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Resources and Energy Quarterly June 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.

This edition brings a significant change to our commodity forecasts. In recent years, we have predicted commodity export earnings would peak in 2018–19. As recently as March 2019, we suggested record earnings of $278 billion in 2018–19, before earnings fell back in the following years. Our forecast for 2018–19 looks to be largely on target but, massive as this revenue is, it is increasingly likely that the peak will now be in 2019–20. Resource and energy commodity earnings in 2019–20 have been revised up by $12.9 billion to $285 billion.

The swing factor is iron ore prices. The fallout from the Brumadinho tailings dam collapse has led to a sharp drop in Brazilian iron ore exports, and this shortfall now looks set to last at least two years. The seaborne iron ore market is thus likely to stay tight, and prices elevated, out to at least 2021. Extra Australian output will partly fill the gap, as mining expands and disruptive weather in Western Australia recedes. The weaker Australian dollar outlook has also pushed up our 2019–20 forecast.

Partially offsetting this, thermal coal — Australia’s 4th largest export commodity — is facing a tougher climate, with prices deteriorating in recent months. As a large producer and importer of thermal coal, China’s import policies, including extended customs clearance times, have added uncertainty into the market. Seasonal factors appear to have had a larger than normal impact this year: the northern hemisphere — where most thermal coal is burnt — has emerged from a warmer than usual winter, which reduced heating-related energy use. Peak summer demand, when air conditioner usage rises, is a month away.

Like any forecast, these ones are not without their risks — the most notable being the worsening of trade tensions between the US and its major trading partners, particularly China. As we publish, the US and China are set for further trade discussions at the G20 meeting in Japan. Commodities helped to protect Australia from larger fallout during the Global Financial Crisis. However, the opposite could happen in a downturn sparked by trade disputes. Trade disruptions will hit global manufacturers especially hard, and the impacts will inevitably flow on to the commodity producers who provide the raw materials to manufacturers. This could result in an outsized impact on nations with a high commodity exposure.

Many firms were able to absorb the initial 10 per cent tariff into their margins. However, the escalated 25 per cent tariff will force major changes to global supply chains. The fallout of these changes may actually favour some steel producers in unanticipated ways. Should the Chinese government proceed with further stimulus packages involving increased infrastructure spending, steel use could actually rise in net terms.

Geopolitics is magnifying uncertainties, especially in oil markets. Many oil producers are facing sanctions as well as domestic turmoil. The age of nuclear power began with the oil crisis of 1973 (a subject explored in this edition’s uranium special topic). Any substantial rise in oil prices, and tight carbon budgets, may accelerate the age of electrification, as nations seek to reduce emissions and curb oil dependency by embracing electric cars.

As ever, economic turning points are hard to predict, and the prospect of one in the near future adds a significant element of uncertainty to our higher forecast. Should a turning point occur, our strength — record commodity exports — could also be our vulnerability.

This edition contains two special topics. The first dwells on the Australian gold industry. Australia has the world’s largest economic demonstrated resources of gold, and gold is forecast to overtake thermal coal as our fourth largest export in 2019–20. The second special topic examines the uranium market, currently emerging from a sharp downturn after the power plant disaster at Fukushima. Uranium’s long term prospects depend on a range of factors, such as climate change pressures, technological change, and the decisions of about 30 nations examining nuclear energy programs.

Mark Cully

Chief Economist
Department of Industry, Innovation and Science

Resources and Energy Overview

Australia’s resource and energy export earnings set to continue to break fresh records.

  • The prices of Australia’s major resource commodities have recently hit 7-year highs, but are likely to drift lower over the outlook period, due to softer demand and rising supply.
  • Resource and energy commodity markets have been buffeted by the impact of both US-China trade tensions and noticeable supply changes in recent months. Combined with the impact of a weaker than expected exchange rate, Australia’s resource and energy exports are set to hit a new record of $285 billion in 2019–20, before falling back in 2020–21.
  • The world industrial production cycle has continued to slow in recent months, and looks set to slow further. The extent of the likely down-cycle in resource commodities depends on whether China can maintain recent rates of economic growth, and the unfolding of trade disputes of the US with its major trading partners.

Macroeconomic outlook

Global economic growth is facing headwinds as a result of rising trade tensions.

