world commodity prices 2010 to mid-2012 - ucl - universit©

ASSOCIATION D’INSTITUTS EUROPÉENS DE CONJONCTURE ÉCONOMIQUE

- Working Group on Commodity Prices -

WORLD COMMODITY PRICES 2010 to mid-2012

Report presented to the AIECE Autumn Meeting Brussels, October 2010

by Paavo Suni ETLA, Helsinki

The Research Institute of the Finnish Economy (ETLA) Lönnrotinkatu 4 B FIN-00120 Helsinki Finland www.etla.fi

World Commodity Prices 2010 to mid-2012, AIECE Commodity Group Report October 2010

2

Members of the Commodity Group: BIPE Bureau d’Information et de Prévisions Économiques, Issy-les-Moulineaux ETLA Research Institute of the Finnish Economy, Helsinki GKI Economic Research Co., Budapest HWWI Hamburg Institute of International Economics, Hamburg IBRKK Institute for Market, Consumption and Business Cycles Research, Warsaw IfW Kiel Institute for the World Economy, Kiel INSEE Institut National de la Statistique et des Études Économiques, Paris NIER National Institute of Economic Research, Stockholm Prometeia Prometeia S.p.A., Bologna AIECE – Association d’Instituts Européens de Conjoncture Économique (AIECE) or Association of European Business Cycle Institutes: www.aiece.org


3

Contents Abstract.................................................................................................................................4 1 Recent price developments ........................................................................................5 2 Price forecasts until mid-2012 ..................................................................................7

2.1 General economic assumptions ......................................................................................7

2.2 Aggregate price developments......................................................................................15

2.3 Energy raw materials....................................................................................................19

2.4 Metals and minerals ......................................................................................................24

2.5 Agricultural raw materials ...........................................................................................31

2.6 Food and tropical beverages.........................................................................................36

Appendix tables................................................................................................................43

Boxes:

Box 1. Long-term commodity prices: A case of base metals.......................................... 11

Box 2. Commodity prices and speculation ……………………………………………...13

Box 3. The shale gas revolution by Miklós Losoncz, GKI, Budapest………………… 23 Box 4. Iron ore contract prices changed from annual to quarterly prices…………...29

The report and the price forecasts are based on the analysis of and discussion on the individual commodity markets by the members of the Working Group. All possible omissions and mistakes are, however, on the author’s own responsibility. HWWI has made the index calculations and ETLA has produced the graphs. Price index graphs show US dollar prices unless stated otherwise.


4

Abstract The development of world market commodity prices has been very dramatic during the 2000s both in nominal and real terms. Average dollar prices of non-energy commodities almost reached their previous peak in July 2008 by autumn 2010. The real prices of non-energy commodities declined only temporarily as well. The significant price level shift during the first decade of the 21st century is interpreted to largely reflect the rise of the commodity-intensive Chinese economy.

Also energy prices rebounded quickly from the lows in recession, but have stayed well below their record highs reached in mid-July 2008. Crude oil prices have on average fluctuated in the 70-85 USD/tonne range since autumn 2009. Uncertainty about the strength of global economic growth, relatively large inventories, and strong growth in non-OPEC supply to the market are containing price pressures. On the other hand, expected robust demand in Asia, geopolitical risks, and possible OPEC production cuts have an opposite effect. This year, prices of energy raw materials will rise by an average of 27 per cent, following the 37 per cent decline in 2009. In 2011, prices will rise only slightly, although demand is expected to accelerate already during the year.

Steel production increased steeply in the first half of 2010. This was followed by a larger-than-expected decline in production during the summer. Consequently, record high contract prices were reached in the third quarter of 2010. The price of ferrous scrap has fluctuated strongly. Ferrous raw material prices are expected to rise by an average of two-thirds in 2010. Next year, the price will be driven downwards by a rise in the supply of iron ore, while scrap prices still rise slightly. Base metal prices have on average climbed less after the trough than iron ore prices. This year, prices are expected to increase by a little over one-third and stabilise in 2011 seven per cent above their average in 2010.

Agricultural raw material prices will rise this year by an average of 35 per cent and turn slightly downwards next year. Global cotton prices will be boosted in 2010–2011 by growing concerns about declining world stocks. After the surge in wool prices at the end of 2009 and at the beginning of 2010, relatively stable wool production and a moderate increase in consumption should keep wool prices in check. The substitution with more expensive fibres, in particular cotton and synthetic fibres is an upside price risk. The price of natural rubber reached a record high level in August in the wake of a rebound in car production across the world. In the coming quarters, rubber demand will ease with the end to subsidised car purchases in most countries. With stable production the rise in rubber prices will moderate. Pulp prices, which rose rapidly due to some supply problems and strong Asian demand, are expected to decelerate, but stay on a high level.

The prices of foodstuffs and beverages will rise more moderately than the prices of industrial raw materials. Prices will rise by about 10 per cent this year and slightly more next year. After the downward correction from their very high levels in 2007 and early 2008, grain prices have generally been sluggish until mid-2010 compared to most other commodity prices. However, in July 2010 grain prices started to rise, triggered by sharply reduced production expectations. Initially the drastic increase in world market prices was confined to wheat. Coarse grain prices followed in September and October. Rising prices can be explained by tighter world markets. In case of wheat by export restrictions have affected the price rise. Price levels are still some way off the peak levels seen in 2008. Nevertheless, there are increasing risks that low-income countries will again have major difficulties in financing necessary grain imports. Sharply rising prices for staple foods may even lead to another food crisis in the developing world.

Upward risks for the prices relate to a stronger-tan-expected depreciation of the US dollar, which would raise dollar-denominated commodity prices given strong Asian growth. Another risk is faster-than-expected industrial growth in China supported by successful strengthening Chinese domestic demand. Downward


5

risks relate to a stronger-than-expected weakening of growth in industrialised countries, which would weaken growth prospects also in the commodity-intensive developing countries.

1 Recent price developments

Average world commodity prices have risen since last spring somewhat less than forecast according to the dollar-based HWWI index. The dollar assumption of 1.3 dollars per one euro was close to realized levels, and prices continued to strengthen due to stronger fundamentals.

In the second quarter the largest difference in the case of raw materials was related to the introduction of the new pricing system for iron ore with quite unclear guide to the public. The old clear system was replaced with a less transparent one. The change was about only half of the realization due to differences in timing. Prices of non-ferrous metals declined slightly instead of an expected rather strong rise. Prices of food and tropical beverages were forecast quite accurately and prices of agricultural raw materials rose a bit slowly than forecast. Energy prices rose two per cent in the quarter instead of the forecast 9 per cent, when intensifying of the debt crisis in early May in the Euro Area depressed the prices.

In the third quarter, industrial raw material prices on average rose as forecast, though forecast errors in the agricultural price forecast were compensated by metal price forecast errors in the opposite direction. Energy raw material prices decreased slightly.

In general, crude oil prices were fluctuating somewhat below 80 US after a drop in May in the second and third quarters and rose on average less than forecast. Non-energy commodities prices rose on the other hand faster than forecast. Forecast errors were, however, fairly small if the large fluctuation of the material prices is taken into account. For example, if we had used the oil price variation since late 2009 to March 2010 in daily data, we had got the confidence interval of 71 - 78 US dollars per barrel with a mean of around 75 USD/barrel. On the other hand, using the last observations of April 2010 as an oil price forecast had given a forecast of around 81 USD/barrel. The realisations for the second and third quarters were 78.5 and 76.8 USD/barrel and the forecasts were 81 and 85 USD/barrel, respectively. The unexpectedly strong rise of non-OPEC supply is a main reason for the forecast error.

In October, the US dollar prices of commodities have generally risen, driven mainly by the weaker US dollar.

The price levels of commodities have strongly rebounded from the crisis-lows in the first quarter of 2009 on average. Prices of rubber and iron ore even broke the previous already high record reached in mid-2008, before the Great Recession.

Commodity prices did not dive very low in the most severe recession of the world economy in 2008/9. They also rebounded surprisingly quickly from the depressed levels, though the recovery in the industrial countries was sluggish. For example, oil prices have fluctuated in a range of 70 - 80 USD/barrel since mid-October 2009 after plunging well below 40 USD/barrel in December 2008. The price rose above 80 USD in late September 2010 boosted by the weaker US dollar, though oil inventories in the OECD countries are high. We touch upon these issues in two s 11 and 13.


6

Table 1 Spring 2010 forecasts and realisations

Forecast Actual Forecast Actual Forecast Actual Forecast Actual

All commodities* 9 4 2 0 12 13 2 -2 Total excl. energy 8 10 5 9 10 19 5 7 Food total -6 -4 -2 14 -4 4 -2 12 Cereals -7 -6 2 22 -5 2 2 20 Tropical beverages, sugar -9 -7 -2 13 -7 2 -2 11 Oilseeds, vegetable oils -1 1 -4 8 1 10 -4 6 Industrial raw materials 13 15 7 7 16 25 7 5 Agricultural raw materials 6 3 -4 3 9 12 -4 2 Non-ferrous metals 8 -2 3 1 11 6 3 0 Ferrous raw materials 31 62 24 16 35 76 24 14 Energy raw materials 9 2 1 -4 13 11 1 -5

USD/EUR 1.30 1.27 1.30 1.29

* HWWI index, total

EUR terms2010 Q2 2010 Q3

Quarterly percentage changes

2010 Q2 2010 Q3USD terms

0

0.1

0.2

0.3

cvar

1981 85 90 95 2000 05 10

Non-ferrous Metals Prices are Very Volatilecalculated as a moving 12-month averages

Coefficient of variation

0

20

40

60

stdev

Standard deviation AIECE / ETLA


7

2 Price forecasts until mid-2012

2.1 General economic assumptions

The world economy is still suffering from the legacy of the Great Recession in 2008-9. A depression in the style of the 1930’s was prevented by firm policy actions of central banks and finance ministries to save the financial system and stimulate the economy. In this process interest rates were lowered close to zero and so-called unconventional methods were undertaken, i.e. purchases of government bonds and other assets from the financial markets. Governments, on the other hand, in addition to many stabilising measures, introduced massive stimulus packages. These actions resulted generally in strong rises in central bank assets and very large budget deficits and quickly rising public sector debts. The depression was avoided. China and many other Asian economies started to recover strongly already in the second quarter of 2009. The Euro Area and the US followed in the third quarter, but with a smaller acceleration. In spite of the growth period of a year, production in industrial countries is still well below the previous peaks, which means quite low capacity utilisation. This hinders the strengthening of the economy by restricting the investments into new capacity and growth in employment.

In the first half of 2010, the growth in the EU and especially in Germany has been stronger than expected due to a rebound in exports from a depressed crisis-level. The Euro Area growth is very dispersed as debt problem countries, and Greece in particular, are rebalancing their public sectors with drastic measures. On average, growth is expected to hover around 1.5 percent in 2010-11.

The US economic outlook has deteriorated during 2010 as the momentum of the growth has decelerated. Support from inventories and stimulus is losing its strength. Due to the forthcoming congressional elections and low interest rates, the main policy tool available is the continuation of quantitative easing. Deflation fears have strengthened as core inflation turned to -0.2 per cent seasonally adjusted in September. The year-on-year rise of unadjusted prices fell to 0.8 per cent. US growth is expected to be slow during the winter 2010/11 and getting stronger only slowly afterwards. Since the previous GDP peak in December 2007 this is the lowest peak-to-peak growth in post WWII cycles. The same applies to the employment. The central bank is expected to continue quantitative easing to speed up inflation and growth. GDP growth is, however, expected to slow to two per cent in 2011 from 2.5 per cent this year. Industrial production will grow roughly twice as fast as GDP, but construction is feared to remain rather flat.

The world economy is in a divided multi-speed phase, which strengthens the role of China as a growth engine. The Chinese government succeeded in alleviating the effects of the crises-induced export collapse in winter 2008/9 thanks to its massive investment plan or stimulus package, which was introduced in November 9, 2008. The package, about 13.5 per cent of GDP, was planned for two years. Funds worth of 37.5 % of the package were devoted to investments in railroads, roads, airports and electricity, while a quarter of it was targeted to the reparation of damages from the severe earth quake in May 2008. In addition, the government introduced measures like subsidised housing, development of rural areas, environment, hospitals and schools aiming to shift the Chinese domestic demands towards private consumption. The activity was supported with many additional measures outside the plan as well.

The Chinese recovery started quickly after the announcement of the investment plan. Exports have rebounded to a large extent from the lows in winter 2008/9 as world trade has recovered from the


8

panic. Rapid export growth is already slowing as demand in the industrial countries is growing slowly. While reliable Chinese seasonally adjusted data on the national accounts is not available, GDP obviously bottomed out in the fourth quarter 2008. In terms of year-on-year growth rates, Chinese growth accelerated to over 11 per cent in the first half of 2010. The economy and property markets in particular were clearly about to overheat. In order to cool the economy China has named six key industries in which overcapacity was seen as a problem: iron and steel, cement, flat glass, coal, chemical, poly-silicon and wind power equipment industries. Relatively large capacity cuts have followed and partly also pre-empted this announcement, e.g. in steel and coal industries focusing on the outdated and polluting small factories. In addition, the People’s bank, which had squeezed the liquidity mainly by changing banks’ reserve requirement ratios, introduced a bit surprisingly an interest rate hike in mid-October.

Chinese growth is expected to slow from a very rapid growth in the first half of 2010 to 9-10 per cent in 2011. This means growth moderation in Asian developing countries on average, though e.g. Indian growth is expected to continue at around 8 per cent. Slowing average growth means also slowing industrial production growth and construction in China.

The world GDP is growing 4.5 per cent this year thanks to strong activity in developing countries and a generally strong first half of 2010. Next year growth is slowing to four per cent as China’s economy is cooling, growth slows in the US and remains slow in the Euro Area. The relatively robust growth in developing countries reflects strong, but slowing growth in world industrial production.

The greatest risks of the forecast in the short-term are the ability of the US authorities to keep the economy running and success of the Chinese government in cooling the economy smoothly. In a longer term, the current account imbalances of the world economy may worsen if the US and China are not able to orientate their macro policies to correct the current account imbalances in a sustained way. A revaluation of the undervalued Chinese Renminbi vis-à-vis the dollar, in particular, would help alleviate the country’s overheating problems and boost imports. This move is difficult as it would hurt its exporters and slash its huge currency reserves. Depreciation of the dollar would, on the other hand, help the US export and import competing industries and help in correcting the current account deficit, if domestic savings can be raised at the same time. It would also help diffuse the threat of a trade war as there is strong pressure in the US to act against “currency manipulators”.


