NAB: Prices for Australia's two biggest exports will fall over the next two years

Photo by ChinaFotoPress/ChinaFotoPress via Getty Images

Surging commodity prices played a big part in Australia registering a record trade surplus. However one of the nation’s largest banks is forecasting iron ore and metallurgical coal prices to decline not just this year but also in 2018.

National Australia Bank cites the possibility of weakening demand from China, Australia’s largest trading partner, for its bearish forecast.

Commodity prices play a crucial role in Australia’s economic growth. The record trade surplus sent the nation’s currency to its highest level since November as investors reduced the odds of another rate cut by the RBA. Economists said the surplus will boost exports and national income.

The NAB expects weaker Chinese steel demand to hurt iron ore prices, falling to $US60 by the year end then averaging $US55 in 2018. That means prices would settle back to levels last seen in October before the current rally that sent the metal past the US$80 mark.

China’s steel exports fell by 3.0% in 2016, to 109 million tonnes. With allegations of steel dumping in global markets and the rise of protectionism, there is limited growth potential for Chinese steel exports, NAB said. Longer-term prospects are also constrained by efforts to reduce steel capacity with plans to cut 100 and 150 million tonnes by 2020 in place already. Australia’s iron ore exports have recorded weaker growth in recent times, while almost 82% of Australian exports went to China over this period.

This chart shows waning Australian iron ore exports

Quarterly hard coking coal contract prices for the first quarter of 2017 were settled at $US285 a tonne in mid-December. NAB expects stronger domestic coal production in China and weaker demand due to slowing Chinese construction to push prices lower to $US150 a tonne by year end and $US100 by 2018’s end.

This chart shows surging China coal imports last year

In 2016, China imported 59 million tonnes of metallurgical coal, an increase of almost 24% . That was in stark contrast to the steep declines exhibited across 2014 and 2015, with imports peaking at 75 million tonnes in 2013. The import story is set to change with China’s National Development and Reform Commission announcing in November, it would ease the restrictions, allowing all mines to return to previous production levels until the end of the winter heating period in mid-March. This would hurt demand.

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