The World Commodities Market 2010

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1 The World Commodities Market 2010 A Super Cycle: Why Today and Where Tomorrow? F. Gerard Adams University of Pennsylvania ( )

2 Do really believe we have enough data to make a decision?

3 Commodity Price Trends What has happened to the price of commodities? General super cycle pattern applying to almost all commodities Typical cycle until 2003 Since then a super cycle? The largest swing in many years

4 Figure 1: Commodity Price Indexes Food Beverages Ag. Raw Materials Metals Energy M1 2000M8 2001M3 2001M1 2002M5 2002M1 2003M7 2004M2 2004M9 2005M4 2005M1 2006M6 2007M1 2007M8 2008M3 2008M1 2009M5 2009M1

5 Table.1: Growth Rates of Commodity Price Indexes (% increase per year, July to July) Food Beverages Ag Raw Mat Metals Energy % -4.5% 6.5% 7.9% na % -8.9% 3.1% -10.6% na % 8.8% -3.0% 0.4% -4.5% % -6.7% -0.2% 1.8% 14.5% % 14.6% 5.4% 22.9% 30.4% (% change 6,12 month period) % -14.5% -26.4% -48.5% -61.8% % 20.9% 28.7% 59.7% 50.9% ** 7.3% 17.9% 21.1% 30.8% 19.4% (Standard Deviation ) 2.4% 5.1% 3.2% 4.1% 6.0% Source: World Bank data **adjusted to base SD= Standard Deviation of annual changes

6 We will talk about: Broad perspectives on the world economy and commodities Situation in the Petroleum market Agriculture and its new relation to energy Situation in Metals markets

7 How to explain the broad price swing Swings in demand Business cycle China and India Failure of supply to keep up Changes in the value of the US dollar Speculative activity

8 The Situation in the World Market Had a tremendous business cycle swing and are now in the early stages of recovery In Economy slowed particularly in commodity using sectors Housing Manufacturing Industries Autos In US, Europe showing some signs of bottoming out and slow recovery- some doubts but on balance we are moderately optimistic China, growth at 10-11%, at a demand pressure peak, India also strong recovery BRIC countries as locomotives in the world economy

9 Supply Failed to keep up with rapid growth of demand

10 The US dollar Commodity prices are affected by decline of US dollar, But 2000= Exchange Rates US $ against other currencies currencies China, P.R. (yuan) Euro Japan (yen) South Korea (won) United Kingdom (pound) 1 United States

11 Speculative forces behind the price swing Sharp movements in all commodities in suggest speculation on an expected price increase Collapse in second half 2008 looks like closing out positions What about recovery in 2009?

12 The Oil Market

14 Supply and Demand and the Oil Price Boom

15 Recent and Projected World Oil Market Balance and Stock Withdrawals (millions of b/d) Actual %change pa 2008 proj Projected 2009 proj Actual 2010 proj Oil Supply OECD % Non-OECD % Total World Production % Oil Demand OECD % Non-OECD % Total World Consumption % Stock Draw & Discrepancy Source: EIA and estimates

16 Demand Side Rapid growth of demand in Asia Slow growth in Europe and US Will oil demand decline as prices rise? Only slowly

17 Peak Oil??? Petroleum is an exhaustible commodity Short run time lags and market equilibrium Long run will we run out of oil? King Hubbert and the idea of Peak Oil Old reserves are being depleted and new ones are more difficult to find and exploit Will we run out of oil? Not for a long time and only in the sense of running out of conventional crude petroleum at economically reasonable extraction cost

18 Oil Reserves and Production: Major Producing Countries 2007 Reserves Production Years' Production** Billion bbls Mil bbl/d Years Saudi Arabia Canada* Iran Iraq Kuwait United Arab Emirates Venezuela Russia Libya Nigeria Kazakhstan United States China Mexico Norway Total of Top 15 1, World Total 1, * Including from oil sands **Reserves/production*365 Source: EIA, Reserve data from Oil and Gas Journal

19 Agriculture and Biofuels US corn based ethanol Brazil sugar cane based alcohol Europe biodiesel Diversion of crop land from food crops is contributing to increase in food prices

