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Resources and Energy Quarterly September 2018

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.

The combined effect of a weaker exchange rate outlook and persistent strength in the price of some resource and energy commodities — particularly thermal coal and oil, which affects LNG prices — has led us  to revise up our resource and energy export forecasts. We now expect Australia’s resources and energy export earnings in 2018–19 to reach  a new high of more than a quarter of a trillion dollars. 

Strong world demand and some concerns over supply have helped keep the prices of oil and thermal coal relatively high over the past quarter, boosting the prospects for Australian export earnings over the outlook period.  

Bulk commodity prices are expected to decline modestly over the outlook period, as global supply of these commodities improves. These price declines will more than offset the impact of growth in export volumes during that period, leading to a modest decline in export earnings in  2019–20. Export earnings should still be well above 2017–18 levels however, reflecting the tightness of resource and energy commodity markets and the benefits of rising Australian commodity production.

International Monetary Fund expectations are for solid global economic growth over the next few years. The US economy continues to grow strongly, helped by tax cuts and still relatively loose monetary conditions. Strong economic growth in emerging and developing economies is also expected to continue, but at a more subdued pace than in recent years, as economic growth in China slows.  

There is some risk to the strong outlook for the world economy and thus commodity demand. Escalating trade tensions between the world’s two largest economies — the United States and China — have raised fears that economic growth in China might slow significantly, with flow-on effects for that country’s commodity demand. Indeed, after the forecasts for this publication were finalised, the US announced it would impose tariffs on a further US$200 billion of imported Chinese products. The implications of this announcement for commodity markets will become clearer in coming months, and will be considered in more detail in the December 2018 Resources and Energy Quarterly. 

The other main risk to the world economic outlook is that, notwithstanding the recent significant rise in the US dollar, the US economy may soon run in to capacity constraints, sparking a sharper than expected rise in US inflation. This may force the US Federal Reserve to raise interest rates more than expected, and these rate rises could hurt US economic growth and have ripple effects across the rest of the world economy. 

The prospect of a rapid rise to prominence of electric vehicles has created a lot of interest in lithium, which was a relatively minor commodity for decades. Electric vehicles require large batteries, and rising sales are expected to create huge markets for battery-grade lithium over the coming years. This edition of the Resources and Energy Quarterly includes a special chapter on lithium, covering its growing global market, new mines opening in Western Australia and the emergence of refining infrastructure that will lift Australia up the supply chain, and future prospects for the lithium industry in Australia. Future editions of the Resources and Energy Quarterly will include a regular lithium chapter, reflecting its growing importance as an Australian mineral export.

Mark Cully

Chief Economist
Department of Industry, Innovation and Science

Resources and Energy Overview

Australia’s resources and energy export earnings to reach quarter of a trillion dollars in 2018–19.

  • Australia’s resources and energy export volumes are expected to show firm growth over the outlook period. While the prices of Australia’s major resource commodities have generally been rising in recent years, prices are expected to decline in 2019–2020, due to lower consumption and rising production.
  • Australia’s resource and energy exports are expected to hit a new record high of $252 billion in 2018–19, before falling back to $238 billion in 2019–20.
  • While global economic growth, industrial production and manufacturing output have continued to grow strongly so far in 2018, there are some concerning signs for resource and energy commodity producers, particularly with regards to rising global trade tensions.

Macroeconomic outlook

The global economy is forecast to grow at 3.8-3.9 per cent a year between 2018 and 2020, driven by strong growth in both advanced and emerging economies.

  • Advanced economies are expected to continue to expand at slightly above their trend GDP growth rates until 2019, after which growth should decline. Economic growth in emerging and developing economies is expected to be at a more subdued pace than in recent years, as economic growth in China slows.
  • The cuts to corporate and personal income taxes in the United Stated are likely to support global economic growth.
  • Trade tensions between the US and its major trading partners, the depreciation of the Chinese Yuan, Brexit negotiations between the UK and the EU, and the financial vulnerabilities in Turkey, present potential risks to confidence and global economic growth.

Steel

India and other emerging economies are expected to drive growth in global steel demand, offsetting a projected gradual decline in China.

