Commodity prices generally fell in April – with particularly steep falls in oil and Liquefied Natural Gas (LNG) markets, along with declines in iron ore and coal.
The global economic outlook has continued to deteriorate – with a wider range of economies impacted by countermeasures to control the spread of
COVID-19. Although China has commenced its recovery phase, consumers remain cautious and industry has not reached its pre-virus level. A secondwave of infections that led to the lockdown of the city of Harbin highlight the risks around recovery.
In annual average terms, US dollar denominated commodity prices are forecast to fall by 16.6% in 2020 – driven by LNG, iron ore and metallurgical coal. We expect prices to stabilise in 2021 at levels marginally higher than mid-2020, however this will result in no change in year average terms.
Heffx Non-Rural Commodity Price Index
Heffx Commodity Price Forecasts
Spot prices eased between late March and early April, but have subsequently remained range bound in the mid-US$80s. Demand prospects for steel remain mixed – with hopes of a boost to Chinese infrastructure
development countered by weakness in manufacturing. However, concerns around Brazilian iron ore supply have risen, as parts of the country’s key production regions have entered COVID-19 lockdowns. We have raised our forecast for the next twelve months, averaging US$84 a tonne in 2020 (with recent strength in prices presenting some upside risk) and US$74 a tonne in 2021.
Iron Ore Stabilized in April
Weakness in global electricity consumption – due to widespread global countermeasures to COVID-19 – has severely impacted thermal coal demand. This also coincided with a ramp up in Chinese coal production (as
COVID-19 constraints have been removed). This led to benchmark Newcastle coal dropping close to US$50 a tonne in early May, while hard coking coal prices dropped below US$110 a tonne. We have trimmed our
hard coking coal forecast to US$138 a tonne in 2020, while the thermal coal forecast is unchanged at US$62 a tonne – however current weak prices highlight downside risk.
Coal Prices Have Fallen Rapidly
During late April, the May WTI contract fell deep into negative territory, due to demand destruction and lack of storage. Consequently, a number of ETFs have rolled over their near-month contracts to a few months further out. However, conditions in the oil market have since stabilised somewhat, albeit at low levels.
A re-opening of the Chinese economy, an easing in the lockdown in parts of the United States and Europe is raising demand. Supply too is being restricted due to the OPEC+ deal kicking in, and lower production in the United States. Also, concerns about the lack of US storage space have lessened. We have trimmed our forecasts, with Brent at
US$43/bl in the December quarter (previously US$46/bl). A further outbreak of the virus might pose downside risks to our forecasts.
Oil Spot Prices Weak but Stabilizing
The demand destruction wrought by the ongoing COVID-19 pandemic has prompted some buyers to cancel their LNG cargoes. This led to an increase in LNG tenders flooding the spot market. The Japan Korea Marker, a North Asian benchmark maintained by Platt’s, is currently tracking around US$2/million Btu. It was trading around US$7/million Btu as recently as October, 2019.
Weak conditions have led to cancellations or deferrals of projects, both in Australia and overseas. We have sharply revised down our LNG export price forecasts, and expect a trough of 6.8 AUD/Gj in the September, quarter, 2020. It typically takes a quarter for oil prices to feed into LNG prices.
Gas Sharp Decline in Near-Term Prices
Gold continues to retain its allure as a safe haven asset, with investors piling into the precious metal. Steep declines in economic activity, combined with massive fiscal and monetary stimulus have been largely
supportive of gold. Gold has also benefitted from rising geopolitical risks due to heightened tensions between the US and China over the origins of this virus. The increase in demand has primarily been through products
such as Exchange Traded Funds, with demand for jewellery remaining weak. Gold has also experienced periodic declines, particularly during ‘risk-on’ sentiment. We have upgraded our price forecasts, with the June
quarter price raised to US$1680/oz (previously US$1650/oz).
Gold Rising But Volatile
Recent trends have varied across the base metals complex, with copper and nickel edging higher (albeit well below pre-COVID-19 levels), while aluminium and zinc stabilised – following on from sharp plunges from
mid-March. Weakness in household consumption (particularly in advanced economies) could flow through into weaker industrial metal demand – particularly in China, albeit infrastructure developments could provide some support. We expect metals prices to remain weak until a broad based global recovery commences – most likely Q3 2020 at the earliest.
Metals Mixed Searching for a Direction
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