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Energy & Commodities

Monthly newsletter from Swedbank’s Economic Research Department


by Jörgen Kennemar No. 6 • 17 June 2010

A bifurcated economic picture


is creating major fluctuations in commodity markets
• Swedbank’s total commodity price index fell by 8.4% in dollar terms in May
compared with the preceding month. Industrial metals accounted for the
largest decline in the index despite that global industrial activity continues to
strengthen and metal inventories have begun to shrink.
• An increased risk aversion among financial investors, a stronger dollar and a
more uncertain growth outlook are pushing commodity prices lower on a
broad basis. The exception is pulp, which rose in nominal terms to its highest
level since 1996. We expect that when jitters in the financial market subside,
commodity prices will trend higher during the second half of the year to the
levels reached before the financial crisis peaked.
• Growing fiscal imbalances in OECD countries and the risk of overheating in
emerging economies will increase the need for austerity measures, however,
which could slow demand for commodities and thereby limit any price
increases in the next year from a fundamental perspective.
Swedbank Commodity Price Index, USD
500
2000=100
450

400

350

300
Index

Energy raw materials


250
Total index
200 Total index exclusive energy commodities
150

100 Food

50
00 01 02 03 04 05 06 07 08 09 10
Source: Swedbank

Swedbank’s total commodity price index fell by of investment capital to commodity markets rose
8.4% in dollar terms compared with April, the substantially as financial markets stabilised and
largest monthly decline since fall 2008. Because of confidence returned after the severe crisis of
the stronger dollar, the decrease in euro and kronor confidence following Lehman Brothers’ bankruptcy
was limited to 2%. Strained public finances in in fall 2008.
several European countries, with the risk of
negative consequences for financial markets and The price of gold is now fluctuating around
the economy, have led to a flight from cyclical historically high levels of just over 1 200 dollar an
commodities to what the market considers safer ounce and long-term interest rates in the US have
investments such as gold and US treasury bonds. fallen to the lowest levels in nearly a year. The fact
This is a clear reversal from 2009, when the inflow that gold is reaching new heights in nominal terms

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 1588.
Magnus Alvesson. +46-8-5859 3341. Jörgen Kennemar. +46-8-5859 1478.
Energy & Commodities
Monthly newsletter from Swedbank’s Economic Research Department, continued

No. 6 • 17 June 2010

can be interpreted to mean that the market is trying Steel production


300
to protect against higher inflation, while lower long- 2000=100
275
term interest rates indicate expectations of 250
Asia

continued weak growth with low inflation. The 225


bifurcated picture also applies to the economy, with

Ton (metric)
200

strong expansion in emerging economies but with 175

the risk of overheating, while several OECD 150

countries are struggling with modest growth and low 125


World

inflation. At the same time several of the latter 100

countries face huge budget cutbacks, which could 75


00 01 02 03 04 05 06 07 08 09 10
impede the recovery. Even rapidly growing Source: Reuters EcoWin

economies, which account for the large part of the


global increase in commodity consumption, are We expect a slight stabilisation of the financial
being forced to slash their spending to reduce the market during the second half of the year at the
risk of overheating. Less expansive economic same time that the risk appetite for commodity-
policies have created uncertainty about global related financial assets is still growing, which is
commodity demand in the quarters immediately driving up metal prices to levels we saw before the
ahead. financial crisis. The ongoing industrialisation and
urbanisation of emerging economies will create an
Industrial metals are the commodity group that has underlying demand for commodities for a long time
been most affected by the financial turbulence and to come, even if variations arise in connection with
therefore accounted for the largest price decline in economic fluctuations and political decisions.
Swedbank’s commodity price index in May,
dropping by an average of 12% compared with The price of crude, which weighs heavily in the
April. The downward price trend has continued in commodity price index, fell by slightly over 10% in
June, and at the time of writing the prices of several May, which means that oil prices are back to the
industrial metals were at their lowest levels since same levels as in February. Like industrial metals,
fall 2009 measured in dollars. crude experienced large price fluctuations during
spring, probably due more to financial flows than
Metal prices are falling despite that fundamentals changes in the real economy. The other major
are relatively strong. Inventories of several metals, energy source, coal, generally remained steady in
such as copper and nickel, have dropped since May, with price levels just over 50% higher than the
March. The inventory situation for aluminium has same month a year earlier. We anticipate that
improved as well, although levels remain historically global oil consumption will continue to rise in 2010
high. Lead and zinc inventories have risen on the after last year’s decline to just over 86 million
other hand. barrels, driven by emerging economies led by
China and India. The US, the world’s largest oil
Stock levels, Base Metals consumer, is also expected to use more oil as its
1.0 225000
economy improves, while fiscal constraints and a
0.9 200000