9

Table 2a Framework Assumptions 2008 - 2011percent change 2008 2009 2010f 2011f

World GDP, volume 3.1 -0.4 4.5 4.0 Advanced economies GDP, volume 0.3 -3.4 2.5 2.0 World, industrial production 5.0 2.0 4.1 5.1 OECD, industrial production -1.8 -11.7 7.0 3.0 China, industrial production 12.9 11.0 15.0 13.0 World trade, volume 2.2 -12.9 16.0 8.0 Export price of Manufactures, in US$ 8.1 -6.3 -0.5 7.9

Exchange rate (US$/EUR) 1.47 1.39 1.35 1.45 f forecast

Source: AIECE WG on Commodity Prices, IMF, OECD, China Statistical Data, CPB, Prometeia

Table 2b World GDP growth by regions

percent change Weight** 1980→09*2004→09* 2008 2009* 2010f 2011fAsia 30.4 4.9 6.7 5.7 3.8 8.5 7.5

- Japan 6.5 2.0 0.0 -1.2 -5.2 2.5 1.5 - China 10.8 9.9 11.0 9.6 9.1 10.0 9.5 - India 4.5 6.3 8.1 6.4 5.7 8.0 8.0 - Nic's 3.8 6.0 3.5 1.8 -0.9 7.5 4.5

Sub-Saharan Africa 4.7 3.4 5.6 5.5 2.6 5.0 5.5 EU27 22.4 .. 1.1 0.8 -4.1 1.5 1.5

- Euro area 15 15.9 .. 0.8 0.5 -4.1 1.5 1.5 CIS Countries 4.4 1.4 4.6 5.3 -6.5 4.5 4.6

- Russia 3.2 .. 4.0 5.2 -7.9 4.0 4.5 Middle East and North Africa 8.5 3.6 4.8 5.0 2.0 4.1 5.0 Latin America 2.3 2.6 3.7 4.3 -1.7 5.5 4.0 North America 23.2 3.3 1.0 0.0 -2.6 2.5 2.0

- United States 21.3 3.3 1.0 0.0 -2.6 2.5 2.0 World 95.8 3.2 3.6 3.1 -0.4 4.5 4.0 **) 2007 GDP at Purchasing Power Parity by the IMFSource: AIECE WG on Commodity Prices, IMF, OECD


10

-4

-2

0

2

4

6

8

%

-4

-2

0

2

4

6

8

%

World Asia MiddleEastand

North Africa

Sub-SaharanAfrica

NorthAmerica

LatinAmerica

EU

2004-09 2009* 2010F 2011F

World GDP growth by regions

AIECE / ETLA

-15

-10

-5

0

5

10

15

%

-15

-10

-5

0

5

10

15

%

80 85 90 95 2000 05 10

Growth of World GDP and World Trade, volumes, %

GDP in the world World tradeGDP in OECD countries AIECE / ETLA


11

Box 1. Long-term commodity prices: A case of base metals

Raw material prices have generally risen very strongly in the first decade of the 2000s. The sharpest rises have been seen in the prices of industrial raw materials. Nominal prices have generally risen to new records, well above the old ones. Prices have risen markedly also in real terms. Base metals are a good example.

The prices of base metals have risen 3.2-fold in nominal terms from 2002 to 2008 according to the annual Grilli-Yang index. In real terms the respective rise was 2.4-fold. Using the HWWI index and monthly data the changes from the bottom in 2001 October to July 2008 were 3.6-fold in nominal terms and 2.3-fold in real terms.

The strong development has naturally caused a lively debate on the reasons for this strong change. Some stress the role of speculation, while others claim a demand shock caused the rise of China in particular.

Cuddington and Jerrett (2008) used a principal component analysis to identify the past super cycles using data on six and three LME metals; aluminium, copper, lead, nickel, tin, and zinc. They identified three past cycles since the 1870s. The first one took place in approximately 1890-1911and the next two in 1930-51 and 1962-77. The fourth started in 1999, which obviously had a set-back in the publication year 2008.

There is no general agreement on super cycles in general and the cycles identified by Cuddington and Jarret do not look very convincing if applied to long-term index data and using manufacturing export prices as the deflator (they use US consumer prices).

However, the most recent strong rise in prices looks very much demand driven as argued by Roache (2010). The rise of China has been raised by commodity-intensive industrial production. Their commodity-intensive growth is expected to continue to be strong and the (industrial) commodities are expected to continue to be expensive. This has triggered a kind of a demand shock, which has increased the price level of the commodity prices as the marginal costs for production as less metal rich sources are satisfying the marginal demand. Normally in the past, the opening up of new mines, enlarging the old ones, advances in mining and metal using technologies and substitution have pushed the price downwards after a rather long lag.

Some argue that the rise of speculation (see box 2. on page 13.) is an important reason for the price rise. We regard the demand shock with a sluggish response of supply as a basic reason for the price level change, though strong variation is at least partly due to changes in speculator’s attitudes. This is consistent with a relatively low decline in the prices during the recent crisis and a subsequent strong rise. As the strong growth in Asia is expected to continue for several years, the prices will stay expensive, though technological advances may ease the cost pressure.

Daniel Jerrett and John T. Cuddington (2008), Broadening the Statistical Search for Metal Price Super Cycles to Steel and Related Metals. Resources Policy 33 (4), (2008)

Shaun Roache (2010), Have Metals Become More Scare, and What Does Scarcity Mean for Prices? A box in World Economic Outlook by the IMF, October 2010.


12

0

50

100

150

200

250

Ind

0

50

100

150

200

250

Ind

1900 10 20 30 40 50 60 70 80 90 2000 10

Real Non-energy Commodity pricesGrilli and Yang Index, 1977-79=100

Non-energyBase metals Grilli & Yang / ETLA


13

Box 2. Commodity Prices and Speculation

The use of financial derivatives of commodities has risen very quickly in the 2000s roughly at the same time, when commodity prices have risen sharply. Commodity prices rose in nominal terms to unprecedented records and became very expensive also in real terms (see 1 on page 11). Oil price rose at its highest close to 150 USD/barrel (Brent), while the price had fluctuated around 20-25 dollars in the beginning of the millennium. The lively debate on the reasons for this rise emerged. Some observers stress the increasing role of financial investors, who generally buy the contracts. Others see the reason in the very rapid rise of commodity-intensive emerging markets, China in particular. The latter, a fundamental explanation regards rise of financial investments mainly as a by-product, when rapidly rising prices draw the attention of financial investors. Theoretically, one of the founding pillars for these rising financial investments is presented in a paper by Gorton and Rouwenhorst (2004). Commodities are explained to have the same return as equities with similar risk premiums and negative correlation with equities and other asset classes. In this box, we try find out with rather new publicly available weekly data, whether the price peak of crude oil in July 2008 was associated with the behaviour of financial investors or rather with a fundamental shift in demand i.e. whether the price has drifted away from its fundamental value due to rising financial investments into commodity derivatives and whether the drastic decline in the price was a burst of the bubble. In two attached charts the development of financial investments is described. In the first chart oil price (WTI) and the number of trade contracts are compared since mid2006, while in the other chart the oil price is compared with the development of positions of financial traders classified by the US Commodity Futures Trading Commission (CFTC).

The data reveal a marked rise in financial investments measured by number of futures contracts (open interest) as well as some co-movement with the oil price in certain periods. The rise in open interests peaked already in the middle of May 2008, i.e. 1.5 moths before the peak of the oil price and started to rise after the panic started in mid-September 2008. Open interests trended downwards after November 2008 till May 2009 and have since fluctuated like the oil price. Regarding the developments of positions, commercials have been net sellers of futures as one could expect as they are expected to use markets to guarantee the future income. ‘Others’ have also had net short positions and ‘non-reportables’ have been rather neutral. Managed money funds including hedge funds and swap traders have from time-to-time had large net long positions i.e. they have been betting on the rise of a price. The development of the position of the latter does not show any strong movements around the peak or collapse of the price rise in 2008.

In order to get more insight in the effect of traders, we applied the Granger causality test between the oil price and the positions of six groups of traders. When the whole data and futures and option positions are utilised, oil Granger-caused position changes of both commercials and swap traders. There was no statistical significance with other investors. In the subset of data till the peak of oil price in mid-July 2008, oil price Granger-caused swap traders positions, while the other causes were not statistically significant. ‘Commercials’ Granger-caused other investors except money funds and ‘others’. The tests do not support the view that increasing fund activity is the reason for the oil price rise.

A natural argument of low stocks in favour of fundamentals is weak as inventories are difficult to measure. An argument in favour of fundamentally driven industrial commodity prices is the fact that non-traded commodity prices like coking coal and iron ore prices have risen also strongly. A bubble did not obviously burst in crises. Non-energy prices have even returned back to their high levels before the crisis on average. De Meo E, Suni P (2009), Speculation and Commodity Prices. ETLA. Suhdanne 1/2009. Domanski D., Heath A. (2007), Financial investors and commodity markets. BIS Quarterly Review, March. Gorton G, Rouwenhorst K. (2004 ), FACTS AND FANTASIES ABOUT COMMODITY FUTURES. Yale ICF Working Paper No. 04-20. Yale School of Management.


14

Net Long Positions of Traders in NYMEX

-300 000

-200 000

-100 000

0

100 000

200 000

300 000

13.6.06 13.12.06 13.6.07 13.12.07 13.6.08 13.12.08 13.6.09 13.12.09 13.6.10 13.12.100

25

50

75

100

125

150

Commercials Swap tradersManaged money incl. hedge funds OthersNon-reportable wti

Number of contracts USD/barrel

A Price Change of Selected Exchange and Non-exchange

Commodities since October 2001

0

100

200

300

400

500

600

700

800

Brent Copper Nickel Zinc Coking coal Iron ore

to 2008/7 to 2010/9

Non-exchange commoditiesCommodities trade in exchanges

Open interest in NYMEX and the price of WTI

900 000

1 400 000

1 900 000

2 400 000

2 900 000

3 400 000

3 900 000

3.1.06 3.7.06 3.1.07 3.7.07 3.1.08 3.7.08 3.1.09 3.7.09 3.1.10 3.7.100

25

50

75

100

125

150 Open interest, futures Open interest, futures and options WTI, scale on the right


15

2.2 Aggregate price developments

The world commodity price development has been very dramatic during the 2000s. The average dollar prices of energy and non-energy commodities were 4.1-fold at their record in July 2008 compared to the average of the year 2000 and 5.2-fold, if compared to the trough in October 2001. The respective changes for energy raw materials were 4.8 and 6.2-fold and for non-energy 2.7 and 3.2-fold. After the peak, prices started decline and they collapsed after the beginning of the Great Recession in September 2008. The decline was less than one could have expected, given the worst global recession since 1930s. Prices also started to recover quickly from the average trough in the end of 2008.

Price developments were closely related to two important issues. First, strong growth of China since 1978 made China one of the global economic powers by the beginning of 2000’s with a GDP share rising from 2.2 per cent in 1980 to about 13 per cent in 2009. Second, the strong rise of the commodity prices was relating to the strong rise of the investment activity and it has also fluctuated with similar profile to prices. The timing has, however, been different.

Both the rise of China and new investment activity have obviously affected commodity prices, but we think that the recent multifold rise of commodity prices reflect to a large extent the rise of commodity-intensive Chinese economy. The role of speculation has been to discover the proper price. For example, the peak price of the crude oil in July 2008 was probably mainly driven by fundamentals. This is supported by low OECD inventories at the time. Now, inventories are high and the current price level rests much on the expected rise in demand. (See the box 2. on 11.)

Energy prices, which declined strongly in the beginning of the recent recession, rebounded also quickly, but stayed well below the records in mid July 2008. Prices have on average fluctuated on the level prevailing in September 2007 since autumn 2009. The pricing system of coking coal changed in the crisis from annual contracts to quarterly contracts similar to what happened in the case of iron ore. Prices of energy raw materials will rise this year by 27 per cent after a 37 per cent decline in 2009. Next year prices rise only slightly, although demand is expected to accelerate already during the year.

Crude oil prices rose quickly from their crisis-induced lows in the end of 2008 and fluctuated in a range of 70-80 USD/barrel in mid-October in 2009 until end of September 2010, when weakening of the US dollar pushed the price above 80 USD/barrel. Crude oil price prices are high, although also inventories in the OECD countries are high as well. Inventories rose strongly in the beginning of the recession in the end of 2008 and have since fluctuated on a high level underpinned by the expected strengthening of demand and increased fund bets on higher prices. The demand growth is expected to be sluggish in developed countries, while it grows fast in Asian developing countries, in the Middle East and in the former Soviet Union countries, e.g. by the International Energy Agency (IEA). On the other hand, spare capacity in OPEC production is high and oil production is rising surprisingly strongly in non-OPEC countries in particular. Currently several factors are keeping a lid on oil prices. On the one hand, there is considerable uncertainty regarding the strength of the world economy. A low capacity utilisation in developed countries adds to the uncertainty of demand growth high as does the timing of forthcoming necessary reductions of fiscal stimulus given large public imbalances. Coal prices declined this summer, reflecting weakening energy and steel consumption growth in China. The moderate demand outlook and mining and/or transport infrastructure capacity additions cool the markets and the rise of steam coal price will decrease from 38 per cent (South African coal) to 4 per cent this year. Coking coal markets will soften less than steam coal markets due to the growth in Chinese and Indian imports.

Steel production started to rise already during 2009 as fiscal stimulus supported steel demand. The rise took place first in China, but later also the EU and the US, while Japanese demand and production recovered. Production rose strongly in the first half of 2010, but stalled after that. One reason is a normal seasonal decline in production in the quarter due to holidays in many countries. The other


16

reasons related e.g. to Chinese attempts to cool its very strongly growing economy and to ease pollution by closing the most inefficient factories. These actions affect scrap demand less than ore demand as China uses to a large extent iron ore-intensive blast furnaces. The price of scrap has, however, declined from May 2010 to August by 100 dollars to 530 dollars per ton. After that the price has somewhat recovered. In the forecast, it is assumed that demand for scrap is rather weak during the winter as steel production is not expected to rebound strongly from the weak third quarter.

Assuming the continuing but sluggish recovery in the industrial countries, the price of scrap is expected to rise only moderately after a rapid rise in the first half of 2010. Iron ore contract prices on the other hand reached a new record price in the third quarter 2010. The price was achieved in a new quarterly pricing system after the annual system was abandoned in April 2010. Prices recovered thanks to the recovery of steel production from the slump sparked by the global crisis. Prices are expected to fluctuate strongly, but heading downwards as iron ore production rises and the expansion of steel production stabilises. Ferrous raw material prices will rise by two thirds in 2010. Next year the price will be driven downwards by the rise in the supply of iron ore. Prices of base metals peaked earlier than those of crude oil. The difference in timing reflected the specific market characteristics as nickel peaked in May 2007, copper in April and tin in May 2008. Prices of base metals reached their troughs in the end of 2008 or early 2009. Base metal prices have on average climbed less from the trough than iron ore prices. Base metal prices are expected to advance this year a bit more than one third. Prices will stabilise next year and stay on average seven per cent higher than in 2010.

Agricultural raw material prices will rise this year on average by 35 per cent and decline next year slightly. Global cotton prices will be boosted in 2010-2011 by growing concerns about declining world stocks, tough the production-consumption gap is forecast to decline sharply. Production is, however, forecast to increase, and consumption to rise at a more moderate pace, which should push cotton prices lower. After the surge in wool prices at the end of 2009 and at the beginning of 2010, relatively stable wool production (interrupting a downward trend) and a moderate increase in consumption should not increase significantly the pressure on prices. The risk of an economic slowdown in the United States and in Europe is a downside risk, but substitution effects with other fibres, in particular cotton and synthetic fibres whose prices are set to rise, constitute an upside risk. Wool production is stabilising. World wool production is forecast to remain almost unchanged at 1.104 Mt this season (compared with 1.109 Mt in 2009-2010) after several years of decline. Natural rubber prices have bounced back in 2010 from their low levels of last year. They reached a record high level in August and September, with an increase by more than 60 per cent y/y, in the wake of a rebound in car production around the world. Thus scrappage subsidies are indirectly one of the main factors of the stronger demand in rubber. In the coming quarters, rubber demand will ease with the end of the car subsidies in most countries, and production should remain stable, so that the rise in rubber prices should slow down. The strong price rise of pulp in 2010 was caused by several supply disruptions. The market situation has now normalised and a price will drift downwards, tough it is supported by the Asian demand.

