Pete Wargent blogspot

CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

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Tuesday, 2 May 2017

Commodity prices roll

Rolling over

The Reserve Bank of Australia (RBA) released its Index of Commodity Prices for April 2017, which showed commodity prices retracing by 3.5 per cent in the month. 

The drop in the price of iron ore more than offset the increase in coking coal prices.

That said, if you used the spot prices for the bulk commodities the index actually increased in April. 

Over the past year the index of commodity prices increased by a crunching 38.6 per cent (or 43.5 per cent using spot prices for the bulks).

The below chart is a fair illustration of why Australia's Budget forecasts are forever a crapshoot.

Don't dream it's over...

The commodities index has been re-weighted effective 1 April, as it is each year.

It is interesting to note that iron ore now accounts for less than 30 per cent of the index, down from nearly 35 per cent only two years earlier. 

LNG now represents 9.7 per cent of the index for its highest ever share, while gold increased its share to 8.7 per cent. 

Nevertheless the index remains heavily weighted towards Australia's key commodities of iron ore and coal, and the outlook for national income is still heavily dependent upon the prices of these exports.

And it looks as though the dream run for the bulk commodities may now be over.

This is not unexpected, but it will be yet another headwind for those arguing for rate hikes, in addition to the forthcoming residential construction downturn.

The Reserve Bank meets today and will keep the cash rate on hold. 

All eyes turn to the May Budget and rumours of infrastructure plans...