Strategy and Macro Research – Large Corporates & Institutions 1 of 5

Titel Macroanalysis - 2 maj 2014

Commodities and Energy

Rising global food prices – a reversal in inflation

Swedbank’s Total Commodity Price Index, USD

• In March Swedbank’sIn March Swedbank’sIn March Swedbank’sIn March Swedbank’s Total Commodity Price Index fell in Total Commodity Price Index fell in Total Commodity Price Index fell in Total Commodity Price Index fell in dollar terms by 0.7% compared with February, driven by dollar terms by 0.7% compared with February, driven by dollar terms by 0.7% compared with February, driven by dollar terms by 0.7% compared with February, driven by lower prices for industrial metals and energy lower prices for industrial metals and energy lower prices for industrial metals and energy lower prices for industrial metals and energy commodities. The escalating political crisis in Ukraine has commodities. The escalating political crisis in Ukraine has commodities. The escalating political crisis in Ukraine has commodities. The escalating political crisis in Ukraine has had limited effect on commodity prices to date. Oil priceshad limited effect on commodity prices to date. Oil priceshad limited effect on commodity prices to date. Oil priceshad limited effect on commodity prices to date. Oil prices are still in the range of USD 105are still in the range of USD 105are still in the range of USD 105are still in the range of USD 105----110 per barrel, where 110 per barrel, where 110 per barrel, where 110 per barrel, where they have fluctuated since 2011. Increased oil supplies, they have fluctuated since 2011. Increased oil supplies, they have fluctuated since 2011. Increased oil supplies, they have fluctuated since 2011. Increased oil supplies, not least from the US, and expectations of higher not least from the US, and expectations of higher not least from the US, and expectations of higher not least from the US, and expectations of higher production in OPEC countries are limiting price increases production in OPEC countries are limiting price increases production in OPEC countries are limiting price increases production in OPEC countries are limiting price increases despite geopolitical uncertainty. despite geopolitical uncertainty. despite geopolitical uncertainty. despite geopolitical uncertainty.

• Production disruptions and fears of lower global Production disruptions and fears of lower global Production disruptions and fears of lower global Production disruptions and fears of lower global production have driven up food prices on a broad basis. production have driven up food prices on a broad basis. production have driven up food prices on a broad basis. production have driven up food prices on a broad basis. Since February of this year Swedbank’s Commodity Price Since February of this year Swedbank’s Commodity Price Since February of this year Swedbank’s Commodity Price Since February of this year Swedbank’s Commodity Price Index for food products has climbed nearly 20% in dollar Index for food products has climbed nearly 20% in dollar Index for food products has climbed nearly 20% in dollar Index for food products has climbed nearly 20% in dollar terms, the largest gain since summer 2terms, the largest gain since summer 2terms, the largest gain since summer 2terms, the largest gain since summer 2012. This means 012. This means 012. This means 012. This means gradually rising price pressure from food compared with gradually rising price pressure from food compared with gradually rising price pressure from food compared with gradually rising price pressure from food compared with last year, when declining global prices were part of the last year, when declining global prices were part of the last year, when declining global prices were part of the last year, when declining global prices were part of the reason for low global inflation. reason for low global inflation. reason for low global inflation. reason for low global inflation.

• Industrial metals fell broadly in March, with growing Industrial metals fell broadly in March, with growing Industrial metals fell broadly in March, with growing Industrial metals fell broadly in March, with growing inventories and uncertainty about the Cinventories and uncertainty about the Cinventories and uncertainty about the Cinventories and uncertainty about the Chinese economy hinese economy hinese economy hinese economy keeping prices in check. The biggest decline in March was keeping prices in check. The biggest decline in March was keeping prices in check. The biggest decline in March was keeping prices in check. The biggest decline in March was in copper. The exception was nickel, which went against in copper. The exception was nickel, which went against in copper. The exception was nickel, which went against in copper. The exception was nickel, which went against the tide and saw its price rise by 40% since the the tide and saw its price rise by 40% since the the tide and saw its price rise by 40% since the the tide and saw its price rise by 40% since the beginning of the year. Additional price declines will force beginning of the year. Additional price declines will force beginning of the year. Additional price declines will force beginning of the year. Additional price declines will force more production cumore production cumore production cumore production cutbacks. tbacks. tbacks. tbacks.

