1

MINERALS & ENERGY OUTLOOK NOVEMBER 2017

NAB Group Economics

CONTENTS Key points 1

Oil & natural gas 2

Bulk commodities 4

Base metals 8

Gold 11

Outlook 12

Forecasts 13

CONTACT Riki Polygenis, Head of Australian Economics and Commodities Research

James Glenn, Senior Economist

Gerard Burg, Senior Economist - Asia

John Sharma, Economist

Amy Li, Economist

Phin Ziebell, Economist

Key Points: There were very few consistent themes across the commodity complex this quarter. The global economic recovery has remained broadly on track, albeit with lingering uncertainties around the political environment and various policy implications. However, even as the recovery continues, the changing composition of global growth is expected to have a material impact on certain commodities going forward, particularly as demand from China shifts down a gear. Meanwhile, supply side conditions are mixed, with production curtailments playing a major role in some markets. Overall however, we have only made fairly modest changes to our outlook for commodity prices, with most revisions merely reflecting recent movements in spot prices. The impact from currency movements was relatively muted in the September quarter, with the USD index broadly stabilising against the major currencies – although it generally strengthened in October. That said, the influence that US political factors are having on the USD is adding to the unpredictability of currency impacts on commodity demand. Global oil prices have strengthened greatly since their recent nadir in mid-2017. Brent has gone from mid-40s in June to touching $60/bbl of late – a more than 35% rally. With an extension of the OPEC-Russia deal likely to continue to at least late next year, prices have found ongoing support. There remains a risk, however, that an extended rally will see a strong supply response from US shale producers. Higher oil prices will flow through to Australian LNG export prices, which is on balance bad news for domestic gas consumers. The Commonwealth has agreed with gas producers to secure more supplies for the domestic market, but the days of $2-4/GJ gas in Eastern Australia are now well and truly over. Bulk commodities prices have exhibited differing trends in recent months – with iron ore prices rapidly retreating across September, metallurgical coal prices surging higher again (having been hugely volatile over the past year) and thermal coal remaining persistently high. Capacity closures in China’s steel industry between November and March should impact demand for iron ore and metallurgical coal, with steel production expected to fall in 2018. Spot prices for iron ore are forecast to trend around US$60 a tonne in 2018. Hard coking coal contract prices are forecast to fall from around US$207 a tonne in 2017 to US$116 a tonne in 2018. The 2018 Japanese financial year contract for thermal coal is forecast to fall to US$80 a tonne, from US$85 a tonne in 2017. We forecast some retreat in copper prices in early 2018 from current high levels, as Chinese demand continues to moderate and supply disruptions are better managed, despite a small forecast deficit in the global refined copper market. Aluminium has received strong support from Chinese efforts to tackle overcapacity with a largely balanced global market expected for 2018. The nickel demand outlook is looking strong, although supply uncertainties could introduce price volatility. Zinc prices will continue to be supported by a lack of supply while the lead market looks well supplied in 2018. From a recent high of USD1,347/oz. in early September, the price of gold has eased to around USD1,270/oz. This easing has occurred in consonance with a stronger US dollar. Gold still maintains investor interest due to geopolitical risks and uncertainty surrounding the outlook for US core inflation, and by extension, interest rates. NAB Economics is forecasting a gold price of around USD1,262/oz. by the end of 2017, rising further to USD1,300/oz by late 2017. Risks to our forecasts are evenly balanced. The NAB USD non-rural commodity price index is expected to rise by around 25% in 2017, although this largely reflects actual price developments to date and masks volatility in bulks prices; the index is forecast to be fairly flat over the year to December 2017. Declines are forecast to resume in 2018, with the USD price index falling nearly 10%. Given our anticipated USD appreciation, prices falls will be slightly less in AUD terms. Overall, the Australian terms of trade is expected to maintain a gradual descent into 2019.

Thousand barrels a day

DAILY OIL PRICES 2017 YTD U

SD/bbl

WEEKLY US FIELD PRODUCTION

zG

lobal oil prices strengthened greatly since their recent nadir in mid-2017. Brent

has gone from m

id-40s in June to exceeding $60/bbl of late – a more than 35%

rally. M

eanwhile, Tapis (a m

ore relevant benchmark for A

ustralian consumers),

has strengthened its premium

against Brent.

zBrent has found support from

two m

ajor factors: OPEC cuts and geopolitical

risks in Iraq. OPEC-Russia cuts have been slow

to support prices, but it appears that they are finally taking hold, w

ith inventories now low

er and prices rising. Recent com

ments from

Saudi Arabia’s Crow

n Prince Moham

mad bin Salm

an point to Saudi support for agreed cuts to continue until at least late 2018. The cuts w

ere to expire next March. Russian President V

ladimir Putin has also

expressed support for continued cuts.

zThe recent conflict betw

een Iraqi and Kurdish forces in northern Iraqi oil hub Kirkuk has caused som

e concerns. How

ever, with m

ost Iraqi production concentrated in the south of the country the im

plications for oil market

fundamentals are relatively sm

all.

zW

TI has also gained, although at a much slow

er rate than Brent. Indeed, the Brent-W

TI spread hit its highest level since 2015 in September and looks set to

remain elevated. W

hile US shale production grow

th looks to be proceeding at a m

ore subdued rate, ultimately favourable global prices are likely to see the tap

turn on further. We see this as som

ething of a brake on a continued price rally. U

ltimately, w

e forecast Brent to trade in the 60s throughout 2018, starting the year around $60/bbl and rising to m

id-60s by Q4.

zH

igher fuel prices, combined w

ith our expectations for a lower A

ustralian dollar, are likely to lead to higher fuel prices for A

ustralian motorists. The Septem

ber quarter saw

petrol average 123.3AU

c/l, but we see petrol in the D

ecember

quarter around 3.9% higher at 128.1A

Uc/l. O

ur forecasts point to petrol being above 130A

Uc/l for m

ost of 2018.

