Press release
01 Jul 2005
Base metal and oil prices to peak by end 2005
The prices of most industrial commodities continue to rise on the back of low stocks, surging demand from China and weak supply response. The Economist Intelligence Unit's price index for industrial raw materials (IRM) will rise by over 4% in 2005. This represents an upward revision from our previous forecast, reflecting greater investment fund support in the speculative market. According to the Economist Intelligence Unit's Senior Commodity Editor, Kona Haque, "with the markets still very tight, commodities continue to be seen as a profitable investment; this is helping push elevated prices even higher".
However, we expect to see signs of a turn from late 2005. The IRM index is forecast to fall by 6% in 2006, as growth in demand for hard commodities starts ebbing away in line with slower global economic growth. A sharper fall of nearly 9% is forecast for 2007 as output rises in belated response to previously high prices.
This trend will be most accentuated in the base metals. Driven by China's insatiable appetite and strong industrial production growth elsewhere, the base metals price index rose by over 37% in 2004. With insufficient response from the supply side (more often than not due to a raw materials shortage), stocks have been dwindling and prices will rise by another 9% this year. In 2006 most of the market's cyclical support will fade as Chinese demand decelerates and production capacity expands; metal prices will plummet as a result. Oversupply will add to the downward pressure in 2007, when we expect the index to fall by a further 14%.
Price forecast summary
(US$ index, 1990=100; % change year on year)
Index %
2003 2004 2005 2006 2007 2003 2004 2005 2006 2007
WCF 94.5 107.7 105.6 101.7 99.0 9.1 13.9 -1.9 -3.7 -2.7
IRM 85.2 103.0 107.4 100.8 91.8 13.0 21.0 4.2 -6.2 -8.8
Base metals 77.5 106.2 115.7 103.6 88.9 10.4 37.1 8.9 -10.5 -14.2
Fibres 93.7 84.0 78.4 83.5 86.2 11.7 -10.4 -6.7 6.5 3.2
Rubber 120.5 144.9 141.5 139.4 138.1 35.6 20.3 -2.3 -1.5 -0.9
Crude oil 128.2 172.1 226.5 208.4 180.8 17.4 34.2 31.6 -8.0 -13.3
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 a weighting of 65.1% in the IRM index, fibres 27.4% and rubber 7.5%. IRM has a weighting of 44.4% in the WCF index.
Source: Economist Intelligence Unit.
Some softening is also forecast in the price of natural rubber, but the high price of synthetic rubber, which accounts for 60% of global usage, will help to keep prices elevated. Influenced more by production variances than industrial cycles (and in contrast to other industrial commodities), the fibre price index will fall 6.7% in 2005 and rise over the forecast period. Cotton output is forecast to decline next season, while demand (aided by the removal of textile quotas) will increase. As the market progressively tightens, prices will firm up.
The buoyancy of the Economist Intelligence Unit's IRM index in 2005 will be more than offset by a decline in the food, feedstuffs and beverages (FFB) index. As a result, the general World Commodity Forecasts (WCF) index, to which the IRM commodities contribute about 44%, will fall by 1.9% in 2005. Bearish prospects in the soft commodity markets will continue to put pressure on the WCF index over the remainder of the forecast period.
Crude oil
Exceeding previous expectations, crude oil prices have continued to rise. Having surged by over 34% in 2004, our oil price index will rise by a further 32% in 2005. We have raised our price forecasts on the basis of year-to-date performance, a sustained level of demand and lowered expectations of non-OPEC supply. A lack of refining capacity and buoyant futures markets is adding further support to the market. The narrow margin of spare production capacity has made prices vulnerable to unforeseen reductions in supply or rises in demand. Our price projections are therefore subject to upside risks. From 2006 onwards, the oil index should ease on average by 10% a year in line with softer global demand and additions to production capacity. Crude oil is excluded from the IRM index on account of its disproportionately high weighting.
For specific commodities, the Economist Intelligence Unit's current forecasts are as follows:
Overview: Backed by strong support from investment funds and Chinese demand, prices for metal, oil and rubber remain high. Demand growth will ease in line with economic growth as we move into 2006-just as production starts to pick up. A market surplus is projected for most commodities by 2007, resulting in falling prices. The reverse is foreseen for fibres.
