Commodities Update March 2023
Commodities had a meaningful correction through April with the broad index down almost 8%, led by a 22% fall in met coal prices (US$204/t), 13% fall in iron ore (US$107/t) and a 5% fall in Brent (US$79/bbl). Our end–2023 forecast for iron ore remains US$100/t but there are clear downside risks emerging.
The following text is based on the article in the May Market Outlook
Our commodity price forecasts can be found in the May Commodities Forecasts
Since the April report commodities have had a meaningful correction. Our broad index (Westpac Exports Price Index) is down almost 8% led by a 22% fall in met coal prices (US$204/t), 13% fall in iron ore (US$107/t), 5% fall in Brent (US$79/bbl), and a 2% fall in LNG. Both base metals and gold were flat in the month, but base metals individually were more mixed with a 7% gain in nickel (US$24,200/t) and a 2% increase in lead being offset by a 3% fall in copper (US$8,600) and a 7% fall in zinc. Rural or soft commodities fell 4% in the month.
At this stage we have left our end 2023 forecast for iron ore at US$100/t. However, as noted below, clear downside risks are emerging for this forecast. We have marked down our met coal forecast to US$206/t but held thermal coal flat at US$185/t for while prices are likely to be volatile, we expect them to track broadly sideways through the remainder of the year.
Our forecasts reflect the broad themes that have evolved this year with a Chinese economic reopening contrasted against the risk of recession in developed economies and a mixed outlook for commodities supply. Currently, Chinese reopening momentum remains a tailwind with recent positive data releases not dimming the prospect of further stimulus support.
However, as we have also highlighted, the commodity intensity of China’s current economic recovery is likely to be lower compared to previous cycles, particularly for early cycle commodities such as iron ore and met coal. While the outlook for base metals may be more robust, care should be taken on what the magnitude of gains might be. China is the key end market for around 50% of base metals but a US/Europe recession would have a material impact, so we need to be careful in assessing the net outcome. We also must keep in mind that metals are also financial assets (old ‘Dr Copper’ is widely followed in financial markets) and slowing economic activity (and/or industrial production) would be a drag on near–term price momentum. We also note that, in broad terms, the supply outlook for commodities is quite mixed. Iron ore supply is in a clear recovery phase while copper and aluminium supply is looking more constrained. The outlook for coal supply is more mixed.
Despite the Chinese construction season having started, iron ore price fell to a low of US$104/t in late April, the lowest level since late November 2022 with reports suggesting the fall was due to moderating demand from Chinese steel mills, with 40% of the steel furnaces in Tangshan – China’s largest steel producing city in the Hebei province – having gone into maintenance. It was also noted that there appears to be signs of improving production discipline among Chinese rebar producers as mills react to meaningfully negative margins. There were also reports of concerns the NDRC is set to intervene after it said it will monitor the iron ore market closely as well as signs of weakening investor confidence as net long positions decline on the Dalian market. For iron ore supply, following a disappointing year in 2022 when key producers trimmed their guidance due to operational, licensing or logistical challenges, supply has been lifting so far in 2023 with Rio Tinto in particular stepping up production. Under this environment the risk to our current year–end forecast for US$100/t are to the downside. The current cost/support level for iron ore is around US$70/t to US$80/t.
Given that EU natural gas prices are now back below LNG prices landed in Japan, has the European energy crisis passed, such that the next northern hemisphere winter no longer presents an upside risk? We do not think so. Overall weaker demand, driven in part by the just–passed mild winter in Europe, resulted in gas inventories tracking around 10–year highs causing a sharp correction in gas prices so far this year. This has flowed on to coal, which has seen a dramatic fall in prices. There are broad expectations for the global LNG market to remain in deficit through 2023 and for gas inventories to drift lower through the second half of the year on the assumption that there is a normal northern hemisphere summer rise in demand along with increased Chinese imports of LNG. Unless there is a matching lift in supply, this scenario should be supportive of gas and coal prices in the second half of 2023 and even into the first half of 2024. The price risks could shift to the downside in 2025 if, as expected, LNG supply ramps up.
We hold to the view that the return of OPEC+ as a meaningful marginal producer will see Brent trade within a US$80/bbl to US$100/bbl this year. The observation that OPEC+ intervened when Brent was rising back towards US$80/bbl suggests this ‘price floor’ may be harder than previously thought. The key downside risk to our price forecasts remains a weaker global economy (currently Westpac is forecasting world growth of 3.0% in 2023, but with growth of just 0.9% across the developed economies) and thus weaker demand. This could take Brent back towards the March lows of around $70/bbl, but this is likely to be short–lived as OPEC+ members still have room for further cuts in production. Alternatively, a more positive economic outlook and a faster than expected Chinese reopening could see prices rise to more than US$100/bbl. However, it is likely it would take very strong demand to sustain prices above this level as OPEC+ has the potential to turn towards raising production faster than expected.
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