Source: Bloomberg, U

S EIA, Baker H

ughes, Datastream

and NA

B Group

Economics

2 OIL Prices have recovered from June lows but how high can they go?

40 45 50 55 60 65

JanFeb

Mar

Apr

May

JunJul

Aug

SepO

ct

BrentTapis

WTI

0

2000

4000

6000

8000

10000

1200020102011

20122013

20142015

20162017

GAS SHARE OF TOTAL ENERGY USE Share of total energy use by sector

AUSTRALIAN LNG EXPORTS Volum

e and average price (inc forecast)

DOMESTIC AND EXPORT GAS PRICES

AU

D/G

J, spot (domestic), quarterly average

zThe ram

p-up in Australian LN

G exports continues

(albeit at perhaps a slower pace than publically

available contractual information w

ould otherwise

suggest). In Q3, A

ustralian LNG

exports were up m

ore than 7%

q/q and 25% y/y. W

e see export volumes

essentially stable in Q4.

zO

f much greater concern is the im

pact of world parity

pricing on the eastern Australian gas m

arket. D

omestic spot gas prices have fallen som

ewhat since

Q1, driven by low

er temperatures reducing gas

powered generation com

bined with a Com

monw

ealth G

overnment agreem

ent with gas producers to m

ake m

ore Queensland coal seam

gas available for the dom

estic market. N

onetheless, for parts of the year, dom

estic spot prices have exceeded export prices. From

first principles, netback domestic prices should

be lower than export prices due to the costs of

liquefaction. Contract price information is not

generally publically available, although reports suggest that contract offers have fallen som

ewhat in

the last few m

onths. Nonetheless, the era of $2-4/G

J gas in eastern A

ustralia is well and truly over.

Dom

estic gas purchasers will be lucky to secure gas

under $10/GJ in the m

edium term

.

zSum

mer w

ill be a major test of eastern A

ustralian gas m

arkets, as demand spikes on hot days are generally

covered by gas-intensive open cycle gas turbines. A

long hot summ

er could see a lack of gas availability, or at the very least high prices, leading to higher electricity prices for consum

ers.

zW

ith most A

ustralian LNG

export prices tied to the price of oil (and oil having increased), w

e now

expect export prices to exceed $10/GJ by

mid 2018.

Source: Bloomberg, Poten &

Partners, APPEA

, Departm

ent of Industry, Australian Bureau of Statistics, D

epartment of

Industry, AEM

O and N

AB G

roup Economics

3 NATURAL GAS AND LNG Impact of exports now felt in east coast gas markets

0%

10%

20%

30%

40%

50%

60%

1980

1985

1990

1995

2000

2005

2010

2015

Mining

Manufacturing

Electricity gasw

ater

Construction

Comm

ercialand services

Residential

0 2 4 6 8 10 12 14 1620102011

20122013

20142015

20162017

20182019

Victoria

Adelaide

BrisbaneSydney

Export LNG

actualExport LN

G (low

er bound fcast)Export LN

G (upper bound fcast)

forecasts

0 2 4 6 8 10 12 14 16 18

0 2 4 6 8 10 12 14 16 18 2019952000

20052010

2015

Price (AU

D/G

J) (RHS)

Export volume (m

illion tonnes per quarter)

0 50 100

150

200

0 50

100

150

20020072008

20092010

20112012

20132014

20152016

2017

63.5% iron content (LH

S)

62% iron content (LH

S)

Source: Bloomberg, Thom

son Datastream

, NA

B Economics

US$/t (incl. cost of freight) Chinese iron ore stocks (RH

S)

Mt

IRON ORE Spot prices fall on weaker Chinese output ahead of capacity shutdown

zIron ore spot prices rapidly retreated across Septem

ber – falling from around U

S$78 a tonne to around U

S$60 a tonne (for 62% ore in China) at the end of the m

onth. Prices for low

er grade ores have remained w

eaker – pointing to a preference for higher grade ores at Chinese m

ills. The rapid fall coincided with w

eaker orders from Chinese

steel mills ahead of upcom

ing capacity closures, while sell side speculators appeared

to return to the futures market (m

ore details here ). Prices remained relatively stable

across October – trading in a range of around U

S$4 a tonne over the month.

zG

rowth in China’s iron ore im

ports has slowed in recent quarters – increasing by 3.2%

yoy in Q

3 2017 (compared w

ith 6.4% in Q

2 and 12.2% in Q

1). Despite this, iron ore

imports rose to record levels in Septem

ber – at 102.8 million tonnes.

