Minerals & Energy outlook – December 2015

Commodity markets remain under pressure, reflecting concerns over emerging market demand (especially from China), at a time when the supply of many commodities is on the incline. Anticipated policy tightening by the US Fed is also having an impact.

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Key Points:

  • Commodity markets remain under pressure, reflecting concerns over emerging market demand (especially from China), at a time when the supply of many commodities is on the incline. Anticipated policy tightening by the US Fed is also having an impact.
  • Commodity price declines are expected to be a little more moderate in 2016 (with the USD NAB non-rural commodity price index falling 20% in average terms). Iron ore will again be the main drag, although falls in gold and coal will subtract. USD strength is helping to partially offset price declines in AUD terms. NAB forecasts the AUD to bottom at around 68 US cents by early 2016, but stabilise at around 70 US cents for the remainder of 2016. Overall, these trends suggest the Australian terms of trade will continue to trend lower, although at a slower pace than in recent years.
  • Prices for bulk commodities have trended down in recent months – as falling output from the global steel industry has tempered demand for iron ore and metallurgical coal, while weaker Chinese imports have slowed thermal coal demand. Falling steel output in 2016, allied with limited growth prospects in China’s electricity sector, means that bulk commodity prices will continue to drift lower in 2016. Iron ore spot prices are expected to stabilise at an average US$42 per tonne in 2016, while hard coking coal contract prices will average US$83.50 a tonne. Our forecast for thermal coal for the 2016 Japanese financial year remains unchanged at US$62 a tonne.
  • In the last week of November, oil prices fell to their lowest level since the global equity market rout in August, on the back of unfavourable financial developments and weak seasonal demand factors. To account for the further upside risks to OPEC production in the coming months (despite a further projected fall in US production), we have revised our near-term forecasts marginally lower. Oil prices are now expected to stay around the high US$40s to low US$50s a barrel for the first half of 2016 and improve slowly to reach US$60 a barrel some time in early 2017. Higher global LNG supply, combined with subdued oil prices, continue to weigh on LNG prices, although most indicators suggest prices have flattened out since March in AUD terms.
  • With base metal prices continuing to decline, many producers have responded with production cuts, however those announcements only managed to provide temporary support to prices, amid gloomy demand forecasts and the reversal of metals carry trades. As a result, we forecast continuously depressed base metal price levels in 2016, with average copper spot prices 15% lower in 2016 and aluminium down 10%.
  • Gold price movements in the coming year will likely be determined by the outlook for US Fed policy tightening; NAB expect a Fed hike in December, but tightening will be gradual next year and accelerate in 2017. As such, gold prices should maintain a moderate downward trend in 2016 to be below US$1000 an ounce by H2 2016.

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