Price prospects for major primary commodities, 1988-2000 (Vol. 1 of 2) : Summary, energy, matals and minerals

The WIrld &mk Price Prospects for Major Primary Commodities, 1988-2000 Compliments of INTERNAIL DOCUMENTS UNIT Volume I HB1-151 x34641 Summarv Energy Metals and Minerals O4. Price Prospects for Major Primary Commodities 1988-2000 Volume I Summary Energy Metals and Minerals The World Bank Washington, D.C. Copyright ' 19N The %V'rid Bank 1818 H Soret. NAV Washingto.-n. 0 C. 2M33, U-S. A. All rights reserved Manufactured in the United States of America First printing February 19N Future developments in commodity markets cannot be known with certaint. Howver, in activities inv4ving comnodities, judgments have to be ma.e, about future evnts in these markets. The forecasts presented here are ludgments baseJ upon analysis ot the commodity markets and on discussions with people with expertise in these markets. Howe\vr, no representation is made that the findings, interpretations, and conclusions expressed are accurate or complete: they are entirely those of ti-e author(s) and should not -e attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Executive Board or the countries thev represent. Users of the information in this publication should recognize the large degree of uncertainty associated with these forecasts and use them with appropriate caution. The World Bank does not take any responsibility for the results of any actions taken by purchasers of this publication based on the information therein. Because of the informality and to present the results of research with the least possible delay, the typescript has not been prepared in accordance with the procedures appropriate to tormal printed texts, and the World Bank accepts no responsibility for errors. The material in this publication is copyrighted. Requests for permission to reproduce portions of it should be sent to Director, Publications Department at the address shown in the copyright notice above. The World Bank encourages dissemination of its work and will normally give permission promptlv and. ;\hven the reproduction is for noncommercial purposes, without asking a fee. Per missio. t photocopy portions for classroom use is not required, though notification of such use having been made will be appreciated. The complete backlist of publications from the World Bank is shown in the annual Index of Pudlications, which contains an alphabetical title list and indexes of subjects, authors, and countries and regions; it is of value principally to libraries and institutional purchasers. The latest edition of each of these is available free of charge from Publications Sales Unit, Department F The World Bank, 1818 H Street, N.W., Washington, D.C. 20433, U.S.A., or from Publications, The World Bank, 66, avenue d'iena, 75116 Paris, France- Contributors to this volume are Bourn-Jong Choe (coal, copper), Tamar Dunietz (gold, silver), Mudassar lmran (energy, natural gas, petroleum), T Langton (aluminum and bauxite, lead, tin, zinc), and Theophilos Priovolos (iron ore, nickel, steel), Library Gf Congress Cataloging-in-Publication Data Price prospects for major primary commodities, 1988-200C ! World Bank. p. cm. Contents: v. 1. Summary, energy, metals, and minerals-- v. 2. Food products, fertilizers, agricultural raw materials. ISBN 0-8213-1190-5 (v. 1)-ISBN 0-8213-1191-3 (v. 2) 1. Prices-Forecasting. 2. Farm produce-Prices--Forecasting. 3. Raw materials-Prices-Forecasting. 4. Fue-Prices- Forecasting. 5. Agricultural prices-Forecasting. 6. Food prices- Forecasting. 7. Commodity futures. 1. International Bank for Reconstruction and Development. HB231.P82 1989 338.5'2-dcl9 89-5529 CIP COMTEMT Preface........ .............. ........ma. Notes and Definitions ..........viii Commodity Descriptions................................. ix Summary................................. ...... .........xi Recent History: 1986-88..............................................xi Short-Term Price Forecast: 1988-90...................................xi Long-Term Price Forecasts: 1990-2000.................... ..........xiii Petroleum Price Forecasts: 1988-2000................................xiv Commodity Markets in 1986-88 . .................... ........1 Non-Fuel Commodities.............................. .........1 Petroleum......................9..........................9 Global Assumptions Underlying the Primary Commodity Forecasts.............11 Initial Conditions of the Projections: The World Economy in 1988.....15 Short- and Medium-Term Effects on Developing Countries: Trade Flows and the Terms of Trade.................................. 16 Setting the Stage for Future Growth: Achieving Greater Balance.......19 A View of World Trade Flows: 1988-2000...............................25 The Uruguay Round and Developing Country Trade........................27 Impact of Structural Shifts in Industrial Countries...................27 ENERGY Energy....................................................................33 Demand Outlook.........................................................33 Supply Outlook........................................................37 Petroleum,................................................................49 Sun ary.............................................................49 Recent Developments within OPEC.......................................51 Recent Developments in Non-OPEC Supplies..............................53 Petroleum Demand....................................................57 Non-OPEC Supply Forecast.-............................................64 OPEC Oil Production Forecasts.......................................67 Trade Outlook....................................................... ..70 Changing Structure of the Oil Industry................................72 Commoditization of Oil................................................73 Price Outlook................................... ............. ....... 74 Natural Gas................................................................85 Summary..................................................... ..........85 Recent Developments......... .. ...................................... .86 Demand Outlook............... , .....................................88 Natural Gas Reserves....................... ............... . .........93 Supply Outlook........ .............................................. .95 Trade Outlook............ ................................... * ... ..... .97 Price Outlook....................................................... 100 - iv - Coal.................................................................. * 105 Summary.............................................................,105 Demand Outlook .......................................................105 Supply Outlook ....................................................... 110 Trade Outlook....................................... .113 Price Outlook........................................................113 METALS AND MINERALS Copper............................................ ...................... 125 Suamm ry................................ .............................125 Demand Outlook ......................... ............................. 126 Supply Outlook......................................................128 Price Outlook................. . ................................. 134 Tin .................................... ................................149 Summary..............................................................149 Introduction.........................................................149 Demand Outlook.......................................................150 Supply Outlook.......................................................155 Trade Outlook........................................................157 Price Outlook........................................................158 Policy Issues and Investment Climate.................................160 Nickel...................................................................171 Suaary..............................................................171 Historical Perspective...............................................171 Consumption Prospects................................................172 Production Prospects.................................................177 Trade Prospects......................................................179 Price Prospects.. .........................................180 ALuminum and Bauxite....................................................189 Summary..............................................................189 Introduction.........................................................190 Demand Outlook.......................................................191 Supply Outlook.......................................................196 Trade Outlook........................................................202 Price Outlook........................................................203 Policy Issues and Investment Climate.................................206 Steel............................ ....................221 Summary......... .... ........................221 Consumption Prospects................................................221 Production and Capacity Prospects...................................223 Trade Prospects. ...... .................... .. 225 Price Outlook...., ...................................228 Iron Ore ............... *...........................*.......................233 Summary. . . ..........................................................233 Consumption Prospects............................................. ..233 Production Prospects............................... . ...... .234 Trade Prospects..... .............. * .... .......................... .237 Price Outlook........................................................237 Lead ..................................................................... 247 Summary ....... ..................................................... 247 Irtroduction.........................................................248 Demand Outlook.......................................................248 Supply Outlook....................................................252 Trade Outlook........................................................ 254 Price Outlook........................................................256 Zinc. ...................................................................267 Suaiary..............................................................267 Introduction................. .......................................268 Demand Outlook......... .......................................268 Supply Outlook..................... .................................272 Trade Outlook........................................................274 Price Outlook........................................................276 Policy Issues and Investment Climate.................................279 Gold.....................................................................291 Supply, . ... .............. .... ...................................291 Denani.. ............................................................292 Price Ou.tlook........................................................292 Silver..................................................................295 Supply...............................................................295 Consumption..........................................................297 Price Outlook....................................... ................298 - vii - PREACS 1. This publication is a two-volume report which revievs the market prospects for the major primary commodities exported by developing countries. In the past this report has been prepared periodically for distribution within the World Bank. However, requests for its distribution outside the World Bank have been manifold, and its publication in this form is in response to these many requests. 2. The forecasts are mainly used in forecasting the balance of payments of countries that borrow from the World Bank and in appraising investment projects that include these commodities as inputs or outputs. Because of the multiple purposes they are intended to serve, the price forecasts are presented in current (nominal) as well as 1985 constant dollar (real) terms. 1/ Up to 1990 the forecasts are in terms of actual prices expected. For 1995 and 2000 the price forecasts are forecasts of the average levels expected during that period. 3. The forecasts are conditional on the various macroeconomic and commodity-specific assumptions used--all of which are subject to uncertainty. The macroeconomic assumptions forming the basis for the price forecasts are set out and discussed in the section that begins on page 11. The primary coamodity forecasts are then discussed, commodity by commodity. For each commodity or group of commodities there is a standardized set of tables giving historical and forecast values for production, consumption, exports, imports, and prices; these tables give details in terms of major economic regions as well as for countries which are major participants in these markets. For most of the commodities, the forecasts have been based on simulation runs of global commodity models maintained within the International Commodity Markets Division of the World Bank's International Economics Department. Details of these models can be obtained directly from the Division. 4. The assistance given to the Division in carrying out this exercise is gratefully acknowledged. People in both public and private organizations have been most forthcoming in providing data and in discussing the outlook for the various commodity markets. Their cooperation has added greatly to the usefulness of the report. 1/ Commodity prices have been deflated by the World Bank's Manufacturing Unit Value (MUV) index, and the US GDP deflator. The MUV index is the c.i.f. index of US dollar prices of industrial countries' manufactured exports (SITC 5-8) to the developing countries and may be regarded as a useful deflator to measure chan6es in the net barter terms of trade of developing countries highly dependent on exports of primary commodities. The US GDP deflator may be a useful deflator to use in circumstances where the US inflation rate is believed to be an appropriate measure of changes in the overall price or cost level. - viii - MOTES AND DUIMITIOWS -Dollars are United States dollars unless otherwise specified. -All tons refer to metric tons (1,000 kilograms) unless otherwise noted. Abbreviations and Symbols TOMS = metric tons LB - pounds CUN = cubic meters XG = kilograms NTO = millions of tons of oil equivalent MA = not available ../-/ = no data = least squares growth rate for the said period is not meaningful due to the shortness of the time period for which data are available, or due to rapid growth from a low base. Economic Classifications Industrial Countries* North America...includes Canada, United States. EEC-10.. :ncludes Belgium-Luxembourg, Denmark, France, Federal Republic of Germany, Ireland, Italy, Netherlands, Spain, United _<ingdom. Other Western Europe...includes Austria, Finland, Iceland, Liechtenstein, Norway, Sweden, Switzerland. Asia and Oceania...includes Japan, Au3tralia, New Zealand. Centrally Planned Economies USSR Eastern Europe...includes Albania, Bulgaria, Czechoslovakia, German Democratic Republic, Hungary, Poland, Romania. Developing Countries Southern Europe...includes Cyprus, Greece, Israel, Malta, Portugal, Yugoslavia, Turkey. Africa...includes South Africa. Latin America and the Caribbean...includes Cuba. Oceania.. .excludes Australia and New Zealand. Asia...excludes Japan; includes China (which includes Taiwan, China, except where specifically noted), Democratic Kampuchea, People's Democratic Republic of Korea, Lao People's Democratic Republic, Mongolia, Viet Nam. * Also includes American Samoa, Guam, Pacific Islands, Puerto Rico, US Virgin Islands with North America; Bermuda, Channel Islands, Faeroe Islands, Falkland Islands, French Guiana, French Polynesia, Gibraltar, Greenland, Isle of Man, Martinique, New Caledonia, Reunion with EEC-10. ·【「긔 SUMMMY Recent History: 1986-88 1. The net barter terms of trade continued to move against non-fuel primary commodities in 1987, but there was a partial recovcry in 1988. The World Bank's non-fuel commodity price index in nominal US dollar terms was vir,, ually unchanged over the three-year period 1985-87. However, during this time the price of manufactured exports to developing countries increased by 302. The upswing in commodity prices from the latter half of 1987 led to prices in nominal terms in July 1988 reaching levels last seen in the first quarter of 1981--at the beginning of the long downswing. For the first seven months of 1988 non-fuel prices have averaged 19% higher than for 1987. Two features of recent price movements are of major interest--the reasons for the stability of prices at low levels over the 1985-87 period and the recovery in the late 1987 and early 1988. 2. For discussion purposes it is useful to split the non-fuel commodities into three groups, as different explanations are important for each group. Also, price movements in these groups--beverages, grains, and raw materials--have different implications for different groups of developing countries. The be-zerages are extremely important foreign exchange earners for many of the low-income developing countries. The grains, besides being the staple of most of the people in the developing vorld, are important imports for the poorest of these countries. The raw materials, both agricultural and minerals/metals (as well as energy), are the main conduit by which fluctuations in the industrial countries are transferred to developing countries. As well, the industrializing countries are rapidly growing consumers of raw materials. 3. Beverage prices increased sharply in 1986, essentially because of a boom in coffee prices due to drought-related crop losses in Brazil. The unwinding of this boom -;a 1987 took place at a time when coffee prices were not receiving support from the export quota scheme run under the International Coffee Agreement, and prices fell to extremely low levels. The reimposition of the export quotas led to an increase in prices but these have subsequently been under pressure--mainly from the prospects for a large Brazilian crop and large stocks held in consuming countries. Cocoa prices have fallen to 'Levels not seen in the past 15 years. Again the depressing factor is increasing production. The increases in coffee and cocoa production in recent years in large part derive from the large-scale new plantings made in the late 1970s in response to the price boom experienced at that time. As well, under the pressures for servicing their external debt, many of these producers have depreciated their currencies significantly to increase supply and hence exports of these commodities, which pushes down world prices. 4. Cereal prices, as well as cotton and soybean prices, were driven to very low levels in 1986 and 1987 as a direct result of US farm policy and responses to these policy initiatives, particularly by the EEC. The basic aim of the 1985-90 US farm legislation was to push down world prices and thereby discourage production and exports from its competitors, so that US farm - i - stocks--which had grown ttemendously under the incentives offered by the 1980- 85 farm legislation--could be reduced by exports. This policy was succes3ful, and prices of most of these commodities began to rise in the last quarter of 1987 as stocks reached more normal levels. The pressures for the recent prices increases -ere magnified by the poor Asian monsoon season in 1987, and the US summer drought in the second and third quarters ef 1988. 5. Raw material prices were largely constant throughout 1986--the bottom of the downswing since 1981--which appears consistent with the fact that the OECD's irnustrial production grew at only 1% during that time. However, raw material prices began to move up sharply from the second quarter of 1987, and this upswing continued until June 1988. At this point the metals/minerals subgroup price index was at a record high in nominal terms. Average 1988 prices for agricultural raw materials are 28% higher than in 1986. The primary reascn for the upswing has been the unexpectedly strong and sustained growth of industrial economies, particularly in the capital goods sector. The United States, Japan, the United Kingdom, and a tew manufactures-exporting developing countries led the expansion. Industrial production growth was also strong in the United States and the United Kingdom. The price increases for the metals and minerals have been sustained because there has been a slow production response. We attribute this to the steady closing down of sLrplus capacity during the long period of declining prices since 1980. Unlike the fast production response to the increase in copper and aluminum prices in the 1983 mini-boom, this time there was little idle capacity available to bring back on-stream. As a result of the increase in nominal primary commodity prices, the net barter terms of trade of non-fuel commodities for the developing countries should increase by nearly 11 in 1988. This would mean an offset of the terms--of-trade loss experienced in 1987. Short-Term Price Forecast: 1988-90 6. The price forecasts included in this report are summarized in constant and current dollars in Tables 1 and 2. The price indices maintained by the World Bank are shown in Table 3 (constant dollars) and Table 4 (current dollars). The indices are also calculated for the forecast period. The deflator used by the World Bank to measure international inflation rates, the MUV, is given in Table 5. 7. Non-fuel primary commodity prices in aggregate nominal terms are expected to decline slightly from their 1988 level over the next two years (see column 2, Table 4). Between 1988 and 1990 there is expected to be a decline in metals/minerals prices of about 16%, based on the expectation that the recent growth rates in industrial production will not be maintained (in fact, a considerable slowdown is posited). We also expect an increase in output resulting from the recent price increases as well as from new capacities committed to coming on-stream. Cereal prices are also expected to fall substantially from their recent highs--though most of this decline should take place in the second half of 1989 and in 1990. Offsetting these declines are expected increases in beverage prices, as coffee and cocoa prices increase from the disastrous lows experienced in 1988. However, we are attaching an important qualification to this forecast. The International Coffee Agreement is due for renegotiation, and substantial difficulties lie in the path to a xiii - new agreement. If the exp3rt quota scheme is s4spended or otherwise becomes insperative, coffee prices--especially for the tropical robusta varieties-- will fall substantially because producers will no longer be jointly constrained to hold the stocks accumulated while the export quota scheme has been in operation. Similar risks face the cocop =a-ket. If the 250.060 tons accumulated by the Buffer Stock Manager, under the international Cocoa Agreement, is released because of lack of support for the aoeration of the Agreement, cocoa prices will be under further dowrnaards pressure. 8. Nominal prices of the "other foods" are also expected to increase. The most important component of this subgroup is sugar. The international price of sugar in US dollars is exp-cted to increase by 351 over the 1988-90 period (see Ta._a 2). Sugar stocks have been reduced to levels that in the past have seen a triggering of sharp price increases. Sugar production is not expected to outpace consumption over the next few years, ard therefore the probability of a production shortfall in a significant producer leading to a price run-up is considered to be high. 9. With the international inflation index forecast to increase by nearly 8% over the 1988-90 per.od, the non-fuel index in constant US dollar terms declines by 10% (column 2, Table 3). Such a decline would wipe out the terms- of-trade gains in 1988, bringing the constant dollar index back to the record- low level of 1987. Long-Term Price Forecasts: 1990-2000 10. Non-fuel comtodity prices in real terms are expected to make only a modest improvement over the 1990-2000 period--increasing by only 51 (Table 3). The foods group price index is expected to decline even further because of substantial declines in the real prices of the fats and oils and other foods groups. The emergence of the EEC as a sigaificant producer of oilseed products, the rapid increase of productive capacity .lr palm oil in Malaysia and Indonesia, and expanded soybean plantings in Sou. America will make the vegetable fats and oils market extremely competitive over the long run. The sugar price, the major component of the other foods index, is expected to decline signifi-antly over the 1990-2000 period, though this decline is somewhat misleading as we are expecting a run-up in sugar prices within the next few years. Still, the sugar market has been and will remain under considerable pressure from substitute sweetners--with the extensio! of high fructose production to developing countries and more extensive use of high potency. noncatoric sweetners in the industrial ccuntries. 11. Beverage prices are expected to decline even further in real terms over the period 1990-95, as cntiruing production increasz, from very :ost- competitive producers--Brazil, Colombia, and Indonesia in coffee; Brazil, Indonesia, and Malaysia in cocoa--keep up pressure on prices. The sustained period of low prices will eventually dampen plantings, and prices are e..pected to increase in the 1995-2000 period as the production increases slow. As with all other commodities, beverage prices will remain subject to considerable variability stemming from, e.g., frosts in the Brazilian coffee-growing areas or dry weather affecting West African cocoa producers. - K1V v 12. Real prices of raw mAterial comodities--agricultural and metals/minerals--should trend up fairly strongly in the 1990-2000 period. This uptrend derives in part from the low levels of prices forecast for 1990, based on the assumed slowdown in OECD industrial production over the next two years. A much faster increase in raw material prices could be seen in the 1990s if the real interest rate were za fall to near long-term levels coincident with reasonably strong economic growth. These circumstances would stimulate a resurgence it investment activity, which has been considerably dampened over the past decade or so. Investment activities are raw material-intensive and an upswing in investment would lead to a sustained run-up in raw 4,aterial prices. In the absence of these improved circumstances, raw material demand will continue to feel the strong competition from synthetic substitutes. Petroleum Price Forecasts: 1988-2000 13. The oil price scenario which we believe most likely foresees a somewhat more cohesive OPEC, following the cessation of the Iran-Iraq war, and a period of low prices stimulating crude oil demand while depressing exploration and development of oil reserves. Under this scenario, OPEC's production control would be sufficient to ensure that crude oil prices would not increase quickly--remaining below $11/barrel in 1985 dollars for the period 1988-90. As well as . stering a pickup in demand, such price levels would also slow the deve'. ant of alternative energies and energy-saving technologies. With increasing demand and assuming a slowdown in the growth of non-OPEC supplies in the 1990s, there should be an upward trend in prices-- rising to $12/barrel by 1995 and $15/barrel by the year 2000 (in 1985 dollars). 14. The cohesiveness of OPEC will remain tenuous. Other factors critical to the future performance of this market include the rate of progr.!ss of technological developments affecting energy use efficiency, conservation, and development of alternative fuels, as well as the growth in non-OPEC supplies. These factors all pose downside potential to our price forecasts. On the other hand, the potential for disruption of oil supplies remains high. These considerations point to a large degree of uncertainty about the forecast and likely considerable variability in actual prices. 目■■国□国■■■■国■■■■■園■■■■■■■■国国国国国国 ―・―----,.--,.-----------,,---------:,----,.--―。，----------：。―-----：、；;; l I Kyl mm AD w~ em 1^ 11 2k-s 341 31.0 26.1 27.5 25.7 13,4 17.2 14.0 13.5 16.6 Z2.0 35.0 LM 0 43 37 92 43 40 47 44 m 37 50 67 n$ 3M m 314 321 4n 251 m 315 _Vo m 40 0 2011) 2M 174 212 m n5 207 199 tco 131) 140 ta m TU Mo ;lo 2n 2w 1*3 233 34 tid 113 171 175 2W 220 271 X3 9~ km et GM 374 las 147 115 90 133 10 337 401 als ~ 575 t W rm 2,4 259 2« 271, 215 =0 zw ~ 257 29k 342 tu 145 379 401 374 an 370 37111 w 374 421 an en 581 457 ~ S 1~ if$ 399 «5 MS 373 332 311106 M 4w tio 4m 450 -563 öw RICE %m 144 434 443 293 7r m 216 2t1 230 MS 297 250 313 yn »&ÅT im 63 191 195 167 tio 165 173 161 134 176 187 1 p 192 236 MIX lm sa 123 131 109 136 136 112 86 74 log 110 94 123 166 WAIN $m 52 129 126 Uffi 12% tig t03 &3 73 [ab 102 91 112 135 FAT$ ~ 01 tt PMA oft 11,111T m SM 571 445 501 rs 501 257 343 464 441 44 M2 671 0~ olk. 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TM 1,3M :,061 l~ 1.371 1.110 l.MI ;,606 2.400 2.100 1,800 2.350 2,9W LEJD $401 304 gm ni SM -125 443 391 46 597 m %0 540 m 9w ZIMC SMT 295 761 M 745 764 Sin 783 734 799 1,100 975 m 1.140 1,wo IRM OK $YW 15.2 25.7 24.3 25.9 24.0 23.2 22.7 22.0 22.0 24.2 27.7 77.6 2111.1 38.5 ~ fTE IST 12.0 32.0 35.4 40.4 37.4 37.0 35.7 33.7 29,5 28.0 28.0 30.0 40.0 48.0 Vroz 36 M 4W 376 423 360 318 ma 4M m 430 3W &M 520 SILVM SITOZ 1.8 20.6 10.5 1,9 11.4 8.1 6.1 5.5 7.0 6.8 7.2 6.9 7.8 9.7 FERVI.92M p~ TE 01= %An 11 47 50 42 17 sa 34 34 31 36 39 43 sa UREA slwr 44 222 216 159 135 171 136 107 n? 148 180 230 2" 3M TIM $mr 43 iw 161 tig 135 131 121 121 134 157 163 las m 330 w SIV] 5< = 195 183 104 IN 169 154 17,4 195 ut m 54 44 POTAUMM CMIR M SAIT 32 116 112 42 73 $4 84 69 69 el 95 103 130 170 W.A. - MOT AVAI1LA111t1. /A DATA ~~ R~. 4 ~511110 ~IDE, " 0~ AS ~#Alt OF POTAM. VM~. Im - xvii - T~ 3: 14T0 IMEX O Tf MIS tc=UTAMT US OXtAM) 8914TIEs 53 (cta T (ES ------------' ---- - ------ --- (cCUmIG . TOT -- FO - - --------- ~000 & g s- ElEl y? TOTAL EVE"S ŒEEALS FATIS 6 0oIs OnKR ke ts 4 (100.0) (67.7) (53.2) (22.3) 9.41 9.3) 112.3) (14.4> ( 5.2) (27.1> I9g 30.0 112.4 123.6 119.2 86.2 153.7 IN.4 mX.7 139.8 43.0 97.9 1949 25.8 112.8 120.9 168.9 99.5 162.2 147.1 99.6 128.6 47.1 105.1 1~ 26.2 149.3 167.4 151.2 146.2 176.7 176.6 12.6 227.0 56.6 122.1 1951 22.7 155.8 171.7 145.2 140.3 165.4 k82.1 110.9 269.3 71.9 132.4 1952 21.7 137.1 139.6 129.0 127.7 156.5 146.3 97.4 178.6 51.4 147.6 1953 23.6 131.6 135.7 134.0 134.0 161.3 150.5 100.4 142.2 48.3 137.. 1954 25.5 144.3 154.3 157.2 194.3 153.2 142.8 %03.6 143.6 67.9 1'4.5 1955 25.0 140.4 141.7 133.3 151.5 132.9 130.3 102.8 172.8 53.4 154.1 1956 24.2 137.6 137.3 133.3 153.4 729.8 129.0 102.7 :52.3 49.6 135.2 1957 23.6 127.9 130.9 127.1 137.3 121.0 127.2 113.1 144.7 46.8 136.3 1958 22.0 117.2 119.3 116.1 123.0 120.6 117.7 99.1 131.0 43.9 126.1 199 19.8 117.1 119.3 110.5 109.7 116.3 127.3 94.9 151.9 52.4 123.9 190 18.2 115.3 116.3 105.5 104.2 106.5 118.5 95.7 156.2 56.4 124.1 1961 17.9 106.7 108.0 101.8 97.1 1 t4.6 717.9 88.5 131.0 57.4 :20.3 1962 16.4 106.1 (06.1 100.3 90.7 124.2 113.1 89.9 127.6 61.7 114.6 1963 16.7 110.1 112.2 709.9 91.4 126.6 121.7 122.0 120.8 61.4 114.4 (964 15.3 117.1 114.0 112.1 103.2 124.0 123.3 110.8 120.9 51.6 137.4 1965 15.1 118,9 109.0 106.7 986.2 120.4 134.5 91.0 117.4 59.1 155.3 1966 14.7 119.2 106.8 !04.5 , 92.7 13.5 126.2 89.1 115.2 60.1 161.5 1967 14.5 110.5 104.4 103.4 89.3 136.8 1:9.5 91.5 108.2 63.5 134.7 (968 14.6 112.1 104.8 102.5 89.1 134.4 115.4 92.8 113.2 65.7 139.1 i969 13.9 112.5 103.7 100.6 87.8 126.5 106.3 9.3 115.2 60.1 144.7 1970 13.1 111.2 102.5 l02.5 96.0 106.9 120.6 97.1 101.4 59.8 142.8 1971 16.2 97.8 93.2 92.3 79.3 99.8 114.4 93.3 96.4 32.9 117.0 1972 16.6 93.9 92.1 92.3 80.0 96.5 103.3 103.0 91.1 52.5 106.4 1973 20.4 124.0 123.9 123.7 87.9 170.2 184.9 107.1 124.3 79.2 133.0 1974 69.3 134.4 134.7 140.3 83.1 202.4 171.6 172.9 114.0 77.9 144.8 1975 60.7 1e0.9 99.8 102.7 71.0 142.4 103., i29.2 89.2 52.8 113.1 1976 64.3 111.9 (15.9 117.3 134.0 114.8 109.5 94.7 110.7 70.0 110.2 1977 64.0 122.9 134.1 142.6 205.6 96.1 123.7 78.0 102.5 74.1 104.4 1978 56.0 101.5 107.9 110.9 132.3 100.1 112.3 79.1 96.8 67.7 92.1 1979 71.3 104.8 105.5 106.4 121.0 92.2 113.5 85.6 101.9 104.3 103.1 190 106.7 104.9 104.4 103.9 99.1 100.5 95.9 121.2 106.4 109.5 105.2 1961 119.3 90.8 90.7 90.3 81.9 106.6 91.9 92.0 91.9 86.6 92.1 1962 109.3 82.4 81.1 80.9 84.8 78.7 75.8 79.1 82.1 88.0 84.4 1963 10!.8 89.2 89.4 88.0 88.; 87.4 91.9 85.4 94.6 84.2 89.5 1964 101.4 92.2 94.2 95.4 103.7 85.0 110.0 77.3 89.7 98.6 85.9 1965 97.4 80.9 81.2 83.0 94.6 73.6 76.3 74.2 74.6 79.5 80.5 1906 41.6 69.0 71.1 74.4 97.7 54.4 49.7 66.0 58.7 74.6 62.7 1967 48.3 62.7 58.7 56.9 58.4 46.7 52.7 65.2 65.2 99.5 65.7 198 36.3 69.5 63.5 63.2 59.7 58.5 66.5 70.6 64.8 95.5 79.5 1969 37.8 64.4 60.8 61.1 58.8 55.5 59.9 70.7 59.5 96.5 67.3 1990 39.9 62.5 60.0 60.2 59.8 47.3 58.8 71.8 59.4 97.0 62.3 "995 4.4 66.0 62.3 59.4 58.4 49.4 59.4 68.6 73.2 103.3 67.9 2000 56.4 65.5 60.5 58.4 60.0 51.0 48.8 68.2 68.5 108.0 69.8 /A CWULITD F~i ~ 1)DCD DATA M0 EFLATED By MI ACTURtNG NT VALLE (M¥) IDEX. Mn : TIIE N lTIES INCLiD0 IN EACH 0.P AM. BVERAES-CWFEE. COCOA, TEA; CEALS--AZE. RIŒ. UAT, GRA:N SG5~a FATS MO Ol$-PALN 01L., WIMNJT OttL, GFOICJT 01 L. SOYMAN$. 0ROA INIMJT MEAL, SOYEEAN (AL; OTIER FOMS-S AR, EEF. MAS, 0MIS; ~ 0M-(DTTON, AM, kIMfR, TAD: TIMIER--LOM; §&TALS MO WMIEIS- R. TIM, NIOCEL, BAUXITE, ALuIIEM. fFOt OM, LEAD, ZIt,. N~PHTE imCX. ~ : wlR &wt. OCT(KR 17, )98 - xviii - Ta8LE ~C -:ICiE uE &(8 IET l3 ~Qm US Ol-L~ n979-83 -(00 3 P~TM 33 (Cm91E$1t - MICLTUP RmTt (CLLDsS TOTAL -- - ~ODD TOTAL EEVE~S CEIALS FAT3 & OttS O~6 utmERALS swaDI O / (100.0) (67.7) (53.2) (22.3) 9.4) ( 9.3) (12.3> (14.41 ( 5.2) (27.1) 1948 8.3 31.0 34.1 32.9 23.8 42.4 52.0 27.8 38.6 11,9 27.0 19~9 6.8 29.9 32.0 31.5 26.4 43.0 39.0 26.4 34,1 12.5 27.8 1950 6.1 34.8 39.0 35.2 34.1 41.2 41.1 28.3 S2.9 132 28.4 195) 6.1 41.9 46.2 39.1 37.7 44.5 49.0 29.8 72.5 19.3 35.6 1952 6.1 38.7 39.4 36.4 36.0 44.1 41.3 27.5 50.4 14.5 41.6 1983 6.5 36.1 37.2 36.7 36.7 44.2 41.2 27.5 39.0 13.2 37.7 1954 6.8 38.7 41.4 <7.1 52.1 41.1 38.3 27.8 38.3 18.2 36.0 1955 6.8 38.3 38.7 36.4 41.3 16.3 35.6 26.1 47.2 14.6 42.1 1956 6.8 38.9 38.9 37.7 45.4 36.7 36.5 29.i 43.1 14.0 43.9 1957 6.8 37.0 37.8 36.7 39.7 35.0 36.8 32.7 4z.8 13.5 39.4 1958 6.5 34.5 35.1 34 1 36.2 35.4 34.6 29.1 38.5 12.9 37.1 1959 5.8 33.9 34.6 32.0 31.8 33.7 36.9 77.5 44.1 15.2 35.9 1980 5.4 34.1 34.4 31.2 30,9 32.) 35.1 28.3 46.2 16.7 36.7 1961 5.4 32.7 32.5 30.6 29.2 34.5 35.5 26.6 39.4 17.3 36.2 1%2 5.0 32.6 32.6 30.8 27.8 38.1 34.7 27.6 39.2 18.9 35.2 1963 5.0 33.2 33.8 33.1 27.5 38.1 36.6 36.7 36.3 18.5 34.4 1%4 4.7 35.8 34.9 34.3 31.6 37.9 37.7 33.9 37.0 15.8 42.0 1965 4.7 36.8 33.7 33.0 30.3 , 37.2 41.6 28.1 36.3 18.2 48.0 ima 4.7 38.0 34.1 33.4 29.6 41.9 40.3 28.4 %.8 19.2 51.5 1967 4.7 35.7 33.7 33.4 2e.8 44.2 38.6 29.6 35.0 20.5 43.5 1968 4.7 35.9 33.5 32.8 28.5 43.0 36.9 29.7 36.2 21.0 44.5 1969 4.7 37.9 35.3 33.9 29.6 42.6 36.5 33.1 38.8 20.3 48.8 1970 4.7 39.8 36.7 36.8 34.4 39.0 43.2 4.8 36.3 21.4 51.! 1971 6.1 37.0 35.2 34.9 30.0 37,7 43.2 35.3 36.5 21.9 44.2 1972 6.8 38.7 37.9 38.0 33.0 39.7 42.7 42.4 37.5 21.6 43.8 1973 9.7 59.2 59.1 59.0 41.9 81.2 88.2 51.1 59.3 37.8 63.5 1974 40.3 78.) 78.2 81.5 48.3 117.6 99.7 100.5 66.2 45.3 84.1 1975 39.2 65.2 64.5 66.3 45.8 92.0 67.0 83.5 57.6 34.1 73.1 1976 42.1 73.3 75.9 76.8 87.7 75.2 71.7 62.0 72.5 45.8 72.2 1977 46.0 88.4 96.4 102.6 147.8 69.1 88.9 56.) 73.7 53.3 75.0 1978 46.4 84.0 89.3 91.8 109.5 2.8 93.0 65.5 80.2 36.1 76.2 1979 66.9 98.3 98.9 99.8 113.5 86.5 106.4 80.3 95.6 97.9 96.7 1980 109.7 707.8 107.3 106.8 101.8 103.3 98.5 124.6 109.4 112.6 108.1 1981 123.4 93.9 93.7 93.4 a4.7 110.2 95.0 95.1 95.0 89.6 95.2 1982 111.5 84.0 82.7 82.5 86.5 S0.3 77.4 80.7 83.7 89.8 86.1 1983 101.1 88.6 88.s 87.4 87.5 86.8 91.3 84.8 94.0 83.6 88.9 1984 98.9 90.0 91.9 93.1 101.2 82.9 107.3 75.4 87.5 96.3 83.9 1985 96.0 79.8 80.1 8.8 93.3 72.6 75.2 73.1 73.6 78.4 79.4 1986 48.6 80.5 82.9 86.8 114.0 63.4 58.0 77.1 68.5 87.1 73.2 1987 61.9 80.4 75.2 72.9 74.9 59.9 57.5 83.6 83.6 127.5 84.1 1988 50.4 96.4 88.1 87.6 82.8 81.1 92.2 97.9 89.8 132.4 110.3 199 55.8 94.9 89.6 90,.1 86.6 81.8 88.3 104.1 87.7 142.2 99.2 1990 59.7 93.6 89.8 90.0 89.4 70.7 87.9 107.4 88.9 145.1 93.1 1995 79.1 117.7 111.1 105.9 104.3 88.1 105.9 122.4 130.5 184.2 121.1 2000 125.9 146.4 135.2 130.4 134,1 '13.9 109.1 152.3 52.9 241.2 156.0 /A CG9UTED FAM U8«~o0 DATA. OTE: Tl£ COMMTIES (I~liD IN EACH E~P AÆ: 21VERAS--CCFFEE, C A. TEA; CEEALS--1AI2E. RICE, UAT, RAIN SM; FATS MD OIIls-~J 01L, 00CT 011,, EORj OIL, SOTEANS, C A GO8T G ~ EA-l, SO~EM W.AIL; OTWR FOOS-S5oAR. BEEF. 8~NANA. ~ES; ~OO5- TTON, iUTE, REIMR, TACCO; TIsfR-LOS; ETALS AM MIIERALS- PER, TIN, NICMEL, 8AUIITE, AUNINM, IEO (M, LEAD, ZIM, HTE C 50OIME: w~tL a~.( OM:TCR 17, 19M8 - xix - VW 5: ØeaU M'9 T vau~ eam I@X. 19- l (1960-100) (1965-10 ( 0IMK) /B 194* 26.8 27.9 1949 25.7 26.8 -3.9 1950 22.6 23.6 -11.9 1951 26.1 27.2 15.3 1952 27.3 28.5 4.8 1953 26.6 27.7 -2.8 1954 26.0 27.1 -2.2 1955 26.5 27.6 1.9 1956 27.4 28.6 3.6 1957 28.0 29.2 2,1 1951 28.5 .29.7 1.7 1959 28.1 29.3 -1.4 1960 28.7 29.9 2.1 1961 29.2 30.4 1.7 1962 29.7 31.0 2.0 1963 29.2 30.4 -1.9 194 29.8 31.1 2.3 1965 30.0 31.3 0.6 1966 31.1 32.9 3.5 1967 31.4 32.7 0.9 198 31.2 32.5 -0.6 1969 2.8 34.2 5.2 1970 34.8 36.3 6.1 1971 36.7 38.3 5.5 1972 40.0 41.7 8.9 1973 46.4 48.4 16.1 1974 56.5 58.9 21.7 1975 62.8 65.5 11.2 1976 63.7 66.4 1.4 1977 70.0 73.0 9.9 1978 80.5 83.9 14.9 1979 91.2 95.1 13.4 1990 100.0 104.3 9.7 1961 100.5 104.8 0.5 1962 99.1 103.3 -1.4 1963 96.6 100.7 -2.5 1964 94.9 99.0 -1.7 1965 95.9 100.0 1.1 196 113.4 118.3 18.3 1967 124.6 130.0 9.8 1968 134.9 140.7 8.3 1969 143,4 149.5 6.3 1990 145.5 151.7 1.5 1995 173.5 181.0 3.6 2000 217.3 226.6 4.6 /A UIT VALUÆ IWfÆX OF M~4ACTIO EXTS (SiTC 5-8) FNFIVE INIXSTRIAL 14~ŒT ECIDMIES TO OE¥ELCIIN C01RlES ON A CIF BASIS. F(R HiSTRY, Tl€ SOISE I1 THiE . lUN,Ml.y BJLETIN OF STATISTICS. C(DTED FIX 160E D DATA. ,1 FIG~S REFER TO ARIT4ITIC RATES (F CHA~ OVER TFE PRVIOUS YEAR; EXCEPT IN 1995 MO 2000 IEN THEY EPMSENT AVERME RATES (W TH PER M 0 HR PR EVICIS FIVE YEARS, C~J1ED USING YER-E INDX LEVELS. ~E l M . EPTEMER 29, 198 COMMODITY MARKETS IN 1986-88 Non-Fuel Commodities 1. The downtrend in non-fuel primary comodity prices that characterized most of the 1980-86 period was reversed from mid-1987. The World Bank's current dollar index (1979-81=100) of non-fuel primary commodity prices increased from a record low of 74.4 for the first quarter of 1987 to 97.5 in the second quarter of 1988--an increase of 31% (see Table 1). 2. After reaching a mini-peak in the first quarter of 1984, primary comnodity prices declined steadily through early 1986 as the growth of industrial economies slowed. The behavior of primary commodity prices in 1986 and in the first half of 1987 proved to be a major disappointment to most primary producers. Despite moderate economic growth during this period, most primary commodity prices in nominal terms--with the main exception of beverages--fell to record-low levels in recent history. In terms of annual averages, the non-fuel commodity price index in current dollar terms remained approximately constant (at about 80) in all three years--1985, 1986, and 1987 (see Table 1). However, had beverage prices not increased sharply in 1986, the lowest point for the index would have occurred in 1986. In constant 1985 dollar terms, 1/ the 1987 index was the lowest ever recorded for the series (See Figure 2). Referring back to Figure 1, it can be seen that the price index in SDR terms showed a pattern of changes during 1980-88 similar to the constant dollar index, reflecting the fact that the deflator index has been heavily influenced by exchange rate changes. 3. Among the commodity groups, fats and oils prices experienced the sharpest declines between 1984 and 1986, with a 45.9% drop. They were followed by cereals prices, with a 23.5% decline. The prices of industrial raw material commodities--metals and minerals and non-food agricultural comnodities--hit record lows in 1986, down by 13.1% and 22.3%, respectively, from their 1984 levels. Beverage prices remained at relatively high levels throughout the 1984-86 period. 4. It was also the raw materials comnodities that benefited the most from the recent price upsurge. Compared to the first quarter of 1987, the metals and minerals price index (which started to move upward from aid-1987) was 58% higher by the second quarter of 1988. Non-food agricultural commodity prices began to increase from the fourth quarter of 1986 and gained 40% between the third quarter of 1986 and the third quarter of 1987. The index subsequently declined somewhat when cotton prices eased substantially to more than offset increases in rubber prices. Cereals and fats and oils prices started to pick up only from late-1987 but made impressive gains, by 39.6% and 42.4%, respectively, between the 1987 first quarter and the 1988 second quarter. 1/ Deflated by the Manufacturing Unit Value (MUV) Index for US dollar prices of manufactured exports from industrial to developing countries. 4041t WEWES WMTELO4ERMES AEtŒPERCEMT C~lgg (S) 19% 197 1987 1987 1988 19e 1917/1985 ~m 1~ amiT JO~t OCT6C -A A JM^-MC OCT-3EC 1985 CROX OIL POT L~ 13,46 7.23 16.89 16.73 15.07 14,63 -35.44 -43.97 .USTMiIAN S~T 31.13 27.50 29.25 :.00 34.00 36.00 -18.52 0.14 4i.S. MMT 43.92 36. 7 36.50 35.50 37.00 37.50 -22.43 -20.43 ElE~iS CC1C 206.96 199.42 197.78 191.26 166.02 162.41 -11.54 -29.22 CFEE t^S 429.26 50.50 255.85 273.92 307.87 317.18 -22.47 -15.04 TEA †/S 192.90 170.75 188.32 194.75 173.73 166.21 -13.90 0.83 CEALS Ril CET 210.50 230.30 205.0 273.68 300.75 300.00 6.66 43.06 OAIm S5C , IAT 82.41 )2.76 69.89 76.40 92.58 114.60 -29.36 -1.80 NIZE SlMT 87.56 75.70 68.55 8.23 99.70 120.27 -32.55 -4.33 WEAT IMT 160.64 135.52 :37.75 136.65 165.62 197.67 -22.94 -12.26 FATS M~ 01LS PAL" OL 5/WT 257.00 342.58 331.00 384.33 440.3' 496.00 -31.56 19.22 COT 0IL MT 296.50 442.25 390.67 496.00 552.Cj 614.00 -25.06 35.96 n^OYM 0IL sMT 342.42 334.25 309.00 359.67 463.33 544.00 -41.56 1.24 $~ANS $MT 208.42 2)5.75 199.00 228.33 302.67 353.00 -3.86 44.59 ODIER F0D0 BEEF †ACc 209.22 238.59 226.24 252.81 244.64 242.29 10.76 12.88 SUGAR G 13.34 14.90 15.74 16.37 20.58 23.30 66.50 77.14 9AMIES VWT 393.73 455.98 358.67 460.34 452.24 439.55 14.45 20.35 AWI|C. N(~OOS CDTTCN f/XG 105.63 164.84 143.01 166.88 147.05 151.63 25.04 37.91 JUTE smi 270.08 322.75 288.67 353.33 370.00 370.00 -44.63 14.43 0 $/KG 330.66 445.95 387.13 490.99 399.14 621.59 25.09 14.39 RUNKR Vm 94.46 111.66 101.83 118.22 136.05 155.74 20.84 47.62 LOGS s/CU 151.27 221.41 178.30 295.64 242.30 228.95 62.52 65.93 MTALS ~M NERALS PSoMT 1,373.78 1,782.50 1,397.18 2,453.33 2,424.85 2.540.27 25.76 75.50 TIN:mALAYSIAN VCI 616.14 668.98 667.75 684.02 685.53 703.58 -42.02 -34.62 NICEL:F~E NT SMT 3.881.24 4.872.22 3,671.43 6.430.13 16,875.53 15.589.^ -0.55 309.48 LEAO /Km 40.61 59.68 47.05 63.42 66.51 67.75 52.70 69.44 ZIC fimS 75.40 79.88 7439 82.81 120.37 136.53 T.96 88.60 ALUSlMU1 1/T 1,261.16 1.607.64 1,338.04 1,836.02 2,818.09 3,308.11 44.80 165.69 #SILVER t/Toz 547.00 700.88 556.60 700.45 668.59 703.68 14.11 10.15 IlR cE $MT 21.99 22.23 21.64 23.66 22.78 22.27 -1.91 0.15 PI 1E ROM SYMT 34.33 31.00 31.00 31.00 36.00 36.00 -8.60 7.46 SELECTED PRICE INICES (1979/81-100) SPICULTUM: FCO 86.80 72.90 71.30 78.10 86.30 92.20 -10.99 4.98 AGtIC.: M012FO (EXCL. LCS) 68.00 84.70 77.50 87.20 88.30 95.30 13.69 30.40 METALS N NI~RALS 73.20 84.10 73.50 99.90 116.10 121.40 6.68 54.14 33 SELECTED CeEITIES (EXCL. FET )* 80.40 80.50 74.40 90.10 97.50 102.60 0.88 24.39 * . MT ILCUAMD IN fiea. M MTE: TIE 33 NIMnITY INEX §I~ES COIIITIES 9i4 A~VE PLUS 8ANANAS, C~PRA, G,90iT 01 t,] E JT gAL, SOY~N lEAL, TOC MM ~[UTE. TW A5TER9SKED TENS, H0WYER, NE NOT INCL(XED. FIGURE 1: NON-FUEL PRIMARY COMMODITY PRICES , 1980 - 88 I CURRENT AND CONSTANT DOLLARS AND SDRS, 198 -100 140- CURRENT DOLLAR 130 120 110 1CONSTANT DOLLAR % 100 S. ø 80 l. ø 70- 60 1980 1981 1982 1983 1984 1985 1986 1957 198 SOURCE: WORLD BANK. FIGURE 2: WORLD BANK INDICES OF PRIMARY COMMODITY PRICES , 1950 - 87 ( CONSTANT US DOLLARS, 1988 - 100 250 - ----------------- --- METALS & MINERALS 200- ...... 33 COMMODITIES :: 1I50\i,...... - "* , * * * *, *.,, I'I 1 ~~ ~ ~ TOTAL FOOD § j/ 100 50- PETROLEUM 1950 1955 1960 1965 1970 1975 1980 1985 SOURCE: WORLD BANK. -5- 5, The wide fluctuations in commodity prices during 1986-88 need to be understood against the backdrop of several important changes in the economic environment. These changes, however, do not provide adequate explanations for the observed commodity price behavior. The low commodity prices experienced in 1986 are not consistent with the mcderate economic growth achieved in that year nor with the sharp depreciation of the US dollar. Low inflation, low petroleum prices, and lingering external debt problems in developing countries could have been important contributors to the low prices, but the sum of their effects falls short of accounting for the severity of the decline. The missing link could be the supply side. The sharp recovery of commodity prices in 1987-88 has been attributed to strong demand growth and supply adjustments that reduced capacity and stocks. However, could improved market fundamentals alone explain the sharp rises in prices? These are the questions we now turn to. 6. Between 1985 and 1987 the non-fuel commodity price index in current US dollar terms hardly changed. However, in terms of other major currencies it declined sharply: by 38.4% in German marks, by 38.8% in Japanese yen, by 32.5% in French francs, and by 20.2% in British pounds. In SDR terms, the decline was 20.8% (see Figure 3). Although one may argue that commodity prices would have been lower had the US dollar not depreciated, the outcome is rather surprising in view of the results from earlier studies that have indicated large short- and long-term impacts of exchange rate changes on commodity prices. Since the US dollar was relatively stable during 1987-88, the short-term exchange rate impact should have been negligible. It may be that the 1987-88 increase in commodity prices partly resulted from the delayed impact of US dollar depreciation during the period 1985-87. If so, the impact has taken considerably longer than before to work its way through. A more likely explanation of the lack of impact from the decline in the US dollar is that while the dollar depreciated against other major industrial country currencies, it did not depreciate against the currencies of the major producers of primary commodities among the developing countries and other producers such as Australia and Canada. 7. The most intriguing aspect of the 1984-87 decline in commodity prices is that it happened during a nonrecessionary period. The GDP growth rate of major industrial countries averaged 3.5% over the 1984-87 period (see Table 2). During this period, industrial production of industrial countries also expanded at moderate-to-rapid rates, except in 1986 when the growth rate averaged only 1%. Against this backdrop, world primary commodity consumption grew at a high rate of 3.4% in 1984, slowed down considerably in 1985 to less than 1%, picked up again strongly in 1986 to 5.1%, and slowed again in 1987 to 0.4% mainly because of a sharp decline in beverages consumption. All the major commodity groups followed this consumption growth pattern except agricultural raw materials, which had strong growth in 1985. 8. After increasing only slightly in 1985, world consumption of foodstuffs (excluding beverages) increased at an exceptionally high rate of 7.1% in 1986. Although the low consumption growth in 1985 may have contributed to the low prices in that year, the sharp increases in consumption of foodstuffs in 1986 do not appear to have had any impact on prices. This was largely because of several years of good harvests, including 1986, that resulted in large accumulations of stocks. World stocks of the major grains, ＿化 TABLE 2: CHANGES IN SELECTED ECONOMIC INDICATORS (Percentages) ------------------------------------------------------------------------------------------------------------------------- 1980 1981 1982 1983 1984 1985 1986 1987 a/ ------------------------------------------------------------------------------------------------------------------------ Economic Activity In the Major 7 Industrial Countries Real GOP 1.2 1.7 -0.4 2.8 5.2 3.2 2.8 3.0 Industrial Production -0.2 0.6 -3.8 3.8 8.5 2.8 1.1 2.9 Gross Fixed investment -2.2 -0.2 -5.2 3.9 9.6 4.5 3.0 3.5 Prices and Interest Rates GDP Deflator (unadjusted) b/ 9.3 8.7 6.9 4.5 3.9 3.5 3.1 2.7 Unit Value of Manufactured Exports (in US dollal-5) 9.7 0.5 -1.4 -2.6 -1.7 1.1 18.3 10.6 Petroleum Prices (in US dollar-i) 64.0 12.5 -9.6 -9.4 -2.1 -2.9 -49.1 26.5 SDR/US Dollar Exchange Rate -0.6 10.4 6.7 3.3 4.3 0.9 -13.4 -9.3 6-Month US Dollar LIBOR 15.5 19.2 -18.7 -27.0 13.7 -23.5 -20.7 6.6 External Debt of Developing Countries 16.1 16.1 10.9 8.3 8.6 8.3 7.6 I's Index of Primary Coonnyodity Production 0.1 3.1 -0.8 -0.6 7.9 1.5 -0.9 7.3 Food -0.1 4.3 4.9 -3.7 8.0 2.0 2.9 -1.4 Beverages 3.7 9.5 -;3.3 5.4 9.2 4.2 -10.7 21.3 Agricultural Raw Materials -0.8 1.6 0.2 1.5 9.0 -0.3 -3.6 7.9 Metals and Minerals 1.3 -0.9 -6.5 1.2 5.4 1.1 -0.2 2.4 Index of Primary Commodity Consumption -1.7 1.8 2.1 1.5 3.4 0.7 5.1 0.4 Food -2.4 3.7 4,0 0.9 2.2 0.7 7.1 2.5 Beverages 1.7 2.4 2.3 0.0 3.4 -1.2 1.9 -5.6 Agricultural Raw Materials 0.7 0.2 2.6 2.7 5.0 5.3 3.3 3.6 Metals and Minerals -3.6 -1.9 -3.5 3.5 5.8 -1.0 3.7 2.9 ---------------------------------------------------------------------------------------------------------------------- a/ Preliminary. b/ GDP Deflator for Seven Industrial Countries. Sources: World Bank and IMF. -8- soybeans, oilseeds, and sugar %iere reduced to more manageable levels only during 1987 when corsumption grew at 2.5% while production declined by 1.4%. Prices of these commodities started to rise from then on. 9. Changes in industrial activity have been a key determinant oF the prices of metals and minerals and agricultural raw materials. Therefore, the low industrial production growth rate in 1986, prima facie, provides sufficient explanation for the low prices of these commodities recorded in that year. There is, however, a minor twist to this story. Consumption of metals and minerals increased rather strongly (by 3.7%) in 1986 thanks to vigorous housing construction. On the other hand, production of metals and minerals fell, which meant that stocks were drawn down rapidly. These changes, however, failed to give a significant boost to prices in 1986 because stocks were still relatively high by the end of 1986, and excess production capacities were believed to be high. In the case of agricultural raw materials, production fell very sharply in 1986, while consumption recorded a sizable increase. However, world production of key agricultural raw material commodities exceeded world consumption through much of 1986, resulting in high stocks and low prices. 10. Continued expansion of industrial production in 1987-88 brought gradual tightening of market balances and higher prices for metals and minerals and other industrial raw materials. Industrial production of the major industrial countries increased at 2.9% in 1987 and 5.9% during the 12 months ending in April 1988. Spurred by increases in capital investments and manufacturing exports from the United States and a few other -ountries, and in domestic spending in Japan and Western Europe, consumption of metals and minerals and agricultural raw materials increased 2.9% and 3.6%, respectively, in 1987. World production of metals and minerals increased by 2.4% in 1987, resulting in persistent reductions in stocks. Consequent price increases have been sharp and persistent for most metals. The large excess capacities in metals and minerals that were believed to exist have not been forthcoming despite the higher prices. For many of the commodities, stocks fell to their lowest levels in recent memory. It appears that the long period of low prices for metals and minerals during the 1980s has indeed had the effect that we first forecast in 1984 of reducing the surplus capacity that grew out of the 1981-82 recession. For the agricultural raw materials, the estimated 7.9% increase in production in 1987 relates to the 1987-88 crop year. The large increase in 1987 in the agricultural raw materials price index largely reflects cotton price increases which peaked during the third quarter of 1987 when 1986/87 crop failure reduced stocks to a low level before the 1987/88 crop became available. 11. The extent to which speculative buying contributed to the rapid escalation of raw materials prices in 1987-88 is not clear. The fact chat the equity market lost steam, particularly after the October 1987 stock market crash, with investors starting to look at commodities as undervalued, would at least have played some role in the price escalation. Some of the commodities may have been considered an inflation hedge. In early 1987, for example, inflation concerns were mounting, and there was some interest by speculators in primary commodities. -9- 12. As in the past, supply developments have dominated the changes in be-verage prices. The Brazilian drought that reduced the country's 1986-87 coffee crop by 50% led to a near doubling of coffee prices in early 1986. When the long-term impact of the drought on the coftte trees proved to be much less severe than initially thought and estimates for Brazilian production in 1987-88 far exceeded pre-drought levels, coffee prices rolled back in 198? to well below their levels before the price rise. 13. Bad weather was the main cause for the peaking of tea prices in 1984 and relatively high prices in 1986. Tea prices declined sharply in 1985 and 1987 when production increased in response to high prices. World cocoa production has exceeded world consumption since the crop failure in 1983/84, resulting in ever-increasing stocks and lower prices. The production in-creases, mostly from the major cocoa-producing countries, overwhelmed the absorptive capacity of the International Cocoa Agr-ement through its buffer stock operations, negating its effectiveness as a price-stabilizing influence. 14 . In summary, therefore, it appears that most non-fuel primary coommdity prices experienced an upturn in 1987-88 as a result of sustained demand increases, structural adjustments within industries that led to sharply reduced capacity, and perhaps because of US dollar depreciation in the pr-eceding years, Although the amplitude of the price changes during the period 1986-88 was exceptionally wide, it appears that they were driven mostly by- changes in market fundamentals. Pe troleum 15 . After their collapse in early 1986, petroleum prices remained low for most of the remainder of the year; prices picked up substantially from late- 1986 and maintained relatively high levels until late-1987. Spot prices a-eraged about $17/barrel in the last quarter of 1987, but declined steadily to average about $13.20/barrel for the third quarter 1988. These price developments were precipitated largely by OPEC's oscillating ability to enforce production quotas. As a result, wide fluctuations in crude oil prices ha.ve been observed during this period--from less than $10/barrel in the first half of 1986 to about $17/barrel in 1987. 16. The 1986 fall was triggered by the decision of Saudi Arabia, which ha.d absorbed the brunt of the earlier declines in world demand for OPEC oil, tc% seek a larger market share d abandon its role as the swing producer. This strategy appeared to be aimed at (M) convincing the other OPEC countries of the high cost of violating production agreements, (ii) reducing the growth in non-OPEC production, and (iii) holding down substitution of alternative eriergy supplies. OPEC was able to forge a production agreement ia July 1986 which received support from most non-OPEC countries. As a result, the market balance turned to a slight excess of demand and the large stock overhang was sLxbstantially reduced. Although OPEC failed in its attempt to negotiate a reduced production quota in July 1987, the market remained relatively stable at around $18/barrel until the last quarter of 1987 as OPEC members broadly stayed within their agreed quotas. Towards the end of 1987, however, this discipline began to disintegrate. Both Iraq and Iran deviated from their qtxotas to finance their war efforts. After the United States applied - 10 - sanctions on its oil, Iran began to offer discounts to promote sales. Iraq made clear its intention to increase exports via the second pipeline through Turkey, thus exceeding its quota. The United Arab Emirates also exceeded its quota on a regular basis. In 1988, repeated attempts by OPEC to control production have proven futile, and crude oil prices have steadily declined. 17. Saudi Arabia has achieved a substantial part of the objectives of its 1986 policy shift. After declining from 1979 to 1985, world oil consumption has grown over the period 1986-88. Consumption increased by 3.5% in 1986 in the wake of the large price decline, while in 1987 there was a more moderate 1.7% increase; the slower growth was apparently a response to the sharp price increase during that year. Since the beginning of 1988 the decline in oil prices (as well, no doubt, as the rapid expansion of industrial production since mid-1987) has stimulated world oil consumption once again. For the first half of 1988 OECD crude oil consumption increased by an estimated 2% (year-on-year). Although lower oil prices have moderated the erosion of fuel oil's share in the power-generation sector, growth in demand for the lighter products has been the main factor behind the oil demand growth. GLOBAL ASSUMPTIONS UNDERLYING THE PRIMARY COMMDDITY FORECASTS 1. Commodities such as fuel, minerals, metals, and agricultural raw materials are essential inputs into production processes, and the demand for them is intimately linked to economic activity. Therefore, assumptions about major trends in the international economy, particularly the rate of activity in the industrial sector over the next 10 to 15 years, are of great importance in making long-term forecasts for the demand-side of world commodity markets. Income growth is also an important determinant of the demand for foodstuffs, particularly in the low-income countries. 2. In general, assumptions concerning four sets of macroeconomic variables form che basis for a forecast of most, if not all, international commodity markets. These variables are: GDP growth rates, inflation rates, exchange rates among major partners, and interest rates. Th:se variables are often correlated, both with one another and across countries. Thus, any assumption about their prospective levels must not only ensure global consis- tency but also prese-ve the basic economic or behavioral relationships among them. 3. Views about future values of other variables, such as population growth rates, are also very important. Population growth is a key determinant of demand for commodities, particularly food and beverages. Population projections are implicit in the forecasts of per capita GDP growth rates presented herein. Demographic models suggest a substantial change in patterns of population growth in the 1990s: a further significant slowdown in the population growth of the industrial countries, and a rapid aging of their populations; and continuing rapid population growth in the developing countries, with youth becoming the dominant segment of the population. 4. An important aspect of the set of global assumptions presented in this chapter is the relationship between the major external/internal adjust- ments that have been taking place since the mid-1980s in the major industrial countries and the prospects for global inflation and economic growth. In 1987, the current account deficit of the United States amounted to more than $150 billion, while the combined payments surplus of the Federal Republic of Germany and Japan was in excess of $130 billion. Although these unprecedented imbalances have gradually declined as a percentage of industrial country GDP, by mid-1988 their absolute levels were still very large. These disequilibria, through the substantial pressures that they exert upon exchange and interest rates, prices of commodities, goods and assets, and financial and trade flows, are critically influencing the short- and medium-term prospects for world output and inflation. 5. The speed with which these external imbalances are assumed to be corrected influences the entire profile of the medium-term world outlook. Also, the manner in which the large current account deficits can be financed and massive surpluses allocated--particularly their geographical allocation-- will determine to a large extent, both the level of inflation in the industrial countries and the level of financial flows to the developing - 12 - countries. This latter factor has become a key determinant of the supply-side of many com-odity exports of the developing countries (e.g., financially strapped developing countries have been striving to increase their export revenues in order to service their external debt by diverting resources into the tradable goods sector). Both the level and the cost of international financial flows to the developing countries are major factors in determining the level of investment--and thereby economic growth in these countries. 6. The most prominent assumption imbedded in the macroeconomic forecasts is the prospective interaction between adjustment in the industrial countries and the macroeconomic policies undertaken. Policy thrust in the industrial countries is assumed to remain anti-inflationary. This has been reaffirmed in the Toronto meeting of the heads of government of the seven major industrial countries as recently as June 1988. 7. The US fiscal deficit, which has been identified as a major factor behind the sharp deterioration of that country's current account deficit, is expected to be significantly reduced in the next few years. Meanwhile, the burden of adjustment will fall upon prices--the dollar exchange rate and world interest rates. Prospective shifts in both of these variables are seen as playing an important role in the adjustment process. Inflation in the United States is expected to accelerate somewhat, the dollar could depreciate moderately, and nominal interest rates are expected to rise. The economic growth patterns among the major industrial countries will reflect their adjustments and policy responses to these trends in the short to medium term. 8. Fluctuations in the exchange value of the key reserve currency--the US dolLar--and its interaction with local-currency-based inflation rates in the major industrial countries are key elements of the forecast. In general, since many commodities are priced internationally in dollars, the inflation rate of the industrial countries as a group, in terms of the US dollar, is the appropriate indicator linking global monetary conditions to commodity prices in dollars. The rate of change of the GNP deflator of the major industrial countries, in terms of the dollar, is expected to decelerate in the 1990s compared with the latter part of the 1980s. This is also reflected in the projected movements of the manufactured exports unit values (MUV). 9. Some studies with longer-term perspective, whose results have been taken into consideration here, paint a moderately optimistic picture of the "post-adjustment" world economy. If there are no major adverse shocks, including those stemming from macroeconomic policy errors, the 1990s could be an era of relatively rapid, noninflationary growth in the industrial countries. There have emerged a vast number of new innovations, still-unused technology, and the outlook is for declining long-run prices (real) of most raw materials. In many industrial countries labor and capital remain under- utilized, and in most developing countries and centrally planned economies demand for goods and services remain unsatisfied. Major prospective economic and institutional changes in Europe by 1992 and potential trade reforms from the Uruguay Round could also generate significant stimulus for the world economy. 10. Tables 1 and 2 summarize the main trends for key measures of the global economy. The projections to the year 2000 presented in these tables - 13 - TABLE 1: MAJOR INDUSTRIAL COINTRIES: REAL GNP AND EXPORT UNIT VALUES OF MANUFACTIES (MUV): 1973-2000 (AVERAGE ANIINAL RATE OF OANGE IN PERCENT) Baseline Projections 1973-80 1984 1985 1986 1987 1988 a/ 1985-90 1990-2000 Rea I GN/GDP France (GDP) 2.8 1.5 1.4 2.4 2.2 3.0 2.1 2.5 Germany, Fed. Rep. of 2.3 3.0 2.7 2.5 1.8 3.0 2.1 2.6 Japan 3.7 5.1 4.5 2.5 4.2 6.0 4.0 3.7 United Kingdom (GOP) 1.0 2.0 3.0 2.8 4.4 3.5 3.1 2.1 United States 2.2 7.0 3.1 2.9 3.4 3.5 2.4 3.0 Total b/ 2.4 5.3 3.1 2.8 3.4 3.9 2.7 3.0 MUV indices in dollar terms France 11.5 -2.0 3.2 25.7 15.7 6.4 9.2 3.4 Germany, Fed. Rep. of 10.8 -9.4 1.3 32.3 17.8 7.0 13.0 3.9 Japan 9.7 0.0 -0.7 21.6 12.1 11.8 10.6 4.1 United Kingdom 16.3 -4.9 2.0 16.7 16.7 10.5 9.7 3.3 Unitea States 11.7 0.8 2.5 3.1 1.7 5.0 3.9 4.5 Total c/ 11.0 -2.1 1.3 17.6 9.8 8.3 8.7 4.0 a/ Preliminary estimates. b/ Weighted by nominal GNP/GDP in 1982. These weights are: France, 0.091; Federal Republic of Germany, 0.104; Japan, 0.185; United Kingdom, 0.082; United States, 0.537. c/ Weighted by exports of manufactures to developing countries. These weights, based on data for 1981-83, are: France, 0.111; Federal Republic of Germany, 0.167; Japan, 0.335; United Kingdom, 0.097; United States, 0.289 . Note: Owing particularly to problems of projecting currency-denominated variables during and after major changes in exchange rates, the national price projections in dollar terms shown here are subject to great uncertainty, Inasmuch as errcrs associated with currency changes (i.e., mistaken projections of exchange rates or of their effects) will tend to be offsetting, somewhat less uncertainty attaches to aggregate figures for all the major countries. Source: HIstorical data on MJV indices are based on data published in the UN Monthly Bulletin of Statistics. Projections: World Bank. TABLE 2: NATIONAL INFLATION RATES AND RELATED VARIABLES: 1973-2000 (AVERAGE ANNUAL RATES OF CHANGE IN PERCENT) Baseline Projections 1!73-80 1980-85 1986 1987 1988 a/ 1985-90 1990-2000 National GNP/GDP Deflators b/ France 11.0 9.2 5.0 2.8 2.8 3.3 4.0 Germany, Fed. Rep. of 4.8 3.2 3.1 2.1 1.8 2.1 2.4 United Kingdom 16.5 6.9 3.7 4.8 5.0 4.7 5.0 Japan 7.4 1.7 1.9 -0.2 1.5 1.7 2.2 United States 8.1 5.3 2.6 3.3 3.3 4.0 5.0 SDR/US$ Exchange Rate -1.3 5.1 -13.4 -9.3 -5.2 -6.0 -0.1 5 Major Countries' GNP Deflator, in terms of: Local Currencies 8.3 5.1 3.0 2.6 2.8 3.2 4.0 US Dollars 9.7 0.0 20.9 12.7 8.2 10.0 4.0 US Real GNP 2.2 2.6 2.9 3.4 3.5 2.4 3.0 US Short-term Interest Rate c/ 9.5 12.0 6.9 7.3 8.0 7.8 7.7 US Real Interest Rate d/ 1.2 6.3 4.2 4.2 4.2 3.8 2.6 a/ Preliminary estimate. b/ In terms of local currency. c/ Six-month LIBOR, for projections and historically back to 1978. Prior to 1978, three-month EURODOLLAR rate. d/ US short-term interest rate, as an index, deflated by the index of change of the US GNP deflator. Note; Owing particularly to problems of projecting currency-denominated variables during and after major changes in exchange rates, the national price projections shown here are subject to great uncertainty. Inasmuch as errors associated with currency changes (i.e., mistaken projections of exchange rates or of their effects) will tend to be offsetting, somewhat less uncertainty attaches to aggregate figures for all the major countries. Source: World Bank. - 15 - contain cycles for growth, inflation, and exchange rates. However, the exact timing of turning points, particularly for exchange rates, are difficult to predict. The same degree of difficulty applies to forecasting the precise magnitude of change in each variable, since these are often heavily influenced by speculative forces. The forecast figures presented in the tables below must therefore be viewed as illustrative of the most plausible scenario, given the assumptions made, and given the initial conditions of the projection--the state of the world economy in mid-1988. Initial Conditions of the Projections: The World Economy in 1988 11. Recent data suggest that the massive payments imbalances of the major industrial economies, which characterized the first half of the 1980s, began the long process of unwinding after mid-decade. The sharp fall in the trade- weighted value of the dollar (despite some strengthening in 1988), and a decline of similar magnitude in oil prices, were accompanied by a loosening of monetary conditions in industrial countries. Together, these factors provided support for continuation of the economic expansion through 1988, despite a major collapse in equity markets worldwide in the Latter part of 1987. Sources of growth during the current phase of recovery have shifted dramatically, as Japan and some European economies have stimulated domestic demand, while the United States shifts from consumption-led to export- and investment-led growth. 12. During 1988, the condition of the world economy improved beyond earlier-held expectations. Not only has the stock market crash of October 1987 barely affected world growth, but, in many instances, growth performance appears to have improved somewhat after the crash. Confidence was preserved by a general easing of monetary conditions, the delayed effects of cheaper oil began to come through, and policy action--especially by Japan--has begun to restructure the profile of economic activity. Nevertheless, while the process of adjustment seems to be well under way in the world economy, from the pers- pective of many developing countries, the beneficial impacts have yet to rr.aterial-.ze. 13. The focal point of the growth recovery of 1988 has been the Far East, led by Japan. A strategic shift in Japanese policy to offset the deteriora- tion in her export performance, by providing significant stimulus to domestic demand has borne fruit--investment spending is surging at double-digit rates, supporting GNP growth of nearly 6%. Rising Japanese imports have engaged the newly industrializing economies (NIEs) of the Pacific Basin in a mutually reinforcing expansion of demand. Moreover, trade between the Far East and Europe is growing rapidly. GNP in the largest three industrial economies of Europe is rising fast enough (at 3% in 1988) to achieve a modest reduction in the rate of unemployment. Nevertheless, a major weakness in the economy of Western Europe is the persistence of large 7ayments imbalances among the major economies. Large surpluses accrued by the Federal Republic of Germany against its tradng partners in Europe are exerting pressure on the European Monetary System (EMS). 14. For the United States, exports are being driven by strong growth of imports in the Far East, and by the gains in competitiveness associated with - 16 - the dollar's earlier decline. The improvement in US real net exports will contribute a full percentage point toward an expected GNP growth of about 3.5% during 1988. The surge in exports has, in turn, stimulated investment expenditure to gains of 11%, while reductions in the nominal trade deficit have finally become significant--the merchandise deficit amounting to an annual rate of $130 billion during the first half of 1988, contrasted with $160 billion in 1987. 15. Importantly, the gradual adjustment to date in the US trade position has tended to support the efforts of the monetary authorities to stabilize the dollar during 1988. Indeed, the US unit strengthened by some 12% in trade- weighted terms in the first nine months of 1988. Questions remain, however, about the impacts of the stronger dollar on the speed of adjustment of the external accouncs, which are projected to remain large. Short- and Medium-Term Effects on Developing Countries: Trade Flows and the Terms of Trade 16. The impact of the improved performance of the industrial economies upon a large number of developing countries is positive, although the picture is less than uniformly bright. Export growth has continued among those countries exporting mainly manufactures, and prospects remain favorable for relatively rapid growth over the coming years. The same has not been the case for developing countries exporting mainly primary commodities: oil markets have been slack, and are anticipated to remain so in the near term; non-oil primary commodity prices stopped falling (relative to manufactures' prices) only in 1987 (Table 3). Although primary commodities as a group have displayed a price surge during 1988, the benefits from stronger growth in the industrialized countries are likely to be delayed until continued gains in commodity-producers' terms of trade provide room for growth. 17. In some ways, the lack of immediate response of growth in the primary commodity exporters is not surprising. For example, up to mid-1988, two of the trends that are stimulating activity and confidence in the industrial countries do not seem to have had widespread benefits for developing counties. The strength of investment affects primarily transactions among the industrial countries, where capital goods and higher-technology machinery are key items in trade. Moreover, the reduction in the US current account deficit, however welcome from a global point of view, places further pressures on the export growth of some of the highly indebted countries--as growth in US import demand slackens, and as the United States regains foreign market share in agricul- tural and semiprocessed materials. 18. An increase in the imports of the industrial economies outside of the United States provided the key stimulus for the 5-6% p.a. advance in world trade volumes (about 14% p.a. gain in nominal dollar terms) during the 1987-88 period. As highlighted in Table 4, trade surged among the industrial countries and between the Asian NIEs and the industrial countries, while that of commodity-producing developing nations has been less robust. Of particular note is the growth in NIE trade with Japan: NIE exports to Japan rose by 50% in value terms, and imports from Japan advanced by some 30%. The role of Japan and, to a lesser extent, the NIEs, has become significant in supporting - 17 - TABLE 3: COMNODITY PRICES IN N0KINAL AND REAL TERMS, 1973-88 1973-80 1984 1985 1986 198? 1988 al -------------------- (Z p.a.)-------------------- Non-oil commodity prices In dollars 9.0 1.5 -11.3 0.6 0.3 26.7 "Real" b/ -2.4 3.3 -12.1 -15.0 -10.1 Price of oil (spot) In dollars 41.4 -2.2 -2.9 -49.1 26.6 -13.7 "Real" b/ 26.7 -0.4 -3.9 -56.9 13.4 G-5 export unit value of manufactures in dollars 11.0 -1.7 1.3 17.6 10.8 8.3 G-5 inflation in dollars 9.7 -0.5 2.3 20.9 12.7 8.2 G-5 inflation in local currencies 8.3 3.5 3.6 2.2 2.6 2.8 a/ Preliminary estimate. Changes in non-oil commodity prices and the oil price are for the second quarter 1988 over the second quarter 1987. b/ Deflated by changes in the G-5 export unit value of manufactures in dollars. Source: World Bank. the ongoing process of international adjustment. Japan became the single most import source of growth in the world economy during the first months of 1988, with the volume of imports rising at an annual rate of more than 17%. 19. A more recent favorable trend for the developing countries' prospects is the sharp increase in the dollar price of several key primary commodities during the first half of 1988. Non-oil commodity prices, as measured by the World Bank aggregate price index of 33 commodities, stood some 26.7% above year-earlier levels in the second quarter of 1988. The main contributors to the rise in prices have been metals and agricultural foods raw materials. 20. While the external environment for exporters of primary commodities has improved considerably over the course of 1988, the impact on growth prospects is anticipated to vary widely among countries, depending on the particular commodities they export and on the ability of their economies to respond to the external stimulus. In Asia, many exporters are benefiting from the terms of trade gains due to higher commodity prices, while at the same time increasing their exports of manufactures. Growth prospects for the - 18 - TABLE 4: TRADE PATTERNS OF INDUSTRIAL OUTRIES, OCTOBER 1987-MARl4 1988 (PEVIOUS SIX OTHS O41GIES IN PARENTHESES; ALL FIGLRES ARE PERCENT CHANCE AT ANNUAL RATE) a/ Tota I Other Other Exports of United Germany, Industrial Asian Developing Row Country Ieporter: States Japan F.R. Countries NIEs Countries to World Volume Value Exporter: United States - 34.5 13.6 26.7 48.7 23.2 25.6 29.1 (-3.2) (12.7) (20.9) (29.0) (12.3) (13.2) (15.5) Japan 8.4 - 18.5 26.3 29.9 13.6 2.7 15.9 (0.6) (11.4) (9.2) (29.0) (-1.4) (-1.2) (5.6) Germany, Fed. Rep. 6.6 44.0 - 21.6 28.7 9.2 6.8 18.7 (12.6) (47.9) (25.4) (41.7) (17.9) (5.7) (22.3) Other industrial Countries 11.6 39,2 21.6 26.7 51.7 10.6 7.4 21.2 (8.2) (14.2) (20.9) (22.4) (44.0) (11.9) (4.8) (16.9) Asian NIEs b/ 17.7 47.4 29.6 6.8 - na na na (30.4) (52.0) (52.0) (40.8) Other Developing Countries b/ 19.5 37.1 10.3 1.0 na - na na (18.4) (20.6) (16.4) (15.6) Total Import of Column Country from the World Volume 6.4 17.6 6.5 3.8 na na (2.0) (6.6; (5.6) (4,1) Value 14.8 37.9 18.2 15.8 na na (11.4) (20.2) (19.7) (17.9) al Percentage change in dollar value of exports--of country or country group in each row to Country or country group in each column, compared with corresponding period in the previous year. b/ Derived from import data of the industrial countries. Note: Unit value and derived volume informatio- is available for eaci industrial country's total imports and total exports only. Source: Based on the IMF's Direction of Trade Statistics. - 19 - primary exporters of Africa remain tess favorable, due in particular to the narrowness of theit export base. 21. Analysis by the World Bank's country economists suggests that in 1988 growth of GDP in developing countries as a group is expected to remain at around 4%. Because of major disparities among the developing countries, however, this implies no growth in per capita terms for many countries. Oil- exporting countries are severely disadvantaged on their terms of trade; prices of beverages remain depressed, which hurts many countries in the tropical areas. Indebted countries with a high exposure to the United States--both regarding their export market and their debt service to US banks--are hardly growing in per capita terms (Table 5 and Figures a and b). 22. The developing countries that are most clearly benefiting from the strength of demand in the industrial countries are the exporters of manufactures, which are projected to grow by some 6% in 1988. Growth is anticipated to continue at a very strong pace among the Asian NIEs, with output rising by about 7.5%. Output is also expected to expand strongly in China; and the Indian economy has begun to recover strongly following last year's drought. 23. Although 1988 is the second consecutive year f gains in the developing countries' terms of trade (following an average 1.9Z decline registered over the 1980--87 period), the question of the longevity of sustained commodity price increases arises. Some of the medium- and longer- term factors which have contributed to the depressed price levels of the 1980s remain at work. Primary product prices tend to boom in the early stages of an upswing in the industrial countries, and the upswing itself may give way to a significant deceleration. Yet the arrival of higher commodity prices was delayed in the current cycle, and further significant increases in raw materi- als prices over the next few years could occur. In the longer term, however, given the technological breakthroughs in synthetic products, the trend toward diminishing commodity inputs per unit of final output continues. Setting the Stage for Future Growth: Achieving Greater Balance 24. On balance, the health of the world economy is no longer as vulner- able to a slowdown in the United States as it was earlier. So long as the maintenance of adequate growth in the world depended critically on the United States, it depended on a continuation of financial imbalances that were accurately perceived as unsustainable in the long term. This situation clearly jeopardized the prospects for world growth. The unfolding process of structural adjustment has allowed the United States to "pass the torch" to other countries, and thus the United States has gained a higher degree of freedom to take decisive actions to deal with its internal as well as external imbalances. 