The Story ahead for Commodity Prices

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Australian Economy, Macro Economics

With changing dynamics for commodities as seen in the recent past, many stocks are moving to-and-fro on the pendulum. While early 2017 brought some relief for many iron ore stocks such as BHP Billiton and Rio Tinto, the iron ore miners now seem to be coming under pressure again as iron ore prices are forecasted to slip by about 10% in 2018. As per the latest market outlook on commodities released by World Bank, the weakness in iron ore price forecast is offsetting the rise in all base metals. The drop is expected to follow the projected 22% increase in 2017. At the same time, upside risks that involve any improvement in global demand with production shortages might impact the price scenario. Overall year 2017 saw a significant jump in metals index, which will now be impacted by correction in iron ore prices. Nonetheless, 2018 metals index might get stabilized with increase in prices in other base metals. In the third quarter of the year so far, there has been an increase in all metals prices led by zinc and nickel (up 14%) followed by iron ore (13%) and copper (12%). With regards to Aluminium prices, high levels were seen to be attained recently considering the last five years’ scenario. Particularly, London Metal Exchange aluminium had lately surged up to $US2215 since March 2012. This has come at the back of many factors including concerns on supply shortfall.

On the other hand, World Bank has forecasted the oil prices to rise to $56 a barrel in 2018 from $53 with growing demand, production cuts, and stabilizing U.S. shale oil production. The market also expects oil to stabilise at $US55 to $US60 a barrel in the near term. The recent uptick in the price has been seen to be coming from the support from Saudi Crown Prince Mohammed bin Salman on the extension of OPEC output cuts beyond March 2018. Meanwhile, Iraq has recommenced the exports of crude from Kirkuk province to Turkish port of Ceyhan.

Considering the above, trading in commodities in the near term needs to entail a cautious approach. Investors can consider some exposures in oil sector for instance, with the improving sentiment. World Bank has forecasted a 4% rise in index of energy products for 2018 while agricultural goods are said to rise 1.2%. On the other hand, a fall of about 0.7% has been predicted for metals and minerals. While gold and silver might face some pressure with any rise in U.S. interest rate; platinum is expected to rise by 4%.

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Commodity Prices (Source: Commodity Markets Outlook by World Bank)


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