0.8
Nickel, right scale
175000
weaker euro are limiting consumption in Europe.
0.7 150000 Our average oil price projection of 75 dollars for this
year remains unchanged. This means that the price
Ton (metric) (millions)

0.6 Copper 125000


Ton (metric)

0.5 Zink 100000


at the end of the year is expected to be around 70
75000
0.4

50000
dollars a barrel. We expect OPEC to maintain
0.3

0.2 25000
current production capacity despite that inventories
0.1 0 exceed the average for the last five years.
Lead
0.0 -25000
00 01 02 03 04 05 06 07 08 09 10
Source: LME, Reuters EcoWin
The long-term price decline for food products
continued in May, with the price index falling by
Growing steel production is also an indication that nearly 1%, although there are variations between
global industrial activity continues to rise. During the different types of foods. Grain prices, which have
first quarter steel production rose by nearly 30% on been under pressure for an extended period of
an annual basis and thus returned to the levels time, turned higher last month, but are still 16%
before the financial crisis in 2008. China accounts lower than a year earlier. Besides excess
for the majority of the increase, but steel production inventories, grain prices are under pressure from a
grew in other parts of the world as well, which has stronger dollar.
increased consumption of nickel and coal, the raw
materials used to manufacture steel.

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Energy & Commodities
Monthly newsletter from Swedbank’s Economic Research Department, continued

No. 6 • 17 June 2010

Among commodities, pulp went against the stream 65-75% during the second quarter. Iron ore prices
in May despite financial concerns and uncertainty are being raised at the same time that steel
about the economy. On average, the price rose by production is expected to reach a new record level
3% measured in dollars (10% in euro), which in 2010 equivalent to 28.5 million tons, thereby
means it has risen by about 60% from a year ago. A exceeding 2006 levels. The large part of the
supply shortage and increased Chinese demand production increase will be outside the OECD,
are driving up prices to the highest nominal levels however, notably in China and Russia, where it is
since 1996. expected to be 78% higher than four years ago. For
the US and Europe, on the other hand, production
Overcapacity of aluminium and steel is is projected to be 20% lower. Demand for steel is
keeping prices under pressure headed upward in the engineering industry, but still
rests on shaky ground, especially in OECD
Despite a longstanding oversupply of aluminium, countries, where any increase in investments has
prices have risen in line with other industrial metals. been put off due to low capacity utilisation.
Aluminium production is energy intensive and is
therefore especially sensitive to large swings in The steel industry has questioned the price
energy prices. In China, the largest producer of increases for iron ore, especially in light of uncertain
aluminium, a recent increase in energy fees is economic conditions, with fiscal policies being
expected to raise production costs. In the short term tightened in Europe at the same time that there are
there is a risk of slight cutbacks in production signs of weak steel demand from the Chinese
capacity if the price of aluminium continues to fall construction sector and auto industry. The steel
and if the strong demand for metals in emerging industry is also wrestling with rising inventories, due
economies in recent years subsides as economic to which steel prises have fallen in China in recent
policies are gradually tightened. An aluminium price months, which could also spread to other parts of
under 2 000 dollars per ton is considered by many the world. Since China accounts for nearly half of
experts to be unprofitable for high-cost countries. In global steel production, a lower production increase
essence, however, there is a tremendous global for steel could have consequences for iron ore
need for aluminium, particularly from the household producers as well.
sector in Asia. By 2020 global demand is expected
to more than double, from 35.6 million tons in 2009 Swedish commodity exports take off
to 74 million tons.
Swedish exports performed better than expected
A new pricing model for iron ore is now being during the first quarter. A strong contributing factor
established. Instead of annual contracts, which was the substantial increase in mineral exports (iron
have typically been used for over 40 years, we are ore and steel), which rose by no less than 30% in
now seeing a transition to quarterly contracts. This volume and contributed an estimated 3 percentage
raises the risk that iron ore prices could be more points to the total increase in goods exports of 7.6%
volatile than before, which could make it harder to compared with the same point in time last year.
predict future production costs, especially for end This is evidence that global demand for raw
users like the steel industry. materials and input goods has strengthened, which
benefits Swedish industry.
The three largest iron ore producers, which account
for around three fourths of the world’s production, Jörgen Kennemar
are expected to announce price increases of 23%
during the third quarter after having raised them by

