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Resources and Energy Quarterly June 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 at a record $310 billion in 2020–21, with almost half of those earnings coming from iron ore alone. This is a very strong result in the context of the global COVID-19 pandemic. In 2021–22, a further significant rise in exports to $334 billion is forecast, before moderating world economic growth and falling prices reduce exports to just below $304 billion in 2022–23.

The rollout of COVID-19 vaccines in the major nations/regions is now steadily allowing a rebound in the services side of the world economy, where many sectors (such as land and air-based tourism and hospitality) were more heavily impacted than goods markets. Gasoline and jet fuel — and hence oil — demand is picking up accordingly. The pent up demand for goods, and strong dwelling and infrastructure spending in many countries, is set to see strong demand for steel and non-ferrous metals for some quarters yet. 

Australian iron ore earnings appear to have surged by almost 50% to an all-time high in 2020–21: after topping the $100 billion mark (for the first time ever for any commodity) in 2019–20, iron ore export earnings are forecast to rise to $149 billion in 2020–21. Base metal prices have all surged back above levels reached just before the COVID-19 pandemic; strong demand and worries over higher taxes on South American miners have raised fears of a fall in mining investment in the continent, boosting the copper price to over US$10,000 a tonne. 

Coal markets continue to adjust to China’s informal import restrictions on Australian coal. Thermal coal prices have surged in China, as a critical shortage emerges ahead of the Northern Hemisphere summer — when cooling demand raises the need for increased power output. Surging demand from steel producers has seen Australian metallurgical coal prices regain all of the losses incurred as a result of China’s informal import restrictions. 

Downside risks to the export earnings forecasts include a spike in global inflation and a sharper than expected tightening of monetary policy, and substantial delays in the successful rollout and take-up of effective COVID-19 vaccines to a large number of the world’s working population. Another downside risk is the extent of further disruption to Australian resource and energy commodity trade with China, which took 45% of such Australian exports in 2020.

Overview

Australia’s resource and energy export earnings to push a new record in 2021-22

  • The outlook for Australia’s mineral exports continues to improve, as the world economy rebounds from the impact of the COVID-19 pandemic. Australian miners have found their product in high demand, helped by the impact of government and central bank measures.
  • In 2020–21, export earnings are forecast to be a record $310 billion. Earnings will rise a further 8% to $334 billion in 2021–22, and then fall back to around $300 billion in 2022–23. 
  • Australia’s resource sector is set to capture the growth in demand for resources used in new and low emission technologies.

Macroeconomic outlook

World economic activity continues to gain momentum, supported by fiscal policies

  • Advanced economies and most of Australia’s major trading partners are recovering from the economic impacts of the COVID-19 pandemic. World merchandise trade and industrial production indicators show activity returning to pre-COVID levels. 
  • IMF world GDP growth forecasts have been revised up: after an estimated 3.3% contraction in 2020, the world economy is forecast to grow by 6.0% in 2021 and by 4.4% in 2022.
  • However risks are present, including vaccine bottlenecks, additional COVID-19 strains and rising inflation over the medium term.

Steel

Recovery in world steel production continues to improve in 2021

  • World steel demand is forecast to rise by 5.8% in 2021, reflecting the ongoing recovery in global activity from the COVID-19 pandemic. This also follows a smaller-than-expected contraction of 0.2% in global demand for 2020.
  • The recovery in steel markets is being led by the release of pent up demand and accommodative government policies across major economies, with infrastructure-led fiscal stimulus providing an additional tailwind.
  • Growth in world steel demand is expected to ease to 2.7% in 2022, as the market returns to more typical growth levels.

Iron ore

Australia’s iron ore export earnings are expected to reach a new record in 2020–21

  • Australia's iron ore export values are estimated to reach $149 billion in 2020–21, surpassing the previous record of $103 billion set in 2019–20.
  • This is on the back of growing volumes and record prices, which surged to over US$200 a tonne in early May. The continuing rebound in economic activity in China and other advanced economies has led to an elevated demand for steel and consumption goods, in the midst of ongoing tightness in global iron ore supply.
  • An easing in prices from the second half of 2021 is expected to push export earnings down to $137 billion in 2021–22, and $113 billion by 2022–23.

Metallurgical coal

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

  • Metallurgical coal prices have recovered moderately, in line with improving global industrial production and economic activity. The Australian premium hard coking coal price is forecast to increase from an average US$143 a tonne in 2021 to around US$157 by 2023.
  • Australia’s exports are forecast to rise from a 2020–21 low of 171 million tonnes to reach 186 million tonnes by 2022–23. Supply chains disrupted by China’s informal import restrictions have largely reorganised, albeit with some loss of revenue.
  • Australia’s metallurgical coal export values are forecast to reverse most of their recent decline, rebounding from $22 billion in 2020–21 to almost $32 billion by 2022–23.

Thermal coal

Australia’s thermal coal export earnings have stabilised

  • Thermal coal spot prices have generally recovered over the past quarter, as Asian economies continue to emerge from the 2020 downturn. The Newcastle benchmark price is forecast to average US$88 a tonne in 2021, easing slowly to US$67 a tonne by 2023.
  • The COVID-19 pandemic and informal import restrictions imposed by China have led to a decline in Australian thermal coal exports, from 213 million tonnes in 2019-20 to a forecast 194 million tonnes in 2020–21. Exports are expected to recover to 212 million tonnes by 2022–23 as economies around the Asian region return to normal conditions.
  • Australia’s thermal coal export values are forecast to be $17 billion in 2021-22, up from the previous quarter’s forecast of $15 billion, but still lower than 2019-20 earnings of $20 billion.

