FYI | Jul 05 2006
By Greg Peel
National Australia Bank economists have revised up their forecasts for commodities "in line with sustained global growth ahead of supply and higher negotiated contract prices". NAB notes non-rural commodities are trending higher than previously forecast due to higher prices for iron ore, base metals and oil.
This tends to suggest the correction was just that. Fundamentals remain firm.
NAB does, however, expect commodity prices to begin easing in late 2007 as fundamentals weaken. In line with the secular jump theory, easier prices will still be at historically high levels. Nevertheless, the Aussie dollar will begin to depreciate.
NAB’s Aussie dollar view comes despite the economists’, and most others, view that the US dollar will weaken. The Aussie will fall victim to a narrowing of the interest differential with the US (one more 25bps rise in the US would spell parity, unless we go up first). Economic growth will also remain "below potential", says NAB, and underlying inflation will still rise somewhat.
On the rural front, NAB sees largely sideways movement with some products balancing out others. Global wheat supplies are tightening, for example, and any deterioration in global crop conditions will serve to push up the price. Of course if you can’t grow it, it means nothing.
NAB’s commodity index is at a high level compared to other indices. It chimes in much higher than the RBA equivalent, basically because NAB’s index includes a 15% weighting for crude oil and the RBA has none. The RBA does include LNG and alumina, both missing from the NAB index.
Of the global indices, the IMF index outguns NAB. Despite including many more commodities, the IMF weights oil at 40%. The CRB index on the other hand is more weighted to rural commodities, and thus it is the lowest of the four.