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Resources and Energy Quarterly March 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.

Each March, the Resources and Energy Quarterly publishes an extended five-year commodity outlook. The annual ‘big picture’ forecast seeks to look beyond immediate issues – e.g., trade tensions, COVID-19 – and considers some of the underlying, longer-term factors which affect commodity markets. As the world continues to urbanise, industrialise, and improve its technology, commodities will continue to play a vital role.

In recent decades, China’s economy witnessed deep industrialisation and an injection of large quantities of iron, steel and coal. The next wave of emerging economies – such as India – could feature relatively less manufacturing and more in services and information technology. Their energy and transport systems may also develop differently. All these trends would add significant opportunities for commodities such as copper, lithium, nickel, LNG, and aluminium.

This edition shows Australia’s resources and energy exports are expected to reach $299 billion in 2019–20, before easing back in subsequent years as some of the surprising price gains of recent quarters unwind. However, the possibility remains for new records to be set if prices continue to surprise on the upside.

The classic case here is iron ore, which faced severe supply disruptions following the collapse of the tailings dam at the Brumadinho iron ore mine in Brazil in early 2019. With reduced supply, iron ore prices surged above US$100 a tonne in 2019, but were gradually correcting – until another wave of floods in Brazil and a cyclone in the Pilbara region of Western Australia sent prices spiking again in early 2020. This is leading to a second surge in iron ore export revenue, making it likely that in 2019–20, iron ore will be the first commodity to exceed $100 billion in export earnings over a single year.

However, to credit this earnings boom purely to ‘price growth’ would be to miss decades of careful work, investment, innovation and automation, all of which have driven significant improvements in productivity and scale, placing Australia at the heart of the global iron ore market. Australia now accounts for more than half of all global iron ore exports. This makes Australia crucial to the global economy itself, since steel is a vital input to energy, infrastructure, housing, construction, transportation and all forms of machinery. In addition to its pivotal role across other industries, steel is among the world’s largest industries in its own right.

Another major industry – and similarly critical to the global economy – is gas and oil. Here, too, Australia has become more important over time, emerging as the world’s top exporter of LNG in late 2019. Our exports of coal, gas and uranium make Australia pivotal to global energy markets. And our resources of lithium, copper, nickel and zinc are likely to hold us in good stead for the future.

Unavoidably, the outbreak of COVID-19 (coronavirus) will have some effect on forecasts for this edition. It is assumed that this event will have an impact on Chinese and global GDP in the first half of 2020, with the effects largely playing out by June 2020, though at the time of writing, this remained a rapidly evolving issue.

While near-term factors such as COVID-19 and trade tensions are often the focus of commodity analysis, a look at the bigger picture shows untold potential and a host of new opportunities as development progresses over the longer term in Asia, Africa and South America. Australia’s prospects as a resource and energy commodity exporter continue to remain strong.

Overview

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

  • In the first quarter of 2020, the COVID-19 outbreak has shifted some commodity prices – notably, oil and base metals (down) and gold (up). These shifts are expected to unwind by the second half of 2020 assuming China’s economy returns to normal by then.
  • Iron ore prices have steadied at high levels, as supply problems offset demand worries. Coal prices have steadied after the sharp declines of 2019. Base and precious metal prices have wavered (in opposite directions), on concerns about the COVID-19 outbreak.
  • Offsetting the impact of weaker prices, higher export volumes and a lower-than-expected Australian dollar are likely to see Australia’s resource and energy exports set a record $299 billion in 2019–20. Earnings are expected to ease in subsequent years as price gains unwind.

Macroeconomic outlook

US-China trade tensions and the coronavirus outbreak are weighing on world economic growth and industrial production at the start of 2020, but growth is expected to rise slowly.

  • The IMF forecasts world GDP growth will slowly recover over the outlook period, due to improving performances in developing economies. However, the IMF has suggested that 2020 growth will be revised down due to the impact of the COVID-19 outbreak.
  • Stimulatory monetary policy is pushing global down bond yields and supporting consumer spending. With global inflation low, monetary conditions are likely to be supportive of growth over the medium term.
  • The Phase One trade deal between the US and China offers some prospects for reducing trade tensions over time, though these tensions remain a notable risk to world GDP growth and commodity demand.

Steel

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

  • World steel consumption appears to be softening early in 2020, and is expected to grow by around 1.1 per cent over the year. However, longer term trends are more positive, with urbanisation and industrialisation across Asia and Africa creating large new markets for steel.
  • World steel consumption is forecast to grow by around 16 per cent between 2020 and 2025, with most growth occurring in the second half of the outlook period.
  • World steel production is forecast to grow by around 17 per cent between 2020 and 2025, with significant growth early in the outlook period, as new mines come online and production recovers in Brazil.