25. Given the international economic environment and the main channels of influence outlined above, the baseline projection for the industrial countries suggests that real GDP growth in this group will accelerate to about 3% in the 1990s. As population growth in these countries is likely to slow significantly--from current rates of 0.6% p.a. to about 0.3% p.a.--the - 20 - TABLE 5: TERMS-OF-TRADE CBANCES OF DEVELOPING COUNTRIES, 1965-88 1965-73 1973-80 1980-87 1987 1988 a/ ----------------------------------------------------------.)----------------- ------------------( p.a.) ----------------- All Developing Countries 2.5 1.4 -1.9 0.9 0.8 By Regions Sub-Saharan Africa b/ -8.3 4.7 -5.1 1.9 -0.1 Eastern and Southern Africa -1.9 -1.3 -2.3 -4.5 1.8 Western Africa (excl. Nigeria) -1.6 1.9 -3.5 -2.3 -1.3 Nigeria -11.2 13.9 -10.8 15.0 -10.0 Asia 5.0 -0.2 -0.8 0.2 0.9 China 3.2 -0.8 -2.7 2.3 -1.8 India 4.9 -3.5 3.2 -5.1 2.9 NIEs 2.6 -2.0 0.6 -2.7 0.8 Other Asia 4.9 2.9 -4.0 4.1 1.6 Europe, Middle East and North Africa, incl. Pakistan -1.1 1.1 -2.1 2.5 -0.0 Latin America and Caribbean 3.8 2.5 -3.4 -0.8 0.4 Brazil -2.7 -4.8 1.6 -5.6 2.3 Other Latin America 3.0 4.2 -5.0 1.6 -0.4 By Economic Groups Low Income Countries 7.5 -2.6 -0.9 -0.5 0.4 Large Low Income Countries 3.9 -2.2 -1.1 0.9 -0.8 Small Low Income Countries 9.1 -2.8 -0.9 -5.5 3.3 Middle Incone Countries 0.5 2.0 -2.0 1.0 0.8 Memo items: Exporters of Manufactures 1.7 -2.7 0.3 -2.1 0.8 Non-Oil Primary Exporters 2.7 -2.8 -1.9 -2.2 2.7 Oil Exporters -0.0 10.0 -7.8 11.3 -5.2 Highly Indebted Countries c/ 1.4 3.5 -3.0 1.1 0.3 All LDCs excl. China, India 2.1 1.9 -3.0 1.5 0.3 a/ Preliminary estimate. Rl Excluding South Africa c/ Argentina, Brazil, Chile, Colombia, C8te d'Ivoire, Mexico, Morocco, Nigeria, Peru, Philippines, Venezuela, Yugoslavia, Uruguay, Ecuador, Bolivia, Costa Rica, Jamaica. Note: Indices of change in imputed (unit value) prices of total exports deflated by the corresponding import prices, all in dollar terms. Source: World Bank. - 21 - FIGURE a: GDP GROWTH RATES. 1966-88 percent cer annum SLE G E N D 8 8 r 9-COUNTRY SAMPLE OF DEVELOPING COUNTRIES \ \- HIGHLY INDEBTED \ DEVELOPING COUNTRIES -- s55 44 OTHERS . 4 4 ; 2 2 1.1 -1 1 -2 2 -40 66 75 80 85 88 Sears FIGURE b: GDP GROWTH RATES. 1966-88 p ,,-_mt per crnnum 14.()_ ..- __ _ _ _ _ 12. L E G E N D 2 EXPORTERS OF MANUFACTURES EXPORTERS OF PRIMARY 8.4 COMMODITIES ..... -E (XPORTERS OF OIL . f'1 2.8 -1 4 -2.8 -4.0 66 20 75 80 85 88 T ears - 22 - TABLE 6: GROWTH OF REAL GPD OF DEVELOPING COUNTRIES, 1965-88 (IN CONSTANT PRICES AND DOLLAR EXCHAIGE RATES) Bits US$ ----------------- (% p.a.)------------------- 1980 1965-73 1973-80 1980-87 1986 1987 1988 a/ 90-Country Group Total 2,133.3 6.5 5.3 4.0 4.9 4.4 4.4 By Regions Sub-Saharan Africa b/ 200.9 6.3 2.8 0.2 2.7 -1.7 3.1 Nigeria 103.3 8.5 2.7 -1.7 !.8 -4.4 4.4 Eastern and Southern Africa 55.0 4.5 1.9 1.9 3.6 2.9 3.3 Western Africa (excl. Nigeria) 42.6 4.2 4.3 2.2 3.1 -2.4 0.4 Asia 800.8 6.6 6.0 7.1 6.6 7.1 6.8 China 286.7 7.8 5.4 10.4 7.9 9.4 7.6 India 172.1 4.0 4.1 5.0 4.4 1.8 7.2 NIEs 142.5 9.9 9.1 7.6 10.4 11.0 7.4 Other Asia 199.5 6.2 6.8 3.2 3.2 4.1 4.2 Europe, Middle East and North Africa, incl. Pakistan 356.3 6.5 5.8 3.4 4.5 3.3 3.1 Latin America and Caribbean 695.7 6.6 5.4 1.4 3.6 2.5 1.8 Brazil 239.8 9.7 6.8 3.3 8.2 2.9 '.7 Other Latin Am.2rica 456.0 5.5 4.8 0.4 1.0 2.2 1.8 By Economic Groups Low Income Countries 573.9 5.5 4.6 7.5 6.4 6.5 6.9 Large Low Income Countries 458.8 6.1 4.- 8.5 6.8 7.0 7.5 Small Low Income Countries 115.2 3.4 3.4 3.2 4.7 4.2 3.6 Middle Income Countries 1,559.4 6.9 5.6 2.5 4.2 3.3 3.2 Memo items: Exporters of Manufactures c/ 961.3 7.4 5.9 6.4 7.4 6.3 5.8 Nor-Oil Primary Exporters 635.2 5.1 4.2 2.3 3.9 3.9 3.6 Oil Exporters 536.8 6.9 5.7 1.1 0.6 0.5 2.0 Highly Indebted Countries c/ 896.2 6.8 5.2 1.1 3.5 1.6 2.0 All LDCs excl. NICs 1990.8 6.3 5.1 3.7 4.4 3.8 4.1 All LDCs excl. China, India 1674.5 6.6 5.5 2.5 4.2 3.4 3.2 a/ Preliminary estimate. b/ Excluding South Africa c/ Argentina, Brazil, Chile, Colombia, CWte d'lvoire, Mexico, Morocco, Nigeria, Peru, the Philippines, Venezuela, Yugoslavia, Uruguay, Ecuador, Bolivia, Costa Rica, Jamaica. Source: World Bank. - 23 - =esulting average growth of per capita income for this group of countries will be faster than experienced anytime since the early 1970s (Tables 7 and 8). 26. Several emerging trends suggest that economic growth in the industrial countries will accelerate somewhat during the second half of the 1990s (after the current disequilibria have been substantially corrected). Najor investment undertakings envisaged by businesses in Japan and Europe for the next several years are likely to result in a significant advance in factor-productivity growth and an expansion of produc- on capacity. Other important developments that could positively affect growth prospects in the industrial countries in the next 10 to 15 years are: ongoing privatization of industries and deregulation of product, labor, and financial markets; likely beneficial effects of trade liberalization measures now under consideration in Ithe Uruguay Round; and availability of a large number of new innovations and techniques of production that not only could cut costs but also would bring .about far greater flexibility into the production process. 27. The baseline forecast is that per capita income in North America and Western Europe will rise by an average 2.5% p.a., while that of the Pacific -region (mainly Japan) will increase by about 3.5% annually. Moreover, there is strong empirical evidence that the very advanced technologies embedded in 3new capital equipment being installed in industrial countries will raise significantly the growth rate of total factor productivity. This in turn should allow an acceleration in the average growth of real output at -relatively low rates of inflation. 28. Due to the anticipated deceleration in industrial country population growth and the rapid aging of population profiles in the 1990s, relatively -rapid economic growth will require that new techniques of production be velatively less labor intensive, and that the process of automation (through greater use of robotics) become more widespread. The extent of such shifts, 1however, will depend on the pace of economic growth as well as the participa- tion in labor markets of different age and sex groups, and greater flexib:lity in working hours and in the retirement age. Since the baseline projection assumed here imply a relatively rapid noninflationary growth of output in the industrial countries in the latter part of the 1990s, it entails a somewhat Tower average unemployment rate than that in 1987-88. 29. The major uncertainty associated with the outlook for the industrial countries--and one which could change for the worse the relatively optimistic scenario presented here--concerns global monetary and financial conditions in the 1990s. Continuation of some degree of volatility in the movements of key currencies against one another would need to be a part of a realistic scenario for the 1990s. The baseline forecast presented here does assume some exchange rate movements, which, in turn, introduce similar fluctuations in the dollar kjvs. 30. The dollar index of manufacturing unit values (MUV) for the largest five industrial countries (the G-5) have previously been shown in Tables 1 and 2. Movements in local-currency based MUVs are determined by cost factors and terms of trade evolution in each of the major industrIal countries. However, the dollar index of these prices is entirely conditioned by the movements of -each country's currency vis-a-vis the US unit. - 24 - TtLE 7: ASSUWTICMN ON THE GloTH OF 111RLD OUtIPUT AND PFMLATION Ratio of Average Annual Growth Rates: --------Historical------- Baseline Projections 1987-2000 Over 1965-73 1973-80 1980-87 1967-90 1990-2000 1965-87 ---------------- P.a.) --------------------------------- Dveloping countries - 6.5 5.3 4.0 4.5 4.9 0.9 o/w Sub-Saharan Africa 6.3 2.8 0.2 3.1 3.7 1.0 Highly Indebted Countries 6.8 5.2 1.0 3.1 3.9 0.8 Asian NIEs 9.9 9.1 7.6 6.5 6.1 0.7 High income Oil Exporters 10.0 7.9 -2,4 1.9 2.9 0.5 Industrial Countries 4.6 2.8 2.5 2.6 3.0 0.8 Population Oevelooing Countries 2 2.5 2.1 2.0 2.0 1.8 0.8 o/w Sub-Saharan Africa 2.7 2.8 3.1 3.3 3.1 1.1 Highly Indetted Countries 2.6 2.4 2.2 2.2 1.8 0.8 Asian NIEs 2.3 1.8 1.5 1.3 1.1 0.6 High Income Oil Exporters 4.6 5.6 4.3 4.0 2.6 0.6 Industrial Countries 1.0 0.7 0.6 0.5 0.3 0.5 a/ 90-country sample. Source: World Bank. TABLE 8: ASSLWTIONS (O THE GROttlH (F WORLD PER CAPITA FEAL MP Ratio of Average Annual Growth Rates --------fHistorical------- -----Projections---- of 1987-2000 Over 1965-73 1973-80 1980-87 1987-90 1990-2000 1965-87 ----------------- ---- (% p.a.) ---------------------------------- Developing countries 1/ 3.9 3.1 1.9 2.4 3.0 0.9 o/w Sub-Saharan Africa 3.5 -0.0 -2.8 -0.2 0.6 0.9 Higrly Indebted Countries 4.1 2.7 -1.6 2.1 2.6 1.1 Asian NIES 7.4 7.2 6.0 5.1 4.9 0.7 High Income OiI Exporters 5.1 2.2 -6.4 -2.0 0.3 n.a. Industrial Countries 3.6 2.1 2.0 2.1 2.6 1.1 o/w North America 2.2 1.9 1.9 1,4 2.5 1.3 Pacific 7.5 2.8 2.9 3.7 3.3 0.8 Western Europe 3.8 2.0 1.6 2.2 2.3 1.0 a/ 90-country sample. Source: World Bank. - 25 - 31. In the United States, the projected weakening of the dollar in 1989, together with rising labor costs, inflate the MUV by some 5% p.a. Over the 1990-2000 interval, an appreciating dollar first forces manufacturers to try to preserve competitiveness by reducing the rate of increase in export prices; later, renewed weakening of the dollar allows manufacturers to increase MUVs more rapidly to enhance profitability without the loss of market share. In Japan, the strength of the yen boosts the incentive to maintain price competitiveness (which forced down the yen MUV from 1987 to 1988) by limiting its rise in 1989 and 1990. As the dollar stabilizes, Japanese producers rebuild profit margins by raising yen-based export prices but will likely restrain increases to moderate rates. In Western Europe during the 1990s, relatively strong investment levels associated with Project 1992 should result in a faster pace of labor productivity growth and limit the advance of MUVs in terms of the ECU. 32. The baseline projections for the developing countries present a mixed picture for the 1990s. Despite a relatively optimistic outlook for the indus- trial countries, the economic situation in a number of developing countries will remain fragile, particularly in the medium term, as the trade and pay- ments adjustment in the major industrial countries continues to unfold. 33. Per capita real GDP in China, India, and the Asian NIEs will continue to grow at rates above the average of the rest of the developing countries. The Asian NIEs, despite their expected above-average performance, will grow at a slower pace than in the 1970s and 1980s. The NIEs may encounter competition from other low-cost exporters of manufactures among the developing countries, as well as perhaps from some of the industrial countries with a greater technological base. NGnetheless, domestic demand in the NIEs is projected to grow at a vibrant pace, attracting growing imports of goods and services. 34. Average per capita real GDP growth in Sub-Saharan Africa is expected to remain well below 1% p.a. Although the average pace of per capita real income growth in the highly indebted countries is expected to accelerate to about 2.5Z p.a. in the 1990s (compared with -1.6% p.a. in 1980-87), their situation is likely to remain quite difficult in the medium term in the face of continuing trade and payments adjustments in the larger industrial countries. A View of World Trade Flows: 1988-2000 35. As a result of increasing global interdependence through the 1980s, growth in world trade has historically exceeded that of world GDP. Moreover, trade flows have tended to react with stronger sensitivity to business-cycle and financial conditions than have world income levels--reflecting with strong amplitude changes in key fundamental factors. 36. World trade is expected to expand by about 4% annually over the 1988 to 2000 interval. Annual growth in world GDP during the same period is anticipated to register 3.3%. As reflected in the world economic projection, important imbalances in the world economy are expected to unwind over the remainder of the 1980s and throughout the following decade. Major factors including slower population growth, the decline of the dollar, the dramatic - 26 - fall and eventual recovery in crude oil prices, the potential repercussions of trade liberalization measures, together with the lagged effects of the ongoing trade and payments adjustment among the major industrial countries, will serve to affect measurably the direction and commodity composition of world trade flows in the 1990s. 37. Significant shifts in the direction of tride dominate the outlook. US export volume surged by 12% in 1987 and 23% in 1988, and is likely to register advances of about 8% p.a. over the period through the mid-1990s. In contrast, US merchandise import growth decelerated from 15% in 1986 to 5-6% during 1987 and 1988, and is expected to remain relatively moderate or even stagnant over the next several years. Japanese export volumes have actually contracted over the 1986-87 period and remained weak in 1988; weak performance is expected to continue to characterize the outlook through 1990. Moreover, an emerging trend of strength in intra-Asian trades and Asia/Europe trades is becoming apparent, as exporters seek alternate markets to the United States (see Table 4)--markets where exchange rate impacts on competitiveness are likely to exert much smaller degrees of influence upon trade flows. 38. Significant changes in the commodity composition of trade charac- terize the forecast period. World trade in manufactures is expected to register relatively strong growth of 4-4.5% p.a. over the forecast period. Dollar-based unit labor costs in the United States have converged with those of Japan and Europe. Costs in all three major industrial areas, however, still stand far above those of the NIEs of Asia. Japanese manufactures exporters, alt'-ough gaining within Asia, are expected to be confronted not only by the direct price effects associated with the rise of the yen, but also by the gain in competitiveness of the Asian NIEs. Potential increases in pro- duction efficiencies in China by the mid-1990s and stabilization of current debt and payments obstacles in Latin America by the later 1990s should under- pin world trade in manufactures to high and sustainable rates of growth over the extended forecast period. 39. World trade in non-fuel primary commodities will be supported at relatively high rates of growth (of about 4% p.a.) by the influence of several factors. The competitive gains of US coarse grains and wheat exports have been achieved not only through the decline in the dollar, but also by the expected longer-term impacts of the 1985 US Farm Bill. Although competing in world markets with Australia, Canada, and Argentina, the United States should recoup market share in Asian, African, USSR, and Middle East markets. Steady longer-term GDP growth of 3% in the industrial countries should serve to underpin demand for basic raw materials and industrial commodities. As commodity prices firm and establish a positive growth path, increasing production and trade will likely be forthcoming from commodity-exporting Asia and Latin America. Finally, rapid population growth in the developing regions of Africa and Asia implies large and expanding import requirements for basic food and feedstuffs over the course of the forecast period. (The major constraint will lie on the demand side, however, as many developing countries will lack the financial capacity to increase food imports significantly.) 40. World trade in fuels is likely to average 3% p.a. growth over the extended projection period. The expected trade flows will be conditioned 1y several assumptions related to world supply and demand conditiors, P-rimiy - 27 among these is the anticipated decline in reserves of crude petroleum in the non-OPEC regions of the world. A potential rise in crude oil prices in real terms beginning in the mid-1990s could induce a gradual movement toward coal, natural gas, and synthetics as alternate fuels. The Uruguay Round and Developing Country Trade 41. World trade, particularly exports of developing countries, in the coming decade will be afiected to a significant extent by the trade liberal- ization measures that are likely to result from the Uruguay Round trade negotiations. The year 1987 was the first fuLl year of multilateral trade negotiations (MTN) under the Uruguay Round, launched at Punta del Este in September 1986. The MTN is seen by many as the main hope for strengthening the multilateral trading system. In scope and complexity, the Uruguay Round surpasses its predecessors, and the negotiations are widely expected to be difficult and lengthy. Agriculture remains a crucial and difficult area of negotiation; progress has been made in negotiations on trade in tropical products, while the discussion of trade in services is a major new dimension of the Round. At the heart of the negotiations lie the issues of removal of qur-titative restrictions and other non-tariff barriers to trade (NTBs). As tariff negotif.ting is perhaps the most developed part of the GATT, early in the Round the contracting parties agreed to ambitious objectives: (i) expansion of tariff concessions among major participants; (ii) a significant liberalization of tariffs and NT8s, and to the maximum extent possible, their elimination; and (iii) particular progress to reduce higher tariffs and tariffs that escalate with the degree of value added. '2. Recent empirical studies suggest that elimination of subsidies to produ-tion and of barriers to imports of agricultural goods could carry benefIts to both industrial and developing regions of the world. Under such a scenario, world agricultural prices might rise significantly, helping to boost the terms of trade of major commodity exporters. Moreover, resource efficiency in developing countries would be improved as the agricultural sector attracts labor and capital; finally, increases in government tax revenues from agriculture could permit a lowering of tax burdens on other sectors of the economy--underpinning wider efficiency gains. The upcoming Montreal mid-term review of the Round will likely be a watershed for the negotiations, particularly concerning the outcome of agricultural issues. Impact of Structural Shifts in Industrial Countries 43. A common element which runs through the rapid growth recorded in many of the major countries in the period 1987-88, is the upturn in business capital formation. Cross fixed capital formation, which as a ratio to GDP had tended to stagnate or decline in the period 1975-85 in many industrial economies, has increased significantly during 1987-88 period in France, the Federal Republic of Germany, Italy, Japan, and the United Kingdom. A number of factors may lie behind this new found buoyancy: a catch-up from the depressed investment levels of the last decade; an improved profit picture; increasing competition in world export markets from the NIEs and the United States; and strong demand and high rates of capacity utilization in North - 28 - America. Major economic restructuring and expanding fiscal and monetary policy stances are the main factors behind the investment rebound in Japan. Project 1992 in Europe has already led to a significant rise in business investment in a number of countries. 44. Such a significant and widespread rise in investment in manufacturing as well as other economic sectors in industrial countries, together with declining labor force growth, suggests a tightening of labor markets and rising real wages over time, particularly in the United States. This in turn could encourage the substitution of capital for labor in many production processes. Thus, further investment in new and higher-technology equipment will be required to boost productivity in both the goods-producing and services sectors of the economy. Indeed, the prospect for sustained economic expansion in the United States at rates near 3% hinges critically upon the emergence of such capital spending. 45. A key question that arises in connection with the growth projections for the industrial countries in the 1990s is: to what extent will the growth affect the demand for commodity exports of the developing countries? During the 1970s and 1980s a major source of growth in the industrial countries was the services- as opposed to the goods-producing sector. Therefore, the demand for raw materials and fuel lagged behind the growth of the overall economy in comparison to the then existing historical relationship. Conservation, more efficient production techniques, and more widespread usage of synthetic products also contributed to the weakening of demand for commodities and the sharp decl:ne in their real p-ices in the 1980s. 46. Some preliminary studies indicate that although the size of service industries will continue to rise rather rapidly in most industrial countries during the 1990s, their share in GDP may begin to stabilize be4c- re the end of the next decade. For examplc, he expected rapid aging of population in the industrial countries will substantially increase the demand for health care services. Other categories of services that may face a substantial increase in demand due to expected demographic changes are tourism, recreation, enter- tainment, and cultural activities. 47. Over the longer term, domestic market conditions in many of the major industrialized countries will be shaped by demographic, technological, and environmental changes. Even Western Europe, despite higher rates of unemployment than in North America, will have to ackle the evolution of an unfavorable age distribution, requiring structural changes in social contributions and benefits, with private savings placed in a much more important role in the funding of economic activity. Moreover, the rapid emergence of a large aging population in Japan--"the Silver Generation"-- implies a longer-term reduction in that country's high savings rate. In contrast with the US experience, structural adjustment in Japan may offer foreign producers the prospect of large market potential over the next decade. 48. On balance, the anticipated shift of industrial country demand away from absorption of consumer goods and toward increasing requirements for capital goods and services may be a positive trend for developing country export performance. Demand for basic and semiprocessed materials as key inputs to the manufacture of higher-technology capital and durable goods - 29 - (various metals, commounications equipment, and medical instrumentation as examples) could serve to underpin trade flows from commodity producers to manufact urers. :- &- 図I 四l の1 &- - 園国国［］国国国国国国国国国■■■11■―■――…1 &1 …… Demand Outlook 1. Table 1 provides a summary of the expected developments in the shares of the major fuel groups in energy consumption in the main economic regions. In the industrial countries the shares of the solid fuels and natural gas in total energy demand are expected to remain stable at around 20% over the forecast period to 2000. The industrial countries' commitment to reducing their dependence on imported oil and support for improvements in the efficiency of oil use should reduce the share of oil in total energy use from 43.3% in 1986 to about 40% in 2000. Electricity is a versatile and highly convenient form of energy and is the preferred fuel in many end-use applications. Consequently, electricity is expected to take an increasing hare of the energy market in the industrial countries. Because of their extremely large gas reserves, the bulk of growth in nergy demand in the centrally planned economies (CPEs) is expected to be supplied by natural gas. The share of primary electr--city i3 also expected to increase, while petroleum and coal are expected to become less important in the CPEs. The uncertainty surrounding future oil production increases in the USSR and its dependence on oil for foreign exchange should contribute to lowering oil's share in energy use in the CPEs. The industrial sector is the largest consumer of energy in this region, and there exist excellent prospects for energy-efficiency improvements--particularly in the energy-intensive industries such as iron and steel and chemicals. Electrification of railways is also expected to increase energy efficiency. Yet, given the competing possibilities for allocations of investments in energy, planners appear to prefer increased supplies to conservation. 3. Energy demand in the developing countries is largely a function of economic growth, the country's stage of development, and the structure of its economy, although technological improvements and energy prices affect demand to varying degrees. In recent years, rural population movements to urban areas &nd industrialization have played a significant role in the growth of energy demand. In many oil-importing developing countries, energy policies directed towards substitution away from oil have provided the industrial sectors with incentives to diversify fuel use. As a result, coal, electricity and, more recently, natural gas now account for a sizable share of their energy market. 4. Within the developing countries the rapid growth of primary electricity and natural gas supplies over the forecast period will ensure that the shares of these fuels in total energy consumption will increase substantially. The share of liquid fuels and solid fuels is expected ta decline, though they will still be the main source of supplies. TABLE 1; ENERGY CONSUMPTION BY COUNTRY GROUPS AND MAJOR FUELS, 1961-86 (ACTUAL) AND 1990-2000 (PROJECTED) 1961 1970 1986 1990 2000 ---------------------------------------------------------------------------------- Countries/Economies MTOE % MTOE x MTOE % MTOE % MTOE z Industrial 1,930.5 100.0 3,121.2 100.0 3,707.1 100.0 3,965.4 100.0 4,591.2 100.0 Liquid Fuels 817.5 42.3 1,576.4 50.5 1,605.1 43.3 1,677.1 42.3 1,834.0 40.0 Natural Gas 322.1 16.7 621.1 19.6 705.1 19.0 758.6 19.1 865.0 18.8 Solid Fuels 646.1 33.5 705.9 22.6 798.1 21.5 853.5 21.5 1,000.1 21.8 Primary Electricity 144.8 7.5 226.8 7.3 598.8 16.2 676.2 17.1 892.1 19.4 Centrally Planned 652.0 100.0 1,052.4 100.0 1,834.8 100.0 1,977.2 100.0 2,438.5 100.0 Liquid Fuels 150.5 23.1 324.9 30.9 540.8 29.4 556.1 28.1 578.1 23.7 Natural Gas 68.2 10.5 188.8 17.9 586.5 32.0 659.7 33.4 951.7 39.0 Solid Fuels 416.7 63.9 503.0 47.8 593.9 32.4 622.8 31.5 683.5 28.0 Primary Electricity 16.5 2.5 35.6 3.4 113.6 6.2 138.4 7.0 225.2 9.3 Developing 412.6 100.0 789.5 100.0 1,866.2 100.0 2,165.8 100.0 3,100.8 100.0 Liquid Fuels 191.5 46.4 383.5 48.6 775.4 41.6 878.9 40.6 1,135.3 36.6 Natural Gas 19.2 4.7 50.9 6.4 165.7 8.9 212.1 9.8 395.1 12.7 Solid Ftels 179.1 43.4 301.6 38.2 730.6 39.1 830.5 38.3 1,130.5 36.5 Primary Electricity 22.7 5.5 53.5 6.8 194.5 10.4 244.3 11.3 439.8 14.2 ---- ----------------------------- -------------------------------------------------- -------------------- Note: Details may not add to total due to rounding. Sources: United Nations, Energy Statistics (actual); World Bank (projected). - 35 - 5. Coal. In Table 2 (page 36), changes in the shares of the various fuels in global energy consumption are summarized for the period 1981-86, and forecasts for the period 1995-2000 are also given. The sharp decline in the international price of oil since 1985 has slowed the growth in world coal consumption. Further penetration of coal in the energy markets, especially in the iidustrial countries, will depend upon its price relative to other fuels and the development of coal utilization technologies capable of resolving environmental problems. Continued expansion of coal capacity in the electric power sectors in both the industrial and developing countries should lead to a 2% p.a. increase in coal consumption over the forecast period. Still, the share of coal in global energy consumption is expected to decline. Given the low oil prices expected up to the early 1990s, the growth in the coal market is likely to be demand constrained, thereby increasing competition among coal exporters and producers. 6. Natural Gas. Although the growth in natural gas consumption in the industrial countries has been minimal over the period 1970-86, mainly due to a decline in natural gas use in the United States, steady growth in other regions has led to a slight increase in the share of gas in global energy demand. The most significant increase in its share has occurred in the CPEs. Supported by the enormous natural gas reserves of the CPEs and the developing countries, natural gas consumptior in these regions will continue to grow. In the developing countries the increase in the utilizatio.n of gas resources will be accompanied by expanding networks for gas transportation and distribution. The increase in the use of gas in the CPEs, besides providing the growing energy needs of the CPEs, will help retain a share of the international market for oil in order to earn the highly sought after foreign exchange. 7. Electricity. The growth in the demand for electricity has outpaced that of any other fuel since 1970. Between 1970 and 1986 global demand for electricity grew by 6.8% p.a., almost doubling its share of the total commercial energy market. Over the forecast period, growth in electricity demand is projected to remain strong a, 3.9% p.a., and its share in global energy demand will increase. Despite concerns over the use of nuclear power, especially since the Chernobyl disaster, nuclear-generated electricity increased by almost 8.9% p.a. between 1980 and 1987. The number of nuclear- generating units increased from 70 to 107 over this period. The growth of nuclear electricity generation is expected to continue, at least over the short term, mainly due to the higher utilization of existing nuclear power plants and as units currently under construction come on-stream. Electricity generation through hydro power is expected to contribute an increasing supply of energy in the developing countries. 8. Crude Oil. Since 1986, the low international prices of oil have slowed the decline in the intensity of oil use in industrial production, and the decline in the share of petroleum in global energy use has also moderated. Based upon our expectation of weak oil prices over the short and medium term, the erosion in petroleum's share is likely to be slower as demand maintains reasonable growth. The pace of demand growth would be faster in the absence of the reluctance of most oil-consuming countries to pass through fully the recent declines in oil prices to consumers. Continued investment. in energy conservation and further improvements in the efficiency of oil consumption should also serve to slow the growth in oil demand. TABLE 2: GLOBAL ENERGY CNBUNPTION BY FUEL TYPEt 1961-86 (ACTUAL) AND 1990-2000 (PROJMCTED) 1961 1970 1986 1990 2000 MTOE % MTOE % MTOE % MTOE % MTOE % Liquid Fuels 1,159.7 38.7 2,285.9 46.0 2,921.3 39.4 3,112.1 38.4 3,547.1 35.0 Natural Gas 409.5 13.7 851.7 17.2 1,457.4 19.7 1630.5 20.1 2,211.8 21.8 Solid Fuels 1,241.9 41.5 1,510.6 30.4 2,122.6 28.7 2,306.9 28.4 2,814.4 27.8 Primary Electricity 184.0 6.1 315.9 6.4 906.8 12.2 1,058.9 13.1 1,557.2 15.4 Total 2,995.1 100.0 4,964.1 100.0 7,408.1 100.0 8,108.4 100.0 10,130.5 100.0 Note: Details may not add to total due to rounding. Sources: United Nations, Energy Statistics (actual); World Bank (projected). - 37 - 9. Since the transportation sector is likely to remain tied to liquid fuels over the forecast period, the increase in multi-firing capacity in the power generation, industrial, and, to some extent, the residential/commercial sectors will provide the main areas of interfuel substitution--particularly for oil. Although the continuing introduction of more energy-efficient transport equipment will reduce the rate of growth of transport fuels, the demand for transport fuels is nevertheless anticipated to grow at a rate somewhat faster than that experienced in recent years, as a result of higher per capita income g:owth. 10. Within 'he industrial sector of the industrial countries, oil's share has fallen sharply since the second oil price shock--from 38.5% in 1979 to around 28% in 1986. Since the first oil embargo in 1973 the consumption of oil by the power-generation sector in the industrial countries has almost halved. The most significant decline has taken place in North America. However, the decline in this sector appears to have stabilized since 1986 as a result of the sharp decline in oil prices. The substitution of coal for oil has been fastest in the iron and steel and cement industries. However, substitution for oil in other energy-intensive industries, though potentially high, remains comparatively slow because of the uncertainty surrounding industrial growth prospects, the old age of the existing capital stock, and environmental and regulatory concerns. Given the recent sharp drop in oil prices, substitution by coal in the industrial sector is likely to be, at best, very slow in the medium term. Environmental considerations and high costs of coal desulfurization are also likely to limit the penetration of c:al. Expectations of volatile prices and concerns over security o! supply have encouraged major industrial energy consumers to increase investments in multi-fired facilities. This form of investment increases the ability of consumers to change the fuel mix quickly in response to relative price movements. In the industrial countries, there currently exists a fuel- switching capacity of almost 100 million tons of oil equivalent (mtoe), mostly in power generation. In the United States, where the industrial and power- generation sectors provide the largest possibilities for fuel substitution, as much as 30% of the energy consumption may be switchable, of which almost 60% would be substitution between fuel oil and natural gas, while the rest would be between natural gas, distillates, liquified petroleum gas and other fuels, noticeably coal. It is estimated that the extent of switchability in the power-generation and the industrial sectors in the United StaLes is over 80% and 50%, respectively, over a short period of time. If oil prices remain low over the short term, the flexibility in fuel use provided by the multi-fired systems will slow the erosion of fuel oil's share. Beyond 1990, the projected increases in oil prices will, once again, create incentives for an increase in the rate of substitution. Supply Outlook 11. Actual and expected changes in the shares of the various fuels in total energy supplies in the major country groups are shown in Table 3 for the 1961-86 and 1986-2000 periods. One of the strongest trends evident in the energy sector is the rapidly increasing production of primary electricity, basically reflecting the enormous expansion of nuclear energy not only in industrial countries and CPEs but also in many diveloping countries. The TABLE 3: RMBRGY PR. -UCTIOM BY COUNTRY CROUPS, 1961-86 (ACTUAL) AND 1990-2000 (PROJECTED) 1961 1970 1986 1990 2000 Countries/Economies MTOR % MTOE % MTOE % MTOE % MTOE % Industrial 1,539.4 100.0 2,135.5 100.0 2,783.8 100.0 2,939.4 100.0 3,340.7 100.0 Liquid Fuels 439.1 28.5 604.2 28.3 786.7 28.3 773.7 26.3 758.0 22.7 Natural Gas 325.3 21.1 620.1 29.0 618.0 22.2 654.2 22.3 704.0 21.1 Solid Fuels 629.8 40.9 684.6 32.1 780.1 28.0 834.5 28.4 985.5 29.5 Primary Electricity 145.2 9.4 226.5 10.6 599.0 21.5 677.0 23.0 893.2 26.7 Centrally Planned 696.7 100.0 1,121.5 100.0 1,991.2 100.0 2,135.0 100.0 2,545.5 100.0 Liquid Fuels 184.5 26.5 377.9 33.7 639.7 32.1 651.8 30.5 610.5 24.0 Natural Gas 67.8 9.7 188.8 16.8 617.6 31.0 693.9 32.5 1,000.3 39.3 Solid Fuels 427.7 61.4 503.0 46.3 618.4 31.1 649.1 30.4 706.8 27.8 Primary Electricity 16.6 2.4 35.6 3,2 155.4 7.8 140.2 6.6 228.1 8.9 Developing 759.8 100.0 1,767.6 100.0 2,633.1 100.0 3,034.0 100.0 4,244.3 100.0 Liquid Fuels 842.2 71.4 1,358.8 76.9 1,494.9 56.8 1,686.7 55.6 2,178.6 51.3 Natural Gas 20.4 2.7 56.0 3.2 221.8 8.4 282.3 9.3 507.5 12.0 Solid Fuels 174.7 23.0 299.4 16.9 724.1 27.5 823.3 27.1 1,122.3 26.4 Primary Electricity 23.6 3.0 53.4 3.6 192.3 7.3 241.7 8.0 435.9 10.3 Note: Details may not add to total due to rounding. Sources: United Nations, Energy Statistics (actual); World Bank (projected). - 39 - share of electricity in the total energy market is projected to increase in all countries as the pace of electrification in developing countries increases an,d as pr-cduction from non-utility cogeneration and other small power producers increases in the industrial countries. Another recent trend of comsiderable intensity is the rapid expansion of natural gas supplies in the CPEs, and further expansion is expected to increase natural gas output from 613 mtoe in 1986 to 1,000 mtoe in 2000 as natural gas fills in the energy demand gap in the Eastern European countries once oil exports from the USSR stagnat e. Given the relatively small size of petroleum reserves in industrial countries, not much increase is expected to take place in oil production in those countries. 12. Thie share of industrial countries in global energy production is pr-ojected to decline further--from 37.6% in 1986 to 33% in 2000--while the share of t1he CPEs is expected to fall marginally. The developing countries' share in tootal energy production is therefore expected to grow to about 41.9% irx 2000 (up from 35.5% in 1986). Details of these changes in the shares of energy produced in the major country groups are given in Table 4. 13. World petroleum reserves and oil production potential remains concentrated in the Gulf region. While there is considerable exploration a(ctivity in several non-OPEC developing countries, supply constraints in the industrial countries (noticeably the United States and the UK sector of the Nk>rth Sea) are expected to adversely affect supplies from non-OPEC sources. It: is projected that an increase in international oil prices after the early 1990s wilL strengthen the search for oil finds, especially in the oil- exporting developing countries. Supplies from non-OPEC countries (excluding CPEs) are expected to increase by 1% p.a. over the forecast period to reach o-7er 1,556 mtoe by 2000. In the period beyond 1995 it is expected that there will be a decline in net exportable quantities from the CPEs and that there will be a leveling off of exports from non-OPEC oil-exporting developing countries. Therefore, given our growth rate forecast of 1.4% in global oil demand, the demand for OPEC oil will increase by almost 500 mtoe by 2000. This would mean that OPEC production would reach 1,413 mtoe, and its share in world oroduction (which had dropped from its peak of 53.9% in 1973 to 32% in 1986) wouLd increase to 32.8% in 1990 and thereafter increase to 39.8% by 2000. TABLE 4s EaNRCY PaODUCTION BY COUNTIY CROUPS, 1961-86 (ACTUAL) AND 1990-2000 (PROJECTED) 196A 1970 1986 1990 2000 Countries/Economies MTOE % MTOE % MTOE % MTOE % MTOE % Industrial 1,539.4 51.4 2,135.5 42.5 2,783.8 37.6 2,939.4 36.2 3,340.7 33.0 Centrally Planned 696.7 23.2 1,121.5 22.3 1,991.2 26.9 2,135.0 26.4 2,545.5 25.1 Developing 759.8 25.4 1,767.6 35.2 2,633.1 35.5 3,034.0 37.4 4,244.3 41.9 World 2,995.9 100.0 5,024.5 100.0 7,408.1 100.0 8,108.4 100.0 10,130.5 100.0 Notet Details may not add to total due to rounding. Sources: United Nations, Energy Statistics (actual); World Bank (projected). TABLE Alt ENERGY - PRODUCTION BY MAIN COUNTRIES AND ECONOMIC REGIONS ACTUAL PROJECTED GROWTH RATES A/ COUNTRIES/ 197 - ECONMIES 1969-71 1979-81 1986 19871B 1988 1989 1990 1995 2000 1961-86 1970-86 2000 - ------------------(MILLION TOWS OF OIL EQUIVALENT)-----------------------------(Z PER ANM)- INDUSTRIAL 2,110 2,537 2,784 2,828 2,870 2,907 2,939 3,126 3,341 2,3 1.8 1.1 NORTH AMERICA 1,600 1,748 1,789 1,816 1,839 1,860 1,875 1,974 2,078 1.8 0.6 0.9 UNITED STATES 1,435 1,500 1,499 1,511 1,523 1,537 1,546 1,610 1,670 1.4 0.3 0.7 CANADA 165 247 290 305 316 323 330 365 408 5.1 2.8 1.9 EEC-10 363 514 609 608 615 623 633 660 707 2.3 ..5 1.0 UNITED CINGDOM 107 200 247 242 243 243 244 235 241 3.3 6.5 0.0 GERMANY, FED. REP. 122 124 127 124 127 130 135 142 153 -0.1 0.3 1.4 OTHER WESTERN EUROPE 48 120 166 174 184 187 190 210 230 6.9 8.9 1.9 JAPAN 49 57 78 80 83 88 91 105 126 1.1 3.7 3.0 OCEAIA 49 i08 142 149 149 148 151 176 200 8.4 5.5 2.0 AUSTRALIA 45 91 130 137 137 136 138 162 184 8.9 5.5 2.0 NON-MARKET 1,128 1,697 1,991 2,039 2,071 2,097 2,135 2,320 2,546 4.2 3.6 1.5 USSR 866 1,377 1,635 1,675 1,702 1,722 1,754 1,912 2,105 4.7 4.1 1.5 EASTERN EUROPE 262 320 356 364 368 374 381 408 440 2.3 1.9 1.3 POLAND 90 117 128 132 134 136 139 152 165 3.0 1.8 1.5 DEVELOPING 1,748 2,569 2,633 2,701 2,789 2,905 3,034 3,619 4,244 4.9 1.6 3.1 ASIA 1,073 1,702 1,650 1,699 1,752 1,818 1,876 2,270 2,711 5.1 1.2 3.2 CHINA 209 444 609 624 644 669 694 827 967 8.1 6.3 3.0 SAUDI ARABIA 198 502 251 224 229 239 248 308 367 6.1 -0.8 3.3 IRAN 206 114 104 125 123 135 141 189 234 1.7 -7.1 4.3 INDIA 51 92 146 152 158 165 171 211 254 6.2 7.3 3.5 AFRICA 318 400 416 425 438 456 484 553 611 6.7 1.3 2.5 NIGERIA 53 98 73 69 71 74 82 98 105 13.5 -1.0 2.9 SOUTH AFRICA 34 66 94 96 98 99 102 111 131 5.7 7.4 2.1 AMERICA 323 424 508 515 535 564 604 708 812 2.9 3.5 3.1 VENEZUEIA 201 138 118 118 117 121 124 151 157 -2.2 -3.6 1.9 SmICO 39 137 175 181 183 188 205 232 263 9.8 12.8 2.5 SOUTHERN EUROPE 34 44 59 61 64 66 69 87 108 4.4 2.9 3.8 WORID 4,986 6,804 7,408 7,568 7,730 7,907 8,108 9,065 10,130 3.6 2.2 2.0 A/ LEAST SQUARES TREND FOR HISTORICAL PERIODS (1961-86)1 END-POINT FOR PROJECTED PERIODS (1987-2000). 1 ESTIMATE. SOURCES3 UNITED NATIONS ENERGY STATISTICS (ACTUAL)i WORLD BANK, INTERNATIONAL ECONOMICS DEPARTMENT (PROJECTED). TABLE A2i ENERGY - APPARENT CONSUMPTION BY MAIN COUNTRIES AND ECONOMIC REGIONS ACTUAL PROJECTED GROWTH RATES Al COUNTRIES1 1987 - ECONOMIES 1969-71 1979-81 1986 1987/ 1988 1989 1990 1995 2000 1961-86 1970-86 2000 -----------------(MILLION TONS OF OIL EQUIVALENT) -------------------------------(X PER ANNUM)-------- INDUSTRIAL 3,097 3,686 3,707 3,770 3,833 3,896 3,965 4,274 4,591 2.5 0.7 1.3 NORTH AMERICA 1,744 2,023 1,994 2,020 2,050 2,079 2,106 2,278 2,422 2.0 0.5 1.2 UNITED STATES 1,574 1,785 1,748 1,771 1,796 1,920 1,643 1,988 2,105 1.8 0.3 1.2 CANADA 157 224 234 237 242 247 251 276 303 3.9 2.2 1.7 SEC-10 904 1,068 1,067 1,089 1, .05 1,123 1,145 1,225 1,316 2.4 0.5 1.3 GERMANY, FED. REP. 234 279 272 277 280 285 294 312 337 2.2 0.5 1.3 UNITED KINGDOM 211 209 211 216 221 224 229 239 254 0.6 -0.6 1.1 FRANCE 158 201 207 207 210 212 215 236 258 3.0 1.2 1.5 OTHER WESTERN EUROPE 121 153 172 174 176 179 182 196 211 3.4 1.1 1.3 JAPAN 270 359 383 395 407 419 434 465 519 5.3 1.3 1.8 OCEANIA 57 83 91 92 94 96 98 110 123 4.3 2.7 1.9 AUSTRALIA 49 72 77 78 80 81 03 93 104 4.4 2.7 1.9 NON-MARKET 1,059 1,578 1,835 1,880 1,908 1,938 1,977 2,191 2,438 4.2 3.4 1.7 USSR 762 1,155 1,382 1,417 1,437 1,456 1,486 1,648 1,840 4.4 3.7 1.8 EASTERN EUROPE 296 423 452 463 472 482 491 542 598 3.5 2.7 1.7 POLAND 81 119 124 128 129 133 135 150 165 3.6 2.6 1.7 ) DEVELOPING 785 1,466 1,866 1,918 1,989 2,074 2,166 2,600 3,101 6.5 5.4 3.3 ASIA 446 861 1,143 1,175 1,220 1,274 1,329 1,599 1,899 7.2 3.8 3.3 CHINA 213 445 595 609 632 660 689 825 968 7.9 6.0 3.1 INDIA 62 113 160 166 174 183 190 237 293 5.8 6.3 3.9 AFRICA 85 154 197 202 208 216 224 257 305 5.7 5.6 2.8 SOUTH AFRICA 44 65 80 82 83 85 87 92 107 4.4 3.8 1.8 AMERICA 195 348 398 406 420 438 459 556 677 5.4 4.6 3.5 MEXICO 40 92 105 106 109 112 116 140 171 7.4 7.2 3.2 BRAZIL 39 91 11? 117 122 128 135 168 209 7.9 6.1 4.0 SOUTHERN EUROPE 58 102 127 133 138 145 152 186 217 6.3 4.6 3.3 WORLD 4,940 6,729 7,408 7,568 7,730 7,907 8,108 9,065 10,130 3.6 2.3 2.0 A/ LEAST SQUARES TREND FOR HISTORICAL PERIODS (1,61-65); END-POINT FOR PROJECTED PERIODS (1987-2000). B/ ESTIMATE. SOURCES: UNITED NATIONS ENERGY STATISTICS (ACTUi WORLD BANK, INTERNATIONAL ECONOMICS DL. TABLE A3j ENERGY - GROSS EXPORTS BY MAIN COUNTRIES AND ECONOMIC REGIONS ACTUAL PROJECTED GROUTH RATES A/ COUNTRIES/ 1987 - ECONOMIES 1969-71 1979-81 1986 1987/B 1988 1989 1990 1995 2000 1961-86 1970-86 2000 --------------------(MILLION TONS OF OIL EQUIVALENT) --------------------------------(% PER ANNUM)-------- INDUSTRIAL 289 500 6") 662 676 683 690 733 788 6.6 4.6 1.2 NORTH AMERICA 122 168 200 214 219 224 228 246 267 5.4 1.9 1.5 UNITED STATES 49 79 95 98 98 100 101 104 107 4.6 5.2 0.6 EEC-10 143 237 289 285 286 285 285 275 281 5.9 4.4 -0.1 NETHERLANDS 42 85 86 83 83 83 83 86 86 8.6 3.3 0.3 UNITED KINGDOM 19 62 108 102 101 97 94 75 70 9.9 13.8 -2.5 OTHER WESTERN EUROPE 9 61 88 95 104 106 108 124 14U 15.1 17.1 2.6 NORWAY 3 47 69 76 84 86 87 102 116 21.7 24.7 2.9 JAPAN 1 2 2 2 2 3 3 3 3 5.7 1.5 1.5 OCEANIA 13 31 61 66 65 65 66 86 97 12.2 8.8 2.7 NON-MARKET 151 280 338 347 355 357 362 363 375 6.1 5.3 0.5 USSR 116 235 277 283 291 292 296 296 308 7.0 6.0 0.6 EASTERN EUROPE 36 45 61 64 65 65 66 67 67 3.2 2.8 0.3 DEVELOPING 1,261 1,556 1,229 1,259 1,289 1,332 1,385 1,613 1,819 3.2 -1.5 2.5 ASIA 737 1,038 742 764 779 801 814 971 1,159 3.8 -2.1 2.8 SAUDI ARABIA 180 472 212 185 187 197 204 258 307 5.8 --1.6 3.4 IRAN 181 75 64 84 80 91 95 132 166 0.3 -9.6 4.7 IRAQ 75 107 74 98 115 115 116 132 178 0.8 -3.2 4.0 UNITED ARAB EMIR 40 83 68 73 72 69 66 81 107 0.0 0.7 2.6 AFRICA 268 293 270 275 283 296 316 359 375 6.9 -0.6 2.1 LIBYA 147 82 48 47 45 46 50 65 67 5.2 -6.6 2.5 NIGERIA 50 90 63 58 60 63 69 82 87 13.3 -1.8 2.7 ALGERIA 42 55 61 65 68 72 75 81 85 4.2 1.7 1.9 AMERICA 253 212 204 208 216 224 242 270 269 -0,4 -0.9 1.7 MEKICO 4 46 72 77 77 79 92 95 96 16.8 33.4 1.5 VENEZUELA 178 100 75 74 73 75 75 89 81 -3.7 -5.8 0.6 SOUTHERN EUROPE 2 13 13 11 11 12 12 13 14 10.9 11.5 1.5 WORLD 1,700 2,336 2,207 2,268 2,321 2,372 2,436 2,710 2,982 4.3 0.6 1.8 Al LEAST SQUARES TREND FOR HISTORICAL PERIODS (1961-86)a END-POINT FOR PROJECTED PERIODS (1987-2000). I 9STIMATE. SOURCES: UNITED NATIONS ENERGY STATISTICS (ACTUAL): WORLD BANK, INTERNATIONAL ECONOMICS DEPARTMENT (PROJECTED). TABLE A4t ENERGY - GROSS IMPORTS BY MAIN COUNTRIES AND ECONOMIC REGIONS ACTUAL PROJECTED GROWTH RATES A/ ----------------------- ------------------------------------------ --------------------------- COUNTRIES/ 1995 2 ECONOMIES 1969-71 1979-81 1986 1987/B 1988 1989 1990 1995 2000 1961-86 1970-86 2000 --------------------------------------------------------------------------------------------- ----------------------- ------------------(MILLION TONS OF OIL EQUIVALENT) -------------------------------(% PER ANNUM)-------- INDUSTRIAL 1,292 1,694 1,563 1,604 1,639 1,672 1,716 1,882 2,039 4.2 0.0 1.6 NORTH AMERICA 276 469 404 418 431 4'3 459 549 611 4.7 0.3 2.6 UNITED STATES 196 387 344 358 371 5e3 398 483 541 5.5 1.4 2.8 EEC-10 685 803 747 766 776 785 798 839 890 3.5 -0.3 1.0 GERMANY, FED. REP. 137 184 165 173 175 176 181 194 209 4.4 0.3 1.3 FRANCE 120 168 131 132 134 136 139 145 156 4.1 -0.3 1.1 ITALY 123 139 135 140 141 144 146 153 162 3.7 0.0 1.0 UNITED KINGDOM 122 73 72 76 79 78 79 80 83 -0.8 -5.3 0.5 NETHERLANDS 69 85 96 94 96 98 99 104 109 3.9 1.3 1.0 OTHER WESTERN EUROPE 84 97 94 95 97 98 100 110 121 3.3 -0.1 1.6 JAPAN 225 307 308 317 326 333 345 363 396 6.9 0.8 1.5 OCEANIA 22 17 10 10 10 12 14 20 21 -1.9 -2.6 5.5 ON-MARKET 83 166 181 188 193 199 204 233 268 7.4 4.3 2.4 USSR 13 14 24 25 25 26 27 32 43 6.3 0.2 3.7 EASTERN EUROPE 70 152 158 163 168 173 177 201 225 7.5 5.0 2.2 DEVELOPING 301 466 462 475 489 502 516 594 675 4.4 2.4 2.4 ASIA 113 203 235 240 247 256 267 301 347 6.4 5.0 2.5 KOREA, REPUBLIC OF 10 32 45 47 49 51 54 65 78 17.4 9.8 3.5 SINGAPORE 20 39 47 48 48 49 50 53 58 8.4 5.1 1.3 AFRICA 38 50 50 52 54 55 57 62 69 3.5 1.5 1.9 SOUTH AFRICA 12 17 16 17 18 18 19 20 23 5.8 1.1 2.1 AMERICA 124 139 94 99 101 98 97 118 134 1.2 -2.3 2.1 BRAZIL 21 50 38 39 39 36 32 41 50 6.9 2.7 1.7 SOUTHERN EUROPE 26 73 82 83 86 90 95 112 123 8.6 6.8 2.7 WORLD 1,676 2,326 2,207 2,268 2,321 2,372 2,436 2,710 2,982 4.5 0.8 1.8 ------------ --------------------------------------------------------------------------------------------------------- A/ LEAST SQUARES TREND FOR HISTORICAL PERIODS (1961-86)1 END-POINT FOR PROJECTED PERIODS (1987-2000). B/ ESTIMATE. SOURCESt UNITED NATIONS ENERGY STATISTICS (ACTUAL)i WORLD BANK, INTERNATIONAL ECONOMICS DEPARTMENT (PROJECTED). TABLE ASt PRINARY ELECTRICITY - PRODUCTION BY MAIN COUNTRIES AND ECONOMIC REGIONS ACTUAL PkOJECTED GROWTH RATES Al COUNTRIES/ 198! - ECOOIES 1969-71 1979-81 1986 1987/B 1988 1989 1990 1995 2000 1961-86 1970-86 2000O ------------------(MILLION TONS OF OIL EQUIVALENT) -------------------------------(% PER ANNUM)-------- INDUSTRIAL 230 421 599 616 634 656 677 776 893 6.0 6.1 2.5 NORTH AMERICA 112 211 277 285 294 303 310 355 403 6.3 5.5 2.3 UNITED STATES 72 137 182 187 191 197 202 231 261 6.6 5.6 2.3 CANADA 40 74 95 99 102 106 108 124 142 5.7 5.2 2.5 BEC-10 49 88 157 161 167 173 182 214 255 6.5 7.9 3.1 FRANCE 15 34 77 80 82 84 85 96 106 8.4 11.6 1.9 GERMANY, FED. REP. 5 16 31 31 32 33 36 43 52 10.3 13.0 3.5 OTHER WESTERN EUROPE 42 70 91 92 93 95 96 102 108 4.7 5.1 1.1 NORWAY 15 22 28 28 29 30 30 34 37 4.5 3.7 1.8 SWEDEN 1. 22 33 33 33 34 34 34 34 5.2 6.6 0.2 JAPAN 22 43 65 68 71 76 79 94 115 5.8 7.5 3.6 CCEANIA 6 8 9 10 10 10 10 11 12 4.4 2.4 1.8 NON-MARKET 35 73 115 122 128 134 140 179 228 7.8 8.3 4.3 USSR 32 61 96 100 105 109 114 141 174 7.3 7.7 3.7 DEVELOPING 53 130 192 203 214 227 242 330 436 9.2 8.4 5.2 ASIA 20 47 79 84 90 96 103 142 194 9.2 8.9 5.7 CHINA 6 18 34 37 40 43 46 66 93 11.7 10.8 6.4 INDIA 7 13 15 16 17 19 20 29 39 7.3 5.4 6.0 AFRICA 6 14 13 14 15 t6 17 22 29 8.2 4.9 3.0 AMERICA 20 56 85 88 92 97 103 140 180 9.9 9.5 4.9 BRAZIL 10 32 48 51 54 57 60 84 111 10.6 10.4 5.3 SOUTHERN EUROPE 7 13 16 16 17 18 19 25 33 7.0 5.6 4.7 WORLD 318 624 907 940 975 1,017 1,059 1,284 1,557 6.7 6.8 3.4 A/ LEAST SQUARES TREND FOR HISTORICAL PERIODS (1961-86); END-POINT FOR PROJECTED PERIODS (1987-2000). B/ ESTIMATE. SOURCESt UNITED NATIONS ENERGY STATISTICS (ACTUAL)& WORLD BANK, INTERNATIONAL ECONOHICS DEPARTMENT (PROJECTED). TABLE A6: PRIMARY ELECTRICITY - APPARENT CNSUMPTION BY MAIN COUNTRIES AND ECONOMIC REGIONS ACTUAL PROJECTED GROWTH RATES Al COUNTRIES1 1987 - ECONOMIES 1969-71 1979-81 1986 1987/8 1988 1989 1990 1995 2000 1961-86 1970-86 2000 ------------------(MILLION TONS OF OIL EQUIVALENT) -------------------------------(Z PER ANNUM)-------- INDUSTRIAL 230 421 599 616 634 656 676 774 892 6.0 6.1 2.5 NORTH AMERICA 112 211 277 285 294 303 310 355 403 6.3 5.5 2.3 UNITED STATES 72 144 193 199 204 210 215 244 274 6.9 6.0 2.2 CANADA 39 67 84 86 90 93 95 111 129 5.1 4.5 2.7 EEC-10 50 92 161 166 171 177 185 217 259 6.5 8.0 3.0 FRANCE 15 35 71 73 74 75 75 86 98 a 11.2 2.0 GERMANY, FED. REP. 7 18 32 33 35 36 40 46 55 9.2 10.7 3.4 OTHER WESTERN EUROPE 40 66 86 88 89 90 92 98 103 4.7 4.9 1.1 NORWAY 15 22 25 26 26 27 27 30 32 4.2 3.4 1.5 SWEDEN 12 22 32 33 33 33 33 35 35 5.2 6.2 0.5 JAPAN 22 43 65 68 71 76 79 94 115 5.8 7.5 3.6 OCEANIA 6 8 9 10 10 10 10 11 12 4,4 2.4 1.8 NON-MARKET 35 72 114 120 126 132 138 177 225 7.7 8.2 4.3 USSR 31 56 88 93 97 102 107 134 166 6.9 7.5 3.9 DEVELOPING 53 130 195 205 216 229 244 334 440 9.2 8.5 5.2 ASIA 20 47 79 84 90 96 103 142 194 9.3 8.9 5.7 CHINA 6 18 34 37 40 43 46 66 93 11.8 10.9 6.4 INDIA 7 13 15 16 17 19 20 28 39 7.3 5.4 6.0 AFRICA 6 14 13 14 15 16 17 23 29 8.2 5.0 5.0 AMERICA 20 56 85 88 92 97 103 140 180 9.8 9.5 4.9 BRAZIL 10 32 49 52 55 8 61 85 112 10.7 10.5 5.3 SOUTHERN EUROPE 7 14 17 18 19 20 22 29 36 7.5 6.5 4.6 WORLD 318 623 907 940 975 1,017 1,059 1,284 1,557 6.7 6.8 3.4 Al LEAST SQUARES TRFND FOR HISTORICAL PERIODS (1961-86)1 END-POINT FOR PROJECTED PERIODS (1987-2000). Bf ESTIMATE. SOURCESt UNITED NATIONS ENERGY STATISTICS (ACTUAL); WORLD BANK, INTERNATIONAL ECONOMICS DEPARTMENT (PROJECTED). TABLE A7, PRIMARY ELECTRICITY - GROSS EXPORTS BY MAIN COUNTRIES AND ECONOMIC RECIONS ACTUAL PROJECTED GROWTH RATES Al COUNTRIES/ 1987 - ECONOMIES 1969-71 1979-81 1986 1987/8 1988 1989 1990 1995 2000 1961-86 1970-86 2000 - -------------------(XILLION TONS OF OIL EQUIVALENT) -------------------------------(% PER ANM)- INDUSTRIAL 13 29 39 41 43 45 47 50 52 8.4 7.3 1.6 NORTH AMERICA 2 9 13 14 14 14 15 15 16 9,7 10.8 0.8 CANADA 2 8 12 13 13 14 14 14 15 12.8 13.2 0.7 EEC-10 6 11 15 15 16 18 19 20 20 9.2 6.6 2.1 GERMANY, FED. REP. 2 4 4 3 3 3 3 3 4 7.7 5.4 0.7 FRANCE 1 3 8 9 10 11 12 13 13 12.2 11.7 2.9 OTHER WESTERN EUROPE 5 9 12 12 13 13 13 15 16 6.8 5.6 1,9 MON-MARKET 3 9 13 14 14 14 14 15 15 12.6 9.1 0.8 USSR 1 5 7 7 7 8 8 8 20.4 10.2 0.5 DEVELOPING 1 4 3 3 3 4 4 4 4 10.0 19.6 1.5 ASIA 0 0 0 0 0 0 0 0 0 0.0 20.7 0.7 AFRICA 0 3 1 1 1 1 1 1 1 6.4 17.3 0.8 AMERICA 0 0 1 1 1 1 1 1 1 26.9 26.4 2.0 SOUTHERN EUROPE 0 1 1 1 1 1 1 1 2 15.8 17.9 2.0 WORLD 16 42 56 58 60 62 64 68 72 9.2 8.2 1.4 A/ LEAST SQUARES TREND FOR HISTORICAL PERIODS (1961-86); END-POINT FOR PROJECTED PERIODS (1987-2000). BI ESTIMATE. SOURCESi UNITED NATIONS ENERGY STATISTICS (ACTUAL); WORLD BANK, INTERNATIONAL ECONOMICS DEPARTMENT (PROJECTED). TABLE A8s PRIMARY ELECTRICITY - GROSS IMPORTS BY MAIN COUNTRIES AND ECONOMIC REGIONS ACTUAL PROJECTED GROWTH RATES A/ COUNTRIES/ 1987 - ECONOMIES 1969-71 1979-81 1986 198713 1988 1989 1990 1993 2000 1961-86 1970-86 2000 - (MILLION TONS OF OIL EQUIVALENT) ------(% PER ANNUM) ------- INDUSTRIAL 13 29 39 41 43 44 46 48 51 8.6 7.3 1.4 NORTH AKERICA 2 9 13 14 14 14 15 15 16 9.9 11.1 0.8 UNITED STATES 2 8 12 13 13 14 14 14 15 12.8 13,4 017 SEC-10 7 15 19 20 20 22 23 23 25 8.0 7.2 1.5 GE1RANY, FED. REP. 4 5 5 6 6 6 6 6 7 5.0 2.1 1.2 ITALY 1 2 6 6 6 6 6 6 6 13.1 14.3 0.0 FRANCE 1 4 2 2 2 2 2 2 3 5.8 3.3 7.4 BELGIU-LUXEMBOURG 1 2 2 2 2 2 3 3 2 11.1 5 5 0.5 OTHERWESTERNEUROPE 4 5 8 8 8 8 9 10 11 8.9 4.1 2.3 NON-MARKET 3 8 11 11 12 12 12 13 12 11.4 /.8 0.5 EASTZRN EUROPE 3 8 11 11 12 12 12 12 12 11.4 8.2 0.s DEVELOPING 1 5 5 5 6 6 6 7 8 11.5 22.4 3.0 ASIA 0 0 1 0 0 0 0 0 1 ... ... 0.0 AFRICA 0 3 1 1 1 1 1 1 1 6.8 18.6 1.3 AMERICA 0 0 1 1 1 1 1 1 1 12.1 18.6 1.7 SOUTHERN EUROPE 0 1 3 3 3 4 4 5 5 21.3 27.5 3.9 WORLD 16 42 56 58 60 62 64 68 72 9.3 8.2 1.4 Al LEAST SQUARES TREND FOR HISTORICAL PERIODS (1961-86); END-POINT FOR PROJECTED PERIODS (1987-2000), B/ ESTIMATE. SOURCESi UNITED NATIONS ENERGY STATISTICS (ACTUAL)i WORLD BANK, TNTERNATIONAL ECONOMICS DEPARTMENT (PROJECTED). PETROLEUN Suamary 1. The recovery of oil prices to an average of $17.20/bbl in 1987 following the mid-1986 plunge to below $10/bbl (from $27/bbl in 1985) was reversed in 1988 despite growth in demand. The main cause of the 1988 decline was production increases from both OPEC and non-OPEC sources. By September 1988, prices had fallen to $12.10/bbl with production from OPEC around 19.5 mbld. Volatility in oil prices has continued which, by and large, has been generated by changes in expectations over the outcome of the various OPEC meetings. 2. Global consumption of petroleum declined from a peak of 3,178 million tons of oil equivalent (mtoe) in 1979 to around 2,833 mtoe in 1985; it steadily increased over the next two years to total 2,957 mtoe in 1987, and a further substantial increase was estimated for 1988. The recent increase in oil demand has been due mainly to the sharp decline in prices, as well as to the rapid growth in industrial production and incomes in the industrial countries and some of the industrializing developing countries. 3. Petroleum consumption is expected to grow throughout the 1990s at an average rate of 1.4Z p.a. The forecast of a return to growth in crude oil demand, albeit slow, is based on the lower oil prices generatLng demand increases and the solid growth assumed in OECD GNP. It also assumes continued investment in oil conservation and efficiency improvements which will allow further substitution away from oil. Since the transportation sector is likely to remain tied to liquid fuels over the forecast period, the power-generation, industrial, and residential/commercial sectors will provide the main areas of substitution for oil. However, the continuing introduction of more energy- efficient transportation equipment will also reduce the rate of growth of demand for transport fuels. Energy pricing policies in many countries have restricted the extent of the pass-through of the recent decline in oil prices to final consumers; it is assumed that these policies will continue which will also constrain the increase in oil demand. The income elasticity of demand is thus projected to remain much lower than it was prior to the 1970s. 4. In the industrial countries, the recent trend towards the consumption of lighter products is expected to continue over the forecast period. The shift in demand towards high octane fuel, linked largely to the demand for high-performance vehicles, will continue to exert pressures on refineries to invest in the conversion and upgrading of their refinery capacity. 1/ While all the major economic regions are projected to share in the increased demand for petroleum, the sharpest increase is anticipated to occur in the developing 1 High-performance vehicles, by and large, do not veed high-octane fuels. The increase demand for high-octane fuels has resulted mostly from marketing efforts by the oil companies, since profits from high-octane fuels are higher than from low-octane fuels. - 50 - count-ies. Increased motorization in combination with growth in per capita incomes (mainly in Asia) will be the main factors behind this strong performance. 5. Since 1980 non-OPEC supplies have increased by around 2.2% p.a. to 2,014 mtoe in 1987. Over the projection period the outlook for supplies from the non-OPEC countries is for an increase of a little less than 1% p.a. The lower prices, the lesser prospects for big oil discoveries, and progress towards resolution of the debt crisis (by reducing debt-servicing pressures to increase oil production) should all contribute to this slowdown. Given the current rate of production in relation to their reserves, it is projected that production from the industrial countries will begin to decline during the period 1990-95. A decline in the net exports from the CPEs is expected during the 1995-2000 period. During this latter period there is also expected to be a leveling out of the growth in exports from the non-OPEC oil-exporting developing countries. 6. Increases in supplies from non-OPEC countries have diminished OPEC's dominant position in the world oil markets. (OPEC production has declined by almost 30% since 1980.) As OPEC attempted to control its output in an effort to support prices, non-OPEC production filled the gap between OPEC supply and global demand. OPEC's policy since 1986 of attempting to regain its market share has not been entirely successful. Its production has increased, and its share has also increased somewhat, but non-OPEC suppliers have also been able to increase production to share in the demand increase. 7. Given the rates at which non-OPEC reserves have been depleted in recent years, however, and the slowdown expected in non-OPEC output, OPEC is expected to fill a significant portion of the future increase in oil demand. With growth at 1.4%, petroleum consumption would reach 2,950 mtoe (excluding the CPEs) in the year 2000. If non-OPEC supplies increase to around 1,556 mtoe, the demand for OPEC oil will increase to 1,415 mtoe--almost 500 mtoe above their current level. 8. The conflict between its Gulf members has been a key contributor to the polarization among OPEC members and to the reduction of its market control in recent years. It is expected that the resolution of the Gulf conflict would increase the cohesiveness of OPEC and its ability to control production. The recent period of low prices and oil revenues as well as the ,alf conflict has increased the pressure on OPEC countries to exceed their allocated quotas. However, in the longer run this experience may lead to a .w,)re cooperative attitude toward production control. Our expectation, the.trefore, is that as its share of total supply increases OPEC will be able to exert somewhat more control over production than it has recently. However, our understanding of cartel bfhavior leads us to expect that such cohesiveness will wax and wane depending on circumstances, leading to substantial fluctuations in prices as experienced in the past. 9. Because of the recent build-up in demand and assuming increased production control by OPEC, we expect crude oil prices to average slightly above 1988 levels (in nominal terms) for the next few years. With OECD GNP growth expected in the neighborhood of 2% p.a. for 1989 and 1990, oil demand growth will be slowed--even though the low prices will provide some - 51 - stimulus. These relatively los ice levels will also lead to a slowing of the development of alternative energy projects and of the pace of energy- saving and oil-switching techn ogies. They will also impede exploration for oil in various regions. Beyond the early 1990s there is expected to be an upward trend in oil prices in real terms (from $10-11/bbl in 1985 dollars for the 1988-90 period to $15.40/bbl in 2000). While improved relations among OPEC membe-s will assist in their control of production, basically the price increase wilU derive from the development of the global supply and demand picture which tavors an increase in OPEC's market share. The 3% p.a. average growth in GNP expected for OECD countries over the 1990s would provide substantial impecus for crude oil demand. The accompanying inflation rate of around 4.5% would be likely to be reflected ;n oil prices. In nominal terms, therefore, the trend in oil prices is expected to be from $22/bbl to $35/bbl over the 1995-2000 period. However, we emphasize that oil prices will continue to be highly variable and policy makers should take appropriate risk management strategies to cope with such variability. This upward trend in nominal and real prices for the 1990s should not be extrapolated beyond our forecast period. While we have not looked at the situation in detail, our position at this stage is that the forecast path for crude oil prices in the 1990s may well be the upswing part of the next long-term cycle in prices and that beyond 2000 prices could decline again in nominal and real terms. Recent Developments within OPEC 10. Following OPEC's December 1985 conference when its decision to defend its "fair market share" of world oil production was announced, petroleum prices fell very sharply. The events that led to the price decline began to unfold in June 1985. At that time Saudi Arabia (with production as low as 2.5 mb/d in May 1985) indicated its intention of acting outside OPEC's resolution on production controls if other members continued to violate OPEC's official prices and production quotas. When it apparently perceived that other OPEC members' pricing and quota violations were likely to continue, Saudi Arabia abandoned its role as a swing producer and began to produce up to its imputed quota of 4.35 mb/d. 11. By the end of June, 1986, OPEC's production had reached approximately 20 mb/d. In the Rotterdam market, prices fell below $10/bbl, while Brent crude traded at around $8.55/bbl and the Arabian light netback values dropped to around $7/bbl. At one point the average of netback prices for OPEC crude fell as low as $8.40/bbl. Since then oil prices have been subject to extreme volatility--strengthening during periods of perceived disciplined OPEC behavior and weakening in response to increases in OPEC production accompanied by price discounts. By and large, the volatility in oil prices has been dictated by changes in expectations over the outcome of various OPEC uneetings. OPEC's production discipline has been weakened during this period by the conflict between Iran and Iraq, with Iraq standing aside from the cartel and producing in excess of its allocated quota. 12. The issue of brin-ing Iraq back into cartel discipline dominated OPEC's end-1987 conferenc. However, the Saudi Arabian-backed plan to increase Iraq's official quota to the same level as Iran's was not accepted by Iran. Hence, excluding Iraq, the 12-member OPEC production quota was agreed at - 52 - 15.06 mb/d. With 0.4 mb/d production in the Neutral Zone and Iraq's assumed production of approximately 2.6 mb/d, the effective ceiling was around 18.6 mb/d. 13. Against the backdrop of low and volatile oil prices, a first joint meeting of the OPEC states and non-OPEC Third World oil exporters was held in Vienna on April 26, 1988 to discuss strategies to ease the downward pressure on oil prices. The discussions centered around a proposal by non-OPEC producers to implement a 5% export cut by both the OPEC and non-OPEC producers. This proposal was not accepted by OPEC members on the grounds that a uniform percentage cut in production would result in greater revenue losses by OPEC due to their larger share in total world production. 14. Despite its unsuccessful outcome, the meeting between OPEC and non- OPEC producers has nevertheless laid the ground work for establishing a relationship that could lead to future cooperation. The key message conveyed at the meeting was that oil market stability is the responsibility of all producers both inside and outside the OPEC cartel, and that action by the major non-OPEC producers to reduce exports to support oil prices would act as a cushion against an oil price crash similar to that experienced in 1986. 15. In the past several non-OPEC countries have indicated their willingness to cooperate with OPEC on production control. Though some output losses could be traced to marketing difficulties, especially at the beginning of 1986, a few countries such as Mexico and Egypt deliberately reduced production. Others, notably Oman, Malaysia, Angola, and later Norway, announced production cuts from previously set targets. The USSR and China also announced export cuts. 16. At its meeting starting June 10, 1988, OPEC members agreed to a six- month extension of the productio.. limits of 15.06 mb/d set in December 1987 for its 12 members 2/ and the continuation of the theoretical benchmark price of $18/bbl. Saudi Arabian-backed efforts to bring Iraq into the cartel by giving it a production quota at parity with Iran were again opposed by Iran and proved unsuccessful. The perceived lack of cohesion among OPEC members increased the downwards pressure on oil prices. 17. The main point of discussion within the cartel has been the issue of production cuts to increase prices. While Saudi Arabia and other OPEC members with large reserves argue that keeping prices low is needed to stimulate demand for oil, other OPEC members such as Algeria and Nigeria favor a production cut to increase prices. Debate over this issue has at times appeared almost irrelevant because of the difficulties the coalition has had in obtaining adherence to existing quotas. 2/ The current OPEC member quota (excluding Iraq and Neutral Zone production) of 15.06 mb/d (agreed by OPEC members at the December 1987 conference) is distributed among its members (in thousand barrels per day) as follows: Algeria 667; Ecuador 221; Gabon 159; Indonesia 1,190; Iran 2,369; Kuwait 996 (excluding its share of Neutral Zone); Libya 996; Nigeria 1,301; Qatar 300; the UAE 948; Venezuela 1,570; and Saudi Arabia 4,343 (excluding its share of Neutral Zone production). - 53 - 18. If efforts to persuade Iran to a. 'cept a quota on parity with that of Iran succeed, up to 600,000 bId of crva could be taken off the market. ]Eraq's current production is running about 2.6-3 ab/d while Iran's production quota is around 2.4 mb/d. A further reduction in the OPEC quota would also come about because production from the Neutral Zone (estimated to be around 0.5 to 0.6 ab/d) is regarded as part of Iraq's quota and would be folded into -raq's quota. OPEC members such as Venezuela have indicated their intention <nf allowing reductions in their quotas to accommodate Iraq. 19. One of the issues that has surfaced since 1982 when OPEC introduced production quotas concerns the definition of crude oil to be used in setting r-he quota. The lack of a clear definition of NCL condensates to be included in the official member quota has allowed some OPEC members to disguise their production levels. Current OPEC production of liquid gases is estimated to be around 1.7 ab/d oil equivalent. Abiding by the American Petroleum Institute's definition of NCL and condensates would mean the inclusion of up to 0.5 mb/d of the current N,L production in OPEC quotas. Although OPEC has commissioned a study on the issue by a group of experts, it is unlikely that the question <)f redefinition will be resolved in the near future, given its complexity. IRecent Developments in Non-OPEC Supplies 20. Oil producers outside the OPEC cartel have continuously posed a threat to OPEC's attempt to prop up prices. Between 1981 and 1986 non-OPEC cil production increased from 1,127.1 mtoe to 1,347.81 mtoe, while OPEC production declined from 1,161.5 mtoe to 933.8 mtoe. The increase in non-OPEC production has come mainly from the North Sea region, Mexico, Oman, Malaysia, and China. There have also been considerable production increases in Brazil, Columbia, and India (see Table 1, page 52). New non-OPEC producers have entered the market, such as the Yemen Arab Republic, which has the capacity to produce 9 mtoe by the early 1990s. 21. Among the industrial countries, the North Sea region has emerged as the dominant producer and exporter of crude--producing about 16% of total non- OPEC oil and 8% of oil output outside the CPEs. North Sea production reached about 178.5 mtoe in 1986, of which more than 70% was exported and almost all traded in the spot market. However, exploration activity in the North Sea -region slowed down after the 1986 oil price crash. 22. The deleterious effects on crude oil production of the 1986 price fall has been nowhere more evident than in the United States. Estimates for the United States indicate that expenditure for exploration and production was slashed from $33.3 billion in 1985 to $16.4 billion in 1986. The bulk of this decline was, of course, in exploration and drilling--from $26.6 billion in 1985 to $13.2 billion in 1986. The end result was a 43% decline in the number of wells drilled--nearly 40,000 wells were drilled in 1986, down from 69,300 in 1985 (Table 2). (The extent of the decline may be better appreciated if it is noted that some 30% of wells drilled annually are dry wells.) There was also a steep drop in the number of exploratory wells--from nearly 12,000 in 1985 to 7,900 in 1986. By the end of 1986 the number of active rigs had dropped to 988 from 1,898 at the end of 1985. Drilling activity in the United States has picked up from the second quarter of 1987, however. - 54 TABLE 1: POMCTIOM OF PETROLEIM IN MAJOR WO-OPEC COUMTRI ES 1981 1982 1983 1984 1985 1986 1987 --------------------------('000 TOE)--------------------------- Angola 7,157 6,399 8,789 10,072 11,450 13,924 17,115 Argentina 25,581 25,504 25,765 25,724 24,682 23,379 21,751 Australia 20,086 19,798 19,346 23,408 27,025 25,606 27,016 Brazil 10,916 13,265 16,921 23,663 28,110 29,450 28,556 China 101,204 102,106 106,050 114,594 124,874 130,608 134,596 Columbia 7,126 7,401 7,966 8,546 9,077 15,378 19,519 Egypt 29,826 33,223 36,462 41,878 45,120 41,195 43,897 India 14,940 19,784 25,062 28,019 31,037 32,336 32,572 Malaysia 12,561 14,750 18,670 21,367 21,417 23,804 24,571 Mexico 28,079 151,964 148,400 152,435 152,254 140,621 145,711 Norway 24,003 25,107 31,929 36,145 41,537 45,341 52,136 Oman 16,714 16,790 19,144 20,762 24,843 26,700 28,344 USSR 617,984 620,737 624,706 621,101 605,207 620,128 627,310 United Kingdom 90,588 105,432 115,355 126,407 129,031 130,429 126,284 Sources: United Nations, Energy Statistics; World Bank. TABLE 2: US DRILLING ACTIVITY, 1973-86 Oil Gas Dry Service Total Total Wells Wells Wells Wells Wells Footage ----------------------------------------------(0)-------------------------f ----------------- (000) --------------------- million ft 1973 10.2 7.0 10.5 1.0 28.7 141.9 1974 13.7 7.2 12.2 1.4 34.4 156.6 1975 14.0 8.2 13.7 1.9 40.8 184.9 1976 17.7 9.4 13.8 1.7 42.6 190.9 1977 18.7 12.1 15.0 1.5 47.3 219.6 1978 19.1 14.4 16.6 1.6 51.7 242.5 1979 20.7 15.2 6.0 1.5 53.4 247.3 1980 32.2 17.2 20.3 2.1 71.8 316.9 1981 42.8 19.9 27.2 2.4 92.3 414.4 1982 40.2 17.2 25.8 2.2 85.4 379.4 1983 38.1 12.6 23.6 2.0 76.4 318.1 1984 43.5 14.6 24.9 2.2 85.2 369.6 1985 35.0 12.3 20.4 1.6 69.3 312.7 1986 20.1 84 10.4 1.0 39.9 186.8 Source: Oil and Gas Journal; World Oil; Energy Information Administration. - 55 - 23. The collapse of crude oil prices in 1986 had an immediate effect on stripper well production in the United States. It is estimated that around 150,000 b/d may have been lost due to the shutting-in of stripper wells. In addition, the decline in production drilling activity adversely affected the producibility of fields throughout the United States. The precipitous drop in exploratory drilling is bound to affect future production capacity. Despite an approximate 5% increase in oil production in Alaska during 1987, crude oil production in the United States fell by the largest amount in over a decade to an average of 470 mtoe in 1987. With the exception of Missouri, Nevada, New York, and Pennsylvania, production in all other lower-48 states declined in 1987. Production in Texas, the largest producing state, declined by about 9% in 1987 to 105 mtoe, the lowest level since 1949. 24. Elsewhere in the world (outside the CPEs), the pace of drilling activity also slowed down in 1986, though not as dramatically as in North America. The number of active rigs fell by nearly 29%--from 1,247 at the end of 1985 to 879 at the end of 1986 (see Table 3). In Africa, the bulk of the TABI -:3: NUMBER OF ACTIVE OIL DRILLING RIGS OUTSIDE NORTH AMERICA End-Dec. End-Dec. End-Dec. End-Sep. End-Dec. 1984 1985 1986 1987 1987 Africa 146 164 116 116 111 Western Europe 204 241 127 151 184 Middle East 134 131 75 87 99 Asia (including China) 249 236 227 227 242 Latin America 438 439 318 339 354 Oceania 37 36 16 26 23 Total 1,211 1,247 879 946 1,013 Source: Oil and Energy Trends. 1986 decline in active rigs took place in Libya--a decline of 22 rigs--though drilling activity in Egypt suffered, too. There was a decline in drilling activity in several European countries, notably the United Kingdom, the Netherlands, Italy, France, and the Federal Republic of Germany. In the Middle East, the largest decline in drilling activity took place in Iraq (15 rigs), followed by Abu Dhabi (8 rigs). In Asia (including China), the decline in drilling operations in Indonesia (34 rigs) was largely offset by the increase in active rigs in India (31 rigs). Operations in both Mexico and Argentina were heavily affected--down to 135 and 34 rigs from 195 and 77 rigs, respectively, while the number of active rigs in Venezuela and Colombia also declined. In Australia, drilling activity was slashed as active rigs fell from 28 at the beginning of 1986 to 13 at the end of 1986. - 56 - 25. Drilling activity outside North America recovered in 1987. By the end of the year the number of active rigs had increased by 15% to 1,013 units. In Europe the increase was most noticeable in the North Sea sector. In the Middle East, Iraq and Syria increased drilling activity considerably. Significant increases in the number of on-shore rigs in Argentina and Mexico resulted in an 11% increase in the number of active rigs operating in Latin America. In Africa, however, the rig count declined mainly due to declines in Algeria and Egypt. 26. These figures may not fully reflect the new circumstances because in many instances oil companies could not suspend drilling operations in view of the contractual obligations assumed as a part of their long-term commitments to the host governments. Given the new environment, international oil companies have become increasingly selective in their foreign operations; and many host governments have found it necessary to modify their terms and conditions in order to attract foreign capital. 27. Exploration and development efforts in the USSR and China seem to have paid dividends. Among the East European countries, production has increased by over 1% in 1987 to 646 mtoe, exclusively due to an increase of about 6.4 mtoe in the USSR. The largest loss was suffered by Romania where production dropped by around 1.7% to 11 mtoe. China's production increased in 1987 by over 3% to reach 135 mtoe. 28. The most significant change from the pre-1986 period is, therefore, the new outlook for supply. US crude oil production has stabilized to around 470 mtoe in 1987--over 2% lower than in 1986--and there are now strong indications that production in the UK section of the North Sea peaked in 1986--production in 1987 was about 125 mtoe (3%) lower than in 1986. The decline in oil production in the United States and the United Kingdom has been offset by production increases in the non-OPEC developing countries such as Angola, China, Columbia, India, Malaysia, Oman, and the Yemen Arab Republic, where combined production reached 257.41 mtoe in 1987, up almost 6% over 1986. 29. Despite the development of new horizontal directional drilling technology in the industrial countries--mainly the United States and North Sea--that has cut oil production costs considerably, a decline in oil prices below $12/bbl in real terms could be expected to adversely affect supplies from the industrial countries. In the United States, for instance, the decline in oil prices during 1988 has reduced stripper well production by around 1 mb/d, while a further decline of 0.4 mb/d in production is expected if prices fall below $12/bbl. It is anticipated that production that would be cut at prices below $12/bbl would require prices to rise above $20/bbl in order to restore it (because of the fixed costs involved). In the North Sea area, where production costs have also been slashed due to the adoption of the new technology, additional costs arising from safety concerns (emerging from the recent incident that took many lives in the North Sea Piper fields) and environmental constraints are likely to partially offset these gains. It is projected that in order to sustain supplies from the industrial countries at their present levels, real oil prices would be required in the range $15- 20/bbl over the forecast period. - 57 - Petroleum Demand 30. Recent Developments. Despite the collapse in oil prices in 1986, demand outside of the CPEs grew by only 50 mtoe in 1986, of which almost 80% was generated in the OECD (over one-half of which was in the United States). The slow response of demand to the change in price was partly due to the energy-saving technological bias and conservation efforts that followed the sharp oil price increases in 1973/74 and 1979/80. Data in Table 4 show the decline in the share of oil in total energy demand since 1973. 31. The sharp declines in oil product prices in the OECD countries--by 27.9% and 22.7% for industry and households, respectively--and the changes in petroleum product demand are presented in Tables 5 and 6. In the United States the consumption of motor gasoline registered an increase of around 3% from 341.5 mtoe in 1985 to 351 mtoe in 1986 (see Table 6). This increase was the result of stimulated discretionary and business driving occasioned by moderate economic growth and the decline in the average gasoline price by around 22%. Although the average price of heating oil declined by 20% in 1986, several factors (such as the warmer-than-normal winter) restrained heatirg oil consumption for heat and power. In contrast, the continued growth in highway use of diesel fuel was the main reason behind the modest increase in the consumption of distillate fuel oils--by only 1% to 145 mtoe. The consumption of jet fuels in 1986 continued its upward trend, increasing by about 7% to 65 mtoe. 32. The bulk of the increase in petroleum product demand in the United States took place in the electric utilities and industrial plants. As prices for residual fuel oil at times dropped well below the break-even price for natural gas and coal, consumption of residual fuel oil for power and heat increased. The increase of some 10 mtoe in the consumption of residual fuel-- from 60 mtoe in 1985 to 70 mtoe in 1986--was the first gain in almost a decade. 33. Developments in Western Europe and Japan have been somewhat different (see Table 6). The Federal Republic of Germany's demand for petroleum products grew by a healthy 5.7%--motor gasoline by 4.3%, gas/diesel oil by 8.3%, and residual fuel oil by 14.9%. In Italy, too, the demand for petroleum products increased by nearly 3.4%, with all products except motor gasoline sharing in the growth--the average price of gasoline in Italy was only slightly reduced from 1,321 lira per liter in 1985 to 1,280 lira per liter in 1986 (as taxes were increased from 851 lira to 1,001 lira per liter). 