Swedbank’s Total Commodity Price Index fell in March by 0.7% in dollar terms compared with February. The krona’s

appreciation against the US dollar reduced the Commodity Price Index by 1.9% in SEK. The biggest decline was in industrial commodities, especially metals, which fell by 2.8% between months, while food prices rose. Geopolitical tension between Russia and the EU/ US, with the risk of disruptions to energy supplies, and lower oil production by OPEC had relatively little effect on oil prices in March. Instead, it was reduced global demand that led oil prices (Brent) lower by 0.7% in dollar terms. In April, the political crisis in the region escalated. Fears of lower supplies resulting from trade sanctions against Russia have driven oil prices slightly higher in recent weeks (USD 109 at the time of writing), though they remain in the range of USD 105-110.

In contrast, the US’s expanding role as an oil producer, which is expected to continue to grow, is holding down prices. The IEA estimates that production outside OPEC is growing by 1.8 million barrels at the same time that there is major production potential in several OPEC countries, especially Iraq, Iran and Libya. OPEC has a clear incentive to raise production levels, not least in countries where political concerns or sanctions have restricted production. In Iraq, production has accelerated and is expected to continue to rise going forward, although there is still far to go to reach previous levels. Higher production from Iran would also bolster global oil supplies.

On the other hand, the worsening geopolitical situation in Ukraine and growing tension between the US/EU and Russia is raising the likelihood of higher crude prices than we forecast in April, when we expected prices to fall to USD 105 dollar per barrel by the end of the year.

Index

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Coal prices are continuing to trend lower, down by 4.0% on a monthly basis, and are now at the lowest level since 2009. Growing supplies and lower Chinese steel production are contributing to the price decline. The long-term price drop and falling profitability that results are raising pressure to cut production. At the same time low coal prices and growing uncertainty about future energy supplies in Europe could lead to higher coal consumption, at least temporarily.

Brent Brent Brent Brent andandandand WTIWTIWTIWTI ooooiiiillll in in in in USDUSDUSDUSD

Supply disruptions are driving up Supply disruptions are driving up Supply disruptions are driving up Supply disruptions are driving up food pricesfood pricesfood pricesfood prices

Global food prices turned significantly higher on a broad basis in March. Swedbank’s Commodity Price Index rose in dollar terms by 9.0% in March after having gained 10.6% in February. This is the biggest monthly increase since 2012 in connection with the US drought. Beverages such as coffee and juice have risen by just over 25% in two months. Coffee prices climbed over 40%, partly due to lower supplies following a frost and dry weather in Brazil.

GlobalGlobalGlobalGlobal food food food food commoditiescommoditiescommoditiescommodities, 2010=100, 2010=100, 2010=100, 2010=100

Grain prices, which trended lower last year, have risen in total by 13% since the start of 2014 in dollar terms, but are still at a lower level than last spring. The increase is being driven by fears of lower US production and poorer grain quality after the cold winter. Another factor is the geopolitical crisis in Ukraine/Russia, which could hurt supplies, especially of wheat, in two countries that account for nearly a fifth of global wheat exports. Prices of products of animal origin such as pork have risen significantly, driven by lower production caused by a swine virus outbreak in the US.

The rising price trend for food and last year's low price levels mean that the annual rate will increase significantly this year, especially in the second half of 2014. As a result, inflation impulses from foods will rise going forward after having constrained inflation in the last year.

Broadly lower metal prices Broadly lower metal prices Broadly lower metal prices Broadly lower metal prices –––– a recovery will have to waita recovery will have to waita recovery will have to waita recovery will have to wait

Industrial metals fell by 1.3% in March compared with February, which means that prices were 10% lower than twelve months ago. Copper accounted for the biggest monthly decline (6.8%), followed by lead (2.6%) and zinc (1.0). Iron ore prices fell for the third consecutive month as a result of slowing steel production in China. This year steel production is expected to grow by 3%, half the rate of 2013 and a result of government attempts to rebalance the economy after an investment-led expansion.

Metal price trend Metal price trend Metal price trend Metal price trend 2013201320132013----2014, 12014, 12014, 12014, 1 January January January January 2013=1002013=1002013=1002013=100

The sluggish global recovery, growing concerns about the Chinese economy and high inventories are contributing to lower metal prices. Pressure to cut production has continued. This includes copper, where production continues to outpace demand in the wake of investments to expand the mining sector when the Chinese economy was growing by double digits. A further price decline is to be expected unless supplies are constrained.

