas is reducing US dependence on oil. The nuclear problem in Japan, where only a few reactors are now in operation, has been replaced by increased imports of fossil fuels. Higher oil prices are therefore having a greater impact on the Japanese economy than previously estimated. Increased energy efficiency, new energy sources and the growth of the service sector are factors that should reduce the effects of oil price increases on the global economy compared with 1 previous periods of escalating prices , although higher prices will still be felt in an already sensitive situation.

Food prices, USD

The impact of weather on food production has increased with the risk of continued price volatility. At the same time underlying demand is rising due to a growing population and changing eating habits as purchasing power improves. If the higher oil prices continue, production costs for food producers will also rise, which tends to push food prices higher. We expect total food prices in dollar terms to rise by an average of 5.5% this year after falling by 4.8% in 2012.

Lower food prices
Unfavorable weather conditions and lower production pushed global food prices higher last summer. This was particularly true of grain. Since last fall prices have retreated due to better than expected production output, especially in South America. Weather problems in Australia in December and January have not yet raised global prices. In January Swedbank’s price index for food fell for the fifth consecutive month. Among food commodities, tropical beverages and tobacco have seen the weakest prices. Since January of last year prices have fallen by no less than 20% and are now at their lowest levels since 2009. Grain prices have dropped since last summer, but price levels are still high from a historical perspective for wheat, barley and corn.

Rising pulp prices
The market for paper pulp stabilized in fall 2012. In January pulp prices rose for the fourth consecutive month, to USD 814.40 a ton, but are still far from the levels of the first half-year 2011, when the price was just over USD 1 000 dollar a ton. Production cutbacks and lower inventories, as well as increased Asian demand, point to rising prices over the course of the year. China accounts for nearly one fourth of global pulp deliveries and therefore has a big impact on the market. Jörgen Kennemar

IMF Survey Magazine 2010, Global economy learns to absorb oil price hikes
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Energy & Commodities Monthly newsletter from Swedbank’s Economic Research Department, continued No. 2 • February 14, 2013

Swedbank Commodity Index Basis 2000 = 1oo
11.2012 T otal index Per cent change month ago Per cent change year ago T otal index exclusive energy Per cent change month ago Per cent change year ago Food, tropical beverages Per cent change month ago Per cent change year ago Cereals Per cent change month ago Per cent change year ago T ropical beverages and tobacco Per cent change month ago Per cent change year ago Coffee Per cent change month ago Per cent change year ago Oilseeds and oil Per cent change month ago Per cent change year ago Industrial raw materials Per cent change month ago Per cent change year ago Agricultural raw materials Per cent change month ago Per cent change year ago Cotton Per cent change month ago Per cent change year ago Softwood Per cent change month ago Per cent change year ago W oodpulp Per cent change month ago Per cent change year ago N on-ferrous metals Per cent change month ago Per cent change year ago Copper Per cent change month ago Per cent change year ago Aluminium Per cent change month ago Per cent change year ago Lead Per cent change month ago Per cent change year ago Z inc Per cent change month ago Per cent change year ago N ickel Per cent change month ago Per cent change year ago Iron ore, steel scrap Per cent change month ago Per cent change year ago Energy raw materials Per cent change month ago Per cent change year ago Coking coal Per cent change month ago Per cent change year ago Crude oil Per cent change month ago Per cent change year ago 345.6 -2.0 -5.3 247.0 -1.8 -8.4 254.5 -4.0 -5.3 330.7 -0.8 19.3 224.8 -4.6 -21.5 136.4 -7.0 -29.6 268.4 -5.3 19.7 244.8 -1.1 -9.2 157.5 -1.1 -9.3 71.2 -2.5 -26.0 127.7 -0.3 -7.7 793.1 2.3 -10.6 225.4 -2.7 -3.0 7693.9 -4.5 1.9 1942.7 -1.4 -6.3 2179.1 1.5 10.0 1904.0 0.0 -0.6 16293.2 -5.2 -8.9 522.8 0.9 -15.8 389.4 -2.1 -4.4 328.6 3.2 -23.3 392.2 -2.3 -3.5 12.2012 348.9 0.9 -3.0 254.3 3.0 -3.7 249.5 -1.9 -3.6 322.9 -2.4 20.0 218.8 -2.7 -20.1 131.3 -3.7 -30.6 267.6 -0.3 22.3 255.7 4.5 -3.7 161.6 2.6 -3.3 74.9 5.2 -15.9 130.3 2.0 -1.5 806.5 1.7 -4.7 238.8 5.9 4.0 7962.1 3.5 5.2 2086.3 7.4 3.3 2274.8 4.4 12.8 2037.2 7.0 6.5 17404.0 6.8 -4.2 544.0 4.1 -12.1 390.8 0.4 -2.8 354.3 7.8 -16.2 392.5 0.1 -2.2