Food and beverages’ prices will rise more moderately than the prices of industrial raw materials. Prices will rise this year about 10 per cent and next year slightly more. After the downward correction from the dramatically elevated price levels during 2007 and early 2008, grain prices until mid-2010 have generally been sluggish in an environment of otherwise mostly sharply recovering commodity prices. However, in July 2010 grain prices started to spike up triggered by sharply reduced expectations for production. While initially the drastic increase of world market prices was confined to wheat, in September and October coarse grain prices followed. With a view on market fundamentals, the rising price can be explained by tighter world markets, in the case of wheat exacerbated by export restrictions of important producer countries. In addition, upward pressure on prices stemmed from a progressively devaluing US dollar and from speculative buying by financial investors. Although price levels are still some way off the peak levels seen in 2008 – especially in the case of rice the price of which still has hardly risen –, risks are increasing that low income countries again will have major


17

difficulties to finance necessary grain imports, or sharply rising prices for staple foods will lead to another food crisis in the developing world.

Real prices of raw materials as nominal prices have on average risen back to the record levels from the recession induced bottom, which reflects the strong demand especially in Asia.

There are upward and downward risks in the economy. Upward risks relate to a strong depreciation of the US dollar, which would elevate the prices given strong Asian growth. Another risk is more rapid than expected industrial growth of China alleviated by a strengthening Chinese domestic demand. Downward risk relates to the stronger-than-expected weakening of the growth in industrial counties, which would weaken growth also in the developing countries.

0

100

200

300

400

Ind

0

100

200

300

400

Ind

80 85 90 95 2000 05 10

Raw material pricesHWWI index, 2000=100

Energy raw materialsTotal index except energyTotal index

AIECE / ETLA

70

100

130

160

190

220

250

Ind

70

100

130

160

190

220

250

Ind

90 92 94 96 98 2000 02 04 06 08 10 12

Non-energy prices in USD’s and EurosHWWI index, 2000=100

EuroUSD

AIECE / ETLA


18

Table 3 Aggregate development 2008-20011Commodity indices in US$ termsIndex values 2000=100 and % change 2008 2009 2010 2011

All commodities 316 210 270 288 33 -34 29 7

Total excl. energy 236 184 242 262 13 -22 32 8

Food total 233 202 221 248 34 -13 9 12

Industrial raw materials 237 176 252 268 6 -26 43 7

Agricultural raw materials 151 125 169 167 -3 -17 35 -2

Non-ferrous metals 242 172 232 250 -11 -29 35 7

Ferrous raw materials 482 338 547 622 61 -30 62 14

Energy raw materials* 354 222 283 301 42 -37 27 6

Crude oil 344 218 277 295 37 -37 27 7

MemorandumIndices in euro terms 2008 2009 2010 2011

All commodities 195 137 186 183 23 -30 35 -1

Total excl. energy 147 121 167 167 4 -17 38 0

Food total 145 134 153 158 25 -8 14 3

Industrial raw materials 148 116 174 171 -2 -22 50 -2

Agricultural raw materials 94 83 117 106 -10 -12 41 -9

Non-ferrous metals 150 113 160 159 -18 -25 42 -1

Ferrous raw materials 301 223 380 396 49 -26 70 4

Energy raw materials* 218 145 195 191 31 -33 34 -2

Crude oil 212 143 190 188 27 -33 33 -1

* Steam coal and crude oil


19

2.3 Energy raw materials

After a period of stability for crude oil prices fluctuating in a 10-dollar range since late 2009, crude oil is now trading at over 80 US dollars per barrel, triggered by the weaker dollar. However, the world oil balance is still in surplus. Ample onshore and offshore stocks have prevented prices from rising towards 90-100 USD/bbl confirming the oversupply in the markets. The global recovery is still too weak to absorb the excess supply. Currently several factors are keeping a lid on oil prices. On the one hand, there is considerable uncertainty regarding the strength of the world economy. A low capacity utilisation in developed countries adds to the uncertainty of demand growth high as do the timing of forthcoming necessary reductions of fiscal stimulus given large public imbalances. The demand growth is expected to be sluggish in developed countries, while it grows fast in Asian developing countries, in the Middle East and in the former Soviet Union countries, e.g. by the International Energy Agency (IEA). On the other hand, spare capacity in OPEC production is high and oil production is rising surprisingly strongly in non-OPEC countries in particular. Anaemic oil product consumption and strong supply have therefore kept inventories significantly above historical highs.

Oil prices endured the summer driving and hurricane seasons almost unaffected. The US gasoline demand was flat during the third quarter this year, growing less than 1% y/y. Low growth is worrying as gasoline consumption in 2009 was very depressed. With low demand and high fuel stocks, refiners are hard pressed to defend their margins. Crude oil inventories reflect a bearish impact of strong production in spite of the expected seasonal strengthening of crude oil prices.

World oil demand is currently affected by weak growth in developed countries and a slowdown in Chinese consumption. The Chinese government has switched to a more restrictive economic policy in an effort to cool the housing sector. If the Chinese slowdown persists during the winter, it would imply a weaker global oil demand as the OECD demand is expected to rise only moderately.

The real surprise in recent months has been the strong rise of non-OPEC supply. The US and Russia are sustaining a reversal in a declining trend of production. However, sustainability of the unexpectedly strong production growth is uncertain. In the US, the growth of supply comes mainly from non-conventional oil (NGL and biofuels) production. A tighter regulation on drilling activity could result in lower crude production in the coming months, which would affect Gulf of Mexico output more than observed so far. On the other hand, Russia’s expansionary output is related to fiscal incentives to raise the somewhat reduced oil exports to support fiscal balances.

We forecast a quite stable path for oil prices. We see current high stocks and relatively large OPEC spare capacity serves as a buffer against small supply disruptions. The global oil balance will show a surplus also in 2011 after prices came under pressure in 2010. Risks are on the downside, as a double-dip scenario has a relatively high probability. On the other hand a weaker-than-expected US dollar would boost the dollar price of crude oil more than expected. OPEC has expressed views that the price range of 70-80 US dollars per barrel is appropriate and even somewhat higher prices do not “hinder the (global) growth”. OPEC decided to keep its quotas unchanged in its October 2010 meeting and considers including Iraq back in the quota system.


20

0

20

40

60

80

100

120

USD

0

20

40

60

80

100

120

Euro

90 92 94 96 98 2000 02 04 06 08 10 12

Crude oil prices (Brent) in USD’s and Euros

USD EuroAIECE / ETLA

Coal prices declined this summer, reflecting weakening energy and steel consumption growth in China. This was a consequence of diminishing effects of the fiscal stimulus package as well as government measures to curb property speculation and restrain credit growth, which were accompanied by surging hydroelectricity supplies, higher output of domestic coal and rising stockpiles at the Chinese thermal power plants. Against this background, Australian steam coal prices decreased from the year’s peak of over US$ 100 USD/mt in April-May to US$ 86 USD/mt in some quotations in August as compared with this year’s reference contract price of 98 USD/mt. At the same time coking coal was priced on a spot basis at less than US$ 200/mt, i.e. substantially below the reference contract price of US$ 225 USD/mt in deliveries from Australia to the Japanese steel mills, settled for the 3rd quarter of 2010; consequently, the 4th quarter reference price was reduced by 7 per cent, to US$ 209/mt.

Recently steam coal prices firmed to a 95 USD/mt at the beginning of October and the upturn could be maintained in the coming months, supported by a pick-up in seasonal demand and usually adverse effects of the rainy season on deliveries from Indonesia and Australia, the two leading coal exporters in the world. However, the rate of possible price increases in the projected period till mid-2012 should be subdued due to the expected demand slowdown in some crucial coal importing countries and regions, which would be accompanied by the greater export potential resulting from the planned completion of a number of infrastructural projects in the major coal exporting countries.

According to the Australian ABARE-BRS, the world steam coal trade volume will increase by 3 per cent in 2010, i.e. at a rate of 1 percentage point lower as compared with last year. This year’s imports have been supported by strong demand from Japan, South Korea and India. The Chinese steam coal imports, after a almost 2.5-fold hike in 2009, will rise by a more modest 17 per cent. On the other hand, the European demand remains weak, reflecting low electricity consumption and competition from relatively cheap natural gas. The EU-27 steam coal imports are to decrease by 15 per cent in 2010, mainly as a consequence of declining deliveries to the UK and Spain. The projection for 2011 indicates the growth rate of the world steam coal imports of 5 per cent, i.e. slightly higher than that expected this year, though with reversed demand patterns in the two main importing regions – Asia and Europe. After a strong rise both in 2009 and 2010 (by 12 per cent annually), the Asian import growth rate will diminish to only 3 per cent in 2011, reflecting expected flat imports to Japan, South


21

Korea and Taiwan as well as a further decline in the Chinese imports growth rate (to 2 per cent) and a slowdown in the imports to India (from a 40 per cent rise in 2010 to 13 per cent in 2011). At the same time the European demand will recover after falling in 2009-2010, with the EU steam coal imports increasing by 10 per cent in 2011. As for the coking coal segment of the market, the ABARE-BRS projects a decline in the world import growth rate from 14 per cent expected this year to 8 per cent in 2011. Lower import growth is to be witnessed by the EU, Japan, South Korea and Brazil, and the world demand will be supported mainly by China and India.

On supply side, important coal mining and/or transport infrastructure capacity additions can be observed in such countries as South Africa, Russia and Australia. The completion of the expansion project at the Richards Bay coal terminal (Phase V) will enable a substantial rise in South African steam coal exports next year. Russia has been enlarging the capacities of its coal terminals in the east coast, increasing its export potential to Asian markets, and port capacity expansion in New South Wales has been accompanied by commissioning of a number of new coal mining projects in Australia. Moreover, relatively high prices should support increased deliveries from other producers (e.g. steam coal exports from Colombia and coking coal exports from Canada).

In view of the above demand and supply outlook, AIECE projects that the annual growth rate of Australian steam coal price will moderate from 33 per cent this year to only 1 per cent next year. Slightly higher rates of 38 per cent and 4 per cent respectively are forecast for South African steam coal as the expected recovery in the European import demand should narrow the gap between the Pacific and the Atlantic price levels. The price of coking coal will rise by 11 per cent in 2010 and by 7 per cent in 2011.

The Western European monthly average import price of natural gas remained practically unchanged in the first quarter of 2010. It dropped by 15 per cent from March to April 2010, but the change in the price formula (the inclusion of the UK and a spot price component) might have played a role in the decrease. Nevertheless, the price stagnated in the second quarter. In the third quarter a minor price increase was recorded.

Following a three per cent increase in 2008, in terms of year-on-year figures apparent or gross consumption (indigenous production plus imports minus exports and changes in stocks) of natural gas in OECD Europe was down by 5.3 per cent in 2009 due to the fall of demand in the business sector as a result of the global economic crisis. In the first half of 2010 apparent consumption grew by 10.6 per cent, indicating the impact of the recovery. In the first half of 2010 both exports and imports of natural gas grew dynamically in OECD Europe.

Taking into account the ongoing global recovery that may slow down somewhat in 2011, the substitution from coal and nuclear energy to natural gas and allowing for growth in Russian and LNG supplies, the oversupply seems to be disappearing and it looks like European demand and supply may become imbalanced by 2011/2012. Therefore, the European natural gas price is likely to stay flat in the fourth quarter of 2010 and to set to increase somewhat more sharply in 2011 and particularly in 2012.

As far as the other determinants of the natural gas market - sometimes beyond our forecasting horizon - are concerned, recently the UK has been a big importer of LNG. These imports of LNG facilitated increased exports to continental Europe suggesting that companies there have taken benefits from the growing LNG import capabilities of the UK. This is now reflected in how Europe imports its LNG which includes more distant suppliers such as Trinidad & Tobago. Some years ago Algeria


22

experienced a fatal accident at one of its LNG plants that reduced its export capabilities. This explains the recent years’ decline in European LNG imports from Algeria. Qatar is emerging as the biggest supplier of LNG for Europe.

Nevertheless, the shale gas revolution shifted LNG demand from the US to Europe with a decrease in LNG prices.

With the glut of natural gas that developed in 2009 as a consequence of the global economic crises as well as the emergence of market hubs in the big, north-west continental markets, partly fuelled by the increase of LNG supply, an alternative, more transparent price reference started to develop. It provides a much better reflection of market conditions than long-term contracts based on oil prices above 80 USD/barrel. Hub prices have increased their share in long-term contract indexation with the reduction of the share of oil products. The determinants of the prices of oil that is basically a transportation fuel are different from those of natural gas that is stationary fuel. The transition to hub-based prices from less flexible and less transparent contract prices seems likely to continue.

Table 4 Energy raw materials (US$ terms)Commodity 09/3 09/4 10/1 10/2 10/3 10/4 11/1 11/2 11/3 11/4 12/1 12/2 2008 2009 2010 2011

Energy raw 243 268 278 284 273 296 300 297 302 303 303 303 354 222 283 301 materials* 14 10 4 2 -4 8 1 -1 2 0 0 0 42 -37 27 6 Crude oil 241 266 272 277 267 291 294 293 298 297 296 297 344 218 277 295

15 10 2 2 -3 9 1 0 2 0 0 0 37 -37 27 7 Steam coal 267 290 355 376 353 365 379 360 360 379 398 378 488 271 362 370

7 8 23 6 -6 3 4 -5 0 5 5 -5 97 -45 34 2 Coking coal 264 264 264 409 460 427 427 409 409 429 429 450 510 351 390 419

0 0 0 55 13 -7 0 -4 0 5 0 5 144 -31 11 7 Natural gas 179 202 229 198 214 216 218 220 223 225 233 246 347 226 214 222

-16 13 13 -14 8 1 1 1 1 1 3 6 57 -35 -5 3 * Crude oil and steam coal only


23

Box 3. The shale gas revolution by Miklós Losoncz, GKI, Budapest

Shale gas is defined as natural gas from shale formations. The shale acts as both the source and the reservoir for the natural gas. Older shale gas wells were vertical while more recent wells are primarily horizontal and need artificial stimulation, like hydraulic fracturing, to produce. Only shale formations with certain characteristics will produce gas. Shale gas is just one of the three unconventional gas technologies. Coal-bed methane, or CBM, is a form of natural gas extracted from coal beds, while tight gas comes from sandstone. In terms of reserves, shale gas is comparable with high-pressure gas and is present everywhere, but the questions is whether the shale gas extraction technology can advance to a commercially economic level.

Environmental concerns, too, are significant. Under the present technique, water, sand and chemicals are pumped into rock formations under high pressure. Environmentalists are concerned the method could contaminate drinking water supplies. The exploitation of shale gas also requires the drilling of a lot of wells close to each other, which leads to a more significant ecological footprint.

Shale gas now accounts for up to 20 per cent of US natural gas production. The US possesses a resource base of 1,836 Tcf (trillion cubic feet) of natural gas. Production of shale gas is expected to increase from 1.4 Tcf in 2007 to 4.8 Tcf in 2020. According to the Department of Energy shale gas production potential of 3 to 4 Tcf per year may be sustainable for decades.

It is likely to take longer for shale gas drilling to increase in Europe than it took in the US, purely because there are not enough of the land drilling rigs in Europe that are essential for shale gas projects. Developing shale gas in Europe is seen by many experts as a means of reducing the continent's dependence on Russian imports. Nevertheless, these expectations are too optimistic and exaggerated.

