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Resources and Energy Quarterly December 2021

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.

Australia’s resource and energy exports are estimated to reach a record $379 billion in 2021–22, up from $310 billion in 2020–21. In 2022–23, export earnings are then forecast to decline back to $311 billion, as commodity prices settle lower.

The global recovery remains underway, sustained by the ongoing rollout of COVID-19 vaccines and continued fiscal and monetary support across major economies. However, new outbreaks (and variants) of the pandemic across many regions are inhibiting a full global recovery, as are supply chain blockages — including shortages of semi-conductor chips and of shipping containers in some locations.

China’s power shortages have been a dominant influence on global resource and energy commodity prices in recent months. As a major global metal refiner, the power shortages have seen Chinese (base and ferrous) metal output cut back. China’s property sector has slowed noticeably since our last report, cutting metal usage. However, the Chinese authorities now appear to be taking steps to stabilise the sector.

New policy developments are also impacting the global resources and energy sector. In October, China’s government instructed the nation’s coal miners to lift output and imposed a thermal coal price cap, following critical shortages. In November, the US Congress passed a US$1.2 trillion infrastructure program, which will have a stimulatory effect on economic growth domestically and have flow-on effects offshore.

A stronger outlook for base metals and coal is expected to more than offset the impact on export earnings of the downward adjustment we have made to our iron ore price forecasts. Lithium exports are expected to overtake zinc exports in 2022–23 as car makers race to capture the electric vehicle market.

With energy inventories lower than normal, the severity of the remainder of the Northern Hemisphere winter will have a critical influence on energy markets in the short term. The La Niña weather pattern will likely impact on the demand and supply for coal and other energy products.

The risks to the record export earnings forecast for 2021–22 are skewed to the downside. They include a much faster than expected decline in coal prices. There is also potential for a further rise in global inflation and a risk of higher interest rates in response. New, vaccine-resistant strains of the coronavirus, and the risk of delays in the rollout of COVID-19 vaccines to the world’s population, could also pose significant risks.

Overview

Australia’s resource and energy export earnings to again reach a new record in 2021–22

  • The outlook for Australia’s mineral exports remains strong, as the world economy rebounds from the impact of the COVID-19 pandemic. High prices across a number of resource and energy commodities, and a weaker Australian dollar are driving a surge in export earnings. Some moderation in prices is likely in 2022, as supply rises and demand growth moderates.
  • In 2020–21, export earnings reached a record $310 billion. Earnings are forecast to rise a further 22% in 2021–22 to $379 billion, before falling back to around $311 billion in 2022–23.
  • The rollout of COVID-19 vaccines in advanced nations is allowing a rebound in services in the world economy, joining the ongoing recovery in industrial production. However, a new surge in cases (of the delta strain or a new variant) in many countries, container shortages and other supply chain blockages, is inhibiting a full global recovery and contributing to upward price pressure.

Macroeconomic outlook

Global recovery remains underway, despite ongoing near-term impacts of pandemic

  • The global recovery continues, sustained by the ongoing rollout of COVID-19 vaccines and continued fiscal and monetary support across major economies.
  • However, the pace of recovery has slowed in recent months. While this follows a moderation of growth rates toward long-run trend levels as the recovery progresses, it also reflects near-term impacts from the pandemic. This includes renewed outbreaks of COVID-19, energy shortages in many regions, and ongoing supply chain disruptions.
  • After growth of 5.9% in 2021, world economic growth is forecast to ease to 4.9% in 2022 and 3.6% in 2023, as levels of pent up demand recede, and governments and central banks continue to withdraw stimulus policies.

Steel

Rate of recovery in world steel production slows in the second half of 2021

  • World demand for steel is estimated to grow by 4.5% in 2021, reflecting the continued recovery in economic activity and industrial output underway in most major economies.
  • Lower global steel production in recent months reflects a moderation of economic (and industrial output) growth rates to lower, longer-run trend levels, as well as production cuts and weakened steel demand in China.
  • A slower pace for the global recovery from the second half of 2021 is likely to see more moderate growth in steel demand from 2022. New outbreaks of the pandemic and ongoing supply chain issues are downside risks to global growth and steel consumption over the outlook.

