Energy & Commodities, No.5, 16 May 2011

Energy & Commodities
Monthly newsletter from Swedbank’s Economic Research Department
by Jörgen Kennemar No. 5 • 16 May 2011

Reduced risk appetite and uncertain global outlook pressure
commodity prices
• The price drop in the commodity market in May is a sign of increased
concerns about the global economy as economic policies are tightened,
especially in emerging economies led by China. Growing investor interest in
commodities stimulated by low interest rates and a higher risk appetite is also
increasing the risk of greater price corrections when global conditions change
or investor interest in commodities slackens.
• The market for base metals is seeing increased supply at the same time that
metal consumption is growing at a weaker pace, because of which metal
inventories continue to rise in 2011. Copper inventories are now at the
highest level since last summer, while inventory levels for zinc are at the
highest level since 2004. Provided that Chinese consumption does not
increase, the growing metal inventories will lead to lower prices. In the case
of precious metals there is still room for price increases, though from lower
levels due to increased inflation concerns and the major fiscal imbalances in
the EMU countries and the US.

In recent days commodity markets have seen Renewed concerns about fiscal conditions in
prices drop after they had risen substantially for Greece and the risk that they spread to other
nearly a year. The price of crude has fallen by more vulnerable economies within the EMU are pushing
than 10% since the end of April, when Brent oil was the euro lower at the same time that the dollar rises.
trading at over USD 125 per barrel, a larger decline A dollar appreciation of nearly 5% against the euro
in absolute terms than when the global financial since the end of April means that commodity prices
crisis intensified in fall 2008. Base and precious have fallen in USD. Despite fiscal austerity in
metal prices have also fallen broadly. The price of Greece in the last year, it has proven too little to
silver declined in USD terms by over 25% since the slow the country’s rapidly growing debt, because of
end of April after having risen by over 50% from the which additional rescue loans may be needed from
start of the year, a rate of increase that was not the IMF/EU, which provided a 110 billion euro
sustainable. The rapid reversal in global commodity bailout last year. The need for more emergency
markets is probably driven more by financial flows loans has arisen at a time when the EMU countries
than fundamental factors, similar to the price are becoming more resistant to finance their debt-
correction in the commodity markets in spring 2010, laden neighbours. A more cautious stance by the
when the sovereign debt crisis in the EMU countries European Central Bank, which suggests that the
was first brought to light. The growing inflow of next rate hike will be put off until July, is also
volatile investment capital to commodity markets in weakening the euro against the dollar, which at the
the last year and a higher risk appetite among time of writing had returned to the level of around
financial investors, stimulated by the low interest 1.43 from early April 2011 after having previously
rates, are increasing the risk of greater price traded around USD 1.48 per euro.
corrections when economic conditions change or
investors lose interest in commodities. The US economy is facing a rapidly growing budget
deficit and a national debt that is nearing 100% of

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. Jörgen Kennemar. +46-8-5859 7730.

Monthly newsletter from Swedbank’s Economic Research Department, continued

No. 5 • 16 May 2011

GDP. This raises the question of how the budget Inventory levels for metals, millions of tons
deficit will be financed once the US central bank
1.0 225000
(the Federal Reserve) stops buying US Treasuries 0.9 200000
(quantitative easing) after June 2011, as expected. 0.8
Nickel, right sca
175000

The drawdown of liquidity means that less liquidity 0.7 150000

Ton (metric) (millions)
can flow to global commodity markets, which could 0.6 Copper 125000

Ton (metric)
100000
put downward pressure on prices. Political disunity 0.5 Zink
75000
0.4
in the US with respect to fiscal consolidation and 0.3 50000
the risk of a credit rating downgrade means that the 0.2 25000

appreciation of the dollar since the beginning of 0.1
Lead
0

May still rests on shaky ground. As a result, the risk 0.0
00 01 02 03 04 05 06 07 08 09 10 11
-25000

