The outlook for Australia’s energy and resource commodity exports has improved overall since our last report in September, despite further waves of COVID-19 in many of the world’s major economies. The markets for most minerals have tightened in recent months, as manufacturing and travel activity — and hence resource and energy commodity demand — recovers, alongside some cuts to supply. The global supply of some commodities has declined as the low prices of the June and September quarters forced plant closures, and as COVID-19 outbreaks impact on workers at various mining and refining operations around the world.
The rollout of an effective COVID-19 vaccine presents the opportunity to bring the pandemic under control in major economies in the first half of our two year outlook period. This will boost economic activity and commodity demand, but also reduce outages to supply. The timing and pace of the recovery is difficult to predict, and influenced by policy decisions that governments make to support economic recovery. The IMF forecasts a contraction in the world economy of 4.4 per cent in 2020, but a resumption in growth of 5.2 per cent in 2021. However, news of at least three effective vaccines postdates the IMF’s outlook, suggesting upside risks to these forecasts.
Rising commodity prices and Australia’s relative success at containing COVID-19 have helped strengthen the Australian dollar further in recent months, partly diminishing the impact on export earnings of rising prices.
Coal markets are in a state of flux dealing with issues quite separate to COVID-19. Shipments of (mainly Australian) coal faced delays at Chinese ports. Price differentials have changed dramatically; the bottom line for Australian coal producers is lower profitability and the likelihood of production cuts the longer the Chinese restrictions remain in place.
Besides the discovery of a number of promising COVID-19 vaccines, another material change since the September 2020 Resources and Energy Quarterly is the election of a new US Administration, effective on 20 January 2021. President-elect Biden has flagged an intention to make policy changes in relation to trade policy and emissions reductions. China, Japan and South Korea also announced targets to reach net zero emissions in either the mid or early second half of the century. These targets sit outside our two year outlook period, and the impacts year to year will be driven by the timing and scope of the policies implemented to achieve them.
China’s economy has maintained growth, albeit slower, through the COVID-19 pandemic and the IMF is projecting growth of 8.2 per cent in 2021. This outlook has been helped by stimulatory policy actions and high foreign demand for goods needed to cope with the pandemic. Beijing appears ready to postpone further stimulus measures, satisfied with its current policies.
Australian iron ore earnings appear set to record an all-time high in 2020–21: strong demand from China and a recovery in American, Japanese, South Korean and European demand has added to the impact of ongoing supply problems in Brazil. After topping $102 billion in 2019–20, iron ore export earnings are forecast to be $123 billion in 2020–21. Gold has surrendered some of the sharp gains of 2020, but is still high in historical terms; export earnings are on track to set a new record (of about $30 billion) in 2020–21. Base metals have recovered to pre-COVID-19 levels, as the market looks to a successful vaccine rollout. Spot LNG prices are now above pre-COVID-19 levels, as demand picks up ahead of the Northern Hemisphere winter and the impact of (mainly US) supply cutbacks and disruptions flow through.
Annual resource and energy exports are forecast to remain over a quarter of a trillion dollars in the outlook period — at $279 billion in 2020–21 and $264 billion in 2021–22. One downside risk is for substantial delays in the successful rollout of the COVID-19 vaccines to a large number of the world’s working population. Another downside risk is the extent of further disruption to Australian trade with China.