  • World steel production increased strongly year-on-year in the seven months to July 2018, driven by high steel prices and margins, robust production in China — the world’s largest steel maker — and a rise in the capacity utilisation of steel mills in major producing nations.
  • World steel production is forecast to rise to 1.8 billion tonnes in 2020, as declining production in China — where ongoing supply-side reforms continue to reduce capacity — is offset by broad growth elsewhere.
  • World consumption is forecast to rise, led by growth in emerging markets, while China — the world’s largest consumer is forecast to decline by 0.5 per cent annually, driven by an expected slow-down in infrastructure projects and construction.
  • The threat of escalating protectionist trade policies is a key risk to the outlook, with the potential to disrupt downstream demand for steel related products and vehicle manufacturing.

Iron ore

Australia’s iron ore exports are set to reach a record 878 million tonnes in 2019–20, as production ramps up.

  • The iron ore price is forecast to decline to US$51 a tonne (FOB Australia) in 2020, as a result of an expected decline in steel production in China and an increasingly well-supplied seaborne market.
  • Australia’s iron ore export volumes are forecast to increase from 849 million tonnes in 2017–18, to 878 million tonnes in 2019–20, driven by a ramp up in output from Australia’s largest producers.
  • The value of Australia’s iron ore exports is forecast to decline from $61 billion in 2017–18 to $56 billion in 2019–20, with the impact of lower prices more than offsetting growth in export volumes.

Metallurgical coal

Australia’s metallurgical coal export earnings reached a record $38 billion in 2017–18

  • Metallurgical coal prices have been supported by strong import demand from both China and India. Some further near-term support is expected amidst persistently high steel margins in China, before a forecast decline from an average of US$197 a tonne in 2018 to US$145 a tonne in 2020, due to weakening demand.
  • Australia’s metallurgical coal export earnings reached a record $38 billion in 2017–18, driven by strong prices. Export earnings are forecast to fall to $31 billion in 2019–20, as rising export volumes are partly offset by lower prices.

Thermal coal

Australia’s thermal coal export earnings reached a record $23 billion in 2017–18.

  • Australian thermal coal prices have surged in recent months, driven by strong demand in Asia. However, the Newcastle benchmark spot price is forecast to decline from an average of US$105 a tonne in 2018 to US$75 a tonne in 2020, as demand growth slows.
  • Australia’s export volumes are forecast to grow from 203 million tonnes in 2017–18 to 208 million tonne in 2019–20, reflecting modest production growth from new capacity and productivity improvements.
  • Australia’s thermal coal export earnings reached a record $23 billion in 2017–18, driven by strong prices. Export earnings are forecast reach a new record of $25 billion in 2018–19, before declining to $19 billion in 2019–20, as lower prices offset rising export volumes.

Gas

Australia’s LNG export earnings reached a record $31 billion in 2017–18, and are set to climb higher.

  • The value of Australia’s LNG exports is forecast to increase from $31 billion in 2017–18 to $48 billion in 2019–20, driven by higher export volumes and higher prices.
  • The completion of the final two LNG projects in Australia’s recent wave of LNG investment will underpin strong growth in export volumes and bring total export capacity to 88 million tonnes.
  • Most Australian LNG is sold under contract at prices linked to oil price movements. LNG contract prices are forecast to rise in 2018–19 before stabilising in 2019–20.
  • Global LNG markets are expected to enter a short period of overcapacity between 2019 and 2020. However, there a number of risks to this outlook that could see demand absorb new supply capacity.

Oil

Higher oil prices and growing condensate production to boost export earnings.

  • Oil prices are expected to remain around current levels over the outlook, as consumption is balanced with higher production from OPEC, Russia and the US. The Brent spot price is forecast to average US$72 a barrel in 2020.
  • Australia’s export volumes are expected to increase from 226 thousand barrels a day in 2017–18 to 331 thousand barrels a day in 2019–20. Higher condensate output at new LNG projects is expected to support this growth.
  • The value of Australia’s crude and condensate exports is forecast to increase from $7.0 billion in 2017–18 to $11 billion in 2019–20. Higher export volumes and maintained price strength are expected to contribute to this growth.
  • Trade tensions and a downturn in world economic activity pose a negative risk to oil consumption and the oil price.

Uranium

Uranium producers continue to face tough conditions, but prices and export earnings are expected to gradually improve from 2018.