34. In Japan, a further 8% increase in nuclear power generation was responsible for a large part of the drop in the consumption of residual fuel oil in the power sector. In 1986 oil and nuclear sources accounted for 23% and 27%, respectively, of total generated power. 35. For the developing countries, preliminary estimates indicate that the larger part of the 25-30 mtoe increase in the consumption of petroleum products in 1986 can be accounted for by the strong growth of demand in only a few countries (namely Brazil, India, and Republic of Korea). The widespread low rates of economic growth and continuing debt problems in the oil-importing developing countries restrained growth in petroleum product consumption. TABLE 4: HISTORICAL PERSPECTIVE ON WORLD DEMAND FOR ENERGY AND OIL 1961 1973 1980 1981 1982 1983 1984 1985 1986 1987 ---------------------------------------------- mtoe)------------------------------------------ Energy Consumpt Ior. Ind. Countries 1,930 3,533 3,691 3,569 3,476 3,470 3,617 3,634 3,707 3,770 CPEs 652 1,210 1,582 1,602 1,643 1,677 1,729 1,787 1,835 1,880 Dev. Countriv, 413 990 1,460 1,501 1,557 1,619 1,714 1,786 1,866 1,918 Total World 2,995 5,732 6,733 6,672 6,676 6,766 7,060 7,207 7,408 7,568 Energy Supply Non-Oil 1,835 2,901 3,684 3,746 3,855 3,948 4,179 4,360 4,487 4,611 Oil 1,160 2,831 3,049 2,926 2,815 2,802 2,833 2,817 2,921 2,957 Non-OPEC 694 1,328 1,732 1,760 1,826 1,883 1,952 1,981 1,987 2,014 Stock Chang,, -6 -52 -50 5 -1 -5 -1 0 0 0 OPEC 472 1,555 1,367 1,161 990 924 882 836 934 943 Share Of Oil (1) 38.7 49.4 45.3 43.9 42.2 40.2 40.4 39.3 39.4% 39.1% Sources: UrtLu Nations, Energy Statistics; OPEC Annual Statistical Bulletins; World Bank. - 59 - TABLE 5: OECD: CHANCE IN REAL ENERCY PRICES FOR END-USERS, 1984-87 a/ 1984 1985 1986 1987 ------------ (2) ------------------- OECD Total Energy Industry -0.8 -1.8 -16.8 -8.7 Households -2.0 -2.0 -13.9 -5.2 Oil Products . Industry 0.7 -1.2 -27.9 -2.3 Households -3.0 -2.5 -22.7 -2.5 United States Total Energy Industry -1.3 -3.4 -16.9 -7.7 Households -3.3 -3.9 -13.0 -5.1 Oil Products Industry 0.3 -2.1 -29.2 7.3 Households -5.5 -4.8 -24.1 -0.7 Euro2e Total Energy Industry 1.4 -0.2 -19.1 -10.5 Households -0.7 +0.1 -16.5 -7.1 Oil Products Industry 2.4 -0.1 -30.7 -4.2 Households -0.8 0.3 -25.6 -4.1 Total Energy Industry -3.5 -2.6 -16.6 -10.6 Households -5.1 -3.9 -11.3 -6.4 Oil Products Industry -3.0 -2.6 -19.9 -14.4 Households -6.9 -5.1 -14.6 -5.4 Source: IEA, Energy Prices and Taxes, fourth quarter 1987. &/ Refers to local currencies. TABLE 6: PETROLEUM PRODUCTS CONSUMPTION IN MAIN OECD COUNTRIES, 1985-86 ------------------------------------------------------------------------------------------------------------ Four Main Total Main United States European Countries Japan Consuming Countries ------------------------------ --------------------- -------------------- -----------------,---- 1985 1986 % Change 1985 1986 % Change 1985 1986 % Change 1985 1986 % Change ------------------------------------------------------------------------------------------------------------- --------------------------------------------- (mtoe)---------------------------------------------- Motor Gasoline 341.5 351.0 2.8 86.0 89.0 3.5 31.5 32.5 3.2 459.0 472.5 2.9 Cas/Diesel Oil 143.5 145.0 1.0 131.5 138.0 4.9 40.0 42.0 5.0 315.0 325.0 3.2 Residual Fuel 60.0 70.0 16.7 60.0 58.0 -3.3 47.0 43.5 -7.4 167.0 171.5 2.7 Other Products 241.5 a/ 241.0 -0.2 98.0 102.0 4.1 104.0 106.0 1.9 443.5 449.0 1.2 Total 786.5 807.0 2.6 375.5 385.5 3.1 222.5 224.0 0.7 1,384.5 1,418.0 2.4 0 ------------------------------------------------------------------------------------------------------------------------- a/ Includes NGL, liquified petroleum gas, etc. Sources: IEA; EIA; Petroleum Economics Ltd; World Bank. - 61 - 36. In the early part of 1987, the growth of demand for petroleum products moderated conaiderably in the OECD countries. This was due to both the lackluster economic activity in most countries and the sharp increase in priLes. The demand for residual fuel oil receded in the United States as other fuels, notably natural gas, reestablished themselves in both the industrial and power-generation markets. For 1987, the increase in the demand for petroleum products in the OECD countries is estimated to have reached about 16 mtoe, a little less than a 1% increase over 1986. Demand for oil in the six major industrial countries has increased much faster in 1988, especially in the United States, where consumption registered an increase of some 6.4% during the first quarter Largely due to a higher-than-expected economic growth rate and the increase in gasoline demand. Gasoline demand, which accounts for about 43% of total oil use in the United States, increased by about 4.4% during the first quarter. About one-quarter of this growth could have been due to the increase in demand resulting from increasing the road speed limits from 55 mph to 65 mph in some parts of the country. The once-and-for-all impact on oit use of the speed limit change appears confirmed by the growth rates for April and May when the growth in demand for oil slowed significantly. Preliminary estimates for the four major European countries also reflect a slowdown in April from the buoyant level of gasoline demand in March. However, compared to the corresponding period in 1987, the demand for petroleum products is still strong in the major European countries, especially in the United Kingdom, where the demand for products in June 1988 was around 10% higher than the demand in June 1987. 37. There has been a recent trend in the industrial countries towards consumption of lighter products (mainly gasoline in the United States and middle distillates in the European market), while the share of fuel oil has been declining. The decline in the demand for oil between 1980 to 1985 was overwhelmingly due to the reduction in fuel oil use. The recent increase in the demand for gasoline is largely linked to the increase in the demand for high-performance vehicles, accelerating the demand for high-quality fuels. In the European countries, particularly in France and the United Kingdom, residual fuel consumption has declined as demand for light and middle distillates has increased in response to increased transportation activity and heating needs. This shift in demand towards the lighter end of the barrel is exerting pressure on refineries to invest in conversion facilities to increase the octane level of premium fuels and to upgrade refineries. 38. Given the extent of the conservation measures of the past and the ongoing interfuel competition, it is anticipated that any growth in the demand for petroleum products in the OECD countries will come mainly from the transportation sector. In the power-generation and industrial sectors, natural gas is expected to replace oil use as the abrogation of the EEC's 14- year ban on gas use for power generation takes effect by the end of 1988 and as electricity generation in the United States utilizes natural gas-fueled combined cycle plants. 39. In the developing countries the demand for oil increased to over 792 mtoe in 1987-an increase of about 2%. Demand appears to have grown sharply during the first quarter of 1988. The growth in demand has been most pronounced in the Asia-Pacific region, where consumption grew by 6% in the first quarter of 1988 (year-over-year). This strong consumption growth is largely attributed to the growth in the size of the motor vehicle fleet that - 62 - has accompanied the strong economic growth. While fuel oil use is shrinking-- as it is being replaced by non-oil fuels--there also appears to be a shift in consumption in most of the countries in the Asia-Pacific region towards the use of the lighter end of the barrel, which is leading to the modification and upgrading of refinery capacity. 40. While lower taxes on middle distillates like kerosene and diesel contributed to the substantial increase in demand for middle distillates in developing countries between 1986 and 198-. (Pakistan by 12.67%, the Philippines by 11.2%, Thailand by 12.25%, Republic of Korea by 10.63%), stronger economic growth and increased motorization have generated growth in demand for motor gasoline. In Republic of Korea, for instance, growing numbers of buses and trucks and sedan cars increased Lhe demand for light oil by about 12% in 1987. The higher number of vehicles in use in Malaysia and Pakistan resulted in an increase in demand of over 6% for light oil in both countries between 1986 and 1987. 41. Demand Outlook. The demand projections have been derived in part from country energy balance sheets. The estimations of the demand for petroleum took into account the GDP forecasts and the potential for substi- tution of petroleum with other fuels at different relative price levels. The evaluation of this potential was based on a comparison of sectoral trends in the consumption of the various fuels, as well as assumptions about investment plans and energy policies in the various countries. For example, it was assumed that consuming countries will allow only a partial pass-through of lower oil and other fuel prices to consumers. The demand for OPEC crude oil was derived as the residual demand that will not be met either by domestic production or supplies from non-OPEC countries. The demand forecasts for the major regions and major consuming countries are given in Table A2. World (including the CPEs) consumption growth is forecast at 1.2% p.a. with the fastest-growing region the developing countries (2.4% p.a.). The changes in petroleum consumption shares of the major economic regions implied by these forecasts are shown in Table 7. 42. With the financial plight of the highLy-indebted countries mostly unchanged a- least for the medium term, the main growth in demand for petroleum in the developing region will probably come from a few major oil- importing developing countries of the Asian continent (China, India and Republic of Korea). Lower oil prices and the fact that many oil-importing developing countries have Little capability for shifting their dependence from oil to other fuels account for the 230 mtoe expected increase in oil consumption of this group of countries. Still, the share of oil in total energy consumption of oil-importing developing countries is anticipated to decline--from 33% in 1986 to 29.7% in 2000. Not much growth in demand is anticipated from the oil-exporting developing countries in the short term as they continue to adjust to substantially lower oil incomes. In the medium to longer term their demand should grow faster with incomes responding to higher oil prices. 43. The industrial countries appear committed to reducing their dependence on imported oil. This observation is based upon their repeated affirmation to improve energy and oil efficiency. In the past, conservation policies have contributed substantially to reducing oil intensities. It is anticipated that such policies will continue while other policies designed to - 63 - encourage the use of substitutes, such as electricity in specific end-uses, will complement these oil-saving efforts. 44. Energy-pricing policies in some countries also point in the direction of reducing the share of oil in tctal energy demand. In some industrial countries and in most developing countries this was reflected in policies which restricted the pass-through of the sharp decline in world oil prices of 1986 to consumers by increasing taxes on petroleum products. For instance, in France, taxes on the industrial uses of heavy fuel oil rose from 10% in 1985 to 32% in 1986, while the tax on the industrial uses of light fuel oil rose from 23% to 33%. Similar sharp increases in taxes were also observed in Greece, the Netherlands, and Spain. In many developing countries gasoline is subject to high taxes relative to other products. For instance, in mid-1987 taxes and duties on premium gasoline in the Philippines, Singapore, Hong Kong, and Thailand were in excess of 50% of retail prices. This taxation policy reflects governments' pricing strategies which are designed to put the heaviest tax burden on the most affluent sector of the population (gasoline is mainly used in private cars). 45. Since the transportation sector is likely to remain tied to liquid fuels over the forecast period, the power-generation, industrial, and residential/commercial sectors will provide the main areas of interfuel substitution, particularly for oil. Although the continuing introduction of more energy-efficient transport equipment will reduce the rate of growth of transport fuels, the demand for transport fuels is nevertheless anticipated to grow at a rate somewhat faster than that experienced in recent years, as a result of higher per capita incomes. 46. Within the industrial sector of the industrial countries, oil's share has fallen sharply since the second oil price shock--from 38.5% in 1979 to 28.1% in 1986. However, it appears to have stabilized since 1986 as a result of the sharp decline in oil prices. The substitution of coal for oil has been fastest in the iron and steel and cement industries. Substitution for oil in other energy-intensive industries, though potentially high, remains comparatively slow because of the uncertainty surrcunding industrial growth prospects, the old age of the existing capital stock, and environmental and regulatory concerns. Given the recent sharp drop in oil prices, substitution by coal in the industrial sector is likely to be, at best, very slow in the medium term. Environmental considerations and high costs of coal desulfuriza- tion are also likely to limit the penetration of coal. 47. Expectations of volatile prices and concerns over security of supply have encouraged major industrial energy consumers to invest in multi-fired facilities. This form of investment increases the ability of consumers to change the fuel mix quickly and provides a ceiling to the upwards movement in oil prices beyond the turn of the century. In the industrial countries there currently exists a fuel-switching capacity of almost 100 mtoe, mostly in power generation. In the United States, where the industrial and power-generation sectors provide the greatest possibilities for fuel substitution, as much as 30% of the energy consumption may be switchable. Almost 60% of this would be substitution between fuel oil and natural gas while the rest would be between natural gas, distillates, liquified petroleum gas and other fuels, notably coal. It is estimated that the extent of switchability in the US power- generation and industrial sectors is above 80% and 50%, respectively, over a -64- short period of time. Given that oil prices are expected to remain low over the short term the flexibility of fuel use provided by the multi-fire system will slow down the erosion of fuel oil's share. Beyond 1990, the projected increases in oil prices will, once again, create incentives for an increased level of substitution. 48. Due to the supply constraints facing the USSR, consumption of oil in the CPEs is expected to grow only marginally--from 541 mtoe in 1986 to 578 mtoe in 2000--with their share of world liquid fuel consumption anticipated to drop from 18.5% in 1986 to 16% in 2000 (Table 7). Since interfuel substitution in these countries is usually a matter of public policy and supply availability, energy planners are placing emphasis on the use of natural gas and nuclear energy. The aim is not only to provide for their domestic energy needs, but also to retain a share of the international market for oil in order to earn the highly sought-after foreign exchange. 'ion-OPEC Supply Forecast 49. While North Sea producers will continue to play an important role, it appears that North Sea oil production will peak in 1988 at almost 195 mtoe and begin to decline thereafter as production in the United Kingdom declines. The remaining proven reserves in the United Kingdom are estimated to be around 2.05 billion toe. In the UK sector of the North Sea, where production increased dramatically in 1985 when the first oil field came on-stream, production is expected to decline by more than 20% by the mid-1990s. A similar outlook faces the Federal Republic of Germany, where production should decline from the peak of 5 mtoe in 1987 to about 4 mtoe in the mid-1990s as the high level of production in recent years is not likely to be sustained by the limited oil reserves. 50. Norway, the only sector in the North Sea region where production is expected to increase up to the early 1990s, has lowered its crude oil production target for the mid-1990s from 100 mtoe to 83 mtoe. Norwegian Government policy, while restricting oil production to around 80-85 mtoe, is encouraging the development of the country's huge gas reserves. The case for limiting oil production has been forcefully argued in a government white paper on the grounds of the need for a more moderate depletion rate as well as the avoidance of excessive pressure on the Norwegian economy. Estimated Norwegian production for 1987 was around 52 mtoe, over one-half of which came from its major Statfford field. 51. Despite aggressive exploration drilling activity, US oil discoveries have been very limited since 1981. The pessimistic outlook for oil prospects in the United States was further strengthened by the failure of the Mukluk well in the Beaufort Sea in 1984. Previously, the area was considered the most promising prospect. Recent estimates of US oil reserves (end of first quarter 1988) are as low as 4.7 billion toe (excluding Federal offshore waters), which amounts to around 10 years of reserves--compared to 11.31 billion toe reported by the US Geological Survey in 1981. In the absence of major new oil discoveries, which appear unlikely, crude oil production in the United States is expected to decline by around 8-10% by the year 2000. TABLE 7t PETROLEUM CONSUNPTION BY COUNTRY GROUPS, 1961-86 (ACTUAL) AND 1990-2000 (PROJECTED) 1961 1970 1986 1990 2000 Countries/Economies MTOE % MTOE % MTOE % MTOE % KTOE % Industrial 817.5 70.5 1,576.4 69.0 1,605.0 55.0 1,677.1 53.9 1,834 51.7 Centrally Planned 150.5 13.0 324.9 14.2 540.8 18.5 556.1 17.9 578.1 16.3 Developing 191.5 16.5 383.5 16.8 775.5 26.5 879.0 28.2 1,135.1 32.0 World ),159.7 100.0 2,285.9 100.0 2,921.3 100.0 3,112.2 100.0 3,547.2 100.0 ----------------------------------------------------------------------------------------------------- Note: Details may not add to total due to rounding. Sources: United Nations, Energy Statistics (actual); World Bank (projected). - 66 - 52. Signs of declining USSR production were noticed first in 1984 and gained strength in 1985 when production declined to around 600 mtoe as a result of technical difficulties. Despite th- increases in USSR production since then (due largely to investments and the use of new technology imported from western countries), it appears that production has indeed peaked. Based upon the extremely difficult operating conditions facing oil extraction in the Kazakhistan region and in the huge Tengiz fields, it is unlikely that the USSR production target of 635 million tons for 1990 will be met. With proven oil reserves estimated at 8.22 billion toe and a low probability of major discoveries given the geological limitations, production will most likely decline to about 600 million tons by the end of the 1990s. These estimates would be revised upwards if the political constraints facing technological imports and foreign participation in the USSR oil industry are removed. 53. In the developing countries a number of oil discoveries have been made in new parts of the Middle East, Latin America, and Western Africa. The most significant discovery in recent years has been made in the Llanos Basin in the Cano Limo field in Colombia. As a result, in 1984 the estimate of Colombian proven oil reserves jumped from 85.5 mtoe to 200-280 mtoe. Ncw finds, combined with the export pipeline from the Cano Limo field to Port Covenas, saw production double from 1985 to 1987. Colombia is ncw in the size category of smaller OPEC members such as Gabon and Ecuador. The rate of growth of the last few years is unlikely to continue, however, as government controls over oil production, pipelines, and export terminals tighten, and foreign investment in the sector is restricted. Colombian oil production is expected to stabilize at around 25 mtoe in the mid-1990s. 54. Brazil is another area of intense exploration activity in Latin America, where discoveries in the Campos Basin and the most recent finds at the mouth of the Amazon River have improved the outlook for Brazilian oil supplies considerably. While the extent of the recent finds may have been exaggerated, we estimate that Brazil's oil production could reach 40 mtoe by the mid- to late-1990s. If the recent finds are as large as some statements assert, production could go up to 50-60 mtoe by 2000 and allow Brazil to emerge as an oil exporter. (Oil production forecasts by Brazil's National Gil Company and the major operator are an optimistic 60 mtoe for 2000.) 55. Angola has been the center of exploration activity in West Africa. The decline in production from the fields discovered before the mid-1970s (mainly the Malongo Tobias and Quenguela fields) has been offset by a number of new fields being brought on-stream. Production is expected to increase from the 1987 level of a little over 17 mtoe to around 27 mtoe by 2000. Uncertainties regarding civil disturbances could be a deterrent to the pace of exploration activity in Angola. 56. Since 1981 Egyptian production has increased by around 50%--reaching 45 mtoe in 1987. Proven oil reserves increased from 438 mtoe in 1981 to 600 mtoe in 1987. Production is expected to rise only moderately up to the mid- i990s and then stabilize as declining oil supplies from the country's major producing area in the Gulf of Suez are offset by discoveries in the western desert area. In Oman, oil production has increased about 70% since 1981 to reach around 28 mtoe. The discovery of new fields at Dhulaima, Wafra, and Tayyadh has improved the reserves position. Oman's proven oil reserves at the end of 1987 were estimated to be around 562 mtoe. The Yemen Arab Republic has - 67 - become a significant producer since the first discovery in 1984. Reserves at the end of 1987 are estimated to be around 137 mtoe, attributed largely to oil discoveries at Alif in the Mareb-Janof concessions. The outlook is also very promising in the Shabwa fields in the People's Democratic Republic of Yemen. With both nations encouraging foreign participation in exploration and devrelopment, the prospects for oil production appear very promising. The discovery of large oil fields at Al-Thayyem in Syria in 1984 has reversed the pessimism o.,er its future oil supplies, as production in the country's main oiL-producing northeast region appeared to have peaked. By 2000, Syria's crL%de oil production is expe-ted to double its 1987 level of around 11 mtoe. 57. Indian oil production has more than doubled since 1981 (to reach 32.5 atce in 1987) with two-thirds of production coming from a single field--Bombay High off the West Coast. With production already stabilized in this field (cuxrrently sustained by injecting water) and with prospects only for de%eloping small-to-marginal fields in Bombay and other regions (namely, leera, Ratna, and Panra), Indian production is likely to peak at around 40 mtoe by the mid- to late-1990s. 58. The rapid growth of China's oil production during the 1970s (over 7% p.a.) ha declined in the 1980s to less than 5% p.a. Three-fourths of China's oiL production comes from Daqing, Shengli, Liaohe, and Bohai See. Despite the possibility that production from Daqing may have peaked, the recent discovery of the WeizThou Field in the South Sea, the Xijiang Field in the Pearl River Basin and ano-her in the Liaodong Bay northeast of Bohai, have revived interest in offshore exploration. These new discoveries, together with the trend towards more liberal policies with regard to foreign oil company panticipation in exploration and development, are likely to result in a continuing increase in production. 59. In addition to the supply prospects referred to in the previous paragraphs, small increases are expected in many countries such as Pakistan, Thailand, and Malaysia. In Sudan, for example, there exists potential for 4-5 mtoe. 60. The supply forecasts are presented by major economic region and for major producers in Table Al. The outlook for supplies from the non-OPEC cotantries is an increase from 1,348 mtoe in 1986 to around 1,524 mtoe in 2000 (see Table 9). Growth in production in the non-OPEC oil-exporting developing =o1untries is expected to be around 2% p.a. Even so, the share of non-OPEC supplies ia the global total should decline from 59% in 198( to 51% in 2000 (see Table 8). The decline expected in the rate of production in the oil- exporting industrial countries would reduce the share of industrial countries from 27% in 1986 to around 21% in 2000. While production in -he CPEs is expected to decline marginally by 2000, their share in global oil supplies is expected to decline from 22% to 17% over this period. OPEC Oil Production Forecasts 61. Declining world demand for oil, combined with rising availability of nor-OPEC supplies, reduced the demand for OPEC oil from 1,345 mtoe in 1980 to 920 mtoe in 1986, During this period OPEC's share in global production declined from 42.6% to around 32%. TABLE 8: PETROLEUM PRODUCTION BY COUNTRY GROUPS, 1961-86 (ACTUAL) AND 1990-2000 (PROJECTED) 1961 1970 1986 1990 20A0 Countries/Economies MTOE % MTOE % MTOE % MTOE % Industrial 439.' 37.7 604.2 25.8 786.6 26.9 773.7 24.9 758.0 21.4 Centrally Planned 184.5 15.8 377.9 16.1 639.7 21.9 651.8 20.9 610.5 17.2 Developing 542.2 46.5 1,358.8 58.1 1,495.0 51.2 1,686.7 54.2 2,178.7 61.4 World 1,165.7 100.0 2,340.9 100.0 2,921.3 100.0 3,112.2 100.0 3,547.2 100.0 Memo: Market Economies 981.3 100.0 1,963.0 100.0 2,281.6 100.0 2,460.4 100.0 2,936.7 100.0 OPEC 472.2 48.1 1,172.8 59.7 933.8 40.9 1,021.0 41.5 1,413.0 48.1 0 Non-OPEC 509.1 51.9 790.2 40.3 1,347.8 59.1 1,439.4 58.5 1,523.7 51.9 1 Note: Details may not add to total due to rounding. Sources: United Nations, Energy Statistics (actual); World Bank (projected). / ‘一 一 圈口口口口口口口口口口口口口口口 70 62. OPEC's attempt to regain market share has al. eady led to a sharp drop in prices and a considerable loss of oil revenues. OPEC's aggregate export revenues declined drastically from its peak of around $300 billion in 1980/81, when the international price of oil was over $30/bbl, to around $100 billion after the collapse of oil prices to $13.50/bbl in 1986. Over the same period its current account surplus of $104 billion moved to a deficit of $30 billion. 63. In the short and medium term, OPEC and non-OPEC exporters are expected to share almost equally in the supply of additional quantities. In the mid-1990s, however, the world will depend increasingly on OPEC for additional sup-lies as many producing areas will reach maturity. It is anticipated that by 2000 production in OPEC countries will increase to 1,413 mtoe, with OPEC's share of total petroleum output climbing to around 48% (see Table 9). OPEC's attainment of a more dominant position in the world oil -market will be largely due to its enormous low-cost reserves vis-a-vis non- OPEC producers. Proven oil reserves in OPEC countries such as Saudi Arabia and Kuwait are around 23.3 billion toe and 12.6 billion toe, respectively, followed by Iran and Iraq with reserves at 6.6 billion toe and 6.04 billion toe, respectively (see Table 10). Based upon end-1986 estimates, out of the approximate 90 billion toe of proven recoverable world oil reserves, only 27 billion toe are located in the non-OPEC countries (including the CPEs), while 70% lie in OPEC countries. The reserves-to-product ion ratio for the non-OPEC suppliers is around 14 compared to about 70 for OPEC. Preliminary estimates at the end of 1987 show that recent petroleum reserves found mainly in Iran, Iraq, and Abu Dhabi may have increased proven global reserves by over 14 billion toe, increasing the estimates for OPEC's share of the global world reserves to around 77%. Trade Outlook 64. The United States is expected to remain the largest importer of crude oil and to have one of the fastest growth rates in its imports. It is expected to account for over one-third of the increase in gross imports over che projection perlod (see Table A4). The import requirements of industrial countries are projected to be supplied a1m3st entirely by the oil-exporting developing countries, mainly OPEC countries, as total exports from the CPEs diminish from 99 mtoe in 1987 to around 32 mtoe by 2000. While industrial countries and oil-exporting developing countries will remain major trading partners, increasing quantities of petroleum will be traded between the oil- exporting and the oil-importing developing countries. 65. By the end of the projection period, OPEC's share in global exports will have grown to 80.3% (from nearly 71X in 186). The share of non-OPEC, oil-exporting developing countries is expected initially to increase from its present level of nearly 20% to approximately 21.7% by 1990 and then drop to around 17.5% by 2000 as its rate of production slows (see Table 11 and Table K3). Bet exports from the CPEs are expected to claim a declining share throughout the period mainly due to a decline in ptoduction in the USSR. 66. While the total volume of net trade is anticipated to grow from 1,072 mtoe in 1986 to 1,433 mtoe in 2000, a growing share of the trade of petroleum will be in the form of products, as more export-oriented refineries come on- stream in OPEC countries. OPEC is expected to supply the largest part of the - 71 - TABLE 10: PROVEN RECOVERABLE RESERVS, SUSTAINABLE PRODUCTION CAPACITY, PREFERE PRODUCTION LEVEL, AND RESERVES-TO-PRODUCTION RATIO IN OPEC COUNTRIES Proven Sustainable Preferred Reserves-to- Recoverable Production Production Production Reserves a/ Capacity Level Ratio b/ ------------------ (mtoe) ------------------ (Years) Algeria 1,210.0 40.0 35.0 35 Ecuador 226.0 15.0 15.0 15 Gabon 71.0 8.0 8.0 9 Indonesia 1,164.4 75.0 75.0 15 Iran c/ 6,557.5 200.0 150.0 43 Iraq d/ 6,042.5 175.0 150.0 40 Kuwait d/ 12,666.0 125.0 75.0 169 Libya 2,918.0 95.0 75.0 39 Nigeria 2,274.0 100.0 100.0 23 Qatar 452.0 27.5 17.5 26 Saudi Arabia d/ 23,492.0 515.0 425.0 55 UAE 4,520.5 100.0 75.0 60 Venezuela 3,505.5 110.0 110.0 32 Total 65,097.0 1,580.0 1,310.0 50 a/ Source: Oil and Gas Journal. b/ Based on reserves at the beginning of 1986 and production at preferred levels. c/ Based on prewar es-imates. d/ Includes one-half of Neutral Zone production. TABLE 11: NET EXPORTS/IMPORTS OF PETROLEUM BY COUNTRY GROUP, 1970-86 (ACTUAL) AND 1990-2000 (PRCJECTED) Country Classification 1970 1986 1990 1995 2000 -----------------------------------------------------te--------------------- ---- --- ---- --- ---(mtoe) ----------- - - - - Total Net Imports 1,162.0 1,072.0 1,174.4 1,327.7 1,433.0 Industrial Countries 995.0 818.4 903.4 1,012.1 1,075.7 Oil-Importing Countries 167.0 254.0 271.0 315.6 357.4 Total Net Exports 1,162.0 1,072.0 1,174.4 1,327.7 1,433.0 CPEs 53.0 98.9 95.7 62.0 32.44 Non-OPEC Oil-Exporting Developing Countries 16.0 214.3 254.6 261.2 250.7 OPEC 1,093.0 758.8 824.1 1,004.5 1,149.9 Share of CPEs (%) 4.6 9.2 8.2 4.7 2.3 Share of non-OPEC Oil-Exporting Developing Countries (%) 1.4 20.0 21.7 19.7 17.5 Shar of OPEC (%) 94.0 70.8 70.2 75.7 80.2 Note: Details may not add to totals due to rounding. Sources: United Nations, Energy Statistics (actual); World Bank (projected). - 72 - oil-importing developing countries' needs for petroleum. Intraregional trade is projected to decline (from 51% in 1986 to around 45% in 2000) as both the industrial and oil-importing developing countries become increasingly dependent on exports from oil-exporting developing countries, mainly OPEC countries. Changing Structure of the Oil Industry 67. In recent years the structure of the international oil industry has undergone many changes. A change that is gaining momentum and that is likely to affect the international oil industry significantly is the move of the national oil companies in the oil-producing countries into downstream operations in the industrial countries (in the form of refineries and service stations). The 1986 collapse of international oil prices and the world stock market crash in October 1987 resulted in a decline in the equity share of oil companies. Also, the existence of surplus capacity and the oil industry's changing financial state have forced governments to reduce their stakes in national oil companies. Such factors have resulted in the shrinking of national oil companies and in restricting the ability of major oil companies to support offshore developments--thereby allowing some producing countries to participate in downstream operations in the consuming countries. 68. Kuwait and Venezuela, which were among the pioneers of the strategy of downstream diveesification by acquiring interests in refining and distribution, have bee, followed by Mexico, Norway, Abu Dhabi, and Libya. While Kuwai: and Venezuela have affirmed their interest in further expansion of their 1ownstream operations, Saudi Arabia (which does not possess any downstream operations) is presently negotiating for the acquisition of major interests in downstream activities in the United States and Europe. 4/ 69. The Nigerian National Petroleum Corporation is currently in negotiation with the Irish Naticnal Petroleum Company for the purchase of a refinery in Ireland and expects te acquire equity also in Eastern Europe and North America. Nigeria's new sales strategy involves selling crude directly to those refineries where it has acquired equity interest and eliminating third party contracts with other trading companies. 70. This new form of integration between oil producers and consumers has advantages for both sides. By participating in joint ventures abroad in the areas of refining and distributing oil products, producers will be ensured of secure outlets for their crude. Refineries in the consuming countries, on the other hand, will be guaranteed access to stable crude oil supplies at stable prices. As producers holding large oil reserves find European and American partners, it is expected that the refining industry and the petroleum product market will become more competitive. Competition will not be confined only to price but will also include product quality resulting from refinery 4/ Kuwait leads the producing countries in the acc .sition of equity holdings. Since 1983 it has purchased refineries in the Netherlands and Denmark. For an estimated $4.7 billion it has also acquired a 22.06% shareholding in British Petroleum. - 73 - modification and upgrading. Refineries and small oil companies that are unable to raise their levels of investment to face such competition may well lose out, leaving fever, larger, and more efficient refineries to supply refined petroleum products. Currently almost 55 mtoe of crude is channeLed through refineries where producers have equity holdings (of which OPEC crude accounts for some 84%). This volume does not include Kuwait's crude supply resulting from its equity purchases in British Petroleum. If Saudi Arabia xs able to acquire downstream operations in the United States and if other OPEC - members succeed in acquiring interests currently under negotiation, the volume of crude passing through producer-owned refineries is expected to exceed 150 mtoe over the next decade. This would result in an increase in the volume currently being marketed by OPEC members through downstream operations fron a little less than 7% of total OPEC exports to over 20%. 71. While crude producers expect integration to aid in securing outlets for their output in an oil market ihich supply increases are pushing down prices, the question remains whet' s objective will still be a reasonable one for OPEC when oil prices ri- 'ected in the mid-1990s. If producers' interests continue to grow in ;ming countries, it is unlikely that a cartel that controls oil throuk various stages from the oil well to the consumer can ever be establishe, This could result in the weakening and perhaps even the eventual disintagration of OPEC. However, the extent and speed with which producers can increase their involvement in consuming countries would depend upon the ertent to which consuming countries are prepared to allow indigenous refining capacity to be subject to foreign control. Although foreign investment of this form does not appear to be a major concern at present, national energy policies could well become an important factor in exerting control over foreign interests in such a vital sector as energy. Conoditization of Oil 72. In the years since the second price shock in 1979/80, the traditional market system--characterized by long-term offtake contractual agreements--has gradually been replaced by active trading on the spot market. With the emergence of spot trading, the previously highly regulated oil industry is now engaged in intense competition. Spot trading is now being used by companies to unload excess supplies during periods of glut or to make purchases to satisfy higher demand during excess demand periods. Since the early 1980s this form of trading has reduced the role of inventories as a hedge against shocks and has provided a more flexible means of balancing supply and demand. Thus, there has come into existence a mechanism whereby oil markets are functioning in a manner similar to a classical commodity market subject to fluctuations. 73. The spot market has been sustained to a large extent by oil supplies fron OPEC as well as from non-OPEC oil producing countries (notably the United Kingdom, Norway, and the USSR). In the six-year period between 1979 and 1985, about 35 non-OPEC producers either started to produce for the first time or increased their production. In the Persian Gulf region, Arabian light (which traditionally enjoyed the largest volume) is being dominated by Dubai crude traded in the spot market. A number of Mideast producers--for instance, Saudi - 74 - Arabia, Kuwait, Iran, Iraq, and Qatar--are now devising pricing strategies that link market-related prices to term contract supplies to Dubai crude. In fact, the spot market has become so dominant that many of the contracts entered into by producers have price clauses that are in some way related to the movements in spot prices. Spot trading and spot-related arrangements have served an important purpose in maintaining the flow of oil at a time when buyers have become increasingly worried about longer-term contracts. However, the heightened instability in the petroleum market will continue to give rise to the issuing of crude oil futures contracts on the New York Mercantile Exchange (NYMEX). 74. The NYMEX opened futures trading activity in heating oil in 1978, followed by crude oil and gasoline futures. Crude oil options were iatroduced in late 1986. As the pace of spot trading has increased, more trading companies, producers, and brokers have become participants in these markets. During 1987, the volume of crude oil futures traded on the NYMEX rose to about 14.6 million contracts--from the 8.3 million contracts traded ir 1986. Crude oil futures contracts are now the mor: actively traded nonfinancial futures contracts on the NYMEX. 75. The emergence of the paper markets in petroleum has assisted the development of the trend towards market-related pricing systems. The development of the futures market has increased the liquidity of the oil market and has offered arbitrage opportunities between futures trading and the spot market. A combination of spot and futures markets has provided the necessary infrastructure for many types of trading by the industry (such as basis pricing with the seller in and the buyer out of futures, or the reverse, or both buyers and sellers :n futures). The futures market is likely to continue to flourish in the presence of perceived price volatility in the petroleum markets due to the inherent uncertain nature of the market and of the b2havior of OPEC members. Price Outlook 76. Developments in world oil markets starting from late-1985--when Saudi Arabia resorted to the netback pricing formula and subsequently abandoned its swing-producer role--resulted in reducing OPEC's control over international oil prices and replacing OPEC crude as the price leader. As more and more OPEC members ignored their "official" prices in favor of market-related pricing strategies and resorted to offering price discounts, prices fell and volatility increased. 77. From the early 1980s to late-1988 prices nearly halved in nominal terms. Since 1985, the loss in the real value of oil prices has been over 60%. Before the large 1986 oil price decline, OPEC members were fairly well committed to their benchmark price for crude and to the maintenance of their production quotas. However, non-OPEC members generally had no such constraints and they responded to any demand gaps allowed by lower OPEC production and exports. Increasing fragmentation of OPEC has been partly responsible for the increased aay-to-day volatility in oil prices. - 75 - 78. The price forecasts presented below have been derived by drawing together the crude oil demand projections and the expected outputs from non- OPEC sources and then assessing the implications of these demand and supply assumptions for OPEC output behavior. Over the long run the basic demand and supply characteristics of the oil market will play a large part in determining the path of oil prices. OPEC could also have an imr rtant impact on the long- run price trerd as well as on the short-run movements. OPEC has been and will presumably continue to attempt to manage the petroleum market by managing its own supplies as well as other suppliers indirectly. This behavior has to be also taken into account. 79. Various scenarios about future developments in oil prices can be imagined. We present below three scenaric3 which we believe have a reasonable probability of being realized. (a) The first scenario envisages the further disintegration of OPEC, leading to a price war--ostensibly to discipline not only the defecting OPEC members but also the non-OPEC exporters. The sharp decline in prices would probably lead to the consuming countries taking steps to protect their domestic energy industries. Given the large, low-cost production capacity in OPEC countries and the quest on the part of all exporters to win larger shares of the market, nominal prices could remain below $10/bb1 for several years. The lowered prices would stimulate demand and reduce the pace of energy-saving technological changes in the industrial countries, thereby increasing their dependence on imported oil. Beyond the early 1990s, despite the absence of a cartel, the expected decline in non-OPEC supplies and the likely sharp increase in demand would dictate a moderate increase in oil prices--envisaged to reach $11-12/bbi (in terms of 1985 dollars) by 20nO. (b) A second scenario foresees a weak but functioning OPEC. This scenario would be characterized by cont-nuing discord among members, conflicting demands, and a tendency to produce in excess of quota. Under this scenario, OPEC would make intermittent efforts to regain control of the market, the result of which would likely to be highly unstable prices. A period of relatively low prices envisaged for the next several years would stimulate demand, reduce non-OPEC supplies and ultimately lead to a period of price increases through OPEC exercising greater market control. The higher prices would, in turn, trigger forces which would lead to demand reductions, lower prices, and less cohesion among OPEC members. (c) If, however, the current efforts to arrive at a more long-lived consensus among OPEC members are reasonably successful a third scenario could be imagined. Under this scenario internal bargaining would make sure that prices are not allowed to climb quickly. OPEC would opt for an increase in its share of the market, fully cognizant of the fact that any cooperation by non-OPEC producers would be short-lived. Its policy would, therefore, be dictated by the consideration that the survival - 76 - of its pricing objectives would, to a large extent, depend in practice on a vigorous demand trend for OPEC oil. For the near and medium term, it would decide on a price path that would slow down the development of alternative energy projects and impede exploration for petroleum in other parts of the world. These forces would lead to a higher growth path for oil, a stronger role for OPEC, and higher prices. 80. Despite the divergent and often conflicting forces that have taxed the ingenuity of the members of the group in their efforts to forge a consensus, it is not Likely that OPEC's position as a dominant player in the world oil market will disappear; but it will be limited in its ability to control world supplies. Because of declining oil revenues, most OPEC members have been forced to undergo economic adjustments. In most countries, not only have budgets been sharply cut, but growth expectations have been generally lowered. While in the short term such difficulties lead OPEC members to act more individually, over the long term it is reasonable to assume that the perception of continued losses in revenues will lead to more cohesiveness within the cartel. This assumption leads us to favor scenarios (b) and (c) over scenario (a). However, in choosing between (b) and (c) we believe that scenario (b), in which OPEC's ability to control production waxes and wanes over time, is more likely than the stable, cohesive OPEC of scenario (c). 81. The price forecasts are provided in detail below (see Table 12). Naturally, given the uncertainty of markets and especially the assumptions made in this report pertaining to the tax policies of consuming countries and the ability f OPEC to control its production, decisionmakers should use these forecasts wita the appropriate degree of caution. 82. Short-Term Price Projection. Over the next few years demand is expected to grow at around 1.6% p.a. under the influence of relatively low oil prices, but the robustness of its growth couAd be slowed by a slowdown in OECD GNP growth in 1989 and 1990. It is expected that in the next few years OPEC will have difficulty in exercising greater control over production than recently. The average OPEC price for the first half of 1988 is $15/bbl. With the presence of excess non-OPEC supplies, the lack of any indication that OPEC members are taking steps to reduce production levels and the slowdown in the momentum of world oil demand, prices have averaged around $12.90/bbl during the third quarter of 1988. Prices in nominal terms are expected to increase to $15/bbl during the fourth quarter as demand picks up during the Northern Hemisphere winter. Therefore, prices should average around $14/bbl for 1988. Prices are expected to fluctuate in the area of $16/bbl in nominal terms until 1990 due to the buildup in demand. Owing to the current level of disarray in OPEC ranks, and the high likelihood of production increases from that source, the short-term price forecasts should be viewed as having a high downside risk. 83. Medium- and Long-Term Price Projections. The period of 1990-95 is likely to be characterized by a decline in the production of petroleum in industrial countries, particularly the United States, while net exportable quantities from the non-OPEC, oil-exporting developing countries are expected to remain level. With the CPEs' exports on the decline, OPEC's share in global net exports is expected to grow from 46% in 1990 to 50% by 1995. In - 77 - this period crude oil demand would be stimulated under our macroeconomic assumption of OECD GNP growing at around 3Z p.a. These circumstances should lead to an increase in petroleum prices in nominal and real terms. Our forecast is for petroleum prices in constant 1985 dollars to increase from $11/bbl in 1990 to $12.20/bbl in 1995. 84. Beyond 1995, it is projected that net exports from the surplus regions, i.e., the CPEs and non-OPEC oil-exporting developing countries, will decline. Demand will continue to grow steadily under our assumption of 3% OECD GNP growth. Given that global demand for oil reaches 2,950 mtoe (excluding the CPEs) by 2000 and that non-OPEC supplies increase to around 1,550 mtoe, the demand for OPEC oil will increase to 1,415 mtoe--almost 500 mtoe higher than the current level. 85. Petroleum prices are therefore projected to increase to around $15.40/bbl in 1985 constant dollar terms by 2000. It is expected that once demand for OPEC oil approaches the preferred output level of Persian Gulf countries, the tendency will be for a large jump in oil prices, followed by a period of stable or even declining prices similar to what was experienced at the b:ginning of the 1980s. If OPEC develops more cohesiveness than we now expect, prices in real terms could trend upwards more quickly throughout the 1990s to reach $17/bbl by 2000 in constant dollars. On the other hand, there is a significant likelihood that OPEC will lose market power over time. Under this scenario, prices would be generally lower, fluctuatiag around a mean of $9-10/bbl (in 1985 dollars) for several years. Beyond the early 1990s, as demand for OPEC oil increases in response to the low prices, the price of oil in real terms could tend toward $12/bbl. 86. The upward trend we forecast in oil prices to 2000 should not be extrapolated beyond the forecast period. Our opinion at this point in time is that the time path for crude oil prices forecast for the 1990s may well be the upswing part of the next long-term cycle in oil prices. Beyond 2000, new resource discoveries, technological developments, fuel efficiencies, and conservation measures may well lead to another downturn in crude oil prices. We would emphasize that oil prices will continue to be highly variable and policy makers should take appropriate risk management strategies to cope with such variability. TABLE 12; OPEC PETROLEUM-AVERAGE PRICES, a/ 1960-87 (ACTUAL) AND 1988-2000 (PROJECTED) -1985 Constant $ Current $ MUV b/ US GNP c/ Actual 1960 1.5 5.0 5.4 1961 1.5 4.9 5.4 1962 1.4 4.5 4.9 1963 1.4 4.6 4.8 1964 1.3 4.2 4.4 1965 1.3 4.1 4.3 1966 1.3 4.0 4.2 1967 1.3 4.0 4.1 1968 1.3 4.0 3.9 1969 1.3 3.8 3.7 1970 1.3 3.6 3.5 1971 1.7 4.4 4.3 1972 1.9 4.5 4.6 1973 2.7 5.6 6.1 1974 11.2 19.0 23.2 1975 10.9 16.6 20.6 1976 11.7 17.6 20.8 1977 12.8 17.5 21.3 1978 12.9 15.4 20.0 1979 18.6 19.6 26.5 1980 30.5 29.2 39.8 1981 34.3 32.7 40.8 1982 31.0 30.0 34.7 1983 28.1 27.9 30.3 1984 27.5 27.8 28.5 1985 26.7 26,7 26.7 1986 13.6 11.5 13.3 1987 17.2 13.3 16.4 Projected 1988 14.0 9.9 12.8 1989 15.5 10.4 13.6 1990 16.6 10.9 13.8 1995 22.0 12.2 14.1 2000 35.0 15.4 17.9 a! For the period 1960-73, this price refers to Saudi Arabian light, 34 - 34.9 API, f.o.b. RAS Tanura; for the years following this peiod, it refers to the weighted average f.o.b. price of petroleum exports from OPEC countries. b/ Deflated by Manufacturing Unit Value (MUV) Index. c/ Deflated by US GNP Deflator. Sources: International Crude Oil And Product Prices, Energy Economic Research, Ltd., Lebanon; Oil Industry Developments; Petroleum Economics, Ltd., (actual); World Bank, (projected). TABLE Ali LIQUID FUELS - PRODUCTION BY MAIN COUNTRIES AND ECONOMIC REGIONS ACTUAL PROJECTED GROWTH RATES Al COUNTRIES/ 1987 - ICONOHIES 1969-71 1979-81 1986 19871B 1988 1989 1990 1995 2000 1961-86 1970-86 2000 --------------------(MILLION TONS OF OIL EQUIVALENT) -------------------------------%( PER ANNUM)------- INDUSTRIAL 603 700 787 787 791 781 774 755 758 2.2 1.9 -0.3 NORTH AMERICA 577 559 560 555 555 549 545 530 520 0.9 -0.2 -0.4 UNITED STATES 508 478 476 467 463 456 450 440 430 0.6 -0.2 -0.5 CANADA 68 81 84 88 92 93 95 90 90 3.6 0.0 0.1 EEC-10 14 95 153 150 148 145 143 133 136 12.0 21.7 -0.7 GERMANY, FED. REP. 8 5 6 5 5 4 4 4 3 -1.9 -2.2 -3.6 UNITED KINGDOM 0 83 130 126 125 121 118 100 95 46.6 63.7 -1.9 OTHER WESTERN EUROPE 3 24 47 53 61 63 64 76 86 14.8 20.6 3.2 JAPAN 1 1 1 1 1 1 1 1 1 -2.3 -3.3 0.3 OCEANIA 9 22 27 28 27 24 21 16 17 41.5 3.9 -3.5 NON-MARKET 378 628 640 647 650 651 652 631 611 5.3 3.4 -0.4 USSR 359 608 620 627 630 630 630 610 590 5.5 3.5 -0.4 DEVELOPING 1,345 1,766 1,495 1,524 1,564 1,621 1,681 1,960 2,179 3.9 -0.6 2.4 ASIA 793 1,166 884 911 931 959 978 1,178 1,376 4.4 -1.3 2.8 SAUDI ARABIA 197 501 247 220 223 234 243 303 359 6.1 -0.9 3.3 IRAN 196 102 94 115 112 126 128 169 200 1.3 -7.3 3.8 IRAQ 78 115 84 108 127 126 126 143 188 1.4 -2.3 3.7 UNITED ARAB EMIR 40 83 71 76 76 7 70 85 111 0.0 1.0 2.5 AFRICA 272 292 263 265 273 285 305 344 353 6.8 -0.8 1.9 LIBYA 148 84 52 51 50 52 56 71 75 5.3 -5.9 2,6 NIGERIA 53 96 70 65 68 71 78 92 95 13.8 -1.2 2.5 AMERICA 269 301 340 340 351 368 394 428 438 1.6 2.2 1.7 MEXICO 24 105 141 146 147 150 164 174 180 11.3 15.5 1.4 VENEZUELA 191 119 95 94 93 96 98 119 119 -3.0 -4.7 1.6 SOUTHERN EUROPE 11 7 8 8 8 9 9 10 10 4.0 -3.6 1.7 WORLD 2,326 3,094 2,921 2,957 3,005 3,053 3,112 3,346 3,547 3.7 0.8 1.2 Al LEAST SQUARES TREND FOR HISTORICAL PERIODS (1961-86)1 END-POINT FOR PROJECTED PERIODS (1987-2000). B/ ESTIMATE. SOURCES: UNITED NATIONS ENERGY STATISTICS (ACTUAL)i WORLD BANK, INTERNATIONAL EONOMICS DEPARTMENT (PROJECTED). TABLE A2% LIQUID FUELS - APPARENT CONSUMPTION BY MAIN COUNTRIES AND ECONOMIC REGIONS ACTUAL PROJECTED GROWTH RATES Al COUNTRIES/ 1987 - BCONOIES 1969-71 1979-81 1?36 1987/ 1988 1989 1990 1995 2000 1961-86 1970-86 2000 ----(MILLION TONS OF OIL EQUIVALENT) - ------(Z PER ANNUM)-------- INDUSTRIAL 1,570 1,792 1,603 1,618 1,637 1,653 1,677 1,767 1,834 2.5 -0.7 0.8 NORTH AMERICA 757 893 822 824 834 839 847 909 942 1.7 -0.2 0.9 UNITED STATES 673 792 741 744 752 757 764 825 856 1.7 -.0.1 0.9 CANADA 71 88 70 69 69 70 70 71 72 2.0 -0.8 0.3 EEC-10 527 559 479 488 492 498 503 526 536 2.8 -1.5 0.6 GERMANY, FED. REP. 122 132 116 118 119 120 122 126 132 3.1 -1.3 0.8 FRANCE 96 111 85 84 84 85 86 91 93 3.5 -1.9 0.7 UNITED KINGDOtt 101 84 78 80 82 82 83 85 87 0.8 -2.5 0.6 ITALY 92 99 87 90 91 93 93 96 98 3.4 -1.0 0.6 OTHER WESTLRN EUROPE 69 70 64 64 65 65 66 68 71 2.6 -1.5 0.7 JAPAN 188 236 209 211 216 220 230 235 250 6.0 -0.7 1.2 OCEANIA 28 34 31 31 31 32 32 34 35 3.2 0.3 0.8 NOP-MmREyl 323 549 541 547 550 553 556 569 578 5.5 3.1 0.4 USSR 269 447 447 451 452 454 455 460 461 3.2 3.1 0.2 00 DvEV"LOPING 385 698 776 793 817 847 879 1,013 1,133 6.2 4.3 2.4 0 ASIA 172 341 394 405 419 435 451 528 599 7.7 5.0 2.6 CHINA 36 105 113 117 121 126 131 154 178 12.5 6.0 2.8 INDIA 19 33 44 45 47 50 52 65 77 6.8 5.2 3.6 KOREA, REPUBLIC OF 9 26 29 31 32 34 35 42 48 16.2 7.1 3.0 AFRICA 41 73 91 94 96 100 103 115 129 6.0 5.3 2.2 AMERICA 139 222 227 228 235 242 251 281 313 4.3 3.1 2.1 MEXICO 25 61 71 71 73 74 75 84 93 7.8 1.9 1.8 BRAZIL 27 53 53 53 55 57 58 59 63 6.3 3.2 1.2 SOUTHERN EUROPE 32 60 62 65 66 69 72 85 93 7.4 3.5 2.5 WORLD 2,278 3,039 2,921 2,957 3,005 3,053 3,112 3,346 3,547 3.7 2.0 1.2 Al LEAST SQUARES TREND FOR HISTORICAL PERIODS (1961-86)1 END-POINT FOR PROJECTED PERTODS (1987-2000). B1 ESTIMATE. SOURCEii UNITED NATIONS ENERGY STATISTICS (ACTUAL)i WORLD BANK, INTERNATIONAL EONOMICS DEPARTMENT (IROJECTED). 他 〕二一 - 〕 l ’一－一一一一一一一一一一－－一－-“一－------－■••闔．■••••••••• - 83 PETROLEUM CONSTANT 19 as DOLLAR PR [CES so- 30- 201 ol 1950 1955 1960 igý5 1970 1975 1980 1985 1990 1995 2000 0EFLATED BY MANUFACTURING UNIT VALUE MUV ) INDEX DE"TED BY U.S. GNP DEFLATOR. 19" - 87 ACTUAIL; 1988 - 2000 PROÆCiW , SOURCE : WORLD SANK, INTERNA110NAL ECONOMICS DEPARTNIENT. MATURAL CAS Sumary 1. The share of natural gas in global energy demand has grown modestly over the last 16 years--from 17.2% in 1970 to 19.6% in 1986. The decline in gas demand in the United States (from 500 mtoe in 1970 to 396 mtoe in 1986) contributed to the slow growth in global gas demand. However, the declining trend in natural gas consumption in the United States appears to have been reversed since 1986 with natural gas consumption increasing for the first time in many years (by 2.5% in 1987). Although all other regions have experienced steady growth in natural gas demand, the most significant growth has occurre- in the CPEs. Owing to the rapid growth in demand in the USSR, the CPEs' share of natural gas consumption has increased from 19.6% in 1973 to 32% in 1986. The region's share is likely to increase even further to reach 39% by the year 2000 as the USSR attempts to reduce the use of crude oil in Eastern Europe while seeking higher revenues from oil exports. 2. Supported by enormous nattral gas reserves (estimated to be around 293 billion barrels oil equivalent and representing over 41% of proven global reserves), the CPEs have increased their share of global natural gas production from 22% in 1970 to over 42% in 1986. The developing countries, with proven gas reserves as large as the CPEs, have increased their share in global natural gas supplies from 6.5% to over 15% during the sane period. The CPEs and the developing countries are expected to increase their share of global natural gas supplies to 45% and 23%, respectively, by 2000. In the industrial countries increases in natural gas ruvplies will be forthcoming mainly from Norway, as the growth rate of production in the United States, the United Kingdom, and other Western European coun-ries will gradually decline in the late 1990s. In aggregate, global producti,.n of natural gas is expected to grow at 3% p.a., reaching around 2,212 mtoe by 2000, and the share cf natural gas in total energy supplies should increase from 19.7% in 1986 to 22% in 2000. 3. Natural gas trade, which increased rapidly during the 1984-85 period after years of stagnation, suffered a decline in 1986 as a result of the sharp decline in the international price of oil. The most significant decline occurred in North America, where US imports from its principal exporter, Canada, declined sharply. Since 1986, however, the international movement of gas has increased due mainly to significant flows from Canada into the United States and from Norway into other Western European countries. Intra-regional trade is expected to grow faster than interregional trade over the forecast period. Lower prices of internationally traded gas and the high cost of moving natural gas over longer hauls will limit interregionai trade. In North Ameiica, Canada is expected to supply increasing quantities of natural gas to the US market. Norwegian supplies to other Western European countries are expected to increase significantly. Although the CPEs and the developing countries will continue exporting natural gas to the industrial countries, it is projected that almost one-half of the increases in exports from the USSR will be to supply the growing needs of Eastern European CPEs. The large distances to the major consuming regions should prevent any significant growth - 86 - in gas exports from gas-rich Persian Gulf countries. Total trade in natural gas is expected to increase from 202 mtoe in 1986 to 378 mtoe in 2000; net imports into the industrial countries are projected to grow from 87 mtoe in 1986 to 161 mtoe in 2000. 4. Since the end of 1985, institutional changes--particularly regulatory changes affecting gas transportation and distribution--and the decontrol of natural gas prices in the industrial countries, have changed the structure of the gas market in the irdustrial countries. Such developments, accompanied by the emergence of the spot market, have introduced a large degree of f'exibility into the gas market while exposing it to greater variability as more and more consumers and producers turn to the burgeoning spot market. With the growth in domestic supplies, gas prices have declined sharply, notably since the beginning of 1986. The decline in world oil has contributed to the erosion of the price of internationally traded natural gas as it has been tied to the price of crude oil and/or petroleum products. 5. In the short and medium term, natural gas prices are likely to stay weak, particularly in the United States and Europe, given current high production levels and low international oil prices. Towards the mid-1990s when the "gas bubble" in the United States is worked off an6 increasing quantities are consumed in the premium residential/commercial markets in most industrial countries, the price of internationally traded natural gas will gradually move in the direction of a level based on an average of heating and low-sulfur fuel oil. By the end of the projection period, the landed price of natural gas into the United States and Western European markets could approach the c.i.f. crude oil parity price. Recent Developments 6. The international natural gas market has undergone a series of changes over the last decade. In the mid- to late-1970s, international trade in natural gas was regulated by long-term contracts with a duration of 20-25 years, mostly on a take-or-pay basis with prices indexed to the price of crude oil or petroleum products. In the United States, sales by producers to interstate pipelines were subject to a price ceiling, thereby creating a shortage of natural gas supplies. 7. The supply shortages in the United States that had been created over many years of regulation up to the late-1970s turned into a glut after enactment of the Natural Gas Policy Act (NGPA) in i978. By setting prices for new gas higher than old gas and by providing for the gradual removal of price controls for some categories of natural gas, the NGPA resulted in encouraging exploration of new gas deposits. By 1982 it was clear that the supply shortfall had been eliminated. In fact, despite the roll-in pricing mechanism and the built-in price escalation at the wellhead--combined with the take-or- pay contracts entered into with domestic as well as foreign suppliers--the pipeline companies were buying more gas (from field producers stipulating minimum purchases at predetermined prices) than they could sell in the downstream markets (at contracted prices). Despite the excess supplies, US gas prices rose as some pipeline companies continued to take deliveries of high-priced "new gas," thereby depressing the demand for natural gas. - 87 - 8. The situation of increasing prices and declining demand by the end of 1982 led to a call for legislative reforms of end-use pricing and contractual arrangements between producers and pipelines and of interstate pipeline re&ulation. However, due to the controversial nature of the proposed legislation, a number of nontraditional arrangements were introduced--such as direct sales contracts between producers and industrial end-users, and pipelir.es carrying gas on behalf of others. In addition, gas brokers between producers and end-users emerged in the market. The gradual introduction of the new mechanisms through 1983 and 1984 helped stabilize the position of natural gas in the US energy market. 9. Significant changes have occurred in the US natural gas market since 1985. The most noticeable are the following: (a) the appearance of the gas spot market and other market mechanisms, such as exchange type clearing houses along one or more pipelines, and (b) the decontrol of wellhead gas prices (on January 1, 1985, as provided for by the NCPA for much of the new gas). Such developments introduced a large degree of flexibility into the gas market while exposing it to market competition, as more and more consumers and producers turned to the burgeoning spot gas market. The natural gas market was exposed to additional uncertainty when increased availability of open access to gas transportation was allowed on a nondiscriminating basis in early October 1985. 10. As the US gas market came under increasing competitive pressure with the growth in domestic supplies, gas prices declined sharply; countries such as Mexico discontinued exports to the United States during late-1984 as they could not match the lower prices. By September 1985, the US liquified natural gas (LNG) contracts with Algeria were suspended. Only Canadian exports met the new price competition. 11. Changes are taking place elsewhere in the world in the natural gas industry. Most European zountries, where major transmission companies in partnership with governments controlled the natural gas market in the 1970s, are becoming increasingly aware of the possibility of a competitive gas market developing. In response to the concerns over energy security and in light of the constraints to further improvements in energy efficiency, energy ministers from the EEC met recently to discuss proposals for creating a common market in energy. However, it is unlikely that the European gas market could achieve the degree of integration and competitiveness of tae gas market in the United States where the grievances in the United States-Canadian gas trade relationship ace less pronounced. The existence of major gas transmission companies in Europe such as British Gas, Gaz de France, Ruhrgas, and Casunie, among others, are likely to limit any significant change in the European gas industry. In the United Kingdom, despite the privatization of British Gas in 1986, government control of the company is still dominant. A number of other obstacles, such as government barriers to the free flow of various fuels among the members of the EEC, domestic price controls, and a spectrum of taxes are cited as complications of a common market for energy. 12. Diverse national energy interests also restrict integration among European nations. Italy is the only major European country where natural gas dominates national energy policies, In the Federal Republic of Germany and France, domestic coal and electricity, respectively, are favored in the politics of energy policies. - 88 - Demand Outlook 13. United States. The declining trend of natural gas consumption in the United States over the last decade appears to have been reversed since 1986 mainly due to low gas prices. In 1987, consumption of natu.ral gas increased by about 2.5%. During the first quarter of 1988 natural gas consumption increased by almost 121 on a year-on-year basis. However, after reaching a peak in January of 2.29 quadrillion btu, consumption declined to around 1.96 quadrillion btu in March 1988. The consumption of natural gas in 1988 is expected to increase by around 1%. It is projecrdd that natural gas conscmption in the United States will increase by les than 0.5% p.a. up to the early 1990s but will increase thereafter at a slightly faster rate as gas use for electricity generation increases. Still, during the 1987-2000 period, demand is projected to increase by less than 1% p.a. Up to the early 1990s there. will not be any signi'icant change in the share of the various sectors in total natural gas consumption (residential 26-Z6.5%, commercial 14%, industrial 34-34.5%, electric utilities 16.5-17%, pipeline fuel, lease, and plant fuel Z.61). However, beyond the early 1990s these shares are expected to change significantly as a result of energy-saving technology. In the residential sector, gas consumption is expected to decline after the mid-1990s despite the expected sizable increase in the number of gas-heated housing units. In the comercial sector, however, gas consumption is expected to increase as the sector expands. 14. Gas consumption in the industrial sector is expected to grow between 0.7% and 0.9% in the 1987-2000 period despite continued improvements in the energy-industrial output ratio (resulting from energy-saving technology bias). The existence of dual-firing systems (oil/gas) in industrial production will make gas a more desirable substitute when oil prices begin to rise aft !r the mid-1990s. Although natural gas use is expected to stabilize up to the mid-1990s in the US power-generation sector--as it is displaced by alternative fuels such as coal and nuclear power--demand in this sector is projected to increase significantly after that as the demand for electricity generLt;nn is expected to be met with low capital cost, combined-cycle units using natural gas. 15. Western Europe. In Western Europe, where the bulk of natural gas is consumed in six countries (namely Belgium, France, the United Kingdom, the Federal Republic of Germany, Italy, and the Netherlands), the pattern of energy demand growth is influenced by the existence of an indigenous resource base and by the promotion of a policy of a balanced energy mix. Penetration of gas in the various end-use sectors is also influenced by national energy policies. In the Netherlands and the United Kingdoci, for instance, where substantial natural gas resources exist, the share of natural gas in total fuel consumption is fairly large (Table 1). Despite additional supplies from Algeria, Libya, and the USSR, natural gas has not inproved its market share in most Western European countries other than Italy. 16. While natural gas demand growth has increased in the residential and commercial markets in Western Europe, the use of natural gas in the power- generation sector has been declining--with the exception of the Netherlands and Italy, where policy regarding the use of natural gas has been relaxed. The decline in natural gas use in the European power-generation sector has TABLE 1i SHARE OF NATURAL GAS IN SECTORAL ENERGY CONSUNPTION OF SELECTED EUROPEAN COUNTRIES, 1975, 1980, 1986 Germany, The United Western Belgium France F.R. Italy Netherlands Kingdom Europe 1975 Residential and Commercial 17 15 13 20 66 33 21 Industrial 29 13 21 22 46 20 18 Power Generation 20 6 18 5 82 3 10 1980 Residential and Commercial 30 23 20 30 75 45 26 Industrial 26 18 22 2f 43 30 20 Power Generation 11 2 14 5 41 1 6 1986 Residential and Commercial 32 27 23 31 74 49 28 Industrial 20 26 22 22 40 28 21 Power Generation 2 1 6 14 62 1 6 Sources: United Nations, Energy Statistics; International Energy Agency, Energy Balances. - 90 - been largely due to two factors: (a) the high growch in coal and nuclear- geaerated electricity that his displaced both oil and natural gas in baseload applications; and (b) the EEC's 14-year ban on gas use for electricir generation (based upon the premise that gas is a premium fuel that is in shor. supply). It is projected that although the residential and commercial markets of zhe major oil-importing countries offer the greatest potential for natural gas demand growth in the next decade or so, gas use will also grow significantly in the power-generaticn sector when the EEC's ban on gas use for electricity generation is abrogated in late 1988. This will also stimulate the use of natural gas in other European couatries such as Norway, Sweden, * Greece, Spain, and Turkey, where the current use of natural gas is limited. 17. In the industrial sector gas faces competition f-om coal and residual . fuel oil. However, cespite low fuel Gil prices, natural gas may gain some market share in the short to medium run by utilizing the spare capacity in the pipeline system at off-peak periods through interruptable supplies. In the 1990s as oil prices increase, the demand for natural gas will grow--given the availability of large underutilized exporting capacities in the countries that traditionally export gas to Western Europe. 18. Given the potential for gas to penetrate these markets, a number of factors such as its price competitiveness and the large investments under implementation (notably Norway's efforts to develop its first gas-fired power station, the new pipeline system being built by Sweden to transport gas from Denmark, and Spain's proposal to construct a new pipeline system) are expected to enhance the share of natural gas in Western Europe. 19. OECD Pacific Region. In the OECD Pacific Region, the growth in the gas industry in Australia and New Zealand has been based upon indigenous resources, while around 95% of Japan's natural gas requirements have been supplied by imports. While gas consumption in Japan increased by around 60% between 1980 and 1985--as it replaced fuel oil used in the power-generation sector--the decline in the price of oil in 1986 resulted in the stagnation of natural gas demand in that year. In Japan's power-generation sector, the share of natural gas consumption declined from 21% in 1984 to 19% in 1986 (Table 2). 20. In the residential and industrial sectors of these three countries, natural gas use is hampered by the structure of gas prices relative to other energy sources and the lack of an adequate infrastructure for gas transmission and distribution. While real oil product prices in the industrial and household sectors declined by around 26% between 1985 and 1987, the decline in natural gas prices was around 14% in both sectors for the same period. These factors are expected to limit any significant penetration of natural gas in Japan. However, in order to increase the availability of natural gas, Japan is making efforts to improve its natural gas transportation network. Japan has also shown interest in providing financial support tc Malaysia's 451 mile pipeline project that would link the Singapore market to gas fields in Malaysia's eastern coast across the Malay Peninsula. This project is to be completed by early 1990. With increasing supplies of natural gas, it is projected that natural gas demand in Japan will increase at a rate of nearly 3.5% p.a. during the period 1987-2000. The share of natural gas in total primary energy consumption in Japan should increase from 9% in 1986 to around 12% in 2000. - 91 - TABLE 2: SHARE OF MATURAL GAS IN SECTORAL EMERGY ZONSUtPTIO IN OECD PACIFIC 0UKTRIES, 1975, 1980, 1986 Japan Australia New Zealand 1975 Residential and Commercial 15 13 4 Industrial 2 10 7 Power Generation 4 4 1 1980 Residential and Commercial 16 18 5 Industrial 2 19 10 Power Generation 14 7 8 1986 Residential and Commercial 17 24 7 Industrial 3 27 38 Power Generation 19 11 17 Sources: United Nations, Energy Statistics; International Energy Agency, Energy Balances. 21. The relative abundance of natural gas and the gas pricing structure in Australia and New Zealand are expected to increase the utilization of gas in these countries. Although the growth in gas consumpzior. in Australia's power-generation sector will be limited to peaking units--as coal enjoys a dominant position in this sector--gas is expected to replace fuel oil in line with the country's move towards reducing its dependence on oil. 22. The issues affecting the development of natural gas in industrial countries continue to be availability, cost, and security of supply. Despite the availability of large resources in the region and the potential for the import of substantial volumes from both the CPEs and the developing countries, natural gas is likely to lose ground mainly because of the tight supply situation in the largest consuming region, the United States. Consequently, the share of industrial countries in global natural gas consumption will shrink to 39% in 2000--down from 48% in 1986 (Table 3). 23. Between 1970 and 1986 the European CPEs accounted for almost 66% of the incremental consumption of natural gas, and the share of natural gas in total energy consumption increased from 222 in 1970 to 40% in 1986. The enormous natural. gas reserves of the USSR will ensure that natural gas will increase its share of energy markets not only in the USSR but also in other Eastern European countries. Given the heavy dependence of the Eastern European countries on energy imports from the USSR, natural gas is the one fuel which can fill the gap as oil exports from the USSR stagnate. The share of natural gas in primary energy consumption of the CPEs is therefore - 92 - TABLE 3: SHARE OF ATIRAL CAS I PIMARY ERCY COMSUNPTION, BY ECOMOIC CLASSIFICATION 1961 1973 1979 1984 1985 1986 --------------- () Z------------------- Industrial Countries 16.7 19.6 19.6 20.1 19.5 19.0 Centrally Planned Economies 10.5 19.6 23.5 29.2 30.1 32.0 Developing Countries 4.7 7.0 8,2 8.7 8.6 8.9 World 13.7 17.4 18.1 19.5 19.6 19.7 Memo: Natural Gas Consumption (mtoe) 409 999 1,228 1,380 1,412 1,457 Energy Consumption (mtoe) 2,995 5,732 6,797 7,051 7,207 7,408 Sources: United Nations, Energy Statistics; World Bank. anticipated to grow from 32% in 1986 to 39% in 2000. The share of natural gas is expected to surpass that of coal by the end of this decade. The CPEs' share in global consumption of natural gas is expected to increase from 40% in 1986 to 43% in 2000. 24. Natural gas consumption in the developing countries increased at 6.3% p.a. over the period 1981-86. While this growth in demand is attributed mainly to rising consumption levels in the oil-exporting countries, gas consumption has also increased--though at a somewhat lower rate--in the oil- importing developing countrier. The expanding network for gas transportation has contributed to this growth. 25. The pattern of natural gas demand in the developing countries is significantly different from that in the industrial countries. While in the industrial countries the residential sector is the largest user (due to its clear burning nature and outstanding flame and temperature quality), in the developing countries the power-generation sector holds the largest share [e.g., Egypt (58%), Pakistan (31%), and Thailand (74%)]. In the industrial countries the share of natural gas use is smallest in the power sector. However, gas use is increasing significantly in the residential market in the developing countries. For example, over the period 1980 to 1986 residential gas consumption in Pakistan increased by around 20% p.a.; the share of natural gas increased from a little less than 7% to around 13%. This increase has been largely due to the lower price of natural gas relative to LPG and kerosene in the housing sector. 26. Natural gas will continue to increase its share of total energy demand in the developing countries. New gas discoveries or additions to the reserves position will contribute to its increased use. In some countries such as India, future increases in the use of gas are reflected in the government's development plans. India's seventh five-year plan (1984/85 to 1989/90) estimates &as use to increase by more that .ve times between 1985 93 - and 1990. Although the 1986 drop in world oil prices and the likelihood of oil prices remaining weak in the short and medium term are expected to reduce the pace of gas utilization in many oil-importing developing countries, natural gas is expected to increase its market share as oil prices increase in the mid-1990s, from 8.9% in 1986 to 12.7% in 2000. The share of developing countries in total world consumption of natural gas is expected to increase over the projection period from 11.4% to almost 18%. 27. Total world demand for natural gas is projected to grow at a rate of 3% p.a., reaching around 2,212 mtoe by 2000 (Table 4). The share of natural gas in total world energy consumption should increase from 19.7% to almost 22% over this period. Natural Gas Reserves 28. Global proven natural gas reserves increased from 3,400 trillion cubic feet (TCF)--equivalent to 580-590 billion barrels of oil--at the end of 1984 to around 3,825 TCF in 1986. Compared to 1984 when natural gas reserves were 84% of the proven oil reserves, proven gas reserves rose to around 90% of proven oil reserves by 1986. Proven gas reserves have more than doubled since 1970. There has also been a significant change in the shares of proven reserves held by the major economic regions. The share of the European CPEs, which accounted for 26.5% of total world gas reserves in 1970, has increased significantly--reaching 44.5% in 1986. Between 1984 and 1986 alone the share of the CPEs increased by around 3.5%. Almost 97% of natural gas reserves in the CPEs (around 293 billion barrels of oil equivalent) in 1986 were located in the USSR, where recent discoveries have been concentrated in Western Siberia and the Asian Republics. 29. The share of industrial countries, which declined from 31% in 1970 to 15% in 1984, has declined further to around 13% in 1987. The developing countries have increased their share slightly from around 41-42% in 1984 to around 42-43% in 1987. Proven natural gas reserves in the developing countries are close to those in the CPEs. About 90% of these reserves are located in the oil-exporcing developing countries. Iran leads this group with around 13% of total world reserves, followed by Abu Dhabi (4.8%), Qatar (4.1%), Saudi Arabia (3.7%), and Algeria (2.8%). Although the oil-exporting developing countries account for the largest share of reserves, many oil- importing developing countries have improved their reserves position over the last two decades. Among this group, Argentina, China, Pakistan, and India are most prominent. 