Energy & Commodities

Monthly newsletter from Swedbanks Economic Research Department by Jrgen Kennemar No. 9 November 16, 2012

Commodity prices fall broadly

Swedbanks Total Commodity Price Index fell by 2.1% in dollar terms in October compared with September after having risen two months in a row. The decline was mainly driven by lower oil prices, but also by industrial metals, which fell broadly, indicating that global industrial conditions remain weak. The exception was iron ore, which rose for the first time since last year. The price decline for coal continued and in October it reached the lowest level since 2009, thereby deviating from previous price patterns, where coal has historically co-varied fairly well with oil. Growing coal inventories and increased competition from other energy-producing alternatives such as natural gas are contributing to the increased price differential between crude and coal.
Swedbanks Total Commodity Price Index, USD

Swedbanks Total Commodity Price Index fell by 2.1% in dollar terms in October compared with September. The decline came mainly from lower prices of energy commodities, with crude falling by 2.9% in October after having risen by slightly over 10% in the last two months. The price of coal continued to fall and since October 2011 has lost nearly 30%. The Commodity Price Index excluding energy commodities rose by 0.7% in dollar terms, but on a 12-month basis is 11% lower. The weak global economy has had a greater impact on the oil market in the last month than earlier in the fall, when prices were driven higher by political concerns in the Middle East, a factor that still exists.

In October global oil consumption fell due to a significant decline in Europe. China has also seen demand drop as its economy grows at a slower pace. Rising US oil inventories are another sign of slowing consumption. The price differential between US WTI crude and European Brent crude remains high at just over USD 20 per barrel. One contributing reason for the price differential is that supply differs between the two types of crude. In the US, oil production has increased substantially in the last two years and accounts for a rapidly growing share of global oil extraction. As soon as 2017 the US could pass Saudi Arabia as the largest oil producer in the world, according to the

Economic Research Department. Swedbank AB. SE-105 34 Stockholm. Phone +46-8-5859 1000. E-mail: ek.sekr@swedbank.se www.swedbank.se Legally responsible publisher: Cecilia Hermansson. +46-8-5859 7720. Magnus Alvesson. +46-8-5859 3341. Jrgen Kennemar. +46-8-5859 7730.

Energy & Commodities Monthly newsletter from Swedbanks Economic Research Department, continued No. 9 November 16, 2012

International Energy Agency (IEA). This also raises the question of what US foreign policy in the Middle East will look like at the same time that US oil needs will increasingly be met from by the domestic market. In Europe, high production costs and insufficient investment in new capacity have led to lower production. North Sea production has been cut in half from 6 million barrels per day in 2000 to 3 million barrels in 2012 despite the new reserves found in recent years.
US oil production and share of global production
11,0 US oil production, left-axis 10,5 Share of global oil production, right axis 14 15

price level higher than forecast. Chinas goal to double GDP per capita by 2020 should further help to raise the price of oil. Swedbanks Commodity Price Index for non-ferrous metals fell by 2.2% in dollar terms in October after having risen by 10% in the previous month. Zinc and aluminum posted the biggest price declines at 4.8% and 4%, respectively, while copper and nickel were largely unchanged between September and October. Among metals, only copper and lead saw higher price levels compared with October 2011. At the same time the market for non-ferrous metals reported growing imbalances with record-high inventories of nickel, zinc and aluminum, while inventories shrunk for copper and lead. The price decline for iron ore was broken in October. After having fallen by 40-50% since peaking in fall 2011, prices have risen by 8.4%. There are as yet no clear signs that demand for iron ore has increased. Instead prices are probably being steered more by expectations that planned infrastructure investments will eventually lead to higher demand for metals. The price decline for non-ferrous metals in October raises questions about the strength of global demand, however. The stabilization in prices in recent months could be a sign of an imminent rise in prices.
Metal prices and Chinese steel production growth
50 Prices on nonferrous metals, %-annual rate, right scale 100

10,0

13

9,5

12

9,0

11

8,5

10

8,0

7,5

7,0 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Source: Reuters EcoWin

Oil prices have not fallen at the rate we expected earlier in the fall despite a weaker global economy. We are therefore revising our average crude estimate upward to USD 112 per barrel for this year from USD 110 earlier in the fall. The fact that oil has stabilized at a higher-than-expected level can be explained by the political tension in the Middle East and concerns about production disruptions. As a result, the price forecast for 2013 also carries a degree of uncertainty, where our estimate of an average price of USD 104 could be on the low end. Oil prices are highly volatile and at the same time reflect the shaky global economy. The risk that the US economy winds up in a recession in 2013 if budget cuts of USD 600 billion are implemented could have a major impact on the global oil market, as well as on other commodities. We are not predicting such an outcome in our main scenario, however. Chinas emergence in the global economy also has a major impact on oil prices, where China is the world's second-largest consumer after the US. Higher growth in the Chinese economy driven by increased infrastructure investment could push the
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40

