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Tuesday, Dec 28, 2004

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Global commodity boom set to continue

S. Sethuraman

Strong demand and rise in investments globally in 2004 in the wake of the world economy's upswing fuelled a price boom for key commodities, both oil and non-oil, especially metals and minerals. This looks set to continue into the new year, even if global output growth slackens under the impact of unrelenting energy costs and higher interest rates.

WHILE oil prices, peaking to $56 in October, moderated to some extent towards end 2004, less apparent has been the surge in prices of steel, copper and other base metals and mineral ores.

The world commodity markets are grappling with China's appetite for raw materials and industrial inputs in its investment overdrive amid global concerns whether its overheated economy would be able to make a soft-landing in the new year.

International steel prices have been on the upsurge for two years in response to expanding demand and also reflecting soaring input costs — coking coal, iron ore, scrap iron, etc.

Supply shortages have added to the current price explosion, with metals and minerals gaining the most — around 60 per cent — while petroleum prices have ruled well above 40 per cent from the 2003 average.

World steel output is headed for further expansion after crossing the 1,000-million-tonne mark in 2003 with strong growth occurring in Asia, mainly in China.

Even so, Japan, one of the leading producers, recently reported metal shortages for its auto and shipping industries.

With a steel capacity of over 300 million tonnes and production of 260 million tonnes in 2004, China was making plans to set up a few more plants to build an additional 150 million tonnes to meet future needs.

Though oil prices had fallen to the $42-45 range by mid-December, the market remains volatile, with likely supply disruptions from terrorist attacks, on the one hand, and intended production cuts by OPEC to ensure that crude prices in 2005 do not fall by any wide margin. There will be no let-up in the growing market share of Asia, particularly China and India and other emerging economies, for high-priced OPEC crude.

In 2003, Asia's oil imports of $128 billion from West Asia outpaced those of North America and Western Europe. Indeed, higher commodity prices gave a value boost to world trade in 2003, when agricultural and mining product prices increased faster than those of manufactured goods, according to the WTO.

A significant factor for the sharp rise in prices of both oil and non-oil commodities in 2004 was the rapid increases in China's demand for energy and for other natural resources for its manufacturing and construction sectors.

Industrial nations had, by and large, absorbed higher crude import costs with only a marginal impact on the consumer price level this year but the outlook for 2005, given the undiminished risk of oil market volatility, record US current account deficits, exchange rate gyrations and monetary tightening, is a growth slowdown projected for both the US and Japan and for the Euro area to continue with a modest recovery.

China, it is assumed, will moderate its growth to 8 per cent from an estimated 9-9.5 per cent in 2004. Inflationary pressures would, however, continue to grip developing countries including India, which are net importers of commodities. The commodity market upturn, most pronounced for oil and minerals, benefited mainly resource-rich countries. For low-income commodity producers, the net gains were insignificant and, in some cases, negative.

Besides oil producers in the Middle East, exporters of mineral ores and metals, both from developed and developing countries, were among the gainers. While India exports iron ore, it has been importing coking coal for its steel plants. India is already running a high trade deficit due to oil price increases.

In the Asia-Pacific region, Australia is in a pivotal position with its energy and mineral resources finding ready markets in China and Japan. Indeed Australia has been setting higher prices for its supplies in new contracts being negotiated for the next year or two with Japan for coking coal and iron ore on the back of its higher global export earnings for copper, alumina, nickel and zinc. It will influence other commodity exporters. Australia, with bulk of its exports being primary commodties and energy, and tapping hidden mineral resources, will remain one of the dominant players in the international commodities market.

It is the world's largest producer of bauxite and, besides its rich coal and iron ore resources, has sizeable deposits of diamond, gold, copper, nickel and zinc.

With 95 billion tonnes of coal reserves, Australia's principal export is coking coal of the order of 125 million tonnes a year. Its exports of agricultural and mineral products in 2004-05 would be around 95 billion dollars ($72 billion). Nevertheless, Australia has long been a net importer of merchandise goods and running substantial current account deficits which would touch 38 billion US dollars this year.

China is emerging the most important market for Australia's oil/gas, coking coke, iron ore and other minerals including uranium as well as dairy products. China has already entered into agreements for long-term supply of gas from Australia's North-West Shelf Project.

One of the leading mining firms, WMC, is embarking on a four-billion dollar expansion of its Olympic Dam project not only to increase the copper output but also to open up what is claimed to be the world's largest uranium mine with 38 per cent of global reserves.

China is regarded as a potentially big market for uranium shipments as it plans to expand its nuclear power generation to tackle energy shortages. In preliminary official-level discussions, China has reportedly indicated willingness to meet conditions such as that the uranium would not be used for military purposes or re-exported.

Export of uranium in the coming decade is likely to figure in the talks with Chinese leaders when the Australian Prime Minister, Mr John Howard, visits China in April 2005,and explores the possibility of a free trade agreement, similar to the ones Australia has concluded with Singapore and the US.

China would, however, like to be treated as a "market economy", a status it has been seeking from both the US and EU, as such a recognition would make it harder in launching anti-dumping actions against the cheaper imports from China. Mr John Howard had a meeting with the Chinese Premier, Mr Wen Jiabao, during the Asean Summit in Vientiane (Laos) on November 29-30.

There has been a dramatic turnaround for the world steel industry which appeared to be in a declining phase during the l990s leading to some consolidation and closures totalling 100 million tonnes. But with demand resurgence, consumption had risen by 26 per cent between l998 and 2003 with remarkable strides in production and exports.

China accounted for 75 per cent of the 175 million tonne increase in consumption between 1998 and 2003, the rest accounted for by other Asian countries led by Korea and Eastern Europe.

According to OECD, crude steel making capacity is expected to rise from 1,128 million tonnes in 2003 to 1,247 million tonnes in 2005. China added 128 million tonnes to its capacity and has become the world's largest producer and consumer of steel. It imported 30 million tonnes in 2003.

India with 39 million tonne capacity, likely to increase to 45 million tonnes in 2005, is ranked as seventh largest steel producer if EU-15 is taken as a single entity.

Given the current demand trends in Asia, which is above the global average of 6 per cent, India is planning for substantial capacity additions in both public and private sectors (SAIL and Tatas).

Markets have tightened for key raw materials (coking coal, iron ore and scrap) along with higher energy costs, leading to successive rounds of increase in steel prices.

(The author, a former Chief Editor, PTI, is a New Delhi-based freelance writer.)

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