30. The global reserves-to-production ratio has increased from around 42 years in 1970 to nearly 56 years. On the basis of 1987 production figures, the reserves-to-production ratio for the industrial countries is around 18 years. The United States, with estimated reserves of 186.7 TCF and production at around 17 TCF (roughly 25% of world production) in 1987, has the lowest reserves-to-production ratio (11 years), followed by around 13.5 years for the United Kingdom. The reserves-to-production ratio is considerably higher in several other industrial countries such as Canada (28 years), Norway (106 years), the Netherlands (23.5 years) and Australia (35 years). Among the oil- exporting developing countries, the reserves-to-production ratio in Indonesia, TABLE 4: NATURAL GAS CONSUNPTION BY ECONOMIC CLASSIFICATION, 1961-86 (ACTUAL) AND 1990-2000 (PROJECTED) ----1961 - ----1970----- -----1986------ ----- 1990----- ------2000----- Countries/Economies MTOE MTOE % MTOE % HTO9 % MTOF % Industrial 322.1 78.6 612.1 71.9 705.1 48.4 758.6 46.5 864.9 39.1 Centrally Planned 68.2 16.7 188.8 22.1 586.5 40.2 659.8 40.5 951.7 43.0 Developing 19.2 4.7 50.9 6.0 165.7 11.4 212.1 13.0 395.1 17.9 World 409.5 100.0 851.7 100.0 1,457.4 100.0 1,630.5 100,0 2,211.8 100.0 Note: Details may not add to total due to rounding. Sources: United Nations, Energy Statistics (actual); World Bank, (projected). - 95 - Mexico, and Algeria is 59 years, 60 years and 72 years, respectively, while in Saudi Arabia and Venezuela the ratio is 189 years and 140 years, respectively. Supported by the reserves discovered over the last two deczdes, the reserves- to-production ratio in other major gas-producing developing co"ntries such as China and Pakistan is 42 years and 53 years, respectively. Supply Outlook 31. In the United States, natural gas production declined by around 7.8% between 1984 and 1986 but increased by 2% in 1987 despite the decline in proven natural gas reserves. The higher productior, in part reflects the optimistic opinion that there exists a significat.tly larger natural gas resource base than the present level of proven reserves. The controversy over the extent of the natural gas reserves in the United States was at the heart of a recent International Natural Gas Conference and the American Gas Association (AGA) meeting held in Washington D.C. It has been suggested by AGA that the potential supply of natural gas in the lower-48 statee could be as high as 66.7 TCF. If so, at current production levels the resource 4ould last for at least another 5; years. However, there is a widespread beiief that the current production of natural gas in the United States can only be maintained up to the mid-1990s, beyond which the production rate will likely decline. Based upon our assessment of the production potential of the lower- 48 states, natural gas supplies in the United States are expected to increase by around 0.5% p.a. over the period 1987-2000. However, beyond 1995 the decline in natural gas reserves wiil begin to reduce the growth rate of supply. 32. in Western Europe, at the current level of production and proven reserves in Norway, the Netherlands, and the United Kingdom, supplies will last for 36 years. Over the last few years, there has been a significant increase in the proven reserves of gas in the North Sea ragion. Despite the fact that Norway's natural gas reserves are more substi -al than its oil reserves, its oil production is almost twice as large as its gas production. This is due mainly to the lack of adequate gas transmission systems. At current production levels Norway's oil reserves will be exbausted in 30 years. However, it ias the potential to supply natural gas at current rates for over a century. It is likely, therefore, that Norway will supply a significant portion of Western European natural gas needs in the future. 33. Indigenous supplies in the other Western European countries are concentrated mainly in the Federal Republic of Germany, Italy, and France. Since 1984, the most significant decline in natural gas production has taken place in France (almost 40% between 1984 and 1987), while gas -roduction _r Italy has increased by 16% over the same period. Given the size of tne reserves in these countries, it is anticipated that current production levels can only be maintained until 1990. Beyond the 1990s a decline in p-oduction appears to 'ae very likely. In the United Kingdom, natural gas production increased by 2.5% over the two-year period between 1984 to 1986, but increased significantly in 1987. It now appears likely that domestic gas supplies in the United Kingdom can increase further by the mid-1990s. Thereafter, the rate of growth of production will decline gradually unless add.itional large deposits are discovered. - 96 - 34. Production of gas in the USSR grew by around 7.41 p.a. during the 1S81-87 period. Production in 1987 was nearly 22 higher than the planned target. Most of the natural gas production in the USSR takes place in its f-ur major deposits at Urengoi, Yamburg, Medvyezhe, and Vyngapur, of which the Jrengoi deposits are the largest with proven reserves around 282 TCP (around 191 of the total proven reserves in the USSR). The production rate from the Urengoi deposits has accelerated over the last few years due mainly to delays in bringing on-stream the Yamburg deposits. However, work on the supply of gas from the Yambzrg field, located 130 km to the north of the Urengoi, is already in progress. Higher prcduction from the Urengoi deposits has also been facilitated by the construction of the 56-inch diameter trunkline that Links the Urengoi fields to central regions and over 3,000 km to the western regions of the USSR. Plans for the development of at least 11 gas and condensate deposits newly discovered on the Yemal Peninsula inside the Arctic Circle wit 1 shift gas production to this area after the 1990s. A number of other discoveries in Turkmenia, mainly in Sovetabad and in the Pre Caspian Basin, are expected to enable production to reach 646 mtoe in 1990 and to move above 952 rntoe/year by 2000. 35. Th-e rapid development of the USSR natural gas industry has been due partly to its ability to lay !-:-distance pipelines rapidly to link the major fields to the industrializec -agions across the countz-y. Currently, the supply grid covers over 1.- v00 km. This elaborate network has also facilitated deliveries to other Eastern European countries, as well as to Western Europe. 36. As oil is the most important source of foreign exchange earnings for the USSR, Eastern European countries have been encouraged to substitute gas for oil. Romania remains the second largest producer of natural gas among the CPEs. currently producing around 11 mtoelyear. However, Romanian production appears to have peaked. The CPFs' share of natural gas in total primary energy production is projected to increase from 3% in 1986 to around 39.3Z in 2000. The region's share in total global natural gas production is anticioated to increase from 42.4% in i986 to 45.2% in 2000 (Table 5). 37. Despite the slowdown in natural gas consumption following the decline in oil prices in 1986, natural gas production in a few oil-importing countries vith large reserves has increased significantly over the recent years. Natural gas is expected to continue to play an important role in developing countries with large gas reserves such as Argentina (24 TCF), Pakistan (22.4 TCF), India (17.6 TCF), Egypt (9.36 TCF), and Thailand (3.72 TCF). 38. Natural gas production in the oil-exporting developing countries increased by around 4.5Z p.a. between 1984 and 1986. Algeria is the largest producer of natural gas in the Middle East area. However, its proven reserves are only around 22% of Iran's, which has proven reserves estimated to be around 490 TCF. Given the magnitude of natural gas reserves in the oil- exporting developing countries and the large extent of domestic use expected around the turn of the century, the continuation of gas exports by these countries at the present levels beyond 2000 appears unlikely unless there are large discoveries. Only a few countries, such as Iran and Qatar, with significant gas reserves and reserves-to-production ratios over 700 years will be ablh to fill the gap which is likely to develop as existing exporters leave the scene. It is projected that natural gas production in oil-exporting developing counties will increase from 160 atoe in 1986 to 350 mtoe in 2000. In aggregate, the production of natural gas in developing countries is anticipated to grow at a rate of nearly 6% p.a. during the projection period, reaching 507.5 atoe in 2000 (up from 221.8 mtoe in 1986). The share of developing countries in total supply is projected to rise from 15% in 1986 to 23% in 2000 (Table 5). Trade Outlook 39. In general, international movements of natural gas are limited due to the lack of adequate gas transport and transmission networks. The volume of internationally traded natural gas increased rapidly in 1984 (by 8%) and 1985 (by 5%) after many ypars of stagnation. However, in 1986 trade in natural gas suffered as a result of the sharp decline in the international price of oil. With the exception of exports from the USSR to Western Europe, which increased from around 28 mtoe in 1985 (Table 6) to over 40 mtoe in 1986, movement of gas from other parts of the world declined in 1986. The higher exports from the USSR were due to significant increases in the import of USSR gas by Italy (up by 114Z), the Federal Republic of Germany (by 18%), and FranLe (by 31%). While imports from the USSR increased in 1986, European imports from Norway, Algeria, and the Netherlands declined by about 6.5%, 0.3%, and 17%, respectively. The increase in Japanese imports from Malaysia (by 13%) and Brunei (by 3.4%) contributed to the 2.2% increase in its total imports in the 1984-86 period. Japan imports mainly in the form of LNG from five countries-- Indonesia, Brunei, Malaysia. the United Arab Emirates, and the United States. 40. The most significant decline in gas trade was in North America, where US imports from its principal exporter, Canada, declined by around 17.5% in 1986. Since 1986, however, tit international movement of gas has increased. This increase was mainly due to the increase of over 30% in Canadian exports to the United States and an approximate 12% increase in exports from Norway-- particularly to the Federal Republic of Germany (22%) and France (37%). Interregional trade still accounts for around 60% of the natural gas traded. 41. The intraregional trade among the Western European countries is projected to grow as the EEC's 14-year ban prohibiting the construction of gas-fired power plants and the use of gas for electricity generation will be abrogated this year. It is projected that Norway will significantly increase its exports in the 1990s. While Norwegian gas is currently supplied to Scotland and the Federal Republic of Germany through its two pipelines, it is expected that Norwegian gas supplies to Belgium will increase after the completion of another pipeline in the 1990s. The Netherlands, Belgium, Spain, and Austria are also expected to become significant natural gas markets. Norway is expected to supply gas as a result of Sweden's plans to close its nucLear reactors and to replace them by gas-fired power plants. In North America, Canada is expected to supply increasing quantities of natural gas to the US market. The expected gap in US gas supply in the late 1990s will need to be filled by imports and/or the construction of the Alaskan Natural Gas Transportation System. TABLE 5: NATURAL GAS PRODUCTION BY ECONOMIC CLASSIFICATION, 1961-86 (ACTUAL) AND 1990-2000 (PROJECTED) -----1970------- -----1986------ -----1990---- -----20' ------- Countries/Economies MTOE % MTOE % MTOE % MTOE % MTOE Industrial 325.3 78.7 620.1 71.7 618.0 42.4 654.2 40.1 704.0 81.8 Centrally Planned 67.8 16.4 188.4 21.8 617.6 42.4 693.9 42.6 1,000.3 45.2 Developing 20.4 4.9 56.0 6.5 221.8 15.2 282.4 17.3 507.5 23.0 World 413.5 100.0 864.5 100.0 1,457.4 100.0 1,630.5 100.0 2,211.8 100.0 Note: Details may not add to total due to rounding. Sources: United Nations, Energy Statistics (actual); World Bank (projected). TABLE 6: ESTIMATES OF INTERNATIONAL TRADE IN NATURAL GAS IN 1985 -Importers----------- North Western Eastern America Europe Japan Europe Developing Total --------------------------------------(MTOE) --------------------------------- Exporters Industrial Countries 23.4 57.5 1.4 - 82.3 Canada 23.4 - - - - 23.4 The Netherlands - 30.1 - - 30.1 Norway - 26.2 - - - 26.2 Others - 1.2 1.4 - - 2.6 Centrally Planned Economies - 28.1 - 29.3 3.1 60.5 USSR - 28.1 - 29.3 3.1 60.5 Developing Countries 0.8 19.6 33.0 2.3 1.8 57.5 Algeria 0.8 18.4 - - - 19.2 Indonesia - - 18.4 - - 18.4 Brunei - - 7.2 - - 7.2 Malaysia - - 4.7 - - 4.7 United Arab Emirates - - 2.7 - - 2.7 Libya - 1.2 - - - 1.2 Bolivia - - - 1.8 1.8 Afghanistan - - - 2.3 -23.3 Total 24.2 105.2 34.4 31.6 4.9 200.3 Sources: International Energy Agency, Oil and Gas Statistics; Trade Journals; various energy publication&. - 100 - 42. Exports of natural gas from the USSR are projected to increase sharply from 63 mtoe in 1986 to over 122 mtoe in 2000. USSR gas exports tow the Eastern European countries have increased steadily over the 1981-87 period. It is expected that almost one-half of the increase in exports from the USSR will be to supply the growing needs of Eastern European CPEs. The spare capacity in its existing export pipelines will also allow the USSR to move larger volumes of gas to Western Europe. However, while exports from the USSR to Turkey, Greece, and Finland are expected to increase, new suppliers entering the European market and competition from Norway are expected to prevent the USSR from improving its share of international gas trade significantly. However, the USSR is projected to maintain its predominant position in the world gas trade over the forecast period. Price Outlook 43. Since the end of 1985, the existence of excess natural gas supplies in the United States and the emergence of the spot market have weakened the price of natural gas. The contractual environment that had been changed materially as a result of both sellers and buyers reneging on their obligations resulted in a decline in natural gas prices (most notably since the beginning of 1986). The decline in world oil prices contributed further to the decline in the price of internationally traded natural gas, as it had been tied to the price of crude oil and/or petroleum product prices. 44. Although titere now appears to be some deviation in the price of internationally traded natural gas from its traditional linkages with the price of residual fuel and heating oil and towards parity with the price of steam coal, the pricing of natural gas still remains predominantly tied to oil prices. Due to the volatility of spot gas prices, coal parity gas pricing is being favcred over spot gas pricing in the United States and in the European market, which is dominated by coal. European suppliers such as Norway, which are seeking bigger markets in the United States and in Western Europe, have also begun to devise gas contracts which would link gas prices to coal prices. This trend is influenced largely by the increase in gas use in the power-generation sectors in the industrial countries. However, because of its desirable characteristics, gas enjoys a premium over high sulfur coal in its two biggest markets, namely the residential and industrial sectors. Due to the high cost of coal desulfurization, natural gas should trade above coal prices and approach the price of fuel oil. In the United States, however, natural gas import prices are projected to be depressed until the "gas bubble" is worked off (towards the early 1990s), after which, as increasing quantities are consumed in the premium residential/commercial markets in most industrial countries, the price of internationally traded natural gas on a heat content basis will gradually move in the direction of a level based on an average of heating and low-sulfur fuel oil prices. By the end of the projection period, the landed price of natural gas into the US and Western European markets could approach the c.i.f. crude oil parity price. TABLE Ali NATURAL GAS - PRODUCTION BY MAIN COUNTRIES AND ECONOMIC REGIONS ACTUAL PROJECTED GROWTH RATES Al COUNTRIES/ 1987 - ECONOMIES 1969-71 1979-81 1986 1987/B 1988 1989 1990 1995 2000 1961-86 1970-86 2000 -------------------(MILLION TONS OF OIL EQUIVALENT) --------------------------(------% PER ANNUM)-------- INDUSTRIAL 611 699 618 632 639 648 654 684 704 2.6 -0.3 0.7 NORTH AMERICA 541 522 445 454 460 466 470 487 499 1.2 -1.5 0.6 UNITED STATES 492 453 373 37't 382 388 389 390 387 0.6 -1.9 0.1 CANADA 49 68 72 76 78 79 80 97 112 5.3 1.5 2.7 EEC-10 65 140 129 133 133 135 135 136 136 11.9 2.6 0.1 NETHERLANDS 26 71 58 59 59 59 59 37 33 23.0 3.0 -0.5 UNITED KINGDON 11 33 39 40 41 42 42 45 48 31.4 5.1 1.2 OTHER WESTERN EUROPE 2 25 26 27 27 27 27 30 33 15.9 25.2 1.5 NORWAY 0 24 25 26 26 26 26 29 32 ... ... 1.6 JAPAN 3 2 2 2 3 3 3 3 4 1.7 -1.8 4.1 OCEANIA 1 9 16 16 17 18 20 29 32 56.5 14.9 4.7 NON-MARKET 198 408 618 642 658 670 694 837 1,000 8.2 7.7 3.0 USSR 166 360 569 592 609 621 646 790 953 8.5 8.5 3.2 EASTERN EUROPE 32 48 49 49 49 48 48 48 48 5.6 2.6 -0.2 ROMANIA 23 35 36 36 36 35 35 34 34 5.0 3.0 -0.5 DEVELOPING 57 154 222 235 247 263 282 368 508 10.2 8.5 3.3 ASIA 25 72 109 116 123 131 140 183 256 12.4 0.6 5.4 IRAN 9 10 8 8 9 9 11 17 30 10.7 -5.7 9.0 INDONESIA 2 14 27 30 32 34 35 40 52 11.3 26.8 3.7 AFRICA 3 23 43 47 50 53 57 75 97 22.0 18.3 4.9 ALGERIA 2 16 32 35 37 39 41 52 63 20.4 19.5 3.9 NIGERIA 0 1 3 3 3 3 3 5 1 ... ... 5.8 AMERICA 28 57 67 69 71 76 81 105 147 6.3 6.0 5.2 maRICO 10 23 23 23 24 26 29 40 61 6.0 6.5 6.6 ARGENTIRA 5 8 13 14 14 15 16 19 27 6.7 6.4 4.5 VENEZUELA 9 15 18 18 19 19 19 22 25 5.5 4.7 2.1 SOUTHERN EUROPE 1 2 3 3 4 4 1 5 7 10.9 3.6 6.0 WORLD 866 1,261 1,457 1,509 1,543 1,581 1,631 1,889 2,212 4,9 3.0 2.6 Al LEAST SQUARES TREND FOR HISTORICAL PERIODS (1961-86)1 END-POINT FOR PROJECTED PERIODS (1907 -000), B/ ESTIMATE. SOURCES: UNITED NATIONS ENERGY STATISTICS (ACTUAL)i WORLD BANK, INTERNATIONAL ECONOMICS DEPARTMENT (PROJECTED). TABLE A2: NATURAL GAS - APPARENT CONSUMPTI*N BY MAIN COUNTRIES AND ECONOMIC REGIONS ACTUAL PROJECTED GROWTH RATES Al COUNTRIES/ 1987 - ECONOMIES 1969-71 1979-81 1986 1987/B 1988 1989 1990 1995 2000 1961-86 1970-86 2000 - (MILLION TONS OF OIL EQUIVALENT) ------ ( PER ANNUM) -------- INDUSTRIAL 606 746 705 723 736 748 759 810 865 3.2 0.6 1.2 NORTH AMERICA 534 524 448 455 460 466 471 491 510 1.3 -1.3 0.8 UNITED STATES 504 478 397 403 407 412 415 129 442 0.9 -1.7 0.6 CANADA 30 46 51 51 53 54 5 62 68 6.3 2.9 1.9 EEC-10 65 184 199 204 207 211 216 233 251 13.9 5.5 1.4 GER.LANY, FED. REP, 14 48 45 46 47 48 50 55 60 10.3 5.9 1.7 UNITED KINGDOM 12 43 51 53 54 54 55 59 62 29.7 7.2 1.1 ITAL 11 24 29 30 30 30 30 32 33 7.3 5.6 0.6 OTHER WESTERN LJROPE 3 7 8 9 9 9 10 12 16 8.7 6.7 4.3 JAPAN 3 22 35 40 44 45 46 53 64 16.6 171 3.1 OCEANIA 1 9 16 16 17 17 17 20 24 56.5 14.9 2.6 NON-MARKET 200 386 587 611 624 636 660 795 952 7.8 7.1 3 0 USSR 166 318 508 530 541 551 574 699 844 7.8 7,4 3.1 EASTERN EUROPE 34 69 79 81 83 84 86 96 107 7.8 5.7 1.9 ROMANIA 23 36 38 39 39 40 40 42 44 5.3 3.5 0.9 DEVELOPING 50 120 166 174 184 197 212 294 395 8.9 7.6 5.6 ASIA 21 49 69 74 79 85 93 130 186 10.0 7.1 6.3 SAUDI ARABIA 1 1 4 4 4 5 5 7 10 20.0 45.5 5.8 IRAN 9 8 3 8 9 9 10 14 20 1C,2 -2.1 6.2 AFRICA 1 13 24 25 26 28 31 42 56 20.6 25.1 5.5 ALGERIA 1 8 13 14 14 15 16 21 26 18.7 27.5 4.5 AMERICA 27 55 67 69 71 76 30 100 136 6.7 5.9 4.7 MEXICO 10 21 23 23 24 26 28 38 55 6.6 6.2 5.9 ARGENTINA 5 9 15 16 16 17 18 20 25 7.7 6,8 3.4 SOUTHERN EUROPE 1 3 6 7 7 8 9 12 17 15.0 11.0 6.5 WORLD 856 1,253 1,457 1,509 1,543 1,581 1,631 1,689 2,212 4.9 3.1 2.6 A/ LEAST sQUARES TREND FOR HISTORICAL PERIODS (1961-86): END-POINT FOR PROJECTED PERIODS (1987-2000). 8/ ESTIMATE. SOURCES: UNITED NATIONS ENERGY STATISTICS (ACTUAL)l WORLD BANK, INTERNATIONAL ECONOMICS DEPARTMENT (PROJECTED). TABLE A3i NATURAL GAS - GROSS EXPORTS BY MAIN COUNTRIES AND ECONOMIC REGIONS ACTUAL PROJECTED GROWTH RATES A/ COUNTRIES/ 1987 - ICONOMIES 1969-71 1979-81 1986 1987/s 1988 1989 1990 1995 2000 1961-06 1970-66 2000 -(MILLION TONS OF OIL EQUIVALENT) ------(I PER ANNUM)------ INDUSTRIAL 32 89 75 82 83 83 86 103 113 11.7 3.2 2.2 NORTH AMERICA 21 23 23 26 27 26 26 36 45 4.4 -1.0 3.8 CANADA 20 21 21 24 25 25 25 35 44 4.4 -0.9 4.0 EEC-10 11 44 29 31 32 32 32 31 29 ... 5.2 -0.6 NETHERLANDS 11 42 17 27 27 27 27 26 23 .. 4.7 -0.7 OTRERWESTERNEUROPE 0 23 24 24 24 25 25 27 31 .. ... 1.5 NORWAY 0 23 24 24 24 24 25 27 31 ... ... 1.5 NON-MARKET 3 46 64 65 71 73 77 98 124 26.8 22.3 4.4 USSR 3 46 63 64 70 72 76 97 123 29.4 22.7 4.4 DEVELOPING 6 37 63 68 71 75 $1 101 142 19.1 12.6 5.0 ASIA 4 24 41 43 46 48 51 61 87 34.6 13.0 4.7 INDONESIA 0 11 21 23 24 26 27 28 36 ... 3.0 AFRICA 2 10 20 23 24 25 27 34 42 ... 13.5 4.1 ALGERIA 2 8 19 22 23 24 25 31 37 ... 17,0 3.3 AMERICA 1 4 2 2 2 2 3 6 13 4.8 9.1 14.0 WORLD 42 172 202 214 223 231 243 302 376 15,4 9.9 3.9 ---------------------------------------------------------------------------------------------- ---------------------- A/ LEAST SQUARES TREND FOR HISTORICAL PERIODS (1961-86)t END-POINT FOR PROJECTED PERIODS (1987-2000). B/ ESTIMATE. SOURCESi UNITED NATIONS ENERGY STATISTICS (ACTUAL)i WORLD BANK, INTERNATIONAL ECONOMICS DEPARTMENT (PROJECTED). TABLE A4: NATURAL GAS - 0088 IMPORTS BY MAIN COUNTRIES AND ECONOMIC REGIONS ACTUAL PROJECTED GROWTH RATES A/ COUNTRIES/ 1987 - ECOMOHIES 1969-71 1979-81 1986 1987/8 1988 1989 1990 1995 2000 1961-86 1970-06 2000 - (MILLION T AS OF OIL EQUIVALENT) ------(9 PER ANNUM)-------- INDUSTRIAL 35 140 163 173 181 184 190 228 274 14.5 9.4 3.1 NORTH AMERICA 22 27 26 26 27 26 27 41 57 4,2 0.0 5.3 UNITED STATES 21 27 25 26 ?7 26 27 41 57 4.5 0.1 5.3 EC-1 12 89 98 102 106 108 112 128 144 ... 12.6 2.3 GERMANY, FED. REP. 4 34 34 34 35 36 38 44 50 .. 12.5 2.5 RANCE 3 18 23 24 24 25 26 31 36 ... 11.6 2.6 AELG IUM-LUXEMBOURG 4 11 8 8 9 9 9 10 12 ... 28 2.3 ITALY 0 13 17 19 19 20 20 23 24 ... 0.0 1.6 UNITED KINGDOM 1 10 12 13 13 13 13 14 14 ... 26.5 0.6 OTHER WESTERN EUROPE 1 5 6 6 7 7 7 9 i3 s .. 10.9 3.1 JAPAN 1 20 33 36 42 43 43 50 60 ... 26.0 3.0 WO-MARKT 6 26 33 35 37 39 42 56 75 22.3 913 5.3 USSR 4 4 2 2 2 2 3 7 15 ... -9.5 13.0 EASTERN EUROPE 2 22 31 32 34 37 39 50 61 22.8 19,2 4.3 DEVELOPING 0 3 7 7 7 8 10 18 29 16.0 17.2 919 ASIA 0 0 1 1 2 2 4 9 16 ... ... 175 1 ANERICA 0 2 2 2 2 2 2 2 3 12.5 7.9 3.0 SOUTHERN EUROPE 0 1 3 4 4 4 5 7 10 * *.. 6.9 WORLD 41 169 202 214 225 231 243 302 378 15.2 9.5 3.9 ---------------------------------------------------------- -------------- ----------------------- -------------- A/ LEAST SQUARES TREND FO HISTORICAL PERioDs (1961-86), END-POINT FOR PROJECTED PERIUDS (1987-2000). 8/ ESTIMATE. SOURCES: UNITED N&TIONS ENERGY STATISTICS (ACTUAL)i WORLD BANK, INTERNATIONAL ECONOMICS DEPARTMENT (PROJECTED). CMAL Summary 1. International export prices of thermal coal in US dollar terms have shown some signs of recovery lately, helped by unexpectedly strong economic growth in parts of the industrial and developing world, restructuring of capacities, and appreciation of the Au3tralian and South African currencies vis-a-vis the US dollar. However, this upturn is not likely to persist. Over the short- to medium-term horizon, thermal coal prices are projected to remain near current low levels because of an impending slowdown of consumption growth. For the remainder of the 1990s, improving market balance through steady demand growth will support slight price increases in real terms. 2. The world demand for coal of all types is projected to increase at 2.1% p.a. over the 1987-2000 period. With petroleum prices projected to increase faster than coal prices in the long term, the share of coal in its main end-use markets (thermal electricity and industrial boiler markets) is expected to increase further. However, its share of world primary energy consumption will remain more or less constant, at approximately 28%. 3. Recent appreciation of the Australian and South African currencies vis-a-vis the US dollar and increases in rail freight rates have resulted in a considerable erosion of the profitability of coal mining companies in these countries. The US coal industry continues to be the marginal supplier to world markets, but its competitive position relative to Australia and South Africa has improved considerably because of the US dollar depreciation and continued productivity improvements. Investments in new coal mining ventures have slowed appreciably in the past several years. This lack of capacity expansion could lead to a period of tight market conditions in the event of any large unexpected demand increases, as would happen if the price of petroleum suddenly increased. 4. There has been little change in the structure of the international coal trade. Despite its political problems and increased costs. South Africa has managed to increase exports but by less than would have been possible otherwise. Australia continued to gain market share--up to 27% in 1986 from 16.8% in 1980. China has shown the potential to become a large exporter but has experienced problems in securing exportable surpluses and suitable coal qualities. Demand Outlook 5. In the wake of the sharp declines in perroleum prices and weak economic growth, world coal consumption increased by only 1.6% in 1986 and by an estimated 1.8% in 1987--down from 2.6% p.a. growth in the 1975-85 period. In the OECD, coal consumption increased by 1.7% in 1987, compared with 2% p.a. growth in the preceding 1978-86 period. OECD consumption of thermal coal increased 2.7% in 1987, slower than the 3.4% p.a. growth during the 1978-86 period. Early estimates point to a slight recovery of coal consumption, both - 106 - thermal and metallurgical, in late 1987 and early 1988, as a result of brisk economic expansion in the industrial countries and in some of the industrializing economies. 6. The share of coal in total primary energy consumption was increasing steadily until 1986 when petroleum prices declined sharply. In 1986, coal's share in world primary energy consumption fell to 28.5% from 29% in 1985. Over the 1975-86 period, the share of coal increased most in the industrial economies, followed by the non-market economies. * 7. The increases in coal consumption mostly took place in the sectors that use coal as a boiler fuel. Table 1 shows that the shares of coal in OECD thermal power and industrial sectors continued to increase in 1986, but their . growth rates slowed significantly because of lower petroleum prices. Subsequent increases in petroleum prices in 1987 and continued weakness in coal prices have restored coal's cost competitiveness over heavy fuel oil. At the latest international market prices, coal imported into Western Europe and Japan now holds a slight cost advantage over imported heavy fuel oil. However, as shown in Table 2, the high coal prices paid by the electric utilities in these countries often put coal at a disadvantage. The main reason for the high prices is the high cost of indigenously produced coal. In the Federal Republic of Germany, for example, the price paid in 1986 by electric utilities for thermal coal was more than 100% higher than that of imported coal and 45-50% higher than that of heavy fuel oil for the equivalent heat value. TABLE 1: OECD COAL CONSUMPTION AND FUEL SHARES 1973 1978 1985 1986 Coal Consumption (MTCE) Thermal power 532 615 820 815 Industry 285 241 242 227 Thermal power fuel shares (Z) Coal 50.9 54.0 70.6 71.4 Oil 32.9 31.0 13.6 14.2 Gas 16.2 15.0 15.9 14.4 Industry fuel shares (Z) Coal 17.5 15.3 17.2 16.5 Oil 44.8 44.7 35.9 37.2 Gas 21.6 20.5 22.6 21.0 Source: IEA, Coal Information, 1987 and 1988. TABLE 2: FUEL PRICES AND COSTS OF ELECTRICITY GENERATION IN SELECTED OECD COUNTRIES, 1986 Fuel Prices Fuel Costs Total Costs jUSM/TCE) (Mills/KWh2_c/ (Mills/KWhq d/ Coal a HFO b/ Co;l H-FO Coal HFO United States 46.2 68.6 16.8 25.7 31.0 - 36.6 36.2 - 37.1 Japan (average) 86.5 131.6 31.4 49.3 45.6 - 51.2 59.8 - 60.7 Imported 44.9 16.3 30.5 - 36.1 Indigenous 118.5 43.0 57.2 - 62.8 Germany, F.R. (average) 111.8 74.2 40.6 27.8 54.8 - 60.4 38.3 - 39.2 Imported 48.6 17.6 31.8 - 37.4 Indigenous 128.6 46.6 60.8 - 66.4 United Kingdom (average) 73.7 81.7 26.7 30.6 40.9 - 46.5 41.1 - 42.0 Imported 54.7 19.8 34.0 - 39.6 Indigenous 96.8 35.1 49.3 - 54.9 Italy 56.5 77.3 20.5 28.9 34.7 - 40.3 39.4 - 40.3 a/ The average prices are delivered prices to the utilities, while those of imported coal and indigenous production are c.i.f. prices and mine-mouth prices, respectively. b/ Heavy fuel oil. c/ Assuming conversion efficiency of 36% for coal and 37% for heavy fuel oil. d/ Assuming operating costs of 5.3 mills/KWh for coal-fired units and 2.6 mills/KWh for oil-fired plants for all countries. Capital costs are assumed to range from 14.2 to 19.8 mills/KWh for coal and from 10.5 to 11,4 mills/KWh for oil-burning power plants. Source: Compiled from IEA, Coal Information, 1987, World Energy Outlook 1982, and Costs of Coal Pollution Abatement, 1983. - 108 - 8. Recently, some of the countries with high-cost dor -. have started to implement programs and policies to gradually the subsidizing of inefficient coal mining. Japan, for example. p:1as tc z1ose all but three of its most efficient mines by 1992, while exa-: .-:.-arted coal use in industrial sectors as well as for power gener- With appreciation of the yen and mounting pressure to cut costs :o maintain international competitiveness of exports, it has become increasingly difficult to pass on the high cost of domestic coal to Japanese industries. Japan had shunned coal for environmental reasons but lately has come to accept it because of the new coal-burning technologies (see para. 15). 9. In the Federal Republic of Germany, with its long tradition of coal mining and still sizable production, changes in coal policy have proven to be more difficult. The high cjst of German coal is paid by electricity consumers in the form of surcharges (Kohlepfenring), currently amounting to 7.5% of their electricity bills. Faced with the prospect of increased domestic coal production under the current system, the pressure to reduce subsidies and to cut capacities is mounting. To date, however, a compromise acceptable to the miners, industry, and consumers has not emerged. Other European countries also have the same problem to varying degrees. We have assumed that over the long term, economic efficiency considerations will dictate the policies of these countries, as is the case in Japan. 1/ 10. It appears the above changes in energy policies are anticipated by the policymakers of these countries. The electric utility programs of the OECD countries submitted in 1986 to the International Energy Agency (IEA) fcresee that the share of coal-fired power capacity will increase from 52.8% of total thermal power capacity in 1985 to 62% in the year 2000. In terms of total electric power capacity, coal's share is projected only to increase from 34% in 1985 to 35% in 2000 because of the faster increase expected in nuclear capacity than in coal capacity. However, if the uncertainties surrounding nuclear programs are taken into consideration, one may have to allow for an even greater share for coal in power generation. 11. The share of coal in total primary energy consumption of the developing countries is projected to decline frnom 39.1% in 1986 to 36.5% by 2000. Although coal consumption in the developing countries is projected to grow faster than petroleum consumption--3.2% p.a. for coal and 2.8% p.a. for petroleum between 1986 and 2000--coal's share is expected ri decline because of rapid increases in consumption of natural gas and primary electricity. 12. Developing economies with significant coal-fired power programs include China, Greece, Hong Kong, India, Indonesia, Republic of Korea, Malaysia, Pakistan, Philippines, Portugal, Singapore, Thailand, Turkey, Yugoslavia, and Zimbabwe. Some of these economies have gone through a 1/ Japan, the Federal Republic of Germany, and the United Kingdom accounted for about 18% of OECD coal production in 1986. If these three countries rationalize their policies and substitute imports for, let us say, 30% of domestic production, 60 million tons of new import demand would be generated--equivalent to 25% of the OECD's 1986 imports. - 109 - substantial revision of tbair power programs in recent years, mostly involving greater reliance on coal at the expense of nuclear power (e.g., Republic of Korea and Taiwan, China) or hydrocarbon fuels (e.g., Indonesia and Malaysia). The total coal-fired pawer capacity in various stages of planning in the developing countries (excluding China) amounts to 103.7 gigawatts (GW), which is more than double the existing capacity of 50.2 GW. 2/ (It is close to the planned total of 113.9 GW in the industrial countries.) 13. Continued expansion of coal capacity in the electric power sector in both the industrial and developing countries is an indication of the utilities' expectation that petroleum prices will increase much faster than coal prices over the long term. As noted above, the most recent price differentials favor imported coal in major markets, and the differential is projected to widen. In the event that these expectations do not materialize and petroleum prices remain near or below recent levels over an extended period, demand for thermal coal could be significantly affected. It is estimated that a 10% decline in petroleum prices would reduce long-term demand for thermal coal by about 5%. The impact could be much sharper at the prices that make coal and petroleum equal in terms of total power-generating co3ts. If we take $45/ton as the long-term price of coal, c.i.f. Europe or Japan, the international price of crude oil could be no less than $16/barrel in order for coal to be cost competitive. However, the likelihood of crude cil prices falling below $16/barrei for an extended length of time over our long-term projection period is considered remote. 14. The demand for metallurgical coal is closely related to production of iron and steel. World production of steel is projected to grow only slcwly-- at 1.6% p.a. during 1987-2000. Most of the increase in production is expected to take place in the developing countries of Asia and Latin America, while the industrial countries' production is expected to increase only slightly. The projections of coal demand have taken these expected developments into account. 15. Recent progress in coal-burning technologies has been remarkable. It has enabled greater coal utilization even in countries highly concerned about pollution. Two refinements to the fluidized-bed combustion (FBC) process-- circulating bed-FBC (CFBC) and bubbling-bed FBC (BFBC), which are the dominant technologies today--have eliminated the problems of the earlier versions to such an extent that sulfur and nitrogen oxide emissions have Deen reduced to minimal levels. Further improvements may be forthcoming. Interesting progr-ss also has been made in coal gasification which may significantly alter the way coal is utilized in the future. 2/ Planned capacities include those cnly under consideration that may not be realized before 2000. See IHA's power station survey in Coal Information 1988, Annex II. - 110 - Supply Outlook 16. During the 1980-86 period, world production of solid fuels increased steadily at 2.6% p.a., compared with 2.9% p.a. growth during the period 1975- e0. Almost 70% of the nzt increase in production between 1980 and 1986 took place in the developing countries, while the industrial countries contributed 212 and the non-market economies the remaining 9t'. The rapid increase in production in developing countries (at 6% p.a. during che 1980-86 period) is mkstly accounted for by a few countries. China and India increased production to meet rising domestic demand, while Colombia and South Africa expanded as major exporters. Among the industrial countries, production increases in Australia and the United States were offset by declines in Western Europe and Japan. Both Poland and the USSR failed to achieve their full potential as sources of supply to other Eastern European countries and the West. 17. World coal resources are ample to meet all perceived needs. Reserves available in the major coal-producing countries--Australia, China, Colombia. India, South Africa, Poland, the United States, and the USSR--are large enough to sustain continued expansion. Production from Western Europe, Japan, and Republic of Korea will continue to trend downward, sometimes very sharply, because of resource depletion and high costs. There are, however, only a few potential entrants into the league of large coal producers and exporters. Indonesia is developing the Kalimantan coal rescurce to supply its coal-fired power plants and for export to the East Asian market. Botswana and Mozambique have sizable coal resources but so far have been unable to exploit them. Venezuela has begun to export coal and may have the potential to become a large exporter. It would not be surprising if large coal resources were found in other parts of Latin America. 18. In the absence of sharp petroleum price increases such as those experienced in the 1970s, the coal industr, is likely to remain demand- constrained for much of the 1990s. The major coal producers and exporters will continue to compete intensely. Market shares will be determined largely by costs. Several factors affect supply costs. The most important include reserve characteristics, mining methods, wage rates, interest rates, rail and ocean freights, and exchange rates. In the last several years, significant clanges have taken place in many of these variables, partly because of low cc-1 prices. The net effect of these changes has been drastic reductions in delivered costs of coal. 19. One of the more significant developments in the 1980s has been the steady inpr,-vement in labor productivity in coal mining. As shown in Table 3, output per man-day in US coal mining increased by 57% betwueen 1980 and 1986, while the real mining wage rate increased by 4% over the same period. Inprovements in other countries are less pronounced but still impressive. It is estimated that the increases in labor productivity contributed to about $5- 7 in cost savings in the United States and $3-4 in Australia. Not enough inforration is available to make estimates for South Africa. US labor productivity has suffered greatly during the 1970-78 period in the wake of the 1969 Mine Health and Safety Act and the substitution of nonunion for union labor. Since 1979, US labor productivity has continued to improve as the industry learned to adjust to the new rules and the labor force became more skilled. Closures of inefficient mines have also helped raise average productivity. - 111 - TABLE 3: LABOR PROOUCTIVITY AND REAL WAGES IN COAL MINING, 1970-86 (1980=100) -----United States------ -------------Labor Productivity-------------- Labor Real Australia a! Germany, F.R. United Kingdom Productivity Wages d/ 1970 122 83 84 b/ 122 c/ 1981 109 98 103 99 103 1982 110 101 101 102 104 1983 130 103 106 102 108 1984 137 106 120 105 96 1985 142 105 133 113 97 1986 157 104 144 a/ 1979-80=100. Years are for the fiscal year starting July 1. b/ For 1972-73. c/ For 1975. d/ Wages and salaries of full-time equivalent employees of the coal mining industry, deflated by the consumer price index. Sources: US Department of Energy, Coal Production, 1976; Joint Coal Board, Black Coal in Australia, various issues; US National Coal Association, International Coal, various issues. 20. No doubt, labor productivity will continue to improve but probably at a lower rate than in the past, primarily because the easier gains to be made under the new rules have already been achieved. The immediate benefits of mine restructuring hare also been gained. Against this backdrop, the labor unions have become more active in Australia, South Africa, and parts of Europe. Low coal prices have been the main depressant of real wage increases. Once profitability improves, demands for higher wages could become difficult to resist. These considerations suggest that only minor reductions of costs will result from labor productivity improvements. 21. Compared to 1986, it is estimated that in 1987 Australian costs in real US dollar terms increased by 8.4% due to exchange rate adjustments, while in South Africa costs increased by about 20% (see Table 4). Since the exchange rates of these currencies had depreciated in earlier years, the latest changes must be looked at from a longer perspective. In comparison to 1980, exchange rate changes have enhanced cost competitiveness of Australian and South African coals relative to US coal. The Colombian peso has been steadily depreciating since 1980. The depreciation helped improve Colombian coal's competitive position vis-a-vis US coal by 76% from 1980 to 1987. 22. Recently, increases in rail freight rates in both Australia and South Africa further eroded the competitive position of the two countries. South Africa's rail freight rate was increased by 80% in 1987. Ocean freight rates also increased by an average of US$1.75/ton in 1987, which put Australia and - 112 - TABLE 4: REAL EFFECTIVE EXCHANGE RATE INDRIES OF MAJOR COAL EXPORTERS (1980=100) Australia South Africa Colombia 1981 108.4 107.6 105.2 1982 108.7 114.7 99.7 1983 106.5 114.2 109.7 1984 109.6 104.6 96.9 1985 92.3 91.3 73.5 1986 80.7 68.1 67.9 1987 80.6 60.7 76.6 Source: IMF, International Financial Statistics, various issues. South Africa at a further disadvantage in the European and East Asian markets, respectively. More details of developments in the key producing countries are given below. 23. United States. Despite worsening competitiveness in international markets and consequent declines in market shares until very recently, US coal production has been increasing steadily throughout the 1980s. The increases were supported by growing domestic consumption. However, the United States remains the high-cost swing producer. Renewed interest in US coal from European and other buyers may be an indication of improved prospects for US coal exports. Despite transportation problems, western open-cast p-oduction will continue to expand faster than that from the eastern Appalachian region, thus holding down average US costs. 24. Canada. Canada's coal export industry has faced serious problems recently. Its inability to match the low international prices has resulted in loss of markets. 25. Australia. With increasing market share, Australia has rapidly expanded mine capacity and related infrastructure. Almost all of the net increase in production in the 1980s came from open-cast mines in Queensland and New South Wales. In underground production, most of which is located in New South Wales, the share of production from longwall faces increased from less than 5% in 1980 to more than 25% in 1986. Largely because of these changes, labor productivity improved by 40% between 1981 and 1986. Despite these changes, the Australian coal industry has been only marginally profitable Lately because of high mining wages, increases in rail freight rates, royalties and taxes, and appreciation of the Australian dollar. Australia, however, has room for further cost savings, by increasing open-cast and longwall production, reducing royalties, and controlling freight and port charges. 26. South Africa. Despite rapid increases in mining wages and recent escalation of rail charges and its currency exchange rates, South Africa still remains the lowest-cost supplier of thermal coal. However, the margin has shrunk considerably and may soon disappear unless measures are taken to reduce - 113 - costs. There were some reported cases of restructuring in 1987. Continuing political problems probably will hinder this effort as well as the marketing of its coal. 27. Colombia. With successful marketing of El Cerrejon North coat to the European markets, Colombia appears to be poised for further expansion of the same deposit formatin or of newly discovered areas. The key factor in these decisions will be capital costs and its financing. 28. China. Although China has great potential to become a major coal exporter, a number of uncertainties cloud its future. Recently, China failed to deliver on its contractual volume, highlighting its problem of securing exportable surplus in the face of high and rapidly growing domestic consumption. To become a major exporter, China has to make large investments in mining and infrastructure, which may not be high priority programs at this time. Trade Outlook 29. World coal imports increased by 4.9% p.a. between 1980 and 1986, down somewhat from the 5.5% annual growth of the 1973-80 period. The growth rate for 190-86 uould have been much higher had petroleum prices not declined drastically in 1986 leading to a slight downturn in coal imports in that year. Over the 1987-2000 period, world coal imports are projected to increase at 30% p.a., compared with the projected growth rate of 2% p.a. for world coal consumption. This differential in growth rates arises because production in the coal-importing countries is not expected to grow as fast as demand. Most of the net increase in demand will be for thermal coal. 30. Majvr exporters of coal will continue to dominate the market. However, export markets are expected to become increasingly more competitive, not only between countries but also among different companies in the same country. Recent industry restructuring has not resulted in greater concentration in the United States. 3/ Furthermore, government policies on coal mining have been moving toward relaxation of controls (e.g., Australia's lifting of price controls) and removal of subsidies. Increases recently in ocean freight rates will favor Australia, China, and Indonesia in the Asian market, while the United States, South Africa, and Colombia will be in a better position in the European market. Price Outlook 31. In the wake of the 1985/86 collapse of petroleum prices, export prices of thermal coal have steadily declined through early 1988 (see Table AS). The subsequent partial recovery of petroleum prices has had no apparent impact on coal prices until very recently. US export prices declinec 31 US Department of Energy, The Changing Structure of the US Coal Industry, 1976-86, June 1988. - 114 - $10.40/ton between 1985 and 1987, while Australian and South African prices declined $6.30/ton and $9.60/ton, respectively. However, in percentage terms, coal prices have declined much less than petroleum prices. US export prices have declined more than the Australian prices, narrowing the quality-adjusted price differential from $12/ton in 1985 to $8/ton in 1987. 32. Coal prices tended to firm up in early 1988--by $2-3/ton in the spot market and in 1988 contracts. There has been unexpectedly strong demand growth for both thermal and metallurgical coals. Cost increases in Australia and South Africa also could have been a factor. It is, however, too early to tell whether coal prices have finally bottomed out. 33. While many of them were losing money at last year's prices, at current export prices the major exporters reportedly have returned to profitability. If that is true, today's price structure may be close to the cost conditions of the currently operating marginal producers. 34. Over the short term, economic growth rates in the industrial and developing economies will largely dictate the Level of international coat prices. It is estimated that closures of inefficient mines in the United States have substantially reduced excess capacity; the average US capacity utilization rate in 1986 stood at 93.3%--up significantly from 88% in 1982. Excess capacity available for exports is believed to be small, with all the major exporters reportedly fully committed. Thus, the market balance could tip either way depending on demand growth. With economic growth expected to slow down in 1989 and 1990, the world coal market should operate with some excess capacity through 1990. Therefore, coal export prices should remain weak, but not sc as to fall below J986-87 lows in real terms. In the event that coal demand continues to grow at about 2% p.a. over the short term, there is a strong likelihood that a tight supply-demand balance will be reached by 1990. Prices then could easily recover by $3-4/ton. 35. Another factor that could boost Australian and South African export prices in the short term is further appreciation of their currencies. Compared to 1980 levels, the inflation-adjusted exchange rate of the Australian dollar vis-a-vis the US dollar was still 10% lower as of May 1988. The South African rand was 31% lower than its 1980 level. Given the recent strength of their primary export prices, the possibility of further real appreciation of these currencies is fairly high. Appreciation would act as a cost push to prices, further narrowing the gap between them and US export prices. 36. With the healthy growth forecast for the market economies from 1992, the international coal market is expected to return to much improved balance. The low prices of the last several years have discouraged investment. Any capacity expansions would be likely to proceed at a lower rate than consumption growth. Export prices then may be expected to recover to levels that allow profits for the majority of the exporters, or roughly the prices currently prevailing. 37. The medium- to long-term prospects for thermal coal prices appear moderately encouraging. There are several reasons for this. First, petroleum prices are expected to increase much faster than coal prices, making coal ever - 115 - more economical than petroleum. Second, the market economies are expected to grow at a fairly rapid pace by recent standards. Third, the relatively low energy prices expected to prevail in the 1990s may revive investments in capital goods that heavily use energy, particularly electricity. Fourth, safety concerns are likely to lead to further scaling down of nuclear energy programs. Fifth, rationalization and restructuring of inefficient coal mines in Europe and Japan will be unavoidable in the long run. Against these positives must be weighed the industry's tendency to overinvest in mine capacity expansions. The coal industry has operated for much of the time with excess capacity. There is little reason to expect that it will oehave differently in the future, which implies that the coal industry will operate for most of the time in the 1990s along the long-run marginal cost curve. 38. Various studies have indicated that the cost of coal mining will increase only very slowly over the long term due to resource depletion. In the United States, the average rate of increase should not exceed 1% p.a. Increases in mining wages in real terms could be largely offset by improvements in labor productivity. The f.o.b. export price of US thermal coal, therefore, is projected to increase at 0.5% p.a. in real terms (deflated by the US CDP deflator, see Table AS), reflecting an assumed 1% p.a. increase in mining costs and a 1.5% p.a. decline in rail freight rates. In South Africa, however, real mining wage rates could increase faster than productivity, resulting in faster increases in total mining costs than for its competitors. Despite a significant number of new mines coming into production in Australia, its cost structure has remained remarkably stable. We expect this situation to continue. Mining costs in Australia are projected to increase at 0.5% p.a. while its rail freight rate is assumed to remain constant in reai terms. The need to invest in the rail network in Australia could prevent freight rates from falling. 39. Several important uncertainties face the thermal coal market. One is the possibility of another petroleum price shock. The short-term impact on coal prices of such a shock during the 199,1s could be substantial, given the more balanced supply and demand conditions expected to prevail during that time. The continuing abundance of coal, however, will minimize the long-term impact of such a shock. Another important uncertainty is the likelihood of continuing political turmoil in South Africa that could result in serious supply disruptions. With much of the excess capacity eliminated, a supply interruption in South Africa or in any other important coal exporter could substantially drive up the prices in the short term. TABLE Al. SOLID FUELS - PRODUCTION BY MAIN COUNTRIES AND ECONOMIC REGIONS ACTUAL PROJECTED GPOWTH RATES Al ------------------------------------ ---------------------------------- ------- ------------------------ -- COUNfRIES/ 1987 * ECONOMIES 1969-71 1979-81 1936 1987/B 1988 1989 1990 1993 2000 1961-86 1970-06 2000 -------------------------------------------------------------------------------------------------------------------- -- ----------------(MILLION TONS OF OIL EQUIVALENT) ----------------------------(0 PER ANNUM)------ INDUSTRIAL 666 717 780 793 807 821 835 911 986 0 5 1 3 1.5 NORTH AMERICA 371 455 508 522 531 542 551 604 657 2 2 2 4 1 5 UNITED SrATES 363 431 469 479 487 497 504 549 593 1 9 2 0 1 4 BEC-10 235 191 171 164 168 171 174 178 181 -2 7 -1 8 0 7 GERMANY, FED REP 99 87 78 75 77 79 81 83 86 -1 7 -1 3 0 9 UNITED XINGDOM 89 73 62 59 60 61 62 63 64 -3 3 -2 8 0 5 OTHER WESTERN EUROPE 2 1 2 2 3 3 3 3 3 -1 0 1 8 2 0 JAPAN 24 11 10 10 10 9 9 8 7 -6 0 -4 3 -2 7 OCEANIA 33 59 90 95 96 97 99 120 138 6 7 5 & 2 6 AUSTRALIA 32 58 89 93 94 95 97 118 137 7 0 5 7 2 6 NON-MARXET 517 588 618 629 635 643 649 673 707 1 4 1 0 0 8 USSR 309 348 351 355 359 362 364 371 389 J 2 0 6 0 6 EASTERN EUROPE 208 240 268 274 276 280 285 303 318 1 7 1 5 1 0 POLAND 85 111 123 127 128 131 133 143 151 2 8 1 9 1 1 DEVELOPING 293 520 724 140 764 793 823 962 1,122 5 9 5 7 2 6 ASIA 235 417 578 589 609 632 655 76a 886 6 3 5 2 8 CHINA 169 307 430 437 452 469 488 571 649 6 7 5 6 2 7 INDIA 36 65 94 98 102 106 130 132 159 5 0 6 6 3 3 AFRICA 37 10 97 99 100 102 104 112 132 5 3 6 9 1 9 SOUTH AFRICA 34 66 93 95 96 98 100 107 125 5 7 7 4 1 8 AMERICA 6 11 17 18 21 23 27 35 47 4 9 6 4 6 5 SOUTHERN ELROPE 16 23 33 34 35 36 37 47 57 3 5 4 6 3 6 WORLD 1,476 1,825 2,123 2,162 2,206 2,237 2,307 2,546 2,814 2 0 2 3 1 8 A/ LEAST SQUARES TREND FOR HISTORICAL PERIODS (1961-86)1 END-POINT FOR PROJECTLD PERIODS (1987-2000) B/ ESTIMATE SOURCES: UNITED NATIONS ENERGY STATISTICS (ACTUAL)i WORLD BANK, INTERNATIONAL ECONOMICS DEPARTMENT (PROJECTED) TABLE A2t SOLID FUELS - APPARENT CONSUMPTION BY MAIN COUNTRIES AND ZCONMIC REGIONS ACTUAL PROJECTED GROWTH RATES Al COUNTRIES/ 1987 - ICONOIES 1969-71 1979-81 1986 1987/5 1988 1989 1990 1995 2000 1961-86 1970-86 2000 ------------ (MILLION TONS OF OIL EQUIVALENT) -----(% PER ANNUM) -------- INDUSTRIAL 692 727 798 813 825 83) 854 924 1,000 0.6 1.3 1,4 NORTH ,AMERICA 341 394 447 456 464 471 479 $22 567 1.9 2.1 1.3 UNITED STATES 325 371 418 425 433 441 448 490 532 1.8 1.9 1.5 SIC-10 262 233 228 232 234 237 241 255 270 -1.7 -0.4 1.0 UNITED KINrrpOM 91 72 66 68 68 68 68 69 71 -2.9 -2.1 0.3 GERMANY, FED. REP. 91 81 79 80 80 81 83 86 90 -1.4 -0.5 0.8 OTHER WESTERN EUROPE 10 10 14 14 14 15 15 18 22 0.1 2.2 3.0 JAPAN 57 58 74 76 76 78 79 83 90 2.1 1.8 1.2 OCEANIA 22 31 35 36 37 38 39 45 52 3.5 2,9 2.6 WON-MARET 501 570 594 603 609 617 623 650 683 1.4 1,0 0.8 USSR 297 334 339 343 346 349 350 356 369 1.2 0.6 0.5 EASTERN EUROPE 203 236 255 260 263 269 273 294 315 2 6 1.4 1.3 POLAND 67 92 97 99 100 102 104 114 121 2.8 2.3 1.4 DEVELOPING 296 517 731 746 772 801 831 973 1,131 .9 5.6 2.8 ASIA 234 424 600 612 634 658 682 800 921 6.4 5.8 2.8 CHINA 168 308 434 440 455 473 492 574 650 6.8 5.7 2.6 INDIA 36 65 96 100 104 108 111 134 161 5.1 6.8 3.2 AFRICA 37 53 69 70 71 72 73 78 91 3.7 4.1 1.6 SOUTH AFRICA 33 48 63 64 64 65 66 68 78 3.9 4.3 1.4 AMERICA 9 15 20 21 22 24 25 35 48 4.8 5.9 5.8 SOUTHERN EUROPE 18 25 42 44 45 48 50 61 70 3.9 5.5 3.2 WORLD 1,489 1,814 2,123 2,162 2,206 2,257 2,307 2,546 2,814 2.0 2.3 18 Al LEAST SQUARES TREND FOR HISTORICAL PERIODS (1961-86)i END-POINT FOR PROJECTED PERIODS (1987-2000). B/ ESTIMATE. SOURCES UNITED NATIONS ENERGY STATISTICS (ACTUAL); WORLD BANK, INTRNATIXONAL ECONOMICS DEPARTMENT (PROJECTED), TABLE A3t SOLID FUELS - GROSS EXPORTS BY MAIN COUNTRIES AND ECONOMIC REGIONS ACTUAL PROJECTED GROWTH RATES Al COUNTRIES/ 1987 - ECONOMIES 1969-71 1979-81 1986 1987/B 1988 1989 1990 1995 2000 1961-86 1970-86 2000 --- (MILLION TONS OF OIL EQUIVALENT) ------(Z PER ANNUM)-------- INDUSTRIAL 76 112 141 153 156 159 161 185 208 3.6 4.1 2.1 NORTH AMERICA 40 60 71 77 79 82 83 91 100 3.9 4.0 1.8 UNITED STATES 37 50 53 55 56 58 58 61 62 2.6 2.8 0.6 CANADA 3 11 18 22 23 24 23 31 38 16.6 9.3 3.8 EEC-10 25 23 14 16 17 17 17 17 1 -2.3 -2.0 1.0 OTHER WESTERN EUROPE 0 0 0 0 0 0 0 0 1 3.5 5.3 1.4 JAPAN 0 1 2 2 2 2 2 2 2 18.8 17.9 1.7 OCEANIA 11 27 5 59 59 59 60 73 87 14.5 9.0 2.6 AUSTRALIA 11 27 55 59 59 59 60 75 87 14.4 9.0 2.6 *ON-MARKET 40 41 51 5 55 56 57 60 65 1.6 0.3 1.1 USSR 17 18 18 20 20 21 22 23 28 1.1 0.0 2.3 EASTERN EUROPE 24 23 33 35 35 35 35 36 37 1.8 0.5 0.3 POLAND 18 18 27 29 29 29 29 30 30 2.6 0.4 0.3 DEVELOPING 4 23 40 43 44 47 51 61 78 10.7 19.8 4.1 ASIA 2 4 6 6 7 7 7 9 13 3.7 7.8 4.7 AFRICA 2 19 30 32 32 33 34 39 47 14.7 27.1 2.7 SOUTH AFRICA 1 18 30 32 32 33 34 39 47 19.7 29.6 2.7 AMERICA 0 0 4 4 6 8 10 13 18 27.8 31,8 9.8 COLOMBIA 0 0 4 4 6 8 10 13 18 ... 39.2 9.8 SOUTHERN EUROPE 0 0 0 0 0 0 0 0 0 7.3 7.1 2.3 WORLD 120 175 233 251 256 263 270 306 330 3.6 4.2 2.2 A/ LEAST SQUARES TREND FOR HISTORICAL PERIODS (1963-86)1 END-POINT FOR PROJECTED PERIODS (1987-2000). B/ ESTIMATE. SOURCESt UNITED NATIONS ENERGY STATISTIC'S (ACTUAL)i WORLD 3ANK, INTERNATIONAL ECONOMICS DEPARTMEWT (PROJECTED). TABLE A41s COLID FUELS - GROSS IMPORTS BY MAIN COUNTRIES AND ECONOMIC REGIONS ACTUAL PROJECTED GR OWTH RATES Al COUNTRIES/ 1987 - ECONOMIES 1969-71 1979-81 1986 198718 1988 1989 1990 1995 2000 1961-86 1970-86 2000 -- (MILLION TONS OF OIL EQUIVALENT) - ------( PER ANNUM)-------- INDUSTRIAL 97 138 159 173 175 177 180 198 223 3.5 3.4 1.7 NORTH AMERICA 12 12 10 11 11 11 11 11 11 0.7 -1.2 -0.1 CANADA 12 10 9 9 9 9 9 9 9 0.0 -1.6 -0.9 EEC-10 44 67 72 83 84 83 84 94 107 2.3 4.1 1.7 FRANCE it 20 12 13 13 14 14 16 20 1.9 2.4 2.7 ITALY 8 11 14 14 15 15 16 20 23 2.7 4.3 3.3 GERMANY, FED. REP. 7 a 9 14 14 23 12 13 15 0.3 2.1 0.3 BELGIU4-LUXEMBOURG 8 9 9 9 9 9 10 11 12 0.8 0.8 2.4 OTHER WESTERN EUROPE 8 10 12 12 12 13 13 16 19 0.8 2.6 3.2 JAPAN 33 49 66 68 68 70 72 78 86 8.7 3.9 1.6 OCEANIA 0 0 0 0 0 0 0 0 1 0.0 0.0 102.1 NON-MARKET 24 26 27 28 29 31 31 36 42 1.2 0.2 2.6 USSR 5 4 7 8 8 8 8 8 8 2.5 0.9 0.3 EASTERN EUROPE 19 22 19 21 72 23 Z3 28 34 0.8 -0.1 3.S DEVELOPING 7 21 47 49 52 55 58 72 86 8.5 14.6 3.8 ASIA 1 11 28 30 31 32 34 41 48 14.3 28.2 3.2 AFRICA 2 2 2 2 3 3 3 4 6 1.0 4.2 6.5 AMERICA 3 5 7 7 7 8 9 13 18 6.1 6.7 6.8 SOUTHERN EUROPE 2 3 10 10 11 12 13 14 14 6.5 10.4 2.0 WORLD 128 184 233 251 256 263 270 306 350 3.7 4.0 2.2 Al LEAST SQUARES TREND FOR HISTORICAL PERIODS (1961-86); END-POINT FOR PROJECTEI) PERIODS (1987-2000). B/ ESTIMATE. SOURCES: UNITED NATIONS ENERGY STATISTICS (ACTUAL.); WORLD BANK, INTERNATIONAL ECOROMICS DEPAWMENT (PROJECTEV). TABLE AS: SPOT EXPORT PRICES OF THERKAL COAL ------United States al------- --------South Africa b/--------- ----------Australia c/--------- Current $ 1985 Constant $ Current $ 1985 Constant $ Current $ 1985 Constant 4 MUV d/ US CNP e/ MUV d/ US GNP e/ MUV d/ US GNP e/ Actual 1977 f/ 33.4 45.8 55.5 19.6 26.9 32.6 29.0 39.7 48.2 1978 39.6 47.2 61.3 20.1 23.9 31.1 28.6 34.1 44.3 1979 35.4 37.2 50.4 21.2 22.3 30.2 29.7 31.2 42.3 1980 43.1 41.3 56.2 30.5 29.2 39.8 39.4 37.8 51.4 1981 56.5 53.9 67.3 40.9 39.0 48.7 52.8 50.4 62.9 1982 52.2 50.5 58.4 42.7 41.3 47.8 54.8 53.0 61.3 1983 44.5 44.2 47.9 31.6 (37.4) 31.4 34.0 38.2 (39.1) 37.9 41.1 1984 48.6 49.1 50.4 32.1 (37.9) 32.4 33.3 31.0 (31.7) 31.3 32.1 1985 46.6 46.6 46.6 33.5 (39.4) 33.5 33.5 33.8 (34.6) 33.8 33.8 1986 43.9 37.1 43.0 26.8 (32.6) 22.7 27.8 31.1 (31.8) 26.3 32.2 1987 36.2 27.9 34.5 23.9 (32.6) 18.4 22.8 27.5 (28.2) 21.2 26.2 0 May 1988 37.0 26.8 (29.7) 33.0 (33.7) Proj2ec ted 1988 37.0 26.3 33.6 28.0 19.9 25.4 34.0 24.2 30.8 1989 36.0 24.1 31.0 27.0 18.1 23.2 33.0 22.1 28.4 1990 38.0 25.0 30.8 28.0 18.5 22.7 34.0 22.4 27.6 1995 49.7 27.5 31.6 37.1 20.5 23.6 44.5 24.6 28.3 2000 66.7 29.4 34.2 50.6 22.3 25.9 59.7 26.3 30.6 Note: The figures in parentheses show the US quality equivalent prices of South African and Australian coals. a/ 12,000 btu/lb, <1% sulfur, 12% ash, f.o.b. piers, Hampton Roads, Norfolk, United States. b/ 11,300 btu/lb, <1% sulfur, 15% ash, f.o.b. piers, Richards Bay, South Africa. c/ 12,000 btu/lb, <1% sulfur, 14% ash, f.o.b. piers, Newcastle/Port Kembla d/ Deflated by Manufacturing Unit Value (MUV) Index. e/ Deflated by US CNP deflator. "/ May-December 1977. Sources: Coal Week and Coal Week International, various issues (actual); World Bank, (projected). - 121 - COAL ( CONSTANT 1985 DOLLAR PRICES* ) 80- 70- 4 60- * , a , 40- 4 O ** S.S 30 . 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 DEFLATED BY MANUFACTURING UNIT VALUE ( MUV ) INDEX ********** DEFLATED BY U.S. GNP DEFLATOR. *1948 - 87 ACTUAL ; 1988 - 2000 PROJECTED . SOURCE : WORLD BANK . INTERNATIONAL ECONOMICS DEPARTMENT. ME T A L S A N D MR A L S 1. After a prolonged period of low prices, international copper prices staged a dramatic run-up in 1987 and, buoyed by strong demand increases and reduced capacities in the wake of the industry's restructuring, remained at high levels through the first half of 1988. Copper prices are expected to decline sharply from 1989 and remain at low levels through the early 1990s-- most of the time below US$0.70/lb. This price behavior will be determined by a combination of slower industrial growth and large production units coming on-stream in the near future. Over the long term, prices are expected to reflect the costs of the marginal producer, likely to be represented by large- scale mines necessary to meet the demand increases to the year 2000. 2. World demand for refined copper is projected to increase at only 1.5% p.a. over the 1987-2000 period. This demand forecast is slightly higher than that made two years ago. The main reason for the higher forecast is the possibility that in the 1990s the copper-intensive capital goods sector may grow faster than previously thought likely because of lower petroleum prices and pent-up demand for investment. Over the medium term, the main competition for copper will come from such conventional substitutes as aluminum and plastics. Rapid development of superconducting materials pose the greatest long-term threat to copper. Recent consumption increases have raised de.bts about the pessimism behind a long-term demand forecast of 1.5% p.a. However, we can find no justification for changing our forecast in a significant way. 3. Unusualty large production units are expected to come on-stream during the 1988-91 period. These projects were initiated in the 1970s and early 1980s when copper prices were relatively high. Few new greenfield mining projects have been studied in recent years; the 1990s are likely to witness the implementation of only a few large-scale c:pper mining projects. Industry restructuring, the increasing share of the solvent extraction/electrowinning (SxEw) process, and exchange rate adjustments have sharply reduced the costs of copper production in the 1980s. Developing countries will probably be able to offset the increasing capital costs resulting from declining ore grades 3y productivity improvements. 4. The copper mining industry in the industrial countries, particularly the United States, has undergone considerable restructuring and reorganization in recent years. The multinational oil companies have virtually divested their interests in the copper industry. Mergers and acquisitions have allowed the major mining companies to streamline and consolidate their holdings to improve operational efficiency. Severe international competition has also forced the developing countries to improve the efficiency of their state-owned mining companies. In fact, in an abrupt departure from past policies, Mexico decided to privatise Cananea and La Caridad, the country's two main copper operations. - 126 - Demand Outlook 5. After a sk-arp decline in 1985, the market economies' consumption of refined copper experienced two years of strong increases--by 4.7% in 1986 and by an estimated 3.7% in 1987. This turnaround, responsible in large parr for the copper price boom in 1987-88, had been totally unexpected. Although long- term implications should not be drawn from a two-year upturn, it nevertheless provides reason for reassessing the post-1973 trend of sharply declining metals intensity of output. Some of the causes of the recent increases in corper consumption are only beginning to be understood. The most fundamental of chese causes--increased production of metal-intensive capital goods--may point to a future for copper demand that is not altogether as bleak as previously expected, at least for the medium term. 6. Most of the major copper-consuming countries participated in the 1985-87 demand increases. Moreover, the increases applied to almost all lines of copper products. The net increase in consumption between 1985 and 1987 was about equally divided between industrial countries and developing countries (including China); the non-market economies had virtually no change. Growth vas particularly strong in the United States; Japan; the Federal Republic of Germany; France; Italy; Republic of Korea; Taiwan, China; Chile; Mexico; and Brazil. 7. The most unusual aspect of the 1985-87 increase in consumption was that the market economies' growth, measured in terms of GDP, has not been particularly strong, except for a few developing countries. The industrial countries' consumption of copper increased almost at the same rate as that of GDP in both 1986 and 1987, even when the CDP growth rate was slightly below average. In developing countries, copper consumption grew at more than twice the growth rate of GDP in 1986 and 1987. This behavior represents a significant departure from past relationships. The main reason appears to be that the copper-intensive industrial and capital goods sectors have done better than the rest of the economy in the United States, Japan, Italy, and several other industrial countries. For the industrial countries as a whole, the growth rate of industrial production in 1987 is estimated at 5.1%, compared with GDP growth of 2.7%. In the United States, depreciation of the dollar finally started to generate export demand for US manufactures while higher capacity utilization and pent-up demand for investments spurred production of capital goods. Particularly impressive has been machine tools production, which has achieved a record level since the 1982 recession. Japan's industrial production increased briskly in 1987, stimulated by expansion of domestic expenditure which was reflected most sharply in a boom in domestic car sales. While the industrial sector was lackluster in the Federal Republic of Germany and other parts of north Europe, copper consumption received a major boost from the construction industry, which benefited from low interest rates and mild weather throughout the region. Exchange rate adjustments are considered the main reason for the phenomenal growth of manufactured exports and hence copper consumption in Republic of Kores and Taiwan, China. 8. There have been some indications that changes in technology and taste may be working in favor of copper. For example, after years of decline, copper intensity in automobiles has stazt.d to move upward with an increasing - 127 - degree of electronic sophistication. Th% proliferation of computers and other electronic products through alt sectors of the economy has provided the main growth market for copper. The pleasing colors and textures of copper and copper alloys also appear to have regained preference among consumers. 9. Against this backdrop, we consider the following as the main factors that will determine the future demand for copper: (a) growth of industrial production, particularly the capital goods sector, in relation to GDP; (b) competition between copper and other conventional substitute materials such as aluminum and plastics; and (c) technological innovations in material science, particularly in superconducting materials. 10. The forecasts of copper consumption for the major copper-consuming countries are based on historical relationships between copper consumption and gross domestic capital formation (or industrial production), and the prices of copper and other factors of production. It is thought that the capital goods sector is more representative of copper-intensive manufacturing than the industry as a whole. The conventional approach to copper demand analysis has been tro focus only on the prices of copper and its important substitutes, particularly aluminum. In most manufactured products, however, copper is a minor input and the decision to use copper may be determined more by considerations of other factors than by its price. The sharp increases in energy prices may have had a significant role in the decline in the copper intensity of GDP, through energy-capital and energy-material complementarity in the production process. In a significant departure from the conventional approach, we have included the price of energy (represented by the price of crude oil) in our copper demand equations. For the majority of countries, its inclusion substantially improve the results. Copper and energy are generally found to be complements. 11. Over the short to medium term, the demand for copper is largely contingent on economic activity in the adustrial and developing market economies. The implications of the us fiscal and balance-of-payments imbalances cloud the medium-term economic prospects. Given that the imbalances cannot be perpetuated, subsequent adjustments to eliminate them will certainly involve economic costs in terms of reduced output and employment. This report assumes that the adjustments will be only moderately costly and relatively short-lived. Therefore, unlike in previous recessions, the market economies' copper consumption is projected to decline only by 0.9% between 1988 and 1990. If the adjustments turn out to be more costly and protracted, copper consumption could decline sharply during this period and even beyond. 12. The world consumption of refined copper is projected to grow at 1.9% p.a. over the 1990-2000 period, somewhat higher than the 1.6% p.a. growth we projected two years ago. The upward revision is based upon the view that the 1990s will include a period of substantial investment activity. - 128 - 13. The main competition for copper in the various end-use markets is likely to come from the already-known substitutes, i.e., aluminum, plastics and opcical fibers. In the longer term, the development of superconducting materials could jeopardize copper's ccmmercial future. Copper's share in the electrical transmission cable market has been stable for some time at about 75%. However, continued improvements in aluminum wires pose a renewed threat to copper in that market. The shift from copper to aluminum in heat exchange equipment, particularly in automobile radiators, is expected to continue unless relative prices change decidedly in favor of copper. Plastics enjoy a large cost advantage over copper so it is expected that they will eventually take over most of the water distribution tubing market. Fiber optics tech- nology will continue to displace copper in the telecommunications market-- reducing copper use in telecommunications by approximately 50% by the end of 1990s. 14. Development of commercially-viable, superconducting material could spell disaster for copper, unless copper turns out to be a major ingredient of the material. The rapid progress recently made in this area has heightened the prospect of developing such a material in the not so distant future. The use of copper &s an electrical conductor roughly accounts for more than 50% of the industrial economies' copper consumption. 15. On the positive side, the trend toward computerization and automation will continue to give a strong boost to copper consumption. In the past ten years growth in copper demand for electronics uses resulted from rapid increases in the volume of such products that more than made up for the reductions due to miniaturization. Another positive factor is the prospect of continued demand growth in developing countries. The countries that have been rapidly industrializing will continue to do so, although probably at slower rates. Structural adjustment efforts made by the heavily-indebted developing countries may be expected to bring them back on the growth path in the 1990s. Large developing countries such as Brazil, India, and China have great potential for growth in consumption of raw materials such as copper, but this potential is often smothered by government restrictions which raise their prices. Supply Outlook 16. The 1980s witnessed surprising changes in the structure and economics of copper production. The changes may be grouped under the following four headings: (a) mine restructuring, leadirg to closure or modernization of inefficient units; (b) the emerging importance of the solvent extraction and electrowinning (SxEw) process; (c) exchange rate adjustments by major copper- exporting countries; and (d) consolidation of ownership through mergers and acquisitions. Forced largely by low prices during this period, these changes eventually resulted in cost savings of different degrees to different producers and hence changes in their competitive position in the world market. In large measure, these changes have completely reshaped the industry. 17. Between 1980 and 1986, about 760,000 tons of copper mine capacity (equivalent to 11% of the market economies' total capacity in 1986) was closed - 129 - permanently or idled indefinitely. In addition, as of 1986 about 240,000 tons of capacity were temporarily out of commission for modernization purposes or because of market conditions. Table 1 summarizes changes in the market economies' copper production capacity in the 1980s. There was a net decline in capacity between 1980 and 1986 because of what appears to be unusually large closures in the industrial countries. Closures were heavily concentrated in the United States and Canada where the industry experienced large-scale restructuring of inefficient mines. The developing countries, however, managed to increase their total capacity over the period; capacity closures were largely limited to normal retirement of old mines. The table conceals the fact that capacity additions could have been much larger had the projects planned to come on-stream by 1986 been realized as scheduled. A large part of these new investments will come on-stream in the next two to three years. TABLE 1: CHANCES IN MARKET ECONOMIES' COPPER CAPACITY, 1980-86 Reduction New Expansion of Net of Existing Capacity Existing Change Closures Capacities Additions Capacities --------------------('000 Tons CU)------------------- Developing Countrie; 217 -162 -435 329 485 Industrial Countries -595 -500 -377 115 266 Total Market Economies -378 -761 -812 444 751 Source: World Bank. 18. The painful adjustment period the copper mining industry experienced in the 1980s has had a profound impact on the industry's cost structure and its investment decisions. Already, investments in new mines and expansions of existing ones have been taking place at a substantially reduced pace. This will affect capacity availability in the 1990s. The criteria for new investments have become much more stringent than in the 1970s. The fact that the industry refused to reactivate idled capacity during the price boom of 1987-88 reflects the industry's restrained outlook for the future. 19. SzEw is a method of producing copper cathodes directly from the tailings accumulated from past production or from the ore (in-situ leaching). As such, it does not require smelting and refining; neither does it require mining when tailings are used. Since the SxEw process bypasses these steps, the direct cash cost of SxEw production is substantially lower than that of the conventional mining and refining. Throughout the 1980s, the SxEw technology has been simplified and improved to overcome quality problems; in the process the industry has succeeded in reducing direct cash costs by 30%. In the United States, where the technology was pioneered, the direct cash cost of SzBw averages about $0.30/lb compared with about $0.60/lb for conventional production methods. As a result, the share of SzEw hqs been - 130 - rapidly increasing in the last 10 years, reaching 13% of total US production in 1987 and going up to 23% in 1988. It is estimated that the increased share of SxEw reduced the average US cash cost by about $0.05/lb in 1988. Because of the large cost advantage, it is clear that SxEw will play an increasingly important role not only in the United States but also in other major copper- producing countries. 20. Exchange rate changes between the major copper-producing countries had a major impact on their international competitiveness. Table 2 shows the changes in exchange rates of the major producers adjusted for their domestic inflation. It is seen that practically all of the developing country producers have had their real exchange rates vis-a-vis the US dollar depreciate by 50-300% between 1980 and 1987. Depreciation of the US dollar since 1986 vis-a-vis the major industrial country producers helped to improve the US competitive position. 21. The net result of the adjustments discussed above has been sharp reductions in the costs of producing copper. For the market economy producers as a whole, the average direct cash cost is estimated to have declined from the high of $0.63/lb in 1981 to $0.45/1b in 1986, and average total costs from $0.82/lb to $0.66/lb. Among the components of total cost, indirect production costs have declined substantially while depreciation and interest charges have increased slightly. Thus, most of the savings in total costs resulted from reductions in the direct cash costs of mining and refining. TABLE 2: REAL EFFECTIVE EXCHANGE RATE INDICES a/ OF MAJOR COPPER PRODUCERS (19UsG=100) Australia Canada Chile Mexico Peru Philippines Zambia Zaire 1981 108.4 106.5 118.0 108.6 109.8 103.2 102.2 92.6 1982 108.7 109.7 106.7 70.6 102.0 107.1 113.9 97.7 1983 106.5 113.9 86.8 64.9 89.6 90.1 105.6 114.3 1984 109.6 111.6 85.3 73.6 84.9 89.2 90.8 45.6 1985 92.3 106.4 68.8 73.3 68.3 97.6 84.0 41.3 1986 80.7 98.2 58.2 56.2 93.7 76.2 40.5 41.2 1987 80.6 99.7 53.9 55.8 98.9 70.1 42.7 35.6 Source: IMF, International Financial Statistice, various issues. a/ Those rates not provided by the International Financial Statistics were estimated as follows: national currencies per US dollar, deflated by the consumer price indices of the respective countries. 22. The countries with the largest declines in costs were Zambia, South Africa, Australia, the United States, and Chile. The industrial country producers' cost savings came mostly from "real" adjustments (productivity improvements, etc.), while exchange rate adjustments dominated the changes among the developing countries. This general picture is somewhat misleading, - 131 - however. Productivity gains in Chile, for example, were largely wiped out by the deterioration in the ore grade (by almost 20%) and the increase in the stripping ratio. Zambia moved from the position of highest-ccst producer to the lowest-cost producer through a combination of exchange rate adjustments and productivity improvements, despite small declines in ore grade. Cost savings in the United States were attained by closures of high-cost mines, productivity improvements through modernization of equipment and mining techniques, enhancement of ore grades through exploitation of better deposits, and lowering of wage rates. The collapse of by-product cobalt prices was the main contributor to the increase in Zaire's costs. 23. It is important to emphasize that the developing countries' competitive position has been maintained in large part by exchange rate adjustments which may or may not be sustainable in the long run. In any case, as a long-term strategy, it would be highly desirable for these countries to achieve cost-saving productivity improvements comparable to those attained in industrial countries in the recent past. This task will require infusion of capital and efficient management, among other things. 24. A tally of known copper mine projects--new projects under construction or firmly committed, extensions of existing facilities, and attritions or planned closures due to resource depletion or deterioration of ore grade--indicate that the market economies' effective mine capacity will rise substantially over the medium term to slightly more than 8 million tons by 1995, or 13% above the 1987 level. This increase will be the result of a number of large-scale projects that have been planne,4 and implemented for some time and !!ready have come close to start of operation. Country-by-country mine capacity projections are shown in Table 3. 