Commodities and Energy Sep

Macro Research - Commodities and Energy
Macro Research
30 September, 2015
Commodities and Energy

Commodities drop broadly as China slows
Weaker growth in emerging markets squeezes metal prices
Lower oil production in US, but higher in OPEC nations
Good harvests and low energy prices mean lower food prices
Reversal in commodity cycle creates low global price pressure

Swedbanks Commodity Price Index fell 11.6% in USD in August
compared with July, reaching the lowest level in six years, when the
global economy was on the brink of recession. On an annualized basis
commodity prices plunged 46.7%. In SEK the decrease was 33% during
the same period.
The August commodity price drop was broad and spanned everything
from energy to metals and food. The biggest monthly decline was in
energy commodities, which fell 14.7% compared with July, while food
prices dropped 4.4%.
The rebalancing of the Chinese economy from investment and export
driven growth to consumption and service oriented growth is having a
major impact on global commodity markets. This is particularly true of
metals, where China has accounted for a major share of global demand
and propelled to a major expansion of global capacity.
Swedbanks Commodity Price Index in USD, 2010=100
150
130
110
90
70
50
2010
2011
2012
Energy Raw Materials Index

Total Index
Source: Swedbank Research & Macrobond
September 30, 2015
2013
2014
2015
Non-Ferrous Metals Index

Food Index
Jrgen Kennemar
Analyst
Jorgen.kennemar@swedbank.se
+46 (0)706438329
Please see important disclosures at the end of this document
Page 1 of 6
Industrial metals
Weaker emerging market growth and overcapacity are squeezing metal
prices on a broad basis; they have now reached the lowest level in six
years. Pressure to increase efficiencies and cut production is growing.
Broad-based drop in metal prices focus on overcapacity and China

In August metal prices fell an average of 6.6% in USD compared with July,
with zinc accounting for the biggest decline (9.6%), followed by nickel
(9.5%) and copper (6.7%). The price level for all industrial metals in
Swedbanks Commodity Price Index has declined nearly 30% on an
annualized basis, with nickel dropping the most, -45%. Iron ore prices
have followed a similar trend, losing nearly 40%. The decline for metals
since the second half of 2011 has now produced the lowest prices in six
years and is tightly squeezing the profit margins of mining companies.
Industrial metal price trend, y/y
Production cutbacks and the shutdown of production units are growing

in frequency in order to reduce a mounting metal surplus after a decade
of major expansion. The Australian mining giant Glencore plans to
shutter its copper production in Zambia and the Congo, reducing supplies
by 400,000 tons a year, while Freeport-McMoran is slashing investment,
which is expected to reduce production in 2016-17. The advantage in
terms of costs that several commodity producers have gained through
currency depreciations could lead to a redistribution of production,
possibly delaying a stabilization of prices.
After the summers price drop and weaker Chinese growth, we estimate
that industrial metals, excluding iron ore, will drop an average of 13%
this year compared with the 2-3% increase we predicted last spring.
Production cutbacks being implemented by the mining industry will
eventually stabilize prices, but its not until 2016 that we expect them to
again begin to rise. The biggest potential for higher prices is in zinc and
copper, where the imbalances are smaller. For aluminum and nickel the
picture isnt as bright, with more capacity coming on line, notably for
aluminum, where China is in the midst of a significant capacity
expansion. The risk is still on the downside, not least if developments in
China deteriorate more than we forecast.
September 30, 2015
Metal inventories, millions of tons
Page 2 of 6
Crude oil
Oil prices remain low despite that US production has probably peaked.
Consistently low prices