of another decline in the dollar cannot be Source: LME, Reuters EcoWin

discounted, which would push commodity prices
higher in USD. Uncertainty about the strength of the global
economy has grown in the financial markets as
economic policies gradually become less expansive
in both OECD countries and emerging economies.
Industrial metals pressured by rising This is reflected in the purchasing managers
indexes in China, the EMU countries and the US,
inventories and growing economic which have fallen in recent months. The substantial
concerns decline in production in Japan following the
earthquake disaster in March has probably
Last year's average increase of 22% in the price of contributed to lower metal prices. A shrinking risk
non-ferrous metals has been followed this year by appetite for cyclical metals is also a factor in the
considerably more modest price gains. Between price decline for the majority of base metals.
January and April 2011, i.e., before the turbulence
in the global commodity markets began in May, Future metal prices will be largely dependent,
Swedbank’s metal price index had risen by nearly however, on developments in the Chinese
5% in USD terms. At the same time growing metal economy, which accounts for the large part of
inventories show that demand has slowed. Copper global metal consumption growth. During the spring
inventories rose in April for the fourth consecutive commodity imports to China have risen at a slower
month and are now at the highest level since June rate than last year, which indicates that economic
of last year. This is a directly contrary to previous austerity implemented by government authorities in
projections that copper supplies would reach the past year to avoid an overheating are beginning
critically low levels at some point in 2011. to have an impact. As a result, lower commodity
consumption in China suggests lower global metal
The price of copper, which reached a record-high prices going forward.
USD 10 000 per ton in February, has therefore
fallen more than other metals in recent months. The Metal Prices and Global Production (PMI)
price is now below USD 9 000 for the first time
since December. Zinc is the base metal with the 65 130

largest imbalances, and inventory levels are at their 60 120

highest since 2004. It is also the metal with the 55 110

weakest price trend this year, along with nickel. 50 100
Index

Index

Aluminium has been most resistant to price 45 90

40 80
fluctuations, which is partly because rising energy
35 70
costs are the largest cost component in its
30 60
production. 25 50
jan apr jul okt jan apr jul okt jan apr jul okt jan apr
08 09 10 11
Price Index for Non-ferrous Metals, USD (Right-Scale)
Global, Manufacturing Sector, Output, PMI (Left Scale)
Source: Reuters EcoWin

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No. 5 • 16 May 2011

Lower crude prices as global oil Oil futures for Brent Crude, in USD

consumption downshifts 130

120
That speculation has affected oil prices was clearly
110
evident at the start of 2011, when prices climbed
considerably faster than global industrial 100

production, as was the case in 2008. In May prices 90

stopped rising, however. Increased uncertainty 80

about the growth prospects in China, where 70

economic policies are being tightened, and the 60
negative impact of high oil prices on global growth jan feb mar apr maj jun
10
jul aug sep okt nov dec jan feb mar
11
apr maj

were probably decisive factors behind the major Spot price Brent Crude Futures Dec 2011 Brent Crude Futures Dec 2012
Source: Reuters EcoWin

price decline for crude. Profit taking by financial
investors is also a likely explanation. The rise in oil Investor interest in precious metals
prices was exacerbated when Libyan production remains
shut down in February and fears grew that oil
supplies could be at risk if political developments in Gold and silver prices have trended higher since fall
the Middle East worsened. 2008, though with less price fluctuation. Silver
posted the biggest increase in terms of percent. As
In its latest forecast this month, the International a result, the price ratio relative to gold fell in April to
Energy Agency (IEA) projected that global oil the lowest level since 1980. Fears of higher
consumption would increase less than previously inflation, expectations of continued expansive
anticipated in 2011. High oil prices are the main monetary policies and concerns about the fiscal
reason that oil consumption around the world is situations in the US and EMU are contributing to
expected to rise at a slower rate, with the exception increased investor interest in precious metals. In
of emerging economies such as China, where early May the price of silver fell substantially,
subsidies on oil products are high. A lower increase however, although gold also lost strength.
in consumption and a stronger dollar mean that
Swedbank’s oil price projection of USD 105 per The factors that previously pushed prices higher still
barrel in 2011 is not unlikely. The price of oil futures remain, although investor interest may have cooled
for delivery in December 2011 has fallen to USD because of the appreciation of the dollar, at the
109, lower than the current spot price of USD 114 same time that there is uncertainty how the phase-
at the time of writing. But as long as geopolitical out of QE2 by the Fed will affect the price picture for
risks remain in the Middle East, there will be a risk precious metals. Growing concerns about higher
premium on crude, even if the size of the premium inflation and huge fiscal imbalances still suggest
varies periodically with a risk that oil prices could rising gold prices.
rise once again.