Some experts think shale gas is even more important for Ukraine, a country without gas resources of its own but rich in coal. Although there has not been yet enough evidence to prove it, according to recent estimates Poland alone could have 3 trillion cubic metres of potentially recoverable reserves of shale gas, enough to satisfy domestic demand for more than 200 years. Europe's gas reserves could jump 47 per cent if Poland's gas reserves are confirmed. Poland consumes 14bn cubic metres of gas a year and imports more than 70 per cent of it from Russia. Poland could decrease its dependency on Russia and might even turn into a gas exporter. The area where shale gas is expected to be found stretches from the Polish Baltic Sea in a wide diagonal across the country to its south-east. In fact, between 2007 and 2010, Poland granted 58 concessions for shale gas development to US companies such as Exxon Mobil and ConocoPhillips. The first potential production is likely to be due only in 10-15 years.

Sources: Konstantin Rozhnov: Should Gazprom fear shale gas revolution? April 8th, 2010. http://news.bbc.co.uk/2/hi/8609131.stm Facts about shale gas. February 1st, 2010. http://www.api.org/policy/exploration/hydraulicfracturing/shale_gas.cfm Shale gas not yet game-changer for Europe. 2010, June 8th, 2010 http://www.euractiv.com/en/energy/shale-gas-not-yet-game-changer-europe-news-494959


24

2.4 Metals and minerals

The price of aluminium fell below 2,000 USD/mt at the start of September to return to its level of last May. The LME stock is down slightly at 4.44 MT. Prices on the SHFE remain higher at 2,200 USD/mt.

Over the first seven months of 2010, production increased by 4 per cent compared with 2009, with different situations by areas: American production is stable, European production including the CEE is growing, as is that in the Middle East and China, but production in other Asian countries is diminishing. China has over-production with growing exports. The economic balance of the Chinese sector is worrisome due to over-production, sales at a loss, expensive energy prices, and a wish by the public authorities to shut down ageing facilities.

In Europe, the shutdown of capacities has been decided or is in the discussion phase following the threat which the European Commission is imposing on the subsidies or advantages awarded to producers relating to electricity prices in Greece, Italy, Spain and Germany. It is worth pointing out that 30 to 40 per cent of the production costs of an aluminium bar are generated by the electricity cost. It is estimated that one million tonnes of production capacities are threatened if these subsidies are withdrawn. For example, the Alcoa Fusin site in Italy (214 KT) closed, because it had a chronic deficit.

Faced with the lacklustre nature of the American market, producers are reducing their capacity growth ambitions by approximately 2 to 3 per cent per year globally. The automotive and construction sectors should pick up gradually in 2011 in the United States after a difficult second half of 2010. China should continue its growth in 2011, but at a slower pace than in 2010.

After the correction, which we expect at the end of 2010, prices will probably start to climb again in 2011.

After falling to 6000 USD/tonne in June, the price of copper has quickly risen over 8000 USD/tonne at the beginning of October. Tightening fundamentals, a high level of liquidity and the return of risk appetite fuelled an upward trend in copper prices. According to the World Bureau of Metal Statistics, in the first eight months global consumption increased 6per cent y/y. China’s consumption remained relatively high on 5 million tonnes (+5per cent y/y), despite the government efforts to cool the domestic housing sector, one of the main end-users. Moreover, in the developed countries refined consumption improved given restocking across the copper industry and a soft recovery of economic growth. Among the OECD countries, the European Union and Japan (+15 per cent and +30 per cent, respectively) were the best performers. On the other hand, the US consumption showed a slower growth rate (+5 per cent) as a consequence of the weak infrastructural and residential market. Hence, the world copper consumption contribution is confirmed to be robust.

In the same period, global copper production rose about 5per cent, with Chinese refined production growth more than offsetting output losses. After the shortfall in refinery output in the first half of 2010 - the major copper miners reported drops in their output as a consequence of low ore grade at some of the largest mines and other disruptions: rainfall in Indonesia and closure for maintenance operations - Chinese copper producers have finally reacted to satisfy an increasing internal demand. Strong domestic consumption and lower concentrate and scrap prices – due to higher availability – fuelled domestic refined output and increasing input demand (+10 per cent in the same period). Despite accelerating domestic production, strong demand spurred a deficit in theglobal copper market. LME


25

warehouse inventories are indeed currently 30per cent lower with respect to the beginning of 2010. Strong physical demand is also confirmed by increasing cancelled warrants (a proxy for physical demand) which remained high in terms of total registered LME stocks (7 per cent in October).

In the short run strong fundamentals should maintain their support for copper prices. Supply is struggling to keep up with demand and inventories are falling. Moreover, a weak dollar is expected to be another bullish factor. In Q42010 we expect a further increase with the price remaining close to 8000 USD/tonne. In 2010 copper prices should average around 7400 USD/tonne (+42 per cent with respect to 2009), whilst in the first half of 2011 a slowing industrial production growth should allow prices to lose some ground.

The price of nickel established itself at 21,040 USD/mt on 1 September with stocks continuing their fall, reaching 117 KT in August.

The production of stainless steel underwent a very significant catching-up process during 2009 and at the start of 2010. The rates of growth in production vary by zone concerned in the first quarter from 37 to 61per cent year-on-year, with Europe the most dynamic.

This sharp rally is reflected in a rise in demand for nickel and chrome, whereas production cannot keep up with this pace; the correction is therefore taking place for the time being through the consumption of the previously built-up stock. The LME stock is therefore down by 30 per cent since February. Over 2010, INSG predicts a slight surplus in the metal whereas other players assert that the market is already experiencing a deficit given this very strong growth in demand.

The forecast of a weakening of growth in emerging countries (China accounts for 36 per cent of global demand for nickel) and the uncertain American situation encourages us to moderate growth in demand whereas new capacities such as the Goro processing plant in New Caledonia should be implemented. The overheating of the first half of the year should therefore slow down and lead to a decline in the prices.

However, a fall in the dollar could prompt financial intermediaries to adopt long positions and support prices.

The price of zinc was listed at 2,147 USD/mt on the LME on 2 September with a regularly increasing stock that exceeds 622,800 tonnes.

In the first half of 2010, the majority of western countries saw a recovery in the growth of their demand, especially Japan and Korea, which are large consumers. China also supported demand. It should be remembered that it consumes 40per cent of the zinc in the world. Demand was up by 20 per cent in total over the first half of 2010. On the production side, this rise was 17 per cent thanks to emerging countries, but also developed countries (Canada, US).

The supply/demand balance measured on the scales remains at a surplus but is gradually declining. The substantial stock makes it possible to cater to this demand at present.

The slowdown in emerging countries and weak American growth should limit the increase in demand. On the supply side, the recent growth in production showed that producers could respond relatively quickly to surpluses in demand. The supply/demand balance should slacken by the end of 2010 with an upward orientation, which should only pick up in 2011.

A further weakening of the dollar against the euro would raise the dollar price of zinc as well as dollar


26

prices of other commodities.

The spot price of lead was 2,127 USD/mt on 2 September. The stock grew steadily at 191,800 tonnes. Paradoxically, prices resumed their progress while stocks have continued to rise.

Over the first half-year, production increased by 0.7 per cent and demand by 1.6 per cent compared with the first half of 2009. Demand rose in Germany, Japan, and in Korea, but it fell in China. China shut down approximately 500 KT of capacity in July, and its demand is down despite a growing car market. Several indicators show that China continues to overproduce lead. A surplus of metal is expected in the market in 2010.

The upward technical correction through restocking should decline for western countries while Chinese markets appear to be oversupplied. If the second part of the year sees a slowdown, the lead surplus will probably expand in the market, which should prompt a stabilisation or fall in prices, excluding the exchange rate effect.

In 2011, the recovery in growth should gradually boost demand and put production capacities under pressure again, leading to a rally in prices.

Tin showed an impressive performance, with its price up 65 per cent since the beginning of 2010. During Q3 the price increased about 16 per cent on concerns about fundamentals: increasing global demand and supply constraints.

The global tin market is affected by a chronic supply shortfall which has worsened in recent years. Production started to suffer in Indonesia, the largest tin concentrate producer, which in 2007 decided for a more restrictive regulation on tin quality and provenance, in order to protect large and state-owned mines and tax revenues from increasing prevalence of illegal mine activity. Moreover, in 2009 the government fixed a maximum annual production quota at about 100k tons, forcing the closure of illegal mining.

According to World Bureau of Metal Statistics (WBMS), in the first eight months of 2010 global tin production rose by 7 per cent y/y. Indonesian exports were around 60k tonnes, 11 per cent lower with respect to the same period of 2009. Lower production levels were also susceptible to adverse meteorological conditions (heavy rains and consequent flooding). The shortage of Indonesian concentrate is further deteriorating the recent trend, with Chinese production failing to keep up with consumption. Chinese domestic refined production rose by 17 per cent y/y to 95k tons, but current levels remain well below the 2007 peak. China was also forced to massively increase mine imports (+225 per cent y/y), although domestic mine production showed slight growth.

According to WBMS, global tin consumption increased by 20 per cent y/y in the first eight months of 2010. The rise was driven by the recovery of almost all main end-use markets. In China (the largest market), production of electronic appliances has progressively strengthened: computers, televisions and mobile-phone production increased by 32 per cent in the first half of 2010. Rising demand for solder is the main factor sustaining 10 per cent growth of Chinese consumption. Moreover, OECD demand also improved, rising about 15 per cent in the same period. Stronger consumption is then reflected in the LME warehouse depletion, with stocks falling about 50 per cent to 12k tons, since the beginning of the year. Hence, the stock-to-consumption ratio is now at 5-year lows, 12 weeks of consumption from 26 in February.

We expect the tin physical market could turn into a 15k t. deficit as supply should be unable to fill the


27

gap with demand. In the coming months, persistent supply shortage should boost the price of tin over 23k USD/tonne. In 2010 the price should average around 20k USD/tonne (+45 per cent with respect to 2009), whilst in the first half of 2011 the price is forecast to drop towards 20k USD/tonne. World tin consumption is then expected to decrease in the coming year, on weakening global industrial production growth and the ending of the restocking process. The fundamentals should however confirm the deficit, as global output growth is expected to only partially offset the weakening consumption.

The demand for steel in developed countries is still well below the peak before the crisis, which clouds the outlook. However, the growth is expected to be stronger than in the developing countries, which have suffered relatively little from the crisis. While the steel demand in developed nations decreased in 2009 by a third, demand rose in emerging economies by close to 9 per cent. As a consequence, the demand in industrialised countries grows much faster than in emerging economies, but it mirrors to a large extent only a normalisation of the markets. China dominates steel production and consumption accounting for 46 per cent of world production and 48 per cent of consumption. World Steel Association expects Chinese steel demand to grow by nearly 7 per cent this year after a rapid 25 per cent rebound in 2009 from the crisis-led bottom. Demand grew also rapidly in the first half of 2010 reflecting especially the recovery of industrialised countries from a deep recession. World demand will reach new records in 2010 and further in 2011.

Strong steel demand growth is diminishing on the second half of this year as the economic growth is generally slowing. Demand will strengthen again during 2011, but it will still stay well below the pre-crisis peak in the industrialised countries according to e.g. World Steel Association.

Steel production has reflected the change in demand. Steel production was cut drastically during the panic-brake in steel demand in winter 2008/9 and it started to grow rapidly as the recovery started to get strength due to significant economic stimulus. However, the depletion of rapidly grown inventories curbed production growth, but at a later stage this stock adjustment was ending and turning even to weak accumulation. Steel production growth will slow in 2011 due to smaller carry over from 2010 and decelerating growth of developing countries. However, world steel production and demand will reach new records both in 2010 and later in 2011 if the world economy continues recovering as


28

expected.

Steel prices, measured with reinforcing rounds (rebar), have fluctuated upwards since bottoming out in March 2009 as cuts of over-sized inventories started to slacken and raw material prices rose strongly. The global financial and economic crises hit the steel markets severely as demand for steel collapsed. The world price of construction steel bottomed out in the second quarter 2010. The price upturn was supported by the wide-spread massive government stimulus and a turn-a-round in the panic-driven de-accumulation of inventories. The price peaked in the second quarter this year and has fluctuated since on a lower level.

The price rise of rebar is restricted by the cooling of stimulus-led construction growth in developing economies, particularly in China. The sluggish construction in developed countries is improving, but it takes time to get back into previous peaks in construction as well as in most of the other production.

Iron ore contract prices reached a new record in the third quarter 2010. The all-time-high price was achieved under a new quarterly pricing system after the annual system was abandoned in April 2010. Prices are now based on the quarterly average of daily Chinese import prices in the previous calendar quarter. Prices recovered thanks to the recovery of steel production of the slump created by the global financial and economic crisis. Prices are expected to fluctuate strongly, but heading downwards as iron ore production rises and the expansion of steel production stabilises.

The contract price of our indicator price (Carajas sinter feed with 67.5 % iron content) to Europe decreased in 2009 by close to 30 per cent as an annual calendar year contract price. In spring 2010 a new quarterly contract price was introduced. In the first quarter this year the contract price a bit arbitrarily remained at last year’s level, but in the second quarter the price rose by almost 2/3 to 167 US cents per metric ton unit (mtu) according to World Bank. The price advanced a further 22 per cent in the third quarter to the new record of 201 cents per mtu and declined after that to nearly 14 per cent in the fourth quarter reflecting the weakened steel production. In the fourth quarter, the Chinese import price development showed a roughly 10 per cent decline to less than 1.8 US dollars per metric ton unit.

The price at more than 1.8 – 2 USD per metric ton unit (around 105 -120 USD/tonne) is very expensive. Last year, the price was around 1 USD per mtu and in 2005 it was around 0.65 USD per mtu and in 2000 the price was at 0.29 USD per mtu. The price rise to almost 7 times higher in 10 years reflects to a large extent the rise of China and especially its steel production. China is now the single most important steel producer, having a 45 per cent world production share. Chinese steel production rose in 10 years 4.7 times higher and it is the development of China which affects the price of ore the most. While China is modernising its industry and improving its energy efficiency and emissions of the steel industry, the recent decline in the production is expected to be temporary.

The stabilisation of steel production growth and the rise in iron ore production and its seaborne trade is stemming the rapid rise in the price of ore. However, there has been a substantial shift to a higher price level as iron ore deposits needed to satisfy demand are of quite low quality, especially in China. The high price is expected to moderate price developments in the forecast period ending up clearly below the recent peaks, however.

Steel scrap prices, measured with the US heavy melting number 1, has risen strongly from the crisis-led bottom in November 2008. The price at 101.5 dollars per ton was only 20 per cent of the previous peak price in May 2008. In September 2010 the price was still 40 per cent relative to the previous peak, but had risen almost three-fold from the bottom. The strongest price declines and rises took


29

place in winter 2008/9. Both the strong decline and marked rebound of the price are attributable to the strong changes in steel production and scrap-using electric-arch furnace (eaf) production. While the world production of steel declined 7.9 per cent in 2009, the eaf-production fell by almost 17 per cent.

Steel production started to rise already during 2009 as fiscal stimulus supported steel demand. The rise took place first in China, but later also the EU and the US and Japanese demand and production recovered. Production rose strongly in the first half of 2010, but stalled after that. One reason is a normal seasonal decline in production in the quarter due to holidays in many countries. The other reasons stem from e.g. Chinese attempts too cool it’s very strongly growing economy and to ease pollution by closing the most inefficient factories. These actions affect scrap demand less than ore demand as China uses to a large extent iron ore-intensive blast furnaces.

