The Outlook for 10 Key Commodities: Office of the Chief Economist

The Australian Government's commodity forecaster – The Office of the Chief Economist – publishes a quarterly report which seeks to forecast the value, volume and price of Australia's major resources and commodity exports.

We've summarised some of the key takeaways for ten key commodities, including iron ore, uranium and lithium. I've been reading the quarterly reports for a couple of years now and in my experience, the forecasts tend to be very conservative but directionally accurate.

Iron Ore

• December quarter highlights: Iron ore prices strengthened in the December quarter following a series of Chinese government measures to support its economy and real estate sector. Production cuts have not been strictly enforced in 2023 as the government prioritised economic growth over environmental consolidations. Steel production has been stronger-than-expected in the first half of 2023 but gradually losing momentum over the second half.

• Key things to note: The world's two largest producers – Australia and Brazil – are expected to collectively growth export volumes by 2.3% per annum through to 2025.

• Outlook: Iron ore prices are forecast to fall from an average US$105 a tonne in 2023 to above US$77 a tonne by 2025.

Source: Office of the Chief Economist

Metallurgical Coal

• December quarter highlights: Australian premium coking coal prices averaged US$320 a tonne in November 2023, a year to date high. Demand for met coal was seen increasing 18% year-on-year in the first 8 months of 2023. The rise was seen rallying off a relatively low base since China's 2022 steel production was heavily impacted by COVID lockdowns.

• Key things to note: World met coal demand is forecast to increase from 312Mt in 2022 to 318Mt by 2025. The supply gap in the first half of 2023 has started to close amid improved weather conditions. India is expected to overtake China as the primary growth market for steel production.

• Outlook: Australian premium hard coking coal is expected to average US$293 a tonne in 2023, easing to US$203 a tonne by 2025.

Source: Office of the Chief Economist

Thermal Coal

• December quarter highlights: Newcastle thermal coal prices traded in a relatively narrow band between US$120 and US$160 a tonne (down from 2022 peaks of almost US$450 a tonne).

• Key things to note: Firmer prices are possible as the year turns, with the recent lift in gas/LNG prices improving the competitiveness of thermal coal, especially in Asia. A colder than normal Northern Hemisphere winter could also add to thermal coal demand, though stocks are high.

• Outlook: Prices are forecast to drift lower as supply rises and demand moderates over the outlook period.

Source: Office of the Chief Economist

Gas

• December quarter highlights: Gas prices have been steadily rebalancing after Russia ceased exports to Europe. Prices have averaged around US$12MMBtu in the September quarter (down from the peaks of around US$45MMBtu)

• Key things to note: Gas demand is facing growing concerns from price caps in Europe and Australia. European governments are accelerating the timeline for renewables and Asian governments are pivoting towards renewable and nuclear energy. Long-term demand for gas rests on future emissions reduction emissions from various countries.

• Outlook: Prices are expected to lift to US$17MMBtu by the March quarter 2024 as winter demand pressures gas supplies. Prices are forecast to ease back down to US$12MMBtu by the end of 2025.

Source: Office of the Chief Economist

Oil

• December quarter highlights: The report main refers to oil market movements for the September quarter, where prices slid due to weak Chinese demand, slower OECD economic growth and higher than expected inventories.

• Key things to note: World oil output is forecast to grow by 1.9% in 2024, with additional supply from North and Latin America. The US has sold close to half the oil held in its Strategic Petroleum Reserve and expects to restock 3 million barrels in early 2024.

• Outlook: Prices are forecast to average US$83 in 2024 but fall significantly further to US$76 a barrel by 2025 driven by weak demand and gains in non-OPEC production.

Source: Office of the Chief Economist

Uranium

• December quarter highlights: Uranium prices rallied from US$59 a pound in September to US$81 a pound in November. The two main catalysts were 1) Cameco's production downgrade and 2) an announcement from the World Nuclear Association that uranium consumption would need to double by 2024 to meet net zero commitments.

