Commodities Update December 2022
Fortunes have been mixed but the broad trend is positive with iron ore rallying 34%, base metals up 14% and thermal coal gaining 13% more than offsetting the 22% fall in met coal and 18% fall in crude oil. A recovery in behind the forecast correction in iron ore and coal prices while LNG prices will be supported by limited supply and growing demand. Australian gas prices fall back to $12/gigajoule on the announcement of price caps then fell to $10 as we went to press.
The following text is based on the article in the December/January Market Outlook
For more details on our longer-term forecasts see December Commodity Forecasts
Through November and into early December the fortune of commodities was again mixed with iron ore, thermal coal and base metals all surging, some more than others, while met coal, crude oil and LNG softened. However, the broad trend was positive with Westpac’s commodity index lifting 5% in the month as iron ore surged 34%, base metals lifted 14% (nickel had the largest gain rising 28%), thermal coal bounced 13% and gold lifted 8%. Offsetting some of the gains was a 22% fall in met coal, an 18% fall in crude oil and a 5% fall in LNG. Rural/farm commodities softened 8% in the month.
From $82/t at the November report iron ore prices lifted to around US$110/t in early December. While the current macroeconomic environment for iron ore continues to improve the fundamental foundations of the market remains poor: China’s pig iron production contracted 4% in October and continued to remain soft through November. Iron ore inventories at ports grew around 4% through November but are still at a relatively modest level and have appeared to level out in early December. Chinese rebar prices have been on a steady downtrend since mid-April and as the outlook for Chinese economic activity in 2023 improved steel prices stabilised. Chinese steel demand is likely to moderate in 2023 which crude steel production at best holding its ground and a rebound in scrap steel consumption following a contraction of around 20mt to 30mt through 2022.
Nevertheless, the recent strength in ore prices is more about tight supply (year to date are down around 1%) than a meaningful strengthening in demand. Ore shipments from Australia, Brazil and South Africa have faced ongoing disruptions (Australian shipments flat, Brazilian shipments down around 3% and South African shipments down 1%). In addition Chinese iron ore production is down over 10% in the two months to September. It is the expected recovery in supply that is key to our caution in regards to iron ore fundamentals and why we see prices easing through 2023 as ore shipments lift. We now see iron ore prices falling to US$90/t by end 2023 and US$80/t by end 2024.
Nevertheless, we are cognisant that iron ore supplies have consistently fallen well short of expectations (both analysts are firms’ guidance) in recent years and there is a lot of doubt in the market that current targets can be achieved.
November saw a further boost to ore supplies when India restored the “status quo” of export duties on iron ore and steel. The May 2022 the Indian government introduced a 15% duty on export steel, increased the duty for >58%fe iron ore from 30% to 50% and from zero to 45% for <58%fe ore. Indian iron exports averaged around 30mtpa between 2011 and 2021 and while India may have achieved a record 246mt od iron ore production in 2021, exports fell 30% to 36mt mainly due to weaker Chinese demand. By October this year, India’s iron ore exports were close to zero with a total of just 7mt to August. There is a clear opportunity for India’s steel and iron ore exports to recover back to pre-May 2022 levels as China reopens in 2023.
For energy markets the fundamentals are more mixed with European gas inventories falling while coal supply remains disrupted and OPEC+ continues to hold back on lifting production quotas. Total global coal shipments are up just 1% year to date with Australian exports down 6%, Colombian exports down 7%, South African exports down 9% offset by a 12% gain in Indonesian exports and a 4% increase in North American exports. We expect the high quality (high calorific) thermal coal market to remain tight though 2023 due to robust demand and elevated gas prices (see more below). However, coal supply from Australian and South Africa should normalise through the year and this should see the Newcastle benchmark price falling to $275/t by end 2023 and $174/t by end 2023.
European gas prices eased back from a peak of US$70/mmbtu in August to US$36/mmbtu in November but this is still significantly higher than the 2020 average of US$3/mmbtu. Europe has gone from having the second cheapest gas market (US gas averaged US$2/mmbtu in 2020 while Japanese LNG averaged US$8/mmbtu) to the most expensive (US gas was $5/mmtbu in November, Japanese LNG was $22/mmtbu).
Significant inflows of LNG, as well as a reduction in gas demand, has meant the EU was able to hit their gas inventories target about a month ahead of schedule. Inventories are currently enough to cover demand over winter, assuming normal temperatures and steady supply. However, there is only a small buffer for variations: a colder than usual winter will boost demand while risks remain in regards to the continuity of Russian supplies. Any further disruption would require a greater reduction in demand and thus risk energy prices spiking higher. With limited possibilities to increase supply and supply disruption will require the EU to focus on a demand response. Through 2022 there was a surprisingly large drop in gas demand of around 12%yr in the first 9 months due to fuel switching, energy-saving measures and a moderation in industrial activity. Current gas prices will lead to an expansion in supply, particularly LNG from Qatar and the US, but this is unlikely to come online till 2026 due to limited investment in production expansion through the last few years. As such, we have upgraded our near-term LNG forecasts and do not expect to see a trend reversal in prices until late 2025 or even early 2026.
Australian gas prices spiked to a record high of $50/gigajoule in July but then eased to around $20/gigajoule through November and into December. But it is interesting to note that post the announcement last Friday (9th of December) that the Commonwealth Government was going to introduce a cap of $12/gigajoule the following Monday (12th of December) saw both the AMEO and Wallumbilla gas price fall to $12/gigajoule and continued to fall through December getting down to $10/gigajoule as we went to press.
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