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Scope 2017 economic survey: Commodity run is probably done

Stephen Koukoulas predicts commodity prices will ease. Photo: Alex Ellinghausen China’s role in giving a boost to commodity prices is clear enough, but is it enough? Photo: Brendon Thorne
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It is rare to find much unanimity among economists, but one of the few things they agree on is that the trough in commodity prices of 2016 will not be repeated.

But after the huge upswing in prices since then – particularly for bulk commodities such as coal and iron ore – the question is how far will prices retreat, especially after the March quarter, which often marks a cyclical high.

Stronger economic growth in most major economies worldwide, coupled with efforts to lift growth in China and changes to regulations there, saw prices of both bulk commodities along with a number of base metals, surge in the latter part of last year. Oil, likewise, has benefited from the move by key OPEC producers to limit production to help take pressure off prices.

“Prices may ease a little after the extraordinary rise during 2016, but they are likely to remain well above the early 2016 lows,” argues Stephen Koukoulas of Market Economics.

And the higher prices will boost supplies, which may also pressure commodity prices.

“Commodity fundamentals have improved,” said Michael Blythe of the Commonwealth Bank. “Demand and supply are closer together than they have been for a number of years. But not close enough to validate current commodity price levels. But the trough is now behind us.”

Giving added force to the impact of these forecasts was the record $3.5 billion trade surplus in December, with the prospect that the surplus could continue at high levels well into the June quarter, especially as the gas export trade begins to hit its stride after the $200 billion-plus investment boom in the sector. This is good news for the federal budget deficit but potentially bad news for the strength of the n dollar in foreign exchange markets.

China’s role in giving a boost to commodity prices is clear enough, but is it enough to help them maintain their gains?

“The [commodity price] rally was tied to Chinese authorities stimulus, which cannot be maintained indefinitely,” said Stephen Anthony of Industry Super. “The global cycle is turning higher into a rebound, led by China. This should support existing stronger commodity prices, provided Chinese authorities maintain existing levels of stimulus.”

Nick Hutley of Urbis Consulting said: “Much hinges on China and how far the Beijing government is prepared to underwrite economic activity – particularly its support for residential construction and infrastructure as well as its stockpiling strategy.

“On balance, prices are more likely to be softer in 2017.”

Then there is the US. Despite the undoubted importance of the US to the health of the global economy, will the plans of the new US government to boost infrastructure spending add to global growth?

“I doubt whether whatever the incoming Trump administration does on infrastructure investment will be enough, on a global scale, to have any material impact on prices of commodities that matter to ,” said Saul Eslake, of the University of Tasmania.

One complication here is the planned renegotiation of the North America Free Trade Agreement, between Canada, the US and Mexico, along with a move to revamp the US corporate tax code which could stall both its near term growth as well as hit capital spending. Added to that is residual concern that US President Donal Trump will impose import duties of a flat 20 per cent, which could hit US trade with China hard.

And, if the Chinese investors become concerned that the domestic stimulus being provided by the Chinese government is creating imbalances, this could trigger a renewed outflow of funds, irrespective of government controls, Industry Super’s Dr Anthony warned.

“This may run down official foreign currency reserves and so restrict the conduct of future stabilisation policy which up to now has seemed to present a limitless range of alternatives.”

One side effect of any renewed outflow of funds from China could be further buying of n residential property, he said.

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