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World Commodity Forecasts Industrial Raw Materials

  • ID: 2101443
  • Report
  • April 2017
  • Region: Global
  • 112 Pages
  • The Economist Intelligence Unit
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After a dismal few years commodity prices began to reverse course in 2016, with the prices of most industrial raw materials (IRM) tracked by The Economist Intelligence Unit now on an upward trend, albeit a wobbly one. The IRM index rose steadily during the second half of 2016, reflecting greater stability in the Chinese economy, a rally in oil prices and tentative signs of producer restraint. The prices of several commodities, particularly copper and other base metals, were boosted in November and December by the election of Donald Trump as the new US president; markets expect Mr Trump to increase spending on infrastructure investment, which would boost US demand for raw materials. We agree that Mr Trump's promises on infrastructure could, if approved by the Republican Party's fiscal hawks in Congress and implemented swiftly, generate stronger demand for some industrial raw materials. But such a deal has several big hurdles to clear. Mr Trump's threat to raise tariffs on a range of imports from China may also exacerbate the oversupply in global markets as Chinese producers look for new destinations for their output. We will fully incorporate these factors into our forecast only once the administration has offered more clarity on its policy plans.

We expect the IRM price index to receive a boost in 2017 as global GDP growth quickens from an estimated 2.2% in 2016 to 2.6%, driven by the return to growth of Russia and Brazil and a faster expansion in North America. This stronger performance will boost demand for industrial raw materials. There are plenty of downside risks: heightened uncertainty about global monetary policy-at a time when traditional easing measures (such as interest-rate cuts) and heterodox ones (such as quantitative easing) are reaching their limits-points to increased volatility across financial markets, including commodities.

More broadly, the market balance across many commodities is not yet supportive of prices. Although some markets have tightened, others are still plagued by oversupply. Production capacity-bolstered by a surge in investment during a decade-long boom in prices in the 2000s-still exceeds demand, which has weakened with China's economic slowdown. Leading producers of raw materials-especially firms at the lower end of the industry cost curve-remain focused on preserving market share. Meanwhile, in China, the biggest supplier of many commodities, cuts in output remain sensitive, as they risk undermining jobs and revenue at a time when economic risk is already high.
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World Commodity Forecasts Industrial Raw Materials

Economist Intelligence Unit commodity price index: Industrial raw materials
Raw materials prices are on a rising trend that will last until 2018
The prices of base metals remain vulnerable to Chinese demand
Prices of rubber, and to a lesser extent cotton, are reviving
Oil has remained above US$50/barrel since the OPEC deal was announced

Aluminium
Demand
Policy uncertainty in the US will result in slower aluminium demand growth
Mr Trump's policies are likely to reduce Mexican aluminium demand
Chinese aluminium demand will be hit by slower GDP growth in 2018
Brazilian and Russian aluminium usage will fail to grow in 2017
Supply
Chinese smelters put in a strong performance in early 2017
North American production is diverging
Australian smelters will continue to be affected by high power prices
Smelter restarts outside of China remain unlikely
Stocks and prices
We have revised up our price forecast for 2017
The possibility of smelter closures is limited, even on current price forecasts

Coal
Demand
China's coal consumption will fall further in 2017-18
US coal will rebound modestly in 2017-18
Coal use falls sharply in the UK, but remains on an upward trend in Poland
India's coal demand will be robust despite an "all of the above" strategy
Supply
China's output will fall as capacity cuts continue amid weaker demand
US production will stabilise in 2017-18, after sharp falls in 2015-16
The Indian government will struggle to double production by 2020
Australia will achieve a marginal increase in output in the near term
Indonesian coal needs to find new markets, given changing Indian tastes
Stocks and prices
Average prices will pick up in 2017 before resuming a decline in 2018-19

Copper
Demand
China's copper demand growth will slow sharply in 2017-18
Chinese apparent demand underwhelms in 2016
Asian consumption growth will struggle, except in India and South Korea
Rising anti-establishment sentiment in Europe poses risks to copper consumption
Supply
Peru is set to remain the second-largest global copper miner in 2017-18
Producers in Chile will face growing constraints in 2017-18
Unexpected government policy decisions could deter investment
Cost-cutting has left producers better placed to cope with lower prices
Freeport McMoRan halts work following impasse with government
Some annual TCs for 2017 are agreed at US$92.50/tonne, down by 5% from 2016
Contrary to earlier declarations, Chinese smelters will not show much restraint
Stocks and prices
Stock flows between LME and SHFE are likely to rise in 2017-18
A roughly balanced market will prevent a sharp increase in prices in 2017

Cotton
Demand
China's recovering competitiveness will lead consumption to rise slightly
Despite sector reforms, India's demand growth will be modest in 2017/18
A power deficit and high operating costs undermine growth in Pakistan
Consumption in Bangladesh will grow, regardless of poor safety standards
Dependence on slow-growing markets dampens Turkey's consumption growth
Supply
China's output will remain subdued as subsidies are trimmed
Weather conditions will support modest output growth in India
Favourable growing conditions will support higher US output in 2016/17
Australia will see an output leap in 2016/17
Stocks and prices
Chinese import restrictions will weigh on prices
Auction sales in China will weigh on prices in the short term
High stocks and weak demand growth will limit price growth

Crude oil
Demand
US light-vehicle sales are likely to plateau at best in 2017-18
European oil demand will remain static in 2017-18
China's demand growth will slow sharply in 2018
Other emerging markets will pick up some of the Chinese slack
Supply
Compliance with OPEC production cuts remains strong, amid price worries
Refusal to comply with deal sees Indonesia suspended from OPEC
Despite some progress, Russia's commitment to output cuts is unclear
US production will return to growth in 2017
Stocks and prices
The OPEC deal will provide a small boost to prices