25. Capacities in 1995 and beyond will be determined by investment decisions yet to be made. Although there is no lack of potential areas that could be developed, the decision to do so may be severely constraincd by the adverse market conditions expected to prevail through the early 1990s. It is therefore expected that capacity expansious will be significantly slowed down in the second half of the 1990s to return to a more balanced supply and demand condition by 2000 (see Table 4). Recent developments and prospects for the major copper-producing countries are summarized below. 26. Australia. The Olympic Dam project, due to come on-stream in 1988 and gradually to expand capacity throughout the 1990s, has made some progress in marketing by-product uranium as well as copper. Future expansions may be constrained by highly uncertain market conditions for uranium. This project and a few other projects based on known reserves are expected to more than offset declines in existing Australian mines. 27. Chile. Continued deterioration in ore grade at Chuquicamata has necessitated large investments to increase mill throughput in recent years. Although financial constraints within Chile have delayed part of these investments in recent years, CODELCO has largely been successful in carrying out the necessary investments. However, increasing arsenic content and declining grade of ore are posing an element of uncertainty to future expansions at Chuquicamata, the world's largest copper mine. Not subject to these problems is SxEw production; practically all of future production increases from Chuquicamata are expected to come from SzEv. The huge - 132 - TABLE 3: PROJECTED MINE CAPACITIES OF THE MAJOR COPPER PRODUCING COUNTRIES, 1988-2000 1988 198S 1990 1995 2000 ('000 Tons CU in Concentrates and Leach Output) Zambia 510 500 490 420 300 Zaire 500 500 490 530 600 South Africa 198 186 180 186 181 Other Africa 107 99 89 48 40 Australia 270 300 310 330 350 Papua New Guinea 250 300 300 320 350 Philippines 220 190 190 200 200 Indonesia 107 115 150 150 150 Other Asia and Middle East 243 244 247 260 278 United Staes 1,590 1,620 1,680 1,500 1,450 Canada 800 800 780 710 650 Chile 1,510 1,630 1,700 2,100 2,350 Peru 400 380 370 390 420 Mexico 280 290 290 320 350 Brazil 54 60 85 130 150 Other Latin America 3 5 10 19 19 Portugal 20 85 110 130 130 Yugoslavia 128 130 140 150 150 Other Western Europe 142 140 138 130 120 Total Market Economies 7,332 7,574 7,749 8,023 8,238 Source: World Bank (projected). Escondida mining project has been under investigation for a long time and may finally come to realization by the early 1990s. The contribution of small mines will increase through recently opened Los Pelambres mine. 28. Papua New Guinea. Upgrades of facilities at the Bougainville mine-- preconcentration screening, tailings pipeline, etc.--will increase its production over the next several years. However, the mine faces a significant increase in stripping ratio in the 1990s which will increase its costs and reduce production. An SxEw facility now under study could partly compensate for this decline; the proposal, however, is not firm enough to be counted as a - 133 - TB 4: MAREET ECONMOIES' al RETID CDPPER BALANCE, 1987-2000 1987 1988 1989 1990 1995 2000 ---------------('000 Tons CU)--------------- (1) Concentrate Production 6,303 6,550 6,677 6,810 7,106 7,512 (2) Concentrate Net Imports b/ 13 13 13 12 10 10 (3) Smelter Output ((1+2) x.965) 6,095 6,333 6,456 6,583 6,867 7,263 (4) Blister Net Imports b/ -8 -8 -8 -8 -7 -7 (5) Scrap 1,200 1,320 1,150 1,150 1,300 1,600 (6) Electro & Fire Refined Output (3+4+5) 7,287 7,645 7,598 7,725 8,160 8,857 (7) SxEw Production 727 874 1,005 1,045 1,230 1,400 (8) Total Refined Production (6+7) 8,014 8,519 8,603 8,770 9,390 10,257 (9) Refined Net Imports b/ 140 110 100 100 50 50 (10) Refined Availability (8+9) 8,154 8,629 8,703 8,870 9,440 10,307 (11) Refined Demand 8,455 8,690 8,372 8,511 9,412 10,405 (12) Stock Changes (10-11) -301 -63 331 359 28 -98 (13) Reported Stocks 462 399 730 1,089 1,747 1,397 (14) Months Consumption 0.66 0.55 1.05 1.54 2.23 1.61 a/ World excluding USSR and Eastern Europe. R Net imports vis-a-vis USSR and Eastern Europe. Source: World Bank. future supply source. The large Ok Tedi project, despite its great potential, :f beset with a number of problems that probably will prevent it from becoming a truly large-scale operation. 19. United States. After Zrastic restructuring and consolidation, the United States emerged as a competitive supplier of copper. Capacity expansions planned through 1995 consist almost exclusively of SxEw projects, based on accumulated leach dumps. Opening a new mine has become a rare event. Although SxEw will increase US production through 1995 or even beyond, its future is limited by the size of the existing leach dump. US production, therefore, is likely to decline in the long term, unless new ore bodies are developed. 30. Zambia. World Bank assistance to the Zambian copper industry at least temporarily arrested the sharp decline in production. The large investment in the Tailings Leach III (Sx9v) project will contribute only marginally to Zambia's production over the short term because of technical problems. Over the long term Zambia faces declining ore reserves and ore grades, as well as more difficult mining conditions, all of which require - 134 - large investments to overcome. Without such investments and appropriate policies regarding exchange rates and other measures to improve efficiency, Zambia's production will continue to decline, maybe even faster than projected. 31. Zaire. Blessed with particularly high-grade but difficult-to- concentrate ore reserves, Zaire is expected to increase production primarily through opening up of new mines. An example is the Tenke Fungurume deposit which should be exploited towards the end of the 1990s. With no significant deterioration of ore grade expected in the near future, the existing mines should be able to maintain current production levels with moderate investments and upkeep of equipment. 32. Other Countries. Canada faces the prospect of sharp reductions in production because of resource depletion. Peru's production is expected to suffer greatly if investments are not made at its two large mines. Despite the financial and other problems the Philippines copper industry has been experiencing, its production level is expected to be roughly maintained through 1990s, thanks to reserve additions and expansions at several mines. Significant production increases are expected to come from Indonesia, Portugal, Mexico, and Brazil. 33. Production of refined copper from secondary sources (scrap) depends on the stock of scrap and the price of refined copper. Over the long term, the proportion of secondary copper in total refined copper supplies has been increasing (from 14.4% in 1976 to 15.2% in 1986 for the market economies) and will continue to do so in the future (to 16.2% by 2000) as the stock of scrap increases. 34. An evaluation of the existing and expected new smelter capacities indicates that there will be more than enough smelter capacity available through 2000. The smelter capacity utilization rate as a whole is expected to reach only about 70-80%; refined copper supplies, therefore, will not be constrained by smelter capacity. Price Outlook 35. Preliminary 1987 data indicate that world demand for refined copper exceeded supplies by 283,000 tons, while the market economies' reported stocks declined by 397,000 tons. By the end of 1987, steady declines (which have been going on since 1982) reduced reported stocks to the lowest level in 17 years. These market fundamentals explain most of the dramatic increases in copper prices in 1987, which peaked at over $1.40/lb on both the LME and COMEX markets in late December 1987. 36. During the first half of 1988, copper prices have shown extreme volatility with respect to changes in exchange stocks and demand indicators. For the first 8 months of 1988, the LME price averaged $1.08/1b, slightly above our forecasts made in January. After a summer lull in demand, the price strongly rebounded in September, reaching $1.20/lb. The main reason for the unexpected rise in copper prices in the second half is the strong growth of industrial economies and hence copper consumption. Despite reactivation of - 135 - the large Bingham Canyon mine, increased production .f secoitdary copper, and coming on-stream of several new units, the surge in consumption all but wiped out excess supplies expected to occur in the sec.ond half. As a result, copper prices are likely to average out the year at well over $1/1b. 37. The supply and demand balance expected over the short to medium term (see Table 4) points to the likelihood of large excess supply over demand during the 1989-92 period. This excess will be due on the one hand to the big surge in production from new mine capacities to come on-stream in 1988-91 and low demand growth expected over this period because of economic slowdown. The size of this imbalance is estimated to peak at 359,000 tons in 1990 even under the mild recession scenario of this report. If the economic downturn is severe enough to result in declines in world copper consumption during 1989- 90, the excess supply availability will be even larger--perhaps as much as 500,000 tons. Even if the expected economic slowdown does not materialize and the market economies grow strongly, the excess supply is not likely to disappear. The expected supply increases are too large to be absorbed by even moderate increases in demand. 38. It is not clear at this time what net impact the expected changes in key financial variables--exchange rates, inflation, and interest rates--will have on copper prices. With higher inflation and interest rates expected over the short term and with the US dollar exchange rate vis-a-vis other major currencies remaining more or less stable, the net effect of these variables on copper prices may be negative as long as investors do not consider copper a good inflation hedge. In any case the impact, if any, will probably be small compared to that of the market fundamentals. 39. Considering these factors, we forecast that copper prices will fall sharply in 1988-89 and remain within the $0.60-0.70/lb range over the medium term--probably through most of the early 1990s. In the event of a sharp downturn in economic activity, prices could fall to extremely low levels, even lower than the 1986 level in nominal terns. Low prices could result in project delays that would smooth out the market imbalance to a certain extent and force further restructuring of the industry, particularly among the inefficient mines in developing countries. Such adjustments would to some extent moderate the price decline. 40. The excess capacity and low prices over the medium term will probably be followed by a period of low investment, improving market balance and hence higher prices. Lately, new mining ventures, particularly large-scale projects, have become a rarity. The only large-scale copper project under preparation is Chile's Escondida project. It is doubtful that there will be more than 2-3 large-scale mining projects coming on-stream throughout the 1990s. It is widely recognized that the long-term demand for copper will not increase sufficiently to justify a continuation of mine investments at the rate experienced in the 1960s and 1970s. Therefore, demand growth to 2000 is likely to be met by expansions of existing mines, additional SxEw facilities, and only a few new mines. 41. Over the long run copper prices in real terms may be expected to gravitate towards the cost of production of the marginal supplier. Among the major producers, the United States currently is close to being the marginal - 136 - producer on a cash cost basis, while in terms of total costs Mexico and the Philippines are near the top because of their high interest charges. Among the possible new mining projects, Escondida's cash operating cost is estimated at $0.37/lb while the total cost peaks at about $0.76/lb because of the huge investment required for the project. 42. Cost conditions will change 7n the future in directions difficult to predict. However, a few trends have emerged which may be expected to continue. First, ore grades in some of the key producing countries have been deteriorating persistently, requiring investment to maintain production capacities. Depreciation and interest costs, therefore, are expected to increase relative to operating costs. Second, developing country governments have begun to take measures to improve the efficiency of their state-owned enterprises. Privatization of Mexico's Cananea and La Caridad is an example in this direction, as well as measures taken by Zambia and Zaire. Recapitalization through privatization could result in large reductions in capital costs, particularly interest charges. Third, the recent declines in costs in the industrial countries may have bottomed out on a mine-by-mine basis, although the overall costs may still come down because of the increasing share of SxEw. 43. Given these trends, the marginal supplier by 2000 may be represented by the US mines or the new mines yet to be developed, such as the Escondida project, because of its high capital costs. Escondida probably is the most cost-competitive among the potential new mining projects. The long-term price projections here are based on the assumption that projects like Escondida will be needed by 2000 and the long-term prices will have to be high enough to justify an investment in such a project. This view is also consistent with the market balance projections (Table 4) that suggest a tight supply/demand balance during 1995-2000, even with the Escondida project and a few other new projects contributing to supply. TABLE Ali COPPER ORE - PRODUCTION BY MAIN COUNTRIES AND ECONOMIC REGIONS ACTUAL PROJECTED GROWTH RATES Al COUNTRIES/ 1987 - ECOOMIES 1969-71 1979-81 1986 1987/8 1988 1989 1990 1995 2000 1961-86 1970-86 2000 ----('000 TONS).-------. -------(% PER ANNUM)------ INDUSTRIAL 2,435 2,528 2,361 2,390 2,495 2,330 2,340 2,210 2,020 1.2 -1.0 -1.3 NORTH ANERICA 2,042 2,069 1,891 1,995 2,090 1,930 1,930 1,850 1,600 0.9 -1.4 -1.7 UNITED STATES 1,447 1,388 1,147 1,275 1,350 1,230 1,230 1,330 1,150 0.2 -2.1 -0.8 CANADA 595 681 743 720 740 700 700 520 450 2.3 -0.1 -3.6 OCEANIA 155 237 245 223 260 270 280 270 350 4.7 2.2 3.5 AUSTRALIA 155 237 245 223 260 270 280 270 350 4.7 2.2 3.' VOf-MARKET 1,095 1,486 1,609 1,630 1,650 1,670 1,690 1,820 2,050 3.9 1.9 1.8 USSR 930 1,037 1,030 1,040 1,050 1,050 1,060 1,130 1,270 2.2 0.0 1.5 EASTERN EUROPE 165 450 579 590 600 620 630 690 780 11.0 7.3 2.2 DEVELOPING 2.712 3,916 4,488 4,521 4,597 4,548 4,660 5,560 6,210 3.6 3.0 2.5 ASIA 298 641 817 835 840 845 865 1,050 1,320 8.3 6.3 3.6 CHINA 110 166 200 210 210 215 230 380 530 4.0 3.4 7.4 PHILIPPINES 163 302 217 214 205 200 190 210 250 7.4 1.8 1.2 AFRICA 1,281 1,348 1,327 1,289 1,295 1,235 1,210 1,170 1,100 1.4 -0.1 -1.2 ZAMBIA 685 391 513 509 520 490 470 420 300 -0.6 -2.0 -4.0 I-A ZAIRE 386 455 503 499 480 480 490 530 560 2.7 1.1 0.9 w AMERICA 984 1,619 2,018 2,027 2,047 1,998 2,045 2,720 3,040 4.1 5.1 3.2 CHILE 694 1,071 1,400 1,375 1,400 1,370 1,420 2,000 2,200 4.0 4.7 3.7 MEXICO 63 171 182 206 220 220 220 230 270 6.6 8.9 2.1 PERU 204 364 397 406 385 360 330 370 400 3.8 5.0 -0.1 OCEANIA 0 161 179 218 250 270 290 300 400 ... ... 4.8 PAPUA NEW GUINEA 0 161 179 218 250 270 290 300 400 ... ... 4.8 SOUTHERN EUROPE 150 147 149 152 165 200 250 320 350 1.0 -0.5 6.6 WORLD 6,242 7,931 8,459 8,541 8,742 8,548 8,690 9,590 10,280 2.8 1.5 1.4 A/ LEAST SQUARES TREND FOR HISTORICAL PERIODS (1961-86); END-POINT FOR PROJECTED PERIODS (1987-2000). 8/ ESTIMATE. SOURCES: NORLD BUREAU OF METAL STATISTICS, METAL STATISTICS (ACTUAL)i WORLD BANK, INTERNATIONAL ECONOMICS DEPARTMENT (PROJECTED). TABLE A2i 'OPPER Ok - GROSS EXPORTS BY MAIN COUNTRIES AND ECONOMIC REGIONS ACTUAL PROJECTED GROWTH RATES Al COUNTRIES/ 1987 - ECONOMIES 1969-71 1979-81 1986 1987/B 1988 1989 1990 1995 2000 1961-86 1970-86 2000 ----------------------------('000 TONS)-------------------------------------(-------% PER ANNUM)------ INDUSTRIAL 240 550 651 587 581 521 481 211 121 8.4 4.5 -11.4 NORTH AMERICA 191 394 516 506 500 440 400 130 40 8.5 4.1 -17,7 CANADA 170 294 341 381 390 37f) 370 30 10 7.4 2.1 -24.4 UNITED STATES 21 101 174 125 110 70 30 100 30 17.6 17.3 -10.4 ESC-10 20 81 15 0 0 0 0 0 0 4.6 1.6 0.0 NON-MARKET 3 0 39 17 20 20 20 20 20 0.0 0.0 1.3 DEVELOPING 313 864 910 871 890 875 890 1,300 1,450 9.0 5.7 4.0 ASIA 151 386 229 179 160 165 160 180 230 8.6 2.5 1.9 PHILIPPINES 149 296 93 89 70 75 60 50 70 5.6 -2 3 -1.8 AFRICA 22 82 83 73 60 60 60 60 60 9.0 9.3 -1.5 ZAMBIA 13 0 0 0 0 0 0 0 0 0.0 0.0 0.0 ZAIRE 0 33 30 23 10 10 10 10 10 0.0 0.0 -6.2 AMERICA 108 225 416 424 430 390 390 750 820 8.3 8.9 5.2 CHILE 52 112 271 260 250 220 240 600 650 10.1 8.3 7.3 PERU 39 25 46 55 60 40 10 0 0 1.9 0.6 ... OCEANIA 0 161 179 195 240 260 280 310 340 0.0 0.0 4.4 PAPUA NEW GUINEA 0 161 179 195 240 260 280 310 340 0.0 0.0 4.4 WORLD 558 1,414 1,560 1,475 1,491 1,416 1,391 1,531 1,591 8.7 5.2 0.6 Al LEAST SQUARES TREND FOR HISTORICAL PERIODS (1961-86)1 END-POINT FOR PROJECTED PERIODS (1987-2000). B/ ESTIMATE. SOURCESi WORLD BUREAU OF METAL STATISTICS, METAL STATISTICS (ACTUAL) i WORLD BANK, INTERNATIONAL ECONOMICS DEPARTMENT (PROJECTED). TABLE A3i COPPER ORE - GROSS IMPORTS BY MAIN COUNTRIES ANl ECONOMIC REGIONS ACTUAL PROJECTED GROWTH RATES Al COUNTRIES/ 1987 - ECONOMIES 1969-71 1979-81 1986 19871B 1988 1989 1990 1995 2000 1961-86 1970-86 2000 --('00 TONS)--------------------------------------- -------(% PER ANNUM)------ INDUST1 4L 517 1,131 1,250 1,209 1,172 1,110 1,085 1,180 1,200 8.8 4.2. -0.1 NORTH AMERICA 34 51 76 68 65 60 65 80 80 4.0 4.9 1.3 UNITED STATES 31 39 5 12 10 10 10 15 15 -0.8 -3.3 1.7 EEC-10 81 187 223 231 220 200 190 170 130 8.5 4.1 -4.3 OTHER WESTERIJ EUROPE 16 48 99 105 107 100 110 200 290 9.4 13.6 8.1 JAPAN 387 843 852 805 780 750 720 730 700 9.6 3.7 --1.1 NON-MARKET 17 37 1 4 4 5 5 6 8 4.0 -7.9 5.5 EASTEPN EUROPE 17 7 0 3 3 4 4 5 7 0.0 0.0 6.7 DEVELOPING 9 140 327 275 315 301 301 345 383 21.8 24.3 2.6 ASIA 4 129 252 250 250 235 245 273 295 0.0 34.8 1.3 KOREA, REPUBLIC OF 3 72 117 166 155 145 150 160 160 0.0 31.1 -0.3 AMERICA 0 1 67 0 40 40 30 45 60 0.0 0.0 --- SOUTHERN EUROPE 2 9 8 2 2 3 3 4 5 0.0 0.0 7.3 WORLD 542 1,308 1,578 1,488 1,491 1,416 1,391 1,531 1,591 9.5 5.5 0.5 A/ LEAST SQUARES TREND FOR HISTORICAL PERIODS (1961-86)1 END-POINT FOR PROJECTED PERIODS (1987-2000). B/ ESTIMATE. SOURCES! WOR.D BUREAU OF METAL STATISTICS, YETAL STATISTICS (ACTUAL)i WORLD BANK, INTERNATIONAL ECONOMICS DEPARTMENT (PROJECTED). TASL9 A4, COPLnk M WN8Id!~IW AI ~ kO~~ W p1clogg ACTUAL PROJECTED GpOWTH RATES A/ COUNTRIES/ 1987 - BCOMMIBS 1969-71 1979-81 1986 19871B 1988 1989 1990 1995 2000 1961-86 1970-56 2000 ----------- -- - - - - - - - - AITN.......................- -.--.* . . R ANNUM) **** INDUSTRIAL 3,076 I,30 3.342 9,640 3,710 3,560 3,39U 3,620 3,540 2,0 010 -012 NORTH AMERICA 1,935 1,705 1,669 1,752 1,830 1,720 1,740 1,720 1,640 0.0 -1.9 -0.5 UNITED STATES 1,497 1,261 1,196 1,249 1,320 1,220 1,240 1,220 1,170 -0.3 -2.4 -0.3 CANADA 439 445 478 503 510 500 500 500 470 0.9 -0.6 -0.5 1EC-10 290 371 486 448 440 430 420 390 350 4.1 2.3 -1.9 OTHER WESTERN EUROPE 130 161 248 273 290 290 310 370 400 3,4 4.0 3,0 JAPAN 589 930 962 980 960 930 920 890 050 5.8 2.0 -1.1 OCEANIA 132 173 170 187 190 190 200 230 300 4.0 1.4 3,7 AUSTRALIA 132 173 170 187 190 190 200 250 300 4.0 1.4 3.7 aOM-MARE? 1,085 1,"25 1,670 1,680 1,690 1,700 1,730 1,900 2,090 4.2 2.2 1.7 USSR 930 1,157 1,155 1,160 1,170 1,180 1,200 1,300 1,440 2.8 0.8 1.7 EASTERN EURDPE 155 468 515 520 520 520 530 600 650 10.3 6.9 1.7 DSVELOPINO 2,390 3,088 3,782 3,834 3,900 1,870 3,920 4,350 4,740 2.9 2.9 1.6 ASIA 130 327 750 774 795 793 815 960 1,140 9.0 11.5 3.0 CHINA 102 206 364 370 380 380 390 480 600 6.1 7.4 3.0 PHILIPPINES 0 0 124 126 130 125 130 160 180 ... ... 2.6 KOREA, REPUBLIC OF 3 74 123 144 143 145 145 150 150 22.4 24.1 0.3 AFRICA 1,270 1,269 1,246 1,250 1,245 1,215 1,205 1,210 1,140 1.1 -0.4 -017 ZAMBIA 677 592 514 523 520 490 470 420 300 -0.4 -1.9 -4.2 ZAIRE 385 421 473 472 470 470 480 520 550 2.2 0.8 1.2 AMERICA 878 1,363 1,619 1,646 1,695 1,695 1,735 1,980 2,200 3.5 4.6 2.3 CRILE 640 952 1,124 1,100 1,150 1,150 1,180 1,350 1,500 3.3 4.3 2.4 PERU 171 333 335 311 310 310 320 360 400 3.9 3.6 2.0 SOUTHERN EUROPE 111 129 167 164 165 165 165 200 260 3.5 1,4 3.6 WORLD 6, 551 8,052 8,994 9,154 9,300 9,130 9,240 9,070 10,370 2.7 1.5 1.0 Al LEAST SQUARES TREND FOR HISTORICAL PERIODS (1961-86)1 END-POINT FOR PROJECTED PERIODS (1987-2000). B1 ESTIMATE. SOURCES: WORLD BUREAU OF METAL STATISTICS, METAL STATISTICS (ACTUAL); WORLD BANK, INTERNATIONmA ECoNoICS DEPARTMENT (PROJECTED). TA3L ASt COPPER BLISTER - GROSS EXPORTS BY MAIN COUNTRIEB AND ECONOMIC REGIONS ACTUAL PROJECTED GROWTH RATES At COUNTRIES/ 1987 - EGOW)"ISS 19d9-71 1979-81 1986 1987/3 1988 1989 1990 1995 2000 1961-86 1970-66 2000 - ------------ (000 TONS)----- ------(Z ER AM) - INDUSTRALM 44 90 70 64 65 70 80 100 150 8,1 3.3 6.8 NORTH AMERICA 12 7 16 12 15 20 30 50 100 4.2 2.3 17.7 UNITED STATES 12 7 16 12 15 20 30 40 80 4.2 2.3 15.7 BEC-10 15 34 22 14 15 15 15 15 15 5.6 -0.1 0.5 NON-MARKET 1 1 4 3 3 3 3 3 3 ... ... 0.0 DEVELOPING 735 662 681 365 570 568 567 520 480 -0.9 -0.6 -1.2 ASIA 1 0 0 0 0 0 0 0 0 ... . . 0.0 APRICA 409 371 366 324 320 318 307 215 160 -0.1 -1.0 -3.3 ZAMBIA 103 8 0 0 0 0 0 0 0 0.0 0.0 0.0 ZAIRE 193 272 276 234 230 250 240 150 100 3.3 1,7 -6.9 AMHER ICA 320 291 313 241 210 250 260 303 320 -1.3 -0.1 2.2 CHILE 183 163 199 134 150 150 130 200 250 -1.7 0.8 4.9 PERU 130 123 95 87 80 80 90 85 so -1.0 -1.3 -4.2 WORLD 779 753 751 632 638 641 650 623 633 -0.3 -0.3 0.0 ------------------------------------------------------------------------------------------------------------- A/ LEAST SQUARES TREND FOR HISTORICAL PERIODS (1961-86) END-POINT FOR PROJECTED PERIODS (1987-2000). B/ ESTIMATE. SOURCESs 4ORLD BUREAU OF METAL STATISTICS, METAL STATISTICS (ACTUAL)i WORLD BANK, INTERNATIONAL ECONOM)CS DEPARTMENT (PROJECTED). TABLE A6t COPPER BLISTER - GROSS IMPORTS BY MAIN COUNTRIES AND ECONOMIC REGIONS ACTUAL PROJECTED GROWTI RATES A/ -------------------------------------------- ...... --------------------------- ----------------- --------- COUNTRIESI EONCmIES 1969-71 1979-81 1986 1987/B 1988 1989 1990 1995 2000 1961-86 1970-86 2000 ---------------------------('000 TONS)---------------------------------------------(Z PER ANNM)---,-- INDUSTRIAL 735 531 516 408 518 516 515 443 386 -1.6 -2.1 -0.4 NORTH AMERICA 167 65 50 45 43 41 41 36 31 -5.5 -7.2 -2.8 UNITED STATES 187 64 49 44 42 40 40 35 30 -8.7 -7.5 -2.') EEC-10 401 316 433 330 440 430 430 360 310 0.4 -0.3 -0.5 OTHER WESTERN EUROPE 11 9 5 5 6 6 7 10 15 0.6 -1.0 8.8 JAPAN 136 80 28 28 29 39 37 37 30 0.0 -5.2 0.5 NON-MARET 2 3 13 25 20 20 20 30 40 5.6 4.5 3.7 EASTERN EUROPE 2 3 13 25 20 20 20 30 40 6.3 5.2 3.7 DEVELOPING 27 91 159 61 100 101 115 150 207 15.9 8.8 7.5 ASIA 10 47 63 31 30 35 40 70 110 21.1 9.9 10.2 AMERICA 1 4 22 20 20 20 20 20 20 ... ... 0.0 SOUTHERN ELAOPE 15 41 74 30 50 50 55 60 77 16.0 7.4 7.3 WORLD 764 625 688 514 638 641 650 623 633 -0,5 -0.8 1.6 Al LEAST SQUARES TREND FOR HISTORICAL PERIODS (1961-86)1 END-POINT FOR PROJECTED PERIODS (1967-2000). B/ ESTIMATE. SOURCES WORLD BUREAU OF METAL STATISTICS, METAL STATISTICS (ACTUAL): WORLD BANK, INTERNATIONAL EC(NOMICS DEPARTMENT (PROJECTED). TABLE A?i COPPER REFINED - PRODUCTION BY MAIN COUNTRIES AND ECONOMIC REIONS ACTUAL PROJECTED GROWTH RATES A/ COUNTRINS/ 1987 - ECOOIES 1969-71 1979-81 1986 19871B 1988 1989 1990 1995 2000 1961-86 1970-86 2000 --('000 TONS)------------------------------------- -------(z PER ANNUM)------ INDUSTRIAL 4,398 4,840 4,537 4,649 5,018 4,670 4,675 4,672 4,775 1.3 0.0 0.2 NORTH AMERICA 2,401 2,356 1,973 2,052 2,383 2,100 2,125 2,122 2,095 -0.1 -1.5 0.2 UNITED STATES 1.941 1,896 1,479 1,561 1,853 1,610 1,635 1,632 1,605 -0.4 -1.7 0.2 CANADA 459 460 493 491 530 490 410 490 490 1.0 -0.6 0.0 BEC-10 1,036 1,123 1,224 1,185 1,210 1,170 1,140 1,120 1,120 1.4 0.9 -0.4 OTHER WESTERN EUROPE 130 162 212 224 240 230 230 280 320 2.5 2.4 2.8 JAPAN 683 1,016 943 980 960 960 960 870 870 5.7 1.8 -0.9 OCEANIA 149 182 185 208 225 210 220 280 370 3.5 1.0 4.5 AUSTRALIA 149 182 185 208 225 210 220 280 370 3.5 1.0 4.5 NON-MARXET 1,293 1,941 2,036 2,050 2,100 2,150 2,210 2,340 2,540 4.3 2.4 1.7 USSR 1,082 1,367 1,400 1,410 1,430 1,460 1,490 1,350 1,690 3.1 1.0 1.4 EASTERN EUROPE 211 574 636 640 670 690 720 790 850 8.9 6.7 2.2 DEVELOPING 1,712 2,622 3,269 3,363 3,477 3,482 3,601 4,495 5,380 4,8 4.1 3.7 ASIA 166 460 775 787 820 845 880 1,085 1,360 9.0 9.8 4.3 CHINA 130 324 370 370 400 420 440 550 710 6.7 6.3 5.1 PHILIPPINES 0 0 137 132 130 130 140 170 200 0.0 0.0 3.2 KOREA, REPUBLIC OF 6 89 165 163 165 170 170 175 180 0.0 26.4 0.8 AFRICA 871 872 877 883 862 852 861 1,020 1,120 1.7 -0.2 1.8 ZAMBIA 573 578 487 506 495 480 470 410 300 0.8 -1.1 -3.9 ZAIRE 194 233 218 210 195 200 220 370 500 0.7 0.2 6.9 AMERICA 569 1,131 1,397 1,473 1,575 1,560 1,635 2,150 2,590 6.7 6.6 4.4 CHILE 462 789 9143 958 1,090 1,030 1,080 1,360 1,560 5.9 5.3 3.8 PERU 34 218 226 216 205 230 223 270 350 10.5 15.5 3.7 SOUTHERN EUROPE 105 159 221 220 220 225 225 240 310 5.3 3.0 2.7 YUGOSLAVIA 88 134 140 139 140 140 140 150 160 5.3 1.2 1.1 wORID 7,402 9,403 9,842 10,062 10,595 10,302 10,486 11,507 12,695 2.8 1.6 1.8 Al LEAST SQTARES TR9ND FOR IISTORICAL PERIODS (1961-86)1 END-POINT FOR PROJECTED PERIODS (1987-2000). BI ESTIMATE. SOURCE3 WORLD BUREAU OF METAL STATISTICS, METAL STATI3TICS (ACTUAL)i WORLD BANK, INTERNATIONAL ECONOMICS DEPARTMENT (PROJECTED). TABLE A83 COPPER REFINED - APPARENT CONSUMPTION BY MAIN COUNTRIES AND ECONGKIC REGIONS ACTUAL PROJECTED COUNTRIES/ 1987 - EcOOsIs 1969-71 1979-81 1986 1987/8 1988 1989 1990 1995 2000 1961-86 1970-86 2000 -----('000 TONS)----- -------(I PER ANNUM) ------ INDUSTRIAL 5,319 6,235 6,C44 6,429 6,592 6,275 6,339 6,812 7,295 1.8 0.8 1.0 NORTH AMERICA 2,105 2,252 2,321 2,405 2,420 2,298 2,315 2,530 2,760 0.9 0.2 1.1 UNITHD STATES 1,881 2,021 2,095 2,173 2,180 2,080 2,100 2,280 2,480 0.9 0.3 1.0 EEC-10 2,089 2,396 2,363 2,392 2,460 2,327 2,346 2,442 2,520 1.5 0.5 0.4 JAPAN 811 1,248 1,219 1,284 1,350 1,300 1,320 1,450 1,580 5.8 2.8 1,6 OCEANIA 107 134 119 125 127 125 128 140 160 2.2 1.6 1.9 NON-MARKET 1,278 1,906 1,885 1,890 1,905 1,930 1,975 2,095 2,290 3.4 2.3 1.5 USSR 949 1,327 1,300 1,300 1,310 1,330 1,370 1,460 1,620 2.9 1.9 1.7 EASTERN EUROPE 328 379 585 590 595 600 605 635 670 4.8 3.4 1.0 DEVELOPING 634 1,446 1,925 2,026 2,098 2,097 2,172 2,600 3,110 7.0 6.6 3.4 ASIA 274 670 1,095 1,173 1,217 1,238 1,285 1,555 1,890 7.8 8.3 3.7 CHINA 188 449 608 660 670 690 720 850 1,030 7.4 6.4 3.5 INDIA 54 73 110 115 120 118 125 145 170 2.0 4.6 3.1 AFRICA 51 110 106 91 97 99 105 120 140 5.0 3.6 3.4 1 AMERICA 196 463 467 471 494 500 512 625 750 6.8 &.8 3.6 BRAZIL 75 213 255 259 260 260 265 320 390 9.5 5.6 3.2 MEKICO 60 123 75 73 90 100 104 125 150 6.2 3.6 5.7 SOUTHERN EUROPE 113 203 257 291 290 260 270 300 330 5.5 4.1 1.0 WORLD 7,231 9,587 10,053 10,345 10,595 10,302 10,486 11,507 12,695 2.7 1.8 1.6 A/ LEAST SQUAkES TREND FOR HISTORICAL PERIODS (1961-86)s END-POINT FOR PROJECTED PERIODS (1987-2000). B/ ESTIMATE. SOURCES: WORLD BUREAU OF METAL STATISTICS, METAL STATISTICS (ACTUAL); WORLD BANK, INTERNATIONAL ECONOMICS DEPARTMENT (PROJECTED). I TABLE Ag: COPPER REFINED - GROSS EXORTS BY MAIN COUNTRIES AND ECONO(IC REGIONS ACTUAL PROJECTED COUTRIES 1987 - OmNIlES 1969-71 1979-81 1986 1987/B 1988 1989 1990 1995 2000 1961-86 1970-86 2000 ---('000 TONS)----- -------(z PER ANNUM) ------ INDUSTRIAL 1,022 1,004 934 947 950 911 910 954 1,040 -0.1 -0.9 0.7 NORTH AMERICA 435 313 317 307 300 292 295 270 240 -2.0 -2.4 -1.9 CANADA 246 263 305 289 285 282 285 260 230 1.6 0.1 -1.7 UNITED STATES 189 50 13 18 15 10 10 10 10 -9.5 -11.3 -4.4 EEC-10 457 473 398 409 405 380 370 360 360 -0.1 -0.8 -1.0 JAPAN 24 97 61 52 50 50 50 40 30 18.7 4.9 -4.1 OCEANIA 41 52 67 82 90 90 99 149 250 6.8 1.6 9.0 AUSTRALIA 38 51 67 82 90 90 99 149 250 7.3 1.9 9.0 MON-MARKET 174 392 283 320 315 320 325 305 320 6.6 1.0 0.0 DEVELOPING 1,324 1,785 2,024 2,070 2,196 2,181 2,274 2,810 3,305 3.8 2.9 3.7 ASIA 2 3 137 157 150 153 170 200 240 0.0 0.0 3.3 PHILIPPINES 0 0 125 119 115 115 125 150 175 0.0 0.0 3.0 AFRICA 826 789 762 775 791 753 769 870 900 1.1 -0.6 1.2 ZAMBIA 573 599 466 499 495 475 405 410 300 0.8 -1.1 -3.8 ZAIRE 187 125 223 205 220 200 220 370 500 0.5 0.2 7.1 SOUTH AFRICA 62 65 72 69 73 75 80 85 90 7.1 1.6 2.1 AMERICA 465 960 1,089 1,120 1,220 1,230 1,285 1,650 1,995 6.8 6.8 4.5 CHILE 434 756 896 940 1,000 1,000 1,050 1,330 1,540 6.3 5.7 3.9 PERU 30 205 193 180 200 200 195 240 315 10.1 16.1 4.4 WORLD 2,520 3,180 3,242 3,337 3,461 3,412 3,509 4,069 4,665 2.4 1.4 2.6 A/ LEAST SQUARES TREND FOR HISTORICAL PERIODS (1961-86)o END-POINT FOR PROJECTED PERIODS (1987-2000). B/ ESTIMATE. SOURCES: WORLD BUREAU OF METAL STATISTICS, METAL STATISTICS (ACTUAL)i WORLD BANK, INTERNATIONAL ECONtIICS DEPARTMENT (PROJECTED). TABLE A10i COPPER REVIXED - GROSS IMPORTS BY MAIN COUNTRIES AND ECONOMIC REGIONS ACTUAL PROJECTED OR ".TB A) COUNTRIESt 1987 - ECC!!0ItiS 1969-71 1979-81 1986 19871 1988 1989 1990 1995 2000 1961-86 1970-86 2000 ---------('000 TONS)------------------------------------- -------(2 PER ANNUM)------ INDUSTRIAL 2,070 2,512 2,545 2,562 2,504 2,457 2,509 3,042 3,472 1.8 0.9 2.4 NORTH AMERICA 146 166 513 521 480 505 470 678 865 6.9 7.8 4.0 UNITED STATES 129 343 492 505 460 495 460 658 845 6.8 8.2 4.0 EEC-10 1,612 1,784 1,665 1,606 1,55u 1,495 1,555 1,640 1,765 0.9 -0.4 0.7 OTHER WESTERN EUROPE 142 102 93 84 87 84 91 105 124 -1.8 -2,9 3.0 JAPAN 171 258 272 348 376 370 390 615 710 6.2 4.1 5.6 NON-MARKET 177 217 140 138 121 101 111 93 91 -0.1 -2.2 -3.2 EASTERN EUROPE 174 212 140 137 120 100 110 92 90 1.2 -2.0 -3.2 DEVELOPING 253 560 716 674 836 854 869 934 1,102 7.2 7 2 3.9 ASIA 116 265 480 417 649 674 698 765 930 9.9 11.3 6.4 AMERICA 90 231 172 190 133 120 126 95 85 5.7 2.2 -6.0 SOUTHERN EUROPE 41 60 62 64 50 35 57 65 72 6.4 2.8 0.9 WORLD 2,500 3,290 3,401 3,374 3,461 3,412 3,509 4,069 4,665 2.4 1.7 2.5 A/ LEAST SQUARES TREND FOR HISTORICAL PERIODS (1961-86); END-POIJT FOR PROJECTED PERIODS (1987-2000). BI ESTIMATE. SOURCES: WORLD BUREAU OF METAL STATISTICS, METAL STATLSTICS (ACTUAL); WORLD BANK, INTERNATIONAL ECONOMICS DEPARTMENT (PROJECTED). - 147 - TABLE All: COPPER - PRICES, a/ 1950-87 (ACTUAL) AND 1988-2000 (PROJECTED) (S/Ton) Current $ - 1985 Conptj at $- MUV b/ US GNP c/ Actual 1930 493 2,083 2.303 1951 607 2,224 2,705 1952 715 2,500 3,139 1953 664 2,388 2,869 1954 586 2,523 2,918 1955 968 3,495 3,987 1956 906 3,157 3,611 1957 605 2,065 2,328 1958 545 1,829 2,054 1959 655 2,229 2,407 1960 677 2,257 2,447 1961 633 2,057 2,266 1962 644 2,069 2,256 1963 646 2,116 2,231 1964 968 3,117 3,288 1965 1,290 4,123 4,272 1966 1,530 4,724 ',,896 1967 1,138 3,474 3,536 1968 1,241 3,824 3,679 1969 1,466 4,287 4,123 1970 1,413 3,833 3,761 1971 1,080 2,819 2,722 1972 1,071 2,565 2,577 1973 1,786 3,692 4,033 1974 2,059 3,494 4,268 1975 1,237 1,885 2,333 1976 1,401 2,109 2,485 1977 1,310 1,795 2,178 1978 1,367 1,628 2,117 1979 1,985 2,087 2,826 1980 2,182 2,092 2,846 1981 1,742 1,661 2,074 1982 1,480 1,431 1,655 1983 1,592 1,581 1,715 1984 1,377 1,391 1,428 1985 1,417 1,417 1,417 1986 1,374 1,161 1,347 1987 1,783 1,371 1,698 Pro jected 1988 2,420 1,720 2,217 1989 i,870 1,251 1,638 1990 1,650 1,087 1,376 1995 2,450 1,354 1,573 2000 2,900 1,280 1,485 a/ London Metal Exchange, cash, virebars up to the end of August 1981; from September 1981 to June 1986, high-grade cathodes replaced wirebars; from July 1986 onward, "Grade A" (vhicb includes high-grade cathodes and high- grade virebars) replaced "high-grade cathodes". b/ Deflated by Manufacturing Unit Value (MUV) Index. c/ Deflated by US GNP Deflator. Sources: Engineering and Mining Journal (actual); World Bank, International Economics Department (projected). - 148 - COPPER (CONSTANT 1985 DOLLAR PRICES • 6000 4000 2000- e m e t u B B 3000 1000 - ol~ o-f.. . 945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 DEFLATED BY MANUFACTURING UNIT VALUE ( MUV ) INDEX DErLATED BY U.S. GNP DELATOR. • 1948 - 87 ACTUAL; 1988 - 2000 PROJECTED . SOUkCE : WORLD BANK, TIN Summary 1. World tin consumption declined from 1970 through the mid-1980s, leading to speculati3n that the metal was in secular decline. High tin prices in real terms during this period and the introduction of new technology led to the less intensive use of tin-a trend illustrated in the use of thinner tin coatings for cinplate. The substitution of aluminum cans for steel (tinplate cans) in tiz beverage sector also contributed to the decline in tin consumption. Additional pressure on demand resulted from the introduction of new packaging systems which have eroded the traditional market for steel cans in the food processing industry. The large decline in tin prices late in 1985 and tae relatively strong growth in tin-consuming sectors since then led to marginally higher world tin demand during 1986-87. Material substitution in major markets such as tinplate and solder is expected to continue as real tin prices gradually increase through the mid-1990s. Consequently, world tin consumption is expected to decrease 0.9% p.a. during the 1987-2000 period. 2. World output of tin-in-concentrates has declined markedly since 1985. The termination of the ITC's program and lower prices have led to the cessation of smuggling which was a major source of tin during the early and mid-1980s. Tin output also has been constrained by the precipitous decline of the Bolivian industry and only modest recent increases of Brazilian production after several years of rapid expansion. Tin mine production should gradually increase to about 193,000 tons by 1989 as stocks are reduced to normal commercial levels. During the 1990s, production should gradually decline, paralleling trends in consumption. Only Brazil is expected to increase output during that period and by the year 2000 should account for approximately 25% of world production. 3. The reduction in tin production and the increase in consumption experienced during the past several years should eliminate the cur-ent tin surplus by 1990. Consequently, prices are expected to increase to USc925/kg in 1990 (US,6l0/kg in 1985 constant dollars). Prices are expected to reach US:1,700/kg in 2000 (USc750/kg in 1985 constant dollars). Tin prices in real terms through the 1990s will remain below levels typical during the pre-ITC collapse period, largely due to cost containment and ample supplies. Introduction 4. The collapse if the International Tin Council (ITC) in October 1985 was marked by a precipitous price decline and, after decades of managed markets and buffer stock activities, a general concern that the emerging competitive environment would result in highly volatile markets. After the initial price decline, there was increased uncertainty regarding future price trends. Some analysts expected continued declines through 1986 while other observers anticipated generally constant prices for several years. In assessing short-term prospects, a major concern involved the length of time required to eliminate the inventory surplus which had emerged when ITC buffer stock operations ceased. In addition, the existence of pre-collapse - 150 - subsidies, royalties, and export controls distorted operating costs and raised questions concerning the extent of likely cost reductions and their impact on long-term equilibrium prices. 5. Experience over the recent past indicates that the more dire predictions of late-1985 and early-1986 were exaggerated. Tin prices have increased modestly since early 1986, but prices have not been volatile-- particularly when compared to the experience of other major metals such as aluminum, copper, lead, zinc, and nickel. (This is probably a matter of regret for producers since tin has not participated in the run-up in metal prices in 1987-88). Surplus stocks still remain, but the large inventory overhang at the end of 1985 has been substantially reduced. The much lower prices have led to reduced tin production and, at least temporarily, appear to have reversed the dramatic decline in tin consumption. Finally, production quotas introduced by the Association of Tin Producing Countries (ATPC) appear to have supported and stabilized prices. Demand Outlook 6. As Table I shows, in the industrial countries tin is used in a variety of applications including tinplate, solder, bronze, and 'orass. 1/ Until recently the largest market for tin was tinplate, accounting for approximately 40% of all tin consumed. However, by 1986 tinplate comprised only 28% of tin use in industrial countries. Solder is now the largest individual application--accounting for approximately 30% of tin consumption. Brass/bronze comprises about 5% of tin use while the "other" (miscellaneous) sector includes a wide variety of applications such as chemicals, babbitt, and white metal. 7. World tin consumption declined from 218,000 tons in 1970 to 201,000 tons in 1985. Industrial country performance during this period was particu- larly poor with consumption declining 1.7% p.a. Tin consumption in developing countries fared somewhat better: consumption increased a modest 1.2% p.a. The deciine in world demand during this period had much to do with the fact that tin prices were held well above free market levels through ITC buffer stock activities and export controls. Sluggish economic growth and technological changes during the period also contributed to lower demand. Prices -ere parLIcularly distorted during the late 1970s and early 1980s--a period when tin prices increased in real terms while real prices of most substitutes declined. Technological changes (such as the development of entirely new packaging systems and the elimination of soldered joints in the automobile sector) also have had a deleterious impact on consumption during this period. 8. Trends in tin consumption by major product for the 1970-85 period are illustrated in Table 2. With the exception of the "other" category (which contains the vibrant chemical sector), all industrial country applications of tin declined. Tin-in-tinplate demand recorded the most serious deterioration, 1/ Comparable end-use data for developing countries are not available. TABLE 1: TIN METAL f?WVSIMPTTG Y MAJOR USE, SELECTED COUNTRIES, 1986 United United States a; Kingdom b/ France a/ Germany, F.R. a/ Italy b/ Japan a/ Tota --- -- -- ------------------------------------------------------------------- ----------------------- --------------------------------------------(Tons)-------------------------------------------- Tinplate 8,S60 3,322 3,496 2,297 2,480 9,061 29,316 Solder 11,125 868 1,626 3,003 1,250 13,722 31,594 Brass/Bronze 1,781 1,435 400 257 1,400 NA 5,273 d/ Other c/ 10,982 4,070 1,939 11,327 1,570 8,738 38,626 Total 32,548 9,695 7,461 16,884 6,700 31,521 104,809 -----------------------------------------% of total------------------- Tinplate 27 34 47 14 37 29 28 Solder 34 9 22 18 19 44 30 Brass/Bronze 5 15 5 2 21 NA 5 d/ Other c/ 34 42 26 66 23 27 37 Total 100 100 100 100 100 100 100 -- --------------------------------------------------------------------------------------------------- a/ Primary tin only. b/ Primary and recycled tin. c/ Includes chemicals, babbitt, white metal, and other miscellaneous uses. 4/ Excludes Japan. NA - Not available. Source: International Tin Council, Tin StatisLics, various issues. - 152 - averaging -4.4% p.a. Most of tl.:. L:all was the result of the development of thinner tin coatings and the popularity of aluminum cans in the large US soft drink and beer markets. The conc :rent decline of the solder market indicates the extent to which the development of new electronic applications was overshadowed by the decline of the traditional construction and automotive market. TABLE 2: GROWTH IN SELECTED TIN USES BY INDUSTRIAL COUVRTRIES United United Germany, Period: 1970-85 States Kingdom France F.R. Japan Total --------------------(Z Change p.a) a!-------------------- Tinplate -6.5 -5.4 -3.0 -5.2 -0.8 -4.4 Solder -0.4 -3.9 -3.9 -1.8 3.0 0.7 Brass/Bronze -4.6 -3.1 -2.5 -0.4 NA -3.7 Other 1.2 -3.9 -1.1 2.6 3.1 1.0 Total -2.4 -4.4 -2.8 0.7 1.6 -1.2 Period: 1985-87 Tinplate 0.9 2.5 -0.3 11.0 2.7 2.4 Solder -1.9 2.2 29.8 -6.4 -2.4 -1.8 Brass/Bronze -2.1 2.1 -13.0 -16.8 NA NA Other 4.6 0.8 15.3 7.7 -2.1 -2.0 Total 1.1 1.7 8.1 5.2 0.8 1.4 NA = Not available. a/ End-point growth rates. Note: 1187 consumption for the United States, the Federal Republic of Germany, and Japan are estimated using annualized data for Jan.- June. United Kiagdom data based upon Jan.-Aug. information. 1987 tin consumption for France and Italy not available, hence 1986 data are used. Source: International Tin Council, Tin Statistics, various issues. 9. The dramatic decrease in tin prices following the collapse of the ITC raised an interesting questio could the decline of consumption be slowed or reversed through more intens _ tin use or the substitution of tin for competing products? Although it is premature to assess the impact of the price decline from this perspective, preliminary data appear encouraging. - 153 - World tin consumption during 1987 is estimated to be 208,000 tons--a 1.7% p.a. increase from 1985 levels. Table 2 also contains preliminary data by major market for the 1985-87 period. The results vary with application and country, but the general increase of tin consumption in the manufacture of tinplate is in marked contrast to the systematic declines recorded previously. The "other" category also has exhibited higher demand growth over the last several years, but it is not possible to isolate specific markets. Brass/bronze continues to exhibit negative growth rates, but the decline since 1985 is not as great as previously. In contrast, the decline in 301der appears to have accelerated since 1985, despite the lower prices. 10. This interpretation of post-1985 consumption data is subject to several strong caveats. First, much of the data is preliminary and some estimated; revisions could change the final data considerably. Second, isolating the impact of price and income effects over such a limited period is difficult. Strong, but probably tempcrary, income factors are concurrently affecting tin consumption: five consecutive years of world economic growth, consumer restocking, and a surge in metal-intensive products such as capital goods and consumer durables have contributed to the apparent imprcvement of tin demand. The impact of these influences is illustrated by the fact that many other metals which have not experienced the massive price decline of tin (e.g., copper, aluminum, lead, and zinc) have also experienced strong demand over the past several years. Finally, short-term price elasticities of demand for tin are low--in the -0.1 to -0.3 range. 11. The impact of price on demand through the 1990s will depend on long- term price elasticities, price expectations, and the extent to which tin applications in some markets are affected by technology and consumer trends not directly influenced by shifts in real tin prices. Our current assessment of world tin demand is more encouraging than several years ago, but a dramatic reversal of the downward spiral experienced by tin markets during the past several decades is not expected. 12. World tin consumption is projected to decline by 0.9% p.a. during the 1987-2000 period. Given the low level of projected real tin prices when compared to prices typical prior to 1985, the decline in tin consumption appears relatively large. This reflects low long-tern price elasticities of demand as well as several technological trends which should continue to negatively impact tin demand. However, a marked difference exists between the expected performance of the industrial and developing countries. 13. Tin consumption in the industrial countries is expected to decline by approximately 2% p.a. during the 1987-2000 period. However, the decline now expected is less severe than the 2.3% p.a. drop experie4ced during the 1970-86 period (Table A2). The analysis of industrial country demand is particularly relevant. Data permit the disaggregation of consumption into tin-in-tinplate and "other" uses for some of the larger industrial countries. The evaluation of tin-in-tinplate consumption requires an analysis of both the intensiLy of tin use--as measured by kilogram of tin per ton of tinplate produced and actual tinplate production. The product of tin intensity and tinplate production yields tin-in-tinplate consumption for the industrial countries. - 154 - 14. The declining trend during the 1:10-85 period in industrial country tin intensity (see Table 3) was a primary factor in the general weakness of the tinplate market. Tin intensity was inItially reduced during the 1970s as producera completed the switch to electrolytic tinplating--a process which permitted tin coating thicknesses to be reduced. The transition was virtually complete by 1980. High real tin prices during this period led to improvements in the electrolytic process and the development of lacquer substitutes which flurther reduced tin requirements. In contrast to these trends, tin intensity is expected to decline only marginally through the 1990s. Several factors lead to this conclusion. The technical efforts and costs involved in reducing tin thicknesses have increased while the achieved reductions in tin thickness are Less pronounced. Hence, the benefits of further improvements to the electrolytic process are now considerably less. The lower real tin prices that are now e:xpected through 2000, compared to those typical in the early 1980s, provide a further disincentive to major reductions in tin coatings. TABLE 3: UNIT CONSUMPTION OF TIN METAL IN TINPLATE Countries 1971-73 1986-87 (Kg of Tin Metal per Ton of Tinplate) Uited States 5.2 4.2 EEC 6.6 4.4 Japan 8.4 5.9 Developing 6.1 5.4 Source: Computed from International Tin Counjcil, Tin Statistics, various issues. 15. Tinplate production is likely to decline slightly through 2000. The primary market for tinp-ste now consists of various food containers. The amoderate levels of economic expansion now anticipated for the industrial countries should inhibit tin market growth, as will the increasing use of alternative packaging technologies such as asceptic and retort packaging. Moreover, consumer preferences and health concerns are resulting in a shift away from the traditional canning technique of food preservation to frozen and Eresh foods. While these factors should restrain growth, a large decline is unalikely, particularly since the aluminum can is not expected to replace r-inplate in the critical food can market. 1.6. The "other" market in the industrial countrie3 consists of a wide gspectrum of applications including solder, brass/bronze, and chemicals. This sector is expected to weaken during the 1987-2000 period, for several reasons. - 155 - First, most final consuming sectors are not expected to expand rapidly. For example, US construction activity is projected to increase only by 0.6% p.a. over the 1987-2000 period. A similar situation exists in Japan and Europe where construction is generally expected to increase by less than 1% p.a. over the same period. These rates are well below the level of general industrial activity. Moreover, the growth of another important tin market--automobiles-- is likely to be lower than experienced during the past several decades. Some applications also will be reduced for reasons largely unrelated to tin prices. Solder use in the auto industry, for example, has been negatively influenced by the high cost of the skilled labor required to solder joints. In the process of reducing labor costs, new manufacturing techniques have been developed which reduced the need for soldered joints. This trend is likely to continue through the 1990s and will be reinforced by the gradual replacement of soldered copper radiators by welded aluminum units. Only the chemical market is expected to show reasonably strong growth through 2000, but sufficient data do not exist to analyze this market in detail. 17. Tin consumption in the developing countries is expected to increase, by 1.2% p.a. through 2000. This relatively sanguine outlook is the result of relatively rapid economic growth--developing country industrial production is expected to increase by 6.3% p.a. during the forecast period. In addition, markets in the developing countries are less mature and will not experience the same degree of material substitution as has been typical in the industrial countries. Although data limitations preclude disaggregation into specific products, tinplate and solder are expected to be the major markets in developing countries through the 1990s. Asia is expected to register a 2.3% p.a. increase during the 1987-2000 period, and should be the strongest regional market. Rapid consumption growth is expected to occur in China (4.1% p.a. through 2000), largely reflecting strong industrial growth. The further development of a domestic food can market will provide an additional boost to China's tin consumption. Supply Outlook 18. World production of tin-in-concentrates has undergone a number of major shocks during the past decade. Output reached approximately 236,000 tons in 1981--a period of rapidly declining consumption. The efforts of the ITC through its Buffer Stock Manager (BSM) to maintain prices, despite rising stocks, proved inadequate and resulted in the imposition of export controls in 1982. Although all major ITC-prcducing countries reduced output during this period, tin remained in surplus and this eventually led to the 1985 termination of BSM activities and collapse of the ITC. 19. A contributory factor to the ITC's demise was smuggling activity which increased from 6,000 tons in 1981 to an estimated peak of approximately 17,000 tons in 1983 (Table 4). In addition, the development of high grade deposits permitted Brazil to emerge as a major world producer during the 1982- 85 period. The artificially high prices which were maintained by the ITC exacerbated the smuggling problem and appear to have accelerated the development of the Brazilian tin industry. - 156 - TABLE 4: TIN ORE PROUCTION, SELECTED COUNTRIES World Bolivia Thailand Indonesia Malaysia Brazil "Smuggled" -----------------(Tin Content, '000 Tons)--------------------- 1980 234 27 34 32 61 7 7 1981 236 28 32 35 60 8 6 1982 224 27 26 34 52 8 10 1983 209 26 20 27 41 13 17 1984 205 20 22 23 41 20 11 1985 195 16 17 22 37 26 11 1986 179 10 17 25 29 25 2 1987 182 8 15 26 30 29 0 Source Computed from International Tin Council, Tin Statistics, various issues. 20. Following the price collapse in late 1985, world tin production declined and has averaged approximately 180,000 tons during the 1986-87 period (Table 4). However, marked differences exist in the pattern of individual producer responses The three large, traditional produceri of Southeast Asia-- Thailand, Malaysia, and Indonesia--together accounted for 76,000 tons in 1985 and 71,000 tons in 1987. This rather small decrease reflects the fact that only Malaysian output contracted significantly while Indonesian production increased. In contrast, high-cost Bolivian production declined and tin smuggling essentially ceased with the elimination of export controls and the price decline of late 1985. The rapid expansion of Brazilian production also slowed, thus minimizing the impact of marginal cutbacks in other countries/regions. 21. Export restraints were implemented by members of the ATCP for the period March 1987-March 1988. Although price declines appear to be the major cause of output reductions, the export restraint scheme apparently contributed to the adjustment process. Moreover, although Brazil and China were not members of the ATCP, they agreed unofficially to nominal quotas of 21,000 and 10,000 tons, respectively. The export quota scheme has been extended for 1988/89. The new quotas, in tons, are as follows (1987/88 quotas are in parentheses): Australia 7,700 (7,000); Bolivia 12,500 (13,761); Indonesia 29,000 (24,516); Malaysia 31,650 (28,520); Thailand 19,000 (19,000); Nigeria 550 (1,461); and Zaire 1,500 (1,736). The declines in Bolivian and Nigerian quotas reflect continuing production problems while Indonesian and Malaysian levels have been increased. The unofficial quota for Brazil increased to 26,500 tons while China's unofficial quota was unchanged at 10,000 tons. 22. Our analysis indicates that mine production should reach approximately 185,000 tons in 1988, a slight increase from 1987. Mine - 157 - production should gradually increase for several years thereafter as commercial inventories approach "normal" levels. By 1990, world mine production is expected to be 203,000 tons and to be in balance with world consumption. During the 1990s, however, tin output should gradually decline, paralleling trends in consumption. By 2000, mine output is expected to be 185,000 tons. 23. The gradual increase in world production through 1990 will result from output expansion in several countries. Indonesian output should increase as relatively low-cost offshore dredging is emphasized. Chinese production also will increase to satisfy expanding domestic consumption. Bolivian mine output is expected to increase modestly in the short run, reflecting the gains attained with the restructuring of Comibol--the state mining company. 24. Brazil remains a key factor in world supply. The increase in Brazilian output since the early 1980s resulted from the discovery and exploitation of low-cost deposits in Amazonas State. The continued exploitation of these deposits, the expected increase of world tin prices, recent announcements of additional tin reserves, and the resurgence of small- scale tin operations (by individuals commonly termed "garimperios") all indicate that Brazilian output should expand to 39,000 tons in 1990 end 48,000 tons in 2000--at that time Brazil is expected to account for slightly over one-fourth of world mine production. 25. In contrast to the situation in Brazil, over the long-term in most other countries/regions output is expected to decline. Industrial country output should be 10,000 tons in 2000--a decline of 3.1% p.a. for the 1987-2000 period. Similarly, Bolivia and the traditional producers of Southeast Asia are likely to exhibit declines in both volume and market share through the 1990s as ore grades and reserves decline. 26. The emergence of a more competitive tin market led to considerable speculation concerning the level of long-term production costs. Efficiency improvements in mining, lower energy costs, and the closure of high-cost facilities were expected to reduce ccsts substantially during 1986. Table 5 indicates that average costs did decline for all major producers except the already-efficient Brazilian operations. Since the Kuala Lumpur (KL) price averaged USc6l6/kg in 1986, it appears that only Brazilian producers operated profitably, on average, during 1986. Continued production efficiencies occurred through mid-1988, but the benefits were limited by an increase in energy prices and the decline in the US dollar. Trade Outlook 27. The developing countries have historically accounted for the majority of tin metal exports (83% in 1986) while the large metal importers have been Japan, the United States, and the industrial economies of Europe. This general trend will remain unchanged through the 1990s. However, several shifts in the pattern of trade are expected during the next decade, The position of the traditional Southeast Asian producers will diminish as Brazil increases both tin output and exports. Brazilian exports are expected to total 41,000 tons by 2000, or 25% of the world total. Also, the value of - 158 - TABLE 5: TIN PODUCTION COSTS, SELECTED COUNTRIES Country 1984 1986 -------------USC/kg------------ Australia 11.55 8.30 Bolivia 14.44 a/ 11.60 Brazil 4.50 4.75 Indonesia 9.70 7.15 Malaysia 9.31 6.60 Thailand 8.36 7.05 United Kingdom NA 10.15 a/ 1981 costs. NA = Not available. Note: Data are average costs and exclude royalties and export duties. Sources: International Tin Council (1984 data) and Elizabeth Mayo "Prices-the Way Ahead" in Tin--A Shining Future?, Proceedings of the 3rd International Tin Symposium, 1987. trade in real terms is expected to decline substantially due to the decrease in consumption and production. During the 1987-2000 period, tin metal exports are expected to decline by 0.8 Z p.a. and reach 159,000 tons by 2000. Price Citlook 28. The termination of the ITC's buffer stock activities and mandatory export controls resulted in the most competitive tin market of this century. The commercialization of the BSM's inventories led to a massive stock surplus and a sharp decline in prices. An additional feature of the ITC collapse was the termination of the LME tin contract-the KL price is currently the only world quote determined through a terminal market. 29. The KL tin price averaged USc616/kg in 1986 compared to UStl,192/kg during 1985. The large decline was expected, given market conditions. However, the subsequent price pattern did not mirror the expectations of many observers who anticipated a continued price decline in 1987, followed by a rapid increase as the market moved to balance. The absence of BSM operations also raised the prospect of severe price volatility. In fact, the KL price increased moderately to US669/kg in 1987 and short-term price volatility was negligible, particularly when compared to the experience of other base metals during the last several years. - 159 - 30. The outlook for tin prices is subject to several major caveats. Over the next several years, the rate of stock reductions will determine the point when the inventory surplus has been eliminated. Perhaps more fundamental is the eventual level of long-run competitive costs. Cost savings (primarily in labor and energy) at existing operations appear to be continuing, but the bulk of such reductions were probably attained by mid-1988. In addition, the continued depletion of known deposits will result in upward cost pressure over the long run. A major unknown remains Brazil, which has large low-cost tin deposits and the potential to develop additional reserves. Exploration activity for new tin deposits appears limited to Brazil. The alluvial tin deposits of Southeast Asia are well known and discovery of new low-cost reserves appears unlikely--a fact illustrated by the steady decline in ore grade mined in the region during the past several decades. 31. Short-term prices will be determined largely by the world supply- demand balance. Table 6 indicates that metal inventories should reach "normal" commercial levels by 1990. Consequently, tin prices should continue to increase slowly, averaging USC690/kg in 1988 (USc490/kg in 1985 constant dollars) and USc925/kg by 1990 (USC610/kg in 1985 constant dollars). 32. Tin prices are expected to reach USCl,700/kg by the year 2000 (or USc750/kg in constant 1985 dollars). Although cutrent dollar prices should experience sizable increases through the 1990s because of the higher level of inflation expected in the latter part of the period, constant dollar prices TABLE 6: TIN SUPPLY/DEMAND BAIANCE ------------Actual Forecast------------- 1987 1988 1989 1990 ----------------------------------------------------('000)------------------- ----------------( 000) ----------------- Mine Production 182 185 193 203 + Reduction in mine stocks +7 0 0 0 = Metal production 189 185 193 203 + GSA sales a/ 4 5 5 5 = Metal available (A) 193 190 198 208 Metal Consumption (B) 208 212 210 208 Metal stocks, beginning of period 74 59 37 25 Change in stocks (A-B) 15 22 12 - Metal stocks, end of period 59 37 25 25 Mine stocks, beginning of period 15 12 12 12 Change in stocks 3 - - - Mine stocks, end of period 12 12 12 12 a/ GSA = General Services Administration. Sources: International Tin Council, Tin Statistics; World Bank estimates and forecasts. - 160 - should remain well below the levels attained during the two decades preceding the collapse of the ITC. The competitive environment now typical of the tin market will encourage continued cost containment and make it highly unlikely that reai costs approach those which typified 1984. The increasing contribution of Brazil to world Cupply should also keep marginal costs low. Finally, the gradual decline in tin demand, which is expected through the 1990s, argues for ample tin supplies,. keeping downward pressure on prices. Policy Issues and Investment Climate 33. Unsettled legal issues and a general lack of support preclude the emergence of a new tin comnodity agreement. However, the role of the ATCP appears to have expanded over the past several years. This is reflected in the ATCP-sponsored research of the International Tin Research Institute (ITRI), as well as the voluntary export quotas adopted by ATCP members. The pr-.mary challenge to the industry and to the ATCP appears to be the likelihood that prices will remain near present levels, which however should both minimize the decline of traditional markets and encourage the commercialization of new applications (e.g., those developed by the ITRI). 34. The elimination of the LME tin contract, following the termination of activities by the BSM and the generally chaotic market conditions which followed, resulted in changes to the traditional commercial relationships in which brokers/traders played a prominent role in tin marketing. The absence of an LME contract reduced the attractiveness of using brokers and led to increased direct links between mine producers and consumers. The experience of Renison Goldfields Consolidated Ltd., Australia, is illustrative: "Following the collapse, we exercised the toll smelting option in our contracts with the smelters, and took delivery cf the metal. We elected not to sell during the initial period of uncertainty and depressed prices, and production was stockpiled." 2/ The shift in commercial practices may not prove permanent. However, its development could aid in explaining the lack of price volatility during the past several years since direct sales on a contract basis with a volume commitment are generally perceived to have a stabiLizing influence on prices. 3/ 35. Although the world tin market appears to have adapted quite well to the absence of an LME contract, a lively debate has emerged over whether tin trading on the LME should be resumed. It is believed by some observers that the currently published prices for tin may not fully reflect world conditions or may be determined on a terminal market with insufficient trading volume (a "thin" market). 2/ William Murphy, "New Trading Relationships Following the ITC Collapse" in Tin--A Shining Future?, Proceedings of the 3rd International Tin Symposium, P. 53. 3/ Op. cit., p. 57. - 161 - 36. Given the prospective market conditions, limited investment activity can be expected in the world tin industry. Brazil is likely to be the only tin mining country to experience a major expansion of output through 2000. Disinvestment and closures are apt to typify other producing regions. Nominal world smelter capacity has been estimated by the ITC at nearly 400,000 tons and is far in excess of estimated requirements. Hence, further consolidation is expected: it is the larger, more efficient smelters that will survive. TABLE Ali TIN METAL - PRODUCTION BY MAIN COUNTRIES AND ECONOMIC REGIONS ACTUAL 1-kOJECTED GROWTN RATES A/ COUNTRIES/ 1987 - ECONOHIES 1969-71 1979-81 1986 18/l 1988 1989 1990 1995 2000 1961-86 1970-86 2000 -----('000 TONS)-------- ------(% PER ANNUM) ------ INDUSTRIAL 47 25 22 21 17 17 15 10 5 -3.6 -5.4 -10.5 OCEANIA 5 5 1 1 1 1 1 1 1 -0.2 -7.2 0.0 NON-MARKET 12 19 22 22 18 18 20 20 20 3,2 3.5 -0.7 DEVELOPING 159 190 147 146 150 158 168 166 160 1.2 -0.2 0.7 ASIA 140 156 108 108 108 110 118 112 102 0.4 -1.4 -0.4 MALAYSIA 89 72 44 44 42 40 41 39 35 -2.0 -4.4 -1.7 CHINA 22 16 20 20 20 25 27 26 22 -2.2 -1.8 0.7 INDONESIA 7 30 22 24 26 27 30 29 26 15.3 7.5 0.6 THAILAND 22 33 20 15 15 16 18 18 17 1.8 C/ 0.1 1.0 AFRICA 12 6 3 2 2 2 2 1 1 -3.1 -5.6 -5.2 AMERICA 6 27 35 15 39 45 47 51 56 10.8 11.1 3.7 BOLIVIA 2 18 8 4 6 8 a 8 8 13.8 12.5 5.5 BRAZIL 3 9 25 28 32 35 38 42 48 12.0 13.1 4.2 WORLD 217 233 191 189 185 193 203 196 185 0.5 -0.7 -0.2 Al LEAST SQUARES TREND FOR HISTORICAL PERIODS (1961-86)t END-POINT FOR PROJECTED PERIODS (1987-2000). BI ESTIMATE. C/ GROWTH RATE FOR 1965-86 PERIOD. SOURCESi INTERNATIONAL TIN COUNCIL, MORTELY STATISTICAL BULLETIN (ACTUAL)i WORLD BANK, INTERNATIONAL ECONOMICS DEPARTMENT (PROJECTED). TABLE A2t TIN METAL - APPARENT CONSUMPTION AY MAIN COUNTRIES AND ECONOMIC REGIONS ACTUAL PROJECTED GROWTH RATES Al COUNTRIES/ 1987 - ECONOMIES 1969-71 1979-81 1986 1987/B 1988 1989 1990 1995 2000 1961-66 1970-86 2000 ----------------------------(000 TONS)------------------------------------- ------(% PER ANNUM)------- INDUSTRIAL 1J3 134 117 119 121 119 117 104 91 -0.9 -2.3 -2.0 NORTH AMERICA 60 49 36 38 39 36 34 30 23 -2.1 -3.2 -3.2 UNITED STATES 55 45 33 35 36 33 31 26 22 -2.2 -3.3 -3.5 EEC-10 61 49 44 44 44 44 43 40 36 -1.4 -2.8 -1.5 JAPAN 27 31 32 32 33 33 32 30 27 3.1 0.2 -1.3 NON-MARX.ET 31 40 40 40 40 39 38 37 37 2.5 1.9 -0.6 DEVELOPING 34 38 48 49 51 52 53 55 57 1.4 1.2 1.2 ASIA 21 20 28 29 32 32 33 36 39 0.7 0.8 2.3 CHINA 13 11 13 13 16 18 19 21 22 -0.3 -0.9 4.1 AMERICA 7 11 13 14 15 15 13 15 15 3.3 3.1 0.5 WORLD 218 212 205 208 212 210 208 196 185 0.1 -0.9 -0.9 A/ LEAST SQUARES TREND FOR HISTORICAL PERIODS (1961-86)1 END-POINT FOR PROJECTED PERIODS (1987-2000). B/ ESTIMATE. SOURCES: INTERNATIONAL TIN COUNCIL, MONTHLY STATISTICAL BULLETIN (ACTUAL)l WORLD BANK, INTERNATIONAL ECONOMICS DEPARTIENT (PROJECTED). TA3LE A3t TIN METAL - GROSS EXPORTS SY MAIN COUNTRIES AND ECONOMIC REGIONS ACTUAL RoJECTED GROWTS ATFE" Al COUNTRIES/ 1987 - ICOPONWES 196(0-71 1979-81 1986 197/B 1988 1989 1990 1995 2000 1961-86 1970-86 2000 -- -- -------- ('000 TONS)-------------------------------------- ------(Z PER ANNUM)------- INDUSTRIAL 29 21 31 27 25 25 23 15 10 -018 -1.8 -7.4 EEC-10 25 18 29 25 25 23 20 12 8 -1.2 -1.2 -8.4 UNITED KINGDOM 13 8 17 15 15 15 15 10 5 -0.3 -4.2 -8.1 *OK-MARKET 0 0 0 0 0 0 0 0 0 0.0 0.0 0.0 DEVELOPING 140 163 148 150 152 153 156 154 149 1.2 -0.6 -0.1 ASIA 125 139 121 126 120 118 119 112 101 0.6 -1.6 -1.7 MALAYSIA 90 69 41 48 45 42 40 36 36 -2.1 -4.6 -2,2 INDONESIA 7 28 23 22 25 26 26 24 22 0.0 6.8 0.0 TUAILAND 23 32 19 17 17 17 16 16 13 0.0 0.2 -1.0 CHINA 6 4 8 12 10 12 14 12 9 -2.7 -2.8 -2.2 AFRICA 11 4 1 2 2 2 1 1 1 -5.9 -10.9 -5.2 AMERICA 3 20 26 22 30 33 36 41 47 17.0 17.9 6.0 BOLIVIA 2 16 7 3 4 5 6 6 6 13.0 11.6 5.5 SAAZIL 0 3 19 19 26 28 30 35 41 ... ... 6.1 6ORLD 169 184 179 177 177 178 179 169 159 0.8 -0.7 -0.8 CIS A/ LEAST SQUARES TREND FOR HISTORICAL PERIODS (1961-86) END-POINT FOR PROJECTED PERIODS (1987-2000). BI ESTIMATE. SOURCES: INTERNATIONAL TIN COUNCIL, MONTHLY STATISTICAL BULLETIN (ACTUAL)i WORLD BANK, INTERNATIONAL ECONOMICS DEPARTMENT (PROJECTED). 江 TABLE A5: TIN ORE - PRODUCTION BY MAIN COUNTRIES AND ECONOMIC REGIONS -------------------- I --------------------------------------------------------------------------------------------------------------- ACTUAL PROJECTED GROWTH RATES A/ --------------------- I ---------- 1. ----- ------------------------------------------ --------------------------- C01INTRIES/ 1987 - zCOW*fIzS 1969-71 1979-18i 1986 1967/B 1988 1909 1990 1995 2000 1961-86 1970-86 ZOOO ----------------------------------------------------------------------------------------------------------------------------------- ------------------- I ---------------- .000 TONS) -------------------------------------- ------ (% PER ANNUM) ------- INDUSTRIAL 15 17 16 15 i5 13 13 12 10 4.2 -1.1 -3.1 OCEANIA 9 12 9 a a 8 9 8 6 3.0 -0.9 -2.2 NOW-XAMT 12 19 19 19 18 is Is 19 19 2.8 2.8 0.0 DEVELOPING 193 200 144 148 152 162 172 165 156 0.0 -1.1 0.4 ASIA 138 152 97 100 103 101) 114 104 95 -011 -1.4 -014 MALAYSIA 73 61 29 30 32 33 34 32 28 -2.0 -4.9 -0.5 CHINA 22 16 22 27 27 29 32 29 27 -2.1 -1.6 0.0 INDONESIA 19 32 25 26 28 29 30 27 25 3.0 1.7 -013 TUAILAND 22 33 17 15 16 17 17 15 14 2.4 0.0 -0.5 AFRICA 19 12 5 6 A 4 4 4 2 -4.1 -6.1 -8.1 36 37 42 42 45 49 54 57 59 2.2 1.2 2.6 30 28 11 8 8 9 10 9 a -0.8 -4,2 0.0 a 7 25 29 13 36 39 44 48 14.3 14.7 4.0 WORLD 220 236 179 182 183 193 203 196 185 013 -0.8 0.1 --------------------------------------------------------------------------------------------------------------------------------- A/ LEAST SQUARES TREND FOR HISTORICAL PERIODS (1961-86)1 END-POINT FOR PROJECTED PERIODS (1987-2000). 81 ESTIMATE. SOVRCESt INTERNAs TIN COUNCIL, MNTHLY STATISTICAL BULLETIN (ACTUAL)i woRLD r 'NTERNATIONAL ECONOMICS DEPARTMENT (PROJECTED). TABLE A6s TIN 0E - GROSS EXPORTS BY MAIN COUNTRIES AND ECONOMIC REGIONS ACTUAL PROJECTED GROWTH RATES Al COUNTRIES/ 1987 - BoOMONIES 1969-71 1979-81 1986 1987/b 1988 1989 1990 1995 2000 1961-86 1970-86 2000 '-------------(000 TONS)------------------------------------- -------(I PER AMUM)------- INDUSTRIAL 4 9 10 13 13 12 10 10 10 20.4 3.9 -2.0 EEC-10 1 2 3 2 2 2 2 2 2 8.2 7.8 0.0 NON-MARKET 0 0 0 0 0 0 0 0 0 0.0 0.0 0.0 DEVELOPING 50 23 26 32 34 36 32 27 21 -4.6 -5.6 -3.2 ASIA 14 7 9 19 20 22 17 14 12 -5.1 -2.0 -3.5 AFRICA 8 6 4 3 3 3 3 3 1 -1.6 -5.1 -8.1 AMERICA 28 10 13 10 11 11 12 10 8 -5.1 -8.9 -1.7 WORLD 54 32 36 45 47 48 42 37 31 -3.2 -4.0 -2.8 ------------- -------------------------------------------------------------------------------------------------------- Al LEAST SQUARES TREND FOR HISTORICAL PERIODS (1961-86); END-POINT FOR PROJECTED PERIODS (1987-2000). B/ ESTIMATE. SOURCESt INTERNATIONAL TIN COUNCIL, MONTELY STATISTICAL BULLETIN (ACTUAL)i WORLD BANK, INTERNATIONAL ECONOMICS DEPARTMENT (PROJECTED). TABLE Alb TIN OR GROSS M RTS BY MIN COM ESAn I cOMIC Rzlons ACTUAL PROJECTED GROWTH RATES Al counTrzs; 1987 - EGONIS 1909-71 1979-81 1986 19871D 1980 1989 1990 31995 2oo 1061-84 1970-8 2000 -- ('000 Toms)------------------------------------- ------ip 0 " ---- INDUSTRIAL 36 17 21 13 15 16 24 0 3 -41s -5.4 -8.1 nEC-l 36 16 17 13 13 14 12 9 4 -4.9 -5.2 -8.7 UNITED KINGDOK 23 7 9 8 a 8 6 5 3 -6.3 -8.3 -7.3 JAAM 0 0 0 0 0 0 0 0 0 0.0 0.0 0.0 MON-MARET 1 1 1 1 1 1 1 1 1 ., 1.6 0.0 DEVLOPING 16 16 19 34 31 31 27 26 25 1.7 0.6 -2.3 WORLD 55 34 40 50 47 48 42 37 11 -2.6 -2.9 -3.6 ----------------------------------------------------------------------------------------------------------- ----------- A/ LEAST SQUARES TREND FOR HISTORICAL PERIODS (1961.86)1 END-POINT FOR PROJECTED PERIODS (1987-2000). 31 ESTIMATE. SOURCESM INTERKATIONAL TIN COUNCIL, MONTHLY STATISTICAL BULLETIN (ACTUAL)I WORLD BAM, INTERNATIONAL ECONOMICS DEPARTMENT (PROJECTED). - 169 - TABLE AB: TIN - LICS, a! 1950-87 (ACTUAL) AND 1988-2000 (PtoMCTD) --(c/kg) (c/kg) 1985 Coascant S :urrent S JV a - US GNP b/- Export Knala Kuala Kala LME CashI C/ Value d/ L.umpur / LME Cash c/ Lampur el LNE Cash c/ Lumpur e/ Actual 1950 206 870 962 1951 2:.- 1.092 1,328 1952 930 1,168 1353 21. 723 869 1954 198 728 842 1955 204 736 840 1956 217 756 865 1957 208 710 800 1958 20- 200 681 671 765 752 1959 216 214 735 728 794 788 1960 220 170 213 733 710 795 770 1961 245 190 241 803 790 877 863 1962 247 210 242 794 778 865 848 1963 251 210 246 822 806 867 849 1964 341 300 335 1,0I 1,079 1J158 1,138 1965 389 350 380 1,243 1,214 1,288 1,258 1966 357 330 39 1,102 1,077 1,142 1,117 1967 333 310 324 1,016 989 1,036 1,008 1968 313 290 303 964 940 928 904 1969 343 330 338 1,003 988 965 950 1970 367 360 359 1,01 989 977 955 1971 350 350 342 914 893 882 862 1972 377 370 368 903 882 907 884 1973 483 450 472 999 976 1,090 1,066 1974 820 730 7R4 1,391 1,330 1,700 1,625 1975 687 650 669 1,048 1,021 1,296 1,262 1976 758 700 747 1,141 1,125 1,333 1,325 1977 1,076 1,010 1,071 1,475 1,468 1,789 1,781 1978 1,291 1,165 1,252 1,537 1,490 2,000 1,939 1979 1,544 1,380 1,482 1,626 1,558 2,201 2,110 1980 1,678 1,620 1,644 1,609 1,576 2,190 2,145 1981 1,416 1,270 1,406 1,350 1,341 1,685 1,673 1982 1,283 1,190 1,295 1,241 1,252 1,435 1,448 1983 1,299 1,230 1,303 1,290 1,294 1,399 1,403 1984 1,227 1,240 1,246 1,240 1,259 1,272 1,292 19S5 1,195 1,200 1,154 1,195 1,154 1,195 1,154 1986 NA 606 616 NA 521 NA 604 1987 NA 660 669 NA 515 NA 637 1988 690 490 632 1989 800 535 701 1990 925 610 771 1995 1,200 663 770 2000 1,700 750 870 NA = Not available. a/ Deflated by Manufacturing Unit Value (MUV) Index. b/ Defl&ted by US GNP Deflator. c/ LME Settlement Price, standard grade. 41 Developing country export unit value. e/ Settlement price. Sources: Metals Veek (various issues); Internatianal Tin Cowncil Tin Statistics (various issues); World Bank, International Ec-)nomics Department (projected). - 170 - TIN (CONSTANT 1985 OLLAR PRICES ) 2500 2000* a e 1000 • 500- 0 1945 1$ 95 16 96 90 17 ?05 19 90 19'95 2030 DEFLATED BY MANUFACTURING UNIT YALUE (MUV )IMDEX ••••••••••DEFL.ATED BY U.ý>. ONP DEMATOR. • 194 - S7 ACTAL ; 1988 - 2000 PROJECTED. SOURCE : WORLD BANK , INTENATIONAIL ECONOMICS VEPARTMIENT. WICEEL Summary 1. In 1987 and 1988 an unanticipated increase in nickel demand ciused LME nickel prices to increase sharply. Low stock levels, production bottlenecks, and high effective capacity utilization rates exacerbated the upward movement of prices. LME nickel prices averaged US$2.21/lb (US$4,872/ton) in 1987 and US$6.26/lb (US$13,811/ton) in the first half of 1988. 2. In the nex. two years prices will very likely subside from their present highs as nickel demand patterns adjust to slower growth rates of stainless steel output in particular and industrial output in general. The downward movement of prices is expected to be almost as sharp as was the upward movement in the last two years. Increases in scrap recycling, in capacity utilization rates, in world effective capacity (as higa-cost smelting units that were shut down in the last three years are brought back to life again) will contribute to the downward adjustment of prices in 1989 and 1990. From a yearly average price for LME nickel metal cathodes of US$5.79/lb (US$12,770/ton) in 1988, prices are expected to decline to US$3.75/lb (US$8,267/ton) in 1989 and US$2.74/lb (US$6,041/ton) in 1990. The nickel industry will move from a position of excess demand in 1987 and 1988 (when world consumption exceeded world production by about 54,000 tons) to a position of excess supply in 1989 with surpluses of around 22,000 tons. Nickel prices are projected to grow by 4.1% p.a. in current terms during the 1990-2000 period, remaining more or less unchanged in real terms. World production and consumption are expected to increase by 1.3% p.a. from 1990 to reach 933,000 tons in the year 2000. Historical Perspective 3. In order to evaluate the short and medium prospects of the nickel industry, it is useful to briefly review developments since 1980. The 1980s started with the market economies' nickel demand at 541,000 tons and effective capacity (including an allowance for non-market economies' exports) at 727,000 tons. High capacity utilization rates resulted in excess supplies, increasing producer and LME stocks and downward pressure on nickel prices. The same pattern prevailed in subsequent years and prices fell from an average of US$2.96/lb (US$6,519/ton) in 1980 to an average of US$2.22/lb (US$4,899/ton) in 1985. While nickel demand increased only marginally during this period, slow but important changes took place on the production side. Most privately owned or controlled production units reacted to the declines in nickel prices with sharp cuts in production costs. Reductions in manpower and energy cost savings were accompanied by retirement of excess plants and equipment. However, these capacity cuts weze, however, slow to come. Then in 1986 the USSR decided to double its nickel exports to the mark:.t economies, reversing expectations that prices would increase. As a result of the increase in USSR exports, prices decreased to US$1.76/lb (US$3,881/ton) in 1986, their lowest level in 12 years. - 172 - 4. Most analysts expected 1987 to be a year of world economic slowdown. At best the nickel demand of market economies was projected as being almost unchanged from that of 1986 at 555,000 tons. In 1987 effective world capacity in the market economies was estimated to be close to 636,000 tons. Producers considered that effective capacity was adequate to satisfy demand. However, with OECD countries adopting expansionary monetary and fiscal policies, industrial economic activity grew rapidly in the second half of the year. Nickel demand increased by 12% in response to an upsurge in stainless steel demand. 5. In 1988 nickel demand (of market economies) is estimated to expand to 638,000 tons. Preliminary figures indicate that this estimate could be on the low side as stainless steel demand in the first half of 1988 (as compared to the first half of 1987) increased by more than 6% in most industrial countries. With 1987's effective capacity of 636,000 tons and inventories of less than two months' consumption, market prices adjusted briskly upwards in the first half of 1988. The high nickel prices are expected to put downward pressure on the gvowth of nickel demand and to provide a financial incentive to producers to rehabilitate any unused capacity. 6. The next four sections review nickel consumption prospects, nickel production and capacity prospects, nickel trade prospects, and the nickel price outlook for the 1988-2000 period. Consumption Prospects 7. Three countries, namely the United States, Japan, and the Federal Republic of Germany, account for over 60% of the market economies' consumption. In 1987 world consumption amounted to 814,000 tons and the market economies' consumption totaled 623,000 tons. 8. In the United States, which in most years has been the largest single consumer of nickel, industrial production and alloy steel demand grew rapidly in the 1960s and 1970s--albeit with setbacks after the two oil price shocks of 1973 and 1980. Consumption growth rates have been very volatile from year to year (see Figure 1). US petroleum refining and chemical industries are the main users, accounting for 24% of total nickel consumption in the form of metal, principall- alloy. (Parts which are subject to normal corrosion typically contain 8% nickel while parts exposed to caustic and saline solutions typically contain higher proportions of nickel). Fabricated metal products are the next largest user and account for 11% of nickel consumption (in the form of stainless steel) while aircraft manufacturing end-uses account for 10%. The main use in this area is in the form of super alloys, valued for their strength and corrosion resistance in jet engines; but stainless and alloy steels are also used for load-bearing elements in air frames and undercarriages. All consumption of nickel in the United States, Japan, and the Federal Republic of Germany moves in the same direction as industrial economic activity (see Figures 2, 3, and 4). The upsurge of nickel demand witnessed in 1987 and 1988 was thus in statistical terms not at all unusual. It is also noteworthy that world demand for nickel grew at 2.3% p.a. in the last decade, 떼｀，·“-! FIGURE 2: NICKEL CONSIDIPTION AND INDUSTRIAL PRODUCTION OF IME UNITED STATES, 1967-87 (INDEX, 1980-100) 140- 130- 120 110- 100- go- ao - 70- Go - w w 1 9 v w I w r I I 1966 1971 1976 1981 1986 0 NICKEL CONS. + W40LGTMAL PROD. Source! World Bank. FICURE 3: NICKEL CONSUMPTION AND INDUSTRIAL PRODUCTION OF JAPAN, 1967-87 (INDEX, 19 0-100) 130 120 110- 100- 90- 80- 70 - so - 50 40 30 20 ..,., 4,,,, 1966 1971 1976 1981 1986 0 NICKEL CONS. - I4USTRIAL PROD. Source: World Bank. FIGURE 4: NICKEL CONSUMPTION AND INDUSTRIAL PRODUCTION OF THE FEDERAL REPUBLIC OF GERMANY, 1967-87 (INDEX, 1980-100) 120-- 110- 100- 90 70- 60- 1966 1971 1976 1981 1986 0 NICKEL CONS. + WDUSTRMAL PRO. Source: World Bank. - 177 - i.e., not significantly lower than the anticipated nickel consumption growth rate for 1988. Nickel consumption is not expected to suffer substantially from substitution during the 1988-2000 period. Its use has been found to be complementary to aluminum (except in the tran3portation sector), and to copper and lead (except in the fabricated metals, cans, and containers sector). However, nickel was found to substitute for tin (except in the transportation sector) and zinc. 1/ The biggest possible substitution threat would be a switch from austenitic (i.e., nickel-bearing) stainless steels to ferritic; however, this development does not seem close to fruition. Austenitic steels are still preferred in view of their workability and corrosion-resistance properties. Another possible substitution threat is the development of ceramic components as a substitute for nickel super alloys in jet engines and turbines. However, the scope for substitution from this source appears to be minimal. 