zSlow

er growth in im

ports and soaring steel production resulted in a modest decline

in China’s iron stockpiles – down to 130 m

illion tonnes (from a peak of around 141

million tonnes in late June), equivalent to just under one and half m

onth’s worth of

demand from

China’s blast furnaces.

zChina’s steel production pulled back in Septem

ber – to 71.8 million tonnes – aw

ay from

record levels in August (74.6 m

illion tonnes). For the first nine months of 2017,

steel production rose by 5.8% yoy to 639 m

illion tonnes.

zSurging profitability has been a driver of the stronger output trend. The steel profitability index rose from

recent lows in A

pril to its highest level in a decade in late O

ctober – as raw m

aterial costs have retreated from early year peaks and dom

estic steel prices have risen (reflecting both dem

and and speculative pressures).

zSom

e of the production surge in output may also represent production being brought

forward. Production is set to fall in com

ing months, w

ith authorities in Beijing ordering capacity closures (as m

uch as 50% of the total) in 28 northern cities to

reduce pollution over the winter heating m

onths from N

ovember to M

arch.

zChina’s steel output data m

ay have been distorted by closures of out-dated capacity. Induction furnaces have been outlaw

ed in China since 2000, however large scale

production (which w

as either under or not reported in official statistics) continued until early this year. D

emand previously satisfied by this induction furnace output is

now being provided by blast furnace produced steel.

zIn the first nine m

onths of 2017, non-Chinese steel production rose by 4.7%

yoy to 628 million tonnes. The largest increases over this period w

ere recorded in India, Turkey, Iran and Brazil.

CHINESE STEEL PRODUCER PROFITABILITY Profits push to decade long high

IRON ORE PRICES RETREATED IN SEPTEMBER

Stockpiles off peaks but remaining historically high

-1200

-900

-600

-300

0 300

600

900

1200

1500

1500

2000

2500

3000

3500

4000

4500

5000

5500

600020072008

20092010

20112012

20132014

20152016

2017

CNY/t

Index

Steel Profitability Index (RHS)

Dom

estic HR Steel Price (LH

S)

Sources: Bloomberg, N

AB Econom

ics

IRON ORE cont. Chinese steel consumption set to retreat from current peaks

zChina’s apparent steel consum

ption has accelerated in recent months, having

previously remained w

ell below the previous peak levels from

2013 to 2014. From

May onw

ards, apparent consumption – based on production, trade and stockpiles –

pushed above 68 million tonnes a m

onth – compared w

ith the previous high of around 65 m

illion tonnes in mid 2014. That said, under reported historic output (from

induction furnaces discussed above) likely understates previous peaks.

zChinese construction activity (w

hich accounts for over half of Chinese steel consum

ption) accelerated from early 2016 – having declined across m

uch of 2014 and 2015 as the previous property bubble deflated. Residential construction starts increased strongly across m

ost of 2016 and the first half of 2017, while non-

residential construction activity has stalled this year.

zW

e expect this construction activity to slow, and this should reduce steel dem

and. Recent data suggests house price grow

th has slowed significantly and construction

starts may be cooling. Chinese authorities have tightened policies across a range of

cities – including tighter eligibility requirements for purchasers and stricter lending

policies. On a three m

onth moving average basis, new

residential starts rose by 4.7%

yoy in September – the slow

est rate of growth this year, and w

ell off the double digit levels of the first half. A

continuation of this trend should slow steel consum

ption grow

th in late 2017 and 2018.

zG

lobal markets offer little opportunity for Chinese steel producers. In the first nine

months of 2017, steel exports have dropped sharply – totalling 59.6 m

illion tonnes – a year-on-year fall of 30%

. While som

e of this trend may reflect strength in dom

estic consum

ption, it also reflects the growing im

pact of protectionist trade measures.

zThe W

orld Steel Association revised up its forecast for global steel dem

and in October

– increasing by 2.8% in 2017 (allow

ing for Chinese induction furnace output) and 1.6%

in 2018. It forecasts Chinese steel demand to rem

ain unchanged next year; we

argue that slowing construction activity could see consum

ption contract in 2018.

zIn the first eight m

onths of 2017, Australia’s iron ore exports increased by 2.4%

yoy (com

pared with double digit rates across 2012 to 2015). O

ver this period, almost 83%

of export volum

es were delivered to China. W

e expect only modest grow

th potential in the short term

– given the outlook for Chinese steel.

zThe rapid retreat of prices since the start of Septem

ber has brought iron ore prices back to our forecast profile. W

e see the spot price trending around U

S$60 a tonne across the next year, given ample supply in global m

arkets.

CHINESE STEEL CONSUMPTION

Construction boom has driven steel use higher

AUSTRALIAN IRON ORE EXPORTS Export grow

th beginning to taper

-40

-20

0 20 40 60

20 30 40 50 60 70Jan-05Jan-07

Jan-09Jan-11

Jan-13Jan-15

Jan-17

Mt (3m

ma)

% (3m

ma)

Sources: CEIC, Bloomberg, N

AB Econom

ics

Apparent steel consum

ption (LHS)

Grow

th rate (RHS)

-10

0 10 20 30 40 40

75 0 15 30 45 60 75Jan-00Jan-02

Jan-04Jan-06

Jan-08Jan-10

Jan-12Jan-14

Jan-16Sources: Bloom

berg, NA

B Economics

Exports (Mt, 12m

ma)