Aluminium: Substantial additions to primary smelter capacity are planned. But slowing consumption will cause stocks to rise rapidly, especially in 2007.
Copper: Investment funds continue to support prices. Destocking and a lack of producer constraint will result in softer prices from 2006.
Crude Oil: Prices and demand continue to rise in response to shortages of crude supply and refinery capacity. Non-OPEC production is slowing, while OPEC is producing close to capacity and appears powerless to control the market. Prices will remain higher and for longer than expected.
Fibres: The end of textile quotas has boosted cotton and wool demand in Asia. After years of overproduction, cotton output will fall in 2005/06, causing stocks to fall and prices to rise. Wool output will rise again in Australia, but stable demand and high stocks will keep prices in check.
Lead: The market will continue to be tight over the next two years amid weak supply growth. Stocks will remain minimal, extending the period of high prices.
Natural Rubber: Global supply will be running slightly ahead of demand through 2007. But synthetic rubber will remain expensive and natural rubber prices can be expected to range narrowly around a slowly declining trend.
Nickel: Demand is beginning to weaken due to falling stainless steel production, while supply-driven by China-expands. Fund support will ebb away during 2006 in anticipation of the coming surplus, falling below US$6.80/lb.
Tin: Although cyclical support is waning, structural factors continue to underpin prices. The supply shortage will persist until 2006, after which production will be catching up with demand.
Zinc: The structural shortage of concentrate will keep the market undersupplied and prices will stay high through 2006. A correction is forecast for 2007 as producers start refining more metal and demand slows.
Economist Intelligence Unit commodity price forecasts
Economist Intelligence Unit Commodity Price Forecasts - Industrial Raw Materials
price % change
Commodity unit 2004 2005 2006 2007 2004 2005 2006 2007
Aluminum US$/t 1,721 1,805 1,644 1,452 20.5 4.9 -8.9 -11.7
Copper US cents/lb 129.5 143.0 119.0 94.5 61.3 10.4 -16.8 -20.6
Lead US cents/lb 40.3 43.8 37.5 31.3 66.0 8.8 -14.4 -16.7
Nickel US$/lb 6.3 7.4 7.0 6.1 43.9 17.4 -5.3 -12.0
Tin US$/lb 3.9 3.8 3.5 3.2 73.8 -2.1 -8.6 -8.0
Zinc US cents/lb 47.7 60.6 62.5 54.8 24.8 26.9 3.2 -12.4
Rubber US$/t 1,480 1,445 1,417 1,406 20.3 -2.3 -1.9 -0.8
Cotton US cents/lb 62.0 56.7 62.0 64.8 -2.0 -8.6 9.4 4.4
Wool A¢/lb 775.3 740.8 765.0 880.0 -18.5 -4.5 3.3 15.0
Crude oil: Brent dated US$/b 38.5 50.5 46.5 39.0 33.6 31.2 -8.0 -16.1
Crude oil: IEA US$/b 38.1 50.1 46.1 38.7 34.2 31.6 -8.0 -16.1
Crude oil: WTI US$/b 41.8 54.1 50.3 42.2 34.4 29.5 -7.0 -16.1
Crude oil: Dubai US$/b 33.5 42.7 39.0 32.8 25.3 27.2 -8.5 -16.1
Source: EIU World commodity forecasts: Industrial Raw Materials
World commodity forecasts: industrial raw materials July 2005 is available from the Economist Intelligence Unit - Tel: +44(0)20 7830 1007 or direct from our online store at www.store.eiu.com
For further information please contact:
Economist Intelligence Unit
Kona Haque: +44 (0)20 7830 1284
Sheila Allen: +44 (0)20 7830 1010 or sheilaallen@eiu.com About the Economist Intelligence Unit
The Economist Intelligence Unit, the business information arm of The Economist Group, publisher of The Economist. Through our global network of over 500 analysts, we continuously assess and forecast political, economic and business conditions in 195 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. More information about the Economist Intelligence Unit can be found on the Web at www.eiu.com. |