75

30

50

20

25

10

0 Chines steel production, %-annual rate, left scale

-25

-10

-50

-20 00 01 02 03 04 05 06 07 08 09 10 11 12

-75

Source: Reuters EcoWin

We expect prices of non-ferrous metals to fall in dollar terms by an average of 15-20% this year before rising by upwards of 10% over the next year. The rise will initially be driven by increased inventory buildup, especially in China, after recent

Energy & Commodities Monthly newsletter from Swedbanks Economic Research Department, continued No. 9 November 16, 2012

cutbacks. A more long-lasting rise in metal prices would require increased global investment activity, which there are as yet no clear signs of. Swedbanks Commodity Price Index for foods dropped by 3.6% in dollar terms in October compared with September. It was the third consecutive month that the index fell. Lower oilseed prices represented the largest price decline after having risen steadily since the end of last year. Since October 2011 the price level for oilseeds (soybeans and rapeseed) has gained over 20% in USD. Grain prices remain at high levels despite falling by 1.5% in the last month. Barley and corn prices have risen by 20% since last year, while wheat is up 10%. The supply situation for the majority of grains remains tight due to smaller harvests in the US and Europe. The tight supply conditions suggest continued high food prices this winter.

Global coal consumption, production and inventories (production minus consumption), millions of tons
4500 250

4000

200

3500

150 Stocks Globalconsumption Production

3000

100

2500

50

2000

This contrasts with the price of oil, which remains at a high level, although volatility is high. Lower growth in steel production and a continued increase in coal production among Chinese mining companies are leading to growing imbalances and falling coal prices.
Price trend for coal and crude, 2010=100

Growing imbalances pressure coal prices

After oil, coal is the most important energy commodity in the world, accounting for one fourth (25%) of global production. Oil accounts for 35% of global energy supplies, followed by natural gas (20%) and nuclear power and other energy sources (20%). Coal is also an important input good in steel manufacturing. Steel production has increased significantly in the last decade, especially in China, which accounts for nearly half of global production. In OECD countries, coal demand has declined slowly due to increased energy efficiencies and lower use of fossil fuels in energy production. In countries outside the OECD, consumption has doubled in the last 10 years, from 1,257 million tons in 2001 to 2,626 million tons in 2011. Emerging markets growing appetite for coal has slowed in 2012, however, in line with the weaker global economy. At the same time China, as the world's largest coal producer, has continued to raise production, which has led to a growing supply in the global market. Last year global coal inventories rose to the highest levels in the last decade. Growing inventories and a slowdown in the global economy have led to falling coal prices. In the last year prices have slid and in October reached their lowest level since 2009.

Natural gas as an energy-producing alternative is another factor affecting coal prices. In 2012 the price of natural gas has fallen to historically low levels, which tends to reduce demand for coalgenerating electricity production. The competitive advantage natural gas has relative to coal therefore suggests continued low coal prices going forward. Changing energy policies, including in Germany, which is planning to close several nuclear power plants, could eventually lead to increased coal usage, however. This could also be true of Japan, especially if the nuclear power problems persist after the devastating earthquake in March 2011. The pressure is also increasing on coal producers to limit production when inventories rise. This could in time lead to a stabilization and gradual recovery in coal prices, especially if growth in emerging markets, led by China, accelerates again. Jrgen Kennemar

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Energy & Commodities Monthly newsletter from Swedbanks Economic Research Department, continued No. 9 November 16, 2012