• Key things to note: New mining capacity is not expected to close supply shortfalls over the outlook period. Stockpiles held by utilities companies are forecast to halve by 2024 and halve again by 2025. This is expected to put upward pressure on prices over the next two years.

• Outlook: Price outlook as been upgraded, now forecast to climb to around US$92 a tonne by 2025 amid a structural market deficit.

Source: Office of the Chief Economist

Gold

• December quarter highlights: Gold prices rose sharply after the Hamas-Israel conflict started, crossing the US$2,000 an ounce level in late October. Prices further strengthened amid falling bond yields and a weakening US dollar – As markets began to price in the end of the global tightening cycle and aggressively price in rate cut expectations for 2024.

• Key things to note: Prices are expected to remain elevated in the near term amid ongoing safe-haven demand and central bank demand. Strong official sector buying is likely to persist and some degree of geopolitical risk premium is expected.

• Outlook: Price are forecast to decline throughout 2024 under a scenario where the US economy slows but does not go into a recession. Under this scenario, real US interest rates will remain high and lead to further declines in gold prices.

Source: Office of the Chief Economist

Aluminium

• December quarter highlights: Expectations of a new round of stimulus from China and production curtailments in China's Yunnan Province boosted prices in the December quarter, with prices likely to average around US$2,250 a tonne, up from US$2,154 a tonne in the September quarter.

• Key things to note: Automakers are seeking to reduce vehicle weight by substituting aluminium for steel. Strong global vehicle manufacturing activity is expected to offset weakness in construction activity and lift global aluminium demand by 0.4% to 68 million tonnes in 2023.

• Outlook: The LME spot price for aluminium is forecast to rise at an average annual rate of 2.9% in 2024 and 2025, reaching approximately US$2,400 by 2025.

Source: Office of the Chief Economist

Copper

• December quarter highlights: Copper prices have continued to trend lower from March peaks of US$8,900 a tonne to an average US$8,190 a tonne in November. Stronger-than-expected Chinese demand failed to offset a damp outlook for construction and manufacturing in other key markets such as Europe and the rest of Asia.

• Key things to note: Downward pressure is expected in the near-term as leading indicators flag further near-term vulnerability in global manufacturing. China's construction sector faces ongoing challenges. Although this could be offset by robust activity from energy infrastructure sectors.

• Outlook: Price are forecast to average US$8,100 a tonne in 2023 and rose to US$8,500 a tonne in 2025. Upside risks include historically low levels of inventories, stronger-than-expected demand and the continued expansion of clean energy manufacturing.

Source: Office of the Chief Economist

Nickel

• December quarter highlights: LME prices averaged just over US$20,000 a tonne the September quarter 2023 and declined further to around US$17,600 in the December quarter 2023. The nickel market faces a surge in output from Indonesia and softening global industrial production.

• Key things to note: Nickel demand is forecast to rise 5.5% year-on-year in 2023 and accelerate to 7.4% annually to 2025. The market will remain in a reducing surplus through to 2025 but low levels of inventories seen at major exchanges such as the LME could see upside risk to prices in the near term.

• Outlook: LME nickel prices are forecast to average US$21,200 a tonne in 2023 and fall further to US$18,000 in 2024.

Source: Office of the Chief Economist

Lithium

• December quarter highlights: The average price over the month of October 2023 was US$2,168 and US$25,327 a tonne for spodumene and lithium hydroxide, respectively. This compares to average 2022 prices of US$4,364 and US$67,279.

• Key things to note: The five largest lithium mines in Australia (which covers 99% of domestic spodumene production) remain profitable at current levels. Their average costs of production per tonne over FY22-23 range from A$670 to A$1,225.

• Outlook: The spot price of spodumene is estimated to average US$3,840 a tonne in 2023 and fall to US$2,200 in 2025. The price for lithium hydroxide is estimated to average US$52,450 in 2023 and decline to around US$30,000 a tonne in 2025. Prices are not expected to return to previous highs before 2025 due to oversupply.

Source: Office of the Chief Economist