Gold
Demand
Net retail investment will pick up in 2017-18
Gold jewellery purchases are set to make a partial recovery
Industrial gold is less competitive than alternatives
A few central banks continue to accumulate gold
Supply
Chinese production will add to global supply in the short term
Australia's production looks set to continue to rise in 2017-18
US dollar strength will undermine US-based miners' profits
Gold output will continue to slip in Russia and South Africa
Higher prices will spur recycling efforts in 2017
Producer hedging will fall in 2017
Stocks and prices
Negative yields in many countries will put a floor under gold prices

Lead
Demand
China's car market may not prove as supportive for lead demand in 2017-18
Geopolitical uncertainties will have a negative effect on growth in Europe
Faster economic growth and restocking will boost US lead usage in 2017
Supply
Disparities in data continue to cloud the true pace of activity in China
Lead-smelting capacity additions are planned outside China
Global mine output will increase gradually in 2017, owing to rising prices
Stocks and prices
Official stocks will tighten, but off-market storage will partially offset this
Lead prices will rise in 2017 as the market tightens

Liquefied natural gas
Demand
FSRUs are helping to create new markets for LNG
Japan's importers are looking for more flexible contracts as demand wanes
Temporary factors have been boosting South Korea's LNG imports
Efforts to reduce coal usage will be a factor bolstering China's LNG imports
Taiwan's LNG demand could jump in 2018
Middle East imports are expected to continue to grow strongly
A cut in India's import tariff should give a boost to LNG imports
The EU could absorb much of the new supply in 2017-18
The shipping industry could be a new source of LNG demand
Supply
Qatar is losing its dominance on supply
Australia's LNG projects will continue to face delays
The US will be a significant LNG exporter by 2018
Russia's Yamal project will come on stream later this year
The first FLNG produces LNG offshore
African production will rise in 2017-18
Prices

Natural gas
Demand
US demand will increase in 2017-18, owing to use in power generation
America First energy policy favours all fossil fuels
Europe's gas demand will grow at a modest rate, supported by low prices
Russian consumption will be limited by the domestic economic performance
China seeks to stimulate demand recovery with lower "city-gate" prices
Supply
North American production continues to benefit from strong US demand
Russian production will increase despite sanctions
Iran courts upstream gas investment following nuclear deal
Saudi Arabia is planning new capacity
Stocks and prices
Price recovery will be muted, owing to high production and stock levels

Natural rubber
Demand
China's NR consumption growth will revive in 2017, before easing back
India will still need to import, despite rising domestic production
Producers are trying to use more NR domestically
North American demand could pick up in 2017-18
Slower EU economic growth will weigh on NR demand
Supply
Floods have hampered output in Thailand
Government support will boost Indonesian production
Vietnam's production may soon peak
Cambodia's exports grew strongly in 2016
China's rubber production is in long-term decline
Government support could help to boost output in Malaysia
The rise in prices has led to more tapping in India
African production is growing, but from a low base
Stocks and prices
Prices will rise in 2017 but will fall back in the following year

Nickel
Demand
China's nickel demand growth will slow in 2017
The easing of Indonesia's export ban will support Chinese consumption
Supply
Environmental policies are constraining nickel mining in the Philippines
Indonesia's policy shift heightens uncertainty for miners and refiners
The government in New Caledonia is stepping in to support the nickel sector
China's nickel producers face myriad challenges
Russia's refined nickel output will rebound in 2017-18
Stocks and prices
Market tightening will push up prices in 2017

Steel
Demand
Steel demand from China's construction sector will weaken
Slowing Chinese vehicle sales growth will have a negative effect in 2017
An increase in infrastructure expend-iture would boost construction activity
EU demand is supported by strong automotive sales
Non-China Asia struggled in 2016
Supply
Chinese output is running at elevated levels
US steel output will make gains in 2017, after struggling in 2016
NAFTA governments seek to protect their steel industries
The EU is also stepping up anti-dumping measures
India's steel production is set to improve owing to import protection
Iron ore prices will fall in 2017, after surging in the second half of 2016
Disruptions to coking coal supply will keep prices high in the first half of 2017
Stocks and prices
Utilisation rates will struggle to rise above 75%
The industry will remain under pressure from high costs and weak demand

Tin
Demand
Tin consumption was mixed in 2016
The outlook for tin demand is positive, but there are challenges
The chemicals sector is expected to add to tin demand, unlike tinplate
China's tin demand will grow further, albeit at a slower pace than previously
European tin demand is forecast to remain flat in 2017-18
Supply
Myanmar is the main provider of tin ore to China
After a sharp rise in 2016, Myanmar's mine output will stagnate in 2017-18
Despite some progress, security and business conditions remain difficult
Regulations and resource depletion are undermining Indonesia's tin sector
There are doubts about Indonesia's tin mine output potential in the long term
New mines and expansions are expected to add only a limited amount to output
Most planned new tin mining projects are unlikely to start until late 2018
Expansions at four recently commissioned mines will be limited
Stocks and prices
Tin prices will be supported in 2017-18 by a balanced market

Zinc
Demand
Strong momentum in China's vehicle sales will support zinc demand in 2017
Emerging-market usage will rise in 2017
Momentum in EU vehicle sales will continue into 2017
Mr Trump's protectionist rhetoric may play into the hands of US steelmakers
Supply
Chinese zinc output will slow as smelters run down concentrate stocks
Tight concentrate availability will lead to lower output in many areas in 2017
Tighter ore availability is becoming evident
Mine restarts will boost production by an average of 4.1% a year in 2017-18
Stocks and prices
Prices will rise more strongly in 2017 owing to a wider market deficit

Statistical appendix: Industrial raw materials
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