Key points:

• Moderate sub-trend global growth continues with a diversity of economic conditions (solid expansion in US, UK, India and China, weakness in Euro-zone, Japan, Latin America). This has been reflected in lower prices for a number of industrial commodities. Falling oil prices should boost global activity, although the impact varies between oil exporting and importing countries (for recent global trends, see Global & Australian Forecasts – January 2015). Despite being a beneficiary of lower oil prices, the flow of economic partials in China have been soft of late (although Lunar New Year distortions may be in play) suggesting the slowing trend over 2014 has continued (see China Economic Update).
• The USD remains strong, reflecting economic and policy divergence between the major economies. Soft commodity prices and the recent interest rate cut has also seen the USD gain more ground against the AUD. The ongoing divergence in policy outlook and soft commodity prices are expected to see the AUD pushed lower from here – expected to bottom at around 73 cents in early 2016. This will help to buffer some of the impact of lower commodity prices on domestic mining operations.
• Bulk commodity markets remain weak – driven primarily by supply growth from Australia. Iron ore markets remain oversupplied (due to surprising supply strength from China’s domestic sector), resulting in a downward revision to our price forecasts. Metallurgical coal prices have remained stable, while there was a modest recovery in thermal coal prices (ahead of contract negotiations).
• Oil price indices started to exhibit some tentative signs of stabilisation since mid- January, aided by a temporary pause in USD appreciation, falling US rig counts and ongoing strikes in a number of US refineries. However, a sustained global oversupply of crude oil will weigh on prices this year and next.
• Prices declined across the base metals complex in January, driven by lower oil prices and demand concerns. Recent soft partials highlight the uncertain demand environment, but supply conditions are expected to tighten this year in some markets. Gold spot prices have strengthened on renewed safe haven demand, but the longer term expectation is still for further declines.

For details, download the full report.

Commodity Update: Minerals and Energy – February 2015 (PDF, 505KB)