Iron ore

Cuts to Chinese steel output and weaker demand have seen iron ore prices retreat by more than 60% from highs

  • Iron ore prices have fallen to an 18-month low (around US$90 per tonne) as of early December, reflecting forced cuts to Chinese steel production and weaker demand for steel in that nation in the second half of 2021.
  • Australian export volumes are expected to grow steadily over the outlook, from 867 million tonnes in 2020–21 to 920 million tonnes by 2022–23. This reflects the commencement of several new mines in Western Australia.
  • Iron ore prices are projected to decline further over the outlook period. This is likely to see Australia's iron ore export earnings fall (from $153 billion in 2020–21) to $118 billion in 2021–22, and $85 billion by 2022–23.

Metallurgical coal

Australia’s metallurgical coal prices have lifted strongly in recent months

  • Metallurgical coal prices have held at historic highs for several months, as supply shortages have met strong Chinese demand and rebounding global industrial production. The Australian premium hard coking coal (HCC) price is forecast to ease from an average of around US$227 a tonne in 2021 to still-high US$162 a tonne by 2023.
  • Australia’s exports are forecast to rise from 171 million tonnes in 2020–21 to 181 million tonnes by 2022–23. Supply chains disrupted by China’s informal import restrictions have largely reorganised.
  • Australia’s metallurgical coal export values are forecast to surge with recent price movements, rebounding from $23 billion in 2020–21 to peak above $50 billion in 2021–22, before easing to $37 billion in 2022–23.

Thermal coal

Australia’s thermal coal export earnings have risen as the global economy recovers

  • Thermal coal spot prices spiked in October as strong Chinese demand hit up against global supply disruptions and capacity constraints. The Newcastle benchmark price is forecast to average around US$134 a tonne in 2021, easing slowly to around US$90 a tonne by 2023.
  • Australian thermal coal exports declined from 213 million tonnes in 2019–20 to 192 million tonnes in 2020–21, but are expected to recover back to 204 million tonnes by 2022–23.
  • Surging prices are expected to push export values up to $35 billion in 2021–22, with a subsequent easing to $27 billion by 2022–23.

Gas

Australia’s LNG export earnings to rebound strongly in 2021–22, as prices recover

  • Asian LNG spot prices and oil-linked contract prices are expected to moderate in 2022 and 2023, as the LNG market remains well supplied and oil prices stabilise around US$70 a barrel.
  • Australian export volumes are forecast to increase by 6.5% to 82 million tonnes in 2021–22, as major technical issues are resolved at several plants, and stay stable at 82 million tonnes in 2022-23.
  • Australia’s LNG exports earnings are forecast to rise from $30 billion in 2020–21 to $63 billion in 2021–22, as oil-linked contract prices surge. Export earnings are forecast to be $55 billion in 2022–23.

Oil

Australian crude and condensate export earnings to lift with higher prices

  • Oil prices are estimated to average US$70 a barrel in 2021 — a 66% increase from 2020. Recovering global consumption amid a tight market boosted prices, with a strong surge in the second half of the year. Brent crude prices are forecast to stabilise around $US70 a barrel over the forecast period.
  • Australian crude oil and feedstock exports in 2021–22 are forecast to increase by 11% to 306,000 barrels a day, before returning to 300,000 barrels a day in 2022–23.
  • High oil prices are expected to lift Australian oil export earnings by 69% to $12.6 billion in 2021–22. Earnings for 2022–23 are forecast to be $11.3 billion.

Uranium

Uranium prices are rising, potentially offsetting falling Australian export volumes

  • Investor demand has seen uranium prices lift in recent months, and further modest growth is expected over the forecast period. Prices are forecast to lift from US$30 a pound in 2020 to US$47 a pound by 2023.
  • Australian production is forecast to decline from 2021, as the number of active uranium mines falls from three to two.
  • Price growth is expected to see uranium export values increase from $582 million in 2020–21 to $623 million by 2022–23.

