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Resources and Energy Quarterly December 2020

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.

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.

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.

Overview

Australia’s resource and energy export earnings outlook has improved since September 2020.

  • Since last quarter, Australia’s outlook for resource and energy exports has improved overall.
  • World economic activity has rebounded, with the demand for resource and energy commodities picking up. Oil consumption and prices are down in 2020, but set to recover partially as lockdown measures ease.
  • While volumes are set to increase, export earnings are expected to be lower than in 2019-20, largely driven by lower LNG prices in 2020-21 and lower iron-ore prices in 2021-22 after reaching seven-year highs. Australian coal prices are also expected to recover over the outlook period.

Macroeconomic outlook

Major economies started to rebound in the second half of 2020 and the outlook is positive.

  • The COVID-19 pandemic, and subsequent containment measures, have significantly affected world industrial production and economic growth. The IMF assumes that the recovery will be unsteady and uneven across economies. The rollout of an effective vaccine will be influential.
  • The economic downturn has been limited by significant stimulatory policies. Governments have imparted fiscal stimulus to support businesses and workers, while central banks around the world have pushed down official interest rates and bought large amounts of debt.
  • The IMF expects that world economic activity contracts by 4.4 per cent in 2020, before growing by 5.2 per cent in 2021 and 4.2 per cent in 2022.

Steel

World steel production is now on a recovery path.

  • World steel consumption is expected to have declined by 2.2 per cent in 2020, due to the COVID-19 pandemic and resulting economic downturn. Stimulus in China has prevented a much worse overall result, though steel demand remains low in many countries.
  • World steel consumption is forecast to rebound as the global economy recovers, growing by 3.8 per cent in 2021 and by 3.6 per cent in 2022.
  • Steel output is forecast to follow a similar trend, falling by 2.0 per cent in 2020 before rising by 3.0 per cent in 2021 and 3.6 per cent in 2022 as steel smelters move back towards normal production levels.

Iron ore

Australia’s iron ore export earnings are on track for a new record in 2020-21.

  • The iron ore price remains over US$110 a tonne, supported by robust demand in China linked to government stimulus measures. The iron ore price is expected to remain above US$100 a tonne until
    mid-2021 before easing to just over US$75 by the end of 2022.
  • Australian export volumes are expected to grow from 858 million tonnes in 2019–20 to 906 million tonnes by
    2021–22 as mines open or expand in Western Australia.
  • Stronger prices are expected to push Australia’s iron ore export values up to a peak of $123 billion in 2020–21. An easing in prices and stronger Australian dollar are subsequently expected to push earnings back to a still strong $95 billion by 2021–22.

Metallurgical coal

Australia’s metallurgical coal prices remain volatile after sharp falls earlier in the year.

  • Metallurgical coal prices have been volatile in the December quarter, rebounding on hopeful signs in world industrial activity, then falling to four year lows on a slow-down in China’s imports. The Australian premium hard coking coal (HCC) price is estimated to average US$125 a tonne in 2020, down from US$179 a tonne in 2019.
  • Australia’s exports are forecast to fall by around 8 million tonnes to 169 million tonnes in 2020–21, due to lower global demand. Exports should lift in 2021–22, as world steel production recovers further.
  • Australia’s metallurgical coal exports values are forecast to fall sharply to $22 billion in 2020–21, from $34 billion in 2019–20. They are forecast to recover partially to $27 billion in 2021–22, as prices and volumes lift.

Thermal coal

Australia’s thermal coal export earnings have stabilised.

  • Thermal coal spot prices stabilised in the December quarter 2020, on the back of production cuts in major exporting countries and stronger demand, as Asian economies emerged from COVID-19 containment measures. The Newcastle benchmark price is estimated to average US$57 a tonne in 2020, before slowly rising to US$65 a tonne in 2022.
  • Reports of informal import restrictions in China on Australian coal are weighing on producer sentiment. Australia’s exports are forecast to decrease from around 213 million tonnes in 2019–20 to 199 million tonnes in 2020–21, then to 222 million tonnes in 2021–22.
  • Australia’s thermal coal exports are forecast to fall from $20 billion in 2019–20 to $15 billion in 2020–21, and $16 billion in 2021–22 driven by higher prices and volumes.

Gas

Australia’s LNG exports are expected to recover.

  • Average Asian LNG spot prices and oil-linked contract prices are expected to recover over the next two years, as the impacts of COVID-19 ease and growing demand catches up to global LNG supply capacity.
  • Australian export volumes reached 79 million tonnes in 2019–20, but are forecast to decline to 75 million tonnes in 2020–21, reflecting the impacts of COVID-19 as well as technical issues at the Prelude and Gorgon LNG plants. Exports are forecast to recover to 80 million tonnes in 2021–22.
  • Australia’s LNG exports earnings are forecast to decline sharply, from $48 billion in 2019–20 to $31 billion in 2020–21, due to weak prices and export volumes, before a partial recovery to $37 billion in 2021–22.

Oil

Oil prices to recover gradually from current low levels.