Oil supplies continue to outpace global demand, which is pressuring
already low prices. Crude prices fell 15.3% in USD in August vs. July, the
biggest monthly drop since January 2015. In September the average oil
price (Brent) was USD 45 a barrel. Supplies continue to grow with OPEC
nations, led by Saudi Arabia, keeping up production. During the first halfyear OPECs production grew steadily compared with the quotas that the
cartel had decided on. The UN endorsement of the nuclear agreement
with Iran is expected to raise supplies by 1 million barrels within a 12-18
month period. Lower oil prices are beginning to impact US production,
which has probably peaked for this cycle. The International Energy
Agency (IEA) has revised production estimates lower for this year and
next to 9.3 and 8.8 million barrels a day, respectively. Lower profitability
and difficulties for the industry in finding financing have become more
common and could eventually stifle production.
Crude surplus remains high
Oil production in OPEC nations
Both the IEA and OPEC estimate that global demand will rise in 20152016, though at a slower pace, 1.4 million barrels a day in 2016 from an
estimated 1.7 million this year. Although the average price (Brent) for the
first nine months of the year of USD 55 a barrel is in line with our
forecast, the risks are on the downside. Growing concerns about
emerging markets, Irans entrance into the oil market and a strong dollar
will keep oil prices from rebounding much higher in the near term.
Food prices
Good harvests and lower production costs in the wake of falling energy
prices are lowering food prices.
Swedbanks food price index fell 4.4% in USD in August compared with
July and is now at the lowest level since 2009. Grain prices fell 9.2% in
August vs. July, followed by oilseeds, which dropped 6.8%. Prices for
exotic beverages such as coffee recovered slightly in August but from low
levels, and coffee prices are about 25% lower than the same month in
2014. In September we saw a slight increase in food prices, but it is too
early to determine whether they have bottomed out.
Several years of good harvests and growing global inventories are
contributing to the low prices. The Chinese economy also plays a major
role, since it is a big net importer. The dip in food prices coincides with
falling energy and fertilizer prices, which are lowering costs for producers.
The outlook is for further downward pressure in coming quarters. The
FAOs global grain production forecast was revised higher this fall by 13.8
million tons to 2,540 million tons due to favorable weather conditions. This
years production is 21 million tons lower than last years record harvests,
however. Consistently low oil prices and a continued strong dollar ahead
of the Feds anticipated interest rate hikes should keep prices in check in
coming quarters. Pressure will also come from producers, which have
become more competitive as their currencies have greatly depreciated.
September 30, 2015
Page 3 of 6
This is especially true of several South American economies, whose

currencies have fallen significantly against the dollar.
The vulnerability of food supplies cant be overlooked, though. A growing
population and changes in consumption will mean a steady increase in
global demand. Another effect that could raise prices is weather
phenomena such as El Nino and La Nina, which pop up on a regular
basis, since prolonged droughts and torrential rains can limit global grain
production. Meteorologists are warning that these are weather impacts
will be more noticeable next year after several years of more favorable
conditions.
Price trend for grains and foods. In total, USD
1,2
1,0
0,8
0,6
0,4
0,2
0,0
2004
2006
2008
2010
2012
World, Zinc, LME, Closing Stock
Nickel
2014
Copper
Source: Swedbank Research & Macrobond
September 30, 2015
Page 4 of 6
Swedbanks Commodity Price Index

Swedbank Commodity Index
Basis 2000 = 1oo
T otal index
Per cent change month ago
Per cent change year ago
T otal index exclusive energy
Food, tropical beverages
Cereals
T ropical beverages and tobacco
Coffee
Oilseeds and oil
Industrial raw materials
Agricultural raw materials
Cotton
Softwood
W oodpulp
N on-ferrous metals
Copper
Aluminium
Lead
Z inc
Nickel
Iron ore, steel scrap
Energy raw materials
Coking coal
Crude oil
- US$ 30-09-15
6.2015
7.2015
8.2015
223,0
-1,7
-37,7
191,4
-1,3
-19,4
197,8
1,6
-19,1
179,3
1,2
-18,5
210,5
1,2
-13,7
125,0
1,2
-17,9
182,6
2,7
-30,2
189,5
-2,2
-19,4
141,0
0,4
-16,4
64,6
-0,7
-24,6
91,7
-0,7
-24,6
852,0
-0,1
-7,9
186,4
-6,8
-13,3
5833,2
-7,3
-14,4
1683,2
-6,6
-8,1
1836,0
-8,3
-12,7
2087,1
-8,6
-1,8
12776,6
-5,2
-31,2
322,4
3,4
-30,4
237,1
-1,8
-42,4
230,0
-3,6
-17,5
237,4
-1,8
-43,2
202,7
-9,1
-42,1
182,6
-4,6
-23,6
201,7
2,0
-13,0
191,8
6,9
-3,1
208,2
-1,1
-14,9
119,8
-4,2
-21,5
194,1
6,3
-14,2
177,1
-6,6
-26,6
135,8
-3,7
-18,9
65,4
1,2
-4,3
92,8
1,2
-4,3
851,5
-0,1
-8,1
177,6
-4,7
-21,3
5456,2
-6,5
-23,2
1637,8
-2,7
-15,8
1762,0
-4,0
-19,5
2001,7
-4,1
-13,4
11380,5
-10,9
-40,2
281,2
-12,8
-40,6
211,7
-10,7
-47,0
227,8
-1,0
-15,0
210,9
-11,1
-48,0
179,3
-11,6
-46,7
176,3
-3,5
-26,1
192,9
-4,4
-16,8
174,1
-9,2
-8,8
204,2
-1,9
-19,3
121,2
1,2
-25,7
180,9
-6,8
-14,8
171,5
-3,2
-28,7
133,7
-1,6
-19,4
65,1
-0,3
0,2
92,5
-0,3
0,2
846,9
-0,5
-8,8
165,9
-6,6
-27,4
5088,8
-6,7
-27,3
1539,9
-6,0
-24,2
1691,7
-4,0
-24,4
1808,8
-9,6
-22,4
10314,6
-9,4
-44,5
283,9
1,0
-38,9
180,6
-14,7
-52,4
221,5
-2,8
-17,5
178,7
-15,3
-53,5
Source : SW EDBANK and H W W A-Institute for Economic R esearch H amburg
September 30, 2015
Swedbank Commodity Index

