Credit Insurer Euler Hermes ACI Issues 2005 Commodities Forecast; High Prices for Raw Materials Linked to Slowdown in World Economy.

OWINGS MILLS, Md. -- Credit insurer Euler Hermes ACI today issued its 2005 commodities forecast and summary of the worldwide economic situation, explaining why prices of raw materials are unlikely to remain at their current levels.

"Although the focus in recent years has been on high tech and service industries, what we're now seeing at the start of the 21st century is that basic industries and raw materials still remain very important to the world economy," said Daniel C. North, vice president, quantitative analyst and chief U.S. economist for Euler Hermes ACI, Owings Mills, Md. "New technology and innovations might attract all the attention, but the fact remains that the world's principle resources are still coal, oil, steel and shipping."

Just as in 2000 the idea of the infinite growth of Internet activity was dominant; the lack of raw materials is the common obsession today, according to North. One reason is that "financial speculation is pushing the price of raw materials to artificial highs, similar to the earlier inflation of dot-com shares," he said. "A more fundamental reason is the re-positioning of the center of growth, which switched from Europe to Asia with the devaluation of the dollar. "The transfer of production to these economies, now using much more energy and raw materials, has put a great strain on the world's transport capacity," North said.

The rise in oil prices has eroded the purchasing power of households more or less everywhere in the world, while lax monetary policies, mainly in the U.S., are producing deficits, which now need to be adjusted. All this has led to a noticeable slowdown worldwide during 2004, which will be reflected more fully in the expected 2005 annual average growth rate of 3 percent, according to Euler Hermes ACI.

This slowdown should give rise to the benefit of reduced demand for raw materials, a drop in inflation during the second half, and growth shifting from Asia provided the dollar reacts logically in response to the continued rise in American interest rates.

"Unless you believe in a structural change in the world economy, it is extremely unlikely that prices will remain at the current level during the next two years," North said. "Prices in general should ease during 2005, led by oil.

"We believe the repercussion of the past rises in spot prices throughout industry as a whole should continue through 2005. These price increases will raise prices for intermediate goods, or erode margins in sectors that can't pass on rising materials costs," he concluded.

Steel: The Metal that is Worth Gold

Steel beat all its records in 2004, and prices have reached a historic high (80 percent-plus yearly average for spot prices). Faced with strong demand, producers have increased their output, which will exceed one billion metric tons. The explosion in demand from China, the leading producer and consumer of steel, whose own production will exceed 220 million metric tons this year, has caused a rise in prices of materials used by the steel manufacturers and has caused interruptions in the supply chain.

In 2005, the world slowdown and the deceleration in China's own growth will moderate demand for steel. Prices are likely to trend upward in the first half of the year and ease somewhat in the second (8 percent-plus yearly average). European steel makers do not anticipate an abrupt change in 2005. Their priority for early 2005 is to pass their increased production costs on to their major customers (automotive, packaging, appliances). U.S. steelmakers expect to see strong continued strong demand and more stable prices.

Energy: The Oil Prices Slip Back

Crude oil prices rose regularly throughout 2004 (33 percent-plus yearly average). From $31, the price per barrel broke through the $50 ceiling several times. Strong global growth is driving demand for oil, which is climbing rapidly and exerting pressure on the market, where the use of production capacities is close to 100 percent. As a result, the least anxiety causes spectacular peaks in demand and increases in price.

The price of crude is still over-valued in relation to the market fundamentals, and there is a strong probability that the barrel price will progressively sink back to $30 in 2005 (less than 6 percent yearly average). Global demand should indeed relax as international growth slows, while production should develop outside OPEC members (Russia, Africa, Caspian). This should give the market a certain amount of room to maneuver, removing risks of shortages and causing prices to become more flexible.

A summary of this analysis appears in an Economic Outlook report, available on request from Euler Hermes ACI. Call [phone] for a copy.

Euler Hermes is the worldwide leader in credit insurance and one of the leaders in bonding and guarantees. With 5,400 employees in 40 countries, Euler Hermes offers a complete range of services for the management of customer receivables and posted a consolidated turnover of 1.9 billion euros in 2004. The North American headquarters is in Owings Mills, Md. For more information visit www.eulerhermes.com.

Euler Hermes, subsidiary of AGF and a member of Allianz, is listed on Euronext Paris. The group and its principal credit insurance subsidiaries are rated A+ by Standard & Poor's.

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