Key Points:

• A relatively stable USD over much of the past quarter has meant that currency pressures have taken a back seat to supply-demand fundamentals in most commodity markets. Uncertainty has lingered following the Brexit decision earlier in the year, but market volatility appears to have settled and economic indicators out of the UK and Euro have generally held up better than expected. While there are signs of stabilisation in areas of the world where economic activity has been weak, timely indicators of activity shown no clear evidence of a pickup in global growth momentum, while Chinese construction activity also appears to be slowing. Supply disruptions (actual and anticipated) in some markets have been offsetting these headwinds, but most appear to be temporary in nature, suggesting recent price rallies will be short-lived. The NAB USD non-rural commodity price index is expected to fall by around 5½% in 2016, and a further 10% in 2017. The decline in 2016 is less than previously forecast, largely due to the unexpected rally in bulk commodity prices in the year to date. Given the anticipated USD appreciation, price declines will be marginally lower in AUD terms. NAB forecasts the AUD to bottom at around 68 US cents by mid 2018. Overall, the Australian terms of trade is expected to resume its gradual descent following a short-lived rise in the near term.

• On the 28th of September, OPEC producers, led by Saudi Arabia, surprised financial markets by coming to an agreement to limit oil production to a range of 32.5 to 33 million barrels a day (mb/d) at their meeting in Algiers. An OPEC production cap around 33mb/day, an expected further moderation in US production and annual global demand growth of 1.4mb/day are expected to contribute to an easing supply glut and should see the global market coming into balance in 2017. With the recent OPEC outcome likely to put a floor on oil prices, we now expect oil prices to fluctuate between high US$40s and low US$50s a barrel in Q4 of 2016, before reaching mid to high US$50s/bbl by end-17 and around US$60/bbl by end-18.

• The ramp-up in Australian LNG production is progressing slower than expected, particularly in Queensland where two out of three terminals have been running well below capacity for much of the year. Prices remain very subdued, although our forecasts suggest they have reached bottom and should slowly increase over the coming year.

• Bulk commodities recorded stronger than expected prices in recent months – particularly metallurgical coal, where cuts to Chinese coal production saw spot prices spike above US$200 a tonne. Steel demand should soften in coming months, as China’s construction boom fades, while Chinese authorities increase domestic coal supply to balance the market. We have revised our forecasts to reflect the stronger starting point for prices in Q4 2016 – iron ore is forecast to average US$44 a tonne and hard coking coal to average US$96 a tonne in 2017. Higher thermal coal spot prices are expected to flow into stronger contract prices for the next Japanese financial year (from April 2017) to US$65 a tonne.

• Among the base metals complex, the outlook on zinc remains the most positive due to supply shortages, while copper, aluminium and lead markets are well supplied, hence no significant price growth expected. The impact of Philippines‘ audit of mines on nickel prices will be closely watched.

• Gold prices have been relatively range-bound in the past couple of months, fluctuating between $1320/oz and $1350/oz since the start of August, following around a 30% increase between mid-December 2015. A more than 50% chance of a rise in the US fed funds rate in December as expected by the markets has dampened the appeal of gold as an investment asset somewhat in recent months. We continue to expect a gradual downward trend in gold prices over the next couple of years as the US Fed resumes monetary tightening, with prices slowing to US$1290/oz on average in December quarter this year, before easing further to US$1184/oz by end-17 and US$1105/oz by end-18.

For details, download the full report.

• Commodity Update: Minerals and Energy – September 2016