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Resources and Energy Quarterly December 2019

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 December quarter edition of the Resources and Energy Quarterly also includes a feature chapter and data on Australia’s resources and energy major projects.

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.

Resource and energy commodity exports in 2019–20 are forecast to set a record of $281 billion, before falling to $256 billion in 2020–21. These represent downward revisions of $1-2 billion from the September 2019 forecasts, but mask noticeable changes among individual commodities.

The resource and energy commodities sector encompasses a diverse set of industries utilising a vast array of production methods. For example, lithium is drawn from hard rock by multiple processes including wet or dry screening, electromagnetism, flotation, and heat and acid treatment. LNG production utilises ultrasound imaging and acoustic waves, long pipelines, and technology to reduce gas temperatures far below zero. While the production processes are diverse, they are also invariably complex.

Diversity is also evident in our commodity markets. The outlook for bulk commodities diverged noticeably in late 2019. Prices for metallurgical coal (which accounts for around 60 per cent of Australia’s coal export earnings) have fallen noticeably as steel production softens in OECD economies. Thermal coal miners also face lower prices and soft demand as 2019 ends. This is creating major problems for US coal miners, with seven large producers filing for bankruptcy over the past four months. Australian coal producers have been supported by both the higher quality of their output and the weaker currency, but will not be wholly immune from these broader market conditions.

In contrast, iron ore producers are experiencing strong markets. Iron ore prices remain elevated, despite a gradual recovery in production following the fallout from the Vale tailings dam collapse in Brazil. These prices have, however, squeezed margins downstream, with input costs rising sharply for steelmakers. This is compounding with a softening in steel demand, which has faced headwinds from slowing automotive production and persistent uncertainty around the direction of the global economy.

Conditions remain mixed for other commodities: copper prices have fallen noticeably, but Australian gold prices have surged, leading local gold miners to re-open previously closed mines. This raises the prospect that Australia may become the world’s largest gold producer by the mid-2020s.

The diversity of Australia’s commodity outputs provides us with some important benefits. It hedges our economy against certain swings in global conditions: for example, changes in energy markets that reduce coal demand may well have upsides for our huge exports of LNG. Global uncertainties that negatively affect steel and copper will likely improve the prospects for gold. Changes to overseas vehicle emissions standards that reduce the demand for oil may have upsides for lithium.

Much of the future depends on investments made today. This edition includes our annual study of major resource and energy commodity investments proposed, planned or underway (Major Projects chapter). The 2019 Major Projects survey shows resource and energy commodity investment has recently stabilised after years of decline, with emerging prospects for recovery. However, while there are a swag of brownfield projects, a lack of greenfield investments remains a key challenge to Australia’s longer-term prospects as a resource commodity supplier.

It has been claimed that high exports of resource and energy commodities imply an unsophisticated economy. However, success in resource commodity markets is far from straightforward. Successful resource and energy commodity production requires that large and complex investments pay off. Innovative methods will increasingly be needed to extract resources from deposits that are deeper, sparser, and more remote than the deposits of the past. Producers must be able to foresee opportunities, anticipate the swings of the global economy, and position themselves appropriately. They need to manage technological change and accommodate increasingly divergent conditions among commodities. An economy lacking in sophistication would not have had the success in commodity markets that we have today.

Russ Campbell

Head of Analysis and Insights Division and Chief Economist
Department of Industry, Innovation and Science

Resources and Energy Overview

Australia’s resource and energy export earnings set to reach a record.

  • The global industrial production slowdown and rising supply has seen the prices of Australia’s major resource commodity exports fall from 7-year highs set in the September quarter 2019.
  • Prices are likely to drift down further over the outlook period, particularly for iron ore, due to rising global supply. Precious and base metal prices have wavered (in opposite directions) on the changing likelihood of a resolution of US-China trade tensions.
  • Australia’s resource and energy export earnings are forecast to set a record $281 billion in 2019–20, as weaker prices are offset by higher export volumes and a lower-than-expected Australian dollar. A stronger Australian dollar and price falls are likely to drive earnings down to $256 billion in 2020–21.

Macroeconomic outlook

US-China trade tensions weighed on world economic growth and industrial production in 2019; the recent Phase One deal is expected to lead to a recovery in 2020.

  • In 2019, growth in global industrial production and trade have weakened, largely due to the impact of US-China trade tensions.
  • Central banks are lowering interest rates in an attempt to support economic growth.
  • The IMF is expecting a pickup in global growth, with the global economy forecast to grow by 3.0 per cent in 2019, 3.4 per cent in 2020 and 3.6 per cent in 2021.

