Overview:

• Supply-side factors played a larger role on prices in recent months for some commodities, although not all these developments have been positive, or enduring. Better demand prospects in H2 2016 helped to improve market conditions across much of the commodity complex, and while the global demand outlook has hit some shaky ground more recently, the tone generally remains fairly upbeat – reflected in a number of ‘soft’ economic indicators, but is less clear in official measures of economic growth. Meanwhile, the USD remains elevated against the major currencies, although it was steady to slightly lower during Q1, minimising the impact on commodity prices. Despite a number of uncertainties and temporary disruptions in some markets, the outlook for the commodity complex remains broadly consistent with our expectations from earlier in the year – prompting us to make only minimal changes to NAB’s Commodity Price Index forecast. That said, it remains to be seen how the recent China rating downgrade by Moody’s will impact commodities near-term.
• The NAB USD non-rural commodity price index is expected to rise by around 22% in 2017, although this masks the correction in bulks prices; the index is forecast to be down 7½% over the year to December 2017. Given the anticipated USD appreciation, prices will be more stable in AUD terms. NAB forecasts the AUD to bottom at around 70 US cents by late 2017. Overall, the Australian terms of trade is expected to resume its gradual descent in the second half of this year.
• Following the OPEC and Russia agreement to limit production from late last year, US shale producers have taken advantage of higher prices to restart production, sending prices tumbling back into the low US$50s range for Brent. Meanwhile, the decision to extend production cuts a further nine months at the May OPEC meeting was met with some disappointment by the market, with prices falling, pointing to an expectation for the cuts to be deepened. We see Brent recovering to mid-high US$50s by the end of 2017, climbing to mid-60s by the end of the decade.
• With most Australian LNG export prices tied to the price of oil (and oil likely to remain subdued), we do not expect major upside for export prices (around AUD8-9/GJ in the coming two years). In contrast, Australian export volumes will increase significantly, although we have pulled back our expectations for 2017 somewhat. We forecast that exports will total around 54.3 million tonnes in 2017 and 67.4 million tonnes in 2018. 
• Bulk commodities prices have retreated from recent peaks – following short term supply disruptions that impacted coal markets and a correction in iron ore markets (reflecting both ample supply and speculative pressure). Steel demand in China (the world’s largest consumer) is expected to fall in coming years – impacting iron ore and metallurgical coal markets. Iron ore is forecast to average US$68 a tonne in 2017 and US$60 a tonne in 2018, while hard coking coal is forecast to average US$200 a tonne in 2017 and $110 in 2018.  Evolving energy requirements are set to impact thermal coal demand in China and India, with the 2018 Japanese financial year contract for thermal coal forecast to fall to US$65 a tonne (from US$85 a tonne this year).
• Copper prices have fallen back after major supply disruptions were resolved, however strikes and supply disruptions will be an ongoing theme. Chinese demand continues to slow, especially as the government tries to cool the property sector. Aluminium was the best performing base metal over the past quarter, as Chinese government put in measures to curb capacity addition. Nickel is plentiful as Indonesia and Philippines both increase supply at a time of a stainless steel glut in China. Zinc is facing a deficit while lead’s long term demand prospects are weakening.
• Gold has been one of the better performing commodities during 2017, with an 8.7% year to date increase. Rising geopolitical tensions have increased the lustre of gold, as the ‘Trump rally’ has gradually fizzled out. We are expecting gold to hover around the USD1250 mark during 2017, with geopolitical tensions likely to be a key factor, in addition to any potential deviation in the US Federal Reserve’s actions on the Fed Funds rate.

For more information please refer to the attached report:

• Minerals and Energy Outlook: May 2017 (PDF, 841kb)