% yoy

Iron ore (LHS)

Export growth (RH

S)

0 50

100

150

200

250

300

350

400Jan-05Jan-07

Jan-09Jan-11

Jan-13Jan-15

Jan-17

US$/t

Source: Bloomberg, D

atastream, N

AB Econom

ics

Metallurgical coal contract price

Queensland Spot Price (H

ard coking coal)

-60

-30

0 30 60 90 120

150

10 10 0 2 4 6 8 10Jan-11Jan-12

Jan-13Jan-14

Jan-15Jan-16

Jan-17

Mt (3m

ma)

Source: CEIC, NA

B Economics

%

Chinese metallurgical coal

imports (LH

S)

YOY grow

th (3mm

a) (RH

S)

METALLURGICAL COAL

Prices to fall from volatile highs on weaker Chinese steel output z

Hard coking coal prices have exhibited incredible volatility over the past tw

elve months

– with spot prices tw

ice spiking in excess of US$300 a tonne (in D

ecember 2016 and

April 2017), before retreating to around U

S$150 a tonne. A third peak – in excess of

US$200 a tonne – occurred in Septem

ber, but has now started to fade, w

ith prices back into the U

S$170 range at the time of w

riting.

zThe quarterly contract price setting m

echanism has changed significantly in 2017 – w

ith N

ippon Steel withdraw

ing from the process (reflecting Japan’s declining im

portance in term

s of global demand). A

s a result, prices are now determ

ined by the quarterly average of price indices produced by Platts, A

rgus and the Steel Index.

zD

emand for m

etallurgical coal has been strong in recent months – w

ith Chinese steel output rising to record levels in July through A

ugust. How

ever, the capacity closures betw

een Novem

ber and March should substantially low

er steel production – and with it

demand for m

etallurgical coal – during this period. The longer term outlook is also

weaker – given the flat to falling profile for Chinese steel dem

and.

zChinese im

ports of metallurgical coal increased strongly across 2016 and the first half of

2017, but have slowed considerably since this tim

e. Over the first nine m

onths of 2017, m

etallurgical coal imports totalled 53.2 m

illion tonnes, a year-on-year increase of 22%.

That said, the bulk of this growth occurred in the first quarter – w

ith imports falling by

0.6% yoy in Q

3.

zA

ustralia’s exports of metallurgical coal are gradually recovering, follow

ing the disruptions caused by Tropical Cyclone D

ebbie in late March. For the first eight m

onths of the year, exports totalled 111.2 m

illion tonnes, a year-on-year fall of 9.8%. That said,

most of the im

pact to volumes w

as evident in April, and there w

as modest year-on-year

growth in both July and A

ugust. We expect exports to recover in 2018 – back tow

ards the levels recorded in 2016, how

ever China’s steel outlook will constrain further grow

th.

zG

iven the slowdow

n in Chinese metallurgical coal im

ports – and the expectations of falling steel production in 2018 – w

e expect spot prices to retreat across the next year. W

e forecast the Q4 contract price to decline to U

S$160 a tonne (from U

S$189 in Q3),

and fall to around US$100 a tonne by the end of 2018.

COKING COAL PRICES Incredible volatility over the past tw

elve months

CHINA’S METALLURGICAL COAL IM

PORTS Im

ports slowing as steel w

inds down; set to fall further

-50

0 50 100

150

200

40 0 10 20 30 40Jan-11Jan-12

Jan-13Jan-14

Jan-15Jan-16

Jan-17

Mt (3m

ma)

Source: CEIC, NA

B Economics

%

Chinese thermal coal

imports (LH

S)

YOY grow

th (3mm

a) (RHS)

THERMAL COAL

2018 prices remaining high; weaker demand to impact longer term

zSpot prices for therm

al coal have remained persistently high in recent m

onths – with

prices at the port of New

castle remaining in the m

id-to-high US$90 a tonne range – w

ell above the 2017 Japanese financial year contract (U

S$85 a tonne).

zA

range of short term factors have contributed to this trend – w

ith hot weather

conditions across much of A

sia during the northern summ

er boosting coal-fired electricity dem

and and supply disruptions due to labour disputes in the Hunter V

alley and cyclone related infrastructure closures in Q

ueensland.

zA

t a high level, thermal coal dem

and is trending lower – driven in a large part by China

(the world’s largest consum

er). China’s coal consumption peaked in 2013 and has

declined since. While Chinese dom

estic production increased over the first nine months

of this year – up by 5.5% yoy – it rem

ains well below

the levels of 2015. Coal usage is expected to decline further in com

ing years – with renew

ables gradually taking a greater share of China’s prim

ary energy consumption.

zChina’s coal im

ports have a outsized impact on global m

arkets – in 2016, imports

accounted for just 7% of Chinese coal consum

ption, but they were alm

ost 19% of global

trade. In the first nine months of 2017, China’s therm

al coal imports totalled 152 m

illion tonnes – an increase of 11%

yoy. That said, import volum

es in 2017 have been weaker

than the peaks of late 2016 and the trends between m

id-2012 and 2014.

zTrends in other A

sian markets differ considerably. South Korean therm

al coal imports

have risen strongly – up around 20% in the first nine m

onths to 84 million tonnes.