Gold

Australia’s gold exports are forecast to reach a record $28 billion in 2021-22

  • The gold price is estimated to increase by 1.8% in 2021 to US$1,800 an ounce. A higher real interest rate environment is likely to see the gold price slide to around US$1,700 an ounce in 2023.
  • Labour and skills shortages are affecting Australian gold mine production, which is forecast to reach 362 tonnes in 2021–22. Production from new mines and existing mine expansions is expected to boost gold mine production to 374 tonnes in 2022–23.
  • Australia’s gold export earnings are forecast to increase from $28.3 billion in 2021–22 to $28.4 billion in 2022–23, driven by higher export volumes (to 377 tonnes in 2022–23).
  • Aluminium, alumina and bauxite

    Australia’s aluminium, alumina and bauxite export earnings to rise to $16 billion in 2021–21.

    • Energy shortages, emission curbs and political instability in Guinea have constrained primary aluminium production and recently pushed the London Metal Exchange (LME) aluminium spot price to a 13-year high. World demand is expected to remain strong, with the primary aluminium price forecast to rise to an average US$2,680 a tonne in 2023.
    • A restart of idled capacity at the Portland Aluminium smelter in Victoria in the September quarter 2022 is expected to boost Australian primary aluminium output to above 1.6 million tonnes a year. Annual Australian alumina output is expected to be broadly steady over the outlook period, remaining at 21 million tonnes.
    • The total value of Australian exports of aluminium, alumina and bauxite is forecast to increase by 31% in 2021–22 to nearly $16 billion, before falling to nearly $15 billion by the end of the outlook period.

    Copper

    Record copper prices support export earnings and Australia’s development potential

    • Copper prices have surged in 2021, averaging US$9,200 a tonne over the year. High prices will be supported in 2022 through the continued economic recovery and the expanding use of copper in low-emissions technology. Prices are forecast to ease slightly to US$8,500 a tonne by 2023 as new mine supply comes online.
    • Australia’s copper export volumes are expected to rise slightly over the outlook period, from 898,000 tonnes in 2020–21, to around 934,000 tonnes in 2022–23 (in metal content terms).
    • Australia’s copper export earnings are expected to increase — first from sustained price gains into 2022, then from increased export volumes in 2023. Export earnings are forecast to rise from $11.4 billion in 2020–21 to $14.7 billion in 2022–23

    Nickel

    The market for battery-grade Nickel is expected to tight over the outlook period

    • The nickel price is estimated to average US$18,388 a tonne in 2021, 34% higher than in 2020. Strong demand in stainless steel usage and electric vehicle batteries drove early gains, and supply-side shocks propelled subsequent gains.
    • New projects and expansions are expected to lift Australia’s export volumes from an estimated 181,000 tonnes in 2020–21 to about 272,000 tonnes in 2022–23 (in metal content terms).
    • Australia’s nickel export earnings are forecast to rise on the back of growing export volumes and higher prices, reaching $5.2 billion in 2021–22 and $4.8 billion in 2022–23, up from $3.8 billion in 2020–21.

    Zinc

    Prices are expected to remain strong in 2021 before falling slightly as increasing supply growth adds to inventories.

    • The LME zinc spot price is forecast to average US$2,990 a tonne in 2022, with government infrastructure programs helping to support prices. Prices are expected to fall to around US$2,675 a tonne in 2023 as production increases, and consumption growth normalises.
    • Australia’s zinc production is forecast to increase from an estimated 1.3 million tonnes in 2020–21 to 1.4 million tonnes in 2022–23.
    • Australia’s zinc export earnings are forecast to increase from $3.3 billion in 2020–21 to around $4.1 billion in 2021–22, and to $3.6 billion in 2022–23. Rising refined production is expected to offset the impact of lower prices.

    Lithium

    Rising prices for lithium are supporting the recovery of Australian producers with lithium hydroxide production underway.

    • Spodumene prices are forecast to rise to an average US$1,185 a tonne in 2022 from an estimated US$720 a tonne in 2021, but fall back to US$990 a tonne in 2023.
    • Lithium hydroxide prices are forecast to rise from US$7,300 a tonne in 2020 to US$18,940 a tonne in 2023.
    • Australia’s lithium production is forecast to rise from 217,000 tonnes of lithium carbonate equivalent (LCE) in 2020–21 to 373,000 tonnes of LCE in 2022–23.
    • Australia’s lithium export earnings are forecast to rise from $1.1 billion in 2020–21 to $4.2 billion in 2022–23 as lithium hydroxide production rises. First lithium hydroxide output occurred in August 2021.