Price of raw materials will cool but oil to remain high



Markets for many industrial raw materials are expected to cool in the
second half of the year after strong growth in early 2008.

As a result, prices will increase by an average of just 1.1 per cent in 2008 as a whole, said a recent report.

The first quarter of 2008 saw a rise in prices despite the slowdown in the United States economy, weaker economic prospects for the Organisation for Economic Co-operation and Development (OECD) countries and turbulence in the world’s financial markets. The falling dollar and rising inflation has prompted many investors to increasingly move to commodities as a safe haven.

The price rise also reflected concerns over supply and relatively low level of stocks, due to an increase in demand from China, Russia and India. Technical disruptions, particularly power shortages, and rising production costs were hampering supply growth across many industrial raw material markets, pushing prices up, said a report by the Economic Intelligence Unit (EIU).

However, over the course of this year the downturn in the US economy will start to have a negative impact on industrial raw material prices, said experts. “The impact will be exacerbated by the fact that the American recession will be consumer driven – thereby having a disproportionately large impact on demand for base metals used in construction and, to a lesser extent, on car manufacturers.

“The tightening conditions in the global credit markets are also likely to depress growth in Europe and Japan. Growth in the more export-dependent, or heavily-indebted, emerging markets could also be constrained,” said the EIU report. 

While the prices of other commodities may weaken, oil prices are expected to remain strong. “The fundamentals of the oil market are still strong. The demand is still expanding modestly, just exceeded by supply growth. Investors have recently been more focused on the conflicting pressures of a weaker US dollar versus a slowing global economy. We believe prices will move lower as demand weakens, but should find support at the $90 to $95pb level from both fundamentals and Organisation of the Petroleum Exporting Countries (Opec) action,” said Helen Henton, head of commodities research at Standard Chartered.

According to projections by the EIU, price for Brent in 2008 should average $91.25/b, close to the forecasts of Standard Chartered.

“Non-Opec supply will prove to be disappointing, resilient demand in China and the Middle East [where the retail price of fuel is subsidised] and Opec’s apparent determination to protect higher prices will keep the price high but the maximum rise in prices is expected to occur in the first half of the year. By the second half, weakening OECD economic growth will limit oil demand in those markets, allowing oil prices to slip back. In 2009, there could be a modest increase in supply, easing the pressure on prices. However, the market fundamentals will remain relatively tight and the price drop could be only marginal,” said the EIU report.

According to the Energy Information Administration (EIA), the increase in non-Opec production in the second half of the year is expected to contribute to increases in Opec surplus crude oil production capacity and ease upward price pressures towards the end of the year.

However, the short-term price risks will remain on the upside and are to be factored in when talking about price falls, experts pointed out. Geopolitical developments in the Middle East, Africa and Latin America may disrupt oil supply, leading to increased pressure on the price scale. On April 20, the price of crude went up to $117 per barrel primarily because of an attack on a pipeline in Nigeria. Incidents like these are a stark reminder of geopolitical issues and the potential for price increases from time to time.

Ongoing financial turbulence will also play in role in determining prices of commodities.

Pressure in bond and equity markets could make speculative investment in the oil market seem even more attractive, pushing up prices. But there is also the risk that struggling financial institutions will need to sell commodity investments to cover losses elsewhere, pushing prices down, said experts at EIU. Coming to average base metals, prices are expected to fall by 1.5 per cent in 2008.

Natural rubber prices in 2008 are expected to grow by 7.9 per cent, primarily owing to lower-than-anticipated supply. Prices of fibres will remain positive. Aluminium prices are high because of low stocks but demand will start to fall in major markets and prices will drop in 2009, forecasts the EIU report.

Copper is based on relatively tight fundamentals near term but the prices will decline over the next two years, said EIU and Standard Chartered.

For lead, EIU predicted prices will soften in response to improved concentrate supply as the year progresses. According to Standard Chartered figures, lead prices dropped sharply in early March. By the middle of the month, prices were down to $2,660/t – a 23 per cent drop from their high in early March.

Beyond 2008, experts have predicted a downward trend in industrial raw material prices. The EIU has said: “Demand is expected to gradually rise, but stocks will have accumulated and supply should be greater and more predictable, with the caveat that the risk of unplanned delays in bringing new supply on stream tilts the balance of risks to the upside of our price forecasts.”

Feeling the pinch


The sharp increase in the price of metals such as copper, steel and aluminium has had a negative impact on the booming construction industry in the UAE.

The total budgeted value of construction projects under way in the Gulf is $1.5 trillion (Dh5.5trn), and demand for housing units is expected to increase further due to the huge growth in population.

With the increase in price of base metals used in construction, businesses are feeling the economic impact. But there seems to be hope for the construction industry in the region as prices of these metals are expected to decline by the year-end.

According to Dan Smith, metal analysts of Standard Chartered bank, the price of aluminium will stay high in the short term as the weak dollar will support commodity prices generally but will eventually soften and is expected to trend lower to around $2,550/t by year-end. Even though outlook for copper is highly uncertain, it should trend lower as the year progresses.