Commodities | Sep 26 2007
By Chris Shaw
In its September Commodity Price Outlook report National Australia Bank has raised its price forecasts in the sector but it has been selective in doing so, seeing the strength coming in the iron ore, coal, wheat and dairy sectors at the expense of base metal prices, which it sees as falling in 2008.
Looking at the upgrades first, bulk minerals and energy economist Gerald Burg expects contract prices among the bulk commodities will be driven higher by constraints on both production and infrastructure, which have caused the iron ore and coal markets to tighten significantly in recent months.
Helping in the case of iron ore has been the imposition of an export tax in India, which leaves prices there as much as 70% higher than equivalent contract prices in the Australian market. With such a positive setting Burg expects iron ore prices to settle around 15% higher in the 2008 Japanese financial year, with any price risk firmly to the upside in his view.
China’s return to a net importer position in coal has tightened that market globally and increased the focus on Indonesia and Australia as potential sources of additional supply. With infrastructure already straining in these markets the supply response has been muted, so the bank expects thermal and semi-soft coking coal prices to increase by 20% and hard coking coal by 17.5%.
In the bank’s view prices among the rural commodities have limited downside as demand continues to grow but supply cannot keep pace, particularly in the wheat market where stocks are approaching 30 year lows.
Base metal prices in contrast have peaked in the bank’s view and declines are expected through 2008 as markets return to surpluses or see a greater supply side response than has been the case until now.
This doesn’t mean a collapse though, as Burg expects prices will remain at what are historically high levels thanks to the potential for any supply disruption to impact on markets given limited stockpiles of most metals.
In terms of the bank’s commodities price index the flat outcome for the September quarter is expected to be replicated in 2008, as the gains in the bulks and rural commodities are balanced by the expected weakness in base metal prices. This has pushed down the bank’s expectations for the Australian dollar, though it sees the currency as being supported at around US80c through 2008.
