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NAB Expects Further Gains In Non-Rural Commodity Prices

Commodities | Jul 29 2011

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– Mixed global growth signals have impacted on non-rural commodity prices
– NAB sees further gains this year then an easing in 2012
– Prices to remain at historically high levels


By Chris Shaw

As National Australia Bank points out, movements in non-rural commodity prices have been mixed in recent months. This largely reflects mixed signals with respect to the global economic growth outlook.

As examples, the bank's non-rural commodities analyst Ben Westmore notes US construction activity has been very weak in recent months, while Chinese GDP in the June quarter surprised to the upside. 

European sovereign debt issues have also impacted on both financial and commodity markets given the potential for further global growth implications, while a weaker US dollar has strengthened demand for commodities denominated in US dollars by foreign buyers.

With respect to the remainder of 2011, Westmore expects non-rural commodity prices will remain elevated, though bulk commodity prices may moderate as existing supply constraints show signs of easing. In US dollar terms the bank's Non-Rural Commodity Price Index is forecast to rise by around 22% for the year to December, before an anticipated fall of around 7% in 2012.

In Australian dollar terms prices are forecast to rise by 18% this year before delivering a relatively flat result through 2012.

For the base metals, price growth in aggregate since the end of 2010 has been flat, which is largely in line with relatively stable Chinese production activity in recent months. While stocks of all major metals in LME warehouses are at above long-run average levels at present, weekly data have shown consistent draws for most metals since the middle of June. 

This is a sign current stock overhang is being reduced, something Westmore suggests is being helped by some recent supply disruptions. These disruptions have also supported metal prices.

Westmore had expected a period of consolidation in base metal prices for some time, this reflecting the view the rapid price gains seen earlier this year simply couldn't be sustained. Prices have in fact consolidated since February, Westmore taking the view base metals markets have actually performed reasonably well given the renewed focus of market participants on the downside risks to global growth.

With the recent weakness in the global economy likely to prove temporary, metals prices should receive additional support going forward in Westmore's view. The major downside risk is a liquidity event in financial markets through a default or debt restructuring, but such an event is viewed by Westmore as unlikely.

Copper excepted, Westmore expects supply to outstrip demand for base metals over the next two years, pushing market balances for all except copper into surplus until 2013. From 2013 zinc should move into deficit, followed by nickel after 2015.

Westmore is forecasting the NAB Base Metals Price Index to increase by around 7% between now and the end of the year, the increase the result of price gains already made in the early months of 2011. For the year to December 2012, Westmore expects the index will decline by around 2%.

For gold, Westmore notes ongoing market uncertainty has kept the metal well supported, while jewellery demand is also starting to make a positive contribution to global gold demand. 

Industrial disputes in South Africa are a threat to near-term supply, something that should help support prices. This is especially the case as the general supply response to higher prices in the March quarter was modest when compared to the three previous quarters.

Aside from investment and jewellery demand, Westmore also sees scope for central banks to look to increase gold holdings, adding another layer of demand to the market. 

Looking ahead, Westmore expects the US debt ceiling issue will be resolved and a bailout package will stave off the possibility of any default by a large European sovereign. This implies the upside risks for the gold price will dissipate, so delivering an easing in the price.

Westmore is forecasting a December quarter 2001 average gold price of US$1,444 per ounce. This would represent a 10% decline over the second half of 2011. In 2012 the bank's average quarterly price forecasts stand at US$1,427 per ounce for March, US$1,410 per ounce in June, US$1,393 per ounce in September and US1,376 per ounce in December.

For the bulk commodities, Westmore notes prices have stabilised at high levels in recent months despite some weakness in global steel production. China was a major contributor to lower steel output, falling 2.2% in June and cutting 1% from the aggregate number. 

China steel production is particularly relevant for bulk commodity markets as Westmore notes much of the country's output comes from blast furnaces that are directly fed iron ore and coke.

Weaker global steel output saw iron ore prices fall in June, but Westmore notes prices have since strengthened again in July. This may signal some improvement in economic activity levels in emerging Asia.

Whether prices reflect this improvement remains somewhat too early to tell, though Westmore notes there are reports in the market Rio Tinto ((RIO)) has agreed to sell iron ore fines in the September quarter at US$168.85 per tonne, which would be 1.5% below June quarter contract prices.

Thermal coal prices were stable in June and have risen slightly in the first few weeks of July, Westmore suggesting prices continue to be supported by re-stocking by Asian utilities ahead of the strong summer demand period.

Metallurgical coal prices for the September quarter have settled at levels slightly below June quarter prices, though as Westmore notes prices remain around 60% above average contract prices miners received in 2010.

Looking ahead, Westmore expects growth in demand from emerging economies will broadly keep pace with additional bulk commodity supply in 2011 and 2012. So while there may be further weakness in demand growth from the developed world in particular, Westmore sees prices as remaining elevated for the next couple of years.

Iron ore average price forecasts stand at US$169 per tonne for the September quarter and US$150 per tonne for the December 2011 to June 2012 quarters. Prices are then expected to ease to US$145 per tonne from the September quarter of 2012, remaining at that level through the March quarter of 2013.

For hard coking coal Westmore is forecasting average prices of US$312 per tonne in the September quarter and US$280 per tonne in the December quarter of this year, easing to US$270 per tonne in the March quarter of 2012 and US$230 per tonne for both the December quarter next year and the March quarter of 2013.

For semi-soft coking coal Westmore is forecasting similar declines from US$240 per tonne in the September quarter this year to US$212 per tonne in the December quarter, then prices of US$205 per tonne in the March quarter of 2012 and US$175 per tonne in the March quarter of 2013.

With respect to thermal coal Westmore expects prices will remain relatively steady, his quarterly forecasts standing at US$130 per tonne from the September quarter this year to the March quarter of 2012, Prices should then ease to US$120 per tonne for subsequent quarters through to the March quarter of 2013. 

Indications of weaker global demand growth saw oil prices ease in June, while the release of strategic reserves by the International Energy Agency also achieved a short-term moderation in prices. West Texas Intermediate prices were the hardest hit. 

Westmore notes since February, stocks of US crude oil have risen and are now around 10% above long-run average levels. Even allowing for this, total stocks on land in OECD countries have fallen since the middle of last year.

OPEC production has also increased since May, the Saudis responsible for most of the increase and so offsetting lower production from Libya. To factor in the latest market data, Westmore has trimmed his oil price forecasts, though the view remains prices will move higher in coming months. 

Westmore is forecasting quarterly average Brent crude prices of US$109 per barrel for the September quarter and US$112 per barrel for the December quarter of this year, then prices ranging between US$113-$116 per barrel through 2012.

For WTI Westmore's forecasts follow a similar pattern, though the current discount for WTI relative to Brent is expected to have closed by the March quarter of 2013 at US$110 per barrel. 
 

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