Japanese coal imports (both therm

al and metallurgical coal) rose by 1.7%

to 142 million

tonnes. In contrast, indicators of Indian imports – w

hich are based on port movem

ents (due to a lack of reliable data) – suggest a decline of around 20%

yoy – as the country continues to build its dom

estic capacity. Weaker Indian and Chinese dem

and is likely to drive the m

arket in coming years.

zThere has been m

inimal grow

th in Australian therm

al coal exports in 2017 – with

volumes increasing by around 1.8%

yoy over the first eight months, to 132.5 m

illion tonnes. Japan rem

ains the largest market for A

ustralian thermal coal – accounting for

just over 40% of the total, w

hile China’s imports (21%

of the total) have been growing

fast – up 26% yoy over the first eight m

onths. In contrast, exports to all other markets

have fallen – down 11%

yoy over the period.

zPersistent high spot prices are likely to im

pact negotiations for contract prices for 2018. O

ur forecast has been raised to US$80 a tonne (from

US$65 previously).

THERMAL COAL PRICES HOLDING FIRM

Spot prices elevated over contract levels

CHINA’S THERMAL COAL IM

PORTS Im

port volumes w

eaker than earlier peaks

0 50

100

150

200Jan-05Jan-07

Jan-09Jan-11

Jan-13Jan-15

Jan-17Source: Bloom

berg, BREE, NA

B Economics

New

castle Spot Price

Japanese Financial Year contract price

US$/t

zChinese copper dem

and has proven resilient and is still expected to grow

, albeit at a slower rate. W

e forecast Chinese G

DP grow

th at 6.5% and 6.25%

for 2018 and 2019 respectively, how

ever the economy w

ill continue its transition tow

ards consumption-led grow

th. Industrial production grew

by 6.6% yoy in Septem

ber and the m

anufacturing PMIs rem

ained at expansionary levels. H

owever, new

construction starts have slowed in

recent months and are w

ell off the peaks recorded in June, and house sales have also softened. The dem

and from

housing construction is likely to weaken over tim

e but copper w

ill remain in dem

and for many other

aspects of modern life w

hile infrastructure investment in

India and the US should also support copper dem

and. z

The outlook for concentrates supply is looking better for 2018 com

pared to a disruption-impacted 2017. O

utput should recover as labour disputes have been resolved, w

hile restarts in the Dem

ocratic Republic of Congo and Zam

bia and to a lesser extent additional output from

new projects/expansions should see w

orld mine

production increase. z

While treatm

ent and refining charges (TC/RC) remain

subdued, the latest guidelines set by the China Smelter

Purchase Team for D

ecember has been raised from

Septem

ber levels, indicating improved concentrates

supply. Historically China has increased scrap im

ports w

hen concentrates supply was tight, but recent

restrictions on scrap imports on environm

ental grounds have seen scrap im

ports levels subdued. z

Overall, the expected surplus in 2017 did not eventuate

and the International Copper Study Group forecasts a

global refined deficit of 151k tonnes in 2017 and a sm

aller deficit of 104k in 2018. We expect som

e pullback in prices in early 2018 from

current high levels, w

ith investors likely becoming less

bullish, USD

appreciation putting downw

ard pressure on copper prices, and as industrial dem

and from China continues to m

oderate.

COPPER PRICE & USD

GLOBAL REFINED COPPER BALANCE

COPPER PRICES & POSITIONING

CHINESE SCRAP IMPORTS

COPPER Market deficits expected in 2018

0 2000

4000

6000

8000

10000

12000

0%

10%

20%

30%

40%

50%

60%20082009

20102011

20122013

20142015

20162017

US$/t

Source: Bloomberg

Scrap imports/total copper

imports - LH

S Copper spot price - RH

S

-450-400-350-300-250-200-150-100

-50 0

20132014

20152016

2017f2018f

*China apparent usage basis Source: International Copper Study G

roup, NA

B

thousand tonnes

-2%0% 2% 4% 6% 8% 10%12%14%16%18%

4000

4500

5000

5500

6000

6500

7000

750020162017

US$/Source: Bloom

berg

Investor position on the LME

Copper price - LHS

LME m

oney manager net

position as % of open

interest - RHS

1140

1160

1180

1200

1220

1240

5400

5800

6200

6600

7000

7400

08-May-17

08-Jul-1708-Sep-17

Copper (LHS)

USD

(RHS)

US$/Source: Bloom

berg

Copper & U

SD

Avg

Price (US$/to

nn

e)Ju

l-17to

Oct-17

Oct-16

toO

ct-17O

ct-17A

lum

iniu

m2131

Cop

per

6808Lead

2498N

ickel11336

Zinc

3265Base M

etals Ind

ex

Sources: LME; N

AB

31

% ch

ang

e, qu

arterly

13.744231041

10.119.417.114.4

* Prices on an LME cash basis.

Base Metal Prices*

28%

chan

ge, an

nu

al12.0

zA

luminium

prices continue to receive support from

Chinese efforts to curb over-capacity, especially as the country enters its w

inter heating season and as policy m

akers remain com

mitted to production cuts

and tackling pollution following the 19

th Party Congress. The LM

E spot aluminium

price surged 11.2%

q/q in Q3 and w

as around $2125/t at the time of

writing. The gains on the SH

FE were even m

ore pronounced, w

ith prices reaching over 16,000 yuan/t. z

North eastern China entered into the w

inter heating season in late Septem

ber, with other northern regions

to follow by m

id Novem

ber. As a result, the

government began m

ore strictly enforcing smelter and

refinery curtailments from

September, w

ith further curtailm

ents likely to have occurred through October.

