Commodities | Jun 27 2011
– NAB updates commodity market outlook
– Base metals and bulk prices should remain supported this year but ease in 2012
– Oil price expected to stabilise, modest decline likely in gold price
By Chris Shaw
An easing in most non-rural commodity prices in May has been followed by subdued price growth in June, National Australia Bank attributing this to the market's focus on the possible implications for global demand in case of a debt default by the Greek government.
As well, the bank's Australia and commodities analyst Ben Westmore suggests economic data over the past few months have shown some weakness, as developing economies have struggled against headwinds and policy tightening in developing nations has begun to impact on activity levels.
This means while production continues to grow in nations such as China, the pace of this growth is slowing. Westmore also notes the earthquake and aftermath in Japan have impacted the Japanese supply train, with the effect being felt across Japan's major trading partners.
Looking forward, Westmore expects non rural commodity prices will remain at high levels through the remainder of this year, though an easing in supply constraints is likely to see some moderation in bulk commodity prices.
Westmore anticipates the NAB Non-Rural Commodity Price Index will rise by around 22% in US dollar terms this year, before a decline of around 8% in 2012.
An easing in global demand growth in May saw the NAB Base Metals Price Index fall by 6.6%, though Westmore notes prices have since stabilised through the first few weeks of June. Even allowing for the falls last month, prices remain above the levels seen this time last year.
Looking forward, Westmore expects with the exception of copper, supply should outstrip demand for all metals over the next two years. According to Australian Bureau of Agricultural and Resource Economics and Sciences (ABARE), this should be enough for the market balance for all metals apart from copper to be in surplus until 2013.
This leads Westmore to suggest the recent declines in prices are no great surprise, especially given the pace of growth since mid-2010. Given the current weakness in the global economy is likely to be temporary, NAB continues to forecast an increase in the NAB Base Metals Price Index of around 9% for the year to December. In 2012 the forecast is for prices to ease by around 4%.
More specifically, Westmore is forecasting average quarterly aluminium prices of US$2,500 per tonne for the June quarter this year, falling to US$2,400 per tonne by the end of 2011 and US$2,300 per tonne by the end of 2012.
For copper, the bank's forecasts stand at US$9,400 per tonne for the June and December quarters this year and US$8,800 per tonne by the end of 2012, while for lead the estimates stand at US$2,550 per tonne in the June quarter and US$2,575 in the December quarters of this year and US$2,650 per tonne for the December quarter of 2012.
With respect to nickel, Westmore is forecasting quarterly average prices of US$27,000 per tonne for the June and December quarter this year and US$25,000 per tonne by the end of next year, while for zinc forecasts stand at US$2,400 per tonne through thus year, rising to US$2,600 per tonne by the end of next year.
In the bulk commodities, Westmore expects prices will see support from additional supply broadly keeping track with the growth in demand from emerging economies across both 2011 and 2012. This means while prices may ease as new supply comes on stream, prices should remain at elevated levels through 2014.
Part of the easing in bulk commodity prices in recent months can be attributed to an easing in global steel production, with China the major contributor in this regard. The Indian monsoon season is expected to cause some slowing in iron ore production, Westmore seeing scope for this and some bans on exports from India to potentially impact on global iron ore supply going forward.
NAB is forecasting iron ore prices of US$175 per tonne in the September and US$150 per tonne in the December quarters of this year, with a decline to US$145 per tonne by the end of 2012.
The recent decline in spot coal prices is the result of a partial improvement in supply from Indonesia and Australia, as both nations continue to work through weather related supply disruptions.
NAB is forecasting hard coking coal prices of US$315 per tonne in the September quarter and US$280 per tonne in the December quarter of 2011. Prices are expected to ease to US$230 per tonne by the end of 2012.
It is a similar story in the other coal sectors, with semi-soft coking coal expected to ease from US$240 per tonne in the September quarter this year to US$197 per tonne by the end of next year and thermal coal forecast to decline from US$130 per tonne to US$120 per tonne over the same period.
Oil prices were also weaker in May, Westmore noting there are some signs Chinese and US demand for crude have moderated. This is consistent with higher prices and some short-term weakness in these economies.
This has prompted the International Energy Agency (IEA) to trim forecasts for global oil demand this year. As Westmore notes, demand is now expected to be 89.2mb/d this year, a decline of 190kb/d from the previous forecast. The new estimate would represent an increase of 1.5% from 2010 demand levels.
There remains a risk premium in the oil market given the difficulty in achieving an orderly resolution of the current conflict in Libya and Westmore sees this premium persisting through 2011. The West Texas Intermediate (WTI) price futures curve has shifted over the past month and is now in contango, though Westmore has not seen any need to change forecasts.
Currently NAB expects oil prices of US$94 per barrel in the second quarter, US$113 per barrel in the third quarter and US$116 per barrel in the final quarter of 2011 in WTI terms. Aside from the June quarter, estimates in Brent crude terms are only slightly higher.
Prices should stabilise in 2012, with Westmore forecasting an average price for the first quarter of US$114 per barrel, falling to US$110 per barrel by the end of the year.
In gold, Westmore suggests the price has been pushed higher by market uncertainty with respect to the threat of a default by the Greek government. What has also supported prices in Westmore's view is jewellery demand has now begun to contribute positively to global gold demand, while continued weakness in the US dollar has also contributed to a stronger gold price.
Continued strength in investor demand combined with stable net accumulation of gold by central banks should see demand stay at solid levels, while continued maturity of mines in South Africa in particular should limit the extent to which supply growth.
Given such an outlook, Westmore is forecasting quarterly average gold prices of US$1,498 per ounce for the June quarter, US$1,467 per ounce in the September quarter and US$1,442 per ounce in the December quarter of this year. By the final quarter of 2012 the price is forecast to average US$1,376 per ounce.
