Key Points:

• An improved outlook for fundamentals has helped to sustain the enthusiasm in commodity markets, despite the fact that the USD generally strengthened against major currencies in the final quarter of 2016 – albeit losing some ground recently. Some economic indicators suggest an improvement in global demand prospects, while supply conditions have improved noticeably in some markets. Despite some lingering (and significant) uncertainties, these developments have prompted us to revise up our near-term forecast for NAB’s Commodity Price Index.

• Largely reflecting sharply higher bulk commodity prices, the NAB USD non-rural commodity price index is now expected to rise by around 22% in 2017, although this masks an anticipated correction in bulks prices; the index is forecast to be down 6% over the year to December 2017. Given the anticipated USD appreciation, prices will be somewhat stronger 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.

• Since the landmark deal between OPEC and non-OPEC members to trim oil production by 1.8mb/day was struck in November, there is anecdotal evidence to suggest that the collective agreed cuts are progressing according to schedule. As a result, oil prices have stabilised around 15% above the pre-deal levels, with Brent and Tapis futures rising disproportionately more than WTI. The upward pressure on oil prices has been partly offset by rising US production since October last year, which is expected continue for the rest of 2017. We now expect oil prices to average around the mid to high USD50s in Q1 and Q2, before reaching the low USD60s by end-17 and stabilising at around those levels in 2018.

• While LNG export prices are likely to stay subdued for some time, increased volume will see the value of exports increase significantly. We forecast the annual value of Australian LNG exports to exceed AUD 27 billion in 2017 and approach AUD 35 billion in 2018.

• Bulk commodities prices have remained elevated in recent months – however coal prices started to fall, as Chinese government imposed restrictions on coal mining have eased, boosting domestic supply. Slowing Chinese construction activity in 2017 is expected to weaken steel demand, and with it, demand for iron ore and metallurgical coal. Given the stronger starting point for prices (compared with our last Minerals & Energy Outlook), we have revised our forecasts higher – iron ore is forecast to average US$66 a tonne and hard coking coal to average US$208 a tonne in 2017. Our forecast for the thermal coal contract price is unchanged at US$65 a tonne, however we note that high current spot prices add some upside risk to this forecast.
• Prices across the base metals complex have generally been stronger than expected in recent months, prompting some upward revisions to our price forecasts. The outlook on zinc remains the most positive due to supply shortages, while copper, aluminium and lead markets are well supplied, which should keep a lid on prices. Nickel remains susceptible to policy changes.

• Demand for gold as a safe haven asset is likely to increase this year, as global geopolitical risk aversion grows on the back of the unorthodox policies by a Trump presidency, continued uncertainty surrounding the terms of Brexit, as well as a general rise in populist politics in Europe. That said, the overarching narrative of an expected acceleration in US Fed funds rate hikes, with Fed officials indicating three 25bps hikes before the end of 2017 (NAB is forecasting two 25bps hikes in the June and December quarters), will be the dominant driver of gold prices this year. Overall, we continue to expect gold prices to follow a mild downward trend in 2017 and 2018 US as Fed monetary tightening gains pace, with prices easing to US$1140/oz by end-17 and US$1060/oz by end-18.

For more information please refer to the attached report:

• Commodity Update: Minerals and Energy – February 2017