- US$ 20/ 02/ 13 1.2013 362.3 3.9 -1.7 263.1 3.5 -3.1 246.2 -1.3 -7.0 316.3 -2.0 14.8 218.8 0.0 -21.0 135.4 3.1 -28.2 259.2 -3.1 12.1 268.0 4.8 -2.0 165.5 2.4 -0.8 78.2 4.4 -18.8 132.3 1.5 2.0 814.4 1.0 -2.1 237.8 -0.4 -2.4 8048.8 1.1 0.3 2038.0 -2.3 -4.6 2339.8 2.9 12.0 2032.9 -0.2 3.0 17459.9 0.3 -11.6 615.4 13.1 -2.4 406.3 4.0 -1.3 352.1 -0.6 -19.7 408.8 4.2 -0.4

Swedbank Commodity Index Basis 2000 = 1oo
11.2012 T otal index Per cent change month ago Per cent change year ago T otal index exclusive energy Per cent change month ago Per cent change year ago Food, tropical beverages Per cent change month ago Per cent change year ago Cereals Per cent change month ago Per cent change year ago T ropical beverages and tobacco Per cent change month ago Per cent change year ago Coffee Per cent change month ago Per cent change year ago Oilseeds and oil Per cent change month ago Per cent change year ago Industrial raw materials Per cent change month ago Per cent change year ago Agricultural raw materials Per cent change month ago Per cent change year ago Cotton Per cent change month ago Per cent change year ago Softwood Per cent change month ago Per cent change year ago W oodpulp Per cent change month ago Per cent change year ago N on-ferrous metals Per cent change month ago Per cent change year ago Copper Per cent change month ago Per cent change year ago Aluminium Per cent change month ago Per cent change year ago Lead Per cent change month ago Per cent change year ago Z inc Per cent change month ago Per cent change year ago Nickel Per cent change month ago Per cent change year ago Iron ore, steel scrap Per cent change month ago Per cent change year ago Energy raw materials Per cent change month ago Per cent change year ago Coking coal Per cent change month ago Per cent change year ago Crude oil Per cent change month ago Per cent change year ago 251.7 -1.1 -5.9 179.9 -0.9 -8.9 185.3 -3.1 -5.8 240.8 0.1 18.6 163.7 -3.7 -22.0 99.3 -6.1 -30.0 195.5 -4.5 19.0 178.3 -0.2 -9.8 114.7 -0.2 -9.9 51.9 -1.6 -26.4 93.0 0.6 -8.2 577.6 3.2 -11.1 164.2 -1.8 -3.5 5603.2 -3.7 1.3 1414.8 -0.5 -6.9 1587.0 2.4 9.3 1386.6 0.9 -1.2 11865.7 -4.3 -9.4 380.7 1.8 -16.3 283.6 -1.2 -5.0 239.3 4.1 -23.8 285.6 -1.4 -4.1 12.2012 249.9 -0.7 -6.7 182.2 1.3 -7.4 178.7 -3.6 -7.2 231.3 -4.0 15.5 156.7 -4.3 -23.2 94.1 -5.3 -33.2 191.7 -1.9 17.7 183.2 2.7 -7.4 115.8 0.9 -7.0 53.7 3.5 -19.1 93.3 0.4 -5.2 577.7 0.0 -8.3 171.1 4.2 0.1 5703.3 1.8 1.2 1494.4 5.6 -0.6 1629.4 2.7 8.5 1459.3 5.2 2.5 12466.6 5.1 -7.9 389.7 2.3 -15.5 280.0 -1.3 -6.5 253.8 6.1 -19.4 281.1 -1.6 -5.9

- SKr 20/ 02/ 13 1.2013 255.2 2.1 -7.0 185.3 1.7 -8.3 173.4 -3.0 -12.1 222.8 -3.7 8.6 154.1 -1.7 -25.3 95.4 1.4 -32.1 182.6 -4.8 6.0 188.8 3.1 -7.3 116.6 0.7 -6.1 55.1 2.7 -23.2 93.2 -0.2 -3.5 573.6 -0.7 -7.4 167.5 -2.1 -7.7 5669.2 -0.6 -5.1 1435.5 -3.9 -9.7 1648.0 1.1 6.0 1431.9 -1.9 -2.5 12297.8 -1.4 -16.4 433.5 11.2 -7.7 286.2 2.2 -6.7 248.0 -2.3 -24.0 287.9 2.4 -5.8

Source : SW ED BAN K and H W W A-Institute for Economic R esearch H amburg

Source : SW EDBAN K and H W W A-Institute for Economic R esearch H amburg

Swedbank Economic Research Department
SE-105 34 Stockholm, Sweden Phone +46-8-5859 7740 ek.sekr@swedbank.se www.swedbank.se Legally responsible publisher Cecilia Hermansson, +46-88-5859 7720 Magnus Alvesson, +46-8-5859 3341 Jörgen Kennemar, +46-8-5859 7730

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 of the analyses reported in this publication. However, we cannot guarantee the accuracy or completeness of the report and cannot be held responsible for any error or omission in the underlying material or its use. Readers are encouraged to base any (investment) decisions on other material as well. Neither Swedbank nor its employees may be held responsible for losses or damages, direct or indirect, owing to any errors or omissions in Swedbank’s monthly Energy & Commodities newsletter.

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