Iron ore

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

  • Iron ore prices remain at unusually high levels as a result of persistent supply disruptions in mid-to-late 2019. In 2020, the iron ore price is forecast to average about US$78 a tonne free on board (FOB) Australia.
  • The real iron ore price is forecast to decline to average US$70 a tonne (FOB Australia) in 2021, and US$61 a tonne by 2025. Supply disruptions are expected to be resolved over the next 12 months.
  • Export volumes are expected to grow from 874 million tonnes in 2019–20 to 898 million tonnes by 2020–21, and to 996 million tonnes by 2024–25. The growth is largely a result of production commencing at several large new mines in Western Australia.
  • Australia’s iron ore export values are set to rise from $79 billion in 2018–19 to $101 billion in 2019–20 (in real terms), as volumes and prices grow. Exports are forecast to fall back to $72 billion by 2024–25 as prices ease.

Metallurgical coal

Australia’s metallurgical coal export earnings to decline from record highs, due to lower prices.

  • The premium HCC spot price is forecast to ease from US$183 a tonne in 2019 to average around US$155 in 2022 (in real terms), due to a combination of soft demand growth and the ramp up of new capacity. The price is then expected to gradually recover, reaching around US$167 a tonne in 2025 (in real terms).
  • Australia’s export volumes are forecast to grow from 184 million tonnes in 2018–19 to reach 205 million tonnes in 2024–25. This reflects the ramp up of new mines and increased output at existing operations, partly offset by the impact of the depletion of resources at several mines.
  • The real value of Australia’s metallurgical coal exports is projected to decline from a record of $44 billion in 2018–19 to $35 billion in 2021–22, before eventually increasing to around $38 billion in 2024–25.

Thermal coal

Lower prices are expected to weigh on Australia’s thermal coal export earnings over the next five years.

  • The Newcastle benchmark thermal coal spot price is projected to average US$60–75 a tonne in real terms over the five years to 2025, down on US$76 a tonne in 2019. Seaborne imports are expected to edge down slightly, but the lack of new thermal coal projects in the pipeline should provide some support to prices.
  • Australia’s export volumes are forecast to grow from 210 million tonnes in 2018–19 to 224 million tonnes by 2024–25, as a number of mines ramp up production. The continued shift in world coal trade towards the Asia-Pacific should favour Australia’s thermal coal exporters over competitors like the United States and Colombia.
  • The real value of Australia’s thermal coal exports is projected to decline sharply from $26 billion in 2018–19 to $21 billion in 2019–20, as a result of the recent price decline. Export earnings are then expected to edge down and level out in the $17–20 billion range through to 2024–25, in real terms.

Gas

Australia’s LNG exports are expected to level out after a period of rapid growth.

  • Australian LNG export prices are expected to decline in 2020, before gradually rising then falling again, tracking oil price-linked contract prices (at which most Australian LNG is sold). Asian LNG spot prices are forecast to recover from current record lows as the market rebalances, before declining as a new wave of LNG projects ramp up.
  • Australia’s LNG export volumes are forecast to rise from 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, before edging back down to 80 million tonnes by 2024–25.
  • The real value of Australia’s LNG exports is forecast to decline from $51 billion in 2018–19 to $49 billion in 2019–20 and $44 billion in 2020–21, and remain in the $44 to $47 billion range to 2024–25.

Oil

Oil prices are forecast to recover from current lows, but for growth to be limited by rapid US production increases.

  • Oil prices are forecast to fall to average US$60 a barrel in 2020, as the COVID–19 outbreak impacts global air and vehicular travel, especially in China. Over the medium term, price gains are likely to be minimal, due to slow demand growth and rapidly rising US shale oil supply.
  • Over the outlook period, global oil consumption growth is expected to slow further, and to be concentrated in China and India.
  • Annual real earnings from Australian oil exports are expected to peak in 2021–22 at $11 billion, before declining to a projected $9.6 billion in 2024–25.

Uranium

Australia’s uranium export earnings are set to decline, with the closure of the Ranger mine offsetting rises in the uranium price.

