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Commodities Update Summary

Core Content Overview

This report provides an analysis of commodity price forecasts and market dynamics for 2014 and beyond, with a focus on coal, base metals, iron ore, and gold. It outlines key factors influencing price trends, including supply and demand shifts, currency movements, and geopolitical developments.

Key Commodities and Price Forecasts

Coal

• Coking Coal:
  • YTD 2014 prices fell by 15%.
  • Forecast cut by 10.1% for 2014, 14.3% for 2015, and 16.9% for 2016.
  • Prices are expected to remain supported by North American supply constraints and lower US-dollar competitiveness.
  • China's increased use of domestic coal and shadow financing have contributed to subdued seaborne demand.
  • China's coking coal imports rose by 41% in 2013 to a record 74Mt, yet prices still declined by 16%.

Thermal Coal

• Prices fell by 1.5% in 2014.
• Forecast reduced to US$84/t for 2014, US$90/t for 2015, and US$90/t for 2016.
• Domestic coal production in China is increasing, reducing the competitiveness of seaborne imports.
• Long-term price cut to US$90/t from US$100/t, reflecting lower capital intensity in Australia.

Base Metals

Copper

• Prices have been affected by trade finance-related inventory movements in China.
• Forecast for 2014 is US$3.15/lb, US$3.22/lb for 2015, and US$3.24/lb for 2016.
• LME prices have been lacklustre, but regional premiums remain strong, indicating market price resilience.
• China's economic growth is expected to remain above 7%, supporting copper demand.

Aluminium

• LME prices have weakened, but regional premiums (up to 21%) provide a clearer reflection of market conditions.
• Forecast for 2014 is US$1,852/t, down 3.2% from previous estimates.
• Smelter closures in Australia, South Africa, and Europe may reduce supply, but are expected to be partially offset by production growth.
• Global production is forecast to rise 4% in 2014, with China contributing 8% to the increase.

Iron Ore

• Prices have declined significantly:
  • 2014F forecast at US$115/t, down 7.5% from US$124/t.
  • 2015F at US$110/t, down 11.1%.
  • 2016F at US$105/t, down 13.4%.
• China's reliance on imports remains high, with 75% of its iron ore imports in 2014.
• Port stockpiles reached 107Mt, but are still aligned with consumption levels.
• Cash cost curve analysis suggests 25% of Chinese production is cash flow negative, which could support prices above US$115/t.
• Supply increase in 2014 is expected to be 130Mt, with China absorbing 100Mt.

Gold

• 2013 was a poor year, with a 28% decline to US$1,205/oz.
• 2014 has seen a 14.5% increase in US-dollar terms, with emerging market currencies showing even stronger performance.
• Forecast for 2014 is US$1,334/oz, up from US$1,281/oz.
• 2015 forecast at US$1,338/oz, with long-term forecast remaining at US$1,100/oz.
• Positive factors include:
  • Stabilisation of gold prices amid tapering of quantitative easing.
  • Central banks continuing to purchase gold as a reserve asset.
  • Relaxation of India's import restrictions due to reduced current account deficits.
  • Investor demand for gold as a hedge against currency devaluation and equity market risks.
  • Physical demand in China and Southeast Asia remains strong.

Market Outlook and Risks

• Global PMIs remain broadly positive, supporting bulk and base metals pricing.
• China's steel production growth is expected to slow to 4% in 2014 from 8% in 2013, but demand for coking coal could still support prices.
• Iron ore is expected to face downside risks in 2016 due to Brazilian and African supply concerns.
• Thermal coal and coking coal prices are expected to remain below incentive levels, but China's domestic production and infrastructure development may provide some price support.
• Copper faces supply risks due to capital discipline and potential disruptions, but demand growth should support prices above US$3.00/lb.

Supply and Demand Dynamics

• China's coking coal imports have been resilient, despite a price decline.
• India's iron ore production is expected to fall to 120-130Mt in FY14 due to environmental restrictions and mining bans.
• Australia is set to dominate the supply increase in iron ore, with seaborne exports forecast to rise to 705Mt in 2014.
• Non-China seaborne imports are expected to increase, potentially displacing higher-cost Chinese production.
• Seaborne supply-demand balance shows a surplus in 2014, but surplus widening is expected in 2015.

Conclusion

• Commodity prices are influenced by a mix of fundamental and non-fundamental factors, including inventory financing, currency fluctuations, and policy changes.
• China remains a key driver of global commodity demand, particularly for iron ore and coking coal.
• Price support is expected for gold and seaborne coal due to strong physical demand and cost dynamics.
• Supply constraints in North America and Australia may provide price stability for coking coal and iron ore over the medium term.