Commodities and Energy Titel

Macroanalysis - 28 January 2014

The price drop for commodities slowed in 2014
Swedbank’s Total Commodity Price Index rose by 2.4 in dollar terms in December after having fallen for two consecutive months. Higher oil prices contributed to the increase, but metals and foods also rose, though from low levels. For the full-year 2013, food and metals were the big losers, with prices declining by an average of just over 10% and 7%, respectively, with growing inventory levels and weaker global industrial conditions. Among the winners were pulp and paper, where prices rose by just over 4%. The commodity market is being pressured this year by weaker demand from emerging markets, led by China, which is also limiting inflation pressures from the commodity market. Lower investment in commodity industries and production cuts to adapt to lower demand helped to limit last year’s commodity price decline, however. For copper, lead and zinc, where inventory levels have fallen, prices are expected to rise in 2014. Record-high global food production in 2013, especially grains, and rising inventory levels are keeping food prices in check at the start of 2014. We expect the price decline to ease in 2014, when lower projected food production is expected to lead to lower supply than last year.
Swedbank’s Total Commodity Price Index, USD

250
Total index
Food

225 200 175
Index

Total excl energy commodities

150 125 100 75 05 06 07 08 09 10 11 12 13
Source: Swedbank

Metals

Swedbank’s Commodity Price Index rose by 2.4% in December after having fallen for two consecutive months. The increase is mainly due to higher oil prices, but metal and food prices also rose, though from low levels, where price levels are still slightly over 10% lower than December 2012. For the full-year 2013 the Commodity Price Index dropped by 2% on average, however, which was the second consecutive year that the index fell. Expressed in euro, the price drop was even greater, at 5%, which also explains the low inflation in EMU countries. The biggest price decline was in food

commodities, which were down just over 10%, with the price of coffee falling by nearly 25%, followed by other beverages (-17%) and grains (-13%). Record-high production levels, especially for grains and coffee, rising inventory levels and favorable weather conditions have driven global food prices broadly lower. Industrial metals excluding iron ore fell by 8%, but the price trend varies between metal products. The biggest loser in 2013 was nickel, which declined by 14.3% on average and continues to show big imbalances, with inventory levels still

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keeping prices under pressure. The price of aluminum, another metal with large inventories, fell by 8.5%, followed by copper (7.5%). Lead and zinc are the two metals that performed the best in 2013. Lead, an important input good in battery manufacturing, among other things, rose by 4% for the full-year 2013. Average commodity prices in 2013, USD

zinc, where inventory levels have fallen at a rapid rate in recent months. Copper inventories, for example, have been cut in half since last fall to 330 000 ton. For nickel and aluminum, we see continued price pressure in 2014 as long as global demand does not increase more than expected or bigger production cuts are announced. A relatively stable oil price of around USD 110 per barrel last year will be challenged this year, when production from OPEC countries is expected to rise after last year's cutbacks caused by political turmoil in Libya and Iran. Successful negotiations on Iran’s nuclear program could eventually lead to increased oil exports, which reached 2.5 million barrels before the trade restrictions, a fraction compared with current levels. Thanks to increased North American oil production, total global production is expected to grow at a faster pace this year than last. In the IEA’s latest forecast from January, supplies are expected to rise by 1.7 million barrels a day in 2014, compared with 1.3 million last year. Oil price forecast, Brent USD
130

10 5 0 -5 -10 -15 -20 -25

Cotton and pulp are two more commodities whose prices rose. Energy commodities, which carry the biggest weight in the Commodity Price Index, saw a weak decline. Crude prices were marginally lower in 2013, although volatility was periodically high in connection with geopolitical uncertainty in the Middle East. Coal prices were considerably shakier and fell by no less than 12.3% last year compared with 2012. Even though global coal consumption rose last year, especially in Europe and Asia, extraction has accelerated. Increased coal consumption is also driven by the energy transformation now underway in Germany, but also by Japan, to compensate for the production drop-off following the the closure of nuclear power plants. We expect prices in commodity markets to keep inflation pressures in check in 2014. Weaker, less commodity intensive growth in emerging markets, especially in China, will pressure prices globally. This is supported by incoming data from China, which shows a slowing growth rate. Metal inventories, LME, millions of tons
1,3 1,2 1,1 1,0 Nickel, right scale 0,9 0,8
Ton (metric) (millions)

120 110 100 90 80 70 60

2011q1

2011q2

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2012q1

2012q2

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2013q1

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2014q1

2014q2

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We expect the price of oil to fall to just over USD 100 by the end of 2014, with an average for the full-year of USD 105 per barrel. Lower future oil prices are reflected in oil futures. The geopolitical situation in the Middle East is still fragile, however, and you can’t underestimate the risk of a new crisis and how it would impact oil prices. Grain production, consumption and inventories, millions of tons
2550 2500 Inventories, r-axis Production Consumption 540 520 2300 2250 2200 480 2150 2100 2009/2010 2010/2011 2011/2012 2012/2013 2013/2014 460 500 560 580

500000 450000 400000 350000 300000 250000 200000 Copper 150000 100000 50000 0 -50000 Lead -100000 -150000 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Ton (metric)

Zink

0,7 0,6 0,5 0,4 0,3 0,2 0,1 0,0

2450 2400 2350

Source: LME, Reuters EcoWin

The price decline for commodities is not expected to be as extensive as in 2013. Production cuts and less investment in new capacity in commodity industries are reducing the risk of a major price decline, especially since global growth is increasing. This is particularly true of industrial metals, where we see prices of non-ferrous metals rising by 5-6% over the course of 2014. This applies especially to lead, copper and
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The global food market is in better balance after last year's strong production. This will also affect prices in 2014, although we don’t foresee the same price dip as in 2013. Demand is growing globally due to population growth and

