Commodities | Mar 30 2007
By Chris Shaw
The first quarter of 2007 has been a volatile one for commodity prices and National Australia Bank suggests investors should prepare themselves for more of the same going forward, particularly in the base metal and oil markets.
If this is the bad news the good news is the bank sees prices across the commodity spectrum as likely to go higher over the course of this year, reflecting ongoing strong economic growth globally and the lack of any significant supply side response in most markets to offset continued strong demand.
This supply issue is playing out in both rural and non-rural commodities but in different ways, as the non-rural sector has been characterised by project delays, meaning output has continued to fall short of expectations. In the rural sector in Australia in particular it has been the drought that has impacted but with the same end result – a lower than expected level of supply.
As a consequence the bank has lifted its price forecasts from what it had expected last October, such that its Commodity Price Index in US dollar terms is tipped to finish the March quarter at 205.6, up from 205.1 at the end of December last year. It sees the Index rising to 207.6 in the June quarter and to 209.7 by the end of September, helped by stronger nickel, copper and oil prices, after which it is expected to slowly trend lower.
While the supply side issue should begin to be addressed in 2008, so bringing prices down from the peak levels of the second half of this year, the bank expects any falls to be modest in nature. Most likely to suffer in its view are the base metals, though prices will remain high by historical standards. There will remain upside risk in the bulk commodities of iron ore and coal, the former given threats of reduced supply from India and the latter given China is again becoming a net importer rather than a net exporter.
With signs the drought is breaking in Australia there is potential for supply increases in rural commodities, but the bank argues strong demand will continue to support prices even if production levels increase.
The “stronger for longer” outlook favoured by the bank should also prove supportive for the Australian dollar, the bank now expecting it to average US80c over the first half of this year before drifting to US77c by the end of December. This drift should continue through 2008, the bank forecasting a US73c exchange rate by the end of next year.