After hitting a 10-year record low (deficit) of -$4.3 billion in December 2015, Australia’s monthly trade position steadily improved over 2016. By November a trade surplus of $1.2 billion was achieved – the first since March 2014, and only the fifth since 2010. The strength of the trade balance turnaround is seen below. Australian monthly trade balance While services and agricultural commodities helped improve our trade position, it was the significant improvement in our main bulk and metal export prices over the year that have been the primary driven. But how long Australia can retain a trade surplus will in large part depend on how commodity prices fare. And how are mining commodity prices likely to perform in 2017? The strength of 2016’s run on prices for almost all mined commodities was unexpected. However, while oil will likely be an exception, the price of many other commodities has now moved beyond the point where today’s market price reflects the fundamentals (future supply and demand) in each market ie many commodities appear overpriced! On the demand side, the story is always about China, which accounts for more than 50% of global demand for most commodities. China’s return to stronger industrial demand during 2016 provided an unexpected boost to many commodity markets. China increased power grid investment by 30% in the year, which helped to support copper demand. Auto production ticked over 22 million units (up 15%), which lent support to lead, steel and aluminium. Much of this additional demand was internally generated by bringing forward planned infrastructure investment from future years. But without a further bring forward of activity by the Chinese government, there are question marks on the sustainability of demand. On the policy front, it’s also all about China. In an effort to encourage consolidation of the domestic coal industry, the country’s government attempted to take 10-15% of supply out of the market by reducing the amount of days all coals mine could operate. This worked well to balance the market and support the global price. However a series of other events, like a main domestic supply rail route going offline due to heavy rain, meant everything got away from them and global coal prices doubled in the space of nine months. With retail power prices heavily regulated in China, power producers couldn’t pass on this increase in coal costs to their customers. This affected their margins and profitability, so the policy was reversed as were were prices soon after. Since then, thermal coal has come back to something closer to reality and met coal prices are expected to drop soon as well. Speculation is, again, all about China too. Having been hurt by house price falls in 2014 and stock market falls in 2015, China’s investors leapt into commodity futures trading in 2016. The result? On a single day in March, trading volumes for iron ore futures were higher than all of 2015 – that’s speculation if we’ve ever seen it. The futures trading volumes for aluminium, nickel, copper, tin, lead and zinc also all showed big increases. But 2017 may see this dampen as China’s government begins to implement restrictions and increase trading costs to reduce speculative trading. The election of Donald Trump has also been talked about as offering support to the outlook for infrastructure investment, and therefore commodities. While a big infrastructure program is being discussed, it may not move the dial enough to result in structural supply constraints to either bulk commodities or base metals and be able to move prices up. For comparison, Trump’s potential infrastructure plan of US$500 billion over four years is well short of the US$400 billion spent on infrastructure by China in 2015 alone. As we look forward, and despite a potential US infrastructure boost, many mining commodity prices are likely to be lower in 12 months than they are today. That will put pressure on Australia’s new trade surplus position. A possible exception will be the oil price, which hasn’t seen the same speculative increase over 2016, and so may see some further gains in 2017 as global economic activity lifts. David Rumbens is a Deloitte Access Economics partner and co-author of our Weekly Economic Briefing.