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Resources and Energy Quarterly June 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.

After 11 years of growth, the world is facing a COVID-19-induced downturn of a breadth and scale that now seems likely to be much larger than assumed in the March 2020 Resources and Energy Quarterly. The previous major global downturn – the global financial crisis (GFC) – affected resource and energy commodities dramatically, but China’s infrastructure drive and a weaker Australian dollar helped provide Australia with a lifeline of sorts.

History might not repeat, but it can rhyme. The current global downturn is affecting commodities in a wide variety of ways, but the overall export outlook is still relatively strong. Export earnings are estimated to set an all-time record in 2019–20. Gold – a safe haven in uncertain times – is set to be a strong performer, with prices surging to an 8-year high, and export earnings now on track to set a new record (of almost $32 billion) in 2020–21. While normally vulnerable during downturns, iron ore earnings have been resilient in recent months, with a strong outlook for prices. The COVID-19 pandemic appears to have affected both sides of the iron ore market: demand disruptions have run up against supply problems localised in Brazil, where COVID-19-related lockdowns have derailed efforts to recover from shutdowns in the wake of the Brumadinho tailings dam collapse. Our earlier forecast for Australian iron ore export earnings to top $100 billion in 2019–20 appears to have been achieved.

COVID-19 has resulted in sharp price falls for other commodities, notably energy. The most significant impacts have fallen on oil producers, with the average Brent crude price expected to plunge by about 40 per cent in 2020. Many oil producers are likely to operate at a loss through much of 2020, with potentially significant implications for the high cost producers. Given the huge price swings induced by large changes in demand and supply, we have constructed scenarios to consider the relatively wide range of possibilities going forward. LNG prices, which were already in a downward cycle, have declined at an accelerated pace since the COVID-19 outbreak began. Coal prices, which fell sharply in 2019, declined further in the June quarter, and are likely to remain low through the rest of 2020.

Base metals have also been significantly impacted, with a sharp fall in vehicle output/sales affecting their outlooks.

Commodity markets overall remain subject to a combination of lower consumer demand and government-imposed lockdowns, which have set back production schedules. However, an emerging wave of stimulus measures should offer a significant (though unpredictable) upside. Unlike downturns in previous decades, this downturn was not due to the bursting of excesses built up in the financial system (the GFC of 2008–09) or in equity markets (Tech stock crash of 2000). It also differs from the 1970s recessions (which were induced by the OPEC oil crises), which helped contribute to stagflation and forced a wholesale restructure of the world’s energy system. It has been imposed as a result of a health crisis as governments around the world have shut down large parts of their economies to suppress the spread of COVID-19. While restrictions are now easing, some households are likely to remain cautious, keeping demand subdued. In line with OECD forecasts, we assume world economic growth declines by 5.5–6.5 per cent in 2020, with growth of 4.5–5.5 per cent resuming in 2021; however, the level of global economic activity doesn’t return to pre-COVID-19 levels until 2022.

On balance, our export earnings forecast has been revised down – but not by an alarming amount. Our previous forecast was for commodity earnings to reach $299 billion in 2019–20 and then fall modestly. In this edition, we estimate Australia earns $293 billion in 2019–20, and forecast exports of about $263 billion in 2020–21 and $255 billion in 2021–22. To give this better context: $293 billion is still the largest resource and energy export figure in Australian history, and $263 billion is third highest. Resource and energy earnings will be almost 50 per cent higher – in real terms – than earned in 2008–09, during the GFC.

This forecast comes with significant risks: a second outbreak of COVID-19, another surge in trade tensions, or an unexpectedly slow global recovery. But on balance, it remains likely that parts of the service sector will bear the brunt of the downturn, and commodities will once again buffer the Australian economy against external headwinds.

Overview

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

  • The COVID-19 pandemic has resulted in a sharp weakening in the world economy, and consequent commodity price falls have been a function of the supply response. With supply now being cut and usage recovering, price falls for most resource commodities seem to be over.
  • Iron ore prices have recovered the losses of the first four months of 2020, as supply problems offset demand worries. Coal and base metal prices have declined as falling demand outpaces supply cuts.
  • Offsetting the impact of generally weaker prices, both higher export volumes and a lower-than-expected Australian dollar are estimated to have seen Australia’s resource and energy exports reach a record $293 billion in 2019–20. Price weakness is likely to cut export earnings over the outlook period.

Macroeconomic outlook

World economic activity is expected to decline because of the containment measures associated with COVID-19.

  • The COVID-19 pandemic is reducing global economic growth and industrial production, with the OECD expecting the greatest global impacts in the second quarter of 2020. However, the recovery is expected to be unsteady and uneven across countries.
  • The OECD expects that world economic activity will contract by 6.0 per cent in 2020, before growth of 5.2 per cent is recorded in 2021.
  • Governments have introduced containment measures to protect public health, as well as widespread stimulatory fiscal policies, and central banks have pushed down interest rates globally.

