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Commodities Update April 2024

Falling coal and iron ore prices drove our commodities index down 4% since our last report. However, this is masking solid price gains experienced by some base metals and crude oil, both of which are facing meaningful supply constraints.

The following is based on text from the Westpac April 2024 Market Outlook (PDF 528KB)

For more details of our longer-term forecasts see Westpac April 2024 Commodity Forecasts.


There was a solid drop in the broad commodities market through March with our broad commodities index (Westpac Export Price Index) falling 4% since our last report. The largest correction was in met coal which lost more than 19% in the month followed by iron ore which lost 11%. However, the correction in iron ore has been ongoing with prices down 6% in the year while met coal is down just 1% compared to where it was a year ago. By contrast, thermal coal lost less than 2% in the month but is down almost 31% in the year having started its correction much earlier than the other two. As always in the commodities market, while some prices may be falling others are rising. On the back of ongoing conflict in the Middle East, crude oil prices lifted more than 7%. This, alongside the pushing back of rate cut expectations by the Fed, lifted gold prices 4% to a new record high. Our base metals index was up 1% in the month, but it was much more mixed for individual metals; the correction in nickel continued, falling around 7% (see our March Commodities Update for more on the nickel market) to now be down 30% in the year, while copper lifted 4% in the month and aluminium gained 6%.

Copper: rallied as negative fundamentals fade and mine production disappoints 

While not perennial copper bulls, our longer-term view on the red metal has a very constructive foundation based on rising demand from the electrification as the world de-carbonises. However, so far in 2024 base metals have faced some fundamental headwinds, including: (1) the hoped-for improvement in China macro/property data failed to materialise at the expected pace; (2) a sustained lift in US/EU demand, and the restocking of inventories, was not as robust as the market has assumed; and (3) expectations for Fed rate cuts have been pushed back further into the year. In contrast, the supply side for copper is looking far more constructive, in that conditions have tightened, with material downgrades to 2024 mine production guidance. What has also capped the upside for copper prices, so far this year, has been the strong production of refined product in the face of above-mentioned lacklustre demand. As shortages of concentrate bites, and refiners cut back on output at the same time as demand firms due to restocking, then copper is set to find further support in the second half of 2024.

 

Aluminium – lack of water in China is putting a constraint on production

As we noted earlier, this month saw a rally in aluminium which can be related back to recent supply constraints. It has been reported that nearly 1.17mt of aluminium capacity in China’s Yunnan province has been idled since November and the recent improvement in energy supply will only see 520kt of it restarted by November if all goes to plan. However, earlier this week, the Ministry of Water Resources initiated a level IV emergency response for drought prevention in the Yunnan and Sichuan provinces. Some companies have been resuming production, but due to concerns about power, the pace has been slow. Rainfall is likely to remain low in April and May.There are some risks to this view, of which the most pertinent is the under-supply assumption that underpins our copper forecasts. It is possible that Cobre Panama could restart sooner than expected, while the rest of the industry could also outperform expectations. However, both these events are not supported by industry history which suggests such an outcome is very unlikely. At the same time, we note that the copper project pipeline continues to shrink. Getting copper projects off the ground is becoming increasingly difficult and through recent history, we continue to observe that miners are consistently overly optimistic about potential project starts and copper production growth. This lack of compelling supply growth has seen us revise up our copper forecasts, from US$8,200 at end-2024 and US$9,100 end-2025 to US$9,000 and US$9,700 respectively.

 

Crude oil – geopolitics and OPEC constraining supply boosting prices

Our colleague Robert Rennie has argued for some time that Brent should be testing the upper end of the $85-$90 range given the underlying tightness in product markets. Now we have hit that range, the risk is that crude oil prices could extend further. Why? The Mexican oil producer Pemex is planning to cut exports ahead of the June 2 Mexican Presidential election as part of a plan to produce more domestic gasoline and diesel. Iran spoke of responding to Israel after an air strike on its embassy in Damascus, with their recent OPEC Ministerial Meeting seeing it maintain current output quotas. Robert also noted that global refined product inventory has fallen in 9 of 12 weeks so far this year to be back to the July 2022 low. With the shift to ‘kinetic energy wars’ in the Russia/Ukraine conflict adding to the risks of product shortages, it is hard not to see why we might hit fresh highs in the coming weeks.

 

Iron ore – the price correction continues

We have been watching the ongoing correction in the Chinese iron ore market and, at least for now, hold our end 2024 forecast of US$82/t. This week saw the benchmark iron ore price drop below US$100/t, hitting US$99/t on weak sentiment in regard to Chinese demand (despite stronger PMI read in March) and on ongoing soft fundamentals which includes rising iron ore port inventories, tight or negative steel margins (despite the fall in iron ore and met-coal prices), depressed blast furnace utilisation rates and the CISA reporting weak crude steel production up to mid-March. In addition, iron ore shipments from traditional markets are up more than 2% year to date – while Australian and South African exports have been below par, strong Brazilian exports have more than made up for the laggards. It has also been reported that last week, a net long position on the Dalian market turned into a net short position.

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