Basis 2000 = 1oo
T otal index
T otal index exclusive energy
Food, tropical beverages
Cereals
T ropical beverages and tobacco
Coffee
Oilseeds and oil
Industrial raw materials
Agricultural raw materials
Cotton
Softwood
W oodpulp
Non-ferrous metals
Copper
Aluminium
Lead
Z inc
Nickel
Iron ore, steel scrap
Energy raw materials
Coking coal
Crude oil
- SKr 30-09-15
6.2015
7.2015
8.2015
200,0
-2,8
-23,1
171,6
-2,4
-0,4
177,4
0,5
-0,1
160,8
0,1
0,6
188,7
0,1
6,6
112,1
0,1
1,4
163,8
1,6
-13,9
170,0
-3,2
-0,5
126,4
-0,7
3,3
57,9
-1,8
-6,8
82,2
-1,8
-6,8
764,0
-1,2
13,7
167,2
-7,8
7,1
5230,9
-8,3
5,7
1509,4
-7,6
13,4
1646,4
-9,3
7,8
1871,5
-9,6
21,2
11457,3
-6,2
-15,0
289,1
2,3
-14,0
212,6
-2,9
-28,9
206,3
-4,6
1,9
212,9
-2,8
-29,9
188,0
-6,0
-27,5
169,3
-1,3
-4,3
187,0
5,4
9,0
177,8
10,6
21,4
193,0
2,3
6,6
111,0
-0,9
-1,6
180,0
9,9
7,4
164,2
-3,4
-8,0
125,9
-0,4
1,6
60,6
4,7
19,8
86,1
4,7
19,8
789,5
3,3
15,1
164,7
-1,5
-1,4
5058,9
-3,3
-3,8
1518,5
0,6
5,5
1633,7
-0,8
0,8
1855,9
-0,8
8,5
10551,7
-7,9
-25,2
260,7
-9,8
-25,6
196,3
-7,7
-33,6
211,2
2,4
6,4
195,6
-8,1
-34,8
166,6
-11,4
-33,1
163,8
-3,2
-7,3
179,3
-4,1
4,3
161,8
-9,0
14,3
189,8
-1,7
1,1
112,6
1,4
-6,8
168,1
-6,6
6,8
159,4
-2,9
-10,6
124,2
-1,3
1,0
60,5
-0,1
25,6
86,0
-0,1
25,6
787,0
-0,3
14,3
154,2
-6,4
-9,0
4729,3
-6,5
-8,9
1431,1
-5,8
-4,9
1572,2
-3,8
-5,2
1681,0
-9,4
-2,7
9585,9
-9,2
-30,4
263,9
1,2
-23,4
167,8
-14,5
-40,3
205,8
-2,6
3,4
166,1
-15,1
-41,7
Source : SW EDBANK and HW W A-Institute for Economic Research Hamburg
Page 5 of 6
General disclaimer
This research report has been prepared by analysts of Swedbank
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September 30, 2015
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