2015q4

new consumption patterns, which in turn are raising demands on production. According to the FAO, the outlook is favorable for continued strong food production in 2014, but we do not expect that the rate of increase to surpass last year’s significant rise of 7.8% for grain. The price decline last year could also reduce the incentive to expand production capacity. A lower anticipated production increase this year, at the same time that underlying demand rises, could push prices higher over the course of 2014. As an annual average, food prices will fall by an estimated 5-6%, which implies a price increase over the course of the year. The biggest risk factor is unfavorable weather conditions that lead to production disruptions, which could quickly cause prices to skyrocket.
Swedbank’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 Agricultural Metals Iron ore/steel Crude oil Coal Total 6.9 9.6 10.5 3.7 66.3 3.0 100.0

Macro analysis Jörgen Kennemar Tel: +46 8 700 9804 e-mail: jorgen.kennemar@swedbank.se

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Swedbank Commodity Index Basis 2000 = 1oo
10.2013 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 Non-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 353,2 -2,1 0,8 243,8 0,7 -2,7 212,6 -0,7 -18,6 226,4 -0,5 -31,8 198,4 0,5 -15,8 106,9 -4,4 -27,1 234,2 -2,9 -13,0 252,8 1,0 2,1 170,7 2,0 7,1 82,4 -2,3 12,8 117,0 -15,6 -6,5 880,8 1,8 13,6 211,1 2,0 -8,9 7187,2 0,4 -10,8 1817,8 3,3 -7,8 2113,9 1,2 -1,5 1884,4 2,0 -1,1 14086,3 2,3 -18,0 580,7 -0,8 12,1 401,7 -2,8 1,8 312,1 5,5 -2,0 405,8 -3,1 2,0 11.2013 346,2 -2,0 0,9 243,7 0,0 -1,0 208,4 -2,0 -16,9 216,5 -4,4 -34,3 191,4 -3,5 -14,9 101,0 -5,5 -25,9 239,9 2,4 -5,9 253,9 0,4 3,8 170,8 0,1 8,5 76,7 -6,9 7,7 108,9 -6,9 -12,7 895,6 1,7 12,9 205,4 -2,7 -8,8 7066,1 -1,7 -8,2 1748,9 -3,8 -10,0 2089,8 -1,1 -4,1 1868,4 -0,9 -1,9 13725,1 -2,6 -15,8 603,0 3,8 15,4 391,7 -2,5 1,4 322,9 3,5 -1,7 394,8 -2,7 1,6

- US$ 28-01-14 12.2013 354,5 2,4 2,4 247,8 1,7 -2,2 211,9 1,7 -13,8 213,1 -1,6 -33,8 195,4 2,1 -10,7 106,5 5,4 -18,9 246,8 2,9 -2,9 258,2 1,7 1,0 173,5 1,6 7,4 82,0 7,0 9,5 116,5 7,0 -8,5 905,5 1,1 12,3 207,2 0,8 -13,2 7202,5 1,9 -9,5 1738,5 -0,6 -16,7 2132,7 2,1 -6,2 1973,9 5,6 -3,1 13911,1 1,4 -20,1 618,6 2,6 13,7 401,8 2,6 3,7 328,1 1,6 -7,4 405,2 2,6 4,1

Swedbank Commodity Index Basis 2000 = 1oo
10.2013 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 Non-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 246,1 -3,4 -2,6 169,9 -0,7 -6,1 148,1 -2,0 -21,4 157,7 -1,8 -34,2 138,2 -0,8 -18,7 74,5 -5,7 -29,6 163,2 -4,2 -16,0 176,2 -0,4 -1,4 118,9 0,7 3,4 57,4 -3,6 8,9 81,5 -16,7 -9,8 613,7 0,4 9,7 147,1 0,6 -12,0 5007,8 -1,0 -13,9 1266,6 1,9 -10,9 1472,9 -0,1 -4,9 1313,0 0,6 -4,5 9814,9 0,9 -20,8 404,6 -2,1 8,2 279,9 -4,1 -1,7 217,4 4,1 -5,4 282,7 -4,4 -1,5 11.2013 247,6 0,6 -0,9 174,3 2,6 -2,7 149,1 0,6 -18,4 154,8 -1,8 -35,5 136,9 -1,0 -16,4 72,2 -3,0 -27,3 171,6 5,2 -7,6 181,6 3,1 1,9 122,2 2,8 6,5 54,8 -4,4 5,7 77,9 -4,4 -14,2 640,6 4,4 10,9 146,9 -0,1 -10,4 5054,0 0,9 -9,8 1250,9 -1,2 -11,6 1494,7 1,5 -5,8 1336,4 1,8 -3,6 9817,0 0,0 -17,3 431,3 6,6 13,3 280,1 0,1 -0,4 230,9 6,2 -3,5 282,4 -0,1 -0,3

- SKr 28-01-14 12.2013 251,9 1,7 1,5 176,1 1,0 -3,0 150,6 1,0 -14,5 151,4 -2,2 -34,3 138,8 1,4 -11,4 75,7 4,7 -19,5 175,4 2,2 -3,7 183,5 1,0 0,2 123,3 0,9 6,5 58,3 6,3 8,7 82,8 6,3 -9,2 643,5 0,4 11,4 147,2 0,2 -13,9 5118,2 1,3 -10,3 1235,4 -1,2 -17,3 1515,5 1,4 -7,0 1402,7 5,0 -3,9 9885,4 0,7 -20,7 439,6 1,9 12,8 285,5 1,9 2,9 233,1 1,0 -8,1 287,9 2,0 3,3

Source : SW EDBANK and HW W A-Institute for Economic Research Hamburg

Source : SW EDBANK and HW W A-Institute for Economic Research Hamburg

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