Overview

•  The global economic upturn continues, despite some disappointing output data from the big advanced economies in early 2017. The business surveys and the timely monthly updates on industrial output and world trade show expansion continuing at a moderate pace. Consequently, demand conditions have held up well, although not enough to prompt us to make significant upward revision to the outlook for commodity prices. Meanwhile, the low level of the VIX “index of uncertainty” points to quiescent markets not pricing in much financial volatility at a time when there are still significant risks – namely geo-political risks associated with elections in big advanced economies and security in East Asia. Additionally, the influence that US political factors are having on the USD (the ‘Trump discount’) is adding to the unpredictability of currency impacts on commodity demand.
• The NAB USD non-rural commodity price index is expected to rise by around 21% in 2017, although this masks volatility in bulks prices; the index is forecast to be down 7% over the year to December 2017. Given our anticipated USD appreciation (albeit delayed), prices will be more stable in AUD terms. Overall, the Australian terms of trade is expected to resume its gradual descent in the second half of this year.
• Oil prices remain subdued, although have recovered from the mid-40s lows seen in June to reach a low 50s level. We see Brent at USD53/barrel by the end of the year. With the Australian dollar having risen recently, domestic fuel prices are enjoying some downside – national average petrol prices are in the low 120s range.
• Oil prices have a substantial bearing on LNG export prices, and consequently we do not see major upside in export prices for the remainder of this year. However, domestic gas prices are likely to remain elevated, although the Minister for Resources may yet declare 2018 a domestic shortfall year.
• Bulk commodities prices have edged slightly higher in recent months – largely driven by Chinese import demand (with steel output rising to record levels in June, while electricity demand has risen due to hot weather). Steel demand is expected to slow, as the construction boom fades, placing some downward pressure on prices. Spot prices for iron ore are forecast to average US$68 a tonne in 2017 and US$60 a tonne in 2018. Hard coking coal is forecast to decline from around US$195 a tonne in 2017 to US$110 a tonne in 2018. The 2018 Japanese financial year contract for thermal coal is forecast to fall to US$65 a tonne, from US$85 a tonne in 2017.
• Copper prices have surged, possibly on improved Chinese demand outlook and some supply disruptions. While aluminium sentiment has been supported by mandatory production cuts in China, although uncertainty over how long these cuts will be maintained has limited further upside to prices. Policy uncertainties in the Philippines cloud the price outlook for Market sentiment has turned more bullish for zinc, while the outlook for lead demand could improve.
• Weakness in the US dollar, combined with political uncertainty have recently pushed up gold’s price to around USD1,270/oz., a seven week high. Chinese demand for gold bars remains solid against a backdrop of uncertain returns in Chinese equities and property markets. The recent upturn in the gold price – combined with cost control measures – has led to an improvement in the earnings of gold miners. Gold price volatility remains low, with prices largely range-bound in the USD1,200-1,300/oz. range. NAB Economics is forecasting a 2017 year end gold price of USD1,244/oz. (previously USD1,232), rising to USD1,300/oz. by year end, 2018.

For more information please refer to the attached report:

• Minerals and Energy Outlook: August 2017 (PDF, 755kb)