Nickel is the one industrial metal to go against the tide, rising by 10.3% in dollar terms in March. The increase is due to Indonesia’s decision last winter to restrict exports as well as concerns of lower Russian exports. Indonesia and Russia account for 40% of global production.

MetalMetalMetalMetal inventoriesinventoriesinventoriesinventories, mil, mil, mil, millilililionononons ofs ofs ofs of tontontontonssss

Sluggish global industrial conditions and large metal inventories have forced commodity producers to cut production

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or delay scheduled capacity expansions. Metal prices have risen in April, especially nickel and iron ore, while copper continues to be weighed down by expectations of rising supplies and weaker Chinese growth. We remain firm, however, in our forecast that metal prices have bottomed out after having fallen by over 30% since their peak in 2011 and that they will turn higher later in 2014 as production adjusts to lower global demand.

Swedbank’s Commodity Price Index is based on the composition of Swedish commodity imports, with crude oil carrying the heaviest weight in the index. The weights in the Commodity Price Index are shown below for each main group.

Food 6.9

Agricultural commodities 9.6

Non-ferrous metals 10.5

Ferrous ore/scrap 3.7

Crude oil 66.3

Coal 3.0

Total 100.0

Macro Research

Jörgen Kennemar Tel: +46 8 700 9804 e-mail: jorgen.kennemar@swedbank.se

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Swedbank Commodity Index - SKr -

Basis 2000 = 1oo 30-04-14

1.2014 2.2014 3.2014

Total index 243,2 248,0 243,3Per cent change month ago -3,4 2,0 -1,9Per cent change year ago -4,0 -2,4 -0,9

Total index exclusive energy 172,4 172,6 170,0Per cent change month ago -2,1 0,2 -1,6Per cent change year ago -6,7 -6,4 -6,0

Food, tropical beverages 147,7 163,7 176,1Per cent change month ago -1,9 10,8 7,6Per cent change year ago -13,5 -1,2 5,7

Cereals 146,1 152,9 162,9Per cent change month ago -3,5 4,7 6,5Per cent change year ago -34,2 -28,3 -23,9

Tropical beverages and tobacco 139,0 160,4 177,9Per cent change month ago 0,1 15,3 11,0Per cent change year ago -9,7 9,1 20,2

Coffee 78,0 97,2 115,0Per cent change month ago 3,1 24,6 18,2Per cent change year ago -18,2 6,7 24,9

Oilseeds and oil 167,5 178,0 180,8Per cent change month ago -4,5 6,3 1,6Per cent change year ago -3,4 1,9 3,1

Industrial raw materials 179,5 175,2 168,2Per cent change month ago -2,2 -2,4 -4,0Per cent change year ago -4,9 -7,7 -9,1

Agricultural raw materials 120,8 119,9 119,6Per cent change month ago -2,0 -0,8 -0,2Per cent change year ago 3,7 3,0 3,6

Cotton 59,9 61,3 63,9Per cent change month ago 2,9 2,3 4,3Per cent change year ago 8,9 8,3 3,7

Softwood 85,2 87,1 90,9Per cent change month ago 2,9 2,3 4,3Per cent change year ago -6,5 -4,6 -0,7

W oodpulp 641,1 646,1 641,3Per cent change month ago -0,4 0,8 -0,7Per cent change year ago 11,8 13,6 9,9

Non-ferrous metals 146,4 144,6 140,9Per cent change month ago -0,5 -1,2 -2,5Per cent change year ago -12,5 -12,9 -10,4

Copper 5137,7 5045,7 4645,1Per cent change month ago 0,4 -1,8 -7,9Per cent change year ago -9,4 -9,7 -13,4

Aluminium 1215,8 1194,9 1186,6Per cent change month ago -1,6 -1,7 -0,7Per cent change year ago -15,4 -16,0 -11,4

Lead 1513,3 1488,7 1432,4Per cent change month ago -0,1 -1,6 -3,8Per cent change year ago -8,2 -9,5 -6,3

Zinc 1435,5 1435,8 1403,2Per cent change month ago 2,3 0,0 -2,3Per cent change year ago 0,3 -2,6 3,5

Nickel 9914,7 10012,7 10907,7Per cent change month ago 0,3 1,0 8,9Per cent change year ago -19,4 -18,5 -6,9