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Energy & Commodities
Monthly newsletter from Swedbank’s Economic Research Department, continued

No. 6 • 17 June 2010

Swedbank Commodity Index - US$ - Swedbank Commodity Index - SKr -


Basis 2000 = 1oo 11-06-10 Basis 2000 = 1oo 11-06-10
3.2010 4.2010 5.2010 3.2010 4.2010 5.2010
Total index 264,6 287,2 263,2 Total index 205,9 224,5 220,0
Per cent change month ago 5,3 8,5 -8,4 Per cent change month ago 3,9 9,0 -2,0
Per cent change year ago 60,7 63,8 33,3 Per cent change year ago 34,6 43,1 32,7
Total index exclusive energy 223,3 254,9 242,6 Total index exclusive energy 173,8 199,2 202,8
Per cent change month ago 3,3 14,2 -4,8 Per cent change month ago 1,9 14,6 1,8
Per cent change year ago 42,2 53,8 39,2 Per cent change year ago 19,1 34,4 38,4
Food, tropical beverages 208,1 206,4 204,5 Food, tropical beverages 161,9 161,3 170,9
Per cent change month ago -4,6 -0,8 -0,9 Per cent change month ago -5,9 -0,4 6,0
Per cent change year ago 14,0 7,4 -2,5 Per cent change year ago -4,5 -6,2 -3,0
Cereals 185,6 178,7 180,8 Cereals 144,4 139,7 151,1
Per cent change month ago -1,1 -3,7 1,2 Per cent change month ago -2,5 -3,3 8,2
Per cent change year ago -7,0 -10,2 -15,7 Per cent change year ago -22,1 -21,5 -16,1
Tropical beverages and tobacco 225,6 222,2 219,8 Tropical beverages and tobacco 175,6 173,7 183,7
Per cent change month ago -7,3 -1,5 -1,1 Per cent change month ago -8,6 -1,1 5,8
Per cent change year ago 24,7 18,6 8,8 Per cent change year ago 4,4 3,6 8,2
Coffee 125,3 126,9 128,2 Coffee 97,5 99,2 107,2
Per cent change month ago 1,5 1,3 1,0 Per cent change month ago 0,1 1,7 8,0
Per cent change year ago 18,3 13,7 4,1 Per cent change year ago -0,9 -0,7 3,6
Oilseeds and oil 184,9 190,4 186,9 Oilseeds and oil 143,9 148,8 156,2
Per cent change month ago 0,6 3,0 -1,8 Per cent change month ago -0,8 3,4 5,0
Per cent change year ago 5,7 -3,9 -16,4 Per cent change year ago -11,5 -16,0 -16,8
Industrial raw materials 227,7 268,9 253,6 Industrial raw materials 177,2 210,2 212,0
Per cent change month ago 5,6 18,1 -5,7 Per cent change month ago 4,2 18,6 0,9
Per cent change year ago 52,2 70,1 54,6 Per cent change year ago 27,5 48,6 53,8
Agricultural raw materials 164,3 169,9 163,9 Agricultural raw materials 127,9 132,8 137,0
Per cent change month ago 4,2 3,4 -3,5 Per cent change month ago 2,8 3,8 3,2
Per cent change year ago 57,2 58,5 46,3 Per cent change year ago 31,7 38,5 45,6
Cotton 81,3 81,5 81,4 Cotton 63,3 63,7 68,0
Per cent change month ago 9,1 0,2 -0,1 Per cent change month ago 7,6 0,7 6,8
Per cent change year ago 88,6 65,7 41,3 Per cent change year ago 58,0 44,7 40,6
Softwood 140,8 146,2 145,0 Softwood 109,6 114,3 121,2
Per cent change month ago 3,2 3,8 -0,8 Per cent change month ago 1,8 4,3 6,1
Per cent change year ago 36,6 42,4 37,4 Per cent change year ago 14,4 24,4 36,7
Woodpulp 877,7 917,2 945,8 Woodpulp 683,1 716,8 790,6
Per cent change month ago 4,5 4,5 3,1 Per cent change month ago 3,0 4,9 10,3
Per cent change year ago 51,7 58,5 61,6 Per cent change year ago 27,1 38,5 60,7
