Minerals & Energy Outlook: October 2018

In US dollar terms, the NAB non-rural commodity price index rose marginally in Q3 2018 – increasing by 0.4% qoq. The strong upturn in the first quarter of this year contributed to a much more significant increase in year-on-year terms – up by 8.2%.

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Overview

  • That said, trends were highly divergent within the commodities space – with our base metals index falling by over 12% qoq. In contrast, prices for thermal coal and LNG grew strongly – up by 14% qoq and 11% qoq respectively.
  • A sizeable depreciation in the Australian dollar in Q3 drove the overall index higher in AUD terms. Quarter-on-quarter, the index rose by 5.2%.
  • The growing trade tensions between the US and China – culminating in the imposition of tariffs by both countries – appears to have impacted base metals most significantly (reflecting the higher intensity of these commodities in Chinese exports than iron ore or coal). Perhaps surprisingly, gold prices have also fallen during this period, despite the uncertainty created by the trade dispute.
  • While global economic conditions have been relatively strong in recent quarters, growth has likely peaked and is set to decline over the next few years. The impact of the trade dispute on China (the largest consumer of commodities excluding oil) and emerging Asia remains somewhat uncertain – given the potential policy response by Chinese authorities (which could favour iron ore and metallurgical coal).
  • A downturn in other emerging markets presents another downside risk to our forecasts. At present fears are largely focused on economies such as Turkey and Argentina, however financial contagion could spread elsewhere.
  • Our commodity price index is forecast to decline modestly in 2019 – down around 2.8% in US dollar terms – but a weaker currency lowers the fall to 2.2% in AUD terms.

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