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Industrial
commodity prices are expected to weaken in the second half
of 2008
After
strong growth in early 2008, the markets for many industrial
raw materials are expected to cool. As a result, prices (as
measured by the Economist Intelligence Unit’s Industrial
Raw Materials (IRM) price index) will fall by an average of
0.3% in 2008 as a whole.
Prices rose in the first quarter despite mounting evidence
of a slowdown in the US economy, weaker economic prospects
for the OECD countries and turbulence in the world’s
financial markets. Indeed, the weakness of the US dollar and
rising inflation expectations were key factors in driving
prices higher, as investors increasingly viewed commodities
as a safe haven. The price rises, however, did also reflect
concerns about supply and the relatively low level of stocks,
at a time when China’s demand remained strong. Technical
disruptions, particularly power shortages and rising production
costs, were hampering supply growth across many industrial
raw material markets.
Prices—especially for base metals—started to weaken
in the second quarter and we expect this trend to continue
this year as markets increasingly factor in weaker OECD demand.
Given that the economic downturns in the US and a number of
key European markets are being led by slumps in the housing
sectors, this will have particularly negative consequences
for the demand for base metals. Average base metal prices
are thus expected to fall by 5.1% in 2008.
The dynamics in the natural rubber market are very different,
however, and the Economist Intelligence Unit has revised up
its forecast of natural rubber prices in 2008 to an average
increase of 22.1%. The soaring cost of crude oil has led to
sharp rises in the cost of synthetic rubber, undermining its
price competitiveness vis-à-vis natural rubber. Furthermore
supply disruptions are expected to continue which will lead
to tightness in the natural rubber market.
The Economist Intelligence Unit also remains bullish on fibres.
Reduced cotton plantings globally (as planting grain appears
more lucrative) and the fact that the cost of manmade substitutes,
such as acrylic and polyester (which use petroleum products
in their manufacture), is increasing, suggest that the outlook
for cotton and wool prices is positive.
In 2009 we continue to expect a more marked downturn in the
average price of industrial raw material prices. Demand is
forecast to remain relatively subdued in the OECD economies
as the rehabilitation of household balance sheets continues.
Moreover, stocks will have accumulated and supply should be
greater and more predictable, with the caveat that the risk
of unplanned delays in bringing new supply on stream tilts
the balance of risks to the upside of our price forecasts.
The IRM index accounts for about 44% of the Economist Intelligence
Unit’s world commodity forecasts (WCF) index, the remainder
being accounted for by soft commodities. Strong rises in many
soft commodity groups will more than offset the weakness in
base metal prices giving an increase of 21% in WCF index in
2008, similar to the 20.8% increase recorded in 2007. A modest
decline in the WCF index is expected in 2009.
Crude oil
We have revised up our forecast of crude oil prices (which
are not included in the IRM index) in 2008 to an average of
US$120/barrel for Brent (US$122.4/b for WTI). Our crude oil
price index (a weighted average of the major benchmark prices)
is expected to rise by 65% in 2008 as a whole. Weak non-OPEC
supply, persistent geopolitical tensions in a number of key
oil producers and resilient demand in China and the Middle
East (where the retail price of fuel is subsidised) underpin
our upward revision. Nonetheless, we expect oil prices to
peak in the third quarter of 2008 at an average of US$140/b,
before undergoing a downward correction as weaker global demand
becomes evident. While slower demand in the OECD is already
apparent, the cutting of retail fuel price subsidies in many
Asian countries in the second quarter 2008 is expected to
feed through to reduced Asian demand this year.
Short-term price risks, however, are on the upside, with an
ever-present threat that geopolitical developments?in the
Middle East, Africa and Latin America?will disrupt oil supply.
The ongoing financial turbulence also creates risks—both
upside and downside. Pressure in bond and equity markets could
make speculative investment in the oil market seem even more
attractive, pushing up prices. But there is also the risk
that struggling financial institutions need to sell commodity
investments to cover losses elsewhere, pushing prices down.
In 2009 some increase in supply should reduce the upward pressure
on prices, but market fundamentals will remain relatively
tight and we expect only a modest fall in oil prices next
year.
For specific commodities, the Economist Intelligence Unit’s
current forecasts are as follows:
Overview: The Economist Intelligence Unit’s commodity
price index is now expected to rise by 21% in 2008, a similar
growth rate to 2007. However, the industrial raw materials
(IRM) subsector is projected to contract slightly, by 0.3%,
depressed by weaker prices for base metals. In 2009 commodity
prices are forecast to fall in response to weak OECD demand,
but will remain high by historical standards.
Aluminium: Additional production in the second half of 2008,
coupled with weak OECD demand, is expected to result in weaker
prices. However, the low level of stocks means that any disruption
to supply or stronger than anticipated Chinese demand could
propel prices higher.
Copper: Tight supply owing to mine production disruptions,
low treatment and refining charges constraining smelter productivity
and overall falling stock levels are supporting copper prices
and we have thus revised up price expectations in 2009-10.
Crude oil: The oil market remains concerned about long-term
supply and more immediate geopolitical risks. We expect increased
supply, particularly from OPEC, to ease pressure in the market
in 2009-10, but for overall prices to be underpinned by the
prospect of strong emerging market demand.
Fibres: With cereal prices continuing to rise, a further switch
away from cotton by farmers will push cotton prices further
upwards. At the same time, rising oil prices will reduce competition
to cotton and wool from synthetics.
Lead: The lead market is expected to return to surplus in
2008, depressing prices both this year and next.
Natural rubber: The booming price of crude oil and synthetic
rubber will have an impact on natural rubber, so demand and
price expectations have been raised significantly.
Nickel: The nickel market is firmly in surplus, which, coupled
with weaker demand, will lead to lower prices in 2008-09.
A price recovery can be expected in 2010, supported by a sustained
recovery in demand.
Tin: Global stocks have been falling, and with severe constraints
on additional supply and strong demand, particularly from
China, this will support prices.
Zinc: With ample stocks and weakening demand, there is downward
pressure on zinc prices. However, by 2010, stronger demand,
notably from developing countries, will erode some of the
surplus in the market and support prices.
The Economist Intelligence Unit is the business information
arm of The Economist Group, publisher of The Economist. Through
our global network of more than 700 analysts and contributors,
we continuously assess and forecast political, economic and
business conditions in 200 countries. As the world’s
leading provider of country intelligence, we help executives
make better business decisions by providing timely, reliable
and impartial analysis on worldwide market trends and business
strategies.
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