Research Dept. News
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Monthly Report, num 291 - May 2006
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International review - Raw materials
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Raw materials: demand pushing prices to new highs
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Raw materials, and not only oil, show notably sharp upturn.
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The all-time highs in oil prices was the most notable news. On April 21, the one-month forward per barrel price of Brent quality crude was 73.85 dollars, a figure never before reached. Far from being a passing figure, this level marked the whole month of April when oil rose by 9%, practically without any swings. Furthermore, this rise came within a trend running over a long period which has taken black gold to show a total increase of 25% so far in 2006.
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While this sharp rise was mainly due to geo-political tensions brought about by the question of Iran’s nuclear programme, the basic reason is the growing strength of the emerging economies, with China setting the pace. This is a situation which reflects the fact that highs in oil prices are being accompanied by further record prices in other raw materials, especially for metals. The year-to-year rise in oil (32% year-to-year in April) looks pale against the figure reached by the metals group in «The Economist» index (51%). In raw materials as a whole, measured by that index in dollars, they rose by 21% year-to-year. In euros, the increase was 28% year-to-year.
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Factor behind increase in raw materials is heavy demand by emerging economies.
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The immediate prospects are not positive. Going back to the first player mentioned in these comments, namely oil, while geo-political tensions may ease off, which would bring about a withdrawal of the more speculative investors from the market, the basic conditions are unlikely to improve in coming months. World growth, especially that of Asia, is going to continue strong. The lack of sufficient world oil production capacity will not be improved over the short term, which makes the market vulnerable to any threat to supply in the Middle East or other oil-producing areas. Refining capacity will also continue to have its difficulties. In the United States, especially, the change in environmental regulations applying to petrol is putting limits on refineries, stopping them from operating at full capacity and requiring the supply of crude with lower sulphur content, the most in demand in the market.
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