  • Uranium spot prices have lifted in recent months and expected to rise further over the outlook period, reaching just over $US28 a pound by 2020. Price growth will be driven by supply cutbacks in Kazakhstan and Canada, and rising demand due to new nuclear reactor builds across Asia.
  • Australian production is expected to sustain at current levels of just over 7,000 tonnes per year over the next three years. Operational improvements at Olympic Dam may support higher production from that site.
  • Australia’s uranium export earnings are forecast to increase slightly over the outlook period, reaching almost $700 million by 2019–20. This is in line with slow growth in prices.

Gold

The value of Australia’s gold exports is forecast to peak in 2019–20 at $20 billion.

  • A rising US dollar has placed downward pressure on gold prices during the past five months.
  • However, gold prices are likely to be supported in 2019 and 2020 by higher inflation and rising interest rates in the US.
  • The value of Australia’s gold exports is forecast to peak in 2019–20 at $20 billion, driven by higher gold prices and a lift in export volumes.

Aluminium, alumina and bauxite

Australia’s aluminium, alumina and bauxite export earnings to decline following high values in 2017–18 and 2018–19.

  • Uncertainty in global aluminium supply chains is expected to drive prices up during 2018, to US$2,146 a tonne for aluminium and US$449 a tonne for alumina. Prices are forecast to decline to US$2,092 a tonne for aluminium and US$354 a tonne for alumina by 2020.
  • Total Australian export earnings for aluminium, alumina and bauxite are forecast to decline from an estimated $14 billion in 2017–18 and 2018–19 to $13 billion in 2019–20, reflecting a decline in prices.
  • A risk to the price forecast is the volatility of the aluminium and alumina markets due to the US Administration’s recent implementation of sanctions and tariffs.

Copper

Australian export earnings from copper are expected to rise over the outlook period.

  • Trade tensions have hit copper prices in recent months, but rising demand is expected to gradually reverse this fall, with prices forecast to rise from US$6,726 a tonne in 2018 to US$7,734 a tonne by 2020.
  • Australia’s copper exports are forecast to rise from 888,000 tonnes in 2017–18 to over 1 million tonnes (in metal content terms) in 2019–20. This reflects an increase in production from several existing mines.
  • Australia’s copper export earnings are forecast to lift from $8.5 billion in 2017–18 to $11.3 billion by 2019–20. Exports should benefit from rising production and from price gains later in the outlook period.

Nickel

Strong demand for nickel should provide a significant benefit to Australia over the outlook period.

  • Nickel prices fell in the September quarter, but are expected to stabilise in the coming months. Prices face competing pressures from rising stainless steel demand and global trade tensions, and are expected to ease slightly to around US$13,500 a tonne in 2019 and US$13,250 a tonne by 2020.
  • Strong demand conditions and a significant upgrade to the Kwinana nickel refinery should see Australia’s refined and intermediate nickel production rise — from 135,000 tonnes in 2017–18 to 157,000 tonnes by 2019–20.
  • Strong prices, in conjunction with rising mined and refined production, should see Australia’s nickel export earnings lift to $3.1 billion in 2018–19 and $3.3 billion by 2019–20.

Zinc

Zinc prices have dropped on trade tensions, but Australian production is rising.

  • Zinc prices are currently in decline, after hitting an 11 year peak in early 2018. Prices are expected to stage a short-term rebound to some extent as fears of oversupply and trade tensions ease. But the long-term trajectory leans towards prices slowly falling, to be around US$2,625 a tonne by 2020.
  • Australia’s production is expected to lift as production ramps up at the re-opened Century mine in Queensland. Export volumes of ores and concentrates are forecast to rise from 1.8 million tonnes in 2017–18 to 2.9 million tonnes by 2019–20.
  • Export values are expected to lock in the substantial gains recorded in 2017–18, remaining above $3.8 billion annually over the outlook period.

Lithium

Lithium is an increasingly important commodity in Australia – and could become far more valuable if Australia can progress into high-grade refining.

  • Lithium has recently begun to draw significant global interest, with demand rising sharply, and prices tripling since 2010.
  • Global lithium use has risen from around 149,000 tonnes in 2012 to 211,000 tonnes in 2017 (in lithium carbonate equivalent [LCE] terms). Global use is expected to reach more than 1.2 million tonnes by 2027, driven by rising demand for lithium batteries in electric vehicles.
  • Australian exports of spodumene ore (the precursor material for lithium) have risen from around $117 million in 2012 to $780 million in 2017, and are expected to rise to around $1.1 billion by 2020.