By Jason Murphy

Being a commodity-exporting nation requires great stoicism. Just when you think you know what prices are doing, they swing dramatically.

Between 2011 and mid-2016 the world grew accustomed to the prolonged slide in the prices of coal and iron ore. Then, in the second half of 2016, the extended erosion of commodity prices was replaced quite suddenly by startling spikes.

The impact is being felt in commodity exporting nations such as Australia, Indonesia and Malaysia, where it is lifting forecasts of economic growth in 2017.

Coal and iron ore boost Australia’s bottom line

The prices of Australia’s major resource exports have jumped during 2016. Coking coal, used to make steel, rose in price from below US$80 a tonne in the middle of the year to more than US$300 by early November.The price of thermal coal, used mostly to produce electricity, rose more modestly over that same period but nearly doubled. The iron ore price has risen by more than 90 per cent in 12 months, trading at US$79 a tonne in early December.

Reserve Bank of Australia assistant governor (economic) Christopher Kent argues the price surge will lift growth and help cut unemployment. Commonwealth Bank economist Kristina Clifton describes the effect as “a solid boost”.

Despite this, Australia’s economy still contracted 0.5 per cent in the third quarter, compared with the second quarter.

Related: A fall in oil price becomes opportunity for Malaysia’s Petronas

If current prices of coal and iron ore are maintained through to April 2017, estimates Clifton, Australia could see a lift in gross domestic product (GDP) of between 0.5 and 1.5 per cent. If higher prices hold to the end of 2017, that bump could be 2 to 3 per cent.

Higher oil prices timely for Malaysia

The oil price, as measured by the futures price of West Texas intermediate crude oil, has risen from US$26 a barrel in February 2016 to more than US$48 in late November and jumped to over US$50 in the first week of December.This has been timely for oil-exporting Malaysia, where economic growth slid from more than 6 per cent in 2014 to 4 per cent in the second quarter of 2016. The mid-2016 oil price rise appears to have supported a recovery in growth, which improved in the third quarter, to 4.3 per cent.

The Asian Development Bank says the Malaysian economy had slowed due to weaker prices for oil, gas and manufactured goods but it now forecasts GDP growth of 4.4 per cent in 2017, attributing some of this to the speedier recovery in global economies and higher prices for oil and gas.

The bank notes, however, there are risks to its forecast, such as from any renewed price weakness or from interest rate increases in the US.

Meanwhile, another, unrelated, oil price spike is also proving useful to Malaysia. Palm oil prices have risen 23 per cent over 2016. Malaysia exported more than 6.3 billion ringgit of palm oil products in October, the most recent period for which the Malaysian Palm Oil Board provides data, up from 5.7 billion ringgit in the same month of 2015.

LNG supports Indonesia

A recent increase in the spot price of liquefied natural gas (LNG) is particularly welcome for Indonesia. Although most LNG is sold globally under contract,  the country’s director of oil and gas, I Gusti Nyoman Wiratmaja, expects a large share of its annual production – almost a third – to be sold on the spot market in 2017.The World Bank, in its June 2016 Indonesia Economic Quarterly, notes that while exports and imports are both falling in Indonesia, exports are falling more slowly, as commodity prices rise or stay steady. The bank expects GDP to grow by 5.1 per cent in 2016 and 5.3 per cent in 2017, above the 4.8 per cent annual growth achieved in 2015.

Japanese buyers are, however, threatening to spoil the party. As the oil price fell during the past two years, the contracted price of LNG began to look high compared to spot prices.
In mid-2016, Japan’s Fair Trade Commission began an investigation that could lead to renegotiation of Japan’s LNG contracts, with the potential to spread through the Asia-Pacific region as buyers sought to renegotiate lower prices for LNG.

“The consequences of this action, if successful, are truly seismic,” argues Geoffrey Cann, Deloitte Australia’s national director of oil and gas. South Korea, China and Taiwan could follow suit, he says.

In this context, the recent bump in Asian LNG spot prices is welcome for LNG exporters such as Indonesia and Australia. LNG spot prices, as reported by market monitoring firm Platts, have risen from less than US$5 per million British thermal units (MMBtu) in April to more than US$7 in November 2016.

How sustainable are commodity price rises?

Coal and oil prices are notoriously hard to predict. That is especially true now, because recent rises depend partly on government decisions as well as market factors.

The coal price spike follows a Chinese government decision in April 2016 to limit production at certain coal mines to 276 days a year. This could explain some of the price rise. China will unwind the restrictions in March 2017 and this could cause some of the recent price increases to weaken.

Commonwealth Bank analysts believe current coal prices cannot be sustained indefinitely but argue prices will remain higher than expected in early 2017.

OPEC’s decision on November 30 to cut oil production by about 1 per cent of global output saw the price of West Texas intermediate crude jump to $US51.79. But it remains to be seen whether OPEC members will stick to their agreement and how much impact the cartel still has on global production and prices.

For commodity exporting nations such as Australia, Indonesia and Malaysia the consequences of these far-off actions will be felt very close to home.

Source : CPA