RBA commodity price index (Jul10) – recovering lost ground

Posted on 05 August 2010

The RBA’s commodity price index continues to push on into the hill climbs of the Pyrenees:

According to the RBA (here), the key drivers were:

Preliminary estimates for July indicate that the index increased by 2.7 per cent (on a monthly average basis) in SDR terms, after rising 2.2 per cent in June (revised). The largest contributors to the rise in July were increases in the estimated prices of iron ore and coal. The price of wheat also rose, while the price of gold fell.

If economic growth has been driving industrial commodities higher, then the question is why is the ratio of base metals to gold languishing at multi-decade lows:

The continued outperformance of gold undermines the thesis that we are slowly but steadily pulling through the crisis. If world growth is going to struggle for the balance of the year, then the liklihood of the ratio tipping back towards its long term average is going to rely on some serious weakness in gold.

And to reinforce the point that world trade has been fading at the margin, the baltic dry index has had a torrid couple of months. While it has recovered some poise over recent days, in isolation it is still underperforming the ASX materials index.

And to place that underperformance in further context, following is our composite indicator for the materials sector – it blends the performance of the BDI, the RBA base metals index and the Shanghai stock market to get a proxy for commodity price and volume demand plus risk appetite in our largest customer. This index has lagged the ASX200 materials index all the way from the bottom – with the spread widening over recent months. If the relative performance argument holds, then the ASX materials sector should struggle to run higher from here without a commensurate move up in Chinese equities and/or the BDI.