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Resources and Energy Quarterly September 2019

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. The December quarter edition of the Resources and Energy Quarterly also includes a feature chapter and data on Australia’s resources and energy major projects.

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.

Australian resource exports appear likely to hold up in 2019–20, in the face of volatile commodity markets. Our new projection of $282 billion in exports in 2019–20 has shaved just $3 billion from our June 2019 Resources and Energy Quarterly projection. Export earnings in 2020–21 have been revised down by a similar amount, to $258 billion. The decline in earnings in 2020–21 will mainly reflect the impact of the steady return of Brazilian iron ore production to normal, following the fallout from the Brumadinho mine tailings dam collapse.

An increase in gold export earnings and the depreciation of the Australian dollar will help counter the impact of escalating US-China trade tensions. While the trade tensions have led to a weaker outlook for our base metal and energy exports, as the world’s 2nd largest gold producer, Australia is benefitting from investors’ flight to safety. Our gold earnings are set to surge by one third to $25 billion in 2019–20. More generally, as US-China trade tensions see US dollar commodity prices fall, the Australian dollar has also dropped, holding up Australian resource and energy commodity producers’ returns.

While the IMF is forecasting world GDP growth to hold up well over the next year, the outlook for world industrial production has deteriorated, taking with it some of the buoyancy of resource and energy commodities in recent years.

The data in this edition shows that global cutbacks in manufacturing production are already flowing through into commodity markets. The importance of China’s burgeoning middle class means that any further decline in Chinese economic growth could have even more significant effects on global supply chains for a range of technology and other products.

Thus far, problems within the global economy remain somewhat quarantined. The usual catalysts for global downturns — miscalculations with interest rates, financial freeze-ups, abrupt collapses in investment — have not yet materialised. But uncertainty is growing. Central banks and governments still have firepower to deploy to prevent a major slowdown, though perhaps less ammunition than was available 10 years ago.

Oil prices have declined in recent months, building on the longer-term price impact of higher US supply. Technological investment in electric vehicles and energy storage is improving the prospects for several emerging commodities, offsetting the impact of trade concerns. Nickel is set to jump in the rankings of significant export earners, as a direct result of this phenomenon. More established commodities, such as steel and aluminium, are set to benefit from some carefully chosen Chinese stimulus measures.
The latest data suggest that mining investment in Australia has turned the corner. For the first time in six years, mining companies are planning to increase their annual spend on building new mines/wells and on expanding and replacing their fleet of plant, machinery and equipment.

This edition includes a special topic on mining productivity. The research suggests that productivity in major parts of the Australian mining sector could be significantly stronger than traditional measures suggest. In globally uncertain times, the factors under our control — such as productivity — become increasingly important.

David Turvey

Acting Division Head
Department of Industry, Innovation and Science

Resources and Energy Overview

Australia’s resource and energy export earnings set to continue to break fresh records.

  • The world industrial production cycle has continued to slow in recent months, and looks set to slow further. The extent of any down-cycle in resource commodities largely depends on whether China can avoid a further slowing in growth, and a resolution of US-China trade tensions.
  • The industrial production slowdown has seen the prices of Australia’s major resource commodities decline noticeably from the 7-year highs set in the June quarter 2019, and prices are likely to drift down further over the outlook period, due to softer demand and rising supply.
  • Notwithstanding weaker prices, both higher export volumes and a lower than expected Australian dollar are likely to see Australia’s resource and energy export earnings set a new record of $282 billion in 2019–20. Further price falls are likely to drive earnings down to $258 billion in 2020–21.

Macroeconomic outlook

Global economic growth is facing headwinds, largely as a result of US-China trade tensions.

  • The global economy is forecast to grow by 3.2 per cent in 2019, and by 3.5 per cent in 2020 and 2021. Growth in global industrial production and trade has weakened during 2019, and are likely to be further impacted by an escalation of US-China trade tensions in recent months. .
  • Trade tensions between the US and China represent the largest risk to the outlook. Targeted stimulus measures are being implemented in China, in an attempt to offset the economic impacts of the US trade measures.

