Commodity Update: Minerals and Energy – June 2015

Key Points:

• There were no signs of global growth accelerating in early 2015. Weak GDP results in the US, UK and Canada outweighed a pick-up in Japan and the Euro-zone and there were similarly mixed trends among the big emerging economies, see Global & Australian Forecasts. In China, economic partials remain soft despite a loosening of monetary policy, prompting the People’s Bank of China to cut its growth outlook (see China Economic Update). Heightened financial market volatility associated with a potential Greek default has had a moderate impact on some commodity prices more recently.

• Commodity prices have been mixed, partly in response to USD movements. The greenback recorded decent gains over May, but gave back ground in early June. The US Fed is expected to remain on hold at this point, but with markets having an eye to a September hike, that might push yields up and support the USD, which will mostly weigh on commodity prices. Additionally, improved US economic data is still expected to assist the USD rise. Offshore events remain key, with Greece and the ECB in particular, influential. NAB’s AUD/USD forecast is unchanged, bottoming at around 73 cents in early 2016.

• Trends in bulk commodity markets were mixed in May. Iron ore prices have recovered from recent lows (on the back of production cuts in higher cost regions, including China) while metallurgical coal prices have continued to ease (reflecting oversupply). Iron ore prices are expected to average US$60 a tonne in 2015 and ease further to US$57 a tonne in 2016. Thermal coal prices were stable, following annual contract settlement.

• Oil prices rebounded sharply in April and May, benefiting from a stall in the USD rally, signs of slowing inventory build-up in the US, as well as unabated geopolitical volatility in the Middle East. However, they lost some momentum in June to-date following OPEC’s decision to maintain its output quota and continuous global production strength. Oil prices are likely to remain around current levels in the near term, but supply consolidation and improving demand will drive prices gradually higher over 2016. 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.

• The base metals complex had a strong rally till 5 May but it was driven more by speculation than fundamentals. Prices have since fallen back and are still declining. A low- volatility global environment for equity and commodity markets lately have helped to keep gold prices largely range bound.

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Commodity Update: Minerals and Energy – June 2015 (PDF, 516KB)