Steel

World steel markets are facing significant pressure from a range of factors.

  • World steel usage is expected to fall by 6 per cent in 2020, due to the COVID-19 pandemic and resulting economic downturn. Construction, manufacturing and other steel-intensive sectors face challenging conditions, including forced closures in some nations.
  • World steel consumption is forecast to rebound by 5.0 per cent in 2021 and 4.0 per cent in 2022, as the global economy recovers.
  • Steel output is forecast to follow a similar trend, falling by 4.0 per cent in 2020 before rising by 4.5 per cent in 2021 and 4.0 per cent in 2022.

Iron ore

Australia’s iron ore export earnings are set to exceed $100 billion in 2019–20, driven by higher prices.

  • Iron ore prices have held up through the early stages of the COVID-19 pandemic as a result of supply disruptions in Brazil and surprisingly robust demand in China.
  • In 2020, the iron ore price is forecast to average about US$79 a tonne free on board (FOB) Australia. Growing supply is expected to reduce the iron ore price to an average of US$65 a tonne by 2022.
  • Export volumes are expected to grow from an estimated 852 million tonnes in 2019–20 to 915 million tonnes by 2021–22. This reflects the commencement of several new mines in Western Australia.
  • Australia’s iron ore export values are estimated to have risen from $78 billion in 2018–19 to $103 billion in 2019–20, due to strong prices and a low Australian dollar. Export earnings are expected to drop to $81 billion by 2021–22.

Metallurgical coal

Australia’s metallurgical coal earnings to fall as COVID-19 impacts demand.

  • Metallurgical coal prices have fallen sharply in recent months, reaching four year lows as a result of the demand-side impacts of COVID-19. The Australian premium hard coking coal (HCCƑ price is forecast to average US$126 a tonne in 2020, down from US$179 a tonne in 2019.
  • Australia’s export volumes are forecast to edge down by around 2 million tonnes in 2020–21 to 180 million tonnes due to lower global demand, before lifting in 2021–22, as world steel production recovers.
  • Australia’s metallurgical coal export earnings are forecast to fall sharply in 2020–21, from an estimated $35 billion in 2019–20 to $25 billion. They are then expected to stage a partial recovery to $29 billion in 2021–22, as prices and export volumes lift.

Thermal coal

Australia’s thermal coal export earnings to decline as the seaborne market contracts.

  • Thermal coal spot prices have fallen sharply as the impact of COVID-19 drives a contraction in seaborne trade for only the second time this century. The Newcastle benchmark is forecast to average US$56 a tonne in 2020, before slowly recovering to US$65 tonne in 2022.
  • The bulk of production cuts are expected to come from Indonesia and the US. However, Australia’s exports are forecast to decline from an estimated 213 million tonnes in 2019–20 to 210 million tonnes in 2020–21, as Australian producers come under pressure from low prices.
  • Australia’s thermal coal exports are forecast to drop from an estimated $20 billion in 2019–20 to $16 billion in 2020–21, before a partial recovery to $17 billion in 2021–22 driven by higher prices and export volumes.

Gas

Low oil prices are expected to weigh on Australia’s LNG export earnings.

  • Australian LNG export prices have fallen to record lows, due to the sharp decline in both oil and Asian LNG spot prices. Both spot and contract LNG prices are forecast to gradually recover from these lows over the next two years.
  • The rapid expansion of Australia’s LNG capacity is coming to an end. Australia’s LNG exports reached an estimated 79 million tonnes in 2019–20, and are forecast to edge up to 80 million tonnes by 2021–22.
  • Australia’s LNG exports earnings are forecast to decline from an estimated $48 billion in 2019–20 to $34 billion in 2020–21, weighed down by low contract and spot prices, before edging up to $36 billion by 2021–22.

Oil

Oil prices are forecast to recover from historic lows, but to remain constrained.

  • Oil prices are forecast to increase in the second half of 2020, but to remain relatively low as the COVID-19 pandemic limits global consumption. Brent crude prices are forecast to average US$42 a barrel in 2020, down from US$64 a barrel in 2019.
  • Australian crude oil and feedstock exports are estimated to have risen to 292,000 barrels a day in 2019–20. Exports are expected to peak at 300,000 barrels a day in 2020–21 before falling marginally in 2021–22.
  • Australian oil export earnings are estimated to decline marginally to $9.0 billion in 2019–20, reflecting low prices late in the fiscal year. Ongoing low prices are expected to lead to export earnings falling to $6.8 billion in 2020–21, before a price rebound lifts earnings to $8.6 billion in 2021–22.

