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Resources and Energy Quarterly March 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.

Every March edition of the Resources and Energy Quarterly provides a five year outlook for Australia’s resource and energy exports (extending beyond the two year focus in other reports). This allows us to consider additional structural factors beyond near-term cyclical and one-off issues.

Australia's resource and energy exports are forecast to hit a record $296 billion in 2020–21, a strong result, in the context of the COVID-19 pandemic. The improved outlook reflects the ongoing rollout of vaccines, and the momentum this is providing for economic activity and trade amongst many of Australia’s major trading partners.

Ongoing success in managing COVID-19 and reduced supply disruptions are expected to restore global demand for resources and energy commodities over the five years. As prices moderate, Australia’s resource and energy exports are forecast to ease slightly to $288 billion in 2021–22, and remain stable over the outlook period to 2025–26.

The value of Australia’s iron ore exports is expected to reach a new all-time high of $136 billion in 2020–21. Strong demand for iron ore and disrupted supply from Brazil, saw a surge in prices in late 2020, coupled with sustained growth in Australia’s export volumes.

Coal markets have been adjusting to trade disruptions with China, with Australia’s exports being redirected to other importing nations (such as India, Japan, and South Korea). However, Australia’s coal exporters continue to receive lower premiums for their coal. If this is sustained, it could raise broader questions around production levels at some of our higher-cost mines.

Another structural change expected to gain momentum over the five-year outlook period is global energy uptake of new and low emissions technologies. Australia’s exports of commodities central to these technologies — lithium, nickel and copper — are set to surge. Revenue from these three commodities is expected to exceed current thermal coal revenue (in real terms) by 2025–26.

In spite of an improving outlook for resource and energy exports, downside risks remain. This includes any substantial delays in the successful rollout of effective COVID-19 vaccines, as well as further disruptions to Australia’s resource and energy commodity trade with China.

Overview

Australia’s resource and energy export earnings to push a new record before stabilising

  • 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 $296 billion. Earnings will drop modestly (down about 3% to $288 billion) in 2021–22, and then steady at about that level over the rest of the outlook period (to 2025–26).
  • 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 to recover over outlook period, supported by fiscal policies 

  • World economic growth forecasts continue to be revised up after the COVID-19 pandemic. After an estimated 3.5% contraction in 2020, the global economy is forecast by the IMF to grow by 5.5% in 2021 and 4.2% in 2022.
  • International trade recovered to pre-COVID-19 levels in November 2020. World trade rose 4% on a quarterly basis in the December quarter 2020, taking calendar year growth to 1.3%; annual average growth for the 2010-2019 decade was around 3.6%
  • Elevated infrastructure spending is expected to see China’s construction and manufacturing activity remain firmly in expansionary territory throughout 2021, generating strong demand for base metals and iron ore. Commodity demand is likely to ease in subsequent years, as stimulus-led infrastructure investment slows.

Steel

World steel production is now on a recovery path

  • World steel consumption declined by 0.9% in 2020, as global industrial activity was affected by the COVID-19 pandemic and resulting economic downturn. Chinese steel consumption grew during the year, but consumption in Europe, the US and Japan was down sharply.
  • World steel consumption is forecast to rebound as the global economy recovers, growing by 3.6% in 2021. Growth eases back slightly in subsequent years.
  • Steel output is forecast to follow a similar trend, with a 0.8% fall in 2020 expected to be followed by 3.0% rise in 2021 and 2.8% in 2022. Growth is expected to ease off slightly in subsequent years.

Iron ore

Australia’s iron ore export earnings are on track for a new record in 2020-21

  • The iron ore price surged in December and January, and is now at its highest level since 2011. Prices have been driven by high demand in China and (fears of) disrupted supply in Brazil and elsewhere. The iron ore price is forecast to remain well above US$100 a tonne until late 2021, before easing gradually over subsequent years, ultimately reaching US$72 (in real terms) by the end of 2026.
  • Australia’s export volumes are expected to grow from around 900 million tonnes in 2020–21 to 1.1 billion tonnes by 2025–26, as several mines open or expand in Western Australia.
  • Stronger prices are expected to push Australia’s iron ore export values up to a peak of $136 billion in 2020–21
    (in real terms). Iron ore exports are forecast to earn more than $700 billion over the outlook period, remaining above $100 billion annually for each of the next five years.

Metallurgical coal

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

  • Metallurgical coal prices have recovered in line with improving global industrial production and economic activity. The Australian premium hard coking coal price is projected to increase from US$133 a tonne in 2021 to US$166 by 2026 as steelmaking grows around the world.
  • Australia’s exports are projected to rise from a 2020-21 low of 168 million tonnes to reach 191 million tonnes by 2025-26. Supply chains disrupted by the import ban imposed by China have already largely reorganised, allowing Australia to successfully redirect to new markets.
  • Australia’s metallurgical coal export values are forecast to increase from a low of $23 billion in 2020–21, to above $30 billion by 2025-26 (in real terms).