  • The global economy is forecast to grow by 3.3 per cent in 2019, and by 3.6 per cent in 2020 and 2021. Global industrial production and trade figures declined in late 2018 and early 2019, but appear to now be stabilising.
  • Trade tensions between the US and China represent the largest risk to the outlook, with a full resolution seemingly unlikely in the near future. Significant stimulus measures are being implemented in China, in an attempt to offset the economic impacts of the US trade measures.

Steel

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

  • World steel production is on track to set another record high in 2019, as robust production growth in China more than offsets subdued growth elsewhere.
  • China’s steel production and consumption is forecast to rise in 2019, fuelled by government tax cuts and stimulus measures directed towards steel-intensive infrastructure and construction projects.
  • US-China trade tensions pose a risk to the outlook via the potential adverse impact on economic growth. Steel-intensive industries, such as construction and manufacturing, are sensitive to swings in economic growth.

Iron ore

Australia’s iron ore export earnings to reach $79 billion in 2019–20, driven by higher prices.

  • The forecast iron ore price in 2019 has been revised up to an average of US$80 a tonne (Free on board (FOB) Australia), due to supply disruptions — primarily in Brazil — and robust demand from China. Australia’s iron ore export earnings are expected to increase from $61 billion in 2017–18 to an estimated $79 billion in 2019–20.
  • The iron ore price is subsequently forecast to decline to average US$57 a tonne (FOB Australia) in 2021, as the seaborne market returns to balance. Export earnings are forecast to decrease to $65 billion by 2020–21, as a result of the forecast decline in prices.
  • Australia’s iron ore exports are forecast to rise from an estimated 806 million tonnes in 2018–19 to 869 million tonnes in 2020–21, driven by large–scale producers ramping up to long term production targets.

Metallurgical coal

Australia’s metallurgical coal export earnings expected to have reached a record high in 2018–19.

  • The premium Australian hard coking coal (HCC) spot price was resilient in the first half of 2019, reflecting a tight market. With supply growth expected to outpace demand, the premium HCC spot price is forecast to decline from an average of US$207 a tonne in 2018 to US$198 a tonne in 2019, and decline further to US$160 a tonne in 2021.
  • Australia’s export volumes are expected to grow from an estimated 180 million tonnes in 2018–19 to 198 million tonnes by 2020–21. This reflects both an expected recovery from supply disruptions and production growth from restarts and new operations in Queensland’s Bowen Basin.
  • Australia’s metallurgical coal export earnings are estimated to have reached a new record of $42 billion in 2018–19. A forecast decline in prices is expected to reduce export earnings to $36 billion in 2020–21.

Thermal coal

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

  • The Newcastle benchmark spot price is forecast to decline from an average of US$105 a tonne in 2018 to US$83 a tonne in 2019, and then to US$70 a tonne in 2021, as supply growth outpaces demand.
  • Australia’s export volumes are forecast to grow from an estimated 209 million tonnes in 2018–19 to 216 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 reached an estimated $26 billion in 2018–19, a record high. Strong growth in export earnings has primarily been driven by high prices in 2018. Export earnings are forecast to decline to $19 billion by 2020–21, as the impact of lower prices offsets higher export volumes.

Gas

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

  • Australia exported an estimated $50 billion of LNG in 2018–19. Export earnings are forecast to lift to $54 billion in 2019–20, driven by growing export volumes, before falling back to $50 billion as prices ease.
  • Australia’s LNG export volumes are forecast to increase from an estimated 75 million tonnes in 2018–19 to 81 million tonnes in 2020–21, as the last two projects in Australia’s recent wave of LNG investment ramp up output.
  • Australian LNG export prices are forecast to remain stable in 2019–20 and then decline in 2020–21, due to an appreciating exchange rate and easing LNG contract prices (at which most Australian LNG is sold). LNG spot prices are forecast to remain low, as additions to global capacity outstrip increases in world demand.

Oil

Oil markets have entered a period of volatility, with demand and supply uncertainty in the short term.

  • After steady price increases over the first five months of the year, oil markets entered a period of high volatility in June 2019, reflecting uncertainty over global economic conditions and oil supply prospects.
  • Australia’s oil export volumes are forecast to peak during the outlook period, as a side effect of new LNG projects coming online.
  • Earnings from oil exports are forecast to continue their upward trend, rising from $9.3 billion in 2018–19 to $12.0 billion in 2019–20 before falling slightly to $11.2 billion in 2020–21. The 2019–20 peak reflects expected volume growth, a higher expected oil price and the impact of a weak 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 peak in 2020–21 at over $22 billion, driven by higher prices and strong export volumes.

