Metals outperform even the oil sector: IMF

Metals outperform even the oil sector: IMF

New York (Platts)--11Sep2006

Petroleum prices may make for eye-catching headlines, but oil is only one
of many commodities that has outperformed other market sectors -- part of a
mega-bull run that began end 2002 and a development that did not go unnoticed
by the International Monetary Fund in its semi-annual World Economic Outlook.
"Nonfuel commodities have a higher share in world trade (about 14% during
200-2004) than fuel commodities (7%)," the IMF said. "...[T]he IMF metals
index has risen by 180% in real terms since 2002, while oil prices increased
by 157%."

Metal prices, like petroleum prices, have scored spectacular gains the
past few years, but the evidence is less compelling in other commodity sectors
such as grains and softs, another observation the IMF made. "Metals prices
have risen sharply since 2002 to the present (by 180% in real terms), while
food and agricultural raw materials have increased much less (by 20% and 4%,
respectively)," the IMF said in its report. "As a result, metals contributed
almost 90% to the cumulative 60% real increase in the IMF nonfuel index since
2002."

Since the end of December 2002, the active front-month crude futures
contract on the New York Mercantile Exchange has surged $34.24/barrel for an
appreciation of 103.51% (based on Thursday's settlement of $67.32/barrel). By
comparison, the front-month gold contract on COMEX, the metals subsidiary of
NYMEX, has gained $345.70/oz, or 124%, while copper futures tacked on
$2.934/Lb for an advance of 401%, over the past four years.

The performance of grains and softs was mixed during the same time
period. If one were to narrow the time frame to year-to-date for measuring
price performance, the petroleum sector is mixed with crude and heating oil up
and gasoline down while the metals are still sporting very solid gains.

Emerging markets have contributed handily to the gains across the metals
sector, the IMF said, with China a key driver.

"During 2002-2005, China contributed almost all of the increase in world
consumption of nickel and tin," the WEO said. "In the cases of lead and zinc,
China's contribution even exceeded net world consumption growth."

China's contribution to aluminum and copper, the two most heavily traded
base metals in the world was about 50%, the IMF added. Russia accounted for
25% of the increase in copper consumption, but only 0.5% of the rise in
aluminum, the WEO said (Russia is a resource rich country, but especially well
known for its oil, gold, platinum and palladium production).

By comparison, during 2002-2005, China contributed 30% of total world oil
consumption while other emerging markets accounted for 7%. Total world oil
consumption growth was 2.2% during that three-year time period. Thus far,
China has generally tracked Japan and Korea during their initial development
phase, the IMF said. What is the sustainability of the run-up in metals and
oil prices?

"Over the next five years, the futures prices for metals retain only
about one-half of the increase accumulated since 2002, in real terms, metals
prices fall by 45% from current levels," the IMF said. "This decline contrasts
with oil futures prices, which remain very close to the current spot price."

However, historically futures markets have been poor predictors of
prices, which leave the petroleum and metals markets at the mercy of
supply/demand fundamentals, as is usually the case with any commodity.

On the demand side, "...[C]onsumption of metals typically grows with
income until about $15,000 to $20,000 per capita (in purchasing power parity,
or PPP, adjusted dollars) as countries go through a period of
industrialization and infrastructure building," the report said. On the supply
side: "In contrast to hydrocarbons, overall reserves of base metals are
practically unlimited."

The IMF stated without reservation that speculators were not behind the
run-up in commodity markets in the time period examined. "...[S]peculators
play a role in providing liquidity to the markets and may benefit from price
movements, but do not have a systematic causal influence on prices."

--Linda Rafield, linda_rafield@platts.com

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