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Resources and Energy Quarterly December 2018

The Resources and Energy Quarterly contains the Office of the Chief Economist’s forecasts for the value, volume and price of Australia’s major resources and energy commodity exports. A ‘medium term’ (five year) outlook for Australia’s major resource and energy commodity exports is published in the March quarter edition of the Resources and Energy Quarterly. The June, September and December editions contain a ‘short term’ (two year) outlook. The June and September editions also include a feature chapter on a topical issue, while the December edition contains a chapter on Australia’s resources and energy major projects pipeline.

Underpinning the forecasts contained in Resources and Energy Quarterly is the Office of the Chief Economist’s outlook for global commodity prices, demand and supply. The forecasts for Australia’s commodity exporters are reconciled with this global context. The global environment in which Australia’s producers compete can change rapidly. Each edition of Resources and Energy Quarterly factors in these changes, and makes appropriate alterations to the outlook, estimating the impact on Australian producers and the value of their exports.

Australia remains on track to set a new record in its resource and energy commodity exports in 2018–19. A decline in the Australian dollar has helped boost commodity export earnings up above $264 billion — meaning resource and energy commodities now represent more than half of Australia’s total export value. This is an upward revision on our previous forecasts, reflecting strong growth in coal and LNG export earnings, as well as favourable movements in iron ore prices.

Behind the strong figures are a growing set of risks. The world is nine years into the post-GFC recovery, and the peak of the current industrial production cycle has clearly passed, with potential issues around debt and spending emerging in a number of countries. Commodity demand — driven by various government stimulus packages — helped Australia to withstand the global financial crisis, but governments now have less room to move on the fiscal and monetary front.

Trade tensions between the US and China are magnifying these economic risks, and are also having some immediate impacts on prices for a range of commodities. Prices for copper, nickel and aluminium — all commodities with strong links to the global economic cycle — have been hit particularly hard, as the US and China exchange tariff hikes and global supply chains are disrupted. Recent trade tensions are unlikely to have a significant impact on Australian commodities. Exports may be redirected, and prices may be volatile in coming months, but the fundamentals continue to support solid commodity demand around the world, especially for the high-grade commodities Australia offers.

There may even be a silver lining for Australian exporters: to fend off the economic impact of US tariffs, China has committed to a sizeable infrastructure program, and has introduced a substantial new set of stimulus measures, as well as new incentives for research and development in the private sector. These policies are likely to provide ongoing support for commodity demand.

There is a risk that this ramp-up of stimulus in China may reduce the country’s capacity to further respond in the event of any substantial slowdown in global economic growth in the years to come. China may find itself in a similar position to the US and Europe, which have maintained sizeable fiscal deficits and low interest rates for many years. The key risk to the commodity outlook thus lies in the ‘double whammy’: the potential dual impact of growing trade tensions and a substantial slowdown in global economic activity.

Each December edition of the Resources and Energy Quarterly contains an analysis of Australia’s resources investment pipeline. Over the past 15 years, hundreds of billions of dollars have been directed towards unlocking deposits and removing infrastructure bottlenecks. It is this investment which has allowed the resources sector to become the largest source of Australia’s export earnings, as well as a substantial employer and driver of growth in Australia’s regions. This edition shows that prospective resource investment is starting to recover again, following a sharp fall due to the completion of the giant LNG projects. Investment is being helped along by the relatively low Australian dollar and by new growth markets in renewable energy and electric vehicles.

Mark Cully

Chief Economist
Department of Industry, Innovation and Science

Resources and Energy Overview

Australia’s resources and energy export earnings to reach over quarter of a trillion dollars in 2018–19.

  • Helped by a weaker Australian dollar in 2018–19, Australia’s resource and energy exports are likely to hit a new record high of $264 billion, but fall back to $241 billion (still the second highest on record) in 2019–20.
  • Australia’s resources and energy export volumes are expected to show firm growth over the outlook period. The prices of Australia’s major resource commodities have been high, but are expected to drift lower in 2019–20 because of moderating demand and rising supply.
  • The world industrial production cycle appears to have peaked in 2018. The extent of the expected down cycle in resource commodities depends on whether China can maintain economic growth as the US-China trade dispute impacts.

Macroeconomic outlook

The global economy is forecast to grow at 3.7 per cent a year between 2018 and 2020 — 0.2 percentage points lower than previously forecast.

  • The US economy continues to grow strongly, but is expected to slow once the impact of the tax cuts wash through and recent interest rate hikes start to exert a larger effect. The outcome of the US mid-term elections in November 2018 has raised the prospects of legislative gridlock.
  • In China, domestic economic growth is decelerating. Eurozone economies recorded their weakest growth in four years in the September quarter. Trade tensions between the US and its trading partners have the potential to escalate. Volatility in global stock markets is expected to continue through 2019. Geopolitical tensions in the Middle East may rise, following the recent reimposition of US sanctions on Iran.
  • Trade tensions between the US and its trading partners have the potential to escalate. Volatility in global stock markets is expected to continue through 2019. Geopolitical tensions in the Middle East may rise, following the recent reimposition of US sanctions on Iran.

