Base metals and oil will drive hard commodity prices higher in 2005 - EIU By Finfacts Team Mar 31, 2005, 13:47
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Over the past three months hard commodity prices have continued to run ahead of our expectations, at times setting new records. While the global economy is set for a modest slowdown, commodities continue to be seen as a profitable investment and are attracting renewed interest from speculative funds.
Having risen by a striking 21% in 2004 (and by over 8% the year before), the industrial raw material (IRM) index is forecast to rise by 3.5% in 2005. Base metals will once again be the star performers. According to the Economist Intelligence Unit's Senior Commodity Editor, Kona Haque, "the expected 9% increase in 2005 metal prices is being driven by physical shortages that are causing stocks to be drawn down rapidly". While Chinese demand—the original trigger behind the rush in the metals market—has decelerated, global supply has been slow to respond to higher prices. Production is expected to speed up, allowing some rebuilding of stocks and more balanced markets by 2006. The Economist Intelligence Unit forecasts prices will peak in the fourth quarter of 2005 and fall the year after. With an index weighting of 65%, the decline in metal prices will push down the IRM index by almost 7% in 2006.
Note. WCF (World commodity forecasts) is an index of 24 hard and soft commodities. IRM (Industrial raw materials) is a price index of nine hard commodities. The metals sector has weighting of 65.1% in the IRM index, fibres 27.4% and rubber 7.5%. IRM has weighting of 44.1% in the WCF index.
Source: Economist Intelligence Unit.
In contrast to metals, prices for fibres and rubber will weaken in 2005, amid lacklustre demand and increased supply. In 2006 fibre prices will rebound sharply in response to a projected decline in output, but rubber prices will remain subdued as global oversupply persists.
The buoyancy of the Economist Intelligence Unit's IRM (hard commodity) index will be more than offset by a fall in the food, feedstuffs and beverages (FFB) index. The general World Commodity Forecasts (WCF) index, to which the IRM commodities contribute about 44%, is thus set to fall by 2.2% in 2005.
Crude oil
Crude oil is excluded from the IRM index on account of its size. Despite rising stocks, oil prices have remained high since the beginning of 2005, thanks to a cold winter and stronger than expected demand. Having suspended its US$22-28/b price target, OPEC now appears willing to defend much higher prices. With production in the former Soviet Union and other non-OPEC world slowing and global demand revised sharply higher in China and the US, our forecast for dated Brent has been raised to US$42/b for 2005 as a whole. According to Kona Haque, "tight global spare capacity and strong speculative interest will keep prices elevated for much of the year". As demand eases and production capacity is rebuilt, the price will ease to US$37/b in 2006.
For specific commodities, the Economist Intelligence Unit’s current forecasts are as follows:
Summary: Industrial commodities have gone from strength to strength, defying earlier expectations. Prices for the majority of markets have moved further upwards, thanks to strong fundamentals and speculative fund support. Base metals will remain firm for longer than expected as stocks continue to dwindle. A downturn is now not expected until 2006.
Aluminium: The impact of measures to control Chinese aluminium production remains the key uncertainty on the supply side. Demand remains very strong. The aluminium market is quite tight and will remain so for much of 2005.
Copper: With production struggling to keep up with consumption, copper stocks have dwindled to critical levels. Prices will remain high this year and weaken in 2006 as supply demand pressures ease, but stay above US cents 100/lb.
Oil: Following upward adjustments to global demand and downward revisions to former Soviet Union production, the call on OPEC crude has risen. With OPEC now willing to defend higher prices, oil will remain expensive for longer. Tight global spare capacity will keep the market vulnerable to upside price risks.
Fibres: Short-term cotton prices will remain weak, reflecting the huge rise in global production in 2004/05. This will discourage planting for the short term and prices will rise. With little change in wool’s global supply/demand balance, prices will show modest growth.
Lead: The tight physical market and continued fund support will push prices to new highs. But moves above US$1,000/tonne will prove unsustainable, and 2005 will represent the peak of the cycle.
Natural Rubber: Our price forecasts are unchanged. Global demand for natural rubber will be running lower than forecast three months ago; but supply even more so, and synthetic rubber will remain expensive.
Nickel: Prices have moved to a generally higher level, where they will remain until the first signs of easier supply-demand conditions emerge late in 2006.
Zinc: Stocks will continue to decline and prices to rise in response to fund buying. The shortage will ease in 2006.The relative cheapness of zinc has attracted fund interest. As inventories continue to decline prices will keep rising, peaking in the first quarter of 2006.