20 Table 7.4: Growth Rates of Food Price Indexes (% increase per year, July to July) Wheat Soy Barley Rice Peanuts Maize Sugar % 5.7% 3.7% 1.0% -4.6% -2.1% 1.2% % -4.4% -1.1% -4.3% 0.6% -1.0% -2.3% % -2.2% 2.8% 8.6% -0.8% -0.2% 0.7% % -1.6% 2.5% -9.6% 0.3% -0.7% -1.2% % 19.0% 18.9% 27.8% 0.7% 7.3% 0.7% (% change 6,12 month period) % -34.2% -51.0% -23.0% -28.7% % -1.6% 20.6% -2.8% 5.2% ** -11.6% -1.0% 10.1% -2.2% 3.7% -38.9% -3.4% -2.2% -14.0% 62.5% 55.4% (Standard Deviation ) 4.6% 5.0% 7.2% 5.8% 8.7% 5.4% 12.8% Source: World Bank data **adjusted to base SD= Standard Deviation of annual changes

21 Metals Metals Prices Aluminum Copper Nickel Tin Zinc = M1 2000M1 2001M9 2002M7 2003M5 2004M3 2005M1 2005M1 2006M9 2007M7 2008M5 2009M3 2010M1

22 Table : Growth Rates of Metals Price Indexes (% increase per year, July to July) Aluminum Copper Iron Ore Lead Nickel Tin Zinc % 5.2% -3.5% 8.6% 22.2% -12.3% 10.3% % -2.8% 3.6% -9.3% -21.2% -7.2% -5.7% % -3.0% 1.3% 6.7% -3.1% 2.5% 2.3% % 0.7% 0.6% -1.1% 14.2% -3.5% -4.6% % 31.8% 29.6% 26.8% 16.5% 31.6% 16.1% (% change 6,12 month period) % -61.2% -28.2% -41.6% -42.5% -49.6% -59.6% % 126.0% 105.4% 59.2% 53.2% 100.8% ** 26.4% 48.9% 62.6% 34.0% 26.8% 65.3% (Standard Deviation ) 5.8% 5.7% 2.4% 5.2% 7.8% 4.7% 2.2% Source: World Bank data **adjusted to base SD= Standard Deviation of annual chan

23 The Metals Price Cycle Cents per lb. Stage I Stage II Market price Long run price Years

24 Past Stage I Lack of exploration and mining development while prices were low in the 1990s and early2000 Sharp increase in demand with economic recovery and particularly growth of large economies, China and India Speculative inventory demand Supply shortage and extraordinary high price (how high?) Next Stage II Increase in supply as new mines begin producing (Note long time lag!)

25 Critical Elements: Short Run Demand Cyclical sensitivity of demand-housing, autos, other industrial products(note rapid growth of demand in China and India) Low Demand Elasticity Supply Unpredictable supply variations-strikes, accidents (Escondido BHP Billiton) Time lag of new production capacity Delay in exploration Long time for construction Increasing consolidation of industry Inventories and speculative froth Meeting Inventory Requirements regardless of price Price expectations and speculation

26 Inventories and Price Price Inventory level, weeks supply

27 World Refined Copper Usage and Supply Thousand metric tons Jan-Nov Jan-Nov World Mine Production 13,757 14,594 15,463 15,530 14,137 14,361 Mine Capacity Util. 89.7% 90.8% 85.4% 82.9% 82.4% 80.5% World Refined Production 15,272 15,928 17,944 18,326 16,708 16,779 Ref Cap utilization 81.2% 83.0% 83.2% 81.1% 81.2% 78.2% World Refined Usage 15,714 16,839 18,168 18,010 16,560 16,635 Refined Stocks (end period) 1, ,027 1,158 1,031 1,341 Weeks' Stocks

28 Critical Elements: Long Run Cost of Producing Additional Metal Cost of developing mines Mining Cost Smelting Cost

29 Conclusion Diverse growth of world economy But rapidly growing China and India and their requirements Continued rise of commodity prices, even though we are not running out Can we see the recovery of commodity prices as a leading indicator of improving demand conditions in the world economy?

30 Calories per person per day Brazil China France Germany India Indonesia Italy Japan United Kingdom United States of America USSR

31 Brazil Protein consumption grams per person per day China France Germany Ind ia Indonesia Ita ly Japan United Kingdom United States of America USSR

32 Fat Consumption per capita per day Brazil China France Germany Ind ia Ind onesia Italy Japan United Kingdom United States of America USSR

A HISTORIC SHIFT TO GOOD TIMES?

RICE GLOBAL E&C FORUM A HISTORIC SHIFT TO GOOD TIMES? Oil Pricing Outlook Alessandro Lanza, PhD Chief Economist, Eni 1 Houston, October 11, 2005 Summary Key factors in oil price dynamics Supply Refining