Commodities Update November 2023
Despite an end of year rally commodity prices fell ~6% through 2023 led by a 60% collapse in thermal coal, a 37% fall in LNG, a 14% fall in base metals and an 11% fall in crude oil. Offsetting these declines was a 37% rally in iron ore, a 22% surge in met coal and a 15% gain in gold. As such, we have lifted our end 2024 forecasts for iron ore and met coal but downgraded our crude and base metals. We provide an update on key base metals and for the first time dip out toes into the outlook for battery metals with a focus on lithium/spodumene.
The following text is from the Westpac Dec 2023 Jan 2024 Market Outlook (PDF 438KB)
For more details on our longer-term forecasts see Westpac Dec/Jan Commodity Forecasts
As we head towards year end our broadest measure of commodity prices (Westpac Export Price Index - WEPI) rallied 6% since our November publication. Grabbling the headlines was the decline in crude oil prices (Brent down 7% in the month) and recent weakness in base metal prices (despite the almost 3% rise in copper the Base Metals Index fell 3%) driven by a 8% rise in iron ore, 10% increase in met coal and an almost 20% gain in thermal coal. As the year ends it can be helpful to put the recent strength in commodity prices in context by comparing them to where they were a year earlier. The WEPI is down 6% driven by a 60% fall in thermal coal (the EU energy crisis pushed thermal coal to a record high), 11% fall in Brent, a 37% fall in LNG and a 14% fall in base metals (due to slower global trade and near term supply fears no being realised) being mostly offset by a 36% increase in iron ore, 22% rise in met coal and 15% gain in gold. Outside of the strength in steel inputs (iron ore and met coal), which is more about tight supply conditions rather than the strength in Chinese demand (Chinese steel production peaked in 2020 and had tracked sideways since then), commodity prices have softened has global industrial production and trade moderated through 2023.
We have lowered our crude oil forecasts as the progression of 2023 saw the crude oil market transition from one driven by a post COVID recovery in demand to one dominated by supply. OPEC+ acknowledged this shift and introduced production quotas in 2023 reducing OPEC+ crude production by around 1mbpd in the year to November. However, offsetting this has been an increase in non-OPEC production with the 1mbpd increase in US crude production, which hit a record high of 13.2mbpd in October, which expectations it can hold this level if not lifting a bit higher. It is interesting to note the significant improvement in productivity from the US tight crude industry. Back in February/March 2020, when US crude production hit 13.0mbpd, there were 674 active drilling rigs. This time with production hitting 13.2mbpd this record production was achieved with just 500 rigs, a 26% fall in the number of active rigs for an almost 2% increase in output. This helps demonstrates not just why US tight oil producers are able to lift output despite lower crude prices but also explains why Texas, New Mexico and North Dakota have not seen the same boost to state economic activity as they did last time crude production surged.
From a peak of US$95/bbl in late September by early December Brent hit a low around US$74/bbl from which there was a small bounce to US$76/bbl that was not enough to address the correction through this week resulting in a 4% fall in the week to December 8th, the seventh consecutive weekly loss. With the Saudi’s having a balanced budget threshold of around US$70-$80/bbl we expect prices to hold around current levels in a volatile if somewhat directionless manner until we either get further direction from OPEC+ in regard to further reductions in production quotas or there is clear, sustained lift in demand, something we are looking to commence with the Fed rate cuts in the first half of 2024. It is interesting to note that as prices have fallen below US$80/bbl the US DoE announced it will purchase 3mmb of crude for March delivery and will hold tenders through at least May to refill the SPR.
For LNG, prices landed in Japan have been broadly tracking sideways since August while natural gas prices in the EU have lifted 52% since July and are now trading above Japanese prices, something that in the last decade or more only occurred during the EU energy crisis of 2021 and 2022 when Russian gas supplies to the EU were cut. Expectations for a warmer than usual northern hemisphere winter help prevent a runup in EU gas prices, at least for the near term, but it is something we are watching closely. Demand from Asia remains robust so any increase in demand from the EU will be a boost for global LNG prices.
Iron ore is holding above US$130/t with reports that Chinese authorities would not apply annual steel production caps this year while the weaker yuan stimulates the export of excess Chinese steel production. These reports have been supportive of iron ore and met coal prices even though rising input prices, in the face of flat steel prices, has been squeezing margins for Chinese steel producers in the second half of 2023. Chinese steel exports are up 33% in the year-to-date January to October which has been a key support for Chinese steel production and therefore iron ore and met coal demand. While we have noted the support of a depreciating yuan there is robust underlying demand for Chinese steel in key markets for Chinese exports particularly Southeast Asia, India, North America and the Middle East. We continue to look for an increase in iron ore and met coal supply though 2024 but it is clear these fundamentals highlight a tighter supply/demand balance that we had thought and thus higher prices that we had forecast.
We expect met coal to hold above US$300/t to mid-2024 before easing to around US$250/t by end 2025 as supply lifts into the second half of 2024. Australia’s Bureau of Meteorology continues to expect hotter and drier conditions on Australia’s east coast until April 2024 which should help see an improvement in shipments. At least for the near-term seasonal restocking from mills will be supportive of demand while a lift in Chinese supply is unlikely.
Some of the most material changes in the commodities space in the last six months have been in the battery raw material space with reported downgrades of between 15% to 40% to lithium, nickel and rare earths forecasts. We are yet to formalise our lithium/spodumene forecasts but current market estimates to around US$1,500/t for 2024 with the current severe correction bottoming through the first half of 2024. Spodumene was trading around US$1,100/t as we went to press suggesting there is downside risk to a year average forecast of US$1,500 without a significant rally in prices through 2024.
It is true that the lithium market could rebalance quite quickly due to rapid demand growth. The current downshift in prices, from US$3,500/t in early August it fell through US$1,500 in early December as was around US$1,100 as we went to press was due to a significant increase in supply chain inventories and this momentum remains a potential headwind. This is huge correction from the heady highs of around US$6,000/t back in 2022. Having observed many commodity price cycles over the last 20 years of so it is hard to recall a price correction of such a magnitude while there has been such robust growth, and an expectation it will continue as such, in underlying structural demand. Market estimates put the growth in the lithium market through 2024 at around 15-40% with most base cases seeming to settle around 20%. If this pace of demand growth is achieved, or even exceeded, then the market has the potential to rebalance faster than have seen in previous commodity price corrections.
We still believe that the outlook for base metals remains very sound with compelling medium-term fundamentals as the current rate of capex investment in unlikely to be sufficient to match robust demand growth stemming from the transition away from carbon-based energy sources. Copper remains the standout with the market is set to be in deficit in 2024 after recent supply downgrades. Given high underlying costs of production, while the demand outlook for aluminium and zinc is not as exciting as it is for copper, we see limited downside for these commodities.
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