Swedbank Commodity Index Basis 2000 = 1oo

8.2012 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 354,7 5,8 2,2 245,8 -4,1 -22,4 275,7 -0,2 -9,0 345,5 4,5 11,7 237,3 -4,2 -26,4 148,5 -6,7 -30,0 312,8 3,5 21,4 237,2 -5,3 -26,0 154,3 -2,3 -23,5 74,0 4,1 -28,6 126,4 -0,8 -17,8 784,8 -3,3 -21,1 215,3 -1,6 -21,3 7496,6 -1,2 -17,1 1839,2 -1,9 -23,0 1897,4 1,1 -21,2 1814,5 -2,0 -17,9 15687,3 -2,9 -28,8 511,0 -11,4 -32,5 402,9 8,8 11,8 349,1 3,0 -24,3 405,4 9,1 14,0 9.2012 360,4 1,6 -2,1 249,7 1,6 -19,0 274,8 -0,3 -7,9 338,3 -2,1 10,5 240,1 1,2 -24,4 151,3 1,9 -29,0 308,2 -1,5 22,4 242,5 2,2 -22,1 156,6 1,5 -19,9 73,4 -0,8 -30,3 127,7 1,0 -14,1 766,1 -2,4 -20,8 236,8 10,0 -7,9 8068,0 7,6 -3,0 2053,5 11,7 -10,6 2168,9 14,3 -5,6 2001,9 10,3 -3,6 17213,0 9,7 -15,6 478,1 -6,4 -37,1 409,5 1,6 3,8 340,1 -2,6 -27,0 412,7 1,8 5,5

- US$ 20-11-12 10.2012 352,8 -2,1 -0,9 251,5 0,7 -11,0 265,0 -3,6 -3,7 333,2 -1,5 18,2 235,6 -1,9 -19,8 146,6 -3,1 -24,5 283,5 -8,0 23,4 247,6 2,1 -13,0 159,3 1,7 -14,8 73,0 -0,5 -27,9 128,1 0,3 -11,5 775,1 1,2 -16,7 231,7 -2,2 -2,1 8059,7 -0,1 9,3 1970,6 -4,0 -9,4 2146,6 -1,0 10,3 1904,9 -4,8 2,4 17179,7 -0,2 -9,2 518,3 8,4 -22,6 397,8 -2,9 2,3 318,5 -6,4 -29,0 401,4 -2,7 4,0

Swedbank Commodity Index Basis 2000 = 1oo

8.2012 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 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 257,1 1,7 6,6 178,2 -7,8 -19,1 199,9 -4,1 -5,2 250,5 0,5 16,4 172,0 -8,0 -23,2 107,7 -10,3 -27,0 226,8 -0,5 26,5 172,0 -9,0 -22,9 111,9 -6,1 -20,3 53,7 0,0 -25,6 91,6 -4,6 -14,3 569,0 -7,0 -17,7 156,1 -5,4 -18,0 5435,0 -5,1 -13,6 1333,4 -5,7 -19,8 1375,6 -2,8 -17,8 1315,5 -5,8 -14,5 11373,3 -6,7 -25,8 370,5 -14,9 -29,6 292,1 4,6 16,6 253,1 -1,0 -21,1 293,9 4,8 18,8 9.2012 258,2 0,4 -2,8 178,9 0,4 -19,6 196,9 -1,5 -8,6 242,3 -3,3 9,7 172,0 0,0 -24,9 108,4 0,7 -29,5 220,8 -2,7 21,4 173,7 1,0 -22,7 112,2 0,3 -20,5 52,6 -2,0 -30,8 91,5 -0,2 -14,7 548,8 -3,6 -21,4 169,6 8,7 -8,6 5779,1 6,3 -3,7 1470,9 10,3 -11,2 1553,6 12,9 -6,3 1434,0 9,0 -4,3 12329,7 8,4 -16,2 342,5 -7,6 -37,5 293,3 0,4 3,0 243,6 -3,7 -27,5 295,6 0,6 4,7

- SKr 20-11-12 10.2012 254,6 -1,4 -1,1 181,5 1,5 -11,1 191,2 -2,9 -3,8 240,5 -0,8 18,1 170,0 -1,1 -19,9 105,8 -2,4 -24,6 204,6 -7,3 23,2 178,7 2,9 -13,1 115,0 2,5 -14,9 52,7 0,2 -28,0 92,5 1,1 -11,6 559,4 1,9 -16,8 167,2 -1,4 -2,3 5817,0 0,7 9,2 1422,3 -3,3 -9,5 1549,3 -0,3 10,1 1374,8 -4,1 2,3 12399,3 0,6 -9,3 374,1 9,2 -22,7 287,1 -2,1 2,2 229,9 -5,6 -29,2 289,7 -2,0 3,8

Source : SW ED BAN K and HW W A-Institute for Economic Research Hamburg

Source : SW ED BAN K and H W W A-Institute for Economic Research Hamburg

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 Jrgen Kennemar, +46-8-5859 7730

Swedbanks 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 Swedbanks monthly Energy & Commodities newsletter.

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