10. World nickel apparent consumption is expected to grow at an average rate of 1.3% p.a. rate during the 1990-2000 period. A downward adjustment in world nickel demand from its 1988 level is expected in 1989 and 1990, partly in reaction to the higher nickel prices in 1987 and 1988. US consumption is expected to grow by 1.1% p.a. Improved terms of trade and increasingly export-oriented manufacturing activities will contribute to an increased growth rate of consumption in the United States with respect to that of the 1970-86 period. Given the strength of the yen, the consumption of nickel in Japan is expected to increase by an average of 1.3% p.a. during the 1987-2000 period--a lower growth rate than during the 1960-87 period. 11. The Federal Republic of Germany is the largest nickel consumer in the EEC. Industrial production grew rapidly until 1973. Since then it has grcwn more slowly and with significant short-term reversals following each oil crisis. Despite the deterioration of its terms of trade, the Federal Republic of Germany has plans to rehabilitate capacity and increase stainless steel production. The additional stainless steel capacity is expected to lead to nickel demand growing by 1% p.a. during the 1987-2000 period. 12. By 2000 it is expected that the industrial countries will consume 57,000 tons more nickel than in 1987. Out of thi: additional tonnage, 27,000 tons will be consumed in Japan and 16,000 tons will be consumed in the EEC-10 countries (of which 11,000 tons will be consumed by the Federal Republic of Germany). Developing countries are expected to add 34,000 tons to their nickel consumption between 1987 and 2000. Asian developing countries (in particular, India, Republic of Korea, and China) should account for 82% of the increase in demand. Production Prospects 13. As pointed out in the section entitled "Historical Perspective," the nickel industry is presently faced with smelting and refining capacity shortages. However, there is no shortage of nickel resources. The US Bureau 1/ See T. Priovolos and T. Dunietz, Substitutability of Metals in U.S. Industry, IECCM Division Working Paper No. 1987-11. - 178 - of Mines estimates world reserves of contained nickel (excluding seabed deposits) to be in the order of 55 million tons. The great majority of nickel ore producers have more than adequate reserves; the most important exceptions being Morro do Niquel in Brazil, which now has a very limited life, and Greenvale in Australia, where high-grading in response to depressed market conditions has reduce6 mine life to around 12 years. 14. The low nickel prices of recent 3:ars limited investment in nickel operations. Most investments made in this period have been directed towards cutting costs rather than expansion. Wherever new capacity has been built, it has generally been in the context of replacing older, high-cost facilities. Nevertheless, several projects have been proposed which, if built, would affect nominal mining, smelting, and refining capacity. 15. The cost of a 20,000 ton greenfield project is estimated to be in the US$250 million range. (Some industry officials have put it as high as US$500 million). The costs of reopening shutdown projects are substantially lower. A figure of US$50 million to $100 million has been quoted for Nonoc (this works out to $1-2/lb of annual production capacity). 16. The projects that seem to have a high probability of being developed are located in the following countries. 17. Brazil. BP Mineracao, in cooperation with local mining companies, is considering the construction of a refining facility that will be able to produce up to 12,000 tons of electrolytic nickel from sulfide mines in Fortelez de Minas. The facility is not expected to be operating at full capacity before 1990. 18. Cuba. A new mine and plant at Punta Gorda, Moa Bay, was originally scheduled for completion in 1983 but is well behind schedule. The first stage of 10,000 tons per annum production is on-stream and effective capacity is expected to rise in the 1990s to 30,000 tons per annum. 19. USSR. Norilsk was the focus of a major expansion program in the early 1980s that included the opening of a smelter in Nadezha in 1982 and the Taymyr mine a year later. Reserve depletion is expected to offset any gains due to increased production or efficiency in the next five years. Domestic demand is expected to absorb most of the expected increase in nickel production though increased exports remain a distinct possibility in the next five years. 20. China. China's production is, at present, satisfying its domestic demand. In 1986 China began exporting marginal quantities of a variety of nickel products. Domestic reserves are large and there are plans for large-scale expansions of nickel smelting and refining capacity by up to 40,000 tons by the year 2000--double its present capacity. The plans include production of matte and exports to Republic of Korea and Japan. Stage 1 of the Jinchuan No. 2 mine was completed in 1982; this helped increase production to 20,000 tons per annum by 1987. Stage 2 of the expansion is expected to be completed in the early 1990s. 21. Canada. Inco plans to invest close to 25 million Canadian dollars over two years to bring che shutdown Crean Mill mine in Sunbury back to operation at a nickel equivalent rate of 10,000 tons per annum. - 179 - 22. South Africa. If platinum prices remain firm, South Africa may add up to 50,000 tons per annum of nickel products as by-products of platinum mining. The probability that platinum and nickel metal output will increase to such levels is very small, however, in view of the large investment requirements and the uncertain political and economic future of the country. 23. Overall, the market economies' effective capacity is expected to increase by at least 132,000 tons by 2000. This additional capacity is expected to alleviate present day supply shortages and amply satisfy additional demand for nickel well beyond 2000. 24. Using our econometr-c model of the nickel industry on the basis of our forecasts regarding industrial and steel output, the growth rate of world nickel consumption is expected to average 0.8% p.a. during the 1988-2000 period. Scrap nickeL may become increasingly important in stainless steel production. In the United States, scrap accounts for 8% of primary consumption, and the stainless steel boom in the 1960s and 1970s should provide a large potential source of scrap nickel when this plant and equipment begins to be pulled down in the 1990s. By then scrap could be meeting 50,000 to 150,000 tons of nickel demand after a long period of low prices and substantial reductions in costs. Trade Prospects 25. Before presenting and interpreting trade patterns and prospects, a review of the extent of integration of the nickel industry is in order. 26. The majority of companies in the industry are vertically incegratei to finished nicKel (ferronickel, metal, or their equlivalents). The major exceptions are: (a) Agnew (when operating) produces a concentrate which is tolled by WMC to a matte and refined by Amex to metal in the United States. Following the closure of Amex's refinery, matte has been refined by Sherritt-Gordon and Falconbridge. (b) Selebi-Phikwe (Botswana) produces a matte at the mine site and refines part of its product in Zimbabwe (Eiffel) and part in Norway. (c) Sherritt-C-ordon (Alberta) was formerly integrated witb its own mine supply from Lynn Lake; now a tolling operation processing (mainly) into concentrate and matte. (d) Indonesian mines (especially Aneka and Tambang) export laterite ore and matte to Japanese smelters. (e) All Japanese smelters rely on imported ores, concentrates, and mattes. The main sources are Indonesia, the Philippines, and Australia (Greenvale). Financial linkages do exist but are not very important. - 180 - (f) Rio Tube (Philippines) supplies laterite ore to Japanese smelters; 40% equity is held by a Japanese consortium. (g) Moa Bay (Cuba) produces a sulphate sludge which was formerly refined at Port Nickel refinery when both belonged to Freeport. Since the Cuban revolution, the sulphate sludge has been refined in the USSR. Overall, the share of the industry that is not integrated is somewhere in the 20Z to 25% range. 27. Downstream integration into sectors using nickel--notably stainless steel alloys and fabricated products--is limited. Inco is significantly integrated downstream. Its subsidiaries include Huntington Alloys and Turbo Products in the United States and Wiggin Alloys and Doncaster Conpanies in the United Kingdom. Gutokumpu has also an integrated downstream operation in view of its chrome mining operation. The fabricated products business of Outokumpu is relatively small, however. In Japan, major stainless steel producers own Pacific Nickel and Nippon Yakin. Lastly, in France the government owns SLN and other major steel producers; however, the companies are not fully integrated. 28. The trade data shown in Tables A3 and A4 have been compiled on the basis of UNCTAD data. It is unclear whether these data include all types of nickel smeltered or refined products and/or include all internationally traded material from all destinations; thus they should be viewed with caution. The projections of exports and imports were based on projections of net exports shown in Table 1, which, in turn, were derived from consumption and production data presented in Tables Al and A2. The data shown in Table 1 are considered to be more reliable than those shown in Tables A3 and A4. Figures with negative signs are imports and figures without signs are exports. 29. In the industrial world only Finland, Norway, and Australia are expected to remain net exporters of nickel metal. 2/ The net nickel demand of industrial countries will continue to be satisfied by developing countries. The message from Table 1 in this regard is clear: the dependence of industrial countries on developing countries' exports will more than double between 1989 and 2000. Latin America, followed by Africa, will remain major net exporters. The non-market economies, in particular the USSR, are also expected to rapidly increase their net exports. Price Prospects 30. The nickel industry is presently operating in an excess demand environment that is very likely going to reverse itself in the near future as demand slows and as the high nickel prices make it profitable for producers to increase their effective capacity. Although the exact timing of the demand slowdown cannot be known with certainty, when it comes (sometime in the next 2/ New Caledonia is not part of the group of industrial countries. TABLE 1: NICKEL NETAL: PRODUCTION LESS CONSUNPTION, 1969/71-2000 Countries/ -------------Actual------------- ------------Projected----------- Economies 1969-71 1979-81 1986 1987 1988 1989 1990 1995 2000 -----------------------------('000 Tons)-------------------------- Industrial -17 -79 -120 -133 -118 -75 -91 -144 -165 North America 23 3 -27 -14 -2 21 15 -3 -18 EEC-10 -56 -112 -118 -127 -126 -119 -118 -129 -136 France -23 -29 -24 -26 -28 -24 -22 -24 -27 United Kingdom 1 -6 4 -3 -3 -3 -2 0 -1 Other Western Europe 16 14 21 25 29 30 30 27 29 Japan -1 -18 -34 -58 -57 -48 -60 -77 -80 Non-Market 23 8 4 4 -8 10 9 27 47 USSR 36 35 42 42 32 48 47 70 90 Developing 14 6b 81 75 74 87 82 117 118 Asia -22 2 -16 -19 -15 -18 -20 -15 -11 China -19 -10 3 0 4 1 -1 5 20 World 20 -5 -35 -54 -52 22 0 0 0 Note: Minus sign indicates net imports; figures without signs are exports. Sources: UNCTAD (actual); World Bank (projected). - 18Z - 12 months) it is very likely that it will put into action some other forces that will create additional downward pressure on prices. Consumers of nickel, mainly stainless steel producers (in 1987 they are estimated to have consumed close to 60% of nickel products). are expected to halt their purchases of nickel products as soon as they sense that the demand for their products slackens. Stainless steel producers are expected then to start using their (stainless steel) scrap, thus reducing their scrap inventory levels that have substantially increased during the last 12 months of fast output growth. The increase in the use of scrap, the slowdown of demand, and the increase of world effective c -ocity is expected to ead to a decline -f nickel prices from their 1988 overa of US$5.80/lb to US$3.80/1b in 1989 and US$2.70/lb in 1990. During this period, world nickel stocks are expected to accumulate to three to four months' consumption level. Thereafter, demand is expected to grow closer to its historical trend, and effective capacity is expected to satisfy comfortably demand needs. Changes in nickel prices -re expected to reflect very closely changes in nickel average costs during the 1990-,000 period. Our forecasts call for nickel prices to grow on average by 4.11 p.a. in current dollar terms during the 1990-2000 period but remain almost unaltered in real terms (i.e., when deflated by the MUV ind?x). TABLE Ali NICKEL METAL - PRODUCTION BY MAIN COUNTRIES AND ECONOMIC REGIONS ACTUAL PROJICTED GROUTH SATEM Al COUNTRIES/ 1987 ECOmoIES 1969-71 1979-81 19d6 1987/8 1988 1989 1990 1925 2000 1961-86 1970-86 2000 ------------('000 TONS)--------------------------------------------(2 PER ANNUM)----- INDUSTRIAL 383 404 390 406 440 461 434 431 431 1.7 -0.8 0.5 NORTH ANEP.ICA 176 157 125 142 166 178 178 160 160 -0.5 -2.4 0.9 CANADA 162 115 124 142 166 178 178 160 160 -1.5 -1.7 0.9 EEC-10 72 59 72 67 74 76 76 74 74 -0.6 -2.9 0.0 FRANCS 10 8 8 7 8 8 8 8 8 -2.2 -4.1 1.0 UNITED KINGDOM 35 21 31 :0 30 30 30 30 30 -3.5 -4.9 0.0 OTHERX WSTEW EUROPE 43 47 58 62 65 63 63 60 60 2.0 0.9 -0.3 FINLAND 4 11 18 15 18 18 18 18 18 9.4 9.7 1.4 JAPAN 87 103 93 90 93 97 93 95 93 6.7 v-A 0.4 OCEANIA 5 39 42 45 42 45 42 42 42 ... 13.1 -0.5 NON-MARKET 129 176 195 195 187 200 202 235 266 4.1 3.2 2.4 USSR 123 165 188 188 180 193 195 228 259 4.1 1.2 2 5 DEVELOPING 43 123 158 159 154 166 164 221 236 9.1 6.4 3.12 ASIA 0 36 29 27 29 29 29 46 63 ... ... 6.7 CHINA 0 11 22 20 22 22 22 39 57 . . w. .. 84 AFRICA 14 32 44 44 44 44 44 34 54 13.7 A 3 1.6 SOUTH ARICA 9 18 28 28 28 28 28 38 38 10.7 4.8 2.4 ZIMBABWE 5 14 16 16 16 16 16 16 16 . .4 0.0 AMERICA 20 43 71 74 64 77 77 107 105 5.0 5.3 2.? CUBA 18 20 17 17 17 20 20 30 30 -0.7 0.6 4.5 BRAZIL 2 2 14 14 14 14 14 33 53 ... 11.8 6.8 COLOMBIA 0 0 19 21 20 21 21 22 22 ... ... 0 4 DOMINICAN REPUBLIC 0 20 22 22 13 22 22 22 22 . . . . . . 0.0 SOUTHERN EUROPE 8 13 14 14 17 18 14 14 14 6.2 C/ 2.3 0.0 GREECE a 13 10 10 13 13 10 10 10 4.4 C/ 0.2 0.0 WORLD 55 704 743 760 781 829 820 887 933 3.2 1.2 1.6 A/ LEAST SQUARES TREND FOR HISTORICAL PERIODS (1961-86)i END-POINT FOR PROJECTED PERIODS (1987-2000). 8/ ESTIMATE. C/ GROWTH ICiTE FOR 1967-86 PERIOP. SOURCESi UNCTAD (ACTUAL)i WORLD BANK, INTERNATIONAL ECONOMICS DEPARi'ENT (PROJECTED). TABLE A2: NICKEL METiL - APPARENT CONSUMPTION BY MAIN COUNTRIES AND ECONOMIC REGIONS ACTUAL PROJECTED GROWTN RATES At COUNTRIES/ 198) - ECONOMICS 1969-71 1979-81 1986 1987/3 1988 1989 1990 1995 2000 1961-86 1970-86 2000 ---------('000 TONr)---- ------ ( PER 1ANU,--- INDUSTRIAL 400 483 510 339 558 536 545 575 596 1,0 0 9 '.8 NORTH AMERICA 153 154 152 15. 168 157 163 163 178 0.5 -09 1.0 UNITED STATES 140 145 142 146 158 150 153 153 168 0.5 -0.6 ..11 BEC-10 128 .11 )20 194 200 195 194 203 210 3.6 1.9 0.6 VRANCE 33 37 32 33 36 32 30 32 33 3.0 0.1 0.5 GERMANY, FED. REP. 37 69 77 79 77 79 80 89 90 5.5 4.2 3.0 ITALY 18 25 30 25 30 27 26 28 30 5.3 2.5 J.4 UNITED KINGDOM 34 27 27 33 33 33 32 30 31 -1.1 -2.3 -0.5 OTHER WESTERN EUROPE 27 33 37 37 36 35 35 33 3t 1.6 1.3 -1.4 SWEDEN 19 20 17 15 15 15 15 15 iS 2.5 -2.5 0.0 JAPAN 88 121 127 146 150 145 153 172 175 7.9 2.2 1.3 NON-MARKET 106 168 191 191 195 190 193 208 219 3.7 3,6 1 1 USSR 87 130 146 146 148 145 148 158 169 3.3 3.5 1.1 EASTERN EUROPE 19 38 45 45 47 45 45 50 50 5.9 4.0 0.8 DEVELOPING 29 57 77 84 80 81 82 104 118 6.2 6.2 2.6 ASIA 22 34 4S 46 44 47 49 61 74 4.3 3.2 3.7 CHINA 19 21 19 20 18 21 23 26 29 1.5 0.3 2.9 WORLD 535 709 778 814 833 807 820 887 933 3.4 1.9 1.1 Al LEAST SQUARES TREND FOR HISTORICAL PERIODS (1961-86)1 EH-POINT FOR PROJECTED PERIODS (1987-2000). BI ESTIMATE. SOURCES: UNCTAD (ACTUAL): WORLD BANK, INTERNATIONAL ECONOMICS DEPARTMENT (PROJECTED). TABLE A3j NICKEL METAL - GROSS EXPORTS BY MAIN COUNTRIES AND ECONOMIC RECIONS ACTUAL PROJECTED GROWTV RATES Al COUNTRIES/ 1967 ECONOHIES 1969-71 1979-81 1986 1987/8 1988 1989 1990 1995 2000 1961-46 1970-86 2000 --('000 TONS)------------------------------- ------- ------(% PER AIM)------- INDUSTRIAL 280 256 244 270 294 313 307 289 289 0.3 -2.2 0.5 NORTH AMERICA 166 116 106 132 155 171 168 150 150 -1.6 -3.9 1.0 CANADA 162 101 104 132 155 171 168 150 150 -2.2 -5.0 1.0 EEC-10 67 70 62 62 62 62 62 62 62 1,7 -2.4 0.0 FRANCE 5 6 6 6 6 6 6 6 6 0.5 111 0.0 V'fTED KINGDOM 30 13 16 16 16 16 16 16 16 -32 -7.9 0.0 OTHR WESTERN BUROPE 43 46 53 50 53 53 3 53 53 1.9 0.4 0.4 FINLAND 4 11 16 13 16 16 16 16 16 9.0 9.5 1.6 JAPAN 0 1 0 0 0 0 0 0 0 0.0 0.0 0.0 OCEANIA 5 23 24 27 24 27 24 24 24 ... 6.0 -019 NON-MARKET 35 33 44 60 44 44 44 44 54 7.0 3.2 -0.5 USSR 34 46 39 S3 39 39 39 39 39 6.3 2.4 -2.6 DEVELOPING 33 110 110 110 105 126 115 142 142 In, 6.0 2.0 AFRICA 10 28 35 35 35 33 35 45 45 16.4 Cl 5.2 2.0 SOUTH AFRICA 3 15 19 19 19 19 19 29 29 13.1 Cl 7.3 3.3 ZIMBABWE 5 13 16 16 16 16 16 16 16 ... 3.3 0.0 AMERICA 17 47 59 60 so 71 63 80 so 7.0 5.7 2.2 CUBA 17 20 18 17 17 20 20 30 10 117 2.2 4.5 BRAZIL 0 0 0 0 0 0 0 6 6 0.0 0.0 0.0 COLOMBIA 0 0 19 21 20 21 21 22 22 ... ... 0.4 DOMINICAN REPUBLIC 0 21 22 22 13 30 22 22 22 ... ... 0.0 SOUTHERN EUROPE 7 17 10 10 13 13 10 10 10 54.1 D/ 2.7 0.0 GREECE 7 16 10 10 13 13 10 10 10 34.1 D/ 2.7 0.0 WORLD 348 418 398 440 443 483 466 475 485 2.4 -0.1 0.8 --------------------------------------------------------------------------------------------------------------------- A/ LEAST SQUARES TREND FOR HISTORICAL PERIODS (1961-86); END-POINT FOR PROJECTED PERIODS (1987-2000). B/ ESTIMATE. C/ GROWTH RATE FOR 1964-86 PERIOD. D/ GROWTH RATE FOR 1962-86 PERIOD. NOTEs HISTORICAL UNCTAD PUBLISHED EXPORTS AND IMPORTS DATA ARE NOT UNIFORMILY DEFINEDs PROJECTIONS SHOULD BE VIEWED WITH CAUTION, EXPORTS INCLUDE SITC EX 287.22 AND 671.69, AS WELL AS SITC 683.1 SOURCES: UNCTAD (ACTUAL>; WORLD BANK, INTERNATIONAL ECONOMICS DEPARTMENT (PROJECTED). TABLE A41 NICKEL METAL - GROSS IMPORTS BY MAIN COUNTRIES AND ECONOMIC REGIONb ACTUAL PROJECTED GROWTH RATES Al COUNTRIES/ 1987 - 300NOMIES 1969-71 1979-81 1986 1987/8 1988 1989 1990 1995 2000 1961-86 1970-66 2000 -- yo00 TONS)------------------------------------ ------(I PER ANNUM)------- INDUSTRIAL 239 259 249 339 350 340 350 380 403 1,2 -0.3 1.4 NORTH AMERICA 108 11u 87 146 158 150 153 153 168 -0.9 -2.2 1.1 UNITED STATES 96 106 84 146 158 150 153 153 168 -0.6 -1.5 11 EEC-10 99 112 117 128 127 120 119 130 137 2.8 0.6 0.5 FRANCE 11 21 19 32 34 30 28 30 32 6.3 4.2 0.0 GERMANY, FED. REP. 33 42 43 45 43 45 46 55 56 3.2 1.5 1 7 ITALY 13 16 18 13 18 15 16 16 18 4.2 2.7 2.5 UNITED KINGDOM 35 18 19 17 17 17 16 14 15 -2.1 -4.9 -1.0 OTHER WESTERN EUROPE 20 17 20 20 18 18 18 18 18 1.1 0.2 -0.8 SWEDEN 16 10 12 12 10 10 10 10 10 -0.1 -2.3 -1.4 JAPAN 9 16 24 45 47 52 60 79 82 15.4 6.4 4.7 NON-MARKET 20 32 39 39 41 39 39 44 44 2.8 3,3 019 USSR 5 0 0 0 0 0 0 0 0 0.0 0.0 0.0 EASTERN EUROPE 15 32 39 39 41 39 39 44 44 6.7 4.4 0.9 00 DEVELOPING 8 31 35 62 52 104 77 51 36 6.5 3.8 -.1 WORLD 266 323 322 440 443 483 466 475 485 1.7 0,4 0.8 I A/ LEAST SQUARES TREND FOR HISTORICAL PERIODS (1961-86)1 END-POINT FOR PROJECTED PERIODS (1987-2000). B/ EBSTIMATE. NOTEi HISTORICAL UNCTAD PUBLISHED EXPORTS AND IMPORTS DATA ARE NOT UNIFORMILY DEFINEDI PROJECTIONS SHOULD BE VIEWED WITH CAUTION. IMPORTS COVER ONLY SITC 683.1 SOURCESs UNCTAD (ACTUAL)s W(0ALD BANK, INTERNATIOVAL ECONOMICS DEPARTMENT (PROJECTED). 2-16-89 - 187 - TABLE A5: NICKEL - PRICES, 1950-87 (ACTUAL) AND 1988-2000 (PROJECTED) ($/Ton) Current $ &/ 1985 Constant US$ 1985 Constaat US$ V b/ GNP c/ Actual 1950 988 4,173 4,613 1951 1,191 4,362 5,305 1952 1,246 4,355 5,468 1953 1,321 4,750 5,707 1954 1.334 4,906 5,673 1955 1,422 5,134 5,857 1956 1,437 5,008 5,729 1957 1,631 5,568 6,277 1958 1,631 5,475 6,149 1959 1,631 5,553 5,996 1960 1,631 5,438 5,896 1961 1,711 5,607 6,125 1962 1,762 5,660 6,170 1I63 1,742 5,705 6,014 1964 1,742 5,607 5,916 1965 1,735 5,545 5,745 1966 1,739 5,370 5,566 1967 1,936 5,909 6,025 1968 2,075 6,393 6,150 1969 2,363 6,911 6,646 1970 2,846 7,830 7,576 1971 2,932 7,654 7,391 1972 3,080 7,377 7,411 1973 3,373 6,974 7,616 1974 3,825 6,491 7,929 1975 4,570 6,975 8,620 1976 4,974 7,488 8,822 1977 5,203 7,130 8,650 1978 4,610 5,490 7,141 1979 5,986 6,294 8,522 1980 6,519 6,249 8,507 1981 5,953 5,677 7,087 1982 4,838 4,678 5,411 1983 4,673 4,640 5,033 1984 4,752 4,802 4,927 1985 4,899 4,899 4,899 1986 3,881 3,280 3,806 1987 4,872 3,749 4,641 Projected 1988 12,770 9,075 11,698 1989 8,267 5,529 7,243 1990 6,041 3,981 5,037 1995 7,275 4,020 4,669 2000 9,039 3,989 4,629 £/ For 1950-79 period: Canadian nickel, electrolytic cathodes, Ni 99.91, shipping point. For 1980-2000: LME nickel price. b/ Deflated by manufacturing unit value (MUV) index. c/ Deflated by US GNP deflator. Sources: Metals Week (actual); World Bank, International Economics Department (projected). - 188 - NICKEL ( CONSTANT 1985 DOLLAR PRICES ) 14000- 12000- g 'a '* 10000- $0008 6000- 4000-1* . ** * 2000- 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 DEFLATED BY MANUFACTURING UNIT VALUE ( MUV) INDEX DEFLATED BY U.S. ONP DEFLATOR. 1948 - 87 ACTUAL ; 1988 - 2000 PROJECTED . SOURCE: WORLD BANK, INTERNATIONAL ECONOMICS DEPARTMENT. AI.EIMNU K;T BAIIT Summary 1. World aluminum production is estimated to have increased approxi- mately 1.7 million tons in the period 1986-83, while world operating rates are estimated to average 90% during 1988. Stocks have declined steadily over the past several years and despite the recent large increase in out5ut are now at record-low levels. Five consecutive years of strong demand growth following the low prices of the early 1980s and the resulting plant closures have contributed to the current tight supply and high prices. 2. Although aluminum consumption has been quite strong during the 1982- 87 period, demand is forecast to expand rather slowly through the year 2000. Substitution by plastics and other competitive materials, generally mature markets, and the absence of important new applications will limit world primary aluminum demanA to a 1.7% p.a. growth rate during the 1987-2000 period. Consumption 'n the industrial countries is expected to increase by 1.2% p.a., while Aeveoping countries should exhibit a 3% p.a. increase. These rates are sim'ar to the forecasts made two years ago. World primary aluminum output is projected to increase 2% p.a. during the 1987-2000 period. Developing country production will continue to expand, particularly in Asia and South America, with Brazil, China, and Venezuela expected to become major world producers. 3. An expected slowdown in demand should alleviate the current short supply of aluminum metal. Only 1.5 million tons of additional capacity should be added through 1990. Most of this is expected to be the result of incremental expansion at currently operating units. New smelters will be required in the 1990s and many are likely to be located in developing countries. The large international aluminum companies, which dominated the industry through the 1970s, are likely to play a less prominent role in the primary aluminum sector during the 1990s. 4. The extended period of oversupply in the alumina sector has ended. The lack of new capacity and increased alumina demand have led to increased utilization rates and prices. Alumina production will continue to increase in bauxite mining areas, particularly those developing countries which are now expanding their aluminum sector. 5. Although bauxite production is expected to increase 2.2% p.a. during the 1987-2000 period, the continued trend toward local processing of bauxite will result in a -0.9% p.a. decrease in exports during the 1987-2000 period. A similar situation exists for alumina; production should increase by 2% p.a., but exports are expected to increase by only 1% p.a. Once again, the trend toward the local processing (of alumina) will dampen export marizets. In contrast, aluminum exports should increase 3.1% p.a.-somewhat faster than the 2% p.a. increase expected for production. This trend reflects the eipected decline of production in large aluminum-consuming countries and their increasing import requirements. Australia and Canada, as well as developing countries such as Brazil and Venezuela, are likely to become prominent exporters . - 190 - 6. The aluminum market has becn extremely volatile in recent years. Prices declined to US$1,110/ton in 1SO, but subsequently increased sharply and reached US$2,818/ton during the second quarter of 1988. Prices are expected to decline substantially )y 1990 to US$1,800/ton (US$1,186/ton in 1985 dollars), as demand softens an4 additional supply becomes available. In the longer term, prices should reach US$2,350/ton and US$2,900/ton in 1995 and 2000, respectively. In constant 1985 dollars, these prices translate into a moderate increase to US$1,299/ton in 1995 and a slight decrease to US$1,280/ton in 2000. Bauxite prices declined in 1987 to US$29.48/ton and are expected to drop further to US$28/ton in 1988. There should be a steady increase through the 1990s to US$48/ton in 2000. Real prices in the mid- and late-1990s should be in the US$21-23/ton range (in 1985 constant dollars), substantially below levels typical during the early 1980s. Introduction 7. Over the past 18 months the economic environment facing the world aluminum industry has improved dramatically from that generally experienced during the 1981-86 period; which raises the question whether the medium and long-rerm outlook for the industry is now more sanguine than was expected several years ago. In particular, seven consecutive quarterly increases in the aluminu= transaction (Metal Bulletin) price--from US$1,226/ton during the fourth quarter of 1986 to a record high of US$2,818/ton for the second quarter of 1988--prompts a re-evaluation. 8. The origin of the current tight markets and rising prices can be traced to the low prices which typified the world industry in the early and mid-1980s. The market reacted as expected by curtailing investment and new projects. Moreover, large-scale closures of high-cost facilities in North America, Asia, and to a lesser extent Western Europe, led to only a marginal increase of smelter capacity--from 18.5 million tons in 1980 to 18.9 million tons in 1987. However, the stagnation of investment activity was paralleled by a scrong and unexpected recovery in aluminum markets. Demand has increased in five consecutive years since the end of the world recession in 1982. By late 1986, world aluminum demand generally exceeded supply--a situation which resulted in record-low stocks by the first quarter of 1988. 9. The price and market outlook are highly sensitive to several key market and behavioral assumptions. Five years of world economic growth have contributed positively to aluminum consumption; but a slowdown in the economic expansion is expected during the next few years. A slowdown will serve to moderate the growth of aluminum demand. The buoyant market over the past several years has raised the question of whether the potential long-term intensity of aluminum use may be now somewhat higher than previously assumed; if so, this will lead to higher consumption in the medium and long term, ceteris paribus. Our view is that taking such a position is not justified, but rather that demand has been bolstered by cyclical growth in metal- intensive sectors such as capital goods. - 191 - Demand Outlook 10. Aluminum markets have been characterized by several major shifts in consumption patterns over the past three decades. During the 1960-73 period consumption increased at 9.6% p.a., reflecting strong world economic growth and declining real aluminum prices, both of which encouraged substitution and the development of new aluminum markets. During this period many aluminum markets were also associated with sectors that were expanding faster than general economic activity (e.g., automobiles and construction). The boom years came to an abrupt end during the 1975 world recession. The factors which contributed to the rapid expansion of the 1960s reinforced the slowdown. World economic growth during the 1975-82 period was decidedly lower than in the previous decade, and the rapid rise of energy prices led to large increases in both real aluminum costs and prices. Higher real prices resulted in substitution by competitive materials, particularly plastics, and efforts to use less aluminum in cases where suitable substitutes were not available (e.g., by developing tighter aluminum cans). The experience of the 1970s led to sveculation that consumption could stagnate; this view contributed to more conservative estimates of required capacity levels. 11. Consumption has increased for five successive years since 1982, Averaging 3.4% p.a. during this period--a distinct contrast to the 1970s, leading some observers to take a more sanguine view of medium- and long-term consumption prospects. Such a re-evaluation of aluminum demand appears premature for several reasons. First, althouEh demand has increased, the rate of growth remains well below levels typical of the 1960s; consumption in 1987 was only marginally higher than in 1979--the peak year of consumption before the onset of the last recession. In addition, many of the aluminum-intensive industry sectors which outperformed aggregate economic activity during the 1960s show no signs of repeating this behavior in the 1990s. 12. A review of industrial country aluminum demand by major end-use is a useful tool in assessing both past and likely future consumption trends. Table 1 contains data for the six largest OECD countries, which account for approximately 80% of industrial country demand. During the 1974-82 period, aluminum consumption in the United States declined dramatically, but trends for various end-uses differed considerably. The decline in consumption in the transportation sector reflects the poor performance of the US auto industry during this period, rather than the effects of substitution. The electrical sector represents a mature market; aluminum has been the preferred metal for high voltage transmission cable but, for technical reasons, has not been able to penetrate the large residential market. Construction has been the most vulnerable sector to substitution, especially by plastics in such applications as siding/cladding. The growth of the aluminum beverage can market allowed the packaging sector to expand significantly during the mid- and late-1970s. The "other" sector includes consumer durables, machinery, and various miscellaneous applications. Depressed capital goods and consumer goods spending, as well as competitive pressures from plastics, resulted in a steady decline of aluminum in these uses. 13. Aluminum consumption in the industrial countries of Europe fared somewhat better during the 1974-82 period than it did in the United States. Only consumption in the electrical sector registered a decline--a result of TABLE 1: 7TAL ALUMINUM CONSUMPTION BY MAIN SECTORS, 1970-86 1970 1972 1974 1976 1978 1980 1982 1984 1985 1986 -------------------------------('000 Tons)-------------------------------- United States Transportation 734 1,066 1,169 1,163 1,431 1,042 796 1,333 1,364 1,441 Electrical Engineering 574 640 780 555 644 612 514 677 642 629 Construction 1,006 1,418 1,363 1,221 1,423 1,165 1,034 1,296 1,381 1,484 Packaging 665 824 1,027 1,166 1,425 1,512 1,618 1,832 1,863 1,899 Other 1,080 1,231 1,411 1,188 1,261 1,115 964 1,381 1,134 1,182 Exports of Semi- manufactures a/ 527 255 428 379 359 995 587 488 546 376 Total 4,586 5,343 6,178 5,782 6,543 6,441 5,513 7,007 6,930 7,01t Japan Transportation 257 310 325 371 462 582 596 689 763 785 Electricial Engineering 156 166 163 178 210 226 170 172 155 165 Construction 298 459 546 668 687 732 677 677 701 736 Packaging 20 23 83 104 137 134 149 168 177 202 Other 409 495 472 523 507 553 561 635 632 602 Exports of Semi- manufactures a/ 53 39 34 77 142 82 162 257 258 231 Total 1,193 1,492 1,623 1,921 2,145 2,309 2,315 2,598 2,686 2,712 Western Europe b/ Transportation 611 613 617 667 720 741 688 726 766 841 Electrical Engineering 259 266 265 244 236 277 231 239 237 232 Construction 234 305 376 409 407 486 433 440 438 487 Packaging 178 222 250 238 253 258 264 283 291 298 Other 641 667 858 848 828 826 787 830 856 887 Exports of Semi- manufactures a/ 300 353 493 570 718 759 904 1,056 1,048 1,062 Total 2,223 2,426 2,859 2,976 3,162 3,347 3,307 3,574 3,636 3,807 a/ Exports of semi-manufactures are not broken down into various end-uses, but are included because they represent a component of domestic consumption. b/ Historical end-use data only reported by the Federal Republic of Cermany, France, .taly, and the United Kingdom. Note: Total aluminum consumption includes both primary and secondary aluminum. Thus, country totals in this table will be greater than primary consumption data shown elsewhere. Data for 1987 are not yet available. Sources: Metal Statistics, Metallgesellachaft (various issues). - 193 - the sam factors affecting the US market. Import penetration by foreign auto- makers was not a major factor in Europe, thus permitting the transportation sector to expand slightly. The packaging market also increased, but the rate was modest, and the European packaging sector remains a relatively small market when compared to its contribution to US aluminum demand. 14. Japan's performance during the period was the most robust, reflecting a strongly growing economy and the materials-intensive nature of production. The rapid expansion of automobile output and exports is illustrated in the large increase in aluminum consumption in the transportation sector. Packaging expanded, but remains a relatively small component of demand. Once again, the electrical sector stagnated. 15. The recovery of industrial country demand since 1982 has been concentrated in the United States. The near doubling of aluminum consumption in the transportation sector was the largest factor in the resurgence of the US market and reflects the recovery of the automobile industry and a slight increase in aluminum use per vehicle. Other markets improved modestly. Perhaps the most significant trend was the leveling off of packaging demand-- aluminum's penetration of the beverage can market (at the expense of tinplate) is virtually complete. European and Japanese performance during the 1982-86 period was more moderate. This reflects the relatively higher levels of demand during the late-1970s vis-a-vis the United States, as well as sectoral differences in demand. In Europe, all major end-uses except electrical expanded, but the increases were rather small--particularly in the case of the transportation market. The Japanese consumption pattern was similar to Europe--all end-uses except electrical increased. Packaging performed rather well, but total volumes remained small. Transportation applications slowed considerably, primarily reflecting lower growth rates in the automobile industry. 16. In summary, sectoral demand for aluminum has varied markedly. Substitution by other materials has been a factor in many applications, particularly construction. Packaging (the aluminum beverage can) has become the major US market, but growth has slowed as the market has matured and lighter aluminum cans have been developed. Packaging has grown in other industrial countries, but in these countries the sector remains small because the aluminum beverage can is not a major component of demand. Differences in transportation markets largely reflect the vagaries of domestic automobile production. Only electrical markets have exhibited stagnation or declining trends in most industrial economies. Finally, the United States has been the primary contributor to the increased aluminum consumption during the past few years. It is problematical whether the United States can maintain this trend. 17. Developing country consumption has exhibited no marked variation in growth rates during the early and mid-1980s vis-a-vis the 1970s--consumption during the 1970-87 period increased by 8.2% p.a. The relatively large and consistent rise reflects the less mature nature of most aluminum markets in the developing countries and the importance of basic infrastructure to aluminum demand. The increases in the construction and electrical sectors are both closely associated with economic development. Brazil and Venezuela are the biggest aluminum consumers in South America--largely due to major infrastructure needs including hydroelectric dams and associated electrical - 194- transmission requirements. Manufacturing for export markets has also contributed to demand in some developing countries, particularly in Asia. Unfortunately, detailed end-use data for the developing countries are not available. 18. Aluminum consumption projections have been made using two methods, depending on available data. For the major industrial countries (the United States, Japan, the Federal Republic of Germany, France, Italy, and the United Kingdom) total aluminum demand (boti primary and secondary) by major end-use was projected. Primary aluminum detaand was derived after making allowances for the recovery of secondary metal. In other countries and regions primary alumincm demand was projected directly using aggregate production indices. 19. The projections for sectoral aluminum consumption are presented in Table 2. Despite the somewhat stronger demand during the mid-1980s, the general outlook is for relatively slow increases in demand. Aluminum will continue to face substitution, arnd markets which are mature will offer minimal growth prospects. No large new markets are expected to be developed during the coming decade. A major feature of the aluminum industry will continue to be the diversity of sector performance between countries and within national markets. In g4neral, packaging is expected to be the most rapidly expanding end-use. This arospect largely reflects the continued growth of the container market at the expense of other materials such as steel and glass. The transgortation sector is also expected to perform reasonably well. Automobile production wor dwide is expected to increase by 2.5 Z p.a., and aluminum use per vehicle is expected to remain steady or even increase somewhat over the medium term. In contrast, the electrical sector should continue to stagnate or even decline, reflecting the largely completed process of electrification in these countries. 20. In the United Stat., total aluminum consumption is expected to increase by 1% p.a. during th2 1987-2000 o-:riod. Packaging should remain the dominant market and register a 1.4% p.a. increase. The slower growth compareu to that experienced during the 1970s reflects the maturity of the aluminum beverage can market. Other packaging applications such as in food cans should expand, but volumes will remain relatively small. Transportation markets shoule benefit from a 1% p.a. increase in automobile production and a medium- term rise in aluminum content per vehicle. For example, during the period 1979-86, the substitution of aluminum for copper radiators and the more extensive use of aluminum wheels resulted in aluminum use per vehicle increasing from 178 lb to 197.3 lb. 1/ Construction activity is expected to increase only 0.6% p.a. during the 1987-2000 period and, in conjunction with continued substitution by plastics, should result in a 0.2% p.a. decrease in the construction market. Electrical applications will continue their historical decline for the reasons noted above. 21. Aluminum markets in Europe are expected to increase 1.8% p.a. through 2000. Packaging should register the strongest growth (3.8% p.a.), largely due 1/ Shearson Lehman Brothers, Annual Review of the Aluminum Industry--1988. - 195 - TABLE 2: TOTAL ALUMMIU COWSUNPTIOW BY EMD-USES, 1986-2000 Actual -----Projected------ Growth Rate 1986 1990 1995 2000 1986-2000 - C000 Tons)----------------- United States Transportation 1,441 1,500 1,350 1,800 1.6 Electrical Engineering 629 620 605 590 -0.5 Construction 1,484 1,550 1,500 1,450 -0.2 Packaging 1,899 2,100 2,200 2,300 1.4 Other 1,182 1,240 1,320 1,400 1.2 Exports of Semi-manufactures 376 38C 440 500 2.0 Total 7,001 7,390 7,715 8,040 1.0 Japan Tra:sportation 785 800 950 1,100 2.4 Electrical Engneering 165 164 157 150 -0.6 Construction 736 750 850 950 1.8 Packaging 202 225 312 400 5.0 Other 602 611 650 690 1.0 Exports of Semi-manufactures 231 220 260 300 1.9 Total 2,721 2,770 3,179 3,590 2.0 Western Europe a/ Transportation 841 830 935 1,040 1.5 Electrical Engineering 232 225 232 240 0.2 Construction 487 490 520 550 0.9 Packaging 298 320 410 30 3.8 Other 887 880 1,015 1,150 1.9 Exports of Semi-manufactures 1,062 1,075 1,238 1,401 2.0 Total 3,807 3,820 4,350 4,890 1.R ai Historical end-use data only reported for the Federal Republic of GermaL-, France, Italy, and the United Kingdom. Note: Total aluminum consumption includes both primary and secondary aluminum. Sources: Metal Statistics, Metallgesellschaft (actual); World Bank (projections). to the continued expansion of the aluminum beverage container. Transportation use is expected to increase by only 1.5% p.a., due to the moderate growth in automobile production. European construction activity is forecast :o increase only 0.8% p.a. during the 1987-2000 period and should limit aluminum rowth to 0.9% p.a. in this use. Electrical applications will remain : slowest expanding sector. -196 - 22. ALamminum consumption in Japan should slov considerably coapared to the experiemce of the past two decades; however, the 2% p.a. growth rate expected is the largest among major industrial countries--a trend consistent with the 4.7% p.a. increase in industrial production expected in Japan during the 1987-2000 period compared to 2.9% p.a. and 3.4% p.a. for the United States and Europe, respectively. Packaging and transportation markets should exhibit the strongest growth, as is the case in other industrial countries. The constructiorn and electrical sectors are expected to expand, but at relatively modest rates. 23. World primary consumption should increase 1.7% p.a. from 17.1 million tons in 1987 to 21.3 million tons in 2000. Industrial country primary demand is expected to increase by 1.2% p.a. The industrial region increase is slightly lower than impliet in Table 2, due to the continued rise in secondary (recycled aluminum). Consumption in developing countries is projected to increase by 3% p.a. The Asian region should expand at a vigorous 3.2% p.a. The rapidly expanding and export-oriented countries of the Pacific Rim are the primary reason for Asia's expected good performance. Consumption in Latin America shoild rise by 2.8% p.a. The lower growth rate is due to the less vigorous economic activity expected in developing America vis-a-vis Asia. ALuminum consumption in the centrally planned economies (CPEs) is expected to increase by 1.7% p.a., a marked slow:iown from the 2.2% p.a. increase typical during the 1970-87 period--a trei. -h..'ich reflects the general maturation of aLuminum demand, as well as the tE .ced infrastructure requirements in these economies. Supply Outlcok 24. A najor feature in the aluminum industry in recent years has been the closure of smelting capacity in response to sharply higher real oil/natural gas prices in the 1970s. Japan's aluminum smelting industry was virtually shut down--declining from 1.4 million tons in 1980 to 64,000 tons in 1987. During this same time period US capacity contracted by some 950,000 tof's as producers closed high-cost units. More limited shutdowns also occurred in Europe. Simce low aluminum prices minimized new replacement investment, world capacity r-emained virtually unchanged from 1980 through to 1987, and utilization rates reached 0.90 by year-end 1987 as demand increased. 25. The few new investments which were committed during this period differed irx several respects from those typical in the 1970s. Due to rising energy prices, only projects based upon hydroelectricity (or inexpensive lignite in the case of Australia) were viable. Many of these new smelters were located in developing countries, particularly South America, where 1.2 million torks of new capacity has been constructed since the late 1970s. An additional feature has been the less prominent role played by the traditional major aluminum companies. The trend, in part, has been due to the location of inexpensive energy in countries and regions where the major companies were not extensively involved previously. The major producers have also sought to de- emphasize primary production in favor of higher value-added. products. The strategy reduced the motivation to invest in new capacity and accelerated the pace of peranent closures. - 197 - 1U 34 A~ ^ C~ = Ile- 19i3 1985 1947 1990 1995 2000 (1000 tpy) taduatrial 11.054 11,099 10,429 10,533 10,859 11.446 eitd Stata 4,872 4,603 4,014 3,977 3,700 3.300 Ca~a 1.234 1,347 1.577 1.747 1,995 2.400 EE-lo 2,343 2,316 2,303 2.091 2,000 2,000 Prance 435 324 33 245 Cermany, red. ep. 731 795 775 711 Italy 220 252 243 235 ~etherlamds 265 265 265 265 United ¥iagdom 285 285 287 287 Spaim 407 395 348 348 Other Weatera EUrope 1,113 1.126 1,209 1,242 1,300 1,500 Anatria 95 95 95 95 Iceland 88 88 88 88 orwany 774 774 869 9ZI Sede~ 70 83 75 90 Switzerland 86 86 82 58 Japan 649 649 64 64 64 64 Ocania 843 1,058 1,262 1,412 1,800 2,220 4ustralia 598 813 1.018 1.168 New Zfaland 245 245 244 244 Developing 3,624 3,812 4,687 5,957 6,580 8,300 Africa 597 622 629 629 630 900 CM*roon 81 81 84 84 Egypt 166 166 170 170 Cana 200 200 200 200 South Africa 150 175 175 175 Other - - LatIn Amerlca 1,059 1,159 1,519 2,149 2,400 3,000 Argentina 140 i40 140 140 -- Brazil 414 514 953 1,263 Veneolå 400 400 470 790 Other 105 105 96 96 Asia 1,424 1,499 1,778 2,418 2,900 3,600 Bahrain 170 '70 170 230 China 503 503 660 1,060 India 363 363 485 625 Indonesia 150 225 225 225 Iran 50 50 50 50 Korea, Rep. of 18 18 18 18 Other Aia - - - - United 4rab Ewiratts .150 150 150 170 Korea, Dem. Rep. 20 20 20 40 Southern Europe 544 532 621 62l 650 800 Greece 147 147 150 Zarkey 60 60 60 60 ygoslavia 337 325 411 4.1 Cantraly Flanned 3,735 3,550 3,812 3,912 4,300 4,500 Czecholovakia 60 60 60 60 Ger~ De~, Rep. 85 85 70 70 ~ungary 75 90 72 72 Poland 55 55 115 115 I&ania 250 250 250 250 USSt 3,210 3,025 3,245 3,345 Total Westerm World 14,658 14.891 14,336 15.390 16,399 18,424 Total World 18,413 18,461 18,928 20,402 21,739 24,246 Sources: 2ngineerin and Mining Jogx-bl, Maclean Hunter, Jann~y 1988; James r. King, or C ty iprt PTimary Aluminm, Aluina and Bauite (vario~s issues); BUreauor u.S.epartmt of the Interior; World Bank (projected). - 198 - 26. The pattern of aluminum capacity expected through 2000 is shown in Table 3 and illustrates both the recent lack of investment activity and the dramatic change in the geographical concentration of production. Although the decline of Japanese production is virtually complete, the situation in the United States is less certain. Many US producers successfully negotiated lower power and labor rates, thus improving industry competitiveness. Also, smelters accounting for approximately 525,000 tons of capacity were "spun off" by aluminum producers during 1986-87 and are now independent units operating on a toll basis (alumina is converted to metal for a fee and the metal remains the property of the alumina supplier). These toll smelters generally renegotiated labor ind power contracts to lower costs and have benefited from the sharp rise in aluminum prices. However, they are older, less efficient units which are likely to close in the future as prices decline. Hence, US capacity should drop by almost 300,000 tons through 1995. In Canada, an expansion of the Beacancour smelter is expected by 1990. Incremental expansions of other units and perhaps one new smelter are likely thereafter. EEC capacity is expected to contract slightly, and little new smelting capacity is likely. An incremental expansion of the Portland smelter in Australia will boost capacity through 1990. Several new smelters are likely to be constructed during the 1990s. Considerable investment activity is anticipated for South America; both Brazil and more recently Venezuela, have become major aluminum producers. The Asian region is also expected to expand capacity. Most of the increase is likely to be limited to the Persian Gulf region, where flared natural gas can provide competitive power, and in China, whose industrial expansion and infrastructure needs require expanded capacity. 27. The principal motivation for these new investments is access to plentiful and inexpensive blocks of base-load electrical power. Smelters in Canada, Venezuela, and Brazil are predicated upon hydroelectric powe-,, and Australian units have utilized the country's vast reserves of lignite (orown coal) to generate electricity. Australia, Brazil, and Venezuela also have large quantities of bauxite, as well as alumina refining capabilities. 28. Most of the aluminum capacity brought on-stream during the past few years is the result of investment decisions that were made at least initially during the 1979-80 price boom and illustrates the lengthy gestation period often associated with capital-intensive mineral projects. The subsequent price decline delayed or canceled many projects; this is evident in the modest rise in capacity expected during the 1987-90 period. Much of the increase is the result of incremental expansions of existing smelters rather than new units. The hesitancy of the industry to invest is also evident in the current lack of firmly committed projects which could be expected to come on-stream during the early and mid-1990s. This reluctance is in part due to a desire to avoid major investments unless price prospects are thought to be firmly positive. During the 1970s major investment decisions were made at the peak of price cycles, but many units subsequently came on-stream during a cyclical price trough. A second factor has been alluded to previously. The strategic decision of many primary producers to de-emphasize primary production may have caused a temporary shortage of the financial and technical resources required for project development. It now appears that further delays in adding new capacity could exacerbate the cyclical swings which have been typical in the past. - 199 - 29. World primary aluminum production was 16.5 million tons in 1987, and utilization rates reached 0.88. Output was approximately 1 million tons higher than in 1986, indicating the strength of aluminum demand and the impact of rising prices. Historically low stocks and continued strong prices should lead to an additional output expansion to 17.2 million tons in 1988, implying a world utilization rate of 0.90. 2/ A relatively small improvement in world aluminum demand should restrict output to 17.4 million tons in 1990. 30. dorld primary aluminum production is projected to increase at 2% p.a. during the 1987-2000 period by which time production is expected to reach 21.3 million tons. The developing countries should account for an increasing share of output (34%) in 2000 compared with 24% in 1987. Venezuelan production alone is likely to account for 6.1% of world output (1.3 million tons) in 2000 and Brazil 5.6% (1.4 million tons). The industrial countries' share will correspondingll fall to 49% from 58%. The decline will be especially ne,iceable in the United States. Only Canada and Australia will expand ouzput during the period. 31. The large degree of vertical integration typical during the 1950s to mid-1970s permitted close coordination between alumina supply and requirements. However, the decline of vertical integration made coordination more difficult and contributed to serious oversupply of alumina, commencing in the early 1980s. As shown in Table 4, permanent capacity closures have typified much of the 1980s, particularly in the United States. Only three major new facilities have come on-stream during the period through 1987 (Ireland, Brazil, and Venezuela) and during the 1987-90 period only two significant expansions are expected (Greece and Venezuela). 32. Stagnant capacity and rising demand for alumina (e.g., increasing aluminum output) have eliminated the previous alumina surplus and led to increasingly tight markets for this product. During the 1990s approximately 6.4 milLion tons of capacity are expected to be added worldwide. Alumina refineries will be located near sources of high-quality bauxite and, with the exception of Australia, will be limited to developing countries--particularly Brazil, China, and Venezuela. In these three countries the primary motivation for investment is expected to be an expanding domestic aluminum smelting sector rather than a desire to increase alumina exports. 33. Alumina production is expected to reach 47 million tons in 2000, a 2% p.a. increase from 1987 levels. As was the case with aluminum, the developing countries' share should increase significantly--from 27% in 1987 to 36% in 2000. Australia, Brazil, and Venezuela are likely to be the major world producers in 2000. 34. In many respects, trends in bauxite capacity and markets can be viewed as evolutionary rather than subject to the cyclical swings which have characterized alumina and aluminum. Bauxite production gradually shifted during the 1950s and 1960s from industrial countries to the Caribbean, Oceania, South America, and Africa. In 1987, thz-se regions accounted for 70% of world capacity (Table 5). Australia accounts for approximately one-third 2/ The western world rate is 0.96. - 200 - TABLZ 4: ALWKLMA CAPACITY 1983-2000 Countries/ ------- Actual---------- ---------Projected---------- Economies 1983 1985 1987 :990 1995 2000 -----------py--------------------------- ------------ ------ ------- -000 tpy) ----- ----------------------- Ind,;striai 25,095 23,875 22,629 21,109 21,609 22,600 United States 7,540 5,920 4,724 4,574 Canada 1,225 1,225 1,225 1,225 EEC-10 5,080 5,480 5,210 4,280 France 1,350 1,350 1,050 700 Germany, Fed. Rep. 1,690 1,690 1,710 1,130 Ireland 400 800 800 800 Italy 720 720 730 730 United Kingdom 120 120 120 120 Spain 800 800 800 800 Japan 1,840 1,840 1,320 880 Oceania 9,410 9,410 10,150 10,150 Australia 9,410 9,410 10,150 10,150 Developing 10,855 11,400 12,5,?0 14,905 16,325 19,325 Africa 700 700 700 700 Guinea 700 700 700 70J Latin America 6,155 6,700 7,485 3,005 Brazil 615 1,160 1,310 1,380 Guyana 315 315 - - Jamaica 2,825 2,825 3,155 3,305 Suriname 1,400 1,400 1,320 1,320 Venezuela 1,000 1,000 1,350 2,000 Asia 1,580 1,580 2,235 3,640 China 920 920 1,000 2,030 India 660 660 1,235 1,610 Other Asia - - - - Southern Europe 2,420 2,420 2,100 2,560 Turkey 200 200 200 200 Yugoslavia i,620 1,620 1,300 1,160 Greece 600 600 600 1,200 Centrally Planned 6,650 6,650 6,400 6,400 6400 6900 Czechoslovakia 130 130 130 130 German Dem. Rep. 60 60 60 60 Hungary 860 860 880 880 Romania 650 650 650 650 USSR 4,950 4,950 ",680 4,680 World 42,600 41,925 L1,549 42,414 44,334 48,825 Industrial and Developing 35,950 35,275 35,149 36,014 37,934 41,925 Western World 35,030 41,005 34,149 33,984 35,404 39,125 Sources: Engineering and Mining Journal, Maclean Hunter, January 1988; James F. King, World Capacity Report, Primary Aluminum, Alumina and Bauxite (various issues); Bureau of Mines, US Department of the Interior; World Bank (projected). - 201 - TABZ 5: BAIIT CAPACITY 1983-2000 Countries/ Actual-------- - Projections-------- Economies 1983 1985 1987 1990 1995 2000 t('000 py)-- Industrial 36,870 63,410 44,895 43,345 42.745 44,745 United States 2,260 2,260 1,000 600 EEC-10 1,990 1,350 1,950 800 France 1,990 1,350 1,950 800 Oceania 32,620 39,800 41,945 41,945 Australia 32,620 39,800 41,945 41,945 Developing 61,990 60,170 62,998 71,913 75,413 81,413 Africa 14,400 14,400 14,760 16,550 Ghana 400 400 350 350 Guinea 13,250 13,250 13,410 14,700 Sierra Leone 750 750 1,000 1,500 Latin America 32,025 29,150 29,267 33,792 Brazil 4,840 6,800 6,650 7,650 Dominican Republic 560 - - - Guyana 4,500 4,500 4,750 4,750 Haiti - - - - Jamaica 16,125 12,850 12,767 13,092 Suriname 6,000 5,000 4,500 5,300 Venezuela - - 600 3,000 Asia 6,505 7,650 9,016 11,616 China 1±800 2,350 2,500 4,800 India 2,405 3,000 4,215 4,515 Indonesia 1,300 1,300 1,500 1,500 Malaysia 1,000 1,000 800 800 Southern Europe 8,970 8,970 9,955 9,955 Turkey 600 600 635 635 Yugoslavia 4,710 4,710 4,320 4,320 Greece 3,660 3,660 5,000 5,000 Centrally Planned 16,450 16,450 16,450 16,450 16,450 17,000 Hungary 3,950 3,950 3,950 3,950 Romania 1,000 1,000 1,000 1,000 USSR 11,500 11,500 11,500 11,500 World 102,430 120,030 124,343 131,708 134,608 143,158 Industrial and Developing 98,860 103,580 107,893 115,258 118,158 126,158 Western World 92,265 117,680 105,393 110,458 112,358 118,358 Sources: Engineering and Mining Jouri 1, Maclear. Hunter, January 1988; James F. King, World Capacity Report, Primac, Aluminum, Alumina and Bauxite (various issues); Bureau of Mines, US Department of the Interior; World Bank (projected). - 202 - of world capacity--nearly 42 million tons. Most of this cutput is refined domestically to alumina. After nearly a decade of decline and restructuring in Jamaica, rising world demand and a modest revival of the US aluminum industry have contributed to the stabilization of capacity at about 13 million tons. Periodic renegotiation of the bauxite levy has also permitted Jamaica to improve its competitive position. Brazil's capacity has increased gradually as the result of expansion of the Trombetas mine. The majority of bauxite has been used to support the expansion of the local alumina/aluminum sectors. The newest and most likely the last entirely new mine for some time has recently come on-stream in Venezuela. Its capacity is expected to reach 3 million tons by 1990; output is planned to support Venezuela's rapidly expanding aluminum industry. Cuinean capacity is second to Australia and destined primarily for export. 35. No major changes are expected in the pattern of bauxite production through the 1990s. The industrial countries will continue to lose market share to the developing countries. Guinea and Jamaica should maintain their role as major producers, but more dynamic growth is expected in Brazil and Venezuela where bauxite development is closely associated with an expanding domestic aluminum industry. Unlike the case with aluminum and alumina, bauxite is likely to remain in ample supply through the 1990s--utilization rates are currently around 0.78, and incremental expansion of existing mines should remain relatively easy. Trade Outlook 36. Bauxite exports were limited to a 0.7% p.a. increase during the 1970- 86 period. This rate was substantially below the 2% p.a. increase in production, indicating that a rising share of bauxiLe was being refined to alumina in the country of origin. The development of the Brazilian and Venezuelan industries typifies this trend. The outlook for exports remains poor since an increasing share of alumina refining is expected Zo be concentrated in the bauxite-producing developing countries. World bauxite exports are therefore projected to decrease by -0.9% p.a. during the 1987-2000 period. It is expected that bauxite exports will decrease by -2.2% p.a. in the industrial countries and decline by some -0.8% p.a. in developing countries. CPEs' exports should decrease by -0.7% p.a. 37. The outlook for alumina trade is somewhat more favorable than is the situation for bauxite. Closures of alumina units in the United States and Western Europe, and the continued expansion of Canadian aluminum capacity (with no comparable expansion of alumina capacity), should allow for a 1% p.a. expansion in alumina exports. Hovever, trade will remain below the 2% p.a. increase expected for world production. Australia--a large and low-cost producer--is expected to expand exports by 1.8% p.a. during the 1987-2000 period. Caribbean exports are likely to expand somewhat over the medium term as the market tightens, and export volume could be even higher if Jamaica's currently-shut Alpart refinery is reactivated. 38. Prospects for aluminum trade remain favorable. The structural adjustment and shifts in corporate strategy which have typified the last decade have encouraged the development of aluminum production outside major -203 - consuming regions. As this trend continues, exports will expand by an estimated 3.1% p.a. during the 1987-2000 period. Exports from the developing countries are expected to rise 6.2% p.a.; expansion should be particularly rapid in South America. Industrial country exports should expand by 1.8% p.a.; the major exporters within the group will remain Canada and Australia. Price Dutlook 39. Aluminum prices have been extremely volatile in recent years. The strong market of 1980 was followed by a recession-induced decline to US$1,061/ton in 1982. Although prices increased in 1983 to US$1,495/ton, a rise in stocks and the strengthening of US dollar again triggered a sharp price decline to US$1,110/ton by 1985. Prices averaged only US$1,261/ton in 1986, despite a weakening of the US dollar. The period of depressed prices since 1980 is unique in its severity and longevity. The initial fall in 1981 was to be expected, given the depth of the rezession. However, the period of depressed prices during 1984/85 is not easily explainable in teems of market movements. An increase in production and modest expansion of inventory occurred in late 1983 and contributed to price weakening in 1984; but during the period of depressed prices in 1985186, stocks were quite low by historical standards and were declining. Aluminum demand also remained strong and showed no signs of weakening. Clearly, the lean years of the 1970s and the 1981/82 recession had negatively affected industry expectations. 40. The industry reaction to low prices was twofold: additional permanent closures were made and numerous temporary shutdowns were announced. In addition, major cost-reduction programs were enacted. Labor costs were slashed by renegotiating contracts covering production workers (direct labor costs) and by cutting administrative expenses. Electricity and alumina costs were also reduced in part by renegotiating existing contracts and by the innovative method of pegging power and alumina contracts to then low aluminum prices. Table 6 illustrates how average operating costs fell approximately 20% to US$1,010/ton during the 1982-86 period. Despite these reductions, average total aluminum costs during this four-year period were consistently below market prices; average operating costs were only marginally higher than prices in most years. 41. The industry's response to the initial price increases of 1986 was cautious. Production was increased and closed facilities reopened, but these actions could not keep up with the persistently strong demand. The result was steadily declining stocks and rising utilization rates. Prices surged to US$1,608/ton in 1987 and averaged US$2,357/ton during Jan.-May 1988. Aluminum costs have been rising since 1987, largely due to higher alumina and electricity prices (many of which are tied to aluminum prices), as well as the continued decline of the US dollar which increases the dollar-denominated costs of non-US smelters (see Table 6). Nevertheless, the surge in aluminum prices has made the industry extremely profitable in recent years. 42. The short- and medium-term price outlook will be determined by the supply-demand balance. Several years of declining stocks culminated in historically low le,els during the first half of 1988. Moderating demand and steadily rising output should result in a small increase in stocks this year (see Table 7) and in 1989 and allow prices to decline to US$1,800/ton by 1990 - 204 - TABLE 6: ESTIMATID TRENDS IN ALUKIRM PRODUCTI COMSTS Average Average Average Average metal Marginal Total Electricity Alumina Bulletin Cost Cost Price (Mills/KWh) Price a/ Transaction Price -----------------------($/Toni----------------------- Mid-1982 1,280 1,565 20.3 206 1,061 1983 1,255 1,520 20.3 212 1,495 1984 1,140 1,400 18.2 204 1,371 1985 1,050 1,390 16.2 180 1,110 1986 1,010 1,365 16.8 158 1,261 1987 1,045 1,395 18.4 156 1,608 1988 b/ 1,160 1,535 20.9 180 2,400 a/ C.i.f. import price. b/ Estimate as of March 1988. Source:. Anthony Bird Associates, Aluminum Annual Review, March 1988. TABLE 7: ALUNIUM MATIIALS BALANCE, 1987-1990 1987 1988 1989 1990 -'000 tons )------------- Primary Aluminum Consumption a/ 13,519 13,619 13,590 13,674 Imports from CPEs b/ -250 -250 100 100 Primary Demand 13,269 13,469 13,490 13,574 Primary Production 12,972 13,689 13,852 13,682 Aluminum Stocks c/ 1,482 1,702 2,064 2,172 Months Covered by Inventories 1.3 1.5 1.8 1.9 a/ Exclusive of CPEs and China. bl Includes China. c/ Primary producer stocks plus exchange stocks, year-end. Sources: World Bank. - 205 - (Table All). In constant 1985 dollar (MUV) terms, prices are expected to decline to US$1,186/ton in 1990. Over the long term, prices should inzrease to US$2,900/ton by 2000, or US$1,280/ton in terms of 1985 constant dollars. 43. The long-term price projections are consistent with cost estimates shown in Table 8. Alumina prices are expected to increase by 5.5% p.a., compared to the 5.2% p.a. rise expected for total costs. The higher inflation rate for alumina reflects the depressed markets (and prices) of recent years and the expected tightening of alumina markets through the 1990s. Power (electricity) rates have been the primary factor determining smelter location during the past decade. These rates have been quite favorable to smelters, due to surplus base-load generating capacity in many regions. Since excess generating capacity has been reduced, power rates are expected to rise at a 5.1% p.a. rate through 2000. In contrast, continued automation and design efficiencies should permit labor costs to inz:ease at a more modest 4.4% p.a. TABLE 8: PROJECTED ALUMNUM PRODUCTION COSTS-TYPICAL NEW FACILITY 1987 1990 2000 ----------(Current US$/Ton)---------- Labor 170 200 298 Electricity 260 362 500 Alumina 350 429 700 Other Costs 240 290 452 Operating Costs 1,020 1,281 1,950 Capital Servicing, Profit 500 600 950 Total Costs 1,520 1,881 2,900 Alumina Price (US$/ton) 180 220 320 Electricity (Mills/KWh) 18 23 35 Note: Table 6 contains average cost data for currently op2rating facilities. Costs will differ for a new facility. 44. Published prices for bauxite are not available because the commodity has traditionally been shipped between units of integrated companies In contrast to aluminum, bauxite is not traded on terminal markets such as the LME or COMER. Previous projections have relied on a constructed series for Jamaican bauxite prices, based upon an estimate of mining costs and the bauxite levy. Howe7er, the decline in Jamaican exports and the continuing evolution of the bauxite levy have made such estimation procedures difficult. Consequently, the US import price has been adopted as the basis for projecting bauxite prices. Bauxite prices tend to lag trends in aluminum--a feature - 206 - illustrated by the high price (US$40.42/ton) reached in 1982, a year of severely depressed aluminum prices. A similar trend can be observed in 1987 when bauxite prices declined for the fifth consecutive year, despite a buoyant metal market. Prices are likely to drop further in 1988 to US$28/ton. Bauxite prices are expected to increase to US$30/ton in 1990, and for the period 1987- 2000 should increase by a further 4.5% p.a. The somewhat lower rate of price increase expected for bauxite vis-a-vis aluminum reflects the adequate supplies of bauxite expected through the 1990s. Policy Issues and Investment Climate 45. Price volatility has become increasingly prevalent during the past decade, and concern is now being voiced that such volatility may be disruptive. Price swings are likely to make the timing of investment decisions more difficult. Delays in the decisionmaking process could result in additional bunching of projects and further volatility. Also important is the potential negative impact on demand. The volatility of copper vis-a-vis aluminum during the 1960s has often been cited as contributing to the substitution of aluminum for copper because it made material cost estimation and control more difficult for consumers. 46. Price swings can be expected, given the inelastic nature of both supply and demand. However, the efforts to reduce costs during the early and mid-1980s included pegging alumina and electricity prices to then low aluminum prices. These institutional changes may exacerbate volatility by shifting the industry supply curve up during periods of rising prices and down during periods of oversupply. Over one-half of US smelter capacity now has power prices linked to the aluminum price. Numerous alumina contracts contain similar clauses. It has been estimated that these links mean that a 10% increase in price will lead to a 13.3% increase in cost. 3/ 47. In many respects, the investment climate for aluminum in 1988 is more favorable than at any time in recent memory. Prices and operating rates are high, demand has been increasing, and only moderate amounts of new or incremental capacity are coming on-stream through 1990. However, by mid-1988 only a few new smelters have been announced that can be expected to come on- strear in the early 1990s. Civen the extent of price fluctuations over the last several years and the past tendency to add too much capacity, the current reluctance to add new capacity may be prudent. Nevertheless, given current demand assumptions new smelter projects are likely to be required by the early- to mid-1990s to avoid another period of sharply higher prices. 48. Several factors may now be contributing to the apparent hesitation in going ahead with investment decisions. First, many of the large traditional producers in the United States and Europe have as a matter of corporate strategy been seeking to reduce their participation in the primary sector. This could serve to temporarily reduce the available financial and technical expertise needed for investment decisions. Also, power rates are higher and more even between countries/regions, hence the choice between possible projects may be more difficult. 3/ Anthony Bird Associates, Aluminum Annual Review, March, 1988. TABLE Alt BAUXITE - PRODUCTION BY MAIN COUNTRIES AND ECC,'OMIC REGIONS ACTUAL PROJECTED GROWTH RATES A/ COUNTRIES/ 1987 - ECONOMIES 1969-71 1979-81 1986 1987/B 1988 1989 1990 1995 2000 1961-86 1970-86 2000 --('000 TOWS)-------------------------------------- -------CX PER AWMI)- INDUSTRIAL 15,203 30,291 34,324 35,835 36,400 36,405 35,625 41,362 47,100 9.7 4.0 2.1 EEC-10 3,230 1,927 1,382 1,2Y4 1,274 1,105 1,100 1,050 1,000 -2.7 --3.7 -1.8 FRANCE 3,010 1,897 1,379 1,271 1,270 1,100 1,095 1,045 995 -2.2 -5.5 -1.9 OCEANIA 9,970 26,734 32,432 34,000 34,626 34,800 34,025 39,862 45,700 25.5 6.1 2.3 NON-MARKET 8,252 9,830 9,797 9,600 9,900 9,950 9,975 9,737 9,500 2.5 0.6 -0.2 USSR 5,467 6,433 6,275 6,275 6,375 6,425 6,425 6,262 6,100 1.9 0.7 -0.2 EASTERN EUROPE 2,785 3,397 3,522 3,525 3,525 3,525 3,550 3,475 3,400 3,9 0.3 -0.3 DEVELOPING 36,567 49,869 47,084 49,058 52,700 53,550 54,300 61,980 69,660 3.6 1.3 2.7 ASIA 4,021 5,402 5,757 6,455 7,200 7,500 8,000 11,000 14,000 4.4 2.4 6.1 INDIA 1,326 1,897 2.338 2,916 3,200 3,200 3,400 4,300 5,600 6.1 3.7 5.1 INDONESIA 1,131 1,168 650 657 700 720 750 700 700 1.9 -3.2 0.3 AFRICA 3,344 14,249 16,137 17,500 18,200 18,200 18,000 18,250 18,500 11.3 10.3 0.4 GUINEA 2,526 13,371 14,656 16,100 16,500 16,500 16,500 17,000 17,500 12.3 12.0 0.6 AMERICA 24,703 21,641 19,21.5 16,979 20,800 21,350 21,600 25,480 29,360 1.0 -2.2 3.4 o JAMAICA 11,L84 11,696 6,964 7,655 8,000 8,100 8,000 8,415 8,830 0.3 -4.0 1.1 SURINAME 6,325 4,590 3.731 2,800 3,200 3,100 3,000 3,070 3,140 -0.8 -5.0 0.9 GUYANA 4,319 2,934 2,074 2,074 2,100 2,150 2,100 2,245 ,,390 -0.9 -4.5 1.3 BRAZIL 476 3,419 6,446 6,446 7,000 7,000 6,500 7,750 9,000 18.4 19.4 2.6 VENEZUELA 0 0 0 0 500 1,000 2,000 4,000 6,000 0.0 0.0 ... SOUTHEIN EUROPE 4,498 6,578 5,975 6,124 6,500 6,500 6,700 7,250 7,800 4.2 1.8 1.9 YUGOSLAVIA 2,062 3,133 3,459 3,394 3,500 3,500 3,400 3,450 3,500 4.2 4.3 0.2 GREECE 2,367 3,014 2,225 2,430 2,500 2,500 3,000 3,650 4,300 3.5 -0.4 4.5 WORLD 60,021 89,990 91,205 94,713 99,000 99,905 99,900 113,079 126,260 4.9 2.0 2.2 --------------..------------------ -----------. ------------------ --------------------- Al LEAST SQUARES TrEND FOR HISTORICAL PERIODS (1961-86)1 END-POINT FOR PROJECTED PERIODS (1987-2000). B/ ESTIMATE, UOURCESi METALLGESELLSCHAFT, METAL STATISTICS (ACTUAL)l WORLD BANK, INTERNATIONAL ECONOMICS DEPARTMENT (PROJECTED). TABLE A2s BAUXITE - GROSS EXPORTS BY MAIN COUNTRIES AND ECONOMIC REGIONS ACTUAL PROJECTED GROtdTB PATES Al COUNTRIES/ 1987 - ECONOMIS 1969-71 1979-81 1986 1987/8 1988 1989 1990 1995 2000 1961-36 1970-86 2000 ----('000 TONS) ------- ------- ( PER ANNUM) ------- INDUSTRIAL 3,904 6,686 3,162 3,020 3,175 3,125 2,745 2,500 2,260 10.2 -1,2 -2.2 BEC-10 151 115 153 150 150 150 140 145 150 -2.1 3.4 0.0 OCEANIA 3,705 6,540 2,939 2,800 2,850 2,800 2,605 2,330 2,060 19.0 -1.4 -2.3 NON-MARKET 673 545 461 460 460 450 455 435 420 -1.9 -3.2 -0.7 DEVELOPING 22,892 28,491 26,303 28,175 27,900 27,175 26,200 25,815 25,420 2.4 1.2 -0.8 ASIA 2,057 2,113 1,450 1,475 1,500 1,550 1,530 1,475 1.400 1.0 -1.9 -0.4 INDONESIA 988 1,053 650 650 700 725 725 723 700 3.5 -3.2 0.6 AFRICA 1,595 11,293 14,696 15,200 15,200 15,400 15,000 14,250 13,500 18.7 15.8 -0.9 GUINEA 777 10,459 13,250 14,000 14,000 14,200 14,000 13,500 13,000 27.6 21.9 -0.6 AMERICA 16,095 12,787 8,208 9,600 9,300 8,375 7,800 8,365 8,920 -1.4 -3.6 -0.6 JAMAICA 7,72? 5,987 2,940 3,400 3,500 3,400 3,100 3,450 3,800 -2.2 -5.6 0.9 SURINAME 3,565 1,707 781 800 850 850 850 975 1,100 -6.6 -10.4 2.5 GUYANA 2,810 1,559 1,374 2,075 2,100 2,000 2,050 2,225 2,400 -1.3 -5.2 1.1 SOUTEEN EUROPE 3,146 2,299 :,949 1,900 1,900 1,850 1,850 1,725 1,600 -0.5 -3.3 -1.3 0 YUGOSLAVIA 1,958 346 765 750 750 750 750 675 600 -4.3 -8.8 -1.7 GREECE 1,165 1,912 1,134 1,150 1,150 1,100 1,100 1,050 1,000 1.7 1.2 -1.1 WORLD 27,469 35,723 29,926 31,655 31,535 30,750 29,400 28,750 28,100 3.0 0.7 -0.9 Al LEAST SQUARES TREND FOR HISTORICAL PERIOt (161-86)1 END-POINT FOR PROJECTED PERIODS (1987-2000). B/ ESTIMATE. SOURCES, METALLGESELLSCHAPT, METAL STATISTICS, UNCTAD (ACTUAL)i WORLD BANK, INTERNATIONAL ECONOMICS DEPARTMENT (PROJECTED). TABLE AS, BAUXITE 0088 IMPORTS BY MAIN COUNTRIES AND ECOOmIC REGVIONS ------------------------------------------------------------------------------------------------------- ACTUAL PROJECTED GROWTH RATES At COUNTRIES/ 1987 - SCOMNES 1969-71 19798. 1986 1987/B 1988 1i9 1990 2.995 2000 1961-46 1970-86 2000 -----('000 TONS)---------- ------ (I PER AN INDUSTRIAL 24,236 30,542 20,076 22,269 22,510 21,900 20,900 20,000 19,100 2.1 -0.9 -1.2 NORTH AMERICA 16,000 16,828 8,569 11,269 11,410 11,200 10,400 9,800 9,200 -0.2 -3.0 -1.5 UNITED STATES 13,584 14,043 6,456 9,156 9,300 9,200 8,400 7,700 7,000 -0.5 -3.6 -2.0 CANADA 2,416 2,785 2,113 2,113 2,110 2,000 2,000 2,100 2,200 1.6 -0.4 0 1 EEC-10 4,261 8,713 9,099 9,100 9,200 8,800 8,600 8,450 8,300 6.7 4,7 -0.7 GERMANY, FED. REP. 2,492 3,927 3,659 3,550 3,575 3,400 3,450 3,375 3,300 4.7 2.0 -0.6 FRANCE 491 1,689 911 910 915 900 850 825 800 12.1 4.3 -..0 ITALY 621 2, 095 1,396 1,400 1,405 1,250 1,223 2,215 1,200 7,9 4.1 -J. JAPAN 3,81/ 4,886 2,30A 1,800 1,800 1,800 1,800 1,650 1,500 4.6 2.6 -1.A NON-MARKET 2,394 4,272 6,027 6,025 6,023 6,050 6,000 6,100 6,200 7.5 5.5 0.2 USSR 1,433 2,909 4,825 4,825 4,825 4,87.5 4,800 4,850 4,900 11.0 7.) 0.1 EASTERN EUROPE 941 1,362 1,202 1,200 1,200 1,225 1,200 1,250 1,300 2.6 0.4 0.6 DEVEIOPING 436 595 2,823 3,200 3,000 2,800 2,500 2,630 2,800 12.3 13 7 -).0 WORLD 27,066 35,408 28,926 31,494 31,533 30,750 29,400 28,730 28,100 3.0 0 5 -0.9 ----------- --------------------- ----------------------------- ---------------------------.------------------t A/ LEAST SQUARES TREND FOR HISTORICAL PERIODS (1961-86)1 END-POINT FOR PROJECTED PERIODS (1987-2000). I1 ESTIMATE. SOURCESt METALLGESELLSCRAFT, METAL STATISTICS, UNGTAD (ACTUAL); WORLD BANK, INTERNATIONAL ECONOMICS DEPARTMENT (PROJECTED). TABLI A4 ALUMINA - PRODUCTION BY MAIN COUNTRIES AND ECONOMIC RZOGIONS ACTUAL PROJECTED GROWTH RATES Al COUNTRIES/ 1987 - ECONOINS 1969-71 1970-81 1086 197/9 1988 1980 1990 1993 2000 1966-86 1970-86 2000 --------('000 TONS)---------- ------- ( PER ANNUM)------ INDUSTRIAL 12,924 20,898 19,317 20,453 21,352 21,522 20,722 21,545 22,360 3.7 2.5 0.7 NORTH AMERICA 7,172 7,701 4,335 5,003 5,400 5,450 5,100 4,550 4,000 -1.3 -2.3 -1,7 UNITED STATES 6,089 6,623 3,320 4,003 4,300 4,300 4,000 3,500 ,n000 -1.7 -2,8 -2.2 CAWADA 1,083 1,078 1,015 1,000 1,100 1,150 1,100 1,050 1,000 0.3 -0.1 0.0 EEC-I0 2,165 4,063 4,603 4,600 4,600 k,400 4,200 3,900 3,600 5.2 3.0 -1.9 JAPAN 1,317 1,086 956 750 750 750 750 675 600 2.2 -1.7 -1.7 OCEANIA 2,265 7,247 9,423 10,100 10,602 10,922 10,672 12,420 14,160 13.5 6.1 2.6 NON-MhARET 3,446 4,886 5.993 6,000 6,050 6,050 6,025 6,960 1,900 3.5 3.2 2.1 USSR 2,683 3,417 4,500 4,000 4,550 4,550 4,525 4,560 4,600 2.9 3.1 0.2 EASTERN EUROPE 762 1,469 1,493 1,500 1,500 1,300 1,500 2,400 3,300 5.5 3.8 613 DEVELOPING 4,870 7,924 9,398 9,898 10,978 10,828 11,628 14,200 16,740 5.2 3.2 4.1 AMERICA 3,1: 4,409 5,523 5,860 5,940 9,990 6,290 7,645 9,000 4.4 1.9 1.4 JAMAICA 1,6kl 2,340 1,586 1,642 1,700 1,700 1,900 1,900 1,900 2,9 -1.3 1.1 SURINAME 1,001 1,2al 1,471 1,316 1,340 1,340 1,340 1,20 1.500 2.8 0.3 0,9 BRAZIL 124 487 1,197 1,560 1,550 1,550 1,550 2,125 2,700 14.9 13.9 4.3 0 WORLD 21,239 33,707 34,708 36,351 37,980 36,400 38,373 42,705 47,000 4.0 2.8 2.0 Al LEAST SQUARES TREND FOR HISTORICAL PERIODS (1961-86)1 END-POINT FOR PROJECTED PERIODS (1987-2000). hi ESTIMATE, SOURCESi METALLGESELLSCHAFT, METAL STATISTICS (ACTUAL)l WORLD BANK, INTERNATIONAL ECONOMICS DEPARTMENT (PROJECTED). TABLE ASt ALUXIXA (METAL CONTENT) - GROSS EXPORTS BY MAIN COUNTRIES AND ECONOMIC kEGIONS ACTUAL PROJECTED GROWTH RATEO A/ COUNTRIES/ 1910 - ECONOMIES 1969-71 1979-81 1986 1987/B 1988 1989 1990 1995 2000 1961-86 1970,-06 2000 ---------('000 TONS)---------- -- ---(I PER ANNm)----- INDUSTRIAL 1,784 4,551 5,208 5,500 5,725 5,700 5,450 5,900 6,350 23.8 6.0 1.1 NORTH AMERICA 540 421 270 230 250 240 230 200 170 3,9 -5.1 -2.9 UNITED STATES 533 403 247 220 230 220 210 180 130 3.6 -5.7 -2.9 EEC-10 260 593 897 900 925 900 800 775 750 8.3 6.3 -1.4 OCEANIA 002 3,352 3,849 4,050 4,304 4,260 4,000 4,540 5,060 0.0 8.2 1.8 NON-MARKET 205 337 333 340 350 360 370 390 410 7.2 1,8 1.5 EASTERN EUROPE 205 337 333 340 330 360 370 390 410 7.2 1.8 115 DEVELOPING 1,836 2,662 2,396 2,472 2,609 2,620 2,650 2,675 2,700 5.7 0.8 0.7 AFRICA 304 342 300 273 280 283 290 300 310 1.6 0.7 0.9 GUINEA 304 342 300 273 280 285 290 300 310 1.6 0.7 0.9 AMERICA 1,431 1,903 1,694 1,700 1,850 1,860 1,870 1,895 1,920 5.8 -0.3 0.9 JAMAICA 790 1,173 781 800 800 800 900 900 900 4.7 -1.3 0.9 SURINAME 485 642 703 670 670 670 680 700 720 0.0 1.4 U.6 SOUTHERN EUROPE 96 381 367 370 380 370 360 380 400 20.4 9.0 0.6 WORLD 3,824 7,550 7,937 8,312 8,684 8,60 8,470 8,96.5 9,460 9.5 3.7 1.0 A/ LEAST SQUARES TREYD FOR UISTORICAL PERIODS (1961-06); END-POINT FOR PROJECTED PERIODS (1987-2000). B/ ESTIMATE. SOURCES: METALLOESELLSCHAPT, METAL STATISTICS, UNCTAD (ACTUAL)i WORLD BANK, INTERNATIONAL ECONOMICS DBPARTMENT (PROJECTED). TABLE A6i ALUMINA (MUTAL CONTENT) - GROSS IMPORTS BY MAIN COUNTRIES AND ECONOMIC REGIONS ACTUAL PROJECTED GROWTH RATES Al COUNTRIES/ 1987- ECONOmIEs 1969-71 1979-81 1986 1987/B 1988 1989 1990 1995 2000 1961-86 1970-86 2000 ------('000 TONS)-.--------------------------------------------(% PER ANNUM)------- INDUSTRIAL 2,977 5,351 5,325 5,800 6,219 5,892 5,597 6,080 6,566 8.1 2.8 1.0 NORTH AMERICA 1,583 2,554 2,679 2,865 3,320 3,138 2,960 3,295 3,631 8.4 3.0 1.8 UNITED STATES 1,111 2,059 1,807 1,772 2,225 2,065 1,790 1,786 1,786 13.7 2.7 0.1 CANADA 472 495 872 1,093 1,095 1,073 1,170 1,507 1,845 2.9 3.9 4.1 EC-10 420 1,241 1,244 1,202 1,199 1,000 915 915 913 11.3 4.4 -2.1 OTHER WESTERN EUROPE 780 1,040 1,144 1,470 1,470 1,530 1,301 1,410 1,770 5.0 2.1 1.4 JAPAN 178 359 32 32 30 25 25 22 20 14.3 -12.9 -3.6 NON-MARKET 40) 799 603 642 626 636 643 512 401 10.9 0.9 -3.6 USSR 311 570 450 482 480 485 490 390 290 10.5 r' 2.4 -3.8 EASTERN EUROPE 177 229 133 160 146 151 153 132 111 4.1 -216 -2.8 DEVELOPING 267 1,205 1,730 1,922 1,839 2,152 2,230 2,361 2,493 16.2 11.7 2.0 AFRICA 164 451 557 570 580 535 600 650 700 11.9 7.1 1.6 AMERICA 62 466 413 540 690 835 838 536 690 20.1 15.3 1.9 WORLD 3,733 7,355 7,658 8,364 8,684 8,680 8,470 8,953 9,460 9.2 3.8 1.0 --------------------------------------------------------------------------------------------------------------------- Al LEAST SQUARES TREND FOR HISTORICAL PERIODS (1961-86)1 END-POINT FOR PROJECTED PERIODS (1987-2000). B/ ESTIMATE. Cl GROWTH RATE FOR 1966-86 PERIOD. SOURCES: METALLGESELLSCHAFT, METAL STATISTICS, UNCTAD (ACTUAL)l WORLD BANY, INTERNATIONAL ECONOMICS DEPARTMENT (PROJECTED). 