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 remain relatively flat over the outlook period, as the LNG market remains well supplied and oil prices stabilise above US$60 a barrel.
  • Australian export volumes are forecast to increase by 5.3% to 83 million tonnes in 2021–22, as technical issues are resolved at the Prelude and Gorgon LNG plants. Export volumes are forecast to be relatively flat in 2022–23.
  • Australia’s LNG exports earnings are forecast to increase from an estimated $32 billion in 2020–21 to $49 billion in 2021–22, as oil-linked contract prices rise sharply.

Oil

Oil prices to remain above US$60 over the outlook

  • Oil prices are forecast to average US$67 a barrel in 2021, significantly higher than 2020, when prices were severely affected by COVID-19. Over the medium term, prices are projected to remain above US$63 a barrel in real terms.
  • Australian crude oil and condensate exports are projected to remain relatively flat, as a result of the numerous FID deferrals during 2020.
  • Australian export earnings in 2021–22 are projected to recover to $10.9 billion (in real teams), reflecting higher oil prices and recovery in export volumes.

Uranium

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

  • Uranium prices are expected to remain relatively contained on balance, growing from US$30 a pound in 2020 to US$35.60 a pound by 2023. Supply cuts at large mines in Canada and Kazakhstan, as well as the closure of Australia’s Ranger mine in early 2021, will lead to some supply pressures. However, large producers retain the capacity to ramp up their output rapidly should prices grow.
  • Australian production is forecast to decline from 2021, as the number of active uranium mines falls from three to two.
  • Uranium export values are forecast to increase from a low of $432 million in 2021–22, to reach $483 million by 2022–23.

Gold

Australia’s gold exports are forecast to reach a record $29 billion in 2021-22

  • Gold export earnings are forecast at $29 billion in 2021–22, before a decline to $28 billion in 2022–23, as gold prices ease back.
  • Labour and skill shortages are affecting Australia’s gold mine production, which is estimated to reach 332 tonnes in 2020–21. Production from new mines and existing mine expansions is expected to boost gold mine production to 388 tonnes in 2022–23.
  • Gold export earnings are forecast at $29 billion in 2021–22, before a decline to $28 billion in 2022–23, as gold prices ease back

Aluminium, alumina and bauxite

Australia’s aluminium, alumina and bauxite export earnings to rise to $13 billion in 2022–23

  • World demand is expected to remain strong in the second half of 2021, and is likely to push primary aluminium prices to an average US$2,130 a tonne in 2021, up 25% from 2020.
  • Annual Australian output is expected to be broadly 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 increase at an annual average rate of 2.4% between 2021–22 and 2022–23, to reach nearly $13 billion by the end of the outlook period.

Copper

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

  • After reaching a record high in May, the copper price is expected to stabilise over the outlook period. Economic recovery and expanding use in low-emissions technologies is expected to see prices average US$8,840 a tonne in 2021 and US$7,890 a tonne in 2023.
  • Australia’s copper export volumes are expected to be moderate over the outlook period, from 924,000 tonnes in 2020–21 to around 909,000 tonnes in 2022–23 (in metal content terms).
  • Australia’s copper export earnings are expected to increase in-line with higher prices. Export earnings are forecast to reach $13 billion in 2021–‍22, up from $10 billion in 2019–20.

Nickel

The market for battery-grade Nickel is expected to be in a deficit by 2023

  • The nickel price is expected to average US$17,360 a tonne in 2021, 26% higher than 2020, driven by strong demand from stainless steel producers and rising expectations about EV demand.
  • Australia’s exports volumes are forecast to rise from 197,000 tonnes in 2020–21 to 251,000 tonnes in 2022–23.
  • Australia’s export earnings are forecast to increase from $3.8 billion in 2019–20 to $4.6 billion (in nominal terms) in 2022-23.

Zinc

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

  • The LME zinc spot price is forecast to average US$2,820 a tonne in 2021 with increased infrastructure programs in some major nations supporting prices. Prices are then expected to fall to around US$2,425 a tonne in 2022 and 2023 as world production increases, and trade begins to normalise.
  • Australia’s zinc production is forecast to increase from an estimated 1.4 million tonnes (in metallic content terms) in 2020–21 to 1.6 million tonnes in 2022–23.
  • Australia’s zinc export earnings are forecast to increase from $3.3 billion in 2020–21 to around $3.6 and $3.5 billion in 2021–22 and 2022–23 respectively. Rising production is expected to offset falling prices.

Lithium

Rising prices for lithium are supporting the recovery of Australian producers with two refineries under construction.

  • Spot spodumene prices (delivered to China) rose by 58% to US$640 a tonne over the five months from December 2020 to May 2021. Spodumene prices are forecast to rise from an average of US$435 a tonne in 2020 to US$740 a tonne in 2023, driven by higher demand for batteries used in electric vehicles. Lithium hydroxide prices are forecast to rise from US$9,890 a tonne in 2020 to US$14,290 a tonne in 2023.
  • Australia’s lithium production is forecast to rise from 233,000 tonnes in 2019–20 to 327,000 tonnes in 2022–23.
  • Australia’s lithium export earnings are forecast to increase from $1.1 billion in 2019–20 to $2.5 billion in 2022–23.