  • Trade and geopolitical risks are likely to support gold prices, which are forecast to rise to an average US$1,440 an ounce in 2021.
  • Export volumes are forecast to increase by 12 per cent in 2020–21, reaching a peak of 370 tonnes.
  • The value of Australia’s gold exports is forecast to peak in 2020–21 at above $22 billion, driven by higher prices, and strong export volumes.

Aluminium, alumina and bauxite

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

  • Aluminium prices are forecast to average US$1,880 a tonne in 2019, before rising to average US$2,015 a tonne by 2021, driven by China’s monetary and fiscal stimulus. However, alumina prices are forecast to fall over the outlook period, averaging US$363 a tonne in 2021, due to growing supply.
  • With no planned expansions to smelter or refinery capacity in Australia until 2020–21, annual output is forecast to remain at 1.6 million tonnes for aluminium and 20 million tonnes for alumina over the outlook period.
  • Total Australian export value of aluminium, alumina and bauxite are expected to peak at $16 billion in 2018–19, before declining to $14 billion in 2020–21.

Copper

Higher copper export earnings are expected to be supported by growing production and rising prices.

  • The copper spot price is forecast to average over US$6,480 a tonne in 2019, before increasing to US$7,750 a tonne in 2021, as higher consumption growth results in tighter world markets.
  • Higher domestic copper production is expected to support an increase in Australia’s export volumes, from an estimated 927,000 tonnes in 2018–19 to around 1.0 million tonnes (in metal content terms) in 2020–21.
  • Australia’s copper export earnings are forecast to grow from an estimated $9.5 billion in 2018–19 to $12.2 billion in 2020–21, supported by both higher prices and export volumes.

Nickel

Production growth in Western Australia and higher prices expected to boost export earnings.

  • Nickel prices have been volatile in 2019, as lower prices — resulting from trade tensions — are countered by unexpected production outages. In 2019, prices are forecast average around US$12,800 a tonne, increasing to reach US$14,400 a tonne by 2021.
  • Australia’s total export volumes are forecast to grow from an estimated 221,000 tonnes in 2018–19 to 291,000 tonnes in 2020–21 (in metal content terms), supported by investment in new mines and capacity expansions, particularly in Western Australia.
  • Higher production and higher prices are expected to support Australia’s total nickel export earnings reaching a forecast to $5.0 billion in 2020–21, up from $3.5 billion in 2018–19.

Zinc

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

  • Zinc prices are forecast to edge back from their recent minor peak in the first half of 2019 — falling from US$2,780 in 2019 to US$2,500 in 2021 — as supply closes the gap with demand.
  • Australia’s production is forecast to peak in 2019–20, as production ramps up at the re-opened Century mine in Queensland, before declining again as a mix of smaller mines hit lower grades and some reach end of life. Export volumes (in metallic content terms) are forecast to peak at 1.5 million tonnes in 2019–20, then taper lower to 1.46 million tonnes in 2020–21.
  • The value of Australia’s zinc exports is forecast to decline from $4.2 billion in 2018–19 to $3.5 billion in 2020–21, largely due to softer prices.

Lithium

Lithium exports face a mixed outlook, with prices falling, but with new refinery capacity also adding value over time.

  • The lithium hydroxide price is expected to ease from $US16,139 a tonne in 2018 to around US$14,080 in 2019. Prices are expected to fall further in 2020 before recovering slightly, to US$12,500 in 2021.
  • Australian lithium production is expected to increase from an estimated 272,266 tonnes (in lithium carbonate equivalent terms) in 2018–19 to around 335,000 tonnes by 2020–21, as the Greenbushes mine is upgraded and several newer mines ramp up.
  • Rising production and new value-adding refineries are forecast to push export revenue up to $1.4 billion by 2020–21.

Australian gold industry

Gold is in greater abundance in Australia than any other country in the world.

  • Australia has the world’s largest economic demonstrated resources (EDR) of gold, with 18 per cent of global EDR.
  • The Australian gold industry is the world’s second largest gold producer and the sixth largest gold exporter (exporting $19 billion in 2018).
  • The Australian gold industry directly employed 22,600 people in 2018.

Nuclear power and uranium

Uranium markets are moving out of a down cycle, with significant change likely over the longer term.

  • The uranium market is emerging from a sharp downturn after Fukushima, with capital starting to flow towards nuclear power again.
  • Long term prospects will depend on a range of factors, including climate change pressures, technological progress, and the decisions of around 30 countries that are considering nuclear energy programs.