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No. 5 • 16 May 2011

Swedbank Commodity Index - US$ - Swedbank Commodity Index - SKr -
Basis 2000 = 1oo 16-05-11 Basis 2000 = 1oo 16-05-11
2.2011 3.2011 4.2011 2.2011 3.2011 4.2011
Total index 341,3 365,8 389,4 Total index 238,6 252,1 262,4
Per cent change month ago 4,4 7,2 6,4 Per cent change month ago 0,6 5,7 4,1
Per cent change year ago 35,8 38,3 35,6 Per cent change year ago 20,3 22,4 16,9
Total index exclusive energy 318,9 314,5 332,9 Total index exclusive energy 222,9 216,7 224,3
Per cent change month ago 3,3 -1,4 5,8 Per cent change month ago -0,4 -2,8 3,5
Food, tropical beverages 317,6 307,9 320,0 Food, tropical beverages 222,0 212,2 215,6
Per cent change month ago 5,0 -3,1 3,9 Per cent change month ago 1,2 -4,4 1,6
Cereals 314,5 313,8 310,5 Cereals 219,8 216,2 209,3
Per cent change month ago 6,7 -0,2 -1,1 Per cent change month ago 2,9 -1,6 -3,2
Tropical beverages and tobacco 337,8 326,3 349,1 Tropical beverages and tobacco 236,1 224,9 235,3
Per cent change month ago 6,6 -3,4 7,0 Per cent change month ago 2,7 -4,8 4,6
Coffee 215,2 223,6 229,9 Coffee 150,4 154,1 154,9
Oilseeds and oil 276,1 264,1 263,1 Oilseeds and oil 193,0 182,0 177,3
Per cent change month ago -0,1 -4,3 -0,4 Per cent change month ago -3,7 -5,7 -2,6
Industrial raw materials 319,3 316,4 336,6 Industrial raw materials 223,2 218,0 226,8
Agricultural raw materials 207,0 202,9 210,0 Agricultural raw materials 144,7 139,8 141,5
Cotton 185,8 201,0 193,2 Cotton 129,9 138,5 130,2
Per cent change month ago 22,6 8,2 -3,9 Per cent change month ago 18,1 6,7 -6,0
Softwood 144,6 146,8 151,7 Softwood 101,1 101,2 102,2
Per cent change month ago 0,3 1,5 3,3 Per cent change month ago -3,3 0,1 1,1
Per cent change year ago 6,0 4,3 3,8 Per cent change year ago -6,1 -7,7 -10,5
Woodpulp 949,1 964,6 992,3 Woodpulp 663,3 664,7 668,7
Per cent change year ago 13,0 9,9 8,2 Per cent change year ago 0,0 -2,7 -6,7
Non-ferrous metals 300,3 296,4 302,0 Non-ferrous metals 209,9 204,3 203,5
Per cent change month ago 4,2 -1,3 1,9 Per cent change month ago 0,4 -2,7 -0,4
Copper 9867,2 9530,1 9477,0 Copper 6896,3 6567,5 6386,7
Per cent change month ago 3,2 -3,4 -0,6 Per cent change month ago -0,5 -4,8 -2,8
Aluminium 2507,8 2552,2 2668,1 Aluminium 1752,7 1758,8 1798,1
Per cent change year ago 22,7 15,7 15,2 Per cent change year ago 8,7 2,5 -0,7
Lead 2586,2 2623,3 2729,6 Lead 1807,5 1807,8 1839,5
Per cent change month ago -0,5 1,4 4,1 Per cent change month ago -4,1 0,0 1,8
Zinc 2464,7 2348,9 2364,1 Zinc 1722,6 1618,7 1593,2
Per cent change month ago 3,8 -4,7 0,6 Per cent change month ago 0,1 -6,0 -1,6
Per cent change year ago 14,4 3,3 -0,1 Per cent change year ago 1,3 -8,6 -13,8
Nickel 28250,1 26807,4 26340,0 Nickel 19744,4 18473,8 17750,9
Per cent change month ago 10,3 -5,1 -1,7 Per cent change month ago 6,3 -6,4 -3,9
Per cent change year ago 49,7 19,4 1,2 Per cent change year ago 32,6 5,7 -12,7
Iron ore, steel scrap 660,0 662,8 757,6 Iron ore, steel scrap 461,3 456,8 510,6
Per cent change month ago 1,0 0,4 14,3 Per cent change month ago -2,6 -1,0 11,8
Energy raw materials 351,3 388,6 414,5 Energy raw materials 245,5 267,8 279,3
Coking coal 479,3 478,9 471,4 Coking coal 335,0 330,0 317,7
Per cent change month ago -2,3 -0,1 -1,6 Per cent change month ago -5,8 -1,5 -3,7
Crude oil 345,4 384,5 411,9 Crude oil 241,4 265,0 277,6

Source : SWEDBANK and HWWA-Institute for Economic Research Hamburg Source : SWEDBANK and HWWA-Institute for Economic Research Hamburg

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 7740 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 7720 monthly Energy & Commodities newsletter.
Magnus Alvesson, +46-8-5859 3341
Jörgen Kennemar, +46-8-5859 7730

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Energy & Commodities, No.5, 16 May 2011

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Energy & Commodities, No.5, 16 May 2011