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Euler Hermes Economic Outlook no. 6 | 2011 - Global Sectors Review Indicators Grains Petroleum Sustainable easing or only a pause? Late June brought surprising USDA corn figures, with higher than expected planting figures for spring and lower than expected reductions (although still to low levels ) in stocks. These encouraging prospects for the world's biggest corn producer also accelerated the decline in Chicago prices, initiated by the contraction in domestic demand (-15.7% yr/yr over March-May 2011). The sharp price fluctuations seen recently could also reflect the scale of arbitraging by purely financial investors. Nevertheless, world supply and demand tensions – which spurred the market to record highs in early June – still largely persist and point to continued firm prices. Moreover, beyond the probable revisions to USDA figures, major uncertainties over yields persist (poor weather conditions during planting) and over ethanol production requirements. For wheat, despite more sustainable fundamentals and the announcement of the lifting of Russian export restrictions, price trends will inexorably correlate with the fate of corn prices, given its status as an alternative feedgrain in animal husbandry. Climatic events in China and Europe are also likely to impact on coming harvests. _BG Down in the short term, up in the long term Towards the end of 2010, the uprisings in the Middle East that spread to become the ‘Arab Spring’ of 2011, and that cut nearly 2% of crude oil production from the world market, heightened fears of supply disruptions and probably increased speculation. This combination of factors led to oil prices rising by 35% from February to April. But the slowing of the economy, the uncertainties raised by the problems of US and European debt, and the probable withdrawal of speculators from the market sent prices back down by 15%. At around $110/bbl, however, Brent crude was still thought to be too high by some. Saudi Arabia also attempted to keep prices low to prevent the fragile OECD economies from further decline. At June’s OPEC meeting, the Kingdom advocated higher production ceilings to lower prices, but an Iran-led contingent opposed the Saudis, and the price later steadied at around $110/bbl. In the short term, the slowing in world growth should impact on prices, but in the longer term, the extraordinary growth in the requirements of China and other emerging countries have every chance of sparking another surge in oil prices._DN World grains production Millions of tonnes 900,000 Corn Wheat 800,000 Petroleum prices USD per barrel 160 140 120 100 700,000 80 60 600,000 40 20 500,000 05/06 06/07 Sources: Cyclope/USDA 07/08 08/09 09/10 10/11 11/12p 0 00 01 02 03 04 05 06 Source: New York Mercantile Exchange 07 08 09 10 11 6
Economic Outlook no. 6 | 2011 - Global Sectors Review Euler Hermes Indicators Steel Semiconductors Growth in world output has slowed with Chinese destocking over H1 At the end of May 2011, world steel output was up by 7% annually, for a new record of 1.437 trillion tonnes. But the scars of the crisis remain, and the so-called ‘old industrial countries’ (OICs) – the US, European Union and Japan – have yet to return to their pre-crisis volumes. The major fact in recent months has been the near-braking in growth of Chinese steel production to just 5% on annual average (even so, to 650 billion tonnes) compared to a 24% annual increase a year before. Two factors account for this lower performance: the slowdown in auto production, alongside destocking by the major local actors. This slower growth in Chinese requirements has, however, also acted to slow the rise in steel prices over the spring. Even so, world steel demand should maintain its growth rate over the second half of the year, and Chinese output – after destocking – should rise at a more sustained rate. As a result, steel prices should again rise in the second half of the year, but only by around 3% on average. _YL An accelerated return to the realities The spectacular recovery in the semiconductor market that began in mid-2009 has just ended. While 2010 was a record year, with 32% growth in the world market, it also signalled a return to normal operating conditions. Admittedly, yearly turnover came close to $300 billion. At a certain point, user industries quickly began to restock, but just as quickly eased off, given that for the past 10 years, prices have fallen by 6% on annual average. Semiconductor market growth failed to accelerate in Q3 2010, making way for an initial slowing in Q4 2010 (-3.7% qtr/qtr), the first decline after six quarters on the rise. This was before the disaster in Japan, which resulted in April 2011 in a 26% drop in deliveries against March levels. But production had already started to slow, with world capacity utilisation rates down to below 95%. Sharp competition continues to be the rule, and Asia Pacific has further strengthened its position in the semiconductors market with a world market share of nearly 55%, according to figures for the first four months of this year. Market price pressures on components persist: prices in Taiwan fell by 3% over the first four months. With the semiconductors sector once again facing its inherent constraints, market growth should be no more than 3% by value in 2011. _DM Monthly steel output Thousands of tonnes China 60,000 EU Japan 50,000 USA Semiconductor markets USD billions per quarter 50 Asia Pacific Japan Americas Europe 40 40,000 30,000 20,000 10,000 30 20 10 0 06 07 Source: Worldsteel.org 08 09 10 11 0 05 Source: WSTS 06 07 08 09 10 11 7
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