Steel

World steel production and consumption are projected to increase, but at a slower pace over the outlook period.

  • World steel production growth eased off in late 2019, as global economic uncertainty continued to affect steel markets.
  • Trade tensions and a recent slowdown in automotive production have resulted in a more fraught outlook for steel production.
  • World steel production is forecast to grow slowly over the outlook period, increasing by around 1 per cent between 2019 and 2021.

Iron ore

Australia’s iron ore export earnings to reach $84 billion in 2019–20, driven by higher prices.

  • The iron ore price in 2019 is expected to average around US$80 a tonne Free on board (FOB) Australia. Iron ore prices remain at an usually high level following supply problems in the major producing nations. The iron ore price is forecast to decline to average US$60 a tonne (FOB Australia) by 2021, as seaborne supply recovers.
  • Australia’s iron ore export earnings are set to increase from $77 billion in 2018–19 to $84 billion in 2019–20. Earnings are then projected to ease to $66 billion in the final year (2020–21) of the outlook period, as seaborne prices gradually decline.
  • Export volumes are expected to grow from 834 million tonnes in 2019 to 878 million tonnes by 2021, as new production commences in Western Australia.

Metallurgical coal

Australia’s metallurgical coal export earnings to decline from record highs, due to lower prices.

  • The December quarter has seen a further fall in the premium Australian hard coking coal (HCC) spot price, a decline that commenced in the second half of 2018. Rising supply and soft demand is expected to see the price trade in a US$120–170 a tonne range over the outlook period.
  • Australia’s export volumes are forecast to grow from 184 million tonnes in 2018–19 to 196 million tonnes by 2020–21, reflecting production growth from restarts and new capacity in Queensland’s Bowen Basin.
  • Australia’s metallurgical coal export earnings reached a record $44 billion in 2018–19. However, low prices are expected to drive a reduction in export earnings, to $35 billion in 2019–20 and 2020–21.

Thermal coal

Lower prices are expected to drive Australia’s thermal coal export earnings lower from record highs.

  • The Newcastle benchmark thermal coal spot price is forecast to decline from an estimated average of US$75 a tonne in 2019 to US$65 a tonne in 2021, as demand softens relative to supply.
  • Australia’s export volumes are forecast to grow from 210 million tonnes in 2018–19 to 214 million tonnes in 2020–21, reflecting modest production growth from new capacity and expansions, a recovery from recent disruptions, and productivity improvements.
  • Australia’s thermal coal export earnings in 2018–19 hit a record $26 billion. Earnings are forecast to fall to $18 billion by 2020–21, as the impact of price falls more than offsets higher export volumes.

Gas

Australia’s LNG exports are ramping up against the backdrop of global overcapacity and low spot prices.

  • Australian LNG export prices are forecast to decline slightly in 2019–20 and 2020–21, due to an easing of oil-linked contract prices (at which most Australian LNG is sold).
  • Australia’s LNG export volumes are forecast to increase from 75 million tonnes in 2018–19 to 81 million tonnes in 2019–20, as the last two projects in Australia’s recent wave of LNG investment ramp up. Export volumes are forecast to hold steady at 81 million tonnes in 2020–21.
  • The value of Australia’s LNG exports is forecast to edge down to $49 billion in 2019–20 and fall back further to $46 billion in 2020–21, driven by declining oil-linked contract prices.

Oil

Oil markets reflect the fortunes of the world economy and the geopolitical risks in oil producing regions.

  • Oil prices have fallen in 2019 as a result of slowing economic growth. An attack on Saudi Arabia’s oil production facilities on 14 September 2019 temporarily boosted prices. However, as of early December 2019, prices have fallen close to levels before the attack.
  • Australia’s condensate and LPG export volumes are rising, while crude oil production in 2018–19 reached its lowest level in many decades.
  • Earnings from crude, condensate and LPG exports are forecast to continue their upward trend, rising from $9.0 billion in 2018–19 to $11 billion in 2019–20, before falling marginally to $10 billion in 2020–21. The 2019–20 peak reflects expected growth in export volumes and the impact of a weaker Australian dollar.

Uranium

Australia’s uranium export earnings are set to decline, with the closure of the Ranger mine offsetting rises in the uranium price.

  • Uranium spot prices have stabilised, after substantial gains in late 2018. Prices remain relatively low, but higher demand and flat or falling output, is expected to push them up to above US$37 a pound by 2021.
  • Uranium production in Australia is expected to decline over the outlook period, as output winds down at the Ranger mine ahead of its scheduled closure in 2020.
  • Australia’s uranium export earnings are expected to remain roughly steady over the outlook period, albeit with a fall in 2020 as output ceases from Ranger.

