Recovery in demand could come this year: ABARE

 Coupled with the increase in share market indices that has been seen around the world, Australia’s foremost commodities researcher believes it could lead to a recovery in demand for minerals in late 2009 or 2010.

The Australian Bureau of Agricultural and Resource Economics (ABARE) reported in its latest ‘Australian Commodities’ for June quarter that much of the recent optimism has been driven by China’s strong growth in imports for commodities such as coal, iron ore and copper in the first half of 2009. Also providing optimism to the market is the stabilisation of credit markets, which was seen as a necessary step prior to a return to global economic growth, especially in North America and Europe.
“The extent to which recent price gains are maintained will depend on the economic recovery occurring at a similar rate and trajectory as expected by the market. This is a source of considerable risk to energy and mineral
commodity price forecasts,” said the report.
Despite the recent price increases, commodity prices are still generally below levels observed at the same time in 2008. Contract prices for Japanese fiscal year 2009 (April 2009 to March 2010) declined by 44 per cent for thermal coal and 57 per cent for metallurgical coal.
With respect to iron ore prices, some Australian producers have settled fines contract prices with Japanese, Korean and Taiwanese steel mills at a 33 per cent discount for JFY 2009.
It remains to be seen whether the demand created by China’s recent build up of strategic reserves will be maintained for commodities such as coal, iron ore and copper, and assisted by the domestic financial stimulus package which will target construction and infrastructure.
Despite resilient Chinese demand, world trade of many commodities is forecast to decline in 2009, according to ABARE.
It suggests that metallurgical coal trade could decline by 18 per cent, iron ore trade by 3 per cent and thermal coal trade by 2 per cent. The decline in trade reflects weaker global demand for construction materials and consumer durables, which tend to be energy and mineral intensive.
However, in 2010, stronger consumption is forecast for most commodities, including iron ore (3 per cent), metallurgical coal (6 per cent) and thermal coal (3 per cent), supported by increasing economic growth rates.
In terms of export earnings ABARE forecasts that Australian will earn $160 billion from energy and mineral commodities in 2008-09, an increase of 36 per cent.
“Underpinning this increase are higher export volumes and record high prices for bulk commodities for JFY 2008, supported by a 17 per cent depreciation of the Australian dollar against the US dollar,” said the report.
In 2009-10, export earnings are forecast to decline by 22 per cent to $124 billion, primarily reflecting declines in bulk commodity contract prices for JFY 2009.