Commodities Update May 2024
Commodities rallied through April as iron ore lifted on speculation of further Chinese housing support while base metals continued a bounce from their recent price correction. There was a partial offset from a decline in crude oil prices as geopolitical tensions swing between escalation and de-escalation while the supply outlook is more positive combined with a less constructive demand outlook.
The following is based on text from the Westpac May 2024 Market Outlook (PDF 420KB)
For more details of our longer-term forecasts see Westpac May 2024 Commodity Forecasts
Overall, April was a positive month for commodities with the Westpac Export Price Index rallying 7.1% since the last report. Iron ore is leading the charge with a solid 17.3% gain in the month supported by thermal coal (11.5%) and met coal (2%) that were only partially offset by a –6.5% fall in crude oil prices. There was also a solid rally in base metals with our Metals Index up 7.6% in the month with nickel (+14.6%) and zinc (+14.6%) leading the charge, all important copper not too far behind (+8.2%) while aluminium put in a solid performance (+5.7%). This month we have left our forecasts broadly unchanged with only minor marking-to-market for some near-term forecasts.
Crude oil: demand outlook has been revised down while the geopolitical outlook remains uncertain.
We continue to hold the view that near term geopolitical issues have been supportive of crude oil prices. As supply continues to outpace demand (the IEA has forecast a soft global demand growth estimate for 2024 of 1.2 million bpd), we expect crude prices to soften back towards US$78/bbl by early 2025.
For the near-term, we see crude capped around US$85/bbl as geopolitical developments remain at the fore. Israel’s war cabinet voted to “continue operations in Rafah to exert military pressure on Hamas in order to promote the release of our hostages and the other goals of war”. Scenes of tanks rolling through the Rafah crossing would certainly add to risks of a wider conflagration. Against this, there have been signs that we are moving incrementally towards an agreement between Israel and Hamas. Around demand weakness, Wood Mackenzie is forecasting this year to see the slowest growth for gasoline demand since 2020 (+340k bpd vs. +700k bpd in 2023), as China nears peak transport fuel demand while the US has passed peak demand.
OilChem (a provider of Chinese energy and chemical information and prices) reported that China was issuing a second quota for fuel exports as the nation faces a ballooning surplus amid faster adoption of clean energy vehicles. In addition, OilChem has also reported authorities had given permission to export 14 million tonnes of diesel, gasoline and jet fuel following the first batch of 19 million tonnes. That compares with 9 million tonnes for a second batch last year and 18.99 million tonnes for a first batch, representing a year-to-date rise of 18%. ADNOC (the Abu Dhabi energy group) confirmed it has ‘officially’ raised its production capacity from 4.65m bpd to 4.85m bpd (the by-product of a five year $150bn spending plan announced in 2022). This is in conflict with the current OPEC production quotas so there will be much in interest in the June 1 OPEC meeting in Vienna to see how this tension is reconciled.
Base metals – appear stretched to fundamentals.
For base metals, we are still not convinced of the strength in the current rally, particularly for copper as it eye’s a US$9,500-10,000/t range. Firstly, our ‘rough’ estimates suggest the combined raw copper production of the top three producers (Chile, Peru and the Democratic Republic of Congo) is up 2.5%yr over January-February with a 5% surge in February alone. This is a far more positive start to the year than had been expected. In terms of refined copper production, Chinese production was up 12.4% in the year to March and 35% higher in the first quarter compared to the Q1 average over the last five years. The Yangshan physical premium paid on imported refined copper into China briefly hit zero last week for the first time on daily data back to 2017, pointing to “extremely weak demand for imported cargoes”. Further, Bloomberg reported that China’s copper exports are set to hit the highest in two years as “beleaguered smelters ship out metals to benefit from a powerful rally in global prices”.
Iron ore – current strength likely to be short lived.
Turning to iron ore, we continue to expect any near-term strength to be capped around US$120/t though we see few reasons to expect a sudden reversal. Inventories of iron ore at Chinese ports are currently at a two-year high and more than one standard deviation above seasonal averages. In March, Chinese steel exports surged 25% year on year to 9.88 million tonnes, the strongest seen since July 2016. The US, Brazil, Chile and Mexico have all announced tariffs and/or quotas on Chinese steel, putting Chinese ‘dumping of surplus steel’ firmly on the political agenda. However, it has been reported that at a recent Politburo meeting, it was suggested that officials are researching ways to deal with stock of unsold properties in China, further raising optimism of a turnaround in the construction industry and triggering a huge rise in mainland property stocks.
While all the above will be supportive of near-term pricing, supply is improving while demand is softening. To March, imports of iron ore are up 5.4% year-to-date while Chinese ore production is up 20% year-to-date. We also note the very soft start to China’s steel production with pig iron production down –2.4% year-to-date in March while crude steel production was down 3.5%. As such, we hold to the view that iron ore prices will soften in the second half of 2024 to US$85/t by the end of the year.
Thermal coal – prices have returned to pre-war levels.
Thermal coal prices reached unprecedented levels in 2022 after Russia invaded Ukraine, due to materially higher gas prices, trade flow disruption and supply disruption in Australia, Colombia, South Africa and Russia. Despite the record high prices, coal capex remains depressed with excess cash flows being used to deleverage or being returned to shareholders. Gas prices have eased, trade flows have largely adjusted, and prices are back to pre-war levels.
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