스 TABLE ASi PRIMARY ALUMINUM - CONSUMPTION BY MIN COUNTRIES AND ECONO"IC REGTONS ..................................... --------------------------------------- ------------------------------------------------------ ACTUAL PROJECTED GROOTH RATES A/ ------------------------------- ------------------------------------------- ---------------------------- COUNTRIES/ 1967 - ECOWHIES 1969-71 1979-81 1986 1987/B 1988 1989 1990 1995 2000 1961-66 1970-86 2000 -------------------------- ----------------------------------------------------------------------------------------- ------------- ----------------------- ---------- ('000 TONS --------------------------------------- ------ (% PER ANNUM) ------- INDUSTRIAL 7,369 10,251 10,533 10,919 11,009 10,952 11,004 11,912 12,820 4.4 1.7 1.2 NORTH AMERICA 3,937 4,d5G 4,497 f"868 4,860 4'alo 4,830 5,120 5,410 2.9 0.2 0.8 UNITED STATES 3,707 4,578 4,143 4,5 6 4,520 4,500 4,520 4,770 3,020 2.8 0.2 0.8 ac-lo 2,070 3,024 3,341 3,320 3,340 3,320 3,330 3,680 4,030 4.8 2.6 1.5 GERMANY, FED. REP. 666 1,044 1,167 1,194 11198 1,190 1,195 11,340 1,486 5.9 3.6 1.7 "AN" 386 579 593, 602 605 600 602 666 730 4.6 3.0 i's UNITED KINGDOM 373 390 389 373 319 375 375 405 435 0.6 -1.1 1.2 OTHER WESTERN EUROPE 329 441 522 481 Soo 495 500 545 590 5.3 2.3 1.6 JAPAN 897 1,671 1,850 1,900 1,950 1,968 1,980 2,165 2,350 20.0 3,7 1.6 RON-MARKET 1,862 2,720 2,761 2,762 2,778 2,780 2,810 3,12.5 3,440 4.6 2.2 2.7 USSR 1,318 1,858 1,885 1,882 1,893 1,895 1,915 1,107 2,300 4.0 2,2 1.6 EASTERN EUROPE 344 861 876 Soo 885 885 895 1,018 1,140 518 2.3 2,0 DEVELOPING 890 2,308 3,308 3,430 3,495 3,33a 3,640 4,333 5,041) 12.1 7.7 3,0 ASIA 474 1,236 1,872 1,960 2,010 2,053 2,110 2,530 2,950 11.5 3,2 AMERICA 209 565 Soo 805 Soo 815 828 990 1,153 10.6 7.1 2.8 WORLD 10,121 15,279 16,602 17,111 17,282 17,290 17,454 19,370 21,3on 3.2 2,6 1.7 --------------------------------------------------------------------------------------- -------------------------------------------- A/ LEAST SQUARES TREND FOR HISTORICAL PERIODS (1961-86)t END-POINT FOR PROJECTED PERIODS (1987-2000). BI ESTIMATE. SOURCESs METALLGESVLSHCAFT, METAL STATISTICS & WORLD BUREAU OF METAL STATISTICS (ACUTAL); WORLD RANK, INTERNATIONAL ECONOMICS DEPAXTMENT (PROJECTED). TABLE A9t PRIMARY ALUMINUM - GROSS EXPOIATS BY MAIN COUNTRIES AND ECONOMIC REGIONS ACTUAL PROJECTED GROWTH RATES A/ COUNTRIES/ 1997 - ECONOMIES 1969-71 1979-81 1986 1987/8 1988 1989 1990 1995 2000 1961-86 1910-86 2000 - ('00 MIS)---------------------------------------- ------(% PER ANNUM)------ INDUSTRIAL 1,973 3,090 4,104 4,486 4,442 4,473 4,554 5,103 5,660 4.5 5.0 1.8 NORTH AMBRICA 1,052 1,068 1,374 1,456 1,426 1,615 1,615 1,935 2,110 1.8 3.1 2.9 CANADA 791 687 1,164 1,172 1.146 1,333 1,435 1,755 1,930 1.8 2.6 3.9 UNITED STATES 261 381 210 284 280 280 180 18O 180 1.2 5.2 -3.4 Eec-10 330 1,128 1,080 1,098 1,100 1,050 1,000 1,000 1,000 6.2 7.5 -0.7 NETHERLANDS 72 359 301 314 320 300 320 310 300 17.1 7.2 -0.4 PRANCE 154 175 143 119 110 105 100 100 95 -0.4 -0.5 -1.7 GERMANY, FED. REP. 49 242 301 334 335 320 300 310 310 9.8 10.7 -0.6 OTHER WESTERN EUROPE 518 695 866 1,010 1,000 1,010 1,000 985 1,000 4.6 2.9 -0.1 OCEANIA 63 190 783 922 916 798 939 1,283 1,550 20.3 C/ 13.2 4.1 AM-MARKET 497 710 829 830 800 846 817 887 945 7.0 2.4 1.0 USSR 365 488 580 590 575 610 600 650 690 5.8 2.2 1.2 DEVELOPING 305 002 1,731 1,856 1,592 1,896 2,327 3,200 4,080 15.0 11.4 6.2 AFRICA 149 244 371 390 350 350 375 475 575 8.5 6.2 3.0 V_ GHANA 111 151 110 130 120 120 140 150 160 -1.1 D/ -3.7 1.6 AMERICA 54 292 694 Boo 700 800 1,000 1,400 2,700 26.0 E/ 20.4 9.8 WORLD 2,775 4,602 6,664 7,172 6,834 7,215 7,698 9,190 10,685 5.9 5.6 3.1 ---------------------------------------------------------- ----------- ------------------------------------------------- Al LEAST SQUARES TR.ND FOR HISTORICAL PERIODS (1961-86)1 END-POINT FOR PROJECTED PERIODS (1987-2000). BI ESTIMATE. C/ GROWTH PATE FOR 1964-86 PERIOD. D/ GROWTH RATE FOR 1967-86 PERIOD. El GROWTH RATE FOR 1965-86 PERIOD. SOURCESz METALLGESELLSCHAPT, METAL STATISTICS & WORLD BUREAU OF METAL STATISTICS (ACTUAL)i WORLD BANK, INTERNATIONAL ECONOMICS DSPARTMENT (PROJECTED). TABLE A1O PRIMARY ALUNIMMU - GROSS IMPORTS BY MAIN COUNTRIES AND ECONOMIC REGIONS ACTUAL PROJECTED GROWTH RATES Al COUNTRIES 1987 - BOOwONIES 1969-71 1979-81 1986 1987/3 1988 1989 1990 195 2000 1961-86 1070-86 2000 ----------------- ------('000 TONlS)------------------------------------- -------(x PER ANNUM)------- INDUSTRIAL 2,115 3,377 5,314 5,580 5,264 5,663 5,953 7,040 8,100 6.9 6.0 2.9 MORT AMRICA 430 579 1,411 X,298 890 1,050 1,395 1,800 2,240 4.6 5.6 4.3 UNXTED STATES 417 563 1,346 1,245 845 980 1,300 1,750 2,200 4.4 5.7 4.5 EEC-10 1,313 1,706 2,243 2,167 2,271 2,270 2,305 2,770 3,230 3,3 3.4 3.1 GEVNANY, TD. RE. 399 517 764 734 803 820 815 995 1,166 7.8 5.0 3.6 FRAMMC 164 316 428 407 393 403 472 351 625 9.4 3,6 3.4 OTHIR ESTum EUmO 105 155 293 280 203 403 333 305 280 7.0 3.4 0.0 JAPAN 266 929 1,366 1,835 1,900 1,940 1,950 2,150 2,350 20.6 13,3 1.9 NON-WARMEt 225 500 53 560 520 565 615 700 785 9.2 4.8 2.6 RAST&W EUROhE 225 500 M 560 520 565 615 700 785 9.2 4.8 2.6 DEVELOPING 231 608 931 1,050 1,050 987 1,100 1,450 1,800 10.9 9.0 4.2 ASIA 67 399 763 780 860 880 900 1,250 1,600 18.6 17.1 5.7 W0LD 2,572 4,485 6,788 7,190 6,834 7,215 7,698 9,190 10,685 7.6 6.2 3.1 At LEAST SQUARES TREND FOR HISTORICAL PERIODS (1961-86)1 END-POINT FOR PROJECTED PERIODS (1987-2000). B1 ESTIMATZ. SOURC8s MZTALLGWILLSCHAPT, METAL STATISTICS & WORLD BUREAU OF METAL STATISTICS (ACTUAL); WORID RAE, INTERNATIOAL ECO0KICS DEPARTMENT (PROJECTED). - 21? - TALE Al1: PQIY AcUMMi FRICSS, 19~ (5-7 (TjAY1. 4J 19912,0 (RO CTED) (1/Toe 7- <S/Tom 1985 Cc,nstant L ---C rr',nt S . -. 1 'SGP b/ Trasacion ta nacin M Tr*ftsact;o~* 4w Pr~ ce /CsN d/ Prce _e/ Csh d/ PrIce c/ Cash :/ Act= i 1958 490 ?,644 1,847 1959 486 1,654 1,786 190 500 1,667 1,7 1961 470 1,540 1,683 1962 435 1.398 1,524 963 444 1,454 1,533 1964 493 1,587 1, 675 1965 489 1,563 1,619 1966 479 1,479 1, 533 1967 484 1.477 1,506 ;98 457 1.408 1.355 1969 531 1,699 1,634 1970 540 1,486 1, 437 1971 435 1.135 1,097 '772 432 1,035 1,039 1973 663 1,371 1,497 1974 944 i,602 1,957 1975 690 1,053 1.301 1976 862 ,298 1,529 1977 991 1.358 1,648 1978 1,045 1,244 1,619 1979 ',520 1,602 1,598 1,685 2,164 2,281 1980 1,733 ,,780 1,659 1,706 2,258 2,323 1981 1,338 1,262 1,276 1,203 1,593 1,502 192 1,06 991 1,026 958 1,187 1,108 983 1,495 1,440 1,484 1,43 1,610 1,551 1984 1,371 1,251 1,385 1,264 1,421 1,297 1985 1,110 1,041 1,110 1,041 1,110 1,041 1906 1,261 1,150 1,066 972 1,236 1,128 1987 1,608 1,565 1,237 1,204 1,531 1,491 Projected 1988 2.400 -,706 2,199 1989 2,100 1,404 1, 840 1990 1,800 1,186 1,501 1995 2,350 1,299 1,508 2000 2,900 1,280 1, 485 SDeflated by Mnufactlng Unlt Vlug (UV) I0dx. b/ Detlated by US GW Defletor. c/ ert*ln other trnsaction, US shipments to Eur9p., MIn 99.5%, c.I.f. Europ (Sourc.: Mtal ti letln). This quutalon ues published beg.nning 0c~br 20, 1957. d/ Avrge bid/skad (Source: Metas ~ek). Source: Ss" footnotss for ctuelk World Bank (projcted). 흙－기 - 219 - TA&Z A12: DAUXITE PRICES, a/ 1972-87 (ACTUAL) AND 1988-2000 (PROJECTED) -($/Ton)- -\'$./Ton)- - 1985 Constant $ Current $ MUV b/ US GNP e/ Actual 1972 13.20 31.62 31.76 1973 IMO 27.08 29.58 1974 NA NA 2" 1975 22.15 33.81 41.78 1976 25.44 38.30 45.12 1977 30.25 41.46 50.29 1978 31.25 37.22 48.40 1979 30.70 32.28 43.71 1980 32.00 30.58 41.76 1981 35.37 33.73 42.11 19,82 40.42 39.09 45.21 1983 37.40 37.14 40.28 1934 37.00 37.39 38.36 1985 35.72 35.72 35.72 1986 3L66 28.45 33.00 1987 29.48 22.68 28.08 Projected 1988 28.00 19.90 25.65 1989 28.00 18.73 24.53 1990 30.00 19.77 25.01 1995 40.00 22.10 25.67 2000 48.00 21.20 24.58 US import price c.i.f. US port. Deflated by Manufacturing Unit Value (1-FJV) Index. Deflated by US GNT Deflator. Sources: Bureau of Mines Minerals Yearbook, "Bauxite and Alumina," various years (actual); World Bank, International Economics Department (projected). - 220 - BAUXIT (CONSTANT 1985 DOLLAR PRICES) 50 50 - 4 a * 404 20- 40 310 19 . 1 9 1 si0 1970 1972 1974 1976 1S78 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 DEFLATED bY MANUFACTURING UNIT VALUE (MUV) INDEX ********* DEFLATED BY U.S. GNP DEFLATOR. * 1948 - 87 ACTUAL; 1988 - 2000 PROJECTED. SOURCE: WORLD SANK, INTERNATIONAL ECONOMICS DEPARTMENT. STREL Summary 1. The world demand for crude steel is expected to grow by an average of 1.6% p.a. during the 1987-2000 period. Steel prices, on average, are not expected to increase in real terms as neither significant shortages nor capacity bottlenecks are anticipated during the forecast period. The share of alloy steel products output to total steel products output will continue increasing, reducing the demand for crude steel. The shift towards lighter, stronger steels, rising efficiency within the steel industry (reflecting particularly the rapid spread of continuous casting), and substitution by other materials will also put downward pressure on the demand for crude steel. Consuation Prospects 2. Steel demand in the industrial countries as indicated by apparent consumption figures (presented in Table A2) covering the period 1979-81 to 1987 has declined significantly. The decline in ap?arent consumption figures is particularly striking when the 1987 volume of steel production in crude steel terms (or in finished product terms) is compared with the 1973 volume level. In the EEC apparent consumption of crude steel was approximately 140 million tons in 1973; it declined drastically to a low point of 97.7 million tons in 1983. By 1987 it had recovered to 103.01 million tons. Similarly, in the United States, apparent consumption reached 149.6 million tons in 1973; it fell sharply in 1982 (to 83.9 million tons) and recovered to 96 million tons in 1987. The same kind of story can be told for Japan. 3. Industrial steel demand is not expected to recover to the 1973 level before the year 2000. The shift towards lighter, stronger steels and some substitution by other materials will dampen the demand for finished steel products despite robust industrial growth rates. A potential threat for steel demand is the substitution of steel by ceramics in areas where substantial heat must be endured and by plastics and aluminum (particularly in the container field). 4. The rapid rise in continuous casting will also result in downward pressure on crude steel consumption. Steel producers through their improvements in production methods have reduced the amount of scrap generated and therefore the amount of steel needed. The US automotive industry, for example, has reduced the amount of scrap generated from 32% to 28%. The high degree of market saturation in the industrial countries for such products as automobiles and appliances will also dampen the prospects oi industrial countries' steel demand in the 1987-2000 period. Automobile output in industrial countries reached 45 million vehicles in 1986 but has only bleak prospects for further growth. Replacement demand, rather than new growth, will be the key in the autonotive industry in most industrial markets in the years to come. - 222 - 5. Steel demand has also been negatively affected in the last ten years by the slow demand growth of new ships. The Japanese steel industry has been principally affected by this slowdown. It is estimated that the 1975 Japanese shipments of 5 million tons of steel to the ship building industry was halved by 1987. 6. On the positive side, infrastructure replacement will increase demand for steel, notably in Japan, where the government is committed to invest billions of dollars in infrastructure over the next decade. Ir the United States there is a need for infrastructure investments; however there is no definite program. 7. On the basis of the aforementioned factors, industrial countries' apparent consumption of steel is expected to increase on the average by only 0.1% p.a. between 1987 and 2000. Among industrial countries the changed terms of trade resulting from the lower dollar will help the manufacturing sector of the United States compete against other foreign steel suppliers; this should also benefit the US steel consuming sector and hamper that of the EEC and Japan. 8. Taking the United States and Canada together, annual consumption of crude steel is projected to grow from 109 million tons in 1987 to 120 mitlion tons in 1995 (mostly as a result of infrastructure replacement needs) and fat back to 114 million tons by 2000. 9. The European Community's (EEC-10, i.e., excluding Greece and Portugal) consumption of steel will be affected negatively by (i) the move to lighter steels and other substitutes; (ii) the poor terms of trade (in view of the appreciation of their currencies vis-a-vis the US dollar); and (iii) the rapidly aging population. Yield improvements in the steel industry are putting additional downward pressure on the growth rate of consumption in crude steel in Europe. It is expected that the savings in crude steel consumption due to improvements will subside sometime in the second half of the 1990s as continuous casting will by then be widespread. (The growth of steel consumption in crude steel terms and in finished product terms would then be similar). Overall, EEC-10 steel consumption is expected to remain stagnant during the 1987-2000 period. 10. Steel consumption in Japan is also likely to be under downward pressure for the same reasons as in the United States and the EEC-10. The Japanese manufacturing industry will face intensified competition in third export markets in view of Japan's appreciated currency. In the domestic market, however, the government's liberal fiscal policies and public works programs will greatly stimulate expenditures on steel-intensive infrastructure projects. Japanese steel demand is expected to increase from 73 million tons in 1987 to 77 million tons in 1995 and fall back to 73 million tons in 2000. 11. In contrast to the outlook for industrial countries, steel demand prospects in the developing world look bright. Youthful populations and increased demand for industrial goods will increase demand for steel products. However, the problems that have restricted the expansion of the steel markets through the 1980s, in particular the developing countries' debt servicing problems, will not disappear. Economic and financial difficulties - 223 - will continue to slow domestic expansion and the prospects for exports--either of steel products or of steel contained in manufactured goods--will remain, with very few exceptions, severely limited. With favorable assumptions for industrial growth in the 1990s, steel-consuming countries in Asia and in Latin America will outgrow those in Africa and the Middle East. Impressive gains in steel consumption should be realized in China, India, Republic of Korea, and Brazil. 12. China is by far the leader among developing countries in steel output and consumption. It is estimated that consumption was close to 81.4 million tons in 1987 and production was close to 58 million tons. Steel demand (on the basis of an average GDP growth rate of less than 7% p.a. for the 1987-2000 period) is projected to reach 158 million tons by 2000. Much basic investment for infrastructure, as well as the establishment and expansion of steel- consuming industries, lie behind this additional demand for steel in China. Republic of Korea's rapid growth in demand for steel is also expected to be mainly generated from investments in infrastructure in other than the major two urban centers of Seoul and Pusan and from expanding the automobile industry. India's and Brazil's growth in demand is expected to come primarily from infrastructure projects and the overall industrial development efforts by these countries. For the developing countries taker, together, the average expected crude steel growth rate during the 1987-2000 period is 3.6% p.a. This increase would take their total consumption from 216 million tons in 1987 to 342 million tons in 2000. 13. In t*e USSR, and the other non-market industrial economies, steel consumption is projected to grow by 1.2% p.a. during the 1987-2000 period. The non-market economies' steel output may become more oriented towards the requirements of the user and away from official plan targets which, together with greater efficiency within the industry, would lead to a slowdown in the need for crude steel. 14. World demand outlook for crude steel is thus projected to grow from 739 million tons in 1987 to 779 millioi. tons by 1990 and to 908 million tons by 2000. Production and Capacity Prospects 15. While the major part of the additional consumption of steel between 1987 and 2000 will be in the developing countries and the non-market economies, the additional supply will be more evenly spread among the industrial and the developing and non-market countries. In virtually all of the industrial countries plant closures are continuing. Further programs for capacity reduction are under discussion in various countries such as those that are members of the EEC and it is, therefore, difficult to assess the volume of capacity which will be operational in 1990 and thereafter. Based on reports from the International Iron and Steel Institute (ITSI), known closure plans and expansion projects which have been firmly decided upon are presented in Table 1. It can be seen that further sharp reductions are ex-ected for Western Europe, North America, and Japan--amounting to close to 10% of the 1985 level. 16. In the steel-making developing countries (excluding China), 1990 capacity will exceed 1985 capacity by around 60 million tons. China's - 224 - rusN a1 am sun amm. cm m ases aI9m 1981 1990 Anatria 6.5 .80 Belgium 17.05125 Demp k 0.90 0.9w France 26.86 2568 Germany. Fed. Iep. of 57.32 52.93 Ireland 0.44 0.44 Italy 38.15 32.35 Luxebourg 5.145 5.45 Netherlands 7.97 7.97 Spain 21.72 20.90 United Kingdom 24.03 24.03 Canada 20.66 20. 66 United States 130.00 114.31 Japan 153.04 152.04 Finland 2.?5 2.75 *orway 1.15 1.15 Swit:erland 1.:G 1.20 Greece 3.25 3.25 Portugal 0.73 0.73 Turkey 5.01 6.91 YugoLavia 6.14 7.52 India 15.51 18.64 Indonesia 2.15 2.15 Malaysia 0.58 1.18 Pakistan 1.74 1.74 Philippines 0.74 0,74 Korea, Rep. of 13.98 16.68 (22) Korea, Den. People's Rep. -a 9.75 13.25 China 52.51 60.88 (80) Taluan, 'Thina 6.00 8.40 Other Asia 2.20 2.42 Argentina 5.40 5.61 Brazil 22.82 27.50 Chile 1,17 1.17 Colombia 0.65 0.85 Cuba 0.35 0.60 )exico 11.75 14.05 Peru 0.79 0.79 Venezuela 5.46 5.56 Other Latin Anerica 1.36 1.36 Algeria 2.23 2.23 Egypt 1.90 2.80 Libya 0.02 1.3Z Nigeria 1.20 2.70 South Africa i0.42 11.00 Zimbabue 1.00 1.00 Other Africa 0.57 0.77 Iran 2.18 3.35 Iraq 0.45 0.45 Saudi Arabia 0.85 0.85 Other Middle East 1.25 1.25 USSR 178.13 186.26 Poland 20.98 211.98 Czechoslovakia 18.71 12.11 Romania 18.90 22,70 German Democratic Rep. 10.70 10.10 Hungary 4.95 4.95 Bulgaria 4.20 5.1 Albania 0.40 0.40 Other 62.66 73.13 Total 1,025.39 1,054.69 N-ote: Numbers in parenthesis represent ronnage assumed in our forecasts. Sources: International Iron axd1 Steel Inatitute (actual); World Eank (forecasts). - 225 - capacity is expected to exceed 60 million tons and, more likely. 70 million tons by 1990. Total world capacity in 1990 and thereafter should be ample to satisfy the 1990 and 2000 steel demand neeas of 779 million tons and 908 million tons, respectively. There is, therefore, room for further closures in the industrial countries. 17. Table 2 compares costs in the production of steel for selected industrial and developing countries in 1980 and 1986. Some significant changes have occurred in the costs for the United States, EEC members, Japan, and othe- European countries during this period. Noteworthy is the improved inter-national competitiveness of the US steel industry following the depreciation of the US dollar. This improvement (accentuated further in 1987) is expected to reduce the gap between production and consumption in the United States. 18. Table 2 also shows the dramatic improvement of steel costs per ton produced for the UK steel industry between 1980 and 1986. Labor cost declines indicate substantial improvement in the UK's labor productivity. Despite significant gains in labor productivity, Argentina's steel costs in 1986 remain almost as high as in 1980; high debt servicing expenses have likely been the reason for this. India's costs per ton produced have also been substantially increased partly due to the increase of material costs during the period. Republic of Korea's costs are still among the lowest in the industry. High labor productivity is among the key reasons for this impressive performance. Preliminary estimates of China's steel cost of production show a 1988 total cost of US$289/ton with a labor content of US$37/ton. These numbers compare favorably with those of Republic of Korea. 19. In the next 10 to 15 years the steel industry will experience an increase in the demand for and production of alloy steels. IISI has noted the increasing share of alloy steel in total output for the United States, EEC members, and Japan between 1970 and 1985 (see Table 3). li in some EEC countries such as the Federal Republic of Germany the share of alloy steel in total steel output is approaching 20%. Similar trends are discernible in the United States and Japan. It is expected that the continuing need for improvements in the mechanical and chemical properties of steel products will lead to increases in the use of alloys. Trade Prospects 20. Within the industrial world, Japan and the EEC-10 countries should remain net exporters during the 1987-2000 period. The improvement in the US terms of trade is reflected in increased steel exports (see Table 4). The United States should become a major net exporter of steel by the year 2000. Steel production and consumption remain almost in balance in the non-market economies during the 1987-2000 period. The USSR should continue to be an imorter of steel from Eastern European countries. 1/ IISI, "Outlook for the World Steel Industry," by L. Hzischuh, Chairman, Metal Bulletin Ferro Alloy Conference, Monte Carlo, 1987. - 226 - TABLE 2: LABOR MATERIAL AND TOTAL COSTS OF STEEL PRODUCTION, SELECTED COUNTRIES, 1980-86 Total Costs Labor Materials and (Operating and Costs Other Costs Financial) ------------(US$/Ton Produced)------------ United States 1980 169.9 249.9 442.1 1986 134.8 267.6 438.7 Japan 1980 56.6 289.7 415.1 1986 89.7 349.5 527.9 Germany, Fed. Rep. 1980 125.4 310.2 472.6 1986 114.3 275.7 420.0 France 1980 81.4 307.9 434.0 1986 139.3 311.7 504.4 United Kingdom 1980 198.8 401.7 657.1 1986 89.1 270.0 377.5 Canada 1980 95.4 177.5 295.6 1986 112.2 196.7 337.1 Brazil 1980 83.0 287.2 410.6 1986 67.8 178.2 339.6 Argentina 1980 141.9 344.4 571.6 1986 94.5 292.3 524.7 India 1980 80.3 266.0 375.0 1986 87.5 393.4 528.9 Korea, Rep. of 1980 11.8 182.1 264.0 1986 14.2 166.8 243.1 Source: P. Marcus and K. Kirsis, World Steel Dynamics, Paine Webber, New York, 1988. TABLE 3: SHARE OF ALLOY STEEL OUTPUT IN TOTAL CUTPUT (Z) Country 1970 1980 1985 -------------------------------------------------------(%--------------- ------------------- (%)------------------ United States 10.7 14.9 13.9 Japan 9.7 12.6 16.9 EEC-7 6.2 12.3 12.9 Source: IISI, "Outlook for the World Steel Industry," by L. Holachuh, Chairman, Metal Bulletin, Ferro Alloy Conference, Monte Carlo, 1987. TABLE 4: STEEL (CRUDE EQUIVALENT) PRODUCTION MINUS 00NSUMPTION BY MAIN 00UNTRIES AND ECONOMIC RECIONS Countries/ -- Actual -----------------Projected-------------- Economies 1969-71 1979-81 1986 1987 a/ 1988 1969 1990 1995 2000 -------------- ------------------------------------------------------------------------------------------ ------------------------------------------('000 Tons)------------------------------- Industrial 24,974 49,180 34,613 44,987 58,959 67,619 71,808 67,044 97,506 North America -12,920 -14,603 -19,298 -13,815 -3,413 2,567 5,781 -9,258 13,840 United States -12,309 -15,923 -20,840 -16,943 -6,017 204 3,425 -12,440 11,479 EEC-10 15,876 30,130 23,546 31,149 31,848 32.825 32,933 34,763 34,277 Germany, Fed. Rep. 4,799 8,831 6,626 5,795 6,001 6,211 6,020 8,716 14,030 France 790 3,149 3,316 3,337 4,978 6,237 7,042 7,705 7,759 United Kingdom 2,767 -8?2 375 6,255 6,835 7,466 7,498 5,021 3,244 Japan 24,952 32,171 28,334 25,603 29,159 31,177 32,054 39,417 48,343 Won-Market 3,757 -348 2,517 3,193 -3,945 -8,035 -9,979 -2,189 -10,668 USSR 5,468 -2,429 -4,437 -3,816 -8,909 -12,057 -13,974 -9,412 -14,681 Eastern Europe -1,711 2,081 6,954 7,008 4,964 4,022 3,995 7,223 4,013 Developing -28,731 -54,275 -46,696 -48,179 -55,014 -59,583 -61,829 -64,855 -86,838 Asia -13,002 -33,997 -45,216 -46,930 -52,361 -56,317 -58,605 -66,649 -89,324 China -3,573 -9,249 -26,111 -22,90? -26,351 -28,917 -30,667 -36,472 -54,329 Korea, Republic of -845 1,947 2,955 1,450 893 508 701 352 315 India -403 -2,728 -2,587 -4,985 -5,857 -6,606 -7,330 -10,094 -14,007 Latin America -6,647 -6,242 5,631 5,840 5,246 5,005 5,058 8,798 10,761 Brazil -898 1,098 6,756 6,951 6,907 6,920 6,981 9,850 12,679 World 0 -5,443 -9,566 0 0 0 0 0 0 ---------------------------------------------------------- ----------------------------------------------- Note: A minus sign before a figure indicates imports. al Estimate. Source: World Bank. - 228 - 21. Over the forecast period the developing countries should also continue to import steel (in net terms) from the rest of the world. The most important importers will be China and India. The youthful populations of the.e countries will demand metal-intensive industrial goods; steel demand will increase faster than production, and the excess will have to be imported. China, in particular, is expected to be a major importer of semis and flat products. The ability of these countries to grow will in large part depend on their ability to raise sufficient funds to finance steel imports. Price Outlook 22. The World Bank's steel prices (WBSP) index is a weighted sum of Japanese export prices of the following products: rebars, plates, sections, hot roll, cold roll, wire rod, merchant bars, and galvanized sheet. The index weights used are the shares of these products in the total output of Japan, the United States, and the Federal Republic of Germany for the 1979-81 period. 23. The WBSP index (1980=100) declined from its 1981 high of 103.1 to 75.0 in 1095 (a 27.3% decline) and has increased since then (see Table 5). In May 1988 the WBSP i-idex reached the level of 117.9. The reasons that lie behind the sharp price increase for steel products over the last three years have been discussed in the previous three sections; however, the closing of excess or obsolete capacity and the sharp increases in industrial activity in the industrialized countries should be singled out. Not all steel products prices fared the same during che 1985-88 period. Cold rolled sheets, wire rods, and rebars prices rose less than the index. In contrast, galvanized sheet- nnd sections prices rose faster than the index. 24. Ove: the forecasting period the WBSP index of steel product prices is expected to grow somewhat less fast than the MUV index in the 1988-95 period and at the same pace as the MUV index in the second half of the 1990s. The slower pace of price increase in the first half of the 1990s reflects the expected slowdown in industrial activity during this period. Long product prices are expected to increase at a faster rate than flat product prices. This development partly reflects the expected sharp increases in the a-ailability of flat products. TABLE 5: STEEL PROWCT PIICIs, 1980-87 (ACTUAL) ARD 1988-2000 (FORRCAST) World Bank CR HR Galv. Merchant Wire Year Steel Index Sheets Sheets Sheets Bars Plates Sections Rod Rebars ommm eeme m memem-------------------------------------------------------------------------------- (1980-100) ----------------------------(Japan, f.o.b. US$/Ton)-------------------------- 1980 100.0 394.2 324.3 473.9 342.1 341.7 362.1 352.5 327.9 1981 103.1 401.0 331.8 516.3 331.7 360.8 383.3 391.3 316.7 1982 88.1 367.9 281.7 431.? 258.3 309.2 333.8 353.3 242.5 1983 83.0 360.8 270.4 420.0 245.8 286.7 285.8 312.5 222.5 1984 87.4 376.7 283.8 451.7 266.4 305.1 300.8 308.8 233.3 1985 75.0 317.9 245.8 369.6 229.6 266.7 246.7 272.5 225.4 1986 77.3 325.4 269.6 384.6 237.5 284.2 248.8 239.6 219.6 1987 90.4 385.4 323.3 452.5 243.3 360.8 330.0 246.3 202.9 1988 116.0 483.1 382.5 607.5 360.0 422.5 435.0 310.6 245.0 1989 119.5 492.7 392.5 623.2 375.5 434.0 452.1 324.5 260.3 1990 121.0 496.7 396.7 629.8 381.9 438.8 459.2 330.2 266.7 1991 120.9 496.3 396.3 629.1 j81.3 438.4 458.5 329.7 266.1 1992 121.1 497.1 397.1 630.4 382.5 439.3 459.8 330.7 267.3 1993 123.3 503.1 403.3 640.2 392.2 446.5 470.5 339.4 276.9 1994 129.1 518.8 419.6 665.8 417.3 465.2 498.1 361.9 301.8 1995 135.1 535.1 436.6 692.6 443.5 484.8 527.1 385.5 327.9 1996 143.7 558.8 461.1 731.2 481.4 513.1 568.8 419.5 365.5 1997 149.6 574.8 477.7 757.4 507.1 532.3 597.2 442.5 391.0 1998 156.2 592.9 496.5 787.0 536.1 553.9 629.2 468.5 419.8 1999 161.7 607.9 512.1 811.5 560.2 571.9 655.7 490.2 443.7 2000 167.0 622.3 527.0 834.9 583.2 589.1 681.0 510.8 466.5 --------m------ -------------------------------m----------m--------------------------------- Source: World Bank. TABLE Al: STEEL (CRUDE EQUIV.) - PRODUCTION BY MAIN COUNTRIES AND ECONOMIC REGIONS ACTUAL PROJECTED GROWTH RATES Al COUNTRIESv 1987 - soMONS 1969-71 1979-81 1986 1987/5 1988 1989 1990 1995 2000 1961-86 1970-C6 2000 -----('000 THS)-- ------ ------( PER ANNUM)------- INDUSTRIAL 376,897 400,486 330,974 347,951 371,583 375,298 375,207 387,922 405,58 1.3 -1.2 1.2 NORTH AMERICA 129,438 127,175 88,113 94,727 106,062 109,311 108,997 110,546 128,105 -0.6 -2.8 2.3 UNITED STATES 118,907 111,586 74,032 79,060 90,919 94,409 94,' 94,825 113,205 -1.1 -3.3 2.8 EEC-10 140,638 143,802 121,,126 134,149 140,722 139,759 138,813 140,570 136,946 1.0 -1.1 0,2 GERMANY, FED. REP. 43,557 43,829 37,134 36,304 38,591 38,300 38,022 39,817 40,295 0.5 -1.2 0.8 FRANCE 23,042 22,598 17,857 17,726 20,680 21,038 21,190 21,381 21,473 0.2 -2.0 1.5 UNITED KINGDON 26,316 16,105 14,725 20,739 22,396 22,193 21,599 18,580 16,471 -2.5 -4.4 -1.8 ITALY 17,C52 25,176 22,882 22,839 22,976 22,713 22,502 23,365 23,197 4.0 1.6 0.1 JAPAN 88,015 108,273 98,275 98,596 105,005 106,749 107,928 116,255 121,059 5.2 0.1 1.6 NON-MARKET 155,521 208,243 221,797 223,831 221,783 220,323 221,069 241,729 247,590 3.4 1.9 0.8 USSR 115,613 148,512 160,685 162,664 162,661 162,14a 162,916 180,348 189,419 3.1 1.7 1.2 EASTERN EUROPE 39,908 39,731 61,112 61,166 59,222 58,180 58,153 61,381 58,171 4.2 2.4 -0.4 DEVELOPING 51,82tl 114,970 162,638 167,425 175,758 178,141 182,536 221,465 255,243 7.7 7.4 3.3 ASIA 28,441 67,708 100,749 104,47 111,056 113,533 117,587 149,308 178,655 8.0 8.3 4.2 CHINA 18,767 38,990 57,445 58,497 61,422 63,219 66,055 86,934 103,295 7.4 7.1 4.5 KOREA, REPUBLIC OF 442 8,974 14,555 16,795 20,154 21,001 22,132 30,157 42,171 26.0 26.4 7.3 INDIA 6,313 10,140 12,197 12,620 13,466 13,555 13,669 15,592 17,432 3.6 4.3 2.5 AMERICA 13,108 27,924 37,708 38,743 41,309 41,587 41,939 47,869 53,571 7.8 6.6 2.5 BRAZIL 5,437 14,143 22,233 22,254 25,370 25,902 2.,262 31,321 37,889 9.4 8.7 4.2 WORLD 584,246 723,699 715,409 739,206 769,124 773,761 778,812 851,116 908,418 2.7 0.9 1.6 -------------------------------------------------------------------- ------------------------------------------------ A/ LEAST SQUARES TREND FOR HISTORICAL PERIODS (1961-86); END-POINT FOR PROJECTED PERIODS (1987-2000). 8 ESTIMATE. SOURCESi INTERNATIONAL IRON AND STEEL INSTITUTE (ACTUAL); WORLD BANK, INTERNATIONAL ECONOMICS DEPARTMENT (PROJECTED). TABLE A2: STEEL (CRUDE EQUIV.) - APPARENT CONSUMPTION BY MAIN COUNTRIES AND ECONOMIC REGIONS ACTUAL PROJECTED GROWTH RATES Al (OUNIRIS/ 1987 - ECONOIES 1969-71 1979-81 1986 1987/B 1988 1989 1990 1995 2000 1961*46 1970-86 2000 ----------------('000 TONS)----------------------------------------------(9 PER ANNUM)------- INDUSTRIAL 351,923 351,306 296,301 302,964 312,624 307,679 303,399 320,878 308,079 0.9 -2.6 0.1 NORTH AMERICA 142,358 141,778 107,411 108,542 109,475 106,744 103,216 119,804 114,265 0.0 -2.1 0.4 UNITED STATES 131,216 127,509 94,872 96,003 96,936 94,205 90,677 107,265 101,726 -0.2 -2.3 0.4 EEC-10 124,762 113,672 100,580 103,000 108,874 106,934 105,880 105,807 102,669 0.5 -2.0 0.0 GERMANY, FED. REP. 38,758 34,998 30,508 30,509 32,590 32,089 32,002 31,101 26,265 0.1 -1.7 -1.1 FRANCE 22,252 19,449 14,541 14,389 15,702 14,801 14,148 13,676 13,714 0.0 -3.3 -0.4 UNITED KINGDOM 23,549 16,927 14,350 14,484 15,561 14,727 14,101 13,559 13,227 -1.7 -3.9 -0.7 ITALY 19,387 23,612 22,508 24,680 25,324 25,620 25,932 27,774 29,766 2.7 0.4 1.5 JAPAN 63,063 76,102 69,941 72,993 75,846 75,572 75,874 76,838 72,716 4.4 0.2 0.0 NON-MARRET 151,764 208,591 219,280 220,638 225,728 228,358 231,048 243,918 258,258 3.5 2.0 1.2 USSR 110,145 150,941 165,122 166,480 171,570 174,200 176,890 189,760 204,100 3,5 2.2 1.6 EASTERN EUROPE 41,619 57,650 54,158 54,158 54,158 54,158 54,158 54,158 54,158 3.4 1.4 0.0 DEVELOPING 80,559 169,245 209,334 215,604 230,772 237,724 244,365 286,320 342,081 7.2 6.0 3.6 ASIA 41,443 101,705 145,965 151,409 163,417 169,850 176,192 215,957 267,979 8.2 8.2 4.5 CHINA 22,340 48,239 83,556 81,399 87,773 92,136 96,722 123,406 157,624 8.1 7.9 5.2 KOREA, REPUBLIC OF 1,287 7,027 11,600 15,345 19,261 20,493 21,411 29,805 41,856 19.0 14 7 8.0 INDIA 6,714 12,868 14,784 17,605 19,323 20,161 20,999 25,686 31,439 3.9 4.9 4.6 AMERICA 19,755 34,166 32,077 32,903 36,063 36,582 36,881 39,071 42,810 5.4 2.0 2.0 BRAZIL 6,335 13,045 14,477 15,303 18,463 18,982 19,281 21,471 25,210 7.0 3.0 3.' WORLD 584,246 729,141 724,975 739,206 769,124 773,761 778,812 851,116 908,418 2.8 1.0 1.6 A/ LEAST SQUARES TREND FOR HISTORICAL PERIODS (1961-86); END-POINT FOR PROJECTED PERIODS (1987-2-0). B/ ESTIMATE. SOURCES, INTERNATIONAL IRON AND STEEL INSTITUTE (ACTUAL), WORLD BANK, INTERNATIONAL ECONOMICS DEPARTMENT (PROJECTED). I0 08E Sumiary 1. World iron ore demand is expected to grow by 1.7% p.a. during the 1987-2000 period. The low growth expected for iron ore demand is directly related to the low growth expected for steel production, to the increased use of scrap-based electric arc furnaces for steel making, and to improvements in yield in steel making. Reflecting the rapid growth of their steel production, developing countries' iron ore apparent consumption is expected to increase by 3.1% p.a. In contrast, iron ore consumption in industrial countries is expected to increase by only 1% p.a., consistent with their slower increase in steel production. 2. World iron ore capacity is expected to increase by 121.8 million tons (in Fe content) during the 1987-2000 period, reaching 738 million tons (in Fe content). Australia, Brazil, and China are expected to increase their annual iron ore production by 105.7 million tons during the forecast period. Most of this increase is expected -.o coe from expansions of existing capacity in these low-cost producers. New capacity is e.epected to come from Ch.na. By the year 2000 China is expected to be the second largest producer (after the USSR) and the largest consumer of iron ore in the world. The increasing importance of China in international iron ore markets is expected to change the negotiating process and settlement of iron ore prices. Sustained iron ore capacity increases by major producers and slow iron ore demand growth are expected to keep iron ore prices under downward pressure and profit margins at lower Levels in the forecasting period than during the historical period. Sincer fine iron ore (c.i.f.) prices are expected to grow at 4.3% p.a. in current terms and to remain unaltered on average in MUV terms during the 1987- 2000 period. Consumption Prospects 3. Demand for steel essentially determines iron ore demand. During the 1961-86 period, world consumption of iron ore and world output of crude steel increased by 2.9% p.a. and 2.7w p.a., respectively. During the 1970-86 period, these growth rates slowed considerably--to 0.7% p.a. and 0.9% p.a., respectively. The decline in the growth of steel output and iron ore consumption in the late 1970s and 1980s is attributed to: (a) the slowdown in the growth rate of industrial output in most industrial countries during this period; (b) the decline in steel intensity in industrial countries; and (c) technical developments that have either reduced the demand for iron ore directly or indirectly (through substitution with scrap). Such technical developments include the increased use of electric arc furnaces for steel making and the increased use of direct-reduction methods in iron making. In 1987, the world demand for steel increased despite an appreciation of the Japanese and European currencies vis-a-vis the US dollar that, ceteris paribus, might have had a depressing effect on their export-dependent economies. The 3.3% increase in world steel output during 1987 was acompanied by a 3.9% increase in iron ore demand. - 234 - 4. In 1988, the steel output of industrial countries is expected to grow by 6.8%; following a 5.1% increase in crude steel output in 1987. Robust industrial production growth and increases in capital expenditures lie behind this significant increase in steel output in major OECD countries. The supply of steel is expected to increase by 5% in developing countries in 1988. This high growth rate is the consequence of either developing countries' effort to increase exports (as with Brazil and Republic of Korea) and or to respond to domestic demand (as with China and India). Steel output growth is expected to decelerate somewhat in non-market economies as restructuring of their steel industries take place. In world terms, steel output is expected to increase by 4.1% p.a. in 1988. 5. World iron ore demand is also expected to increase by 4.8% in 1988. 1/ Low stocks, high scrap prices, and robust industrial demand have contributed to the large increase in iron ore consumption despite substantially higher freight rates. During the 1989-2000 period, world iron ore demand is expected to increase by an average growth rate of 1.8% p.a. Higher iron ore prices and slower industrial growth are expected tc Lead to a deceleration in the growth rate of iron ore demand. By 2000 industrial countries are expected to consume 11.6 million tons more of iron ore than in 1989. Non-market and developing country economies are expected to increase their 1989 consumption by an additional 13.2 million tons and 74 million tons, respectively, by 2000. Japan, -he United States, and the Federal Republic of Germany are expected to have the Largest increases in the consumption of iron ore among the industrial countries in response to their steel supply needs. Among developing countries, China, Republic of Korea, India, and Brazil have ambitious steel production plans and even the partial realization of these plans implies that their total demand for iron ore will outpace that of all other developing countries. With the exception of Republic of Korea, these major developing country consumers of iron ore have important reserves. Brazil and India are also major exporters of iron ore. Production Prospects 6. The rapid increase in steel output in the 1960s led to large invest- ments in iron ore mines in the 1960s and early 1970s. The slowdown of steel demand growth since the mid-1970s has resulted in excess iron ore capacity and many iron mine projects have been canceled, postponed, or delayed. 7. In 1985 world iron ore capacity (nominal capacity in terms of metal content) was estimated at 616.2 million tons. The USSR, Brazil, and Australia were three of the largest, accounting for 23.1%, 13%, and 12.3%, respectively, of world capacity (see Table 1). It is estimated that proven iron ore reserves can satisfy world consumption at current levels for 194 years. 1/ The projections are based on the econometric iron ore model described in T. Priovolos, An Econometric Model of the Iron Ore Industry, World Bank Staff Commodity Working Paper No. 19, October, 1987. - 235 - TABLE 1: IRON ORE YWINAL CAPACITY: 1985, 1990, AND 2000 GROSS WEIGHT AND METAL COnTT (MILLION TONS) -----Gross Weight----- ---Metal Content---- 1985 1990 2000 1985 1990 2000 Canada 56.0 59.9 59.9 34.0 36.4 36.4 United States 86.6 82.2 82.3 51.2 48.6 48.6 France 15.1 15.4 15.4 4.6 4.7 4.7 Sweden 22.4 22.4 22.4 14.0 14.0 14.0 Spain 8.0 8.2 8.2 4.7 4.8 4.8 Germany, Fed. Rep. of 0.4 0.4 0.3 0.1 0.1 0.1 Australia 119.3 142.4 168.3 75.9 90.6 107.1 South Africa 34.3 34.2 34.2 21.8 21.7 21.7 Liberia 21.5 13.2 13.2 14.3 8.8 8.8 Mauritania 10.8 10.8 8.0 6.8 6.8 5.0 India 64.6 70.0 89.0 40.1 43.5 55.3 Brazil 119.5 191.3 239.0 79.9 128.0 159.9 Chile 7.8 7.8 7.8 5.1 5.1 5.1 Mexico 8.0 8.2 8.2 5.3 5.3 5.3 Peru 8.0 8.0 8.0 5.0 5.0 5.0 USSR a/ 256.9 287.2 305.3 142.1 158.8 167.0 China a/ 130.0 210.6 277.1 68.2 110.5 145.4 Venezuela 26.3 26.8 26.8 15.7 16.0 16.0 Subtotal 995.5 1,199.0 1,373.4 592.2 707.0 810.2 % of World 94.6 94.6 94.6 96.1 96.1 96.1 World 1052.3 1,267.4 1,4S1.8 616.2 735.7 843.1 a! World Bank estimate. Sources: International Iron and Steel Institute (actual); World Bank (projected). 8. By 2000, the USSR, Brazil, China, and Australia are expected to account for 19.8%, 19%, 17.3%, and 12.7%, respectively, of world capacity. It is noteworthy that there have been new developments in iron preparation techniques involving beneficiation and agglomeration. The development of improved beneficiation methods has made numerous low-grade deposits economically viable, in spite of an abundance of high-quality ore throughout the world. Technical developments along these lines, however, are expected to diminish as technical and cost factors eventually will limit the degree to which the iron ore content of ore can be improved. Table 1 indicates the in:reased importance of Brazil and China in the iron ore markets. While China's iron ore supply developments are a response to its own domestic demand, Brazil's capacity developments are a result of the country's drive to not only satisfy its domestic demand but also to expand its exports in order to service its external debt. Brazil is able to follow this policy economically because it is a low-cost producer (see Table 2). - 236 - TABLE 2: IKKNMTIONAL I.O ORE COSTS Pellets Sinter Feed (US$/Long Ton, f.o.b. port, 1987) a/ Australia Savage River 16.90 Mt. Newman 11.70 Brazil CVRD 17.20 CVRD 11.70 MBR 12.10 Liberia Bong 20.90 Bong 13.40 South Africa ISACOR 12.40 Sweden KINUNO 23.10 KINUNO 17.40 a/ One long ton = 1.016 metric tons. Source: P. Marcus, K. Kirsis and P. Kakela, 1987, "The Threatened North American Iron Ore Industry," Paine Webber, World Steel Dynamics. 9. Table A2 shows that iron ore production in the industrial countries (with the exception of Australia and Canada) is expected to stagnate during the 1987-2000 period while that of developing countries is expected to grow by an average 2.3% p.a. Among the industrial countries, Canada's mines and pelletizing facilities are expected to increase output at a 1.3% p.a. rate between 1987 and 2000. Canadian iron ore producers have improved their cost competitiveness by cutting substantially their labor costs and energy expenses in the 1986-87 period. Canadian pelletizing operations are expected to play an increasingly important role in satisfying European demand as Europe's obsolete pelletizing facilities are closing down. 10. China's iron ore producticn plans are significant but they are expected to be short of demand requirements. China is expected to increase its imports from 0.4 million tons in 1987 to 16 million tons in 2000. Australian, Brazilian, and Indian iron ore producers will benefit the most from steel industry developments in the Pacific Basin countries. Australia's low-cost iron ore production is expected to satisfy the largest share of - 237 - China's import demand of iron ore. While Australia will remain the major supplier of the Japanese iron ore market, Brazil will remain the major supplier of European iron ore markets. Other Latin American countries such as Chile and Peru are also expected to benefit somewhat from increased demand in the Pacific Basin. Thei: (relative to Brazil) high cost of production, however, will constrain their ability to expand. Mexico plans to restructure and modernize its iron ore capacity in order to reduce its cost of production. Venezuela has important plans to develop DRI production. Such a development is expected to affect favorably the production and consumption of iron ore in Venezuela. 11. During the 1987-2000 period, the non-market economies' output is not expected to increase as fast as during the 1960-86 period. The USSR and the other Eastern European countries have plans to restructure their steel capacity by increasing the share of electric furnaces. Such a development is expected to slow the pace of growth of their iron ore production. Electric furnaces are fed with scrap or sponge iron. The use of the former will slow the demand for iron ore, Trade Prospects 12. The percentage of world iron ore production traded internationally rose from 30% in 1961 to 41% in 1986. The total international export volume reached a peak of about 226.4 million tons (in iron content) in 1986. Six countries (Brazil, Australia, Canada, the USSR, India, and Liberia) accounted for 81.6% of total exports in 1986. Three importers (Japan, the EEC-10, and the United States) accounted for 69% of total imports in that year. Exports and imports have been projected for individual countries and for major regional groups on the basis of the production and apparent consumption projections. (These are presented in Tables A3 and A4.) By 2000 world imports are expected to account for 41.8% of world iron ore consumption. 13. Japan and Republic of Korea will continue to rely on the Picific Basin iron ore-producing countries for their iron ore needs. The share of African exports to the EEC will remain constant or decline while that of Brazil, and possibly Canada, will increase. Efforts by Australia to penetrate Western European markets will be constrained by shipping cost considerations. Increasingly, major iron ore producers in the developing world will aim at replacing their iron ore exports with higher value added producti! such as pig iron, DR products, or steel semis. Price Outlook 14. Iron ore presently accounts for only 10-15% of the cost of a ton of steel, even though it takes about 1.2 tons of iron cre to produce one ton of steel. Moreover, the price of iron ore does not fluctuate with the prices of iron/steel. Iron ore is mainly traded on the basis of long-term contracts with an annual renegotiation of prices. Japanese and European steel makers dominate the market for iron ore and, to a great extent, influence the iron ore prices set in the annual contracts. - 238 - 15. Although the exact pricing policies adopted during the contractual negotiations for a specific iron ore are rather complex, some basic mechanisms have been established and in general have applied through the years. Until a few years ago, the annual European iron ore price negotiations normally started in October/November and ended before Christmas (in Europe "the iron ore year" is the calendar year whereas in Japan it is the fiscal year--April 1 to March 31). In some recent years the negotiations have had a tendency to drag on well into the new year. In cases where no price agreement had been reached before the end of the delivery year, the parties normally agreed on a provisional price for shipments. In view of the large ore quantities received via Rotterdam, it has for very many years been trade practice to take the c.i.f. Rotterdam price as a reference price for negotiations in Europe. Most iron ore f.o.b. prices for European destinations are qucted and agreed upon on the basis of the c.i.f. Rotterdam reference price, after deducting an estimated freight rate. The price is defined in US$/Fe unit/DMT (dry metric ton). The f.o.b. price of an ore is also determined by the special properties of the ore. Such differences are expressed as premia or discounts on the calculated general f.o.b. price in USC/Fe. 16. Up to 1970-75, contractual arrangements between the Swedish iron ore exporters and the steel mills of the Federal Republic of Germany set the pace for other contractual negotiations. In subsequent years, the negotiated price between the same steel mills and the Brazilian company, CVRD, served as the benchmark price for other ore price negotiations. 17. In the 1980s, however, a worldwide abundance of iron ore put the producers at a great disadvantage during price negotiations. The oversupply of iron ore, reinforced by expectations of declining world steel demand and the fear of smaller iron producers that the upcoming increase of high-quality, low-cost Brazilian (Carajas) capacity would undercut their market share, has made the market very competitive and led to iron ore prices declining in real terms. 18. Although steel companies have diversified their markets and ensured the expansion of available iron ore, the iron o:e exporters themselves have not been successful in diversifying their markets. Each of the major exporting countries rely mainly on one market, which weakens their bargaining position. Examples of this are Canada to the United States, Sweden to Western Europe, and Australia to Japan. Thus, what seemed to be a bilateral oligopolistic market a few years ago has been increasingly turning into a highly competitive market. 19. in Japan, prices are quoted in US$/Fe unit/DLT (dry long ton). In the past, the Japanese steel mills agreed to pay for the "Atlantic" Basin ores the f.o.b. prIze valid for delivery to European buyers, plus the freight for the transport to Japan. This practice made the c.i.f. price for "Atlantic" ores substantially higher than the "Pacific" ores. As the expansion of steel capacity slowed down in Japan, Japanese steel mills felt more secure in their supply of iron ore. Their pricing policy was gradually replaced by a "freight sharing" system under which the setter and the buyer shared the difference between the freights to Europe and to Japan on an equal basis. However, the Japanese steel mills now seem to be inclined to shift from this "freight sharing" system to the European system that equalizes c.i.f. prices for various imported iron ores. - 239 - 20, Among the different qualities of iron ore the premium for pellets over and above sinter fines varied from :S18-20/Fe unit in times of high steel demand and from USc9-10 when steel demand was low. The premium for lump ores as compared with sinter fines varied from USC3-10/Fe unit. 21. During the 1987 negotiations, Japanese steel producers concluded their negotiations before the Eurom!an steel producers. The long delay in the 1987 negotiation was not repeated during the 1988 negotiations. During these negotiations lower sinter fine f.o.b. prices were agreed upon. in c.i.f. or c. & f. terms iron ore prices increased by 4.5% to 8.8% in 1988; in f.o.b. terms, however, the iron ore prices declined by 1.5% to 7.7%. The difference is due to higher freight costs. Pellet prices fared better than lump ore and fine prices. 22. Despite the expected 14.7% upsurge in c.i.f. sinter fine iron ore prices in 1989, mostly due to the increased demand for iron ore and freight rate increases, continued oversupply will keep downward pressure on iron ore prices in real terms in the years to come. Despite gradual increases in capacity utilization rates, ample capacities at relatively low cost will continue to depress the iron ore markets in the 1990s. The market shares of iron ore producers with higher costs and/or poorer quality than Brazil's and Australia's will also decline. Austialia will compete with Brazil and India for the Pacific Basin market. Industrial countries will remain important importers of iron ore products. Developing countries, however, are expected to increase steel output faster than industrial countries. In particular, countries with young populations such as China, India, and Brazil are expected to demand industrial goods with high metal content. It is primarily these types of countries that are expected to show the largest increase in their demand for iron ore products. For this reason, China is expected to play an increasingly important role in future iron ore price negotiations. The European and American markets will be dominated by Brazilian and Canadian producers. &frican high-cost producers are not expected to sustain their market share in these markets. As long as the anticipated increases in capacity take place, and excess iron ore capacity persists in the iron ore markets, producers will find it difficult to obtain significant price concessions from steel mills. Sinter fine iron ore prices are projected to grow by 4.3% p.a. in nominal terms during the 1987-2000 period. In 1985 MU*V terms, however, c.i.f. sinter fine iron ore prices are expected te remain unaltered, on average, during this period. TABLE Als IRON ORE (METAL CONTENTS) - PRODUCTION BY MAIN COUNTRIES AND ECONOMIC REGIONS ACTUAL PROJECTED GROWTH RATES Al COUNTRIES/ 1987 - ECODOMIES 1969-71 1979-81 1986 1987/B 1988 1989 1990 1995 2000 1961-86 1970-86 2000 ----- *- --------------('000 TONS)--------------------------------------- --------( FER A t)------- INDUSTRIAL 164,702 174,332 130,118 127,62 140,049 140,442 140,885 146,074 154,380 0.8 -2.3 1.5 NORTH AMERICA 78,448 81,980 46,527 47,427 51,387 50,918 49,517 50,220 50,897 -0.6 -3.5 0.5 UNITED STATES 52,052 48,769 23,766 27,966 27,833 27,264 26,563 27,296 27,973 -2.0 -4.8 0.0 CANADA 26,396 33,211 .,761 19,461 23,554 23,654 22,954 22,924 22,924 2.0 -1.6 1.3 EEC-lU 27,886 14,271 7,363 7,008 7,100 7,196 7,170 7,170 7,170 -5.9 -8.6 0.2 PRANCE 17,523 8,339 3,768 3,408 3,610 3,590 3,570 3,570 3,570 -6.3 -10.2 0.4 OTHER WESTERN EUROPE 24,991 20,48$ 17,063 17,153 15,691 15,091 14,761 14,517 14,362 -0.8 -4.0 -1.4 SWEDEN 20,700 16,296 13,246 13,346 12,988 12,588 12,683 12,191 11,866 -1.5 -4.h -0.9 OCANIA 32,455 57,315 59,003 56,104 65,871 67,237 69,437 74,167 81,951 13.5 2.0 3.0 AUSTRALIA 32,417 35,390 57,584 54,634 64,401 65,937 67,937 72,667 80,351 13.3 1.9 3.0 NON--MARKET 107,514 136,686 137,900 136,900 135,930 135,900 136,900 140,500 149,400 2.6 1.3 0.7 USSR 104,466 134,722 136,202 135,202 134,650 134,900 135,900 139,000 141,900 2.8 1.4 0.4 DEVELOPING 141,317 221,644 254,996 265,773 280,044 285,313 289,637 330,485 356,690 5.3 3.1 2.3 ASIA 50,801 92,689 112,024 131,151 135,024 138,339 142,874 167,447 181,313 5.7 5.1 2.5 1 CHINA 23,400 62,374 77,280 90,280 94,721 95,146 99,451 116,996 130,820 8.2 8.2 2.9 INDIA 19,686 25,619 30,269 37,569 38,303 39,193 40,423 40,451 41,493 4.j 1.7 0.8 d. AFRICA 37,560 38,5'8 34,634 32,298 30,486 29,307 29,106 28,430 27,972 3.6 -1.1 -1.1 SOUTH AFRICA 5,686 18,075 15,422 15,022 14,731 14,902 14,383 15,007 15,491 8.4 7.3 0.2 LIBERIA 13,537 11,344 9,516 9,416 8,585 7,085 6,405 6,400 6,485 2.9 -4.2 -2.8 MAURITANIA 5,640 5,543 5,960 4,860 4,820 4,820 4,820 3,700 3,300 6.7 -0.9 -2,5 AMERICA 49,784 87,220 103,701 97,68V 109,897 112,897 113,020 128,971 138,768 5.9 3.4 2.7 BRAZIL 21,864 62,627 80,771 80,471 90,371 95,771 96,241 112,271 119,911 10.9 6.6 3.1 WORLD 413,533 532,663 323,014 530,365 556,043 561,635 567,422 617,059 660,470 3.0 0.8 1.7 Al LEAST SQUARES TREND FOR HISTORICAL PERTODS (1961-86)t END-POINT FOR PROJECTED PERIODS (1987-2000), B/ ESTIMATE, SOURCES: UNCTAD (ACTUAL)t WORLD BANK, IXTERATIONAL ECONOMICS DEPARTMkNT (PROJECTED). TABLE A2i IRON ORE (METAL CONTENTS) - APPARENT CONSUMPTION BY MAIN COUNTRIES AND ECONOMIC RETONS ACTUAL PROJECTED GROWTH RATES A/ OUNITRES/ 1987 - ECOOKIES 1969-71 1979-81 1986 1987/8 1988 1989 1990 1995 2000 1961-86 1970-86 2000 ------------(000 TONS)-------------------------------------------CX PER AUM)------- INDUSTRIAL 244,133 252,097 196.63 205,035 218,886 220,848 220,797 225,272 232,430 1.2 -2.2 1.0 NORTH AMERICA 80,077 73,360 37,933 S9,154 42,394 43,694 43,596 43,861 49,547 -1.9 -5.3 1.8 UNITED STATES 75,231 63,328 31,372 ;2,994 36,135 37,230 37,147 37,370 43,091 -2.5 -6.1 2.1 REC-10 87,543 85,740 72,993 76,396 80,244 79,895 79,274 78,777 77,616 0.6 -1.7 0.1 GERKANY, FED. REP. 27,230 28,720 24,362 23,866 25,728 25,555 25,392 26,452 26,734 1.0 -1.0 0.9 FRANCE 17,080 16,404 12,352 12,315 12,992 13,079 13,117 13,167 13,190 -0.3 -2.9 0., UNITED KINGDOM 14,716 8,849 0,970 12,926 14,154 14,016 13,620 11,610 10,216 -2,4 -4.1 -1.8 ITALY 6,879 9,784 10,209 10,189 10,270 10,143 10,045 10,448 10,376 5.0 2.0 0.1 JAPAN 62,204 77,850 69,302 69,485 75,391 76,672 77,070 81,777 84,410 6.7 -0.1 1.5 NO-XARKET 108,091 145,010 145,912 146,999 148,099 149,213 150,341 156,204 162,449 2.8 1.7 0.8 USSR 84,914 110,782 111,320 112,545 11,783 115,034 116,299 122,838 129,745 2.6 1.6 1.1 DIVELOPING 57,361 124,073 167,718 178,331 189,058 191,394 196,284 233,383 265,591 7.4 6.4 3.1 ASIA 35,952 89.289 114,208 119,694 126,233 129,088 133,496 166,381 185278 8.0 7.9 3.4 CMINA 23,444 66,895 89,349 90,689 95,224 97,504 101,146 127,208 146,776 8.8 9.0 3.8 KORLA, REPUBLIC OY -3 5,723 7,557 8,839 10,253 10,745 11,392 14,154 16,430 ... ... 4.9 INDIA 8,280 11,484 9,645 10,166 10,736 10,847 10,958 12,419 13,072 4.2 1.1 2.0 AMERICA 9,200 22,175 33,192 34,674 37,745 37,869 38,159 41,955 46,676 7.6 5.9 2.3 BRAZIL 4,056 11,765 20,784 21,574 23,947 24,362 24,630 28,465 33,216 8.3 7.5 3.4 WORLD 409,587 522,080 510,265 530,365 556,043 561,655 367,422 617,059 660,470 2.9 0.7 1,7 A/ LEAST SQUARES TREND WOR HISTORICAL PERIODS (1961-86): END-POINT FOR PROJECTED PERIODS (1987-2000). El ESTIMATE. SOURCES: UNCTAD (ACTUAL); WORLD BANK, INTERNATIONAL ECONOMICS DEPARTMENT1 (PPOJECTED). TABLE As IRON ORE (METAL CONTENTS) - GROSS EXPORTS SY MAIN COUNTRIES AND ECONOMIC REGIONS ACTUAL PROJECTED GROWTH RATES A/ OOUNTRIzS/ 1967 - ECO"ONIES 1969-71 1979-81 1986 1987/B 1988 1989 1990 1995 2000 1961-86 1970-86 2000 --------('000 TONS)--------- ------ (X PER ANNUM) ------- INDUSTRIAL 77,291 99,814 87,627 79,326 91,768 93,357 95,772 100,686 108,350 4.0 0.0 2.4 *ORTH AMERICA 25,488 30,261 22,301 19,402 23,396 23,291 22,600 22,534 22,569 1.1 -0.9 1.2 CANADA 22,738 26,812 19,527 16,628 20,622 20,517 19,832 19,760 19,795 1.6 -.,4 1.4 Ec-1o 6,800 3,570 2,291 2,291 2,291 2,291 2,291 2,291 2,291 -5.1 -8.0 0.0 FRANCE 5,750 2,609 1,292 1,292 1,292 1,292 1,292 1,292 1,292 -6.8 -10.5 0.0 OTHE WESTERN EUROPE 19,278 15,368 11,798 10,888 10,265 10,493 11,493 11,749 11,594 -1.0 -3.9 0.5 SmEDEN 17,521 13,423 10,504 10,612 10,093 9,863 9,793 9,296 8,991 -1,4 -4./ -1.3 OCEANIA 25,724 50,614 51,237 46,745 55,816 57,262 59,382 64,112 71,896 24.6 C/ 2.8 3.4 AUSTRALIA 25,710 48,925 50,027 46,484 55.555 57,175 59,091 63,821 71,505 24.4 C/ 2.6 3.4 VOD-KARKET 20,065 24,357 24,882 22,795 22,795 22,795 22,795 22,795 22,795 4.0 0.4 0.0 USSR 19,552 23.940 24,882 22,657 22,657 22,657 22,657 22,657 22,657 3.9 0.7 0.0 DEVEILPING 85,440 112,660 113,859 111,305 119,276 122,022 122,823 139,369 144,976 4.1 1.1 2.1 ASIA 14,938 13,904 20,624 27,403 27,547 28,346 29,465 34,432 35,421 1.7 0.8 2.0 INDIA 11,406 14,135 20,624 27,403 27,547 28,346 29,465 28,032 28,421 4.6 2.0 0.3 A7RICA 29,041 30,074 21,135 19,298 17,986 17,057 16,906 16,330 15,872 3.4 -1.9 -1.5 LIBERIA 12,993 12,902 9,700 9,416 8,585 7,085 6,405 6,400 6,465 4.0 -2.0 -2.8 AMMRICA 41,383 66,678 72,100 6*,604 73,743 76,619 76,452 88,601 93,683 5.4 2.7 2.9 BRAZIL 17,807 50,861 59,987 58,897 66,424 71,409 71,611 83,bOj 86,o45 11.9 6.7 3.0 WORLD 12,816 236,831 226,368 213,426 233,839 238,174 241,390 262,850 276,121 4.0 0.6 2.0 Al LEAST SQUARES TREND FOR HISTORICAL PERIODS (1961-86); END-POINT FOR PROJECTED PERIODS (1987-2000). BI ESTIMATE. Cf GROWTH RATE FOR 1964-86 PERIOD. SOURCES& UNCTAD (ACTUAL)l WORLD BANK, INTERNATIONAL ECONOMICS DEPARTMENT (PROJECTED). TABLE A4: IRON ORE (METAL CONTENTS) - GROSS IMPORTS BY MAIN COUNTRIES AND ECONOMIC REGIONS ACTUAL PROJECTED GROWTR RATES At COUNTRIES 1987 - ECONOMIES 1969-71 1979-81 1986 1987/B 1988 1989 1990 1995 2000 1961-86 1970-86 2000 -----------------------------------------------------------------00 TO-S--------------- -----------------------------------P--A---1------- --- -- -- -- -- -- -- - ..-------- ('000 TONS) - - -- - - - - - - - - ----------- ------( PER ANNUM) ------- INDUSTRIAL 156,722 177,579 154,144 156,669 170,605 173,763 175,684 179,884 186,400 3.1 -0.9 1.3 NORTH AMERICA 27,117 21,641 13,707 11,129 14,403 16,067 16,685 16,175 21,219 -2.6 -5.9 5.1 UNITED STATES 25,929 18,008 10,380 7,802 11,0?6 12,740 13,358 12,848 17,892 -3.3 -7.6 6.6 EEC-10 66,457 75,039 67,921 71,679 75,435 74,990 74,395 73,698 72,737 2.5 -0.5 0.1 GERMANI, FED. REP. 25,304 28,193 24,147 '1,866 25,728 25,555 25,392 26,452 26,734 1.9 -0.6 019 1PANCE 5,306 10,675 9,876 1U,19. 10,674 10,781 10,839 10,889 10,912 9.1 2.9 0.5 UNITED KINGDOM 11,492 8,338 8,880 12,926 14,154 14,018 13,620 11,610 10,216 -0.6 -2.7 -1.8 ITALY 6.534 9.721 10,209 10,189 10,270 10,143 10,045 10,448 10,376 5.8 2.3 0.1 JAPAN 61,283 77,572 69,140 69,485 75,391 76,672 77,070 81,777 84,410 7.1 0.0 1.5 NON-MARKET 20,662 32,681 32,894 32,894 34,944 36,108 36,236 38,499 35,844 4.6 2.5 0.7 DEVELOPING 1,486 15,989 26,581 23,863 28,290 28,303 29,470 44,467 53,877 18.8 20.8 6.5 ASIA 80 12,504 22,808 15,946 18,756 19,095 20,087 33,366 39,386 40.4 42.5 7.2 CHINA 44 4,522 12,069 409 503 2,358 3,695 10,212 15,956 35.3 41.1 32.6 KOREA, REPUBLIC OF 23 5,466 7,260 8,839 10,253 10,745 11,392 14,154 16,430 0.0 45.7 4.9 AMERICA 800 1,633 1,591 1,591 1,591 1,591 1,591 1,591 1,591 6.8 4.7 0.0 WORLD 178,870 226,249 213,619 213,426 233,839 238,174 241,390 262,850 276,121 3.8 0.4 2.0 Al LEAST SQUARES TREND FOR HISTORICAL PERIODS (1,61-86)s END-POINT FOR PROJECTED PERIODS (1987-2000). B/ ESTIMATE. SOURCES: UNCTAD (ACTUAL)4 WORLD BANK, INTERNATIONAL ECONOMICS DEPARTMENT (PROJECTED). - 244 - TABLE AS: IROM ORE - PRICKS, s/ 1950-87 (ACTUAL) AND 1988-2000 (pRoJECTED) ($/Ton) Current $ - 1985 Constant 3- MUV b/ GNHP c/ Actual 1950 12.4 52.4 57.9 1951 16.3 59.7 72.6 1952 22.3 78.0 97.9 1953 20.1 72.3 86.9 1954 17.1 62.9 72.7 1955 18.2 65.7 75.0 1956 21.4 74.6 85.3 1957 22.5 76.8 86.6 1958 21.5 72.1 81.0 1959 17.1 58.2 62.8 1960 17.1 57.0 61.8 1961 17.8 58.3 63.7 1962 16.8 54.0 58.8 1963 15.7 31.4 54.2 1964 15.7 50.5 53.3 1965 15.7 50.2 52.0 1966 15.3 47.2 49.0 1967 13.5 41.2 42.0 1968 12.6 38.8 37.4 1969 11.8 34.5 33.2 1970 15.2 41.8 40.5 1971 13.5 35.2 34.0 1972 12.8 30.7 30.8 1973 17.1 35.4 38.6 1974 19.0 32.2 39.4 1975 22.6 34.5 42.6 1976 21.9 33.0 38.8 1977 21.6 29.6 35.9 1978 19.4 23.1 30.0 1979 23.3 24.5 33.2 1980 26.7 25.6 34.8 1981 24.3 23.2 28.9 1982 25.9 25.0 29.0 1983 24.0 23.8 25.8 1984 23.2 23.4 24.1 1985 22.7 22.7 22.7 1986 22.0 18.6 21.6 1987 22.2 17.1 21.1 Projected 1988 24.2 17.2 22.1 1989 27.7 18.5 24.3 1990 27.6 18.2 23.0 1995 28.1 15.5 18.0 2000 38.5 17.0 19.7 &/ Spot sinter fines of Brazilian ore, c.i.f. Geraan ports, 652 MC content (1975-77); from 1978, 61.5% MC content; prior to 1975, 682 MC content. Pricts for 1950-59 are estimated on the basis of Swedish are. b/ Deflated by Manufacturing Zlnit Value (MUV) Index. 1/ Deflated by US GNP deflator. Sources: Statistiches Bundesat, Preise und Preisladises fur die ein und Ausfhr, (actual, 1964-87) and computations of the World Bank; World Sink, International Economics Department (projected). - 245 - IRON ORE (CONSTANT 1985 DOLLAR PRICES*) 120 100- rsos 40- 20, so-1, I I p 1 1945 1950 1955 1960 1965 1970 1975 . 1980 1,985 1990 1995 2000 DEFLATED CY MIANUFACTIURIM4 UNIT VALUE ( VUV ) INDEX DE, "TED BYU.S. GNPDFLATOR. * 194S - 87 ACTUAL; 1958 - 2000 PROJECTED. $OURCE : WORLD BANK.* INTERNATIONAL ECONOMICS DEPARTMENT. LEAD Summary 1. World consumption of lead increased at 1.3% p.a. during the 1970-86 period compared to slightly over 4% p.a. during the 1960s. Slower economic growth, material substitution, the downsizing of batteries, and health/ environmental regulations were responsible for the slower growth. These factors were particularly prevalent in the industrial countries which registered a modest 0.2% p.a. increase in consumption during the 1970-86 period. In contrast, developing countries' consumption increased at 4.5% p.a. during the comparable period. The growth of world lead consumption should continue to moderate to 0.8% p.a. during the 1987-2000 period. Material substitution and health/environmental considerations will constrain industrial country consumption growth to 0.2% p.a. during this period. Developing country consumption should increase at 2% p.a. during the 1987-2000 period. The slower growth expected for developing cou-ntries during the 1990s vis-a-vis the 1970-86 period reflects the increasing importance of the factors which have constrained industrial country demand. For example, legislation restricting leaded gasoline is likely to become more widespread. 2. Industrial and developing country lead mine capacity totaled 3.4 million tons in 1987; by the year 2000 capacity is projected to increase only by 170,000 tons to 3.6 million tons. In contrast, industrial and developing lead country refinery capacity was estimated to be 5.8 million tons in 1987 and is expected to increase by approximately 450,000 tons during the period 1987-2000. The difference in mine and smelter capacity levels and expected growth reflects continued expansion of the secondary (recycled) lead sector. Therefore, lead mine and smelter (refined) production during the 1987-2000 period are expected to increase at 0.2% and 0.7% p.a., respectively. No major shifts in the current mine production pattern are anticipated, and the most current producers of lead ore (Australia, Canada, Mexico, Peru, and the United States) will remain major suppliers. Mexico and Peru are expected to increase their share of world output, and the opening of the Red Dog mine is likely to permit an increase in US production. Most of the increase in lead metal production during the 1987-2000 period is likely to come from recycling, and it is anticipated that most of the incremental production will be located in developing countries. Consequently, the developing countries' share of world lead production is projected to increase from 22% in 1987 to 25% in 2000. 3. Lead metal exports are projected to increase at 0.4% p.a. during the 1987-2000 period compared to 0.7% p.a. for lead metal production. Slow consumption growth and adequate smelting capacity in the large consuming countries will minimize their import requirements. Trade in lead ores/ concentrates is expected to increase at 0.3% p.a. during the 1987-2000 period-approximately the same rate as production. 4. The depressed lead prices in 1985 elicited the expected supply cutbacks, and prices increased to US$597/ton in 1987. Prices increased further to US$661/ton during the first half of 1988. Unanticipated supply disruptions have also contributed to the recent price increases. Over the near term, lead - 248 - m&rkets are expected to move into surplus as demand increases only marginally and production expands in response to prize. By 1990 the lead price is projected to decline to US$540/ton (US$356/ton in 1985 constant dollars). Recent cost reductions should limit long-term price increases to US$795/ton (US$434/ton in constant 1985 dollars) and US$950/ton (US$420/ton in constant 1985 dollars) in 1995 and 2000, respectively. Introduction 5. The performance of the world lead industry during the 1980s has been mixed. Weak demand and depressed prices early in the decade resulted in a generally poor perception of lead's prospects over the medium and long term. From the standpoint of the producer, lead was viewed as one of the least attractive base metals. A modest recovery in lead demand since 1982 and supply curtailments have permitted lead prices to increase significantly since 1985--as has been the case with a number of other base metals. However, the longer-term view remains basically pessimistic. Prices are expected to decline from their current high levels in line with long-term cost trends. Moreover, demand will remain sluggish as material substitution and environmental concerns continue to erode the lead markets. Lead consumption will continue to be buoyed by the battery market, but this may be a mixed blessing. As the lead sector increasingly becomes a one-market industry (batteries), the risks associated with the loss of this market increase. Although no substitute for the lead-acid battery is currently foreseen, such a technological development would result in severe overcapacity. Demand Outlook 6. Lead consumption during the 1970-86 period increased at 1.3% p.a. However, during this period developing country consumption increased at 4.5% p.a. while industrial country consumption registered a negligible 0.2% p.a. rise. As has been the case with other major metals, demand was particularly weak during the mid- to late-1970s and suffered declines once again during the 1981-82 recession. The recovery of lead consumption during the 1983-8? period has been rather weak--a total of only 6% compared to increas2s of 20% and 14% for aluminum and zinc, respectively. 7. The modest improvement in lead demand should be viewed cautiously, given the declining consumption in many end-use markets. Lead is unique in the number of markets/applications for which serious health and environmental concerns have been raised. Lead gasoline additives have been reduced or eliminated through legislation in many countries. 1/ It appears likely that virtually no lead additives will be used by 2000 in the industrial countries. The impact of such legi:lation is illustrated by the experience in the United States where the additive market has declined from 253,000 tons in 1970 to 28,500 tons in 1986. Household lead-based paints (pigments) are yet another 1/ International Lead and Zinc Institute (ILZSG), "The Market Situation for Lead," London, 1986. - 249 - example of a market severely constrained by health issues. Only the battery market has exhibited sustained growth. Metal Bulletin concluded, "No other base metal has received as much adverse environmental publicity as lead, but despite this, usage is steadily rising." 2/ A major question remains the extent to which the battery market can continue to support lead demand. 8. Table 1 5hows lead consumption trends by major use in selected industrial count es. 3/ All major applications--with the notable exception of batteries-have declined since the peak demand year of 1979. Batteries accounted for approximately 61% of consumption in 1986 compared to 50% in 1979. The next largest market was pigments and other compounds which accounced for about 12% of consumption in 1986. A large number of relatively small markets comprised the remainder. 9. Gasoline additives have suffered the largest decline since 1979-- approximately 14% p.a.--with much of the drop attributable to the mandated shift to lead-free gas in the United States. Lead-based paints for household applications have also been sharply reduced for health reasons and have contributed to the 2.4% p.a. decline in pigment markets since 1979. The 7.3% p.a. decline in lead alloy use during the 1979-86 period largely reflects technological shifts. Solder is the single most important application of lead-ba3ed alloys and its use has fallen with the decline of the three-piece steel (soldered) food can and its replacement by two-piece or three-piece welded cans which use little solder. Other soldering applications (e.g., automobiles) have also declined. Similarly, lead alloys used for printing and type declined markedly with the introduction of new printing methods such as offset lithographic reproduction. Cable shNeathing has also declined markedly--at 7.3% p.a. since 1979. Plastics have substituted for lead in telephone cables and some high-tension power cables; where lead has been retained in these uses, the required thicknesses are lower. 10. The battery market has been the only growth sector for lead in the industrial countries. The 1.2% p.a. increase during the 1979-87 period reflects the strong growth in world vehicle production and the continued rise in vehicle registrations (a proxy for vehicles-in-use). World vehicle production averaged 37 million units during the 1970s, but increased to 44.8 million units in 1985 (the last year of comprehensive data). 4/ Similarly, vehicle registrations in the major industrialized countries have expanded from 230 million units in 1970 to an estimated 324 million units in 1986. 5/ 2/ Metal Bulletin, "Lead Comes in From the Cold," September 17, 1987. 31 End-use data include most industrial countries. Comprehensive data are not available. 4/ Motor Vehicle ManufactLrers Association, "World Motor Vehicle Data 1987 Edition," Detroit 1987. 5/ Shearson Lehman Brothers, "Annual Review of The World Lead and Zinc Industries," 1987. - 250 - TABLE 1: LEAD CONSUNPTIO TRENDS BY MAIN USES IN SEIUCTED INDUSTRIAL (UMTRIES, 1979-86 Average Rate of 1979 1980 1981 1982 1983 1984 1985 1986 Change S------------------------T-------------------- Batteries 1,751 1,558 1,640 1,591 1,702 1,856 1,888 1,902 +1.2% Cable Sheathing 251 241 230 209 189 169 171 162 -6.1% Rolled and Extruded Products 297 301 282 255 283 295 271 276 -1.0% Shot/Ammunition 94 85 90 91 90 103 10]. 90 -0.6% Alloys 216 184 157 167 154 154 140 i27 -7.3% Pigments and Other Compounds 433 413 398 360 362 380 386 364 -2.4% Gasoline Additives 284 232 200 204 171 158 126 101 -13.7% Miscellaneous 144 142 143 114 115 119 117 118 -2.8% Total 3,470 3,156 3,140 2,991 3,066 3,234 3,200 3,140 -1.4% Sources: International Lead and Zinc Study Group, Principal Uses of Lead and Zinc, various issues. 11. Lead demand for batteries has been particularly strong in Japan--4.5% p.a. during the 1979-86 period. The increase reflects the rapid expansion rof the domestic auto industry and ccncomitant need for original equipment batteries. The much more modest US increase of 0.8% p.a. during the same period tesults from the greater need for replacement batteries as the vehicle population expanded. 12. The positive influence of rising vehicle production and population has been offset somewhat by several factors. High lepd prices in the late 1970s prompted renewed efforts to reduce its use. Also, the desire to improve energy efficiency after the two oil-price shocks led autonobile producers to reduce vehicle weight. This facilitated the development of lighter, less lead-intensive batteries. Since 1980, average battery weight in the United States has decline by approximately 6%. In addition, technological improvements have extended battery life. 13. Comparable end-use data for most developing coantries are not available. However, partial information indicates that batteries represent - 251 - the largest and most dynamic single use in that region. 6/ This trend is consistent with rapidly expanding autcmobile production. The more vigorous growth in developing country demand implies that the environmental/technical factors that have constrained lead consumption in the industrial countries have not played a major a role as yet. For example, leaded gasoline remains the predominant fuel in developing countries. 14. World consumption of lead during the 1987-2000 period is expected to increase at a relatively slow 0.8% p.a., in contrast w.ith 1.3% p.a. increase experienced during the 1970-86 period. The slowdown in demand growth reflects the continued decline of many markets and the modest growth anticipated in the battery sector. 15. Lead consumption in the industrial countries is projected to rise at 0.2% during the 1987-2000 period--the same rate experierced during the 1970-86 period. Most markets for lead in the industrial countries should continue to contract. Casoline use--particularly outside the United States--will decline as additional restrictive legislation becomes effective. H-alth and environmental issues will continue to negatively impact other uses such as paints. Plastics should further erode lead cable and sheathing applications. Technological shifts in manufacturing processes are likely to diminish solder uses. However, many of these markets are now quite small, and their continued decline will be compensated by the steady, albeit moderate, increase in the battery market. 16. Because most lead-acid batteries are used in automobiles and trucks for starting/ignition purposes, the vehicle production and population will determine battery demand. The demand for original equipment batteries (in new cars) is likely to be limited since vehicle production in the United States and Europe is estimated to expand by only 1% p.a. through 2000. Japanese vehicle production is expected to increase by about 2% p.a. Replacement battery demand represents a large proportion of total battery use (generally 5C-80% in the industrial countries) and is a function of fleet size (vehicle population). Fleet size is expected to increase by 1-2% through 2000. 7/ 17. 'iven vehicle production and population, the growth in lead-in- bat-ery d-iand is likely to vary within a 1-1.5% p.a. range in most industrial ccuntries. towever, several caveats are necessary. It is assumed that the re4uctions in batery weight and increases in battery life have largely run their cours! and will not severely constrain lead demand. Second, it is assumed that no substitute for the lead-acid battery n automotive applicatio-s is likely through 2000. 6/ In Brazil, the battery market in 1986 accounted for approximately 65% of total consumption and increased 15% p.a. during the 1979-86 period. The battery market in the Republic of Korea expanded by 13% p.a. during a comparable period and accounted for approximately one-half of total demand in 1986. 7/ P. King, "Lead and Zinc Developments to the Year 2000, with Focus on Asia," in Economics of Internationally Traded Minerals, US Society of Mining Engineers, New Orleans, 1986. 18. Lead consumption in the developing countries shcuid increase at 2% p.a. during the projection period. The relatively stronger performance of the developing countr es vis-a-vis the industrial countries is due to higher expected economic &-owth. For example, growth of manufacturing output is expected to average 4-L% p.a. in the developing countries, compared with 3-4% anticipated in the industrial countries. However, lead consumption growth is expected to remain well below the growth rates achieved during the 1970-86 period. The factors which constrained its expansion in industrial countries are anticipated to become increasingly relevant in developing countries. Supply Outlook 19. Industrial and developing countries' lead mine capacity amounted to 3.4 million tons in 1981, an increase of approximately 110,000 tons from 1985 estimated levels (see Table 2). The largest individual increment to supply was accounted for by the reopening of the Faro 7ine in qCanada. Other (smaller) mine additions included Montana Tunnels (United States) and the Heller unit (Australia), as well as various expansions in Latin America. Mine capacity through 1990 is expected to increase only by 40,000 tons. The stagnation reflects mine closures in Canada (Pine Point in 1988) and several European facilities including Bad Grund, Rammelsburg, and Black Angel. A more fundamental reason is the rather poor expectations for lead demand. No major new lead mines are expected to come on-stream over the medium term, and the expansions that are now anticipated are largely the result of zinc mines which have relatively small Lead concentrations (e.g., Caribou in Canada; Green Creek in Canada; Cadjebut and Lady Loretta in Australia). 