Commodities Update May 2025
Crude crashed through US$60/bbl on the back of OPEC+ agreeing to lift output while ‘Liberation Day’ left iron ore trading below $100/t. However, the Westpac Export Price Index (WEPI) gained 2.5% over the month, driven by a 14% rally in gold. We have reassessed our forecasts given these significant shifts. We also note the ongoing degradation of the quality of Australian iron ore and the impact it might have on pricing.
The following is based on text from the May Market Outlook (PDF 3MB)
For more details of our longer-term forecasts see May 2025 Commodity Forecasts
Grabbing headlines in the past month has been crude oil crashing through and holding below US$60/bbl on the back of OPEC+ agreeing to lift output while the demand outlook softened. Additionally, the aftermath of ‘Liberation Day’ has left iron ore trading below $100/t, range-bound between US$94.5/t and US$99.5/t. While the overall market was marked with losses as is typically the case, the underlying story was more mixed. The Westpac Export Price Index (WEPI) gained 2.5% over the month, led by a 14% rally in gold to fresh record highs and a near 8% gain in met coal. Offsetting this was a 3.3% fall in base metals, led by copper (–2.6%), an almost 4% fall in iron ore, and a 3% fall in thermal coal.
Putting the recent ‘gold rush’ in perspective, gold prices have lifted a whopping 44% in the year to April. This has managed to fully offset declines over the same period across iron ore (–16%), met coal (–22%), thermal coal (–26%), crude oil (–29%), LNG (–6%) and base metals (–4%), leaving the WEPI basically flat over the year to date.
The ongoing rally in gold has seen us lift our near-term forecast for the precious metal, and we now expect it to hold around current levels (US$3,400oz) while acknowledging significant upside risks that are hard to quantify. We have incorporated further near-term downside risks for crude oil and have Brent at US$55/bbl in June before a modest recovery to US$57/bbl in September and US$60/bbl in December. Our iron ore and met coal forecasts are unchanged with a gradual correction down to US$86/t and US$167/t respectively in December. We expect falling crude prices to be a drag on LNG export prices which now have a low of US$9/mmbtu in December. For thermal coal, we expect prices to hold around US$100/t for the near-term.
Brent below US$60/bbl
OPEC+ is adding an additional 411kbpd to the market this month and the same amount next month. As noted by Westpac Strategy colleague Robert Rennie, we see a risk that this will continue, meaning all 2.2mbpd in production restrictions could be returned to the market by October. At the same time, demand destruction from tariffs and trade wars will likely peak around the third quarter of the year, adding to an already strong inventory build. The latest crude oil outlook by the EIA is broadly in line with our thinking, with crude production set to rise a combined 2.6mbpd over 2025 and 2026. However, consumption is forecast to rise by just 2mbpd, a downward revision of 0.5mbpd compared to their earlier forecasts as demand destruction kicks in. Given the fall in crude prices, it is not surprising that the forecast for US production has been revised down. From an all-time record output of 13.7mbpd at the end of this year, the EIA is expecting US production to drop to 13.44mbpd at the end of 2026. Here is where ‘drill baby drill’ crashes up against the realities of US crude production and the need for oil producers to have solid margins. However, the EIA is expecting this to be more than offset by strong production increases from non-OPEC+ countries. In addition, while Kazakhstan is “considering all possible options for meetings its [OPEC+] commitments” we remain sceptical given that we have heard this for some time with nothing to show. Hence, we expect to see further weakness below US$60/bbl.
Iron ore now on the path down to US$86/t
Westpac has long been looking for iron ore prices to weaken with an 2025 end point around US$86/t. At least for the near-term, we expect prices to be supported above US$95/t but we are looking for a drop below US$90/t in the second half of the year. Recent reports suggest Chinese steel production will be 50mt lower this year. As iron ore exports from Australia and Brazil normalise after the extreme weather disruptions in February, a rebuilding of iron ore inventories at Chinese ports is underway. However, the level of inventories remains relatively low compared to steel production.
Simandou is slated to start production later this year while Sinosteel confirmed that output from the Kribi-Lobe mine in Cameroon should start by March 2026. The long-awaited new supply out of Africa is just about here. Offsetting this is prospects of an increase in new equipment investment in China as domestic policies focus on stimulating growth and stabilising confidence. So while we believe that iron ore prices have a bit of a cushion for the moment, we are increasingly confident that prices will fall below US$90/t later this year.
In the background there has been an emerging story that has important implications for the long run pricing of our iron ore exports. It is the ongoing gradual degradation Rio Tinto’s and BHP’s ore bodies. Both are lowering the grades of their Pilbara blends with Rio Tinto facing the challenge somewhat earlier. Through the first quarter of 2025 Rio’s lower grade 58% iron ore (fe) product was 29% of total shipments, a new record high share. So it is not surprising to read Platts report that Rio plans to lower the iron content of its Pilbara Blend Fines from 61.6%fe currently to less than 61%fe. It has also been reported that BHP is also lowering the grade of its Pilbara Fines.
To put this in perspective, 58%fe trades at a 12% discount to benchmark 62% fines and we expect this discount to increase over time as steel makers focus on productivity and lower emissions (higher iron content means less coal is burnt). A lower iron content will see a greater discount applied to Australian iron ore exports. By contrast, Vale should see a medium-term benefit due to the higher iron content of its ore which is set to improve further due to expansion of its Northern system.
Base metals, copper supported by tariffs while exemptions are support aluminium
Copper supply is currently rising reasonably strongly while demand does have the potential to be hit hard by the current havoc being created by tariffs and trade wars. However, the massive migration of copper from Asia to the USA continues supporting prices globally. You can see just how tight the copper market is in China via ShFE calendar spreads as well as the outright copper premium in China is compared to LME pricing. So, at least for the near-term copper Robert Rennie expects copper prices to continue probing the US$9,500/t level. However, we remain cautious as we are expecting a sharp reversal as there is likely to be an outright hit to demand once the US copper tariff is know.
On the other hand, aluminium is looking much more supported given that auto part importers will now be spared tariffs on steel and aluminium products while the proposed UK trade deal will see zero tariffs on British steel and aluminium. Out of the base metals aluminium has performed poorly compared to copper so we are looking for a bit of catch-up.
Gold continues to display upside momentum
Chinese gold ETFs have experienced a significant lift in inflows in the last four month with net inflows into the four major China based ETFs having been strongly positive in twelve of the last sixteen weeks. In addition, volumes traded on the Shanghai Futures Exchange and the Shanghai Gold Exchange have surged. Combined we view this as evidence of an unfolding structural move away from US dollar based assets into Yuan based assets which is the natural outcome of a weaker US dollar and rising geopolitical tensions. As such we see any dip below US$3,200/oz as being a short lived event and continue to see gold push on to fresh record highs, at least for the medium term. However, given we have no way to gauge just how high gold will go our forecast are set around the current level with acknowledge risks to the upside.
Met coal down around 50% this year on soft demand and robust supply
Premium low vol hard coking coal (PLV HCC) has seen prices fall from around $330/t at the start of 2024 to currently US$170-180/t, lowest level since mid-2021. This has been driven by weak global demand, excluding China, and ample supply in the spot market despite the weather-related disruptions in Australia through January and February. With prices now close to the 90-95th percentile of Wood McKenzie’s cost curve, and signs of tightening supply from high-cost alternatives out of the US, we think prices may have started to find a base to work off. However, the market looks set to remain in surplus at least out to 2027 and so it is hard to see how prices could rise much more than would support the required level of output until we see some of the supply exit the market.
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