Industrial raw materials set to rise by a further

An Economist Intelligence Unit product story

Edited by the Engineeringtalk editorial team Apr 3, 2006

Having risen by over 10% in 2005, the Economist Intelligence Unit's Industrial Raw Materials price index is set to rise by a further 12% in 2006.

Having risen by over 10% in 2005, the Economist Intelligence Unit's Industrial Raw Materials (IRM) price index is set to rise by a further 12% in 2006.

This represents a sharp upward revision from the previous minimal change expectation, and reflects prospects of continued shortage in most commodities and a renewed bull trend in the futures market.

However, the downturn in 2007 will also be sharper than previously forecast: the IRM index will fall by 17% next year, compared with the 11% decline expected three months ago.

The biggest upward revision has been in base metals: prices are now expected to rise by over 11% this year, following a rise of almost 17% in 2005.

According to Kona Haque, the Economist Intelligence Unit's Senior Commodities Editor: "With the exception of lead and tin, stocks of most metals remain uncomfortably low and supply is taking longer than expected to help ease the situation".

Anticipating persistent tightness in the markets, traders and funds have gone long again, contributing to the renewed price strength.

Despite the prolonged bull-run, demand in most markets outside China is showing signs of slowing and, at some point, this will help reduce the upward pressure in prices.

A cyclical dip in industrial demand is forecast for the second half of 2006.

Combined with an upsurge in supply, this will push metal prices down by over 25% in 2007.

The Economist Intelligence Unit has also raised projections for natural rubber, whose prices will soar by a quarter in 2006 against 11% expected previously.

Consumption growth remains strong in China and is recovering elsewhere; but with political and weather factors affecting production in most parts of the world, the market will remain in serious deficit.

The fibres index has undergone a minor upward revision.

Prices are now expected to rise by up to 5% this year and 6% in 2007.

The markets for both cotton and wool are finely balanced, and modest declines in production will tend to reduce stocks and support prices.

The IRM index contributes to about 44% of the Economist Intelligence Unit's world commodity forecasts (WCF) index, the remainder being accounted for by soft commodities.

As a result of the latest changes to the industrial commodities index, the WCF index will now rise by 5% in 2006, but fall by over 9% in 2007.

Forecasts for crude oil prices have also been revised upwards.

"Compared with our previous expectations of unchanged prices in 2006, we now see a rise of 10%, following the 43% increase in 2005", says Haque.

The changes reflect an increase in political tensions - mainly in relation to Iran's nuclear ambitions, destabilisation in Iraq and unrest in Nigeria - against a backdrop of continued shortage of spare crude oil capacity and a modest revival in demand.

Additional OPEC production should take some steam off the market in 2007, and prices will ease by 10%.