Non-ferrous metals 239,8 253,2 222,4 Non-ferrous metals 186,6 197,9 185,9
Per cent change month ago 9,1 5,6 -12,2 Per cent change month ago 7,6 6,0 -6,1
Per cent change year ago 86,8 75,2 46,5 Per cent change year ago 56,4 53,1 45,8
Copper 7462,4 7744,4 6863,9 Copper 5807,7 6052,4 5737,3
Per cent change month ago 9,2 3,8 -11,4 Per cent change month ago 7,7 4,2 -5,2
Per cent change year ago 99,1 75,8 50,1 Per cent change year ago 66,7 53,6 49,3
Aluminium 2205,6 2316,4 2045,2 Aluminium 1716,5 1810,3 1709,5
Per cent change month ago 7,9 5,0 -11,7 Per cent change month ago 6,4 5,5 -5,6
Per cent change year ago 65,2 63,0 40,2 Per cent change year ago 38,3 42,4 39,5
Lead 2171,7 2264,5 1892,8 Lead 1690,1 1769,8 1582,1
Per cent change month ago 1,9 4,3 -16,4 Per cent change month ago 0,5 4,7 -10,6
Per cent change year ago 75,4 63,8 31,5 Per cent change year ago 46,9 43,1 30,8
Zinc 2274,7 2366,3 1977,9 Zinc 1770,3 1849,3 1653,3
Per cent change month ago 5,5 4,0 -16,4 Per cent change month ago 4,1 4,5 -10,6
Per cent change year ago 87,0 71,7 33,2 Per cent change year ago 56,6 50,0 32,5
Nickel 22453,4 26022,8 22164,3 Nickel 17474,6 20337,4 18526,5
Per cent change month ago 19,0 15,9 -14,8 Per cent change month ago 17,3 16,4 -8,9
Per cent change year ago 131,6 133,2 75,3 Per cent change year ago 94,0 103,7 74,4
Iron ore, steel scrap 355,5 566,2 570,9 Iron ore, steel scrap 276,7 442,5 477,2
Per cent change month ago 1,1 59,3 0,8 Per cent change month ago -0,3 59,9 7,8
Per cent change year ago 9,5 73,6 72,0 Per cent change year ago -8,3 51,6 71,1
Energy raw materials 283,0 301,6 272,4 Energy raw materials 220,2 235,7 227,7
Per cent change month ago 6,0 6,6 -9,7 Per cent change month ago 4,6 7,0 -3,4
Per cent change year ago 68,4 67,8 31,2 Per cent change year ago 41,0 46,6 30,5
Coking coal 352,1 377,9 377,4 Coking coal 274,0 295,3 315,5
Per cent change month ago 1,2 7,3 -0,1 Per cent change month ago -0,2 7,8 6,8
Per cent change year ago 51,2 57,9 56,0 Per cent change year ago 26,6 38,0 55,2
Crude oil 279,8 298,1 267,6 Crude oil 217,8 233,0 223,7
Per cent change month ago 6,3 6,5 -10,2 Per cent change month ago 4,8 7,0 -4,0
Per cent change year ago 69,5 68,4 29,8 Per cent change year ago 41,9 47,1 29,2

Swedbank
Economic Research Department 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
SE-105 34 Stockholm, Sweden of the analyses reported in this publication. However, we cannot guarantee the accuracy or
Phone +46-8-5859 1028 completeness of the report and cannot be held responsible for any error or omission in the
ek.sekr@swedbank.se underlying material or its use. Readers are encouraged to base any (investment) decisions
www.swedbank.se on other material as well. Neither Swedbank nor its employees may be held responsible for
Legally responsible publisher losses or damages, direct or indirect, owing to any errors or omissions in Swedbank’s
Cecilia Hermansson, +46-88-5859 1588 monthly Energy & Commodities newsletter.
Magnus Alvesson, +46-8-5859 3341
Jörgen Kennemar, +46-8-5859 1478

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