The price of scrap has, however, declined from May 2010 to August by 100 dollars to 530 dollars per ton. After that price has somewhat recovered. In the forecast, it is assumed that demand for scrap is rather weak during the winter as steel production is not expected to rebound strongly from the unexpectedly weak third quarter.

Assuming the continuing but sluggish recovery in the industrial countries, the price of scrap is expected to rise only moderately after a rapid upswing in the first half of 2010.

Box: Iron ore contract prices changed from annual to quarterly prices The pricing system for iron ore has changed in April this year from the annual contract prices utilised since the 1960s to quarterly pricing. The price is now set according to Chinese import prices on a “landed price equivalent basis” instead of free on board (fob) prices, which means that transportation costs do play a more direct role in pricing of the ore than in the annual pricing. Rising transport costs decrease the contract price. Freight costs of ore shipped from Australia to China are almost a third of the costs of Brazilian shipments to China, which makes Australian exports more competitive compared to Brazilian production.

The main argument of the mining companies for this change was a need for more market- orientated pricing system to promote market adaptation under rapidly changing market conditions. This was reflected in a rise of China as a dominant customer and also a disturbing rise of spot markets. A great recession was seen to prove the inability of the annual pricing system to react to large shocks.

The steel producers point to heavy concentrations of the iron ore supply. Australia and Brazil account for 54 per cent of world exports and on a company level the three main producers Brazilian Vale and Australian Rio Tinto and BHP Billiton accounted for 68.5 per cent of world seaborne trade according to the World Steel Association.

The change in the system was set unilaterally by the mining companies. Steel producers generally resisted the move, but accepted it. The iron ore markets are bit by bit approaching the practises in the other metal markets.

The system is less transparent than the old one, as new “official” reference prices are no longer available. Even simple calculated procedures are interpreted in a different way. It is not clear whether the average of the calendar quarterly change of import price defines the change of the next calendar quarter contract change or whether it is the average of three months before the calendar quarter with a lag of one month. For example Brasilian Vale has announced to use the latter formula, but the data basing on SBB (Steel Business Briefing) coincides better with the prices contract published by the World Bank.


30

Iron Ore Pricing System has Changed

0

50

100

150

200

2009/1 2010/1 2011/10

50

100

150

Contract price (67.5)*, World Bank, fob Landed, "fob",axis to the right

+0.1%

-9.9%

24.1 %

67.1 %

22.8 %65.4 %

0 %0 %

USD/tonne USD/tonne

-10% (f) 2 % (f)

* transformed to dollars per (dry) tonnes

Table 5 Metals and minerals (US$ terms)

Commodity 09/3 09/4 10/1 10/2 10/3 10/4 11/1 11/2 11/3 11/4 12/1 12/2 2008 2009 2010 2011

Non-ferrous metals 192 214 232 228 230 239 240 241 253 265 265 267 242 172 232 250 25 11 8 -2 1 4 0 1 5 5 0 1 -11 -29 35 7

Aluminium GB 117 129 139 135 135 131 136 144 151 163 163 163 167 108 135 149 22 11 8 -3 0 -3 4 6 5 8 0 0 -2 -35 26 10

Copper GB 323 366 398 388 399 441 426 410 413 417 418 424 385 284 406 417 26 13 9 -3 3 11 -3 -4 1 1 0 2 -2 -26 43 2

Lead GB 425 504 490 430 447 425 429 438 473 487 487 487 461 380 448 456 29 19 -3 -12 4 -5 1 2 8 3 0 0 -18 18 2 7

Nickel GB 205 203 231 261 245 233 244 249 299 329 329 329 244 170 242 281 37 -1 14 13 -6 -5 5 2 20 10 0 0 -43 -30 42 16

Tin GB 268 279 316 329 378 454 440 427 446 458 450 452 342 250 369 443 8 4 13 4 15 20 -3 -3 4 3 -2 1 28 -27 48 20

Zinc GB 156 196 203 180 178 177 185 204 214 231 231 231 166 147 184 209 20 26 4 -11 -1 -1 5 10 5 8 0 0 -42 -12 26 13

Ferrous raw materials 347 347 352 570 660 607 617 621 625 625 625 600 482 338 547 622 5 0 2 62 16 -8 2 1 1 0 0 -4 61 -30 62 14

Iron ore BRA 351 351 351 649 778 701 715 715 715 715 715 679 488 351 620 715 0 0 0 85 20 -10 2 0 0 0 0 -5 66 -28 77 15

Steel scrap US 274 274 288 312 312 318 318 328 339 339 339 339 371 249 308 331 18 0 5 8 0 2 0 3 3 0 0 0 40 -33 23 8

Steel scrap EU 402 402 424 458 455 464 464 479 495 495 495 495 564 365 451 483 18 0 6 8 -1 2 0 3 3 0 0 0 57 -35 23 7

Steel 234 234 239 272 233 241 245 245 262 262 276 276 332 230 246 2547 0 2 14 -14 3 2 0 7 0 5 0 19 -31 7 3


31

2.5 Agricultural raw materials

World cotton production should rebound strongly in 2010-2011. According to Abare (the Australian Bureau of Agriculture and Resource Economics) world cotton production is projected to jump by 14 per cent to 25.3 Mt this season, which is slightly higher than our previous forecast (+12 per cent to 25.1 Mt). This sharp rise, the first since 2006-2007, is mainly due to an increase in the world cotton area (+9 per cent to 32.9 Ma, which is similar to the pre-crisis cotton area) prompted by the rise in cotton prices and the improvement in credit availability.

It also stems from an increase in cotton yields (+6 per cent), due to better weather. In Australia for instance, cotton production is forecast to increase by 69 per cent mainly thanks to ample water supply from rainfall. In the United States, the third largest producer, production is expected to rise by 55 per cent, as more favourable seasonal conditions result in a drop in the rate of abandonment (area planted but not harvested), which should fall to its lowest level in 60 years.

Meanwhile, in China and India, the two highest producers, cotton production is expected to increase by 2 per cent and 12 per cent, respectively. Only in Pakistan should the cotton production decrease (-9.5 per cent), because of the floods that occurred this summer.

In the 2011-2012 season, the world cotton area as well as production should continue to increase, which, combined with a smaller rise in consumption, will result in a set-back in world cotton prices.

Cotton demand growth is slowing. World cotton consumption is forecast to increase by 2.7 per cent this season, after +3 per cent in 2009-2010. Consumption growth is driven by two opposite factors. On the one hand, demand is boosted by the world recovery and particularly the global income growth; on the other hand, consumption is constrained by limited available supplies, high prices and relatively low prices for competing synthetic fibres. In particular, there has been a growing gap between cotton and polyester prices.

In 2010-2011 most of the major cotton consumers are forecast to increase mill use. India is expected to account for most of this increase: record crop levels and government-limited exports could boost India’s cotton consumption by 8 per cent according to the ICAC (International Cotton Advisory Committee). China’s cotton consumption, which accounts for more than 41 per cent of global cotton mill consumption, is forecast to increase only slightly (+3 per cent). Turkey, Brazil and the United States are also expected to increase their consumption by 3 per cent, 5 per cent and 4 per cent, respectively. Unlike them, Pakistan consumption should remain unchanged.

Overall, world cotton consumption is forecast to be still higher than production, at 26.3 Mt, but the production-consumption gap should begin to decline this season.

After a strong decrease in 2009-2010, world stocks’ decline is forecast to soften this season.

China’s stocks, which account for more than two-third of global stocks, are forecast to decrease by 16 per cent in 2010-2011: the Chinese authorities will run down of the national reserves to reduce the impact of higher cotton prices on textile manufacturers. This drop will largely offset the rise in Indian stocks (+15 per cent, India accounting for nearly one fifth of global stocks) due to exports restrictions. Likewise, commensurate with higher production, cotton stocks are also forecast to increase in Australia and Brazil.


32

World consumption has outpaced production for six consecutive seasons, leading to a significant decline in the stocks-to-use ratio. The ratio was even lower than expected last season (40.3 per cent instead of 45.3 per cent), and is projected to reach its lowest level since 1993-1993 at 35.4 per cent in 2010-2011.

To conclude, in the short run, the price should continue to slightly increase because of low stocks and excess consumption. But when autumn cotton crops become available, prices are forecast to decrease. A more dynamic Chinese domestic consumption remains an upward risk.

The wool production is forecast to remain stable in Australia, the world largest producer, unlike our previous forecast of an ongoing - but less pronounced - decline. This is mainly due to a slower decline in the number of sheep flocks in Australia (-1.4 per cent instead of three per cent in our previous forecast) as producers respond to more favourable weather conditions. The number of sheep shorn in Australia is also forecast to show a slower decline: -1.3 per cent in 2010-2011, compared with an average decline of 6 per cent a year over the previous five years. The production is also projected to remain stable in South Africa, and to increase in New Zealand (reflecting the 3.5 per cent increase in the number of sheep flocks last season) and in Argentina.

In 2010-2012, as lamb activities remain more profitable than wool production, no significant rise in the sheep flocks is likely to happen, though the downward trend may continue to ease.

Wool consumption continues to grow moderately benefiting from the world recovery. Wool consumption rebounded by 5 per cent last season after a drop of 14 per cent in 2008-2009. Wool consumption is forecast to continue to increase by 4.8 per cent in 2010-2011, in line with our previous forecast. Consumption growth is mainly driven by China, where wool imports have already increased by 15 per cent y/y over the first five months of 2010. This upward trend for Chinese demand for wool and wool products is likely to continue. Likewise, the United States’ demand recovery is expected to continue in 2010-2011, albeit at a slower pace. US wool imports have been on a rising trend since the end of 2009, and have increased by 4.6 per cent between June and July. The other main cloth markets, Japan and Australia, have also strongly increased this summer.

However, there are emerging signs showing that consumer spending will slow down, in the short term, in the United States and in the European Union. This, combined with an already weak demand for wool in the European Union, could dampen demand in the latter part of 2010-2011, and weigh on prices.

Wool demand is influenced by the price of other fibres, as textile manufacturing allows a high degree of substitution between wool, cotton and synthetic fibres such as polyester. The polyester-to-wool fibre price ratio has been decreasing since the beginning of the year, thus distancing itself from its long-run mean and leading to substitution effects. This favourable substitution may continue, as oil prices remain high, thus supporting wool prices.

Likewise, following a sharp rise in cotton prices, wool has become more attractive since this summer. The cotton-to-wool price ratio is now above its long turn mean. With cotton prices set to increase, the competitiveness of wool relative to cotton is expected to continue to improve in 2010-2011.

To conclude, with a growing demand facing a sluggish production and the return of favourable substitution effects, wool prices should rise in the short term. However the risk of weaker economic growth in the United States and in Europe could weigh on prices in the medium term.


33

Natural rubber production is stabilising after a strong decline in output last year due to bad weather. Rubber production is forecast to stabilize. On the one hand, production is projected to grow rapidly in Vietnam and Indonesia, where the export sector is boosted by relatively weak currencies. On the other hand, production will decline in the other main producing countries, Thailand and Malaysia.

In Thailand, the world’s number one producer, rubber supply has remained flat since the beginning of the year. After dropping at the end of 2009, Thai supply bounced back in Q1 2010. Yet the production only averaged 3.2 per cent growth y/y from the exceptionally low levels of last year. The latest data on Thai production are even gloomier as it fell by nearly 5 per cent y/y in Q2 2010. In July and in August the production remained almost unchanged (+0.9 per cent and +0.1 per cent y/y, respectively).

In Malaysia, rubber production fell sharply in the beginning of the year and increased only a little since spring. Compared with last year, the production decreased by more than 12 per cent in June and again by 2 per cent in July, thus remaining at a low level.

As a whole, world rubber production should remain stable this season, as weak production in Malaysia and Thailand is partly offset by dynamic production in Indonesia and Vietnam.

World demand of natural rubber will grow moderately. Indeed the srappage allowance programs, which brought about a strong rebound in the car industry last year, continued to boost world rubber consumption in Q1 2010. But this temporary support will be phased out in second half of this year. The latest data show a slowdown in the car production since spring. Overall, car production is set to remain at a high level in 2010, which will result in an increase of more than 1.2 Mt for rubber demand (as compared to 2009).

Next year, rubber consumption should slow down due to the negative after-effects of the car support schemes (as buyers may have advanced their buying decisions to take advantage of the subsidy) and the expected economic slowdown in Asia and in the United States.

In the coming months, with the slowdown of the growth rate of demand and the stabilization of production the pressure on the price of natural rubber is forecast to slow down.

Moreover, the evolution of the price for natural rubber should also be more in line with that of oil prices. To meet the global demand for rubber, synthetic rubber, made from oil, can also be used. Variations in oil prices directly affect synthetic rubber prices, which in turn affect natural rubber prices.

Considering the Working Group’s forecasts for oil prices, rubber prices will rise sharply in the end of 2010 and more moderately next year.


34

60

80

100

120

140

160

180

200

Ind

60

80

100

120

140

160

180

200

Ind

90 92 94 96 98 2000 02 04 06 08 10 12

Agricultural raw material pricesHWWI index, 2000=100

Agricultural raw materialsTimberWood pulp

AIECE / ETLA

The price of pulp fell dramatically from that prevailing in the 3rd quarter 2008, when the prices reached its latest peak close to 900 USD/tonne. As most other commodities the global recession led to a worldwide fall in demand, resulting in a very steep drop. To cope with the decrease in demand, production cuts have been made. The price fell to 590 USD/tonne before prices started rising dramatically.

Short-run restriction on supply pushed the price in mid-2010 to an all-time-high in July, 979 USD/tonne.

Demand is expected to be subtle in Europe, North America and Japan. Even if there is a pick-up in demand, it will be easily met by idle supply. There is a big difference in demand from the different users of pulp. The main increase in demand comes from China and other growing countries.

The fall in demand led to production cuts. Low profitability has led to some pulp mills shutting down in North America and Finland. From the second half of 2009 the price on wood pulp has risen quite quickly. This marks the same trend as seen for most other commodity prices. However, the sharp rise in prices during most of 2010 is due to supply-side shocks. Earth quake in Chile, strikes in Finland and the on-going problem of Finnish mills in getting access to Russian wood, tough mainly birch have led to problems in supply and lower inventories. In addition there is a supply shortage of wood fibre in North America due to wet weather.

These supply restrictions now seem to have been settled, as there have been no strikes in Finland and capacity utilisation is increasing.

The price peak was mainly cased by the short-run restriction in supply. Additional supplies and fairly modest (though rising) demand will put a downward pressure on the price of wood pulp.

Forward contracts are trading down to 820 USD/tonne in the beginning of 2012. Spare capacity from earlier production cuts will make the supply side stronger than the increase in demand, hence pushing down the price, starting already in the third quarter


35

Still prices are considered as fairly good, and are still on high levels from an historical point of view supported by the Asian demand.

The price on sawn soft wood reached its peak in the third quarter 2007 at 352 USD/tonne. The next year and a half prices dropped to 230 USD/tonne at the lowest. Since mid 2009 prices have increased and in the first quarter 2010 prices reached 294 USD/tonne. During 2010 the price development of sawn wood has been more or less unchanged.

Sawn wood is mainly used in construction. Demand in North America and Europe has been and is expected to be weak. Some countries have problems with over capacity in the housing market, for which reason new construction is expected to be on low level in the years ahead. It is not a surprise that an increase in demand comes from China and other fast-growing countries.

