The World Commodities Market 2010 A Super Cycle: Why Today and Where Tomorrow? F. Gerard Adams University of Pennsylvania (3.11.2010)
Do really believe we have enough data to make a decision?
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
Figure 1: Commodity Price Indexes 2000-2010 300 250 200 150 100 50 0 Food Beverages Ag. Raw Materials Metals Energy 2005-100 2000M1 2000M8 2001M3 2001M1 2002M5 2002M1 2003M7 2004M2 2004M9 2005M4 2005M1 2006M6 2007M1 2007M8 2008M3 2008M1 2009M5 2009M1
Table.1: Growth Rates of Commodity Price Indexes (% increase per year, July to July) Food Beverages Ag Raw Mat Metals Energy 1983-1988 2.2% -4.5% 6.5% 7.9% na 1988-1993 -3.4% -8.9% 3.1% -10.6% na 1993-1998 -1.2% 8.8% -3.0% 0.4% -4.5% 1998-2003 -2.2% -6.7% -0.2% 1.8% 14.5% 2003-2008 15.2% 14.6% 5.4% 22.9% 30.4% (% change 6,12 month period) 2008.7-2009.1-28.3% -14.5% -26.4% -48.5% -61.8% 2009.1-2010.1 10.2% 20.9% 28.7% 59.7% 50.9% 2009.1-2010.1** 7.3% 17.9% 21.1% 30.8% 19.4% (Standard Deviation 1980-2003) 2.4% 5.1% 3.2% 4.1% 6.0% Source: World Bank data **adjusted to 2008.7 base SD= Standard Deviation of annual changes
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
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
The Situation in the World Market Had a tremendous business cycle swing and are now in the early stages of recovery In 2007-8 Economy slowed particularly in commodity using sectors Housing Manufacturing Industries Autos In 2009-10 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
Supply Failed to keep up with rapid growth of demand
The US dollar Commodity prices are affected by decline of US dollar, But 2000=1.00 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00 1994. 1996. 1998. 2000. Exchange Rates US $ against other currencies currencies 2002. 2004. 2006. 2008. China, P.R. (yuan) Euro Japan (yen) South Korea (won) United Kingdom (pound) 1 United States
Speculative forces behind the price swing Sharp movements in all commodities in 2007-8 suggest speculation on an expected price increase Collapse in second half 2008 looks like closing out positions What about recovery in 2009?
The Oil Market
Supply and Demand and the Oil Price Boom
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 2008.3 2009.3 Oil Supply 2004 2007 2004-2007 OECD 22.8 21.5-2.00% 21 20.6 20.2 20.4 20.8 Non-OECD 60.3 63 1.40% 63.9 64.8 65.7 65.3 63.7 Total World Production 83.1 84.4 0.50% 84.9 85.3 85.9 85.7 84.5 Oil Demand OECD 49.4 49.1-0.20% 49 48.9 48.8 46.5 44.9 Non-OECD 33 36.8 3.60% 38.1 39.5 40.9 38.3 39.4 Total World Consumption 82.4 85.9 1.40% 87.1 88.3 89.7 84.7 84.3 Stock Draw & Discrepancy -0.7 1.5 2.2 3 3.8-1 -0.2 Source: EIA and estimates
Demand Side Rapid growth of demand in Asia Slow growth in Europe and US Will oil demand decline as prices rise? Only slowly
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
Oil Reserves and Production: Major Producing Countries 2007 Reserves Production Years' Production** Billion bbls Mil bbl/d Years Saudi Arabia 260 8.8 81 Canada* 179 2.7 182 Iran 136 3.9 96 Iraq 115 3.7 85 Kuwait 102 2.5 108 United Arab Emirates 97 2.5 106 Venezuela 80 2.4 91 Russia 60 9.5 17 Libya 41 1.8 62 Nigeria 36 2.3 43 Kazakhstan 30 1.4 21 United States 21 4.9 12 China 16 3.9 11 Mexico 12 3.2 10 Norway 8 2.8 8 Total of Top 15 1,193 56.3 58 World Total 1,292 84.8 42 * Including from oil sands **Reserves/production*365 Source: EIA, Reserve data from Oil and Gas Journal