Despite the heavy curtailm

ents in the regions surrounding Beijing and other population centres, new

projects and restarts have been reported in other provinces, m

ostly in the country’s west. Firm

s that have cut capacity are also able to transfer production quotas to other m

ore efficient smelters. W

hile the governm

ent remains com

mitted to tackling pollution,

it may relax enforcem

ent to ensure supply security. The exact extent of production cuts is hard to know

, nonetheless the support on sentim

ent from such

efforts remains strong. Rising costs of alum

ina and electricity have also supported alum

inium prices.

zThe dem

and outlook looks positive for aluminium

, at least in the near term

. Dem

and from pow

er generation and transport is looking strong w

hile demand from

the real estate sector should slow

over time as China aim

s to cool its housing sector. Investor positioning on the LM

E indicates overall bullish sentiment for alum

inium,

however net long positions have retreated

somew

hat from the M

arch 2017 highs. z

Overall w

e forecast a largely balanced global m

arket with prices averaging $2100/t in 2018.

COPPER & ALUM

INIUM PRICES

INVESTOR POSITIONING ON THE LME

CHINESE SEMI ALUM

INIUM EXPORTS

ALUMINIUM

Chinese efforts to tackle overcapacity supporting aluminium prices

MAJOR EXCHANGE INVENTORY 0 2000

4000

6000

8000

10000

12000

1,000

1,500

2,000

2,500

3,000

3,50020102012

20142016

Alum

inium (LH

S)Copper (RH

S)

US$/t

Source: Bloomberg

LME spot prices

0% 5% 10%

15%

20%

25%

1200

1300

1400

1500

1600

1700

1800

1900

2000

2100

2200Jul-2014Jul-2015

Jul-2016Jul-2017

US$/t

Source: Bloomberg

Investor position on the LME

Alum

inium spot price - LH

S

LME m

oney manager net

position as % of open interest

- RHS

0 1 2 3 4 5 6 720032005

20072009

20112013

20152017

Million

tonnes

Source: Bloomberg

Major exchange alum

inium inventory

0

100

200

300

400

500

60020002002

20042006

20082010

20122014

2016

000 tonnes

Source: Bloomberg

Chinese semi alum

inium products

exports

zSeveral new

developments w

ill likely make 2018 an

interesting year for nickel. First on the supply side, Philippines’ new

environment m

inister might end the

ban on open-pit mining by this year’s end. It could see

the development of new

mines and increased exports.

Indonesia’s nickel pig iron exports have also ramped

up, along with relaxed restrictions on raw

ore exports. O

n the demand side, Chinese steel m

akers will likely cut

production during the Novem

ber-March w

inter heating season and m

edium-term

demand w

ill likely slow. The

biggest emerging them

e however has to be the

anticipated significant increase in demand from

car battery m

anufacturers, with som

e junior miners looking

at nickel assets. Nickel inventory levels declined

somew

hat, but remained at high levels com

pared to the other m

etals. Current exchange stocks would satisfy

around eleven weeks of dem

and. We forecast further

price growth in nickel w

ith more volatility expected.

zM

arket fundamentals continue to look strong for zinc,

with prices reaching a ten-year high in early O

ctober. Stock levels rose slightly, but rem

ain well below

the long-run average. A

ME estim

ates that total visible stocks cover only 2.4 days of annual dem

and. Investor positioning has turned m

ore bullish as environmental

restrictions in China further limit production. O

verall, significant reduction in global m

ined supply and a strong dem

and outlook will continue to support zinc

prices.

zLead prices rose w

ith the base metals com

plex, up 11%

in the September quarter. W

hile demand from

the autom

otive sector will rem

ain supportive for prices, new

generation lithium-ion batteries w

ill likely see lead batteries being phased out eventually. W

e forecast a w

ell supplied lead market in 2017

and 2018.

NICKEL, LEAD & ZINC PRICES (LM

E)

GLOBAL NICKEL MARKET BALANCE

LME STOCKS

INVESTOR POSITIONING IN LME ZINC

NICKEL, LEAD & ZINC

Nickel prices to remain volatile, while the zinc outlook is strong

-40

-30

-20

-10 0 10 20 30 40 5020052007

20092011

20132015

2017

000 tonnSource: Bloom

berg

Global refined nickel surplus/- deficit

80 90

100

110

120

130

14003-Jan-1703-A

pr-1703-Jul-17

03-Oct-17

LeadN

ickelZinc

Index

Source: Bloomberg

Index (3 Jan 2017 = 100)

0 100

200

300

400

500

600

700

0

100

200

300

400

500

600

70020062008

20102012

20142016

Alum

inium

Nickel

Zinc Lead

Copper

Long run Average = 100

Index

Sources: Datastream

; NA

B

-5%

0% 5% 10%

15%

20%

25%

30%

1200

1700

2200

2700

3200

3700Jul-2014Jul-2015

Jul-2016Jul-2017

US$/

Source: Bloomberg

Investor position on the LME

Zinc spot price - LHS

LME m

oney manager net

position as % of open interest

- RHS

GOLD Near-term consolidation, but gradual improvement ahead

zG

old rose to a recent high of USD

1,347/oz. in early September influenced by geopolitical

events (primarily N

orth Korea), as well as expectations of a m

oderate path of future US

interest rate rises on account of low inflation outcom

es. Since then, less-dovish comm

ents from

US Fed Chair Janet Yellen that rates need to be raised before inflation reaches 2%

, a stronger U

S dollar, general strength in equities and less bellicose comm

ents on North Korea

have taken

the sheen

off the

yellow

metal.