The price of sawn wood has - like most other commodities - increased from the second half of 2009. The price has not, however, reached its earlier peak. The high price is due to supply reactions. A fall in demand led to production cuts. Low profitability has led to some sawn mills shutting down in Europe. As for the market for wood pulp, supply problems in Finland are deemed to be the reason behind relatively high prices.

The high price, however, will not be sustained. Minor problems in the supply side, then expected before together with a fairly sluggish demand will put downward pressure on the price of sawn wood.

Supply problems in the short run will gradually diminish and spare capacity after earlier production cuts will make the supply stronger than demand, taking the price down a bit. Prices are nevertheless considered to be fairly good.

Table 6 Agricultural raw materials (US$ terms)

Commodity 09/3 09/4 10/1 10/2 10/3 10/4 11/1 11/2 11/3 11/4 12/1 12/2 2008 2009 2010 2011

Agricultural raw 131 152 161 166 171 179 173 169 164 160 158 156 151 125 169 167 materials 17 16 5 3 3 4 -3 -3 -3 -2 -1 -1 -3 -17 35 -2

Textile fibres 117 137 148 151 159 178 168 160 160 159 159 158 130 113 159 162 11 17 8 3 5 12 -5 -5 0 0 0 0 5 -13 40 2

Cotton US 98 116 126 135 145 165 152 142 140 139 137 136 106 95 143 143 11 17 9 7 7 14 -8 -7 -1 -1 -1 -1 11 -11 51 0

Wool AUS 166 195 205 194 196 210 210 211 212 214 217 219 189 158 201 212 12 17 5 -5 1 7 0 0 1 1 1 1 -4 -16 27 5

Natural rubber THAI 275 362 443 440 453 512 522 531 536 540 543 546 365 268 462 532 18 32 23 -1 3 13 2 2 1 1 1 0 17 -26 72 15

Wood products 124 140 140 146 151 152 145 139 132 126 123 120 137 118 147 135 16 12 0 5 3 1 -5 -4 -5 -4 -3 -2 -8 -14 24 -8

Softwood S 158 176 168 169 174 177 168 159 148 140 135 132 162 150 172 154 17 11 -5 1 3 2 -5 -5 -7 -5 -3 -3 -16 -7 14 -11

Woodpulp FIN 99 113 124 139 143 141 137 133 130 127 126 124 126 97 137 132 14 15 10 12 3 -2 -3 -3 -2 -2 -1 -1 8 -23 42 -4


36

2.6 Food and tropical beverages

International wheat prices have continued to decline as expected in the second quarter 2010, but have risen dramatically over the summer months. Our benchmark price (US Hard Red Winter) increased by around 60 per cent between June and September. The change in direction of prices was triggered by heightened uncertainty about world wheat supplies, underpinned by a progressive devaluation of the US dollar and speculative activity of non-commercial funds.

The forecast for global wheat production in the new market year 2010/11 has been reduced by some 30 million tons (5 per cent) during the summer months. The most striking event was the massive loss in output in the European part of the CIS countries due to a severe drought and raging wildfires. Russian wheat production alone is expected to shrink by around 25 per cent (15 mill. tons) compared to the previous year. The effect of the flooding in Pakistan on output will be similar in proportion, although less dramatic in absolute terms (production is expected to fall by around 6 million tons in 2011). While planting in Pakistan had not begun and will be possible in most areas according to initial assessments, it is not clear that sufficient wheat seed will be available given the massive damage inflicted on Pakistan’s infrastructure and a substantial loss of wheat seed stocks, which have been either destroyed or used for food. The outlook for the 2010/11 harvest in other parts of the world is mixed. On the one hand, crop prospects look good for southern hemisphere producers (production in Argentina could recover from last year’s draught-reduced low level, and output in Australia should be broadly stable), and in the US another very large harvest has been witnessed in recent weeks with average wheat yields having reached new record highs. On the other hand, European Union harvests have been mixed resulting in a fall in overall production by 2 per cent to 136 million tons, and in Canada unusually wet weather has resulted in a substantial fall in wheat output by an estimated 5 million tons (almost 20 per cent).

Wheat consumption growth is expected to be dampened by higher prices and reduced availability over the forecast horizon. Food use, which constitutes around 70 per cent of wheat consumption is nevertheless expected to continue rising, particularly in the emerging economies, supported by income growth and the associated urbanisation and change of tastes. Demand for livestock feed, which has been an important source of rising overall demand for wheat in the past five years, will be more affected by high prices and strong competition from higher protein feedstuffs. Industrial use of wheat – especially for ethanol (mainly EU) and starch – should grow at a lower rate for the time being given the increased cost of the commodity – in addition its share in total usage is still small at around 3 per cent.

Despite the expected drop in production, wheat output in 2010/11 is still expected to be one of the largest on record and the market deficit expected for this year is forecast to be small. In addition, after two years of bumper crops the level of global inventories is comfortable (see figure). This is in stark contrast to the situation in 2007/08, when wheat prices rose to record levels, and we thus project a gradual moderation of prices over the forecast horizon. However, total inventories which are estimated to have been at almost 200 million tons at the end of the previous market year, include an estimated 80 million tons of wheat stockpiled in China and India. These are hardly available on the world market as China exports only small amounts and India has an export ban in place which is expected to remain for the time being. Therefore, the situation on the wheat market is actually tighter than it seems judging by the global stocks-to-use ratio. The situation has been aggravated in recent months by the decision of Russia and other countries to suspend exports in order to secure sufficient supplies for the domestic market and limit upward pressure on prices at home. Finally active investment by speculative funds


37

has contributed to the surge in international wheat prices in recent months. Against this background, we expect that any correction in prices will be modest and admit that there is a significant risk of further increases in prices in case of additional bad news for production or trade or another substantial devaluation of the dollar.

Coarse grain prices have been relatively slow to participate in the rally in grain markets over the summer, but in September prices finally also started to escalate, jumping by 15 per cent in just one month in the case of maize. Behind this surge, which followed more modest increases in July and August, were concerns about the US crop in combination with stronger than anticipated foreign demand, and there has also been fresh speculative fund buying on the heels of the steep rise in wheat prices. In early October, a new report of the US Department of Agriculture confirming a sharp downgrade of harvest expectations triggered another sharp increase in prices, which rose by another 20 per cent in only a few days.

Maize consumption is forecast to reach a record 837 million tons in the year 2010/11(July-June) mainly due to increases in feed use and industrial use to produce ethanol. The steep rise in wheat prices has made it increasingly unattractive for wheat to be used as feed ingredient. As barley prices also have risen, feed manufacturers have switched to more competitively priced grains, such as maize. Use of maize for the production of ethanol will continue to rise, especially in the US where around half the consumption will go into industrial processing next year. However, as the amount of ethanol is approaching the maximum level of biofuels that is technically feasible to be blended with petroleum-based fuels, the growth rate is projected to diminish.

Global maize production is now estimated to have risen to around 810 million tons in 2009/10 setting a new record. This is largely due to fact that the US has produced a record corn crop. Output in Asia also looks to have risen substantially, while it has declined by 7.5 per cent in Europe compared with the previous year’s bumper crops. For 2010/11, despite the recent substantial downgrade of forecast US maize yields, a further significant increase of world production can be expected given that the area planted for maize has expanded. This rise in output to an estimated 820 million tons will, however, not result in a surplus on the corn market given the continuation of substantial growth of consumption (2 per cent, following 3 per cent in 2009). Therefore, global stocks should continue to tighten over the forecast horizon giving support to prices going forward. We expect maize prices to advance by 16 per cent and by more than 40 per cent on average this year and next, respectively. Against the background of an already historically low stock-to-use ratio there is a risk of even stronger rises if the currently bullish outlook for global production next year should deteriorate significantly.

International rice prices continued a slightly declining trend through most of 2010, but have picked up in September as news on the severity of loss of harvest in Pakistan to the flooding – around 25 per cent of the expected Pakistani production equivalent to almost 2 million tons is estimated to have been destroyed – combined with renewed buying interest by some importers. However, the market situation is not expected to tighten drastically despite the first fall in global production in seven years. Next year is projected to see a significant recovery in output, and despite a continued increase in consumption the world market should return to surplus in 2010/11 thus limiting the upside pressure on prices going forward. Export availability should improve leading to an easing of the world market for rice in the course of next year – especially if India relaxes its ban on exports of lower quality grades.

Since November 2009 the prices of soybeans are fluctuating in a range from 900 to 1200 US¢ per bushel. In September 2010 concerns that the weather pattern La Nina, which can cause below average rains in Brazil and Argentina, led to a price rise to the upper limit of the range. At the beginning of


38

October the soybean price was listed at 1170 US¢ per bushel. In comparison to the all- time-high in 2008 the prices are still 35 per cent lower.

The USDA forecasts that the worldwide soybean output will be 254.9 million tonnes in 2010/11. Against the prior season, in which a record harvest of 259.9 million tonnes was achieved, production will decrease by around 2 per cent. Expected lower crops in South America (Brazil -5 million tonnes and Argentina -4.5 million tonnes) will overcompensate the record crop of 94.79 million tonnes in the United States.

Brazil is the world’s second largest producer of soybeans after the United States, and Argentina ranks third. The main reason for the decline in output is to be found in hot, dry weather conditions in parts of Argentina and southern Brazil, which delay planting and reduce sowing of soybeans. In the US the situation is different. The average soybean yield is forecast at 44 bushels per acre, which would be comparable with last season’s record.

World soybean consumption is predicted by the USDA to increase by 6 per cent in the 2010/11 season. The increased human consumption and the use of biodiesel worldwide, strengthen the soybean oil consumption. For the expanded production of biodiesel an increased amount of raps and palm oil is needed. Because of the resulting smaller availability of these oils for human consumption, they have to be substituted by soy oil. This will subsequently increase the demand for the latter.

China, the world largest consumer of soybeans, will buy more supplies from the United States to boost the production of cooking oil and animal feed.

According to the Australian Bureau of Agricultural and Resource Economics (ABARE) China’s use of vegetable oils will soar by around 9 per cent in the 2010/11 season. It is forecast that crushing of soybeans in China will rise by over 16 per cent in comparison to the last 2009/10 season to 56.7 million tonnes. China’s quality standards that restrict the importation of soy oil from Argentina contribute to the increase in domestic crushing to a large degree. China is importing less soybean oil and expanding its domestic processing capacity.

50

100

150

200

250

300Ind

50

100

150

200

250

300Ind

90 92 94 96 98 2000 02 04 06 08 10 12

Food and tropical beverages pricesHWWI index, 2000=100

Food and tropical beveragesCoffeeSugar

AIECE / ETLA


39

Risk of extraordinary dry weather in South America due to the weather pattern La Nina and a stronger cooking oil and animal feed demand will support higher soybean and soy oil prices in the next quarters. Furthermore production losses in other oils, in particular raps oil, will strengthen the demand for soy oil.

Full inventories (63.6 million tonnes worldwide) due to an excellent crop in 2009/10 will nevertheless prevent a pronounced jump in prices. But in 2012 a stronger Chinese meat-demand could increase the use of soybeans as animal feed and therefore cause price rises. Furthermore it is anticipated by the International Energy Agency (IEA) that in the next future the use of biofuels will increase, which accordingly will increase the demand for vegetable oils like palm oil and soy oil.

Table 7 Food and tropical beverages (US$ terms)

Commodity 09/3 09/4 10/1 10/2 10/3 10/4 11/1 11/2 11/3 11/4 12/1 12/2 2008 2009 2010 2011

Food total 201 213 209 200 227 249 248 246 247 250 252 255 233 202 221 248 -3 6 -2 -4 14 10 0 -1 0 1 1 1 34 -13 9 12

Cereals 180 197 190 178 216 264 269 270 270 268 267 265 276 196 212 269 -14 9 -3 -6 22 22 2 0 0 -1 0 -1 44 -29 8 27

Barley CAN 156 177 183 185 203 228 234 234 227 225 225 221 259 162 200 230 -7 14 3 1 10 12 3 0 -3 -1 0 -2 19 -37 23 15

Maize US 157 186 179 171 204 279 288 294 300 303 305 305 255 179 208 296 -20 19 -4 -4 19 37 3 2 2 1 1 0 42 -30 16 42

Wheat US 176 179 171 167 231 258 258 254 247 241 234 229 286 191 207 250 -16 2 -4 -3 39 12 0 -1 -3 -3 -3 -2 31 -33 8 21

Rice THAI 270 275 271 223 226 242 245 242 240 237 234 234 326 272 241 241 2 2 -1 -18 2 7 1 -1 -1 -1 -1 0 102 -16 -12 0

Tropical beverages, sugar 218 239 242 226 256 258 248 240 241 244 247 250 198 210 245 243 10 10 1 -7 13 1 -4 -3 0 1 1 1 20 6 17 -1

Coffee US,D,F 179 189 194 206 246 236 231 229 236 243 248 252 193 179 220 235 -2 5 3 6 19 -4 -2 -1 3 3 2 2 16 -7 23 6

Cocoa US 334 385 371 362 344 327 311 305 299 302 305 308 291 326 351 304 15 15 -4 -3 -5 -5 -5 -2 -2 1 1 1 33 12 8 -13

Tea (avg) ALL 157 175 153 136 149 158 155 143 135 137 140 142 123 144 149 143 21 12 -13 -11 10 6 -2 -8 -5 1 2 2 14 17 4 -4

Sugar US 252 282 303 190 246 306 284 256 249 242 235 235 149 218 261 258 40 12 8 -37 30 24 -7 -10 -3 -3 -3 0 22 47 20 -1

Oil seeds, vegetable oils 198 195 187 188 204 228 232 234 237 241 246 251 238 198 202 236 -10 -2 -4 1 8 12 2 1 1 2 2 2 41 -17 2 17

Soybeans US 205 202 192 193 206 231 236 238 241 245 250 255 249 205 206 240 -9 -1 -5 0 7 12 2 1 1 2 2 2 44 -18 0 17

Soybean meal US 191 179 164 166 177 193 197 197 199 201 205 209 197 189 175 198 -10 -7 -8 1 7 9 2 0 1 1 2 2 40 -4 -7 13

Soybean oil US 220 240 243 240 253 296 299 305 311 317 326 336 325 224 258 308 -6 9 1 -1 5 17 1 2 2 2 3 3 43 -31 15 19

In mid-June 2010 tight supplies were responsible for a strong increase in the coffee composite indicator for Arabica and Robusta beans of the International Coffee Organization (ICO). The rise was near 15 per cent. During July and August 2010 the upward price movement continued. The composite


40

indicator rose with a price listing of 167 US¢ / lb to a long time high. But at the beginning of October there was a price decline to 152 US¢/lb.

According to the ICO world production of coffee in the crop year 2009/10 will be around 120 million bags, a decrease of 6.6 per cent compared to the previous season. For the next crop year 2010/11 the USDA forecasts a new record global coffee production of 139.7 million bags. It is expected that over 50 per cent of the coffee production will come from Brazil and Vietnam. The USDA estimated a jump in the Brazilian coffee production by 10.5 million bags to 55.3 million in 2010/11. This increase is mainly a result of the ongoing biennial crop cycle of Arabica variety production. In Vietnam reasonable rainfalls supported the prosperity of the coffee beans. For that reason production in Vietnam is forecast to rebound by 1.2 million bags to 18.7 million in the coming crop year.

World coffee demand was estimated by the ICO at 129.1 million bags in calendar year 2009. This constitutes a fall of 1.2 per cent in comparison to 2008, when 130.7 million bags were consumed worldwide. The USDA forecasts the world coffee consumption at 131.5 million bags. The increased demand will come mainly from the EU-27 and Brazil. In Brazil the strong marketing campaign of the Coffee Industry Association and the improved product quality should trigger higher domestic demand.

