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 the EIU expects 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 theEconomist 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 the EIU continues 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 the EIU 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.
The EIU revised up its 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/Nymex). The 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 the upward revision. Nonetheless, the EIU expects oil prices to peak in the third quarter of 2008 at an average of US$140/b, before undergoing a downward correction as weaker global demand becomes evident. While slower demand in the OECD is already apparent, the cutting of retail fuel price subsidies in many Asian countries in the second quarter 2008 is expected to feed through to reduced Asian demand this year.
Short-term price risks, however, are on the upside, with an ever-present threat that geopolitical developments in the Middle East, Africa and Latin America, will disrupt oil supply. The ongoing financial turbulence also creates risks—both upside and downside. Pressure in bond and equity markets could make speculative investment in the oil market seem even more attractive, pushing up prices. But the EIU says there is also the risk that struggling financial institutions need to sell commodity investments to cover losses elsewhere, pushing prices down.
In 2009 some increase in supply should reduce the upward pressure on prices, but market fundamentals will remain relatively tight and the EIU expects only a modest fall in oil prices next year.
|(US$ index, 1990=100; % change year on year)
|Source: Economist Intelligence Unit.
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 the EIU 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. The EIU expects 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.