Iron ore, steel scrap 422,8 403,0 369,2Per cent change month ago -3,8 -4,7 -8,4Per cent change year ago -2,4 -9,5 -16,1

Energy raw materials 274,7 281,5 275,8Per cent change month ago -3,8 2,5 -2,0Per cent change year ago -3,2 -1,3 0,6

Coking coal 223,0 209,9 199,0Per cent change month ago -4,4 -5,8 -5,2Per cent change year ago -10,0 -14,3 -17,0

Crude oil 277,0 284,8 279,3Per cent change month ago -3,8 2,8 -1,9Per cent change year ago -2,9 -0,8 1,3

Source : SW EDBANK and HW W A-Institute for Economic Research Hamburg

Swedbank Commodity Index - US$ -

Basis 2000 = 1oo 30-04-14

1.2014 2.2014 3.2014

Total index 345,3 351,6 349,2Per cent change month ago -2,6 1,8 -0,7Per cent change year ago -4,0 -4,2 -0,4

Total index exclusive energy 244,7 244,7 244,0Per cent change month ago -1,2 0,0 -0,3Per cent change year ago -6,7 -8,1 -5,5

Food, tropical beverages 209,7 232,0 252,8Per cent change month ago -1,0 10,6 9,0Per cent change year ago -13,6 -3,0 6,3

Cereals 207,4 216,7 233,8Per cent change month ago -2,7 4,5 7,9Per cent change year ago -34,2 -29,6 -23,5

Tropical beverages and tobacco 197,4 227,3 255,4Per cent change month ago 1,0 15,1 12,4Per cent change year ago -9,8 7,1 20,8

Coffee 110,8 137,8 165,0Per cent change month ago 4,0 24,4 19,7Per cent change year ago -18,2 4,8 25,6

Oilseeds and oil 237,8 252,3 259,6Per cent change month ago -3,6 6,1 2,9Per cent change year ago -3,4 0,0 3,7

Industrial raw materials 254,9 248,4 241,4Per cent change month ago -1,3 -2,5 -2,8Per cent change year ago -4,9 -9,4 -8,6

Agricultural raw materials 171,5 169,9 171,7Per cent change month ago -1,1 -0,9 1,0Per cent change year ago 3,7 1,2 4,1

Cotton 85,1 86,9 91,8Per cent change month ago 3,8 2,1 5,6Per cent change year ago 8,9 6,3 4,2

Softwood 120,9 123,5 130,4Per cent change month ago 3,8 2,1 5,6Per cent change year ago -6,5 -6,3 -0,2

Woodpulp 910,2 915,8 920,5Per cent change month ago 0,5 0,6 0,5Per cent change year ago 11,8 11,5 10,4

Non-ferrous metals 207,9 205,0 202,3Per cent change month ago 0,4 -1,4 -1,3Per cent change year ago -12,5 -14,5 -10,0

Copper 7294,3 7151,6 6667,6Per cent change month ago 1,3 -2,0 -6,8Per cent change year ago -9,4 -11,4 -13,0

Aluminium 1726,2 1693,6 1703,2Per cent change month ago -0,7 -1,9 0,6Per cent change year ago -15,4 -17,5 -11,0

Lead 2148,5 2110,1 2056,0Per cent change month ago 0,7 -1,8 -2,6Per cent change year ago -8,2 -11,2 -5,8

Zinc 2038,1 2035,0 2014,1Per cent change month ago 3,3 -0,2 -1,0Per cent change year ago 0,3 -4,4 4,1

Nickel 14076,4 14191,6 15656,8Per cent change month ago 1,2 0,8 10,3Per cent change year ago -19,4 -19,9 -6,4

Iron ore, steel scrap 600,2 571,2 529,9Per cent change month ago -3,0 -4,8 -7,2Per cent change year ago -2,4 -11,2 -15,7

Energy raw materials 389,9 399,0 395,9Per cent change month ago -2,9 2,3 -0,8Per cent change year ago -3,2 -3,1 1,1

Coking coal 316,5 297,5 285,6Per cent change month ago -3,5 -6,0 -4,0Per cent change year ago -10,1 -15,8 -16,6

Crude oil 393,3 403,6 400,9Per cent change month ago -2,9 2,6 -0,7Per cent change year ago -2,9 -2,6 1,9

Source : SWEDBANK and HW WA-Institute for Economic Research Hamburg

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