Commodities: Return to the gradual downward trend in prices is expected - NAB

The USD stabilised somewhat against major currencies in the third quarter of 2017, having a minimal impact on commodity prices generally as demand conditions tend to vary across the commodity complex, although the overall situation has so far been a little better than expected, according to analysts at NAB.

Key Quotes

“Supply side developments have also been playing a major role in most markets, especially with capacity curtailments coming into the mix.” 

“Looking forward, the global economic recovery should remain on track, but we do expect to see a tempering in demand conditions for certain commodities, particularly as support from Chinese buyers begins to wane. Additionally, fiscal risks stemming from the US remain a concern and any reasons given to question the Trump administration’s promises on infrastructures spending/fiscal stimulus will have a ripple effect through commodity markets. Other events stemming from the political situation in Europe, or policy changes – such as any deleveraging or environmental campaigns in China – are simply adding to the uncertainty.”  

“The outlook for demand in China remains as critical as ever to the outlook for Australian commodities. NAB continue to expect a moderation in China’s construction this year, which will have flow-on consequences for bulk commodity markets, although our GDP growth forecasts for China have been revised modestly higher for 2017 to reflect the recent strength in activity. Longer term, China’s growth is increasingly being driven by services – which are far less commodity intensive than the ‘old economy’ heavy industrial sector.”

“Despite the relative resilience of the AUD recently, commodity price in AUD terms are still expected to be supported somewhat over coming quarters by an anticipated USD appreciation as the US Fed resumed the gradual normalisation of monetary policy. The trough for the AUD is expected to be around USD 0.73, occurring in mid- 2018. In annual average terms, prices are forecast to rise by 22% in 2017, following very modest price declines on average in 2016, but a decline of nearly 6% is expected for 2018.”

“In light of these commodity price projections, NAB is forecasting the Australian terms of trade to decline in Q3 2017, albeit more modestly than the 6% drop seen in Q2, and will maintain a gradual decline thereafter. In annual average terms, the terms of trade are forecast to  rise around 10% for 2017, but will be down 4% over the year for December 2017. We are forecasting a 7½% decline in 2018.”