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
Table 7.4: Growth Rates of Food Price Indexes (% increase per year, July to July) Wheat Soy Barley Rice Peanuts Maize Sugar 1983-1988 0.3% 5.7% 3.7% 1.0% -4.6% -2.1% 1.2% 1988-1993 -3.2% -4.4% -1.1% -4.3% 0.6% -1.0% -2.3% 1993-1998 -1.5% -2.2% 2.8% 8.6% -0.8% -0.2% 0.7% 1998-2003 2.1% -1.6% 2.5% -9.6% 0.3% -0.7% -1.2% 2003-2008 18.3% 19.0% 18.9% 27.8% 0.7% 7.3% 0.7% (% change 6,12 month period) 2008.7-2009.1-27.1% -34.2% -51.0% -23.0% -28.7% 2009.1-2010.1-15.9% -1.6% 20.6% -2.8% 5.2% 2009.1-2010.1** -11.6% -1.0% 10.1% -2.2% 3.7% -38.9% -3.4% -2.2% -14.0% 62.5% 55.4% (Standard Deviation 1980-2003) 4.6% 5.0% 7.2% 5.8% 8.7% 5.4% 12.8% Source: World Bank data **adjusted to 2008.7 base SD= Standard Deviation of annual changes
400.0 350.0 300.0 250.0 200.0 150.0 100.0 50.0 0.0 Metals Metals Prices 2000-2010 Aluminum Copper Nickel Tin Zinc 2005.1=100 2000M1 2000M1 2001M9 2002M7 2003M5 2004M3 2005M1 2005M1 2006M9 2007M7 2008M5 2009M3 2010M1
Table : Growth Rates of Metals Price Indexes (% increase per year, July to July) Aluminum Copper Iron Ore Lead Nickel Tin Zinc 1983-1988 10.6% 5.2% -3.5% 8.6% 22.2% -12.3% 10.3% 1988-1993 -15.3% -2.8% 3.6% -9.3% -21.2% -7.2% -5.7% 1993-1998 1.7% -3.0% 1.3% 6.7% -3.1% 2.5% 2.3% 1998-2003 1.9% 0.7% 0.6% -1.1% 14.2% -3.5% -4.6% 2003-2008 15.1% 31.8% 29.6% 26.8% 16.5% 31.6% 16.1% (% change 6,12 month period) 2008.7-2009.1-53.7% -61.2% -28.2% -41.6% -42.5% -49.6% -59.6% 2009.1-2010.1 57.0% 126.0% 105.4% 59.2% 53.2% 100.8% 2009.1-2010.1** 26.4% 48.9% 62.6% 34.0% 26.8% 65.3% (Standard Deviation 1980-2003) 5.8% 5.7% 2.4% 5.2% 7.8% 4.7% 2.2% Source: World Bank data **adjusted to 2008.7 base SD= Standard Deviation of annual chan
The Metals Price Cycle Cents per lb. Stage I Stage II Market price Long run price Years
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!)
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
Inventories and Price Price Inventory level, weeks supply
World Refined Copper Usage and Supply 2004-2009 Thousand metric tons 2003 2004 2007 2008 2008 2009 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) 1,780 923 1,027 1,158 1,031 1,341 Weeks' Stocks 5.9 2.9 2.9 3.3 3.0 3.9
Critical Elements: Long Run Cost of Producing Additional Metal Cost of developing mines Mining Cost Smelting Cost
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?
4500 4000 3500 3000 2500 2000 1500 1000 500 0 Calories per person per day 1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 Brazil China France Germany India Indonesia Italy Japan United Kingdom United States of America USSR
140 120 100 80 60 40 20 Brazil Protein consumption grams per person per day China France Germany Ind ia Indonesia Ita ly Japan United Kingdom 0 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 United States of America USSR
180 160 140 120 100 80 60 40 20 Fat Consumption per capita per day Brazil China France Germany Ind ia Ind onesia Italy Japan United Kingdom 0 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 United States of America USSR