We do not expect a collapse in global commodity prices. But we do anticipate substantial declines across a number of key commodities – primarily in metals and bulk commodities but also in energy – and we think the period of continued year-on-year price increases is behind us. Exhibit 11 shows our forecasts for commodities in the longer term. We expect oil prices to moderate towards USD100/bbl. In metals we expect both gold and copper to fall around 10% from current levels in the longer run. We remain bearish on iron ore, and expect a surplus market to drive the longer-term price down another 17% from the current spot price. We see limited upside for agricultural commodities over the longer run. Should these forecasts materialise, they will have a notable impact on EM FX through terms of trade – both from the shift in income from commodity producers to commodity importers, as well as shifts in the relative fortunes within commodity producers. Beyond these base-case forecasts, we also consider a downside risk scenario, which, given the potential for additional supply across a number of commodity markets, we take as a 10% downside from our long-term forecasts.
The upshot is a lower Australian dollar as the terms of trade plunge:
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