The prospects are good that the coffee production will meet the demand or even outreach it. Rain at the end of September 2010, which was necessary for the growth of the coffee beans in the Brazilian producer region, supports that forecast.

Favourable world coffee production in the coming crop year will help to refill the global coffee stocks and will set the prices under downward pressure. But unforeseen weather conditions in the top coffee producing countries and speculative activity by investment funds could lead to unexpected price movements.

Especially the weather phenomenon La Nina could cause extreme weather events by reducing rainfall significantly in the South-American coffee planting regions. This impact is the inverse of El Nino’s effect, which includes severe rains. At the end of 2011 prices should increase due to reduced production mainly as a consequence of the off-year of the biennial crop cycle in Brazil’s coffee production. Also the increasing tendency in Asia to consume coffee could lead to rising demand, which would boost the price of coffee.

After staying on a moderate level for several years, the price of cocoa spiked in summer 2008 at 3296 US-Dollar/tonne, decreased in late 2008 under 2000 US-Dollar/tonne, and rose in December 2009 to the highest price in 30 years at 3600 US-Dollar/tonne. Since February 2010 the price of cocoa decreased with light up and down fluctuations, through it had a little peak in summer 2010 at 3360 US-Dollar/tonne. At the beginning of October 2010 the prices were below 2900 US/tonne.

According to the International Cocoa Organization (ICCO) global cocoa production (2009/10) remained almost unchanged (by -0.2 per cent) in comparison to the previous crop season. It is estimated that the world production was 3 596 thousand tonnes in the October 2009 to September 2010 season.

The outlook for the 2010/2011 output in the main cocoa producer countries Ivory Coast (about 35 per cent of global output) and Ghana (18 per cent) is promising. It is expected that favourable weather conditions and increased yields due to the use of fertilizer will raise the production of cocoa in West Africa. The bigger of the two harvests in the Ivory Coast and Ghana usually starts in October and ends in late February.


41

On the demand side, cocoa consumption (grindings) rose by 4.1 per cent in the 2009/2010 season according to ICCO. The just finished crop season ended with a global deficit of 72,000 tonnes, after a surplus of 79,000 tonnes one season earlier. The stocks/grindings ratio at the end of the crop season 2009/10 fell from 48.8 per cent in the season before to 44.9 per cent.

Because of the promising production forecast the ICCO expects for the 2010/11 season that the cocoa market may return to a surplus in a range between 70,000 and 80,000 tonnes. Unless bad weather conditions or diseases affect the cocoa crop negatively a positive global supply/demand balance in the next season is very likely. Therefore cocoa prices are expected to recede in the last quarter of the year 2010 as well as next year.

As in the past, the cocoa market will be influenced in 2011 and 2012 by the health condition of cocoa trees, the political stability and the infrastructure investments in Ivory Coast.

World tea prices have remained on a high level as a result of weather induced reductions in output, mainly in Kenya and South Asia, accompanied by growing Asian tea demand. After tea prices fell to 147.7 US¢/kg in 2003, the lowest rate in decades, all in all prices have constantly gained value until they reached 364.3 US¢/kg in November 2009, the highest level since 1984. Prices dropped by 25 per cent in the second quarter of 2010, steadily rising again by 16 per cent to 316.2 US cent per kg by the date.

China has constantly increased tea production on a massive scale for years, with an average growth rate of 8.3 per cent according to the Food and Agriculture Organization (FAO). Tea production in India, the world’s largest grower after China, decreased in 2010 due to crop damage from pest attacks. It is estimated that Indian production may be lower by 10 to 15 million kg in comparison to 979 million kg in 2009. The Sri Lanka Tea Board estimated that the national tea production might exceed 220 million kg (+ 21 per cent). In Kenya the national tea board announced an increase of tea production to 350 million kg in comparison to 314 million in 2009.

While the Indian consumption is slowly but consistently increasing at an average of 2 per cent due to robust GDP growth rates and higher consumer spending power, Chinese consumption is gaining drastically and has almost doubled during the last five years with an average growth rate of 10.8 per cent and approximately 1 million tons in 2009.

The Indian consumption is slowly but consistently increasing at an annual average rate of 2 per cent over the last 4 years due to well off GDP growth rates and higher consumer spending power. In comparison, the Chinese consumption is gaining drastically and has almost doubled during the last five years with average growth rates of 10.8 per cent and approximately 1 million tons in 2009.

According to the Chinese Academy of Agricultural Sciences the gain in tea consumption is explainable not only by a general improvement of the standard of living, but also by a change in buying patterns, with consumers focusing on health aspects.

In the last quarter of 2010 prices will continue their rise due to wage increase in the Indian tea production sector and the ongoing worldwide surplus in demand. China’s increased production will be absorbed by its own rush in tea consumption. In 2011, when producers push additional quantities on the market due to the tea cultivation cycle of three years, prices will decrease.


42

In the medium term, supply and demand will be in equilibrium, causing a gradual price decline with prices levelling off at a moderately high level. But if the expansion of output is not able to catch up with the steadily increasing Asian demand, prices will experience an increase.

The world sugar market over the last two years has resembled a rollercoaster as prices are concerned. 2009 saw a sharp rise in prices, peaking in the last days of January 2010 at just above 30 ct/lb, the highest level in almost 30 years. This boom was followed by a steep decline of international sugar prices in the remainder of the first half of this year – only to rebound again from a low point of below 14 US cents/lb (world contract No. 11 New York) towards 27 cents/lb in early October. While some firming of prices had been expected in the April Commodity Group forecast, the recovery turned out to be much more vigorous than projected.

The recent volatility of world sugar prices is partly due to changing views about global economic growth in general and prospects for the international sugar market in particular. A second important underlying factor is active investment from hedge funds and other financial investors that were quick to spot renewed investment opportunities. Finally, in recent weeks a weak US dollar helped to drive sugar prices higher.

The main fundamental reason behind the collapse of prices in the first half of the year was the expectation of a sharply reduced sugar market deficit in 2009/2010 (October-September market year) and a return to surplus in the following year as Indian output recovered from the extraordinarily low levels seen in 2008/09 and production of the world’s leading producer, Brazil, was expected to climb to new record levels. However, in recent months negative news on expected production led to an expectation of a postponed return to a world market surplus. This news included the loss of sugar cane output in Pakistan due to the devastating flooding that hit the country in August (official estimates put the loss at around 10 per cent of expected production), disappointing crops in Thailand, one of the world’s major exporters, droughts and heat waves weighing on expectations for sugar production in CIS countries and the European Union, and last but not least dry weather in Brazil reducing availability from this source.

While expectations for global sugar production have been revised downwards over recent months, projected sugar consumption has been unaffected and is expected to continue rising, driven by population growth and income growth in the developing countries, although high prices in 2009 have reduced the rate of increase from more than 4 per cent in the “sugar glut” years 2006/07 and 2007/08 to less than 2 per cent more recently.

Despite the recent bad news on the production front, and projecting steady demand growth, we still expect the world sugar market to swing back into surplus in the new market year 2010/11, although by a small margin only. This will help global inventories, which have come down quite substantially in the past two years, to start being replenished. Confirmation of such a market trend should eventually lead to another reversal in prices, and consequently we forecast sugar prices to decline by one per cent next year, following an increase of 20 per cent in 2010. The level of prices should, however, remain relatively high compared to levels seen before the recent price spikes, and the risk that disappointing news on production prospects in combination with speculative activities of financial investors will lead to further increases is substantial given the currently still tight market situation.


43

Appendix tables


44

Table A1 Actual and forecast commodity price indices (index in US$ terms, 2000=100, percentage change on previous period)

Commodity Weight 09/3 09/4 10/1 10/2 10/3 10/4 11/1 11/2 11/3 11/4 12/1 12/2 2008 2009 2010 2011

All commodities¹ 100 226 249 257 268 268 285 287 285 289 291 291 290 316 210 270 288 13 10 4 4 0 6 1 -1 1 1 0 0 33 -34 29 7

Total excl. energy 32.6 192 208 215 236 256 262 261 260 262 265 265 263 236 184 242 262 9 8 3 10 9 2 0 -1 1 1 0 -1 13 -22 32 8

Food total 9.9 201 213 209 200 227 249 248 246 247 250 252 255 233 202 221 248 -3 6 -2 -4 14 10 0 -1 0 1 1 1 34 -13 9 12

Cereals 2.7 180 197 190 178 216 264 269 270 270 268 267 265 276 196 212 269 -14 9 -3 -6 22 22 2 0 0 -1 0 -1 44 -29 8 27

Tropical beverages, sugar 3.8 218 239 242 226 256 258 248 240 241 244 247 250 198 210 245 243 10 10 1 -7 13 1 -4 -3 0 1 1 1 20 6 17 -1

Oilseeds, vegetable oils 3.4 198 195 187 188 204 228 232 234 237 241 246 251 238 198 202 236 -10 -2 -4 1 8 12 2 1 1 2 2 2 41 -17 2 17

Industrial raw materials 22.6 188 207 218 252 269 268 267 266 269 272 271 267 237 176 252 268 16 10 6 15 7 0 0 0 1 1 0 -1 6 -26 43 7

Agricultural raw materials 10.1 131 152 161 166 171 179 173 169 164 160 158 156 151 125 169 167 17 16 5 3 3 4 -3 -3 -3 -2 -1 -1 -3 -17 35 -2

Textile fibres 1.0 117 137 148 151 159 178 168 160 160 159 159 158 130 113 159 162 11 17 8 3 5 12 -5 -5 0 0 0 0 5 -13 40 2

Wood products 7.4 124 140 140 146 151 152 145 139 132 126 123 120 137 118 147 135 16 12 0 5 3 1 -5 -4 -5 -4 -3 -2 -8 -14 24 -8

Non-ferrous metals 9.1 192 214 232 228 230 239 240 241 253 265 265 267 242 172 232 250 25 11 8 -2 1 4 0 1 5 5 0 1 -11 -29 35 7

Ferrous raw materials² 3.4 347 347 352 570 660 607 617 621 625 625 625 600 482 338 547 622 5 0 2 62 16 -8 2 1 1 0 0 -4 61 -30 62 14

Energy raw materials 67.4 243 268 278 284 273 296 300 297 302 303 303 303 354 222 283 301 14 10 4 2 -4 8 1 -1 2 0 0 0 42 -37 27 6

Coal³ 4.8 267 290 355 376 353 365 379 360 360 379 398 378 488 271 362 370 7 8 23 6 -6 3 4 -5 0 5 5 -5 97 -45 34 2

Crude oil 62.7 241 266 272 277 267 291 294 293 298 297 296 297 344 218 277 295 15 10 2 2 -3 9 1 0 2 0 0 0 37 -37 27 7

¹ HWWI index, total ² iron ore, steel scrap ³ steam coal


45

Table A2 Actual and forecast commodity price indices (index in euro terms, 2000=100, percentage change on previous period)

Commodity Weight 09/3 09/4 10/1 10/2 10/3 10/4 11/1 11/2 11/3 11/4 12/1 12/2 2008 2009 2010 2011

All commodities¹ 100 145 154 171 193 190 188 183 182 184 185 185 185 195 137 186 183 8 6 11 13 -2 -1 -3 -1 1 1 0 0 23 -30 35 -1

Total excl. energy 32.6 124 130 143 171 183 173 166 166 167 169 169 168 147 121 167 167 4 5 10 19 7 -5 -4 -1 1 1 0 -1 4 -17 38 0

Food total 9.9 130 133 139 145 162 164 158 157 158 159 161 162 145 134 153 158 -8 2 5 4 12 1 -4 -1 0 1 1 1 25 -8 14 3

Cereals 2.7 116 123 127 129 154 174 171 172 172 171 170 169 172 130 146 171 -18 6 3 2 20 13 -2 0 0 -1 0 -1 33 -24 12 17

Tropical beverages, sugar 3.8 140 149 161 164 183 170 158 153 153 156 157 159 124 138 169 155 5 6 8 2 11 -7 -7 -3 0 1 1 1 12 12 22 -9

Oilseeds, vegetable oils 3.4 128 121 124 137 145 150 148 149 151 153 157 160 148 131 139 150 -14 -5 2 10 6 3 -2 1 1 2 2 2 31 -11 6 8

Industrial raw materials 22.6 121 129 145 182 191 177 170 169 171 173 173 170 148 116 174 171 10 6 13 25 5 -8 -4 0 1 1 0 -1 -2 -22 50 -2

Agricultural raw materials 10.1 84 95 107 120 122 118 111 107 104 102 101 99 94 83 117 106 11 12 13 12 2 -3 -6 -3 -3 -2 -1 -1 -10 -12 41 -9

Textile fibres 1.0 76 86 99 111 115 117 107 102 102 102 101 101 81 74 110 103 6 14 15 11 4 2 -9 -5 0 0 0 0 -3 -8 49 -7

Wood products 7.4 79 86 92 105 107 100 92 88 84 80 78 77 86 78 101 86 10 9 7 14 1 -6 -8 -4 -5 -4 -3 -2 -15 -9 30 -15

Non-ferrous metals 9.1 124 134 155 165 164 158 153 154 161 169 169 170 150 113 160 159 19 8 16 6 0 -4 -3 1 5 5 0 1 -18 -25 42 -1

Ferrous raw materials² 3.4 223 216 235 413 471 401 393 396 398 398 398 382 301 223 380 396 0 -3 9 76 14 -15 -2 1 1 0 0 -4 49 -26 70 4

Energy raw materials 67.4 156 166 184 204 194 195 191 189 192 193 193 193 218 145 195 191 9 7 11 11 -5 0 -2 -1 2 0 0 0 31 -33 34 -2

Coal³ 4.8 172 180 236 272 251 241 241 229 229 241 253 241 303 179 250 235 2 5 31 15 -7 -4 0 -5 0 5 5 -5 83 -41 40 -6

Crude oil 62.7 155 165 180 199 190 192 187 186 190 189 188 189 212 143 190 188 10 7 9 11 -5 1 -2 0 2 0 0 0 27 -33 33 -1

¹ HWWI index, total ² iron ore, steel scrap ³ steam coal


46

Table A3 Actual and forecast prices of individual commoditiesIndex in US$ terms, 2000=100, percentage change on previous period

Commodity 09/3 09/4 10/1 10/2 10/3 10/4 11/1 11/2 11/3 11/4 12/1 12/2 2008 2009 2010 2011

Barley CAN 156 177 183 185 203 228 234 234 227 225 225 221 259 162 200 230 -7 14 3 1 10 12 3 0 -3 -1 0 -2 19 -37 23 15

Maize USA 157 186 179 171 204 279 288 294 300 303 305 305 255 179 208 296 -20 19 -4 -4 19 37 3 2 2 1 1 0 42 -30 16 42

Rice THAI 270 275 271 223 226 242 245 242 240 237 234 234 326 272 241 241 2 2 -1 -18 2 7 1 -1 -1 -1 -1 0 102 -16 -12 0

Wheat US 176 179 171 167 231 258 258 254 247 241 234 229 286 191 207 250 -16 2 -4 -3 39 12 0 -1 -3 -3 -3 -2 31 -33 8 21

Coffee US,D,F 179 189 194 206 246 236 231 229 236 243 248 252 193 179 220 235 -2 5 3 6 19 -4 -2 -1 3 3 2 2 16 -7 23 6