Gold

Australia’s gold export earnings to set a record of $28 billion in 2019–20, driven by higher prices and strong export volumes.

  • Australian dollar gold prices are forecast to rise to a record annual average high of A$2,040 an ounce in 2020, due to the global economic slowdown, political uncertainty in the United States, and geopolitical risks in the Middle East.
  • Australia’s gold exports are forecast to reach a record high of $28 billion in 2019–20, reflecting high gold prices and an expected rise in export volumes to 403 tonnes.
  • A partial US-China trade agreement could restore shaky confidence in equity markets and potentially restrain further upward movement in gold prices.

Aluminium, alumina and bauxite

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

  • Rising aluminium supply and slowing aluminium demand are expected to drive aluminium prices lower in 2020 and 2021, to average US$1,700 and US$1,615 a tonne, respectively. Alumina prices are also forecast to fall over the outlook period, to average US$312 a tonne in 2021.
  • After reaching a peak of $16 billion in 2018–19, the total value of Australian exports of aluminium, alumina and bauxite is expected to fall to $14 billion in 2020–21, due to lower forecast prices.
  • With no planned expansions to smelter or refinery capacity until after 2020–21, annual Australian output is likely to be steady over the outlook period, at 1.6 million tonnes of aluminium and 20 million tonnes of alumina.

Copper

Copper export earnings to grow, supported by higher production and positive price trends.

  • Copper prices declined in 2019 to an average of US$5,980 a tonne, weighed down by slowing economic growth. Over the outlook period, rising consumption is expected to boost prices, with the price forecast to reach US$6,190 a tonne in 2021.
  • Australia’s copper exports are expected to grow in line with higher production, supported by expansions and new projects. Export volumes are forecast to rise from 932,000 tonnes in 2018–19 to 1.0 million tonnes in 2020–21 (metal content terms).
  • Higher volumes and stronger prices are expected to increase Australia’s copper export earnings. Export earnings are forecast to exceed $10 billion in 2020–21, up from $9.7 billion in 2018–19.

Nickel

Expanding domestic production and higher prices expected to boost export earnings.

  • Nickel prices are expected to rise as a result of higher consumption and Indonesia’s restrictions on exports of nickel ore. Prices are forecast to average US$16,500 a tonne in 2021, up from US$14,000 a tonne in 2019.
  • New projects and expansions in Australia’s production should support exports, which are forecast to increase from 225,000 tonnes in 2018–19 to 270,000 tonnes in 2020–21
  • Both higher prices and growing export volumes are expected to drive Australia’s nickel export earnings, which are forecast to reach $4.7 billion in 2020–21, up from $3.6 billion in 2018–19.

Zinc

Zinc prices are expected to fall over the outlook period, due to rising production.

  • Zinc prices are expected to decrease over the forecast period, as robust production growth boosts inventories and weak industrial production shrinks demand for the metal.
  • Australia’s zinc production is surging, having increased by 30 per cent from 2017–18 to 2018–19. Production is forecast to increase further over the outlook period.
  • The value of Australia’s zinc exports is forecast to decline from $4.0 billion in 2018–19 to $3.2 billion in 2020–21, due mainly to softer prices.

Lithium

The value of lithium exports to fall slightly, as lower prices offset higher export volumes..

  • The spot lithium hydroxide price has eased from US$16,139 a tonne in 2018 to about US$11,000 a tonne in late 2019. Prices are expected to ease further in 2020 – to a forecast US$9,500 a tonne – before recovering to about US$10,925 a tonne in 2021.
  • Australian lithium production is expected to increase from 249,000 tonnes (lithium carbonate equivalent) in 2018–19 to 289,000 tonnes in 2020–21. Growth reflects product improvements with the CGP2 expansion at Greenbushes, and other possible expansions.
  • Rising mine output and lithium hydroxide refining are forecast to increase export revenue to $1.6 billion by 2020–21.

Major projects

Analysis of 280 major projects under development show a strong and diversified outlook for the investment pipeline.

  • The 2019 Major Projects survey shows resource and energy commodity investment has recently stabilised after years of decline, with emerging prospects for recovery.
  • The value of committed projects in October 2019 stood at $30 billion, almost unchanged from the level recorded in the year to October 2018. Our outlook for resources and energy investment suggests that this may be near the bottom of the mining investment cycle.
  • While there are a swag of brownfield projects, a lack of greenfield investments remains a key challenge to Australia’s longer-term prospects as a resource commodity supplier.