Commodities | Nov 23 2010
By Chris Shaw
National Australia Bank has reviewed the outlook for non-rural commodity markets, the bank paying particular attention to gold, oil and the bulks.
With respect to gold, the bank's non-rural commodities analyst Ben Westmore notes new demand for gold has been strong over the past six months. In large part this is thanks to increased investor appetite for the metal.
Some investor safe-haven demand for gold is likely to continue shorter-term in Westmore's view, at least until the global economic recovery has gained greater traction. As gold investment declines, a recovery in jewellery consumption is expected, so supporting aggregate gold demand.
Westmore notes price expectations for gold continue to shift higher, as between July and October the anticipated gold price implied by the average forecaster surveyed by Consensus Economics rose from US$1,220 per ounce to US$1,337 per ounce in quarter-average terms.
In Westmore's view, this reflects the market's expectation a combination of strong official sector gold purchases and strong investment demand on the back of an uncertain outlook for the US dollar are likely to remain the primary drivers of gold for some time.
In particular, the increased importance of investment demand is likely to persist in Westmore's view. This reflects investor preference for less opaque assets in the wake of the Global Financial Crisis, which makes the investment properties of gold increasingly attractive.
A further upside risk to gold demand, according to Westmore, is the potential for a central bank in a nation such as China, Russia or India to significantly increase the proportion of gold in reserve assets as a counter to the ongoing uncertain outlook for the world's major reserve currencies.
China has been doing this to some extent but Westmore notes its increase in official gold holdings has to date been sourced from domestic producers. With China holding only around 4% of world gold reserves, any policy seeking to permanently increase China's share of reserve assets held as gold would require increased buying in the global market as well.
While greater official sector buying is likely to continue subtracting from world gold supply, one possible supporting factor for future supply, in Westmore's view, is higher prices may see the development or re-opening of mines that weren't economically viable before prices rallied.
In terms of price forecasts, Westmore sees the gold price averaging around US$1,320 per ounce in the December quarter of this year, rising to US$1,375 per ounce in the March quarter of next year. Beyond that prices are expected to remain reasonably well supported, with a December quarter 2011 forecast of US$1,350 per ounce and a December 2012 quarter forecast of US$1,275 per ounce.
Turning to oil, Westmore notes ongoing concerns about the global economic recovery have caused a moderation in oil prices in recent weeks. Also contributing are still high stocks in the US, with distillate and crude stocks currently 19% and 13% above their long-run averages respectively.
Demand for oil has remained solid, Westmore noting in October the International Energy Agency (IEA) revised up its estimate for global demand by around 300,000 barrels per day in both 2010 and 2011. From a revised forecast of 86.9 million barrels per day this year the IEA is now forecasting 2011 demand will increase to around 88.2 million barrels per day.
In part this reflects a recent pick-up in Chinese demand, as Westmore notes the six month moving average of Chinese crude oil imports has risen by 10% for the year to October 2010.
On the supply side, Westmore notes global oil production for the year to June 2010 remains about 13% above the level of 10 years ago, with OPEC and non-OECD countries outside of OPEC accounting for most of the increase.
OPEC has indicated an oil price in the range of US$75-$85 per barrel is a comfortable range for both producers and consumers, Westmore pointing out the group sees such a price range as posing little downside risk to world growth.
Looking forward, Westmore suggests the combination of abundant supply and sluggish demand conditions in most advanced economies will act as a headwind to prices. To reflect this, Westmore is forecasting quarterly oil prices for West Texas Intermediate (WTI) of US$82 per barrel in the December quarter this year, rising to US$85 per barrel by the final quarter of 2011. By the end of 2012, Westmore expects prices will average US$89 per barrel.
Global steel production remains weak, Westmore noting October saw a 1.7% decline on the back of soft Chinese production numbers as a result of the continued imposition of output restrictions. This has impacted on global output given China accounts for about 45% of world steel production.
This softness in steel production has not held back iron ore prices, which Westmore notes rose by around 7% between September and mid-November. Still strong apparent Chinese consumption has helped, with Chinese imports rising 3% for the three months to October.
As evidence of the importance of Chinese buying on the global iron ore market, Westmore notes in 2004 China imported around the same amount of iron ore as the rest of the Asian region in aggregate. By 2009 Chinese imports had increased to 3.5 times that of the rest of Asia.
Westmore expects global steel production will rise in coming months, thanks to some cyclical re-stocking and limited further shutdowns to Chinese steel mills. This should see global iron ore consumption remain strong, especially as China's domestic iron ore industry remains unable to keep pace with the rate of domestic steel production.
New iron ore supply should come on stream in coming months though, Westmore expecting this will temper price growth towards the end of 2011. As well, he notes the ability of high cost mines in China to lift production as prices increase should also limit future price gains.
Coal prices have also been stronger of late, Westmore noting Newcastle FOB spot prices for thermal coal are up 6% since September, while average prices in October are 36% higher than a year earlier. This reflects some supply issues, with heavy rain in Indonesia and Australia playing a role in limiting the amount of material available. These supply conditions have also impacted on the metallurgical coal market.
In metallurgical coal, Westmore expects a recovery in Chinese steel production combined with significant constraints to supply will see the market balance tighten, so delivering higher contract prices in the first half of 2011. Beyond that time supply should return to the market, so causing prices to moderate.
Thermal coal contract prices are similarly expected to rise further in 2011 thanks to strong import growth from emerging economies and ongoing supply issues in major producing nations. It isn't until 2012 that Westmore sees additional supply as limiting further price upside.
In terms of actual forecasts, for iron ore Westmore expects average quarterly contract prices of US$134 per tonne in December, declining to US$130 per tonne in Mach next year before rising to US$150 by the December quarter. By the June quarter of 2012 iron ore prices are forecast to return to US$130 per tonne.
For hard coking coal, Westmore expects a December quarter price of US$195 per tonne, rising to US$230 per tonne in the June quarter of next year and staying around that level through the balance of 2011 before declining to US$215 per tonne by the June quarter of 2012.
Semi-soft coking coal prices are forecast to be US$150 per tonne in the December quarter, rising to US$168 per tonne in the June quarter of next year. Prices are expected to finish 2011 at around that level before falling to US$155 per tonne in the June quarter of 2012.
For thermal coal, Westmore is forecasting prices of US$98 per tonne in the December quarter before an increase to US$108 per tonne for the June to December quarters of next year. Prices should remain elevated beyond this time, as evidenced by a June 2012 quarterly price forecast of US$112 per tonne.