Gold

has been

last trading

around the

USD

1,270/oz level, well off recent highs and below

the critical USD

1,300/oz threshold – although it has received som

e support due to recent events in Catalonia.

zThe trend in the net long gold futures positions has largely been in sym

pathy with

movem

ents in the spot gold price, with hedge funds and m

oney managers cutting their

positions due to a lower gold price and a higher U

SD.

zH

oldings in gold ETFs continued to rise during 2017, with 191.9 tonnes (net) flow

ing into gold ETFs during the January-Septem

ber 2017 period. North A

merican and European based

funds experienced inflows, w

hile Chinese and Indian-based ETFs recorded outflows.

zLooking ahead, N

AB Econom

ics is forecasting the gold price to end 2017 around U

SD1,262/oz, rising to U

SD1,300/oz during the end of 2018. The risks to our forecasts are

evenly balanced.

zExpected rate rises in the U

S will exert dow

nward pressure. Further, a successful

passage of the Trump’s adm

inistration’s tax package would boost equities and

negatively impact safe haven assets like gold. Conversely, potentially overvalued

asset prices and geopolitical tensions could provide support.

GOLD PRICE – EASING WITH HIGHER USD

NET LONGS IN GOLD FUTURES OFF RECENT HIGHS

ETF INFLOWS STRONG IN EUROPE &

NORTH AMERICA

800

950

1100

1250

1400

1550

1700

1850

2000

0 50

100

150

200

250

300

35020082009

20102011

20122013

20142015

20162017

Sources: Thomson Datastream

, NAB

Tonnes

US Net Long Positions in Gold Futures and Derivatives (LHS)

'000

Exchange Traded Funds (RHS)

75.0

80.0

85.0

90.0

95.0

100.0

1000

1080

1160

1240

1320

1400

03-Oct-14

22-Dec-14

12-Mar-15

31-May-15

19-Aug-15

07-Nov-15

26-Jan-16

15-Apr-16

04-Jul-16

22-Sep-16

11-Dec-16

01-Mar-17

20-May-17

08-Aug-17

27-Oct-17

US$/ounce

Index

US M

ajor Currencies Index (RHS)

Gold Price

(LHS)

Source: Thomson D

atastream, N

AB

-50 0

50

10

0

15

0

20

0

25

0

No

rth

Am

eric

aE

uro

pe

Asia

Oth

er

To

tal (N

et)

Re

gio

na

l Go

ld E

TF f

low

s: Y

TD

(till S

ep

'17

)

So

urce

: WG

C

To

nn

es

OUTLOOK z

NA

B’s non-rural comm

odity price index is expected to drop 7% q/q in Q

4 2017 (in US

dollar terms), signalling the return to a dow

nward trend in bulk com

modity prices

following their 2016 rally. Iron ore and coking coal are m

aking the largest contribution to the quarterly decline, largely reflecting the anticipated closure of steel production capacity from

Novem

ber (along with som

e changes to contractual price setting).

zThe U

SD stabilised som

ewhat against m

ajor currencies in the third quarter of 2017, having a m

inimal im

pact on comm

odity prices generally. Dem

and conditions tend to vary across the com

modity com

plex, although the overall situation has so far been a little better than expected. Supply side developm

ents have also been playing a major

role in most m

arkets, especially with capacity curtailm

ents coming into the m

ix.

zLooking forw

ard, the global economic recovery should rem

ain on track, but we do

expect to see a tempering in dem

and conditions for certain comm

odities, particularly as support from

Chinese buyers begins to wane. A

dditionally, fiscal risks stemm

ing from

the US rem

ain a concern and any reasons given to question the Trump

administration’s prom

ises on infrastructures spending/fiscal stimulus w

ill have a ripple effect through com

modity m

arkets. Other events stem

ming from

the political situation in Europe, or policy changes – such as any deleveraging or environm

ental campaigns in

China – are simply adding to the uncertainty.

A RETURN TO THE GRADUAL DOWNW

ARD TREND IN COM

MODITY PRICES IS EXPECTED

Index, September 1996 = 100

•The outlook for dem

and in China remains as critical as ever to the outlook for A

ustralian comm

odities. NA

B continue to expect a moderation in

China’s construction this year, which w

ill have flow-on consequences for bulk com

modity m

arkets, although our GD

P growth forecasts for China

have been revised modestly higher for 2017 to reflect the recent strength in activity. Longer term

, China’s growth is increasingly being driven by

services – which are far less com

modity intensive than the ‘old econom

y’ heavy industrial sector.

•The U

S dollar denominated N

AB non-rural com

modity price index is expected to be broadly flat over 2017, although it w

ill still be 25%

higher than 2016 in annual average terms. D

eclines in prices for iron ore and coking coal over the year are being offset by rises elsewhere, w

ith particularly strong gains com

ing from copper and oil prices.