Thermal coal

Australia’s thermal coal export earnings have stabilised

  • Thermal coal spot prices have recovered following production cuts in major exporting countries and recent growth in demand as Asian economies emerged from COVID-19 containment measures. The Newcastle benchmark price is forecast to average US$64.50 a tonne in 2021, rising slowly to US$73 a tonne by 2023, before easing to around US$60 a tonne by 2026.
  • Import restrictions imposed by China on Australian coal have contributed to a decline in exports, from 213 million tonnes in 2019-20 to 198 million tonnes in 2020-21. However, exports are projected to increase to 231 million tonnes by 2025-26 as supply chains adjust and global markets increasingly prioritise high-quality coal.
  • Australia’s thermal coal export values are forecast to fall from $20 billion in 2019–20 to $14 billion in 2020–21. However, earnings are expected to increase back to $15 billion (in real terms) by 2025-26.

Gas

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

  • Asian LNG spot prices and oil-linked contract LNG prices are expected to increase modestly over the projection period, as the global LNG market remains well supplied and oil prices stabilise.
  • Australian export volumes are forecast to decline to 78 million tonnes in 2020–21, due to technical issues at the Prelude and Gorgon LNG plants. Exports are then forecast to recover to 81 million tonnes in 2021–22, and remain around these levels out to 2025–26.
  • Australia’s LNG exports earnings (in real terms) are forecast to increase from $33 billion in 2020–21 to $45 billion in 2025–26, as prices recover.

Oil

Oil prices to be relatively flat over the medium term

  • Oil prices are forecast to average US$61 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 around US$60 a barrel
    in real terms, as higher production offsets
    consumption growth.
  • 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 2025–26 are projected to recover to $10 billion (in real teams), reflecting higher
    oil prices.

Uranium

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

  • Uranium prices are expected to rise steadily over the outlook period. 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 rapidly should prices grow significantly.
  • Australian production is forecast to decline from 2021, as the number of active uranium mines falls from three to two.
  • Export values are forecast to increase from $520 million in 2020–21 to $659 million by 2025–26 (in real terms), as prices pick up.

Gold

Australia’s gold exports are forecast to reach a record $29 billion in 2020-21

  • Higher prices are expected to push the value of Australia’s gold exports up to a record of $29 billion in 2020–21. Earnings (in real terms) are then projected to decline to $22 billion by 2025–26, as gold prices ease back.
  • Export volumes are forecast to fall by 2.2% to 342 tonnes in 2020–21, as high gold prices reduce gold demand. Volumes are projected to rise to 367 tonnes by 2025–26, as demand recovers.
  • An effective COVID-19 vaccine rollout and consequent global economic rebound is projected to see the gold price slide from US$1,700 in 2021 to US$1,210 an ounce in 2026 in real terms.

Aluminium, alumina and bauxite

Australia’s aluminium, alumina and bauxite export earnings to remain steady at $12 billion

  • Driven by the global economic recovery and the rollout of COVID-19 vaccines, prices are projected to rise (in real terms) to US$2,044 a tonne for aluminium and US$309 a tonne for alumina by 2026.
  • Australia’s primary aluminium and alumina export volumes are projected to be steady over the outlook period — at 1.4 million tonnes of aluminium and 18 million tonnes of alumina a year.
  • Australia’s aluminium, alumina and bauxite export earnings are projected to be steady at $12 billion a year (in real terms) until 2025–26, as lower alumina and bauxite exports are offset by increased aluminium export values (due to higher aluminium prices).

Copper

Growing copper consumption to higher export earnings

  • The copper price is expected to be buoyed by the global economic recovery and rising investment in renewable energy and electric vehicles. Prices are forecast to increase to an average US$8,260 a tonne in 2021, before stabilising around a projected US$7,940 a tonne (in real terms) in 2026.
  • Australia’s copper exports are projected to rise from 924,000 tonnes in 2019–20 to around 992,000 tonnes (in metal content terms) in 2025–26, 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 2019–20 to $16 billion (in real terms) in 2025–26, up an average 7% a year.

Nickel

Rebounding stainless steel consumption and growing use in EV batteries is expected to push the nickel market into deficit by 2023

  • The nickel price is forecast to rise from an average of US$18,700 a tonne in 2021 to US$20,500 a tonne in 2026.
  • Australia’s exports volumes are forecast to rise from 201,000 tonnes in 2020–21 to 246,000 tonnes in
    2025–26.
  • Australia’s export earnings are forecast to increase from $3.8 billion in 2019–20 to $6.5 billion (in real terms) in 2025–26.

Zinc

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

  • Prices (in today’s prices) are projected to fall from an average of US$2,310 a tonne in 2020 to US$2,220 a tonne in 2026, driven by increasing production, after a high of US$2,690 a tonne in 2021.
  • Australian exports of zinc are projected to rise from 1.5 million tonnes in 2019–20 to 1.7 million tonnes in 2025–26, driven by rising production.
  • Australia’s zinc export earnings are projected to decline from $3.6 billion in 2019–20 to $3.5 billion in 2025–26 (in real terms), as the impact of price declines outweighs production increases.

Lithium

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

  • Spodumene prices (in today’s prices) are projected to rise from an average of US$445 a tonne in 2020 to US$710 a tonne in 2026, driven by higher demand for batteries used in electric vehicles. Lithium hydroxide prices are projected to rise from US$7,790 a tonne in 2020 to US$11,800 a tonne in 2026.
  • Australia’s lithium production is projected to rise from 233,000 tonnes in 2019–20 to 571,000 tonnes in 2025–26.
  • Australia’s lithium export earnings are projected to increase from $1.1 billion in 2019–20 to $5.4 billion in 2025–26 (in real terms).