Key Points:

• NAB’s non-rural commodity price index is expected to fall a further 8% in the September quarter (in US dollar terms) – following an anticipated 7% decline in June. The fall is larger than previously anticipated, reflecting the response in commodity markets to concerns over China’s economic growth outlook, and ructions in financial markets that have seen the USD strengthen further. Commodity price declines are expected to be more moderate in 2016 than they have been this year. Iron ore will again be the main drag, although gold and coal declines will make a meaningful contribution. USD strength should offset price declines next year in AUD terms. NAB forecasts the AUD to bottom around 68 US cents by early 2016, although the expectation for the AUD to drop to 70 US cents by year end has materialised a little earlier than predicted, suggesting further downside risk.

• Bulk commodities have exhibited differing trends – iron ore prices have been highly volatile in recent months – likely impacted by sell-offs related to China’s equity market – while coal prices have been relatively stable. Weaker demand prospects, largely driven by China, and ample supply will push bulk commodity prices lower in 2016 – US$53/t for iron ore, US$93/t for hard coking coal and US$62/t for thermal coal.

• Oil prices were one of the main casualties of the global stock rout that caused wild gyrations in commodity prices in the third week of August. Heightened risk aversion following the global equity market fallout sent emerging market and oil market volatility indices to the highest levels since 2011 and March this year respectively. As a result, oil prices retraced sharply in August, with Tapis falling by 18%, while Brent and West Texas Intermediate (WTI) were both 17% lower. The former two averaged at US$47 a barrel in the month, while WTI was around US$43. Oil prices are now expected to stay around current levels until the end of 2015, before rising to the mid to high 50s by the end of 2016. Higher global LNG supply, combined with subdued oil prices, continue to weigh on LNG prices. We forecast Australian LNG export prices to reach AUD 10.07/GJ in Q4 2015 and AUD 10.16/GJ in Q1 2016. Even if prices stay low, the volume increase will see the value of Australian LNG exports increased considerably over the coming years.

• The base metals index is forecast to gradually recover, with nickel and zinc leading the pack and copper lagging. There were some signs of a return of gold’s safe haven allure in August, but gains are likely to be short-lived with the further declines in gold prices expected into 2016.

For details, download the full report.

Commodity Update: Minerals and Energy – September 2015 (PDF, 578KB)