•D

espite the relative resilience of the AU

D recently, com

modity price in A

UD

terms are still expected to be supported som

ewhat over com

ing quarters by an anticipated U

SD appreciation as the U

S Fed resumed the gradual norm

alisation of monetary policy. The trough for the A

UD

is expected to be around U

SD 0.73, occurring in m

id- 2018. In annual average terms, prices are forecast to rise by 22%

in 2017, following very

modest price declines on average in 2016, but a decline of nearly 6%

is expected for 2018.

•In light of these com

modity price projections, N

AB is forecasting the A

ustralian terms of trade to decline in Q

3 2017, albeit more m

odestly than the 6%

drop seen in Q2, and w

ill maintain a gradual decline thereafter. In annual average term

s, the terms of trade are forecast to

rise around 10% for 2017, but w

ill be down 4%

over the year for Decem

ber 2017. We are forecasting a 7½

% decline in 2018.

70 100

130

160

190

220

250

0

100

200

300

400

500

60020062008

20102012

20142016

2018

Index (Sep 1996 = 100)

NA

B No

n-Rural Com

mo

dities Price Index

AU

D term

s (lhs)

USD

terms (lhs)

Forecasts

Australian term

s of trade (rhs)

Source: BREE,ABS, Bloomberg, Thom

son Datastream, N

AB

NAB COMM

ODITY PRICE FORECASTS

13

Spot A

ctual Forecasts

U

nit 31-10-2017

Sep-17 D

ec-17 M

ar-18 Jun-18

Sep-18 D

ec-18 M

ar-19 Jun-19

Sep-19

WTI oil

US$/bbl

54 50

52 54

56 57

58 58

58 58

Brent oil U

S$/bbl 60

53 58

60 62

63 64

64 64

64

Tapis oil U

S$/bbl 64

54 59

61 63

64 65

65 65

65

Gold

US$/ounce

1269 1280

1260 1270

1280 1290

1300 1310

1320 1330

Iron ore (spot CFR) U

S$/tonne n.a.

72 62

60 62

61 60

60 60

60

Hard coking coal*

US$/tonne

n.a. 189

160 140

120 105

100 101

99 100

Semi-soft coal*

US$/tonne

n.a. 135

115 101

87 76

72 73

71 72

Thermal coal*

US$/tonne

98 85

85 85

80 80

80 80

65 65

Alum

inium

US$/tonne

2142 2010

2140 2120

2100 2100

2100 2100

2100 2100

Copper U

S$/tonne 6817

6350 6800

6730 6660

6660 6660

6660 6660

6660

Lead U

S$/tonne 2403

2330 2490

2470 2440

2420 2400

2400 2400

2400

Nickel

US$/tonne

12257 10540

11700 11700

11760 11820

11880 11880

11880 11880

Zinc U

S$/tonne 3322

2960 3260

3280 3290

3310 3320

3320 3320

3320

Aus LN

G**

AU

D/G

J n.a.

8.50 8.00

7.45 7.67

7.92 8.17

8.30 8.43

8.56

* Data reflect N

AB estim

ates of US$/ tonne FO

B quarterly contract prices (thermal coal is JFY contract). A

ctual data represent most recent final quarterly

contract price. ** Implied A

ustralian LNG

export prices

Gro

up Econo

mics

Alan O

ster G

roup Chief Economist

+61 3 8634 2927 Jacqui Brand Personal A

ssistant +61 3 8634 2181 A

ustralian Econo

mics and Co

mm

odities

Riki Polygenis H

ead of Australian Econom

ics +(61) 475 986 285 Jam

es Glenn

Senior Economist – A

ustralia +(61) 455 052 519 A

my Li

Economist – A

ustralia +(61 3) 8634 1563 Phin Ziebell Econom

ist – Agribusiness

+(61) 475 940 662

Behavioural &

Industry Econo

mics

Dean Pearson

Head of Behavioural &

Industry Economics

+(61 3) 8634 2331 Robert D

e Iure Senior Econom

ist – Behavioural & Industry Econom

ics +(61 3) 8634 4611 Brien M

cDonald

Senior Economist – Behavioural &

Industry Economics

+(61 3) 8634 3837 Steven W

u Econom

ist – Behavioural & Industry Econom

ics +(613) 9208 2929 Internatio

nal Econo

mics

Tom Taylor

Head of Econom

ics, International +61 3 8634 1883 Tony Kelly Senior Econom

ist – International +(61 3) 9208 5049 G

erard Burg Senior Econom

ist – Asia

+(61 3) 8634 2788 John Sharm

a Econom

ist – Sovereign Risk +(61 3) 8634 4514

Glo

bal Markets Research

Peter Jolly G

lobal Head of Research

+61 2 9237 1406 Ivan Colhoun Chief Econom

ist, Markets

+61 2 9237 1836

Impo

rtant No

tice This docum

ent has been prepared by National A

ustralia Bank Limited A

BN 12 004 044 937 A

FSL 230686 ("NA

B"). Any advice contained in this docum

ent has been prepared without taking into account

your objectives, financial situation or needs. Before acting on any advice in this document, N

AB recom

mends that you consider w

hether the advice is appropriate for your circumstances.

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