Overview:

• Stability in financial markets over 2017 and early 2018 came to abrupt end in recent weeks, with a surge in market volatility and big falls in equity markets and prices for many commodities. However, it was partly encouraging news on wages in the US that triggered the reaction —  given its implications for central bank tightening —  with underlying fundamentals for most of the commodity complex remaining intact (assuming volatile conditions do not persist). That said, compositional shifts in global growth drivers – with the more advanced economies now leading the way – is likely to have significant implications for certain commodity markets, particularly for Australian exporters as demand from China shifts down a gear. The USD has also been less of a drag on commodity demand than previously expected, having actually depreciated against major currencies in the final months of 2017. Supply side factors have been relatively favourable for prices across much of the complex as well since late last year. Overall, we have made some upward revisions to our outlook for commodity prices from three months ago, which partly reflects spot price movements since November despite oscillations in some markets more recently.
• Global oil prices have rallied since mid-2017 but have retreated considerably since the start of February. Brent went from mid-40s in June to breaking $70/bbl in January before falling to around $62/bbl earlier this month. The OPEC-Russia deal has been a major driver of prices, although with the US shale tap turned back on and inventories building, the rally has been blunted. Higher oil prices will flow through to Australian LNG export prices, which is on balance bad news for domestic consumers. We see LNG export prices exceeding AUD11/GJ this year, which points to a potential return to double digits for domestic wholesale prices.
• Bulk commodities prices have trended higher in recent months – led by a sharp increase in metallurgical coal prices (due largely to short term supply constraints). Weaker prospects for China’s steel industry should see prices for bulks decline across 2018. Spot prices for iron ore are forecast to ease from current levels (above US$75 a tonne) back towards US$60 a tonne by the end of the year. Metallurgical coal prices are forecast to fall from current peaks above US$200 a tonne, to around US$110 a tonne by the end of the year. Higher spot prices during the contract negotiation period could result in an increase in the Japanese financial year thermal coal contract – to US$90 a tonne (from US$85 a tonne).
• In the absence of much change in the underlying fundamentals, base metal prices have been driven more by USD movements and investor sentiment. As a result, prices could remain volatile for a while yet. For copper, the positive demand outlook and a lack of exploration efforts could mean the copper market goes into deficit in 2018. Aluminium prices will likely remain supported by Chinese capacity cuts, but prices might retreat in March post the Chinese New Year. Zinc continues to be our pick given supply shortages, while nickel and lead prices will be influenced by car battery demand, with nickel prices likely to remain volatile.
• Gold: Gold has recovered smartly, after falling to a recent low of around USD1240/oz in early December 2017, following the interest rate rise by the US Federal Reserve.  US dollar weakness and doubts around alternatives (such as crytocurrencies) are generally supportive of gold, and we expect it to remain in the USD1300/oz range. NAB forecasts the year-end price at around USD1360/oz, with further upside momentum into 2019 and 2020.
• The NAB USD non-rural commodity price index rose by around 25% in 2017, although that outcome masks some of the volatility in bulks prices; the index was up a more modest 2¼% over the year to December 2017. Declines are forecast to resume in 2018, with the USD price index falling around 2¼% over the year. We now expect to see the AUD depreciate more gradually, and from a higher starting point, which means prices will fall by slightly less in AUD terms through 2018. Overall, the Australian terms of trade is expected to lift slightly in the near-term, but will resume a gradual descent from mid-2018.

For more information please refer to the attached report:

• Minerals and Energy Outlook: February 2018 (PDF, 773kb)