Published: 4:51 pm, Monday, 5 January 2015

Commodity prices suffered their greatest fall in six years in 2014 and dealt a hit to the Australian economy, but there is scope for optimism.

Multinational bank HSBC has calculated that commodity prices fell 30 per cent in 2014, with oil’s plunge the biggest driver.

The price falls are reducing Australia’s export earnings by tens of billions of dollars.

The news is not all bad, with HSBC predicting a slight recovery this year for iron ore, the nation’s most valuable export, and extra income from the ramp up in natural gas exports.

Oil’s fall is also having a potential net benefit, due to the savings households are making from cheaper fuel.

The key risks for Australia are further falls in prices, due to weaker growth in China or an over-supply of commodities squeezing economic growth and national income, says HSBC.

GDP growth is below trend at under three per cent, with the non-mining sectors that represent 90 per cent of the economy yet to step up and replace falling resources investment.

HSBC predicts iron ore prices will rebound this year from a current $US68 a tonne, to an average of $US85 and $US80 long term.

That is a far cry from the $US134.20 it started 2014 at.

The reason for a recovery is a long-anticipated reduction in high-cost Chinese iron ore mining that is produced at an estimated $US90-110 a tonne.

‘We’re not that downbeat. Those Chinese producers are running at a large cash loss and we would expect that in 2015 you might see some of that iron ore come out of the market,’ HSBC Australia chief economist Paul Bloxham told AAP.

‘That should provide bit of support for the iron ore price.’

The start of LNG exports last week from one of three mega-projects at Gladstone in Queensland was also a positive, despite the fact that gas is linked to the oil price, he said.

‘Our view is that that is a far bigger story than the fall in gas prices seen recently in terms of the overall impact on Australia,’ Mr Bloxham said.

‘There is a 330 per cent rise forecast in gas exports out of Australia from 2015/2019. the (resources) investment fall will be more than offset by the ramp up in resources exports led by LNG.’

HSBC’s report, which comprises 34 commodities, found prices were down by 42 per cent from their 2011 peak, but 50 per cent higher than their 1990s average in real terms.

The weakest performer was iron ore, with prices down by 49 per cent, followed by oil prices down 42 per cent.

Commodity prices fell for the sixth consecutive month in December and was the largest fall since a 37 per cent drop in 2008.