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 _no MIML SMT 2~ 4.519 3.953 4.2121 4.673 4.M 4^ 3.991 4,872 12,770 8.267 6,6c1 7.275 9,039 Atumtmffi $mr 5540 1 . 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 . 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- 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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