Key points:

• The USD has stabilised somewhat in recent months, helping reduce the strain on commodity markets, but the focus remains very much on the impact rising supply is having on some commodities, especially in the context of a weaker outlook for emerging market demand.

• Financial volatility suggests there is a high degree of uncertainty around the outlook for commodity prices. However, assessment of the fundamental drivers suggests that commodity markets could see relatively more stable prices in 2016 and 2017 – although still expected to fall in aggregate. The NAB USD non-rural commodity price index is expected to fall more than 20% in 2016, but only a further 2% in 2017, with iron ore and energy prices leading the way. Despite stalling of late, USD appreciation will continue to help partially offset price declines in AUD terms for 2016 – reversing in 2017. NAB forecasts the AUD to bottom at around 67 US cents by late 2016, but stabilise at around the mid-70s by late 2017. Overall, these trends suggest the Australian terms of trade will continue to trend lower, although at a slower pace than in recent years.

• Short term supply disruptions have driven iron ore prices higher, but this trend is unlikely to be sustained – with weak steel demand and falling production in 2016. This is forecast to drive both iron ore and metallurgical coal prices lower this year. Similarly, thermal coal prices are set to soften, on weaker Chinese and Indian demand. Iron ore spot prices are expected to stabilise at an average US$42 per tonne in 2016, while hard coking coal contract prices will average US$80.8 a tonne. Our forecast for thermal coal for the Japanese financial year are lower, at US$58 a tonne.

•  In February, global oil market volatility continued to track at elevated levels, although it eased slightly towards the end of the month. There are tentative signs of cooperation between OPEC and non-members to stabilise the market, but the probability for coordinated output cuts remains slim. As such we expect the global oil oversupply to last into 2017, keeping prices below USD 40/bbl for most of 2016 before rising to USD 50/bbl by end-2017. Lower global oil prices continue to affect East Asian LNG markets, although the lower AUD has provided some support to AUD denominated prices.

• Base metal prices have stabilised at the beginning of 2016, as producers have announced significant supply cuts and worries about global financial conditions wanes. We forecast price recoveries in 2016 for all base metals, stronger for copper, zinc and lead with robust market fundamentals and more subdued for aluminium and nickel whose markets remain well supplied

• Since its recent low in mid-December, gold prices have surged by more than 15%, overshadowing the returns of other major asset classes to be one of the best performing major commodities in the year-to-date. While there could be further upside to gold prices in the short term, we expect gold prices to resume a moderate downward trend in H2 2016 in conjunction with gradual US monetary tightening.

For more details, please refer to the attached document.

• Commodity Update: Minerals and Energy – March 2016 (PDF, 726 KB)