The rebound in commodity prices is primarily attributed to rising demand in China. Although China's economic is expected to slow further for at least two more years, monetary and fiscal stimulus has driven resurgence in Chinese demand creating key support for these commodity prices. Meanwhile, the US economy is also improving although the International Monetary Fund (IMF) recently lowered its growth forecast for the US economy to 1.6 percent (y/y) in 2016 and to 2.2 percent (y/y) in 2017, down from 2.2 percent and 2.5 percent, respectively, in the institution's earlier estimate. Despite the cut there remains optimism that the US economy will jump next year.

For Indonesia rising commodity prices means that its exports should improve hence relieving pressures on the existing current account deficit and support a strengthening rupiah exchange rate. Indonesia is one of the world's largest coal, crude palm oil and natural gas exporters. Indonesia's Central Statistics Agency (BPS) reported in mid-September 2016 that Indonesia’s exports reached USD $91.7 billion in the January-August 2016 period, down 10.61 percent from the same period one year earlier. Despite the weakening export performance, Indonesia has been posting a series of monthly trade surpluses since last year due to even-more-severely-weakening imports.

Coal prices have rebounded due to declining production in Indonesia, Australia and China, while coal demand has been rising, including in Indonesia where authorities are engaged in an ambitious power generation program. The government wants to add 35,000 MW to the nation's power capacity by 2019, mostly through coal-fired power plants. Moreover, over the next couple of months, coal demand should rise as many countries enter the winter season.

Production of crude palm oil (CPO) in Malaysia and Indonesia, the world's top palm oil producers and exporters, has also declined. This is due to weather conditions (earlier we had the El Nino droughts and in the last couple of months of the year La Nina is bringer wetter-than-usual weather). Meanwhile, demand for CPO has been rising, particularly in the USA, China, India and European Union. Indonesia too will see rising CPO consumption on the back of its B20 biodiesel program.

Rising Trend Eight Commodity Prices:

Commodity    Q1
  50.9   51.9   67.5
Crude Oil
  32.7   44.8   44.7
Crude Palm Oil
  631   704   715
 4,675  4,736  4,778
Iron Ore
   48    56    59
 8,508  8,825 10,258
15,438 16,902 18,574
 1,181  1,260  1,334

Source: World Bank