Uranium

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

  • A pause in production at Canada’s Cigar Lake mine has led to a surprise lift in the uranium price in May. Spot prices are currently around US$33 per pound, and are expected to lift past US$50 a pound by late 2022.
  • Production in Australia is set to decline from 2021, due to the closure of the Ranger mine. However, new prospects, including Boss Resources’ Honeymoon mine, could lift production beyond the outlook period.
  • Price growth is expected to push the value of Australia’s uranium exports up from an estimated $650 million in 2019–20 to $747 million by 2021–22.

Gold

Australia’s gold exports are forecast to reach a record $32 billion in 2020–21.

  • Due to the COVID-19 pandemic and its impacts, the gold price is forecast to reach an 8-year high, averaging about US$1,630 an ounce in 2020. An expected global economic rebound is projected to see the price slide to around US$1,510 an ounce in 2022.
  • Australia’s gold mine production is forecast to reach a peak of 381 tonnes in 2021–22, as high prices encourage an expansion in production.
  • The value of Australia’s gold exports is forecast to reach a record $32 billion in 2020–21, driven by higher prices and export volumes, before declining to $30 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 demand and increasing supply.

  • The global aluminium industry is facing challenging conditions caused by the impacts of COVID-19, with slowing demand, increasing supply, and rising inventory levels. Aluminium prices are forecast to fall by 8.3 per cent in 2020, to average US$1,643 a tonne, before recovering to US$1,726 a tonne by 2022.
  • Annual Australian output is expected to be steady over the outlook period, at 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 20 per cent in 2019–20, to $13 billion, and 2.8 per cent in 2020–21, to $12 billion, due to low aluminium and alumina prices.

Copper

Copper export earnings weighed down by COVID-19 related price falls, expected to recover in 2022.

  • Copper prices are forecast to fall to US$5,560 a tonne in 2020, as the COVID-19-related economic slowdown weighs on consumption. Copper prices are then expected to lift over the outlook period, rising an average 6.0 per cent a year to a forecast US$6,240 a tonne in 2022.
  • Australia’s copper exports are forecast to rise from an estimated 925,000 tonnes in 2019–20 to around 966,000 tonnes in 2021–22 (in metal content terms), as output from existing mines expands and new mines start.
  • As copper prices and export volumes rise, Australia’s export earnings are forecast to steadily lift, from an estimated $9.6 billion in 2019–20 to $9.9 billion by 2021–22.

Nickel

Expanding domestic production and higher prices are expected to boost export earnings over the outlook period.

  • The nickel price is forecast to decline to US$12,600 a tonne in 2020, as a result of weaker consumption. Subsequently, the market is forecast to tighten, pushing the price up to a forecast US$15,100 a tonne in 2022.
  • New projects and expansions are expected to lift Australia’s export volumes from an estimated 282,000 tonnes in 2019–20 to around 333,000 tonnes in 2021–22.
  • Australia’s nickel export earnings are forecast to strengthen on the back of growing export volumes and recovering prices, reaching $6.8 billion in 2021–22, up from an estimated $4.3 billion in 2019–20.

Zinc

Prices are expected to grow modestly over the outlook period with supply growth tempering price gains.

  • Zinc prices are expected to remain soft for the rest of 2020, with the COVID-19 pandemic weighing on an already weakening market. Prices are expected to grow modestly over the rest of the outlook period, with supply growth tempering any significant price gains. Prices are forecast to rise 3.1 per cent to US$2,055 a tonne over 2020 to 2022.
  • Australia’s zinc production is forecast to increase from an estimated 1.3 million tonnes (in metallic content terms) in 2019–20 to 1.6 million tonnes in 2021–22.
  • Australia’s zinc export earnings are forecast to decline from $3.5 billion in 2019–20 to around $3.2 billion in both 2020–21 and 2021–22 based on an appreciating Australian dollar, despite increasing production and rising prices.

Lithium

Lithium producers face difficult price conditions, but large growth in demand is expected.

  • The spodumene price (delivered to China) fell by 17 per cent to US$425 a tonne in the first five months of 2020. Prices are forecast to remain flat at US$425 a tonne in 2021 and 2022 until increasing electric vehicle uptake makes shortages possible after 2022.
  • Australian lithium production is expected to fall from 208,000 tonnes (lithium carbonate equivalent) in 2019–20 to 146,000 tonnes in 2021–22, after a sharp pullback in 2020–21 (to 131,000 tonnes) due to continued weakness in spodumene prices.
  • After falling from $1.0 billion in 2019–20 to $0.6 billion in 2020–21, Australian lithium export earnings are forecast to partly recover to $0.7 billion by 2021–22.