  • Although oil price volatility has eased in recent months, further price recovery has been limited by lingering COVID-19 containment measures. A gradual recovery in consumption is expected to lift Brent crude prices from US$44 a barrel in the December 2020 quarter to US$57 a barrel by the December 2022 quarter.
  • Australian crude oil and condensate exports in 2020–21 are expected to increase by 4.6 per cent to 304,000 barrels a day, and remain around these levels in 2021–22.
  • Low prices are expected to lead to Australian export earnings falling by 20 per cent to $7.2 billion in 2020–21. An uptick in prices is expected to lift earnings to $8.3 billion in 2021–22.

Uranium

Australia’s uranium production and export earnings are set to decline from 2021.

  • Uranium prices are expected to rise steadily in 2021 and 2022. The closure of Australia’s Ranger mine in early 2021 will lead to some supply pressures during the year, though large producers retain the capacity to ramp up rapidly should prices grow significantly.
  • Australian production is set to decline from 2021, as the number of active uranium mines falls from three to two.
  • Export values are expected to ease from $688 million in 2019–20 to $547 million by 2021–22 as mine output declines.

Gold

Australia’s gold exports are forecast to reach a record $30 billion in 2020-21. 

  • The COVID-19 pandemic and its fallout are likely to have seen the gold price peak at an annual record high in 2020, averaging about US$1,780 an ounce. An effective COVID-19 vaccine rollout and consequent global economic rebound is projected to see the gold price slide to around US$1,560 an ounce in 2022.
  • Australia’s gold mine production is forecast to reach a record 384 tonnes in 2021–22, as record prices encourage an expansion in production.
  • The value of Australia’s gold exports is forecast to reach a record $30 billion in 2020–21 — driven by higher prices and export volumes — before declining to $27 billion in 2021–22, as gold prices ease back.

Aluminium, alumina and bauxite

Australia’s aluminium, alumina and bauxite export earnings to decline, due to slowing bauxite export .

  • Growing demand is expected to drive aluminium prices higher in 2021 and 2022, to an average of US$1,880 and US$1,960 a tonne, respectively. Alumina prices are also forecast to rise over the outlook period, to an average of US$289 a tonne in 2022.
  • Annual Australian output is expected to be broadly steady over the outlook period, remaining at around 1.6 million tonnes of aluminium and 20 million tonnes of alumina.
  • The total value of Australian exports of aluminium, alumina and bauxite is forecast to fall by 7.1 per cent in 2020–21 to $12 billion as bauxite volumes decline, then hold steady in 2021–22.

Copper

As the economic recovery strengthens copper prices, export earnings lift to a forecast $11 billion.

  • The copper price is estimated to average US$6,060 a tonne in 2020, after propelling higher since March 2020. Growing consumption amidst a modest recovery in the world economy is expected to lift prices to a forecast US$6,570 a tonne by 2022, up an average 4 per cent a year.
  • Australia’s copper exports are forecast to rise from 925,000 tonnes in 2019–20 to 941,000 tonnes in 2021–22 (in metal content terms), as output from existing mines expands and new mines start-up.
  • After reaching $10 billion in 2019–20, Australia’s export earnings are forecast to rise 3 per cent a year to reach $11 billion in 2021–22.

Nickel

Restored prices and expanding domestic capacity expected to lift nickel export earnings.

  • The 2020 nickel price is estimated to be US$13,600 a tonne, down 2 per cent on 2019. Prices are forecast to recover to US$15,600 a tonne in 2022, fuelled by returning consumption growth.
  • New projects and potential restarts are expected to lift Australia’s export volumes from 231,000 tonnes in 2019–20 to a forecast 253,000 tonnes in 2021–22, up an average 6 per cent a year.
  • Australia’s nickel export earnings are expected to rise with higher export volumes and recovering prices, reaching a forecast $4.4 billion in 2021– 22, up from $3.8 billion in 2019–20.

Zinc

Prices are expected to grow modestly before supply growth tempers price gains.

  • Zinc prices are firm heading into 2021, with demand strong due to COVID-19 government stimulus packages focused on infrastructure spending. Prices are expected to increase from an estimated average of US$2,245 a tonne in 2020 to US$2,285 a tonne in 2021, before rising supply pushes the price lower to an average US$2,170 a tonne in 2022.
  • Australia’s zinc mine production is forecast to rise from 1.3 million tonnes (metallic content) in 2019–20 to 1.6 million tonnes by 2021–22.
  • Australia’s zinc export earnings are forecast to decline from $3.6 billion in 2019–20 to around $3.2 billion in both 2020–21 and 2021–22, as the Australian dollar appreciates and then tops out.

Lithium

Australian lithium producers still face difficult price conditions, but new offtake agreements continue to be signed.

  • The spot spodumene price (delivered to China) increased by 0.2 per cent to US$392 a tonne between September and November 2020. Prices are forecast to rise to US$510 a tonne by 2022, based on rising electric vehicle uptake and ‘green’ government stimulus packages in response to the COVID-19 pandemic.
  • Australian lithium production is expected to rise from 233,000 tonnes (lithium carbonate equivalent) in 2019–20 to 277,000 tonnes in 2021–22, based on production tied to offtake agreements.
  • After falling from $1.1 billion in 2019–20 to $1.0 billion in 2020–21, Australian lithium export earnings are forecast to increase to $1.3 billion by 2021–22.