20. During the 1987-2000 period, lead mine capacity will expand by only 170,000 tons in the industrial and developing countries. Industrial countries will continue to account for a large proportion of capacity, but their share is expected to decline from 57% in 1987 to 50% in 2000 even though a major contributor to world lead capacity during the 1990s will be Alaska's Red Dog mine. 8/ Developing countries should increase their share of capacity by a corresponding amount. A significant constraint on mine capacity remains the expected increase in secondary (recycled) lead. 21. Lead smelter capacity in 1987 was 5.8 million tons and represented a decline of 180,000 tons from 1985 (see Table 3). The contraction of capacity was primarily the result of smelter closures in industrial countries-- particularly the United States. In the US primary sector, severai mergers/consolidations led to smelter closures. The US secondary sector also has contracted as excess capacity and stringent environmental regulations served to close high-cost units. Developing country primary smelting capacity in 1987 declined slightly from 1985 levels, but the decrease was more than 8/ The Red Dog mine is expected to have a capacity of 65,000 tons of lead. - 253 - TAILA 2: VORLD LEAD NINE CAPACITY a2 ----Actual------ ---Projected---- Countries/eonomies 1980 1985 1987 1990 1995 2000 --00------------ons----------- Industrial 1,775 1,812 1,949 1,890 1,875 1,800 North America 994 958 1,070 1,040 1,125 United States 616 551 640 640 Canada 378 407 430 400 Other Industrial 781 854 879 850 750 EEC-10 249 204 204 180 Oceania 412 525 535 570 Other 120 125 140 100 Developing 1,315 1,511 1,480 1,579 1,650 1,800 Asia 323 450 455 510 China 180 190 200 240 Africa 295 300 300 300 Morocco 110 114 90 90 Namibia 38 38 38 38 South Africa 97 97 97 97 Latin America 553 609 570 617 Mexico 192 192 220 220 Peru 227 240 245 245 Southern Europe 144 152 155 152 Yugoslavia 111 119 119 119 Industrial and Developing 3,090 3,323 3,429 3,469 3,525 3,600 a/ Excluding European CPEs. Sources: International Lead and Zinc Study Group; Engineering & Mining Journal, (January 1988); Bureau of Mines, US Department of the Interior, "Lead" in Mineral Facts and Problems, Washington, D.C., 1985; World Bank (projected) - 254 - compensatedl for by an increase in secondary capi-ity. During the 1987-2000 period, total industrial and developing country .melter capacity is expected to increase by 450,000 tons. However, most of the increase is due to expanding secondary capacity. The growing impor:ance of the battery market implies that, ceteris paribus, the supply of used (recyclable) batteries will increase. The trend will be especially noticeable in the developing countries where secondary capacity is expected to increase 52% (from 461,000 to 700,000 tons) during the 1987-2000 period. 22. World mine production is expected to increase at 0.2% p.a. during the 1987-2000 period and regional production should parallel capacity trends. Industrial country output is projected to decline by 0.4% p.a., largely due to contractions in the EEC and North America. In contrast, Australian production should increase modestly. The decline of industrial country production will be mitigated somewhat by the opening of the Red Dog mine. The 0.9% p.a. increase in developing country output reflects the generally higher ore grades and presence of by-products (particularly silver). 23. Lead metal production should increase at about 0.7% p.a. over the long run. The faster growth rate vis-a-vis mine output results from the continued e=pansion of secondary lead. Industrial country output is projected to increase at only 0.2% p.a.--parallelin- the increase in industrial world lead cons;amption. The stronger 1.9% p.a. increase in developing country production reflects a more robust domestic lead market, greater emphasis on secondary lead, and the strategy of many developing countries to increase value-added through local smelting of ores/concentrates. Trade Outlook 24. Trade in lead ores/concentrates during the 1987-2000 period is expected to increase at 0.3% p.a.--apDroximately the same rate as ore production--somewhat faster than the growth experienced during the 1970-86 period. Industrial country exports are expecced to decline by 0.6% p.a. Although E-EC exports should decline significantly (1.1% p.a.) during the period, the start-up of the Red Dog mine will allow North American exports to expand by 0.2% p.a. Developing country lead ore/concentrate trade is projected to increase 2% p.a. during the 1987-2000 period. 25. Exports of lead metal increased 0.7% p.a. during the 1970-86 period., in contrast to the 1.6% p.a. rise in lead production. The slower growth in exports likely reflects two trends. First, slow consumption growth and adequate capacity in the industrial countries reduced import requirements during the period. In addition, secondary (recycled) output has expanded rapidly and the production is used predominantly for local markets (e.g., the manufacture of batteries), thus minimizing import requirements. This pattern is expected to continue with lead exports increasing by only 0.4% p.a. during the 1987-2000 period--compared to a 0.7% p.a. increase in lead metal production. Developing country exports should increase by 0.7% p.a. compared to the 0.3% p.a. growth expected for the industrial countries. - 255 - UAL" 33 MOLD IJA RW IMY CPACITT s/ ----Actual----- -----Projected--- Countries/conomies 1980 1985 1987 1990 1995 2000 --- - -- -- --('000 tons)--- - -- Priusry Plants Industrial 2,363 2,354 2,206 2,221 2,221 2,100 North America 931 922 781 781 781 Uaited States 714 714 573 573 Canada 217 208 208 208 Other Industrial 1,432 1,432 1,425 1,440 1,440 BC-10 875 875 360 875 Oceania 250 250 250 250 Japan 260 260 260 260 Other 47 47 55 55 Developing 1,110 1,265 1,241 1,301 1,400 1,450 Africa 200 200 170 170 Latin America 522 554 540 540 A*it 213 330 350 410 Southern Eurlope 175 * 181 181 181 Industrial and Developing 3,473 3,619 3,447 3,522 3,621 3,550 SecondarLPlants Industrial 2,442 1,947 1,897 1,897 1,921 2,000 North America 1,345 921 871 871 871 United States 1,224 800 750 750 Canada 121 121 121 121 Other Industrial 1,097 1,326 1,026 1,026 1,050 ESC-10 871 800 800 800 Oceania 53 53 53 53 Japan 126 126 126 126 Other 47 47 47 47 Developing 377 418 461 523 625 700 Africa 56 56 56 56 Latin America 200 213 213 225 Asia 79 107 150 200 Southern Europe 42 42 42 42 Industrial and Developing 2,819 2,365 2,358 2,420 2,546 2,700 Total Primary and Secondary 6,292 5,984 5,805 5,942 6,167 6,250 a/ Excluding CPEs. Sources: International Lead and Zinc Study Group; Engineering & Mining Journal (January 1988); Bureau of Mines, US Department of the Interior, "Lead" in Mineral Facts and Problems, Washington, D.C., 1985; World Bank (projected). - 256 - Price Outlook 26. As has been the case with most other base metals, lead prices have exhibited considerable volatility. Prices reached an all-time high in 1979 (US$1,208/ton) and subsequently declined through 1983 (to US$425/ton), as the world recession depressed demand. The consequent cutback in production, as velt as an increase in consumption, resulted in a moderate price recovery during 1984 (to US$443/ton). However, the higher output, in conjunction with slower growth in demand, resulted in a further price decline in 1985 (to US$391/ton). Lower production (the result of depressed prices), as well as the continued increase in lead demand, led to prices averaging US$597/ton in 1987. An additional factor leading to the increase in lead prices has been supply disruptions. Labor disputes in 1986-87 occurred in Australia, Canada, and Latin America and contributed to the steady decline in stocks during these two years. Lead prices increased further to average US$661/ton during the first half of 1988. 27. Pri-! swings over the short terx are determined by the current and anticipated aear-term market balance. Our projections indicate that the current tig't supply/demand balance will moderate. Lead demand should continue to increase only marginally, while output should be more than adequate since producers are likely to increase production in response to current high price levels. Supply disruptions are not expected to constrain output to the extent typical in 1986-87 because no major labor contracts are due for renewal over the near term. Consequently, inventories are expected to rise over the near term (see Table 4). Lead prices are projected to average US$630/ton in 1988. Prices should decline to US$590/ton and US$540/ton in 1989 and 1990, respectively. However, a precipitous price decline is not anticipated since demand should continue to expand slowly and smelter capacity will increase only marginally. 28. Average lead operatinz costs in 1986 were estimated to be 18.20/lb (US$401/ton) on a fully atlocated basis. Costs have declined significantly since the early 1980s, particularly for mining and milling. Producers have struggled to reduce costs and improve productivity and these efforts, as well the closure of high-cost units, appear to have both contributed to the cost reductions. It appears likely that there will not be further significant cost reductions over tbe next few years and that real lead costs will be in the 18- 20c'lb range during the 1990s. Long-run prices should parallel these co3t trends and average US$795/ton and US$950/ton in 1995 and 2000, respectively, (US$439/ton and US$42C/ton in constant 1985 dollars). - 257 - TABLE 4: CRLD LEAD MAKET SITUATION AND OUTLOOK 1987-90 a/ Actual -------Projected----- 1987 1988 1989 1990 ---------------( '000 Tons)--------------- Refined Production 4,190 4,219 4,235 4,165 Refined Net Exports to Eastern Europe and China 34 50 50 so Lead Metal Available 4,156 4,169 4,185 4,115 Lead Metal Consumption 4,093 4,133 4,118 4,127 Refined Metal Stocks, Commercial 422 458 525 513 Months Consumption Covered 1.2 1,3 1.5 1.5 by Inventory al Excluding CPES, China, and the Democratic People's Republic of Korea. Sources: International Lead Zinc Study Group (actual); World Bank (projected). TABLE Ali LEAD ORE - PRODUCTION BY MAIN COUNTRIES AND ECOWOKXC REGIONS ACTUAL PROJECTED GROWTH RATES Al COUNTRIES/ 1987 - ECONOMIES 1969-71 1979-81 1986 1987/B 1988 1989 1990 1995 2000 1961-86 1970-86 2000 -- - (000 TONS)--------------------------------------- ------(% PEk AN") INDUSTRIAL 1,703 1,613 1425 1,491 1,490 1,480 1,420 1,417 1,414 1.2 -1.2 -0.' NORTH AMERICA 876 341 702 734 740 730 690 695 700 2.1 -2.1 -0.4 EEC-10 242 249 173 177 180 170 165 150 140 0.2 -1.3 -1.8 OCEANIA 425 388 411 455 450 455 450 467 485 0.8 0.7 0.5 AUSTRALIA 424 38 411 455 450 455 450 462 48s 0.8 0.7 0.0 NON-MARKET 681 759 726 729 730 725 725 740 750 1.7 -0.1 0.2 USSR 477 580 550 552 553 552 551 556 561 2.2 0.6 0.1 EASTERN EUROPE 205 179 176 177 177 173 174 184 189 0.3 -1.9 0.5 DEVELOPING 1,003 1,159 1,200 1,192 1,19a 1,209 1,203 1,269 1,336 1.4 1.0 0.9 ASIA 230 318 371 372 375 385 388 429 470 3.2 2.0 1.8 CINA 110 158 185 190 192 200 205 220 245 3.0 3.0 2.0 AFRICA 209 255 227 227 227 228 220 220 220 0.9 2.4 -0.2 MOROCCO 77 115 72 71 70 71 68 67 65 1.2 1.5 -0.7 AMERICA 422 432 454 461 463 465 460 493 526 0.7 0.1 1.0 MEXICO 165 157 197 204 205 210 208 219 238 0.1 0.4 1.2 PERU 155 187 194 204 205 202 207 221 235 1,4 1.2 1.1 SOUTHERN EUROPE 141 154 148 132 133 131 135 127 120 1.1 0.0 -0.7 YUGOSLAVIA 123 123 117 103 102 102 104 111 95 0.6 -0.5 -0.6 WORLD 3,387 3,531 3,351 3,412 3,418 3,414 3,348 3,426 3,500 1.4 -0.2 0.2 ---------------------------------------------------------------------------------------------------------------------- A/ LEAST SQUARES TPREND FOR HISTORICAL PERIODS (1961-86), END-POTNT FOR PROJECTED PERIODS (1987-2000). 31 ESTIMATE. SOURCES: INTERNATIONAL LEAD AND ZINC STUDY GROUP, LEAD AND ZINC STATISTICS (ACTUAL); WORLD BANK, INTERNATIONAL ECONOMICS DEPARTMENT (PROJECTED). TABLE A24 LEAD ORE - GROSS EXPORTS BY MAIN COUNTRIES AND ECONOMIC REGIONS ACTUAL PROJECTED GROWTH RATES A/ COUNTRIES/ 1987 - ECONOMIES 1969-71 1979-81 1986 1987/B 1988 1989 1990 1995 2000 1961-86 1970-86 2000 ---------------------------('000 TONS)----------------------------------------------( PER ANNUM)----- - INDUSTRIAL 360 361 .326 443 435 420 382 397 411 1.9 -2.2 -0.6 NORTH AMERICA 158 179 111 245 245 234 203 228 250 2.3 -5.0 0.2 CANADA 153 148 107 242 240 230 200 125 125 1.4 -5.3 -5.0 EEC-10 97 106 74 84 80 78 72 61 50 6.7 -1.3 -3.9 OTHER WESTERV EUROPE 44 47 44 46 45 44 44 42 40 1.0 -0.4 -1.1 OCEANIA 45 21 92 58 60 59 58 64 71 0.0 0.5 1.6 NON-MARKET 10 0 0 0 0 0 0 0 0 .,, ... 0.0 DEVELOPING 399 318 162 208 232 242 238 254 270 -0.7 -3.1 2.0 ASIA 132 41 22 30 31 32 29 29 30 -6.3 -13.0 0.0 AFRICA so 127 79 111 112 114 110 107 105 0.4 5.8 -0.4 MOROCCO 44 69 22 32 33 31 32 31 29 -2.0 -3.1 -0.8 ANERICA 152 117 50 55 78 86 90 110 130 0.5 -2.5 6.8 PERU 108 86 27 35 55 65 70 85 100 1.4 -2.1 8.4 MICO 1 2 2 2 2 2 3 5 15 0.0 0.0 16.8 SOUTHERN EUROPE 65 33 12 12 11 10 9 8 5 3.0 -9.2 -6.5 WORLD 769 679 488 651 667 662 620 651 681 0,4 -2.7 0.3 A/ LEAST SQJARSS TREND FOR HISTORICAL PERIODS (1961-86)t END-POINT FOR PROJECTED PERIODS (1987-2000). B/ ESTIMATE. SOURCES: INTERNATIONAL LEAD AND ZINC STUDY GROUPS, LEAD AND ZINC STATISTICS (ACTUAL)4 WORLD BANK, INTERNATIONAL ECONOMICS DEPARTMENT (PROJECTED). 他 TABLE AAs LEAD METAL - PRODUCTION BY MAIN COUNTRIES AND ECONOMIC REGIONS ------- ----- -- ACTUAL PRO ECTED GVjDWTH RATES A/ ------------------------------------- -------------------------------------------- --------------------------- COUNTRIES/ 1957 - SCOMOKIRS 1969-71 1979-61 1986 19871s 1988 1989 1990 1995 2.000 1961-66 1970-86 2000 ------------------------ -------------------------------------------- ------------------------------------------------------------- ----------------------------------- (POOO TONS) ------------------------------------- ------ (Z PER ANNUM) ------- INDUSTRIAL 2,747 3,338 3,141 3,269 3,297 3,285 3,230 3,292 3,353 2,3 1.2 0.2 MUTH AWdRICA 1,211 1,389 1,182 1,212 It237 1,223 1,190 1,242 1,295 1.9 0.0 0.3 UNITED STATES 1,017 1,148 917 992 997 9do 950 987 1,025 1.7 -0.6 0.3 CANADA 175 242 245 220 240 245 244 25S 270 2.4 3.2 1.6 XIC-20 1,050 1,340 lo322 1,370 1,400 1,395 1,380 1,370 1,360 3.0 1.8 -0.1 OCRANIA 209 244 166 217 210 225 220 232 245 04 0.2 0.9 AUSTRALIA 209 244 168 217 210 225 220 232 245 0.2 0,2 019 Ww_MARym 020 1,089 1,126 1,116 1,130 1,130 1,200 1,270 2.9 1.9 1.0 USSR 575 787 790 790 805 floo Soo 860 921 3.1 2.1 1.2 EASTERN EUROPE 242 302 326 326 330 330 110 340 2.4 1.6 015 DEVELOPING 759 1,026 1,181 1,219 1,225 1,245 1,253 1,380 1,505 2.3 2.5 1.6 ASIA 189 321 462 497 500 525 530 395 660 4.0 5.5 2.2 CHINA 120 198 274 285 290 310 315 310 330 412 5.9 2.4 AFRICA 139 147 134 156 160 160 155 166 Igo 2.6 1.1 1.1 MOROCCO 23 44 55 62 65 63 62 65 70 S.2 120.0 0.9 AMERICA 310 416 395 403 400 410 405 4/40 477 113 110 113 MEXICO 172 192 1S9 189 182 Igo 185 200 230 012 014 115 PERU 73 87 68 71 70 72 71 77 84 -0.2 0.1 1.3 SOUTHERN EUROPE 121 143 190 163 165 170 165 177 lag 1.7 1.3 1.1 YUGOSLAVIA 101 113 155 142 145 150 JAB 135 162 1.1 1.5 2.0 WOPLD 4,326 5,453 5,438 5,604 5,657 5,680 5,615 5,872 6,130 2.b 1.6 0,7 --------------------------------------------------------------------------------------------------------------------------------- Ai LEAST SQUARE$ TREND YOR HISTORICAL PERIODS (1961-86)1 END-POINT FM PROJECTED PERIODS (1987-2000). S/ ESTIMATE. SOURCESi INT W ATIONAL LEAD AND ZINC STUDY GROUP, LEAD AND ZINC STATISTICS (ACTUAL); WORLD SANX, INTERNATIONAL ECONOMICS DEPARTMENT (PROJECTED). TABLE As LEAD METAL - APPARENT CONSUMPTION BY MAIN COUNTRIES AND ECONOMIC REGIONS ACTUAL PROJECTED GROWTH RATES A/ COUrTIS/ 1987 - 9CONOMIES 1969-71 1979-81 1986 1987/B 1988 1989 1990 1995 2000 1961-86 1970-66 2000 - -- ---------('000 TONS)-------------------------------------(------( PER ANNUM)------- INDUSTRIAL 2,954 3,265 3,163 3,155 3,185 3,165 3,155 3,197 3,238 1.4 0.2 0.2 NORTH AMERICA 1,323 1,307 1,224 1,248 1,260 1,243 1,239 1,277 1,315 0.6 -0.9 0,4 UNITED STATES 1,265 1,189 1,119 1,147 1,160 1,145 1,140 1,175 1,210 0.4 -1.4 0.4 EEC-10 1,228 1,168 1,348 1,337 1,345 1,350 1,345 1,331 1,3'0 1.6 0.2 -0.1 GERmANY, FED. REP. 339 342 359 345 347 348 349 347 345 1.5 0.2 0.0 UNITED KINGDOM 271 298 282 287 285 283 279 277 276 0.1 -0.1 -0.3 FRANCE 202 211 205 208 210 211 210 205 202 1.2 -0.2 -0.2 ITALY 189 263 232 244 248 251 252 250 250 4.8 0.8 0.2 JAPAN 203 380 390 378 380 370 372 382 393 5.2 4.9 0.3 MON-MARKET 834 1,209 1,179 1,179 1,190 1,195 1,195 1,268 1,340 3.7 2.2 1.0 USSR 515 793 760 760 770 774 774 025 875 4.1 2.7 1.1 EASTERN EUROPE 319 416 419 419 420 421 421 443 465 3.1 1.4 0.8 DEVELOPING 560 984 1,201 1,05 1,220 1,20 1,257 1,407 1,552 5.6 4.5 2.0 ASIA 249 430 594 430 640 650 670 765 860 6.2 5.3 2.4 CEINA 167 236 274 290 298 306 320 360 400 4.9 3.2 2.5 " AMERICA 172 281 273 270 272 274 7. 307 340 4.0 2.5 1.8 SOUTHERN EUROPE 94 169 216 187 193 192 198 215 232 5.8 4.3 1.7 WORLD 4.348 5,458 5,543 5,539 5,595 5,590 5,607 5,872 6,130 2.5 1.3 0.8 Al LEAST SQUARES TREND FOR HISTORICAL PERIODS (1961-86)1 END-POINT FOR PROJECTED PERIODS (1987-2000). B1 EST1VATS. SOURCES: INTERNATIONAL LEAD AND ZINC STUDY GROUPS, LEAD AND ZINC STATISTICS (ACTUAL) i WORLD BANK, INTERNATIONAL ECONOMICS DEPARTMENT (PROJECTED). TABLI A6t LEAD METAL - GROSS EXPORTS BY MAIN COUNTAIES AND ICONCHIC RXCIONS ACTUAL PROJECTED GROWTH RATES Al COUNTRIES/ 1987 - zCO#OIxS 1969-71 1979-81 1986 1987/8 1988 1989 1990 1995 2000 1961-86 1970-86 2000 ---('000 TONS)----- ------ (I PER ANNUM)-----*- INDUSTRIAL 732 957 945 945 1,085 930 010 941 977 4.1 1.9 0.S NORTH AMRICA 124 181 123 104 130 120 103 115 142 14.1 0.7 2.4 CANADA 120 122 112 100 124 117 100 113 139 0.0 0.5 2.6 aC-10 306 414 422 440 560 445 415 456 470 5.1 2.5 0.5 OTHER WESTERN EUROPE 20 39 69 70 70 60 50 40 30 7.5 7.2 -6.3 OCEANIA 298 318 305 311 310 315 315 320 330 1.9 0.9 015 MON-KARET 69 14 20 20 20 25 15 22 28 -10.7 -11.& 2.6 DEVELOING 373 328 302 292 270 295 290 306 321 -1.3 -1.5 0.7 ASIA 49 40 49 50 45 50 .8 50 52 -1.0 -2.1 0.3 AFRICA 115 99 80 90 80 87 87 91 95 0.9 -0.5 0.4 m00oCo 22 35 50 59 54 58 56 59 59 7.1 162.0 0.0 AMERICA 151 164 157 132 128 138 137 147 159 -1.5 -0.4 1.4 PERU 68 70 31 44 42 45 44 49 52 -1.1 -1.0 1.3 mXIcO 83 95 105 s 86 93 93 98 107 -1.8 0.1 1.5 SOUTHERN EUROPE 58 24 16 20 17 20 18 18 15 -5.5 -8.4 -2.2 WORLD 1,194 1,299 1,267 1,257 1,375 1,270 1,215 1,269 1,326 1.6 0.7 0.4 A/ LEAST SQUARES TREMD YOR HISTORICAL PERIODS (1961-86)1 END-POINT FOR PROJECTED PERIOD- (1987-2000). 3 ESTIMATE. SOURCZSj INTERXATIONAL LEAD AND ZINC STUDY GROUPS, LEAD AND ZINC STATISTICS (ACTUAL)l WORLD BANK, INTERNATIONAL ECOMOICS DEPARTMENT (PROJECTED). TA5ILE A7: LEAD UBTAL - GROSS INMRTS 3Y NAIN COUNTRIES AND ECONOIMIC REGZIN ACTUAL PROJECTED GROTN RAns A/ GENTkIE8/ 1987 - £GodNo~S 1969-71 1979-81 1986 1987/3 1988 1989 1990 1995 2000 1961-86 1970-86 2000 ----------------------------- C000 T0MS)--------------------------------------------( PER ANIM)- - InDUsTRIAL 912 924 925 911 901 850 840 846 860 0.4 0.0 -0,4 NRT AMERICA 220 131 142 202 193 163 132 152 162 -3.0 -2.4 -1 7 ImD STAT S 218 126 138 199 190 160 150 147 161 -3.'. -2.5 -1.7 ZEC-lo 614 633 627 557 560 540 530 535 530 1.2 -0.4 -0.4 O1E WEFTE E 70 al 82 80 78 75 74 70 68 1.0 1.6 -1.2 JAPAN 5 74 70 67 68 70 84 91 100 4.8 21.0 3.1 NM-MA~E 108 145 96 96 95 90 92 90 98 0.6 0.1 0.2 QC~VrIw 175 182 231 240 245 260 283 333 368 4.9 2.4 3.3 W~MLD 1,195 1,251 1,252 1,247 1,241 1,200 1,215 1,269 1,326 1.0 0.4 0.5 ------------------------------------------------------------------------------------------------------------------------ Al LEAST SQAU TEND Pm 8ISTMICAL PERM S (1961-60); EWD-POIMT PR PROJECTE PERIODS (1987-2000). 5/ ESTINATE. SOURCES: INNAIO L LEAD AND 2INC STUDY GROUPS, LEAD AND ZINC STATMSTICS (ACTUAL)i WORLD ANK, INTE^NATIOMAL ECON(MICS DEPARTSELT (PROJECTEDi. - 265 - TABIU AS: LEAD - P%lCES, 1950-87 (ACtUAL) AMD 1988-2000 (POJECTED) ($/Ton)--($/Too) 1985 Constant $ - Current - -$ IIV - -----US GNP b/- US Producer US Producer US Producer Price c/ LHE 4/ Price c/ L1f 4/ Price c/ JIE d/ Actual 1950 293 293 1,238 1,238 1,369 1,369 1951 386 446 1,414 1,634 1,720 1,988 1952 363 372 1,269 1,301 1,594 1,633 1953 297 252 1,068 906 1,283 1,089 1954 310 265 1,140 975 1,319 1,127 1955 334 292 1,206 1,054 1,376 1,203 1956 353 321 1,230 !,e18 1,407 1,279 1957 323 266 1,102 908 1,243 1,023 1958 267 201 896 674 1,006 758 1959 269 195 916 664 989 717 1960 263 198 877 660 950 716 1961 240 176 787 577 859 630 1962 212 154 681 495 743 539 1963 245 174 802 570 846 601 1964 300 278 966 895 1,019 944 1965 353 318 1,128 1,016 1,i69 1,053 1966 333 262 1,028 809 1,066 838 1967 309 229 943 699 962 1 1968 291 240 897 740 863 712 1969 328 289 959 845 922 813 1970 344 304 946 836 916 809 1971 305 254 796 663 769 6.40 1972 331 302 793 723 796 727 1973 359 430 742 889 811 971 1974 497 593 843 1,006 1,030 1,229 1975 474 417 723 636 894 786 1976 504 445 766 670 903 789 1977 677 617 928 845 1,126 1,026 1978 742 661 e88. 787 1,149 1,024 1979 1,160 1,208 1,220 1,270 1,651 1,720 1980 936 906 897 869 1,221 1,182 1981 805 727 768 693 958 865 1982 562 546 543 528 629 611 1983 478 425 475 42.3 515 458 1984 563 443 569 448 584 459 1985 420 391 420 391 420 391 1986 486 406 411 343 A77 398 1987 792 597 605 459 754 569 Projected 1988 630 448 577 1989 590 395 517 1990 540 356 450 1995 795 439 510 2000 950 419 486 a/ Deflated by Manufacturing Unit Value (MUV) Index. / Deflated by US$ GXP Deflator. / Lead, comou grade, New York. According to Eyel rim and Mining Journal to 1946; Metals Weaek from 1967 on. Ale Metaligelelhls . metal Statistics. di Refined PIC Lead, London Metal Exchange. Sources: See c/ and 4/ for (sctual); World Bank, laternational Econoica Departeut (projected). - 266 - LEAD (CONSTANT 1985 DOLLAR PRICES ) 2500 2000 ** *a ** 1500 ~I . Z - ,. S*-C : soo- *~ I ' '...**-. 100s Ie 195 150 15 190 16 90 17 98 95 19 95 20 *199-67ATAL5188-20 PROJECTED00 SOURCE : WORLD BANK , INTERNATIONAL CCONOMICS GkaTMENT . ZINC Summary 1. World zinc consumption during the 1961-86 period increased 2.6% p.a., but demand slowed markedly in the 1970s due to lower economic growth and material substitution. The recession of 1981-82 exacerbated the decline. However, zinc demand has increased steadily since 1983. Consumption reached 6.68 million tons during 1986--a record high. Although zinc demand has been relatively strong during the mid- and late-1980s, consumption is projected to increase only 1.5% p.a. during the 1987-2000 period. Slow anticipated growth in major markets, such as construction and a continued trend toward thinner zinc coatings and lighter diecasts, will restrict consumption growth. 2. After stagnating through most of the 1980s, zinc mine capacity expanded by approximately 750,000 tons during the period 1985-87. The increase in industrial and developing country zinc mine capacity to approximately 6.8 million tons was the result of improved market conditions and the subsequent reopening of a major Canadian mine and the start-up of several new units. During the 1987-2000 period, zinc mine capacity is expected to expand by approximately 900,300 tons with greenfield mines playing an important role. The most prominent new operation will be the Red Dog mine in Alaska which should come on-stream in the early 1990s with a zinc capacity of 314,000 tpy. 3. World zinc smelter capEcty was 6.5 million tons in 1987--an increase of only 150,000 tons since 1985. Expansions were limited to developing countries. High costs (particuiarly energy and labor) have resulted in declining capacity in Japan and Europe. This trend in the industrial countries is expected to continue and may accelerate if recently announced mergers prompt additional rationalization. Consequently, the 730,000 ton increase expected in zinc smelter capacity during the 1987-2000 period will be the result of expansions in developing countries which will then account for 40% of smelter capacity in the year 2000 compared to only 31% in 1987. 4. World mine production is projected to increase L.4% p.a. during the 1987-2000 period. Mine depletion will reduce output in Japan and Europe. A large increase in North American production is expected from the opening of the Red Dog mine. World smelter production should also increase 1.4% p.a. Capacity contraction in Europe and Japan will limit industrial country output to a 0.6% p.a. increase, while developing country production is expected to expand 3.1% p.a. 5. Exports of zinc ores/concentrates should increase 2.3% p.a. during the 1987-2000 period--somewhat faster than production. Decreasing mine output in Japan an6 Europe and the rise in metal production in developing countries with limited mine output should account for the moderate rise in exports. Zinc metal exports through 2000 are expected to increase at the same rate as output-1.4% p.a. Several contrasting trends are apparent. Higher smelter capacity in Asia will reduce metal import requirements, but stagnant demand in North America and Asia is expected to minimize import requirements in these regions. - 268 - 6. Ziz3c prices are expected to average US$1,100/ton in 1988, up from US$799/ton in 1987. The rapid price increase reflects declining stocks and tight market conditions brought on by strong demand and supply disruptions. It is estimated that production losses at zinc smelters amounted to a combined total of over 270,000 tens in 1986/87. Prices are expected to moderate over the short t-erm as demand slows and increasing outpuc permits stocks to rise. By 1990, zisnc prices are expected to average US$895/ton. Prices are projected to averoge US$1,140 and US$1,799/ton in 1995 and 2000, respectively, and should mirrecr underLying cost changes. Prices in real (constant 1985 dollars) terms will increase from US$590/ton in 1990 to US$794/ton in 2000. Introductiom 7. The performance of the world zinc industry during the mid- and late- 1980s--by amost measures--has been reasonably good. As has been the case with other metals such as aluminum and copper, demand has been buoyant. World consumption in 1986 surpassed the previous high attained in 1973. Prices soared to US$922/ton in 1984 while the ensuing downward price correction in 1985 to US$783/ton was relatively moderate. Prices remained in the US$730- 830/ton rarage thro%Agh 1987. However, the market became increasingly tight during the latter part of 1987. Zinc pracis have risen dramatically during 1988, averaging US$1.058/ton for the first half of the year. 8. Recently the market has been typified by declining inventories which are now at historically low levels. The tight supply situation is the result of several factors . The generally 3or markets and excess capacity which typified match of the late 1970s and early 1980s curtailed investment spending; world smelting capacity stagnated during the 1980s, and utilization rates increased. In addition, demand has been unexpectedly strong, particularly in some developing countries. A third factor-unanticipated supply disruptions-- has also contributed. Although strikes and technical difficulties have oczurred with considerable frequency in the zinc industry, the magnitude of the supply disruptions during the past several years has been particularly large. 9. StzructuraL changes, including plant closures, mergers, and rationalizations, have typified many base metal industries during the mid- 1980s, but were noticeably absent in zinc until recently. Since 1987 four new operating *groups/companies have been formed. These new units could lead to capacity rationalizations and could serve to raise the degree of production concentration. The structural shifts may also lead to lower world capacity levels and higher utilization rates and price levels-at least in the medium term. Demand Outlook 10. Zinc demaoni during the 1961-86 period increased at 2.6% p.a. However, tiis average rate masks several distinct trends. Zinc consumption expanded at a 5.4% p.a. rate in the 1960s, but lower economic growth and material s-bstitution led to a precipitous decline during the 1970s. The 1981-82 recession resulte4 in further contraction. Zinc demand has increased - 269 - steadily since 1983, a"d 1987 marked the fifth consecutive year of higher demand. The strong in reases recorded in 1983-84 were typical of the early phases of a recovery, ut !?-and has risen further since then as pent-up demand for consumer d-rables was reinforced by rising output in the metal- intensive capital gccdz sector. The 1% increase in demand during 1986 to 6.68 million tons was an all-time high. A modest increase in demand was recorded in 1987, and prelimia&ry data indicate that zinc demand expanded during the first half of 1988. 11. An import, : feature of the zinc market during the 1970s and early 1980s was the decline of most traditional markets due partly to disappointing economic conditions, but also as the result of material substitution, less intensive zinc use, downsizing of products, and various technological innovations. These trends were particularly evident in the industrial countries. Althougn the recent general improvement in demand raises the question of whether some of the changes have run their course, a clear trend does not appear to have emerged. US zinc demand, for example, has increased by 31% since 1982, buc much of this recovery reflects the depressed state of major markets such as automobiles and construction during the early 1980s. European consumption nas generally stagnated since the early 1980s, while Japanese consumption has declined over the past several years. The mixed performance of industrial country demand can be further highlighted by a review of trends in major intermediate uses. 12. Table 1 contains data for most industrial countries on the principal end-uses of zinc during the 1979-86 period. All major applications have declined since 1979, and only marginal improvement in most applications has been observed since 1982. The three largest end-uses remain galanizing, zinc alloys, and bronze/brass. Galvanizing has increased its share if demand and accounted for 41% of consumption in 1986, while zinc alloy markets (primarily diecasts) have continued a downward spiral that started in the early 1970s. Bronze/brass markets appear to be weakening once again. Despite the lack of a dramatic turnaround in any of the major zinc markets in the industrial countries, there are indications that several applications such as galvanizing and diecasts may not be subjected during the 1990s to the intense substitution and technological pressures which characterized these markets during the 1970s. 13. Galvanizing, which is used to protect iron and steel against corrosicn, has been primarily associated with construction markets. Although hot dipping remains an important galvanizing method, electrolytic deposition has become increasingly pop741ar because it permits a more uniform and thinner coating. The progressively thinner zinc coatings introduced had a deleterious effect on zinc use. One study estimated that in the United States the average use of zinc per ton of galvanized sheet declined from 92 lb/ton in 1967 to approximately 84 lb/ton in the early 1980s. 1/ However, over the past several years electrogalvanized saeet used in the automotive sector increased 1/ ECAR Associates, ' Slab Zinc-U.S. Markets and Growth Prospects, 1967-85," Bethesda, Maryland, 1983. - 270 - markedly. 2/ By 1986 the average US car contained 13.83 lb of zinc for corrosion resistance--an increase of approximately 45% s-nce 1982. The developoent and expansion of this relatively new market should serve to cushion industrial demand against further large declines, but it is doubtful that galvanizing demand can increase since further declines in zinc coating thickness coa be expected and galvalume--a competing corrosion resistant coating (55% aluminum-45% zinc)--continues to expand its market. 14. Competition from plastics and aluminum resulted 4n substitution and * the loss of key diecast markets in the construction and automotive markets. Competitive pressure also resulted in the development of lighter, less metal- intensive "thin-walled" diecasts. Substitution and new material-saving * technology resulted in a rapid decline in zinc use. For example, the amount of zinc diecasts per auto in the United States declined from 64 lb per auto in 1967 to 19.7 lb in 1986. 3/ However, the decline in zinc use per auto has moderated, and many observers believe it will remain steady in the near and medium term. 15. In contrast to the guarded outlook for galvanizing and diecasting, the outlook for brass remains generally pessimistic. Brass--an alloy of copper and zinc--is a mature product with a large number of diverse applications based on its qualities of formability, corrosion resistance, and decorative appearance. Brass consumpt*on continues to decline and substitution pressures are likely to continue. For example, construction uses, particularly for plumbing, are likely to decrease further as plastics expand market .iare. The continued replacement of aluminum radiators for copperibrass units zaould place downward pressure on automotive markets. 16. In addition to the stabilization of industrial country demand, zinc markets have beer. aided by the 5% p.a. increase in developing country consumption during the 1980-87 period. Comprehensive end use data does not exist for developing countries, but it appears that consumption of all major zinc applications expanded. As is the case in the i,iustrial countries galvanizing is the largest single application (52% in 1986). Asian and Latin American consumption during the 1980-87 period increased by 6.6% p.a. and 4.1% p.a., respectively. The rapid industrialization, large infrastructure requirements, and generally stronger economic growth of the developing countries largely explains their superior performance. In addition, the substitution and material-saving technology which has acted as a drag on industrial country demand has had limited impact on the smaller and less mature markets typical of the developing countries. 2/ In 1986 nearly 3 million tons of new electrogalvanizing capacity was added in the d,,rld outside of the CPEs and China. Most of this capacity was to serve projected automotive requirements. 3/ "U.S. Automotive Market for Zinc Die Casting 1984-86", The Zinc Institute, 1986. Efforts to reduce vehicle weight and improve gasoline mileage also contributed to the decline in zinc diecasts. TABLE 1: ZINC CONSUMPTION TRENDS BY KAIN USES IN SELECTED COUNTRIES, 1979-86 Average Annual Rate of 1979 1980 1981 1982 1983 1984 1985 1986 Change ------I-------I-------------------------------------------------------------------------------- ------------------------------------('000 tons)-------------------------------- Galvanizing 1,730 1,592 1,562 1,487 1,577 1,624 1,587 1,574 -1.3% Zinc Alloys 752 647 650 583 634 636 642 606 -3.3% Brass 6 Bronze 1,042 970 874 751 852 971 868 873 -2.5% Semi-manufactures 302 308 336 331 347 332 318 302 - Chemicals 393 352 336 305 320 356 364 337 -2.2% Others 164 159 179 150 151 166 168 155 -0.8% Total 4,383 4,028 3,937 3,937 3,881 4,085 3,947 3,847 -1.8% Source: International Lead and Zinc Study Group, Principal Uses of Lead and Zinc, various issues. - 272 - 17. The outlook for zinc consumption through 2000 is mixed. Total consumption is expected to increase 1.5% p.a. during the 1987-2000 period, which contrasts to the 0.9% p.a. rate exhibited during the 1970-86 period. Our current foorecast reflects a slight upward revision from the 1.3% p.a. increase anticipated several years ago. Industrial country consumption is expected to increase modestly. Although expanding galvanizing markets and renewed competitiveness of diecasts should arrest the declines experienced previously--1% p.a. during the 1970-86 period--several trends should restrict industrial country consumption growth to 0.6% p.a. through 2000. Continued keen competition should lead to further reductions in zinc coating thickness and lighter diecastings. Moreover, a major end use market for zinc-- construction--is expected to expand at only 0.5% p.a. in the industrial economies through 2000. In contrast, consumption in the developing countries is forecast to increase by 3.2% p.a. during the 1987-2000 period. Supply Outlook 18. By 1987 industrial and developing country rinc mine capacity totaled approximately 6.8 million tons, an increase of 750,000 tons over estimated 1985 capacity (see Table 2). The increase reflected improved market conditions and the subsequent reopening of a major mine as well as the start- up of several new units. In Canada, the Faro mine was reopened by Curragh Resources, and the Montana Tunnels unit commenced operations in the United States. Aberfoyle's Heller mine also came on-stream in Australia. Mine expansions were undertaken in China and Thailand. South African capacity increased with the opening of the Pering mine, but will shortly decline with the closure of tht Prieska unit. Although a number of new mines are expected to open over the next several years total capacity is expected to be largely unchanged in 1990. Among those mines closed by mid-1988 or scheduled shortly for shutdown are Pine Point (Canada) and several European mines including Bad Grund, Remmelsburg, and Black Angel. Capacity expected on-stream by 1990 will be concentrated in Canada (Winston Lake, Mines Selbaie, and Caribou), the United States (Greens Creek, Ward) and in Australia (Cadjebut, Lady Loretta). 19. A large proportion of the additions to capacity during the early and mid-1980s consisted of mine expansions. Howaver, through 1990 greenfield projects rather than expansions will be the preferred type of investment. The new lead-zinc mines planned for the next several years also are predominantly zinc. Recent exploration and development activity has emphasized zinc (and by-products such as silver) with minimal consideration to lead content. These two trends reflect the more sanguine outlook for zinc vis-a-vis lead and are illustrated particularly by investment activity in Australia and Canada. 20. During the 1987-2000 period, zinc mine capacity will expand by approximately 900,000 tons. Industrial countries will continue to account for the majority of capacity, but their proportion should decline slightly from 60% in 1987 tq 56% in 2000. The continued expansion in industrial countries during t . 1990s is dominated by the anticipated opening of Alaska's Red Dog mine in 1991 (314,000 tpy of zinc). 4/ 4/ The Red Dog deposit (17.1% zinc, 5% lead, and 2.6 oz. silver/ton) is consistent with the trend toward high zinc content and precious metal by- products. - 273 - TABLE 2: ZINC NINE CAPACITY Countries/Economies a/ 1980 1935 1987 1990 1995 2000 ---------------- ---(000 tons)--------- - Industrial 3,909 3,846 4,050 4,060 4,000 4,300 North America 1,850 1,720 1,890 1,860 2,100 Canada 1,367 1,390 1,570 1,500 United States 483 330 320 360 Other Industrial 2,059 2,126 2,160 2,200 1,900 KEC-10 909 771 720 700 Other Western Europe 250 310 350 350 Japan 337 260 200 160 Oceania 563 785 890 990 Developing 1,990 2,204 2,739 2,704 3,044 3,400 Asia 451 518 830 830 890 China 123 170 250 320 Africa 318 302 375 340 370 South Africa 88 88 145 110 Zaire 76 76 90 90 Zambia 55 55 55 55 Latin America 1,037 1,200 1,350 1,350 1,600 Mexico 291 430 400 400 Peru 586 610 630 630 Southern Europe 184 184 184 184 184 Industrial & Developing 5,899 6,050 6,789 6,764 7,044 7,700 a/ Excludes CPEs. Sources: International Lead and Zinc Stuoly Group and US Bureau of Mines, Minerals Yearbook (actual); World Bank (projected). - 274 - 21. Smelter capacity in 1987 was 6.5 million tons, an increase of approximately 180,000 tons since 1985 (see Table 3). However, expansions were limited to developing countries, particularly China and Republic of Korea. The zinc smelting sector has long been characterized by independent "custom smelters' located primarily in Europe and Japan. The concentrate feed for these smelters is either purchased outright from mining companies or converted to metal on a toll basis. High energy and labor costs have resulted in declining capacity in both Japan and Europe over the past decade. This trend is expected to continue and could accelerate given recent merger announcements (see section on policy issues and investment climate). Consequently, indus- trial country capacity will stagnate during the 1987-2000 period; the 730,000 ton capacity increase expected over the period is the result of investment activity in developing countries. Both Asia and Latin America should experience significant increases. By 2000 'oping countries are expected to account for approximately 40% of smelter ty compared with only 31% in 1987. 22. World mine production is expectk increase 1.4% p.a. during the 1987-2000 period. Regional production sn,uld parallel capacity trends. Output expansions will be concentrated in those countries/regions with relatively low costs and substantial by-product credits. Japanese and European output should decline during the neriod. The North American increase is due to expected production from the Red Dog mine in Alaska. Australian mine output will also rise. In the developing countries, the relatively high silver values in both Peru and Mexico should encourage expanded output. In general, industrial and developing country output should increase 0.6% and 2.5% p.a., respectively, during the 1987-2000 period. 23. Zinc metal production is projected to increase 1.4% p.a. during the forecast period. Developing country output should increase 3.1% p.a. while industrial country production is expected to expand a modest 0.6% p.a. and is expected co be constrained by the contraction of smelting capacity in Europe and Japan. The more robust 3.1% p.a. expansion of developing country output reflects increasing zinc consumption and the desire of many developing countries to increase the value-added of mining by expanding smelting activities. Trade Outlook 24. Intermational trade in zinc ores/concentrates reflects the fact that mining and smelting/refining often occur in different countries, and trends in the location of these activities will largely dictate trade patterrs and volume. The tendency for increased smelting in mining countries argu-: for a decline in concentrate trade. In contrast, decreasing mine output in Japan and Europe indicates that import requirements should remain strong. North - 275 - TABLE 3: ZINC SMELTER CAPACITY Countries/Economies a/ 1980 1985 1987 1990 1995 2000 ------------------('000 tons)----------------- Industrial 4,712 4,537 4,455 4,380 4,400 4,400 North America 1,159 1,089 1,089 1,089 1,100 Canada 644 699 699 699 United States 515 390 390 390 Other Industrial 3,553 3,448 3,366 3,291 3,300 EEC-10 1,980 1,871 1,871 1,871 Germany, Fed. Rep of 474 415 415 415 Belgium-Luxembourg 423 325 3.5 325 France 360 310 310 310 Italy 170 253 253 253 Spain 268 268 268 268 United Kingdom 100 100 100 100 Netherlands 185 200 200 200 Other Western Europe 275 275 315 270 Japan 972 972 850 800 Oceania 326 330 330 350 Developing 1,295 1,750 2,011 2,091 2,550 2,800 Asia 490 700 890 950 1200 Korea, Rep. of 100 100 200 200 Africa 262 283 283 283 300 Latin America 403 627 658 678 830 Mexico 194 307 307 307 Peru 70 170 170 170 Southern Europe 140 140 180 180 220 Yugoslavia 120 120 160 160 Turkey 20 20 20 20 Industrial & Developing 6,007 6,287 6,466 6,471 6,950 7,200 a/ Excludes CPEs. Sources: International Lead and Zinc Study Group and US Bureau of Mines, Minerals Yearbook (actual); World Bank (projected). - 276 - American trade should expand with the opening of Alaska's Red Dog mine. 5/ The increase of developing country metal production in countries with little mine production such as Republic of Korea will also encourage ore/concentrate trade. On balance, we expect zinc ore exports to increase 2.3% p.a. during the 1987-2000 period or slightly faster than vorld mine output. Industrial country exports should increase 2% p.a. during the same period, while developing countries should experience a 2.9% p.a. growth. CPE exports will remain minimal throughout the period. 25. Exports of zinc metal increased at 3% p.a. during the 1970-86 period, compared to 1.4% p.a. growth in metal production. The relatively rapid growth of exports reflects the increased requirements of many countries, particularly in Asia. Export growth is projected to be 1.4% p.a. during the 1987-2000 period--equal Lo the expected rise in world production. The more modest expectations for metal trade relate directly to shifts in smelting capacity. Expanded smelter capacity in Asia will reduce import requirements, while stagnant consumption in North America and Europe should minimize import requirements in these regions. Price Outlook 26. Zinc prices have continued to exhibit a marked degree of volatility during the 1980s. Prices reached US$846/ton in 1981, but the world recession resulted in a price decline to US$745/ton in 1982. The resulting cutback in production and the strong world recovery of zinc demand during 1983-84 (consumption expanded approximately 10% in these two years) precipitated a price surge to US$944/ton in 1984--the highest level since 1974. Once again, higher output, in conjunction with less vigorous (but still -ising) demand, resulted in a price decline in 1985. Thus, a feature of the world zinc market during the 1980s has been the relatively rapid supply response to price fluctuations. 27. A second trend which has emerged, particularly since 1986, iaQ been the prevalence of supply disruptions. Table 4 shows that production losses at zinc smelters during 1986 and 1987 totaled over 270,OOC tons. During 1986, labor disputes in Canada and Peru accounted for most of the supply losses; Canadian labor disputes also accounted for most of the losses in 1987, although technical difficulties were significant in 1987. It is difficult to ascertain the reasons for the rise in labor difficulties, although one possibility may be the increased pressure on producers to reduce costs, particularly Labor. 5/ This mine is being developed by the Canadian producer Cominco. A substantial amount of output from what is expected to be the world's largest zinc mine will be smelted at its Trail leadiminc refinery complex in Canada. - 277 - TABIE 4: ESTINATED OUTPUT LOSSES AT ZINC SELTUS DRIMC 1986 AMD 1987 Smelter Length Output Lost (Operator) (Cause) (Tons) 1986 Valleyfield, Canada June-November (Noranda) (Labor Dispute) 94,000 La Oroya, Peru March-April (Centromin) (Strike) 10,000 Others Various 40,000 Total 144,000 1987 Trail, Canada May-November (Cominco) (Strike) 76,000 Timins, Canada Jananuary-Decei.oer (Kidd Creek) (Technical Difficulties) 13,000 Cajamarquilla, Peru May-JLne (Minero Peru) (Technical Difficulties) 12,000 Others Various 29,000 Total 130.000 Source: World Bank. 28. The combination of constrained production and the continued strength of demand has contributed to a dramatic price increase since the third quarter 1987 (see Table 5). Price increases during the second quarter of both 1986 and 1987 correspond with major supply disruptions. However, continued strong demnd and record low stocks have led to further price increases in 1988. - 278 - TABLE 5: QUARTERLY ZI0C PRICE FLUCTUATIONS, 1986(1) - 1988(2) ---------------g------------- 1986(1) 62.6 1987(2) 82.6 1986(2) 72.4 1987(3) 79.7 1986(3) 83.1 1987(4) 82.8 1986(4) 83.5 1988(1) 91.2 1987(1) 74.4 1988(2) 120.4 Note: LNE High Grade settlement price. Source: World Bank. 29. Price movements over the short run are largely the result of shifts in expectations and metal balances (inventory levels). Our outlook calls for an easing of the current tight supplies and a waning of the stroagly positive expectations which cow apparently dominate the market. Although demand will increase marginally through 1990, production should be more than adequate. 6/ Consequently, inventories and the critical consumption-inventory ratio will increase (see Table 6). Zinc prices are expected to avera3e US$1,100/ton in 1983, implying a moderate decline from the high levels attained during the second quarter. Prices should continue to decline in 1989 (US$975/ton) and 1990 (US$895/ton) as stocks increase and sluggish demand negatively impacts speculative stock holdings. However, a price collapse is not expected for several reasons. First, demand will continue expanding albeit quite slowly, and second, both mine and smelter capacity are expected to decline slightly. 7/ These trends are illustrated in the rising mine and smelter utilization rates shown in Table 6. 30. Zinc operating costs in 1936 were estimated to be approximately 37.40/lb on a fully allocated basis. The costs of both mining/milling and smelting/refining have declined significantly since the early 1980s as producers struggled to improve productivity and profits. Although some additional cost reductions are likely, further large productivity improvements in the near term are unlikely. Real zinc production costs are likely to be in the 35-37c/lb range during the 1990s. Long-run prices are expected to parallel cost trends and should average US$1,140/ton and US$1,799/ton in 1995 and 2000, respectively (US$623 and US$794/ton in constant 1985 dollars). 6/ Labor disputes are expected to have a much smaller constraining influence on supply through 1990. Over the near term no major labor contracts are scheduled to expire. 7/ This comment refers to capaity exclusive of the CPEs, China, and the Democratic People's Republic of Korea. - 279 - TABLE 6: WORLD ZXVC MARKE- SUPPLY-DEMAND BALANCE, 1987-90 a/ -Actual- --Projected-- 1987 1988 1989 1990 -----------------('000 Tons)--------------- Refined Production 5,078 5,105 5,162 5,250 Refined Exports to Eastern Europe and China 40 20 20 20 Zinc Metal Available 5,023 5,180 5,305 5,265 Zinc Metal Consumption 4,982 5,160 5,212 5,240 Refined Metal Stocks 565 585 678 703 Months Consumption Covered by Inventory 1.4 1.4 1.6 1.6 Zinc Smelter Operating Rate b/ 0.85 0.86 0.88 0.90 Zinc Mine Operating Rate b/ 0.84 0.85 0.85 0.89 a/ Excluding CPEs, China, and the Democratic People's Republic of Korea. b/ Industrial and developing countries. Sources: International Lead and Zinc Study Group (actual); World Bank (projected). Policy Issues and Investment Climate 31. In contrast to the performance of some other base metal industries, (e.g., copper and aluminum) during the early and mid-1980s, the zinc sector did not experience significant restructuring/merger activity. However, recent consolidations/mergers could have far-reaching effects on industry behavior and performaLce. US zinc mine output has been declining since the late-1970s and has prompted a number of closures/consolidations. One of the more significant was the consolidation of St. Joe Minerals' and New Jersey Zinc's mining properties into a new operating unit called Zinc Corporation of Ameriza which is, in turn, owned by Horsehead Industries. The US consolidation is small compared to the more recent and complex arrangement focusing on Canada, where Teck Corporation has joined forces with MetalIgesellschaft and Mount Isa Mines to purchase a 31.3% share of Cominco. Cominco owns the huge Red Dog deposit, together with a 47% stake in Aberfoyle, which is developing the iarge Hellyer zinc-lead-silver deposit in Tasmania. - 280 - 32. Excess zinc smelting capacity has typified the European industry for a number of years and prompted several unsuccessful attempts at European-wide rationalization. In April of 1988--and probably as an indirect result of the previous European discussions--Preussag and Penarroyt reached agreement on merging their European lead and zinc operations. The new grouping will account for some 250,000 tpy of smelting capacity and will be the second largest European zinc producer (Union Miniere is the largest). In Australia-- the remaining major zinc producing region--CRA and North Broken Hill recently announced plans to merge their lead and zinc operations. This action will result in Australia's largest zinc producer with refined zinc capacity in excess of 300,000 tpy. 33. The worldwide merger/consolidation activity significantly increases the horizontal integration and concentration in the industry and could lead to further mine and smelter rationalizations. Higher concentration ratios may also result in more disciplined investment schedules which could minimize the likelihood of excess capacity developing once again in the 1990s. 34. The joint production of lead and zinc in many mines has made the task of coordinating zinc mine supplies with demand particularly difficult. However, in recent years exploration and development has focused on zinc, and the generally more sanguine view of zinc markets (vis-a-vis lead) should continue this trend through the 1990s. The emphasis on zinc is likely to make the balancing of zinc mine supply with demand less problematic. thus reducing the likelihood of excess mine capacity. The development of the Red Dog mine (314,000 tpy zinc and only 64,000 tpy lead) is a prine example of this trend. 8/ 81 The large capacity of the Red Dog mine does raise questions concerning the ability of this facility to come on-stream without depressing prices--at least temporarily. TABLE Al: zINC ORE - PRODUCTION BY MAIN COUNTRIEr AND ECONOMIC REGIONS ACTUAL PROJECTED GROWTH RATES A/ COUNTRIES/ 1987 - EcOiKIES 1969-71 1979-81 1986 1987/8 1988 1989 1990 1995 2000 1961-86 1970-86 2000 --------('000 TONS)-------------------------------------- ------~(2 PER ANNUM)------- INDUSTRIAL 3,122 3,092 3,336 3,579 3,605 3,685 3,725 3,760 3,845 1.9 0.4 0.6 NORTH AME,ICA 1,759 1,448 1,507 1,734 1,650 1,700 1,690 1,850 2,050 1.0 -1.7 1.3 CANADA 1,231 1,119 1.291 1,504 1,450 1,400 1,400 1,300 1,500 3.1 -0.6 0.0 UNITED STATES 528 328 216 230 250 300 290 550 550 -3.3 -5.1 6.9 REC-10 458 648 652 658 725 710 730 660 595 3.5 3.3 -0.8 OTHER WESTERN EUROPE 180 277 322 326 330 375 390 370 350 3.5 4.0 0.5 JAPAN 281 241 222 166 160 160 155 105 55 0.7 -1.0 -8.1 OCEANIA 443 479 633 695 720 740 760 775 795 3.0 2.9 1.0 NON-MARKET 1,023 1,350 1,269 1,270 1,290 1,300 1,305 1,420 1,535 3.4 0.9 1.5 DEVELOPING 1,393 1,734 2,198 2,183 2,240 2,280 2,320 2,670 3,020 3.0 2.3 2.5 ASIA 305 431 642 627 660 690 710 840 975 4.7 3,3 3.5 AFRICA 265 255 301 317 320 320 320 350 375 0.3 0.6 1.3 ZAIRE 102 72 82 81 81 80 78 80 80 -2.0 -2.0 -0.1 AMERICA 691 901 1,096 1,094 1,110 1,120 1,135 1,322 1,510 3.3 2.6 2.5 PERU 318 492 598 588 600 601 605 715 830 4.1 3.9 2.7 mXIcOo 261 233 285 304 305 308 310 345 380 0.5 0.3 1.7 SOUTHERN EUROPE 132 147 159 145 150 150 155 158 160 2.4 0.4 0.8 WORLD 5,538 6,176 6,803 7,032 7,135 7,265 7,350 7,450 8,400 2.5 1.0 1.4 Al LXAST SQURER TREND FOR HISTORTCAL slIODS (1961-86); ND-POINT FOR PROJECTED PERIODS (1987-2000). BI ESTIMATE. ="72ES: iTERNATIC&AL LEAD AND ZINC STUDY GROUP, LEAD AND ZIAC STATISTICS (ACTUAL); tWORLD AN, INTERNATIONAL ECONOMICS DEPARTMENT (PROJECTED). TABLE A2i ZINC ORE - GROSS EXPORTS BY MAIN COUNTRIES AND ECONOMIC REGIONS ACTUAL PROJECTED GROWTH PATES Al COUNTRIESI 1987 - ECONOMIES 1969-71 1979-81 1986 1987/B 1988 1989 1990 1995 2000 1961-66 1' -86 2000 ---------('000 TONS)---------- ------(2r p"*U )- INDUSTRIAL 1,347 1,347 1,374 1,583 1,590 1,620 1,625 1,940 2,060 3.1 0.8 2.0 NORTH AMERICA 762 56 397 627 657 667 670 1,110 1,230 2.2 -3.6 5.3 CANADA 762 516 394 623 65 655 655 690 790 1.8 -4.2 1.8 EEC-ID 254 381 322 320 310 320 325 300 295 5.1 4.0 -0.6 OTHER WESTERN EUROPE 119 185 222 235 225 225 220 130 130 2,2 5,3 -4,5 OCEANIA 211 223 433 401 398 408 410 380 405 4,6 5.4 0.1 NON-MARKET 0 3 6 6 5 5 5 5 10 . . . . . . 4.0 DEVELOPING 740 680 602 789 795 800 810 975 1,140 0.1 -0.3 2.9 AFRICA 125 67 91 95 96 95 93 85 90 -4.9 -3.0 -0.4 AMERTCA 475 512 413 594 600 603 610 730 1,020 1.4 0.6 4.2 PERU 262 376 248 444 448 449 452 540 630 3,9 2.2 2.7 MEXICO 151 65 109 118 119 120 122 135 150 -4.6 -3.9 1.9 WORLD 2,087 2,030 1,982 2,378 2,390 2,425 2,440 2,920 3,210 1.9 0.4 2.3 --------------------------------------------------------------------------------------------------------------------- At LEAST SQUARES TREND FOR HISTORICAL PERIODS (1961-86)1 END-POINT FOR PROJECTED PERIODS (1987-2000). B/ ESTIMATE. SOURCESi INTERNATIONAL LEAD AND ZINC STUDY GROUPS, LEAD AND ZINC STATISTICS (ACTUAL), WORLD BANK, INTERNATIONAL ECONOMICS DEPARTMENT (PROJECTED). TABLE A31 ZINC ORE - GROSS IMPORTS BY MAIN COUNTRIES AND ECONOMIC REGIONS ACTUAL PROJECTED GROWTH RATES At COUNTRIES/ tl - ECONOMIES 1969-71 1979-81 1986 1987/8 1988 1989 1990 1993 2000 1961-S6 1910-86 2000 -('000 TONS)------------------------------------- ------(s PER ANNUM)- INDUSTRIAL 1,792 1,876 1,958 1,987 1,990 2,045 2,060 2,455 2,620 2.4 0.7 2.2 NORTH AMERICA 445 205 108 79 52 62 70 315 370 -0.3 -0.1 12.6 UNITED STATES 445 158 72 47 35 42 55 50 s0 -a. -9.7 0.5 EEC-10 850 1,110 1,237 1,230 1,235 1,335 1,370 1,390 1,500 3.5 2.4 1.5 OTHER WESTERN EUROPE 41 129 177 200 185 175 170 155 180 9.s 0.6 -0.8 JAPAN 457 432 436 478 518 473 450 595 570 5.8 -1.6 1.4 NON-MARKET 0 42 107 107 95 105 100 5 60 ... ... 2.2 DEVELOPING 57 111 200 240 275 275 280 380 450 15.5 C/ 14.5 5,0 WORLD 1,849 2,029 2,265 2,334 2,360 2,425 2,440 2,920 3,210 3.1 1.8 2.5 ------------------------------------------------------------------------------------------------------------------ A/ LEAST SQUARES TREND FOR HISTORICAL PERIODS (1961-56)1 END-POINT FOR PROJECTED PERIODS (1987-2000), B1 ESTIMATE. C1 GROWTH RATE FOR 1965-86 PERIOD. SOURCESi INTERNATIONAL LEAD AND ZINC STUDY GROUPS, LEAD AND ZINC STATISTICS (ACTUAL)s WORLD BANK, INTERNATIONAL ECONOMICS DEPARTMENT (PROJECTED). TABLE Ai ZINC METAL - PRODUCTION BY MAIN COUNTRIES AND ECONOMIC REGIONS ------ --------------------------------------------------------------------------------- ACTUA) PROJECTED GROWTH RATES A/ COUNTRIES/ 1967 - ECONOHIES 1969-71 1979-6t 1986 19871/ 1988 1989 1990 1995 2000 1961-86 1970-86 2000 ---------------------- -------------------------------------------------------------- --------------- --------('000 TONS)-------------------------------------- -------% PER ANNUM)------- INDUSTRIAL 3,519 3,795 3,801 3,884 3,960 4,070 4,040 4,110 4,185 1.7 0.6 0.6 NORTH AMERICA 1,284 1,027 887 944 1,000 1,055 1,040 1,055 1,070 -1.4 -1,4 1.0 UNITED STATES 681 430 316 334 375 375 370 360 350 -5.1 -5,9 0.4 CANADA 403 597 571 610 675 680 670 695 720 3.8 3.0 1.3 ERC-10 1,150 1,485 1,627 1,666 1,700 1,723 1,723 1,735 1,750 2.9 2.0 0.4 OTHER WESTERN EUROPE 117 246 269 293 310 325 320 350 380 8.0 4.4 2.0 JAPAN /06 731 708 666 623 625 615 595 575 1.9 -0.5 -1.1 OCEANIA 261 306 310 313 325 340 340 375 410 2.5 0.9 2.1 NOW-MARET 1,070 1,421 1,359 1,360 1,380 1,400 1,400 1,300 1,625 3.4 1.1 1.4 USSR 722 1,068 1,030 1,030 1,050 1,060 1,060 1,140 1,225 4.4 1.9 1.3 EASTERN EUROPE 348 353 329 330 330 340 340 360 400 1.1 -1.0 1. DEVELOPING 612 1,056 1,504 1,639 1,720 1,755 1,753 2,075 2,440 5,7 5.4 3.1 ASIA 217 413 699 782 832 050 860 1,020 1,110 6.2 6.3 2.7 0 KOREA, REPUBLIC OF 4 79 126 186 195 195 195 210 250 ... 24.7 2.3 APRICA 144 191 197 202 205 210 205 223 250 3.8 1.9 1.7 AMRICA 185 341 491 501 525 535 335 640 750 6.4 6.6 3.2 MEXICO 84 144 176 186 195 19 210 230 270 5.5 4.8 2.9 PERU 63 87 156 144 160 165 165 195 230 5.0 7.2 3.7 SOUTHERN EUROPE 66 112 117 154 1b8 160 153 190 230 5.2 4,9 3.1 YUGOSLAVIA 66 94 102 130 133 140 135 160 180 4.2 3.5 2.5 WORLD 5,201 6,272 6,664 6,883 7,060 7,225 7,195 7,665 8,250 2.7 1.4 1.4 ------------ -------------------------- ------------------------------------------------------------- ---------------- I/ LEAST SQUARES TREND FOR HISTORICAL PERIODS (19-1-86); END-PoiNT FOR PROJECTED PERIODS (1987-2000). 8/ ESTIMATE. SOURCESi INTERNATIONAL LEAD AND ZINC STUDY GROUP, LEAD AND ZINC STATISTICS 'ACTUAL)i WORLD BANK, INTERNATIONAL ECONOMICS DEPARTMENT (PROJECTED). TABLE AS: ZINC METAL - APPARENT CONSUMPTION BY MAIN COUNTRIES AND ECONOMIC REGIONS ACTUAL PROJECTED GROWT RATES A/ COUNTRIES/ 1967 - ECONOMIES 1969-71 1979-81 1986 1987/s 1988 1989 1990 1995 2000 1961-86 1970-86 2000 ---('000 TOKJ)------------------------------------- ------(Z PER ANNUM)------- INDUSTRIAL 3,839 3,522 3,608 3,645 3,735 3,760 3,750 3,850 3,950 1.1 -1.0 0.6 NORTH AMERICA 1,623 1,096 1,152 1,212 1,265 1,270 1,250 1,280 1,304 -015 -3.2 0.6 UNITED STATES 1,523 957 999 1,052 1,100 1,100 1,080 1,100 1,120 -0.9 -3.8 0.Q EEC-10 1,339 1,438 1,457 1,455 1,480 1,490 1,490 1,535 1,585 1.3 0.1 0.7 GERMANY, FED. REP. 394 399 434 452 460 465 468 490 310 1.3 0.5 0.9 FRANCE 228 296 260 247 250 251 245 255 265 1.8 0.6 0.5 UNITED KINGDOM 280 203 182 186 190 188 189 190 195 -1.9 -3.3 0.4 ITALY 172 225 232 245 247 250 252 23 260 3.4 1.3 0.5 JAPAN 631 743 733 728 740 750 760 760 795 4.3 0.9 0.7 NON-MARKET 988 1,484 1,426 1,426 1,440 1,430 1,455 1,570 1,690 4.2 2.3 1.3 USSR 680 1,023 990 990 1,000 1,010 1,010 1,090 1,170 4.6 2.4 1.$ EASTERN EUROPE 308 460 436 436 440 440 445 480 520 3.3 2.1 1.4 DE'YLOPING 620 1,224 1,644 1,727 1,813 1,862 1,915 2,263 2,610 6.7 6.2 3.2 F N.) ASIA 299 618 929 964 1,010 1,035 1,070 1,285 1,500 6.9 7.6 3.5 00 AMERICA 166 319 383 423 445 455 470 550 630 6.3 4.6 3.1 SOUTHERN EUROPE 81 132 168 167 170 175 180 200 225 5.9 4.5 2.3 WORLD 5,447 6,230 6,678 6,798 6,990 7,072 7,120 7,683 8,250 2.6 0.9 1.5 Al LEAST SQUARES TREND FOR HISTORICAL PERIODS (1961-86)1 END-POINT FOR PROJECTED PERIODS (1987-2000). Bf ESTIMATE. SOURCES: INTERNATIONAL LEAD AND ZINC STUDY GROUPS, LEAD AND ZINC STATISTICS (ACTUAL)l WORLD BANK, INTERNATIONAL ECONOMICS DEPARTMENT (PROJECTED). TABLE A6t ZINC METAL - CROSS EXPORTS BY MAIN COUNTRIES AND ECONOMIC REGIONS ACTUAL PROJECTED GROWTH RATES Al COUNTRIES/ 1987 ECONOMIES 1969-71 1979-81 1986 1987/B 1988 1989 100 1oos 2000 1961-86 1970-86 2000 -----------('000 TONS)---- ------ ( PER ANNUM)------- INDUSTRIAL 663 1,512 1,636 1,723 1,735 , 1,770 1,760 1,841 1,941 5.3 4.2 0.9 NORTH AMERICA 302 452 431 445 460 485 480 510 541 3.6 3.4 1.5 CANADA 294 452 427 440 455 480 475 507 539 4.2 3.7 1.6 EEC-10 259 623 733 760 755 760 755 765 780 6.4 6.3 0.2 BELGIUM-LUXEMBOURG 140 170 186 210 212 215 217 217 218 1.7 0.7 0.1 NETHERLANDS 29 154 182 177 175 175 176 178 180 11.7 12,9 0.1 OTHER WESTERN EUROPE 80 189 210 240 240 250 245 270 300 9.0 5.3 1.7 OCEANIA 150 204 237 243 245 245 240 275 310 010 2.9 1.9 NON-MARKET 124 82 30 24 24 25 24 24 25 -4.1 -6.9 0.3 USSR 42 45 16 10 10 10 10 10 10 -3.7 -9.4 0.0 EASTERN EUROPE 83 37 14 14 14 15 14 14 15 -4.5 -8,5 0.5 DEVELOPING 311 342 438 447 453 455 450 560 673 2.9 1.8 3,2 AFRICA 111 94 94 83 85 85 86 92 93 0.6 -1.2 0.9 00 AMERICA 99 124 191 165 195 190 180 210 275 4.7 6.2 3.1 MEXICO 40 53 81 89 95 92 89 111 133 4.4 3.9 3.3 PERU 57 70 105 Cl 90 89 81 99 140 4.3 7.7 3.9 SOUTHERN EUROPE 24 27 23 39 40 39 40 41 40 6.8 -2.1 0.2 WORLD 1,298 1,936 2,104 2,194 2,212 2,250 2,234 2,425 2,639 4.1 3.0 1,4 A/ LEAST SQUARES TREND FOR HISTORICAL PERIODS (1961-86)t END-POINT FOR PROJECTED PERIODS (1987-2000). B/ ESTIMATE. SOURCES: INTERNATIONAL LEAD AND ZINC STUDY CROUPS, LEAD ANG ZINC STATISTICi (ACTUAL)l WORLD BANK, INTERNATIONAL ECONOMICS DEPARTMENT (PROJECTED). TABLE A7. ZINC K6TAL - GROSS IMPORTS BY MAIN COUNTRIES AND ECONOMIC REGIONS ACTUAL PROJFCTED GROuTH RATES A/ COUmTRIEs/ 1987 - ECONOMIES 1969-71 1979-81 1986 1987/B 1988 1989 1990 1995 2000 1961-86 1970-86 2000 -- -('000 TONS)------------------------------------- ------(9 PER ANNUM)------- INDUSTRIAL 880 1,188 1,412 1,450 1,540 1,500 1,470 1,581 1,706 3.4 1.5 1.3 NORTH AMERICA 280 Irl9 674 712 740 740 690 735 775 7.5 3.3 0.7 UNITED STATES 279 514 666 706 735 735 685 732 772 7.5 3.3 0.7 EEC-10 489 546 541 545 535 525 520 565 615 1.3 -0.1 0.9 OTHER WESTERN EUROPE 82 65 78 80 100 100 95 100 100 -0.2 -1.8 1.7 NON-MARKET 88 126 126 126 84 75 79 94 90 2.9 2.9 -2.6 DEVELOPING 347 490 625 658 630 675 685 750 843 5.6 4.7 1.9 ASIA 212 323 446 460 440 460 465 530 600 7.5 7.9 2.1 AMERICA 47 96 60 82 95 110 115 120 125 1.8 0.4 3.3 SOUTHERN EUROPE 69 50 91 91 70 70 80 85 90 6.4 -2.4 -0.1 WORLD 1,315 1,804 2,163 2,234 2,254 2,250 2,234 2,425 2,639 3.9 2.4 1.3 t-1i A/ LEAST SQUARES TREND FOR HISTORICAL PERIODS (1961-86)1 END-POINT FOR PROJECTED PERIODS (1987-2000). BI ESTIMATE. SOURCES: INTERNATIONAL LEAD AND ZINC STUDY GROUPS, LEAD AND ZINC STATISTICS (ACTUAL)l WORLD BANK, INTERNATIONAL ECONOMICS DEPARTMENT (PROJECTED). - 288 - TABLE A8: Z!NC - PRICES, 1950-87 (ACTuAL) AND 1938-2000 (PROJECTED) ---------(/o -------(S/Ton) --1985 Constant S-- - 1985 Constant S-- --- --CurrenE --4uV 2/-- -- ----- S CP b/-- us Us US Producer LME Pr >dtcer 1'(E Prod ucer LKE Price / Settlement dl Price c/ Settlement d! Petce cl Settlement d A-tual 1950 306 328 1,293 1,386 1,429 1,532 1951 397 -73 1,455 1,733 1,769 2.i08 1952 357 412 1,248 1,441 1,567 1,809 1953 239 207 860 745 1,033 895 1954 235 216 864 794 1.000 919 1955 271 250 978 902 1,116 1,030 1956 297 269 1,035 937 1,184 1,072 1957 251 225 857 768 966 866 1958 227 182 762 61H 856 686 1959 252 226 858 769 926 83t 960 285 247 950 823 1,030 893 1961 254 214 833 701 909 76. 1962 256 185 823 594 897 648 1961 264 212 865 694 912 732 i64 299 324 963 1,043 1,016 1,1n 1965 320 311 1,023 994 1,060 I,030 196b 320 282 988 87i 1,024 902 19r, 305 273 931 833 949 850 !968 298 262 918 807 883 777 N69 322 287 942 839 906 807 i70 337 295 927 805 897 785 1971 355 309 927 807 895 779 1972 391 377 937 903 941 907 1473 455 851 941 1,759 1,027 1,921 !974 792 1,2 9 1,344 2,102 1,642 2.S68 i975 859 743 1,311 1,134 1,620 1,401 j976 816 712 1,229 1,072 1,447 1,263 ;977 758 591 1,039 810 1,260 983 !978 683 593 813 706 1,03i 919 1979 822 742 864 780 1,170 1,056 1980 825 761 791 730 1,077 993 1981 982 8+6 936 807 1,169 1,007 1982 848 745 820 720 949 833 1983 912 764 906 759 982 823 1984 1,072 922 1,082 932 ',110 956 1985 890 783 890 783 890 783 !986 838 754 708 637 822 739 987 924 799 711 615 880 761 Lrojected 1988 1,100 782 1,008 1989 975 652 854 1990 895 590 746 1995 1,140 630 732 2000 1,800 794 922 a/ Deflated by Manufacturing Unit Value (MUV) Index. b/ Deflated by US GNP deflator. / Prime Western Zinc, East St. Louis. Beginning January 1971 delivered consumer plant. Beginning September 1980 high grade. According to Engineering and Mining Journal to 1966; Metals Week from 1967 on. Also MetalIgeselachaft, Metal Statistics. d/ Metals Week and Metallgesellachaft, Metal Statistics. Beginning September 1984, high grade, previously GOB. Sources: See footnotes for actual; World Bank, International Economics Department (projected). - 239 - ZINC (CONSTANT 1885 DOLLAR PRICES > 3000 2500 2000- 1 000 , ,% ** 500- 1945 1950 1955 1950 1965 1970 1975 1980 1985 1990 1995 2000 OEFLATED BY MANUFACTURING UNIT YALUE ( MUV ) INDEX ....".. DEFLATED BY U.S. GNP DEFLATOR. • 1948 - 87 AC'fUAL : 1988 - 2000 PROJECTED . SOURCE : WORLD SANK, INTERNATIONAL ECONOMICS DEPARTMENT. COLD 1. Diminishing fears of inflation, declining petroleum prices, and improvements in the US balance of trade have pushed gold prices downward throughout most of 1988. Still, average gold prices for the first half (US$452.70/troy ounce) were higher than the annual average for 1987 (US$446.50/troy ounce). Downward pressures became much more dominant in the third quarter, and gold prices sustained a substantial decline to an estimated third-quarter average of US$430/troy ounce. Gold fell below the USS400/troy ounce level in mid-September, a level not experienced since February 1987. 2. The weakness in petroleum prices seems to have been an important factor in the slide in gold prices. Indirectly, the lower petroleum prices have offset other inflationary forces. Directly, the lower oil prices have reduced Middle East demand for gold. As well, they have induced the USSR to sell more gold and other commodities to counter the decline in its oil export revenues. If, as reported, the USSR intends to purchase additional large quantities of grains in the near term, this should lead to increased gold sales by the USSR. 3. World gold production continues to grow, and the strong demand from the Far East experienced in the first half of 1988 seems to be weakening. Taiwan, China, imported 268 tons of gold bars and coins during the first seven months of 1988 but its demand for the remainder of the year should be significantly smaller (about 55 tons) as Taiwan, Chira, gets closer to its goal of diversifying its official reserves out of US dollars. This activity by Taiwan, China, illustrates the point that central banks can have a significant impact on the market as their net activities determine how much gold will be available to the investor. Supply 4. Gold production has been expanding rapidly in recent years, largely in response to the shift in relative metals prices in favor of gold. 1/ Expansion and exploration activities continue, in particular in North America and Australia. South African production declined in 1987 due to a combination of lower grades and the failure of the industry to increase the volume of ores mined. The South African decline was more than offset by other major producers, in particular in the United States, Canada, Australia, and Brazil. Other smaller, but still important, producers are the Philippines, Papua New Guinea, Colombia, Chile, and Venezuela. In the United States and Canada gold output surpassed 3.8 million ounces in 1987, and the intensive exploration activity is expected to continue because prices are high relative to average production costs. Australian output increased not only because of 1/ The index of the ratio of gold prices to the average of the prices of nonferrous base metals increased from around 100 in the 1981-84 period to 112 in 1986 and 117 in 1987. - 292 - higher gold prices but also because of more favorable tax laws. Since 1980 its output has increased fivefold. Brazil's output has doubled over the same period. 5. The USSR and China are major producers of gold, though their supplies fluctuate considerably. For the USSR the sale of gold is an important means of obtaining foreign exchange in order to finance its imports--in particular agricultural imports. Both China and the USSR are expected to increase their mine production, and total production in the CPEs is expected to reach about 15.5 million ounces by 1990. 6. Other sources oF gole supplies are secondary supply and official transactions. Secondary supply from recycling has increased since 1981 as it is price sensitive. It is also governed by a combination of changing economic circumstances which at times can lead to distress selling. In the past few years supplies from this source have been governed mostly by profit taking as prices have risen. Net official transactions (outisde the CPEs) in 1987 forced down market supplies though to a lesser extent than in 1985 and 1986. Demand 7. Demand for gold is made up of fabricated demand (jewelry, electronics, dentistry, and other industrial uses) and investment demand (officially issued coins, bullion, and medallions). Fabricated demand has increased in this decade, though it has declined in the past two years. Jewelry accounts for nearly 82% of total fabricated gold. Since the drop in jewelry consumption in 1979-80, when gold prices rose dramatically, jewelry demand has risen by 4.7% p.a. The Middle East and Far East, in particular India and Japan, have increased their share of jewelry consumption in this decade--growing from less than one-third to almost one-half of total demand. Jewelry sales are a function of net disposable income. Even though we expect in the short term a slower industrial growth rate, the demand for jewelry should increase--in particular in light of lower gold prices in most of the currencies other than the US dollar. 8. The use of gold in electronics is around 9% of total fabricated demand. The major users are Japan, the United States, and the Federal Republic of Germany. The use of gold in dentistry accounts for about 3.5% of total fabricated demand. 9. The demand for gold in official coins and medallions fluctuates. The year 1986 saw a peak in demand for coinage with consumption of 10.9 million ounces. Demand fell to about 7.2 million ounces in 1987. Price Outlook 10. The forecasts of gold (and silver) prices have been made on the basis of our understanding of the cycles inherent in the historical price series, the relationship between inflation rate and exchange rate movements and gold and silver prices, and expected changes in the supply and demand for the metals. - 293 - 11. The decline in gold prices in the first quarter of 1988 interrupted an upward trend experienced since February 1985. We expect the gold price to bagii to increase towards the end of the year as inflation is expected to strengthen. The slower industrial growth rate expected in the industrial countries and the increased exploration and production activity as a result of the higher relative prices for gold will have a dampening effect in 1989, which should become more dominant in 1990. With the dollar expected to appreciate in the early 1990s, price increases in the United States are expected to be relatively low in the early 1990s. The combination of these factors point to a lower gold price in 1990 and 1991 and a slow rebound in 1992. For the longer term, gold prices should advance slowly from 1992 to 1995 with inflation continuing at a moderate pace. In the 1995-2000 period, with the value of the US dollar declining and the US inflation rate at a higher level, we should see gold prices increasing at a faster pace. The price forecasts are set out in the table below. PRICE FORECASTS FOR GOLD ------------(US$/Troy Ounce)------------- Year Current $ 1985 Constant $ a/ 1987 446.6 344.0 1988 440.0 313.0 1989 430.0 268.0 1990 380.0 250.0 1991 360.0 234.0 1992 368.0 234.0 1995 420.0 232.0 2000 520.0 229.0 a/ Deflated by the Manufacturing Unit Value (MUV) Index. SILVER 1. Unlike gold pricesl silver prices do not seem to have benefited from the devaluation of the US dollar since early 1985. For the period 1984-86 fundamentals in the silver market seemed to be a more dominant factor in silver price determination than speculative inventory investment. As inflationary expectations built up in the first half of 1987, however, the speculative aspects of precious metals asserted themselves; silver prices in 1987 averaged 28% higher than in 1986. During the first half of 1988, the silver price averaged US$6.60/ounce--below the average for 1987 (US$7.01/ounce). Since February, 1988 silver has had an upward trend. It surged in June/July to levels above US$7/ounce as it responded strongly to the increase in agricultural commodity prices in the wake of the US drought. 2. Observation of the gold/silver price ratio (see Figure 1) shows that silver prices have generally been declining relative to the gold price since around 1981. In 1986 the ratio was above 70:1. It is believed that the ratio will fluctuate around 60:1, a significantly higher ratio than in the 1970s. Even though this increase in the ratio might be an indication that silver is losing its precious metals characteristics and becoming more like the base metals, silver remains sensitive to changes in the economic environment, inflationary expectations, and political unrest. Therefore, its link to gold will continue. Supply 3. Silver is a by-product or coproduct of other metals. Some two-thirds of silver reserves are contained in lead, zinc, and copper sulfides, while only about 25% originates from pure silver mines. Mine production is the largest source of supply. It has accounted for nearly 70% of total supply over the past few years. Other sources of supply are: secondary recovery, coin melt, South Asian dishoarding, and sales from government stocks. The supply of the secondary source is price sensitive, in particular the recovery of scrap. Scrap supplies peaked in 1980 when silver prices peaked. The coin melt and South Asian dishoarding have lost importance as sources of supply in the past few years. Under our price scenario their share of secondary supplies remains relatively small. 4. Since 1976 world mine production has increased at an everage annual growth rate of 2.9%. 1/ World mine production peaked in 1984, declined slightly in 1985 and 1986, but recovered in 1987 when the silver price recovered. The major producing countries are Mexico (17.2%), Peru (14.3%), Canada (9.1%), United States (7.9%), Australia (7.5%), and the USSR (11.9%). 2/ Smaller producers are Chile, Japan, Spain, and South Africa. 1/ Metallgesell schaft. 2/ Ibid. FIGURE 1: GOLD/SILVER RATIO 80- 70 - 60 - 50- 40 30 20 197301 197501 197701 197901 198101 198301 198501 198701 Source: World Bank. - 297 - Because of their low-cost production. Mexico and Peru are expected to maintain, if not increase, their current level of iine production. Moreover, they are increasingly using their silver as a means of obtaining hard currency. 5. In 1987 mine production picked up in North America and Australia, due to increased production of base metals and also because of the start-up of new silver mining capacity as silver prices increased. As Long as prices remain above US$5.50/ounce (the level of average production costs for a range of mines in the United States for mie-1986) it seet-is unlikely that production will drop. 6. Though the USSR is one of the major silver producers, the USSR and other C?Es have been either almost nonactive in world trade or net impcrters in the 1980s. In previous periods they had been net exporters. Judging from the incomplete data available it seems that their consumption has grown while their production has remained static. Aowever, as oil prices were much higher prior to 1986, they may not have needed to oroduce silver for foreign ex aange purposes. Moreover, it is unclear to what extent they built up stocks during this period. Consumption 7. World consumption of silver has increased modestly since 1983, though the level of consumption is significantly smaller than it was ten years ago. Reduced jewelry demand and more efficient use of silver in photography after the 1979-80 high-price period appear to be the main reasons for the reduction in consumption since 1977. 8. The major users of silver are the United St.-es, the major countries in Europe (France, the Federal Republic of Germany, _,e United Kingdom, and Italy), and Japan. The major EEC countries as a group have experienced modest growth rates over the past five years, and their level of consumption is still much lower thar it was ten years ago; so, too, is the consumption of the United States. Japan's consumption has maintained its general upward trend and its consumption level in the mid-1980s was higher than ever. 9. The composition of world silver consumption is as follows: photography (45%), currently the dominant user of silver; electronics, about 17%; jewelry and silverware, 14%. The end-use composition in the Uzited States is photography 50%, electronics 22%, and jewelry and silverwate 'OZ. In the major European countries photography has 35%, electronics 21Z, and jewelry and silverware 25%. The composition of end-use in Japan is photography 60%, electronics 10%, and jewelry and silverware 1%. As can be seen, for the industrial countries the photographic sector is the largest industrial consumer of silver with the main uses in x-rays, photography, and graphic arts. 10. In the absence of improved efficiency in use, the co-asumption of the major European countries for photographic purposes has the potential to increase-perhaps reaching a share close to that of the United States. There is also potential for higher demand by the photography sector, both in the - 298 - Xnited States and in Japan, through a combination of an increase in the number of photographs taken by individuals as well as by industrial and medical nisers. There is also potential for increased demand by the developing countries as the standard of living increases and medical services improve. 11. The electronics sector also has potential for growth in silver consumptio. In Japan in recent years there has been a shift from consumer Soods such as televisions and stereo equipment towards industrial products-- -robots and office equipment (microchips and circuit boards)--which are greater users of silver. 12. Hovever, the intensity of use of silver in industry will be subject to continuing technological innovation. In the industrial countries there will continue to be a trend towards replacing electromechanical switching systems in telephone exchanges with electronic devices, more widespread use of miniaturization, new manufacturing processes, and improved contact lifetime. -All these improvements in efficiency will have a negative impact on silver consumpt ion. 13. The jewelry and silverware industry has suffered a general decline in its consumption level a7 -pared to the level experienced ten years agc. The demand for costume jewe , which is a cheap substitute for silver jewelry, has increased (stainless steel, brass, and vood). Silver is at a disadvantage; it has an image of being cheap relative to other precious metals such as gold and platinum and it tarnishes on exposure. However, the current lower silver prices might encourage consumers' interest in silver as jewelry. Price Outlook 14. Silver prices averaged US$6.60/ounce in the first half of 1988. The surge in agricultural prices generated substantial activity in silver, leading to a better performance than gold over tie summer months. We expect the silver price to average US$6.65/ounce in 1988. In 1989 the price of silver should move up as we expect relatively healthy demand and sustained inflationary concerns. 15. By 1990 the fundamentals point to downwards pressure on the price; industrial demand is expected to be weak and mining output is expected to increase . Inflation snould be moderating, and the gold price should be veakening. Therefore, prices are projected to decline in 1990 and 1991 but begin to move upward again in 1992. The long-term silver price cycles we have identified are similar to those for gold, so we have adopted much the same rate of change for silver prices for the period 1992-2000 as for gold. The silver price forecasts are shown in the following table. - 299 - P t PORPCASTS FOR SILVER -----------(US$/Troy Ounce)-- --- Year Current $ 1985 Constant $ al 1987 7.01 5.40 1988 6.60 4.70 1989 7.20 4.80 1990 6.90 4.50 1991 6.70 4.30 1992 6.90 4.40 1995 7.80 4.30 2000 9.70 4.30 a/ Deflated by the Manufacturing Unit Value (.UV) Index. The World Bank Headquarters 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. 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