Steel

India and other emerging economies are expected to drive growth in global steel demand, offsetting a projected gradual decline in China.

  • World steel production is forecast to rise to 1.8 billion tonnes in 2020, as broad growth across most major producers keeps pace with consumption.
  • Compared to the strong year-on-year growth of 4.9 per cent in 2018, world consumption is forecast to grow at a slower pace over the next two years, due to softening global economic growth.
  • Growing consumption will be led by several emerging markets, while consumption in China — the world’s largest consumer — is forecast to be steady in 2019 and taper in 2020.

Iron ore

Australia’s iron ore exports volumes are set to rise.

  • The free on board (FOB) Australia iron ore price is forecast to decline to US$51 a tonne in 2020, driven by slowing global economic growth and a well-supplied seaborne market.
  • Australia’s iron ore export volumes are forecast to increase from 849 million tonnes in 2017–18 to 879 million tonnes in 2019–20, driven by a ramp up in production from Australia’s largest producers.
  • The value of Australia’s iron ore exports is forecast to decline from $61 billion in 2017–18 to $57 billion in 2019–20, with the impact of lower prices more than offsetting growth in export volumes.

Metallurgical coal

Australia’s metallurgical coal export earnings forecast to reach a new record of $41 billion in 2018–19

  • Supply disruptions pushed the premium hard coking coal (HCC) spot price to well over US$220 a tonne during the December quarter.
  • Supply growth and softening demand are expected to reduce the premium HCC spot price from an estimated average of US$207 a tonne in 2018, to US$145 a tonne by 2020.
  • Australia’s export volumes are forecast to grow from 179 million tonnes in 2017–18 to 190 million tonnes in 2019–20, reflecting an expected recovery from supply disruptions and modest production growth.
  • Australia’s metallurgical coal export earnings are forecast to increase from $38 billion in 2017–18 to a new record of $41 billion in 2018–19, before declining to $31 billion in 2019–20. The impact of growing export volumes is forecast to be more than offset by lower prices.

Thermal coal

Australia’s thermal coal export earnings forecast to reach a record of $26 billion in 2018–19

  • The Newcastle benchmark spot price is forecast to decline from an estimated average of US$105 a tonne in 2018 to US$74 a tonne in 2020, primarily driven by declining import demand from China.
  • Australia’s export volumes are forecast to grow from 203 million tonnes in 2017–18 to 209 million tonnes in 2019–20, reflecting productivity improvements and modest production growth from new capacity.
  • Australia’s thermal coal export earnings are forecast to reach a new record of $26 billion in 2018–19, up from a record $23 billion in 2017–18, driven by strong prices. Export earnings are then forecast to decline to $20 billion in 2019–20, as the impact of lower prices more than offsets rising export volumes.

Gas

Australia’s LNG export earnings to reach $50 billion as new projects ramp up

  • The value of Australia’s LNG exports is forecast to increase from $31 billion in 2017–18 to $50 billion in 2018–19, driven by higher export volumes and higher prices, and remain near this level in 2019–20.
  • Australia’s LNG exports are forecast to increase from 62 million tonnes in 2017–18 to 78 million tonnes in 2019–20, driven by the ramp up of the final two LNG projects in Australia’s recent wave of LNG investment.
  • LNG contract prices — at which most Australian LNG is sold — are forecast to rise in 2018–19 before easing slightly in 2019–20.
  • LNG spot prices are expected to decline, as additions to global supply capacity outstrip growth in LNG demand and as oil prices ease.

Oil

Australia’s petroleum exports supported by growing condensate production

  • After price volatility in the December quarter, oil prices are expected to settle over the outlook period as production increases balance consumption growth. The Brent crude oil spot price is forecast to average US$72 a barrel in 2020.
  • Australia’s petroleum export volumes are forecast to increase from 226 thousand barrels a day in 2017–18 to 319 thousand barrels a day in 2019–20, supported by new LNG-related condensate capacity.
  • Higher volumes growth is expected to support export earnings growth over the outlook period, export earnings are forecast to rise from $7.0 billion in 2017–18 to $11 billion in 2019–20.

Uranium

Uranium producers continue to face tough conditions, but prices and export earnings are expected to gradually improve from 2018

  • Uranium spot prices have lifted in recent months, and are expected to rise further over the outlook period, reaching just over $US28 a pound by 2020. Price gains will be driven by supply cutbacks in Kazakhstan and Canada, and rising demand due to new nuclear reactor builds across Asia.
  • Australian production is expected to be sustained at current levels of just over 7,000 tonnes per year over the next three years. Operational improvements at Olympic Dam may support higher production from that site.
  • Australia’s uranium export earnings are forecast to increase slightly over the outlook period, reaching almost $700 million by 2019–20. This is in line with slow gains in prices.