  • Uranium prices remain low, but with tight supply conditions, a rise in demand is expected to lift prices. Spot prices are expected to rise from around $US25 per pound in early 2020, to over US$40 per pound by 2025 in real terms.
  • Uranium production in Australia is expected to decline, following the scheduled closure of the Ranger uranium mine in 2021. However, new prospects, including Boss Resources’ Honeymoon mine, could help to lift production towards the end of the outlook period.
  • The value of Australia’s uranium exports is forecast to lift from a low of $558 million in 2019–20 to $652 million (real terms) by 2024–25.

Gold

A recent surge in gold investment, prompted by high world prices, is expected to see Australia overtake China to become the world’s biggest gold producer in 2021.

  • The gold price is forecast to reach a 7-year high of US$1,475 an ounce (in real terms) in 2020, due to uncertainties over the COVID-19 (coronavirus) outbreak and its impacts on the world economy, particularly China. A global rebound is projected to see the price slide to US$1,220 an ounce by 2025.
  • Australia is expected to overtake China as the world’s largest gold producing country in 2021, with high prices encouraging an expansion in production.
  • The real value of Australia’s gold exports is forecast to set a record of $26 billion in 2019–20, driven by higher prices and export volumes, before declining to $21 billion in 2024–25 as gold prices ease back.

Aluminium, alumina and bauxite

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

  • Slowing demand and strong supply are expected to see aluminium and alumina prices fall in the short term, before recovering as global economic growth picks up. Prices are projected to average US$1,640 a tonne for aluminium and US$307 a tonne for alumina in 2025 (in real terms).
  • With no planned expansions to smelter or refinery capacity, 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.
  • After reaching a peak of $16 billion in 2018–19, the total value of Australian exports of aluminium, alumina and bauxite is projected to fall at an average annual rate of 4.6 per cent, to $12 billion (in real terms) in 2024–25, due to softening prices for aluminium and alumina, and lower bauxite export volumes.

Copper

Copper export earnings are set to grow over the next five years, supported by higher production and prices.

  • Copper prices are expected to increase over the outlook period, as consumption outpaces production. Prices are forecast to average US$5,990 a tonne in 2020, before rising an average 2.0 per cent each year to reach a projected US$6,900 a tonne in 2025 (in real terms).
  • Australia’s copper exports are projected to rise from 929,000 tonnes in 2018–19 to around 1.1 million tonnes (in metal content terms) in 2024–25, driven by growing production from new and existing mines.
  • As prices and output grow, Australia’s copper export earnings are projected to lift from $10 billion in 2018–19 to $13 billion in 2024–25 (in real terms).

Nickel

Expanding domestic production and higher prices are expected to boost export earnings over the next five years.

  • Strong nickel consumption is expected to support price rises over the outlook period. After averaging US$14,200 a tonne is 2019, nickel prices are forecast to average US$15,300 a tonne in 2020 and US$15,800 a tonne in 2025 (in real terms).
  • New projects and expansions are expected to lift Australia’s export volumes from 225,000 tonnes in 2018–19 to a projected 436,000 tonnes in 2024–25.
  • Export earnings are expected to strengthen with higher prices and growing volumes. Australia’s export earnings are projected to reach $6.6 billion in 2024–25, up from $3.7 billion in 2018–19 (in real terms).

Zinc

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

  • Zinc prices are expected to decline in real terms over the next five years, as production starts to respond to the high prices of recent years. A down-tick in prices in real 2020 terms is projected by the end of the outlook period as production comes on line and stocks build with most price reduction in the short term. Prices are projected to decrease from US$2,605 a tonne in 2019 to US$1,864 a tonne in 2025, in real terms.
  • Australia’s zinc production is projected to increase from 1.2 million tonnes (in metallic content) in 2018–19 to 1.8 million tonnes in 2024–25.
  • Increasing production, combined with falling prices is expected to see the real value of Australia’s zinc exports decrease from $4.0 billion in 2018–19 to $3.1 billion by 2024–25.

Lithium

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

  • The lithium hydroxide price (delivered to China) eased by 18 per cent, from US$9,410 a tonne to US$7,750 a tonne over the December quarter. Prices are projected to rise to around US$10,400 a tonne in 2025 (in real terms) amidst higher electric vehicle uptake, with shortages possible from 2023.
  • Australian production is expected to rise from 244,000 tonnes (lithium carbonate equivalent) in 2018–19 to 393,000 tonnes in 2024–25, after a sharp pullback in late 2019 and early 2020 due to falling prices.
  • After dipping from $1.6 billion in 2018–19 to $0.6 billion (in real terms) in 2020–21, rising lithium hydroxide production is projected to drive export earnings to $3.0 billion (in real terms) by 2024–25.