Commodities Update October 2023
September was a volatile month for many commodities but our broad commodities index was flat in the period. Falling thermal coal, gold, copper and nickel were offset by stronger met coal, LNG, aluminium and zinc. Iron ore prices have been held up by robust steel production while our crude oil forecasts have been lifted due to a sharper than expected rally over the last three months.
The following text is based on the article in the Westpac October 2023 Market Outlook (PDF 417KB)
For more details on our longer-term forecasts see Westpac October 2023 Commodity Forecasts
It has again been a mixed, and somewhat volatile, month for commodities but in the end our broadest commodities index finished the month roughly where it started down just –0.1%. Brent rose from US$90/bbl to a peak just under US$95/bbl before falling back to US$90/bbl as we went to press. Iron ore prices are currently where they were in the last report at US$120/t despite hitting a peak of US$125/t and a low of US$117/t. Thermal coal has fallen 4% to US$160/t. On a positive note, since the September report, premium met coal has lifted 19% to US$337/t while LNG is up 2%. Base metals overall are down 2%, on the back of a 4% fall in copper offset to some extent by a 6% rise in aluminium and zinc lifting 3%. Overall, commodity prices have had a significant correction this year with the Westpac Commodities Export Price Index down 15% in the year to early October.
We have seen a modest improvement in seaborne iron ore supply this year so it may be somewhat surprising to see how robust iron ore prices have been. Iron ore supply grew more than expected with the traditional markets of Australia, Brazil and South Africa lifting shipments by around 3% this year while the non-traditional markets of India, West Africa (and others) surged 38% in the year to date; overall imports are up 7% in the year to August/11% through the year. However, this has been offset by: (1) a lift in China steel production which is up close to 3% in the year to August and through the year (driven by a material lift in steel exports); (2) a reduction in China’s domestic iron ore production, which is down 8% in the year to August but up 7% through the year due to base effects; and (3) a decline in scrap steel consumption by Chinese steel mills. As a result, the market has been tight since February with China’s port inventories falling outright; –11% year to September, –49% through the year.
The Chinese iron ore market is likely to remain tight into early 2024 as low inventories support prices through the fourth quarter – when traditionally, China starts to curtail iron ore production – and the seasonally weak supply situation eventuates in the first quarter. Looking further out, we see global supply continuing to lift, a further increase in scrap steel consumption as a carbon price will equalise the relative economics of scrap steel vs. pig iron. Domestic Chinese iron ore production is likely to hold steady until prices fall below US$100/t. For now, our end 2023 forecast for spot iron ore is US$100/t falling to US$83/t by end 2024. However, given just how tight the market continues to be, the risk to those forecasts lie to the upside.
In Asia, metallurgical coal prices have rallied on the back of firm demand amid tight spot liquidity with premium met lifting from US$284/t in the September report to US$337/t as we went to press. A lack of supply for November-loading of Australian premium hard coking coal is underpinning current prices. It has been reported that prime hard coals are facing an acute shortage in India, with robust demand from several end-users. We do expect the supply situation to improve and demand to ease as Chinese steel production moderates seeing premium met coal easing back to US$315/t by end 2023 and US$238/t by end 2024.
Thermal coal prices peaked in mid September at US$170/t but have since eased back to around US$160/t. Thermal coal prices remain more exposed to a correction than met coal. It appears that Chinese demand has softened as even a fire in a mine in Guizhou, which has hit supply, could not lift domestic prices. As such, the fundamentals for thermal coal remains weak and it does appear that the continuing disconnect between high and low calorific coals may be due, at least in part, to market speculation. It is likely that China’s coal supply will remain robust through the remainder of 2023 pushing prices lower into the year end and through 2024. We are forecasting thermal coal to ease to US$150/t by end 2023 and US$130/t by end 2024 with downside risks to those forecasts.
We have lifted our end 2023 forecast for Brent from US$85/bbl to US$90/bbl reflecting a much sharper than expected rally through the past three months. Last month we saw OPEC+ extended their production quotas with both Russia and Saudi Arabia agreeing to extend their current quota limits which has been due to expire. Due to the expectation of continued tight supply, crude prices did get a boost but this faded as the month progressed. However, due to limited potential supply increases from other producers, prices have held above US$90/bbl. Then in late September Russia announced a temporary ban on low-sulphur gasoil (diesel) and gasoline exports. The measure has been introduced to counteract recent spikes in wholesale fuel prices and a series of domestic shortages. While it is not expected to be in place for an extended period of time, it is expected to result in a reduction in exports to the EU. Russia has exported an average of 1.1 mb/d of diesel year to date. This has boosted gasoil futures which is something to watch for in regards to Australian inflation, as the recent surge in auto fuel prices in the CPI was driven in large part by an outsized surge in diesel fuel prices.
Meanwhile, as we neared month end EU natural gas prices renewed the recent correction hitting a multi-year low as unusually warm weather crimped demand.
Thinking about local energy prices Wallumbilla spot gas has falling to $6/gj, the lowest price since April 2021 and well below the imposed price cap of $12/gj. While we are yet to see how gas supplies respond to the northern hemisphere winter at least for now this inflationary risk has faded faster than expected. Our forecast is for gas prices to firm somewhat has we head through the northern hemisphere winter in the first quarter of 2024.
Through September we have seen a continuation of the sell-off for industrial metals with copper trading below US$8,000/t for the first time since late May. Base metals continue to have positive medium-term fundamentals as we believe that the current rate of capital expenditure as insufficient to match the forecast robust demand coming from the investment required to the energy transition to net zero. Despite recent headwinds from higher real rates and a stronger US dollar we maintain a constructive outlook on gold due to our forecasts for the Fed to cut rates in 2024, a resulting weaker US dollar and with current investor positioning on the lighter side of usual.
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