Gold

The value of Australia’s gold exports is forecast to peak in 2019–20 at $20 billion

  • Gold prices have rebounded despite a further rise in the US dollar.
  • The US and China trade tensions, and a softer US dollar are likely to support gold prices in 2019 and 2020.
  • The value of Australia’s gold exports is forecast to peak in 2019–20 at $20 billion, driven by higher gold prices and a lift in export volumes.

Aluminium, alumina and bauxite

Australia’s aluminium, alumina and bauxite export earnings to decline, following high values in 2018–19

  • Prices are forecast to ease from elevated levels in 2018 which, arose from supply concerns. Prices are forecast to decline to US$2,098 a tonne for aluminium and US$354 a tonne for alumina by 2020.
  • Australia’s aluminium and alumina exports are expected to be steady through to 2019–20, at 1.4 million tonnes and over 17 million tonnes per annum, respectively. Bauxite exports are forecast to increase from 32 million tonnes in 2018–19 to 36 million tonnes in 2019–20.
  • Total Australian export earnings for aluminium, alumina and bauxite are forecast to decline from $15 billion in 2018–19 to $14 billion in 2019–20, reflecting a decline in aluminium and alumina prices.

Copper

Australian export earnings from copper are expected to rise over the outlook period

  • Trade tensions have hit copper prices in recent months, but rising demand is expected to gradually reverse this fall, with prices forecast to rise from US$6,430 a tonne in 2018 to US$8,013 a tonne by 2020.
  • Australia’s copper exports are forecast to rise from 892,000 tonnes in 2017–18 to over 1 million tonnes (in metal content terms) in 2019–20. This reflects an increase in production from several existing mines.
  • Australia’s copper export earnings are forecast to lift from $8.4 billion in 2017–18 to $10.9 billion by 2019–20. Exports should benefit from rising production and from price gains later in the outlook period.

Nickel

Strong demand for nickel should provide a significant benefit to Australia over the outlook period

  • Nickel prices fell in the September quarter, but are expected to stabilise in the coming months. Prices face competing pressures from rising stainless steel demand and global trade tensions, and are expected to ease slightly to around US$13,950 a tonne in 2019 and US$13,750 a tonne by 2020.
  • Strong demand conditions and a significant upgrade to the Kwinana nickel refinery should see Australia’s refined and intermediate nickel production rise — from 135,000 tonnes in 2017–18 to 157,000 tonnes by 2019–20.
  • Strong prices, in conjunction with rising mined and refined production, should see Australia’s nickel export earnings lift from $2.8 billion in 2017–18 to $3.8 billion by 2019–20.

Zinc

Zinc prices have dropped on trade tensions, but Australian production is rising

  • After hitting an 11-year peak in early 2018, zinc prices declined in the second half of 2018. Prices are expected to rebound modestly in the near term, as fears ease over both rising supply and trade tensions. Prices are expected to slowly ease over the outlook period, to average US$2,775 a tonne in 2019 and US$2,625 a tonne in 2020.
  • Australia’s output is expected to lift over the next two years, as production ramps up at the re-opened Century mine in Queensland. Export volumes of ores and concentrates are forecast to rise from 1.7 million tonnes in 2017–18 to 2.8 million tonnes by 2019–20.
  • Export values are expected to lock in the substantial gains recorded in 2017–18, remaining above $3.7 billion annually over the outlook period.

Lithium

Lithium is an increasingly important commodity in Australia – and could become far more valuable if Australia can progress into high-grade refining

  • Lithium hydroxide prices are expected to trend down — from around US$16,500 a tonne in 2018 to US$12,700 a tonne by 2020 — as supply growth outpaces demand. The supply surplus will likely reverse after 2020, as battery demand accelerates.
  • Australian lithium production is expected to increase from 229,000 tonnes (in lithium carbonate equivalent terms) in 2017–18 to around 311,000 tonnes by 2019–20, as the Greenbushes mine is upgraded and several newer mines ramp up. All production is expected to be exported.
  • Rising production is forecast to push export revenue up from $905 million in 2017–19 to $1.2 billion by 2019–20.

Major Projects

While the past few years has seen sharp falls — driven by the conclusion of LNG mega projects — the next few years are likely to see an increase in investment activity.

  • A year on from the release of our last publication, the value of committed projects at the end of October 2018 stood at just $30 billion, down from $122 billion a year earlier. The decline has been driven by the substantial completion of the final three projects in Australia’s recent wave of LNG investment, together valued at around $100 billion: Ichthys, Prelude and Wheatstone.
  • The value of ‘publicly announced’ projects, as well as the number and value of projects being examined for ‘feasibility’, has increased slightly over the past 12 months. This pick-up in investment activity likely reflects the impact of higher commodity prices, a lower Australian dollar and growing confidence about the long-term outlook for global commodity demand.
  • While the improvement in the outlook will not be comparable to the boom of last decade, it points to some significant emerging opportunities for Australia’s resources and energy