Cocoa US 334 385 371 362 344 327 311 305 299 302 305 308 291 326 351 304 15 15 -4 -3 -5 -5 -5 -2 -2 1 1 1 33 12 8 -13

Tea avg 157 175 153 136 149 158 155 143 135 137 140 142 123 144 149 143 21 12 -13 -11 10 6 -2 -8 -5 1 2 2 14 17 4 -4

Sugar US 252 282 303 190 246 306 284 256 249 242 235 235 149 218 261 258 40 12 8 -37 30 24 -7 -10 -3 -3 -3 0 22 47 20 -1

Soybeans US 205 202 192 193 206 231 236 238 241 245 250 255 249 205 206 240 -9 -1 -5 0 7 12 2 1 1 2 2 2 44 -18 0 17

Soybean meal US 191 179 164 166 177 193 197 197 199 201 205 209 197 189 175 198 -10 -7 -8 1 7 9 2 0 1 1 2 2 40 -4 -7 13

Soybean oil US 220 240 243 240 253 296 299 305 311 317 326 336 325 224 258 308 -6 9 1 -1 5 17 1 2 2 2 3 3 43 -31 15 19

Cotton US 98 116 126 135 145 165 152 142 140 139 137 136 106 95 143 143 11 17 9 7 7 14 -8 -7 -1 -1 -1 -1 11 -11 51 0

Wool AUS 166 195 205 194 196 210 210 211 212 214 217 219 189 158 201 212 12 17 5 -5 1 7 0 0 1 1 1 1 -4 -16 27 5

Natural rubber THAI 275 362 443 440 453 512 522 531 536 540 543 546 365 268 462 532 18 32 23 -1 3 13 2 2 1 1 1 0 17 -26 72 15

Softwood S 158 176 168 169 174 177 168 159 148 140 135 132 162 150 172 154 17 11 -5 1 3 2 -5 -5 -7 -5 -3 -3 -16 -7 14 -11

Woodpulp FIN 99 113 124 139 143 141 137 133 130 127 126 124 126 97 137 132 14 15 10 12 3 -2 -3 -3 -2 -2 -1 -1 8 -23 42 -4

Aluminium GB 117 129 139 135 135 131 136 144 151 163 163 163 167 108 135 149 22 11 8 -3 0 -3 4 6 5 8 0 0 -2 -35 26 10

Copper GB 323 366 398 388 399 441 426 410 413 417 418 424 385 284 406 417 26 13 9 -3 3 11 -3 -4 1 1 0 2 -2 -26 43 2

Lead GB 425 504 490 430 447 425 429 438 473 487 487 487 461 380 448 456 29 19 -3 -12 4 -5 1 2 8 3 0 0 -19 18 18 7

Nickel GB 205 203 231 261 245 233 244 249 299 329 329 329 244 170 242 281 37 -1 14 13 -6 -5 5 2 20 10 0 0 -43 -30 42 16

Tin GB 268 279 316 329 378 454 440 427 446 458 450 452 342 250 369 443 8 4 13 4 15 20 -3 -3 4 3 -2 1 28 -27 48 20

Zinc GB 156 196 203 180 178 177 185 204 214 231 231 231 166 147 184 209 20 26 4 -11 -1 -1 5 10 5 8 0 0 -42 -12 26 13

Iron ore BRA 351 351 351 649 778 701 715 715 715 715 715 679 488 351 620 715 0 0 0 85 20 -10 2 0 0 0 0 -5 66 -28 77 15

Steel scrap US 274 274 288 312 312 318 318 328 339 339 339 339 371 249 308 331 18 0 5 8 0 2 0 3 3 0 0 0 40 -33 23 8

Steel scrap EU 402 402 424 458 455 464 464 479 495 495 495 495 564 365 451 483 18 0 6 8 -1 2 0 3 3 0 0 0 57 -35 23 7

Steam coal AUS 280 302 369 388 362 373 388 368 368 387 406 386 500 281 373 378 9 8 22 5 -7 3 4 -5 0 5 5 -5 98 -44 33 1

Steam coal SA 230 255 313 339 326 343 353 335 335 355 373 355 450 240 330 345 3 11 23 8 -4 5 3 -5 0 6 5 -5 94 -47 38 4

Crude oil avg 241 266 272 277 267 291 294 293 298 297 296 297 344 218 277 295 15 10 2 2 -3 9 1 0 2 0 0 0 37 -37 27 7


47

Table A4 Actual and forecast prices of individual commoditiesIndex in euro terms, 2000=100, percentage change on previous period

Commodity 09/3 09/4 10/1 10/2 10/3 10/4 11/1 11/2 11/3 11/4 12/1 12/2 2008 2009 2010 2011

Barley CAN 100 110 122 134 145 149 153 153 149 147 147 144 160 107 137 150 -11 10 10 10 8 3 3 0 -3 -1 0 -2 9 -33 28 10

Maize USA 101 116 119 124 146 183 189 193 196 198 200 200 159 119 143 194 -24 15 2 4 17 26 3 2 2 1 1 0 31 -25 20 36

Rice THAI 175 172 181 162 162 159 161 159 157 156 154 154 204 181 166 158 -3 -1 5 -11 0 -2 1 -1 -1 -1 -1 0 87 -11 -8 -5

Wheat US 113 112 114 120 164 168 168 166 162 157 153 150 177 127 142 163 -20 -2 2 6 36 2 0 -1 -3 -3 -3 -2 22 -29 12 15

Coffee US,D,F 116 119 130 150 176 155 152 151 155 160 163 166 122 119 153 155 -7 2 10 15 17 -12 -2 -1 3 3 2 2 8 -2 28 1

Cocoa US 215 240 247 263 246 214 204 200 196 198 200 202 182 215 243 199 9 12 3 6 -6 -13 -5 -2 -2 1 1 1 23 18 13 -18

Tea avg 101 109 102 99 106 103 101 93 89 90 91 93 77 94 103 93 16 8 -7 -3 8 -3 -2 -8 -5 1 2 2 6 22 9 -9

Sugar US 160 174 199 136 174 198 184 166 161 156 152 152 92 141 177 167 33 8 15 -32 28 14 -7 -10 -3 -3 -3 0 14 53 25 -6

Soybeans US 132 126 128 140 147 151 154 156 157 161 164 167 155 136 142 157 -14 -5 2 9 5 3 2 1 1 2 2 2 33 -12 4 11

Soybean meal US 123 111 109 120 126 126 129 129 130 131 134 137 123 125 120 130 -14 -10 -2 10 5 0 2 0 1 1 2 2 30 2 -4 8

Soybean oil US 142 150 162 174 180 194 196 200 204 208 214 220 202 148 177 202 -11 6 8 7 4 7 1 2 2 2 3 3 32 -26 20 14

Cotton US 63 72 84 98 103 108 99 92 91 91 90 89 66 62 98 93 5 14 17 17 6 5 -8 -7 -1 -1 -1 -1 3 -6 58 -5

Wool AUS 107 122 137 141 140 137 138 138 139 140 142 143 117 104 139 139 7 14 13 3 0 -2 0 0 1 1 1 1 -11 -12 34 0

Natural rubber THAI 177 225 295 318 323 335 342 348 351 353 355 357 226 176 318 348 12 28 31 8 2 4 2 2 1 1 1 1 8 -22 81 10

Softwood S 102 110 112 123 124 116 110 104 97 92 89 86 102 99 119 101 11 8 2 10 1 -6 -5 -5 -7 -5 -3 -3 -22 -2 20 -15

Woodpulp FIN 63 70 82 100 102 92 89 87 85 83 82 81 78 63 94 86 8 11 17 22 2 -10 -3 -3 -2 -2 -1 -1 0 -19 48 -9

Aluminium GB 75 81 93 98 96 86 89 94 99 107 107 107 104 71 93 97 16 7 15 5 -2 -11 4 6 5 8 0 0 -10 -32 32 5

Copper GB 208 228 265 280 284 288 278 268 270 272 273 277 238 186 279 272 20 10 16 6 2 1 -3 -4 1 1 0 2 -10 -22 50 -2

Lead GB 273 314 325 310 318 278 280 286 309 318 318 318 285 248 308 298 23 15 4 -5 3 -13 1 2 8 3 0 0 -25 -13 24 -3

Nickel GB 132 127 154 189 175 153 160 164 196 216 216 216 151 112 168 184 31 -4 22 22 -7 -13 5 2 20 10 0 0 -48 -26 50 10

Tin GB 173 174 211 238 270 297 289 280 292 300 295 296 212 165 254 290 3 1 21 13 13 10 -3 -3 4 3 -2 1 18 -23 54 14

Zinc GB 100 122 135 130 127 116 121 134 140 151 151 151 103 96 127 137 14 22 10 -4 -2 -9 5 10 5 8 0 0 -47 -7 32 8

Iron ore BRA 226 218 233 470 555 458 467 467 467 467 467 444 307 232 429 467 -5 -3 7 101 18 -17 2 0 0 0 0 -5 55 -24 85 9

Steel scrap US 178 172 193 228 224 209 209 216 223 223 223 223 229 165 213 218 12 -3 13 18 -2 -7 0 3 3 0 0 0 27 -28 29 2

Steel scrap EU 259 251 283 333 325 304 304 314 324 324 324 324 346 241 311 317 13 -3 13 18 -2 -7 0 3 3 0 0 0 43 -30 29 2

Steam coal AUS 180 188 245 281 258 244 253 241 241 253 265 252 311 185 257 247 4 4 31 15 -8 -6 4 -5 0 5 5 -5 84 -40 39 -4

Steam coal SA 147 158 208 244 232 223 230 218 218 232 243 231 279 158 227 225 -2 7 31 18 -5 -4 3 -5 0 6 5 -5 81 -43 43 -1

Crude oil avg 155 165 180 199 190 206 209 208 211 211 210 211 212 143 194 210 10 7 9 11 -5 9 1 0 2 0 0 0 27 -33 36 8


48

Table A5 Commodities not included in the HWWI index2000=100, percentage change on previous period

in US$ terms 09/3 09/4 10/1 10/2 10/3 10/4 11/1 11/2 11/3 11/4 12/1 12/2 2008 2009 2010 2011

Coking coal 264 264 264 409 460 427 427 409 409 429 429 450 510 351 390 419 0 0 0 55 13 -7 0 -4 0 5 0 5 144 -31 11 7

Natural gas 179 202 229 198 214 216 218 220 223 225 233 246 347 226 214 222 -16 13 13 -14 8 1 1 1 1 1 3 6 57 -35 -5 3

Steel reinforcing rounds 234 234 239 272 233 241 245 245 262 262 276 276 332 230 246 254 7 0 2 14 -14 3 2 0 7 0 5 0 19 -31 7 3

in euro terms

Coking coal 170 165 176 297 329 304 304 291 291 305 305 320 323 237 277 298 -5 -3 7 69 11 -8 0 -4 0 5 0 5 129 -27 17 8

Natural gas 116 127 153 144 153 154 155 157 158 160 166 175 221 151 151 157 -19 9 21 -6 7 0 1 1 1 1 3 6 48 -31 0 4

Steel reinforcing rounds 151 147 160 197 167 171 174 174 187 187 196 196 208 152 174 180 2 -3 9 24 -15 2 2 0 7 0 5 0 10 -27 14 4

Table A6 Weights of commodities and commodity groups¹

per cent share in: total excl. energy total excl.

energy

HWWI index, total 100 Industrial raw materials 22.6 69.5

Total excl. energy 32.6 100 Agricultural raw materials 10.1 31.1 - Cotton 0.9 2.8

Food total 9.9 30.5 - Wool 0.3 1.0 - Hides 0.7 2.1

Cereals 2.7 8.4 - Natural rubber 0.8 2.3 - Barley 0.1 0.4 - Wood 4.5 13.7 - Maize 1.3 3.9 - Woodpulp 3.0 9.1 - Wheat 0.9 2.8 - Rice 0.4 1.2 Non-ferrous metals 9.1 27.9

- Aluminium 4.8 14.8 Oilseeds, vegetable oils 3.4 10.3 - Copper 2.4 7.3 - Soybeans 1.7 5.2 - Lead 0.2 0.6 - Soybean meal 1.2 3.7 - Nickel 0.9 2.8 - Soybean oil 0.1 0.2 - Tin 0.2 0.7 - Coconut oil 0.2 0.5 - Zinc 0.6 1.7 - Palm oil 0.1 0.4 - Sunflower oil 0.1 0.3 Iron ore, steel scrap 3.4 10.5

- Iron ore 2.4 7.3 Tropical beverages, sugar 3.8 11.8 - Steel scrap 1.0 3.1 - Coffee 2.2 6.7 - Cocoa 0.7 2.2 Energy raw materials 67.4 - Tea 2.3 1.0 - Coal 4.8 - Sugar 0.6 2.0 - Crude oil 62.7

¹ Based on world imports of OECD countries minus Intra-EU trade, 1999-2001


49

Table 7 Price quotations included in the HWWI Commodity Price IndexVariety Market/

originCurrency / units of quotation

Barley Canadian No. 1 Western, nearest month Winnipeg CAD/t

Maize US No. 2 yellow , nearest month Chicago US¢ / 56lb bushel

Rice White Thai Long Grain, 100% B Grade, fob Bangkok US$/t

Wheat US hard red winter, nearest month Kansas City US¢ / 60lb bushel

Soybeans US No. 2 yellow, in bulk, nearest month Chicago US¢ / 60lb bushel

Soybean meal 48 percent protein, fob railroad cars at shipping plants, nearest month Chicago US$/sht

Soybean oil Raw, ex warehouse, nearest month Chicago US¢/lb

Coconut oil Philippines, bulk, cif Rotterdam Rotterdam US$/t

Palm oil Malaysian, 5 % , cif England, nearest month London US$/t

Sunflower seed oil All origins, ex tank Rotterdam, nearest month Rotterdam US$/t

Coffee ICO composite average indicator price NY,F,D US¢/lb

Cocoa ICCO price, average daily London/NY US$/t

Tea Average price of Calcutta, Colombo and Kenia auctions US¢/kg

Sugar Raw, CSCE, contract No 11, nearest month New York US¢/lb

Cotton Middling upland, 1 1/16 inches, contract No 2, nearest month New York US¢/lb

Hides US, heavy domestic steers, ex warehouse Chicago US$/pc

Wood Sawnwood, Swedish pine, 63 x 175 mm, cif NW Europe NW Europe EUR/m³

Rubber Natural rubber, RSS 1, nearest month Kuala Lumpur Malays.¢/kg

Aluminium Primary High Grade, ex warehouse, cash London US$/t

Lead Standard, ex warehouse, cash London US$/t

Copper Grade A, ex warehouse, cash London US$/t

Nickel Primary High Grade, ex warehouse, cash London US$/t

Zinc Special High Grade, ex warehouse, cash London US$/t

Tin Ex warehouse, cash London US$/t

Iron ore Brazilian, Carajás fines, contract price to Europe, fob P da Madeira US¢/dmtu

Steel scrap 1 No. 1 Steel (HMS1) NE USA US$/long ton

Steel scrap 2 No. 1 Steel Europe EUR/t

Coal 1 Australian steam coal, average spot price, fob Newcastle US$/t

Coal 2 South African steam coal, average spot price, fob Richards Bay US$/t

Crude oil 1 Dubai, 32% API, spot price, fob London US$/barrel

Crude oil 2 Brent, 38% API, spot price, fob London US$/barrel

Crude oil 3 West Texas Intermediate, 40% API, spot price, fob USA US$/barrel

world commodity prices 2010 to mid-2012 - ucl - universit©

Documents