Trends in Commodity Prices

Paul Mills, Economic Advisor, Chinggis Law LLP (Mr Mills previously worked for the Australian government, leading work forecasting future skill needs in Australia’s resources sector).

We are currently in an era of extreme volatility in terms of commodities, where we can experience the swiftest growth in value, and one of the sharp drops, all within a few weeks of one another (Australian Mining August 2016).


For Mongolia commodity prices are the news.  A rise or fall prices for copper, coal and gold has very significant implications for Mongolia, as mining is Mongolia’s most important industry.  Mining provides the major part of Mongolia’s gross domestic product, and the major share of tax revenues arises from the mining sector.

Sadly, commodity prices are volatile, and very difficult to predict.  In recent years commodity prices have been in decline across the board, as shown in Chart 1, courtesy of the International Monetary Fund (IMF).



Source:
International Monetary Fund, 2016a. IMF Commodity Price Indices

Trends in 2016

Copper prices are rising!

Copper prices are of vital importance to Mongolia. The Bloomberg Commodity Index for Copper has risen significantly in late 2016, and now stands nearly 30% above the low point of January 2016 but still remains around a third lower than in 2012 – 13).  Gold spot prices have also surged during the year, but have fallen since July 2016, and like copper are around 30% lower than in 2013.  

Coal prices are rising!

Both coking and thermal coal prices are also of strong interest to Mongolia.  Australia’s Bureau of Resources and Energy Economics reports global metallurgical coal prices rallied to four year highs in the September quarter, driven by increased import  demand from China and production disruptions in Australia while thermal coal prices rose further than anticipated in the September quarter to two year highs, driven by government mandated cuts to supply in China.
Indeed, Australian Mining notes expectations of a 20% rise in coal prices by the end of the year due to drastic actions in China to reduce output and stockpile.

China accounts for 40% of the world copper market

China is the key

China is Mongolia’s main export market for two Mongolian commodities, copper and coal.   In 2016 there has upwards movement in commodity prices, largely reflecting developments in China.  Growth or slowdown in China has huge implications for Mongolia.

The outlook for Mongolian mining commodities look better next year but markets are very volatile


The future outlook

Especially with the election of Donald Trump to the U.S. presidency, the future for mining commodity prices remains something of a mystery, and will also depend, as suggested above, on developments in China.  

Inevitably the next two decades will bring a variety of surprises (McKinsey and Co, 2010)

For example, to reduce air pollution the Chinese government has adopted a policy of diversifying from thermal coal.  On the other hand, in the short to medium term most Chinese electricity will continue to arise from thermal coal.  Price Waterhouse Cooper also suggest China’s economy will grow by around 6% a year until 2020, meaning substantial demand for thermal coal will continue, but growth in demand is uncertain.  

Copper prices will also depend on the extent and nature of Chinese development.  Growth in China’s electronics industry would benefit Mongolia.  In 2017, the World Bank suggests a quiet outlook for copper, with the market expected to remain oversupplied as new capacity comes online in the next 2-3 years (World Bank 2016: 23).