Steel

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

  • World steel production is on track to set another record high in 2019, as robust production growth in China more than offsets subdued growth elsewhere.
  • China’s steel production and consumption is forecast to rise in 2019, fuelled by government tax cuts and stimulus measures directed towards steel-intensive infrastructure and construction projects.
  • US-China trade tensions pose a risk to the outlook via the potential adverse impact on economic growth. Steel-intensive industries, such as construction and manufacturing, are sensitive to swings in economic growth.

Iron ore

Australia’s iron ore export earnings to reach $81 billion in 2019–20, driven by higher prices.

  • The forecast iron ore price in 2019 has been revised up to an average of US$83 a tonne Free on board (FOB). This reflects the full effect of supply disruptions — primarily in Brazil — and firm demand from China.
  • The iron ore price is subsequently forecast to decline to average US$57 a tonne (FOB) by 2021, as the seaborne market gradually returns to balance.
  • Australia’s iron ore export earnings are set to increase to $77 billion in 2018–19, then to $81 billion in 2019–20. Earnings are then projected to ease to $65 billion in the final year of the outlook period, as seaborne prices gradually decline. Export volumes are expected to remain largely steady at just over 900 Mt over the outlook period.

Metallurgical coal

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

  • The premium Australian hard coking coal (HCC) spot price has declined sharply over recent months, and is forecast to remain subdued over the outlook period. Rising supply combined with falling demand is expected to drive an easing of the average price from US$186 a tonne in 2019 to US$158 a tonne in 2021.
  • Australia’s export volumes are forecast to grow from 183 million tonnes in 2018–19 to 198 million tonnes by 2020–21, reflecting production growth from restarts and new capacity in the Bowen Basin.
  • Australia’s metallurgical coal export earnings reached a new record of $44 billion in 2018–19. However, a forecast decline in prices is expected to reduce export earnings to $35 billion by 2020–21.

Thermal coal

Lower prices are expected to drive Australia’s thermal coal export earnings lower from record highs.

  • The Newcastle benchmark thermal coal spot price is forecast to decline from an average of US$105 a tonne in 2018 to US$72 a tonne in 2021, as demand softens relative to supply.
  • Australia’s export volumes are forecast to grow from 210 million tonnes in 2018–19 to 214 million tonnes in 2020–21, reflecting modest production growth from new capacity and expansions, a recovery from recent disruptions, and productivity improvements.
  • Australia’s thermal coal export earnings reached a record $26 billion in 2018–19. Strong growth in export earnings has primarily been driven by high prices in 2018 and a high contract price settled for 2019–20. Export earnings are forecast to decline to $18 billion in 2020–21, as the impact of lower prices offsets higher export volumes.

Gas

Australia’s LNG exports are ramping up against the backdrop of global overcapacity and low spot prices.

  • Australia exported $50 billion of LNG in 2018–19. Export earnings are forecast to lift to $52 billion in 2019–20, driven by growing export volumes, before falling back to $49 billion, as prices ease.
  • Australia’s LNG export volumes are forecast to increase 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 output.
  • Australian LNG export prices are forecast to decline slightly in 2019–20 and 2020–21, due to an appreciating exchange rate and easing oil-linked contract prices (at which most Australian LNG is sold).

Oil

Oil markets reflecting the fortunes of the world economy and the geopolitical risks in oil producing regions.

  • Deteriorating world economic conditions have dominated oil markets since May 2019, driving prices to their lowest levels since early January. An attack on Saudi Arabia’s oil production facilities on 14 September 2019 shocked markets, adding a risk premium to prices on fears that Saudi oil infrastructure is vulnerable to major disruption.
  • AAustralia’s condensate and LPG export volumes are rising and forecast to peak during the outlook period, while crude oil production in 2018–19 reached its lowest level in generations.
  • Earnings from crude, condensate and LPG exports are forecast to continue their upward trend, rising from $10.1 billion in 2018–19 to $13.7 billion in 2019–20, before falling slightly to $12.9 billion in 2020–21. The 2019–20 peak reflects expected export volume growth and the impact of a weaker Australian dollar.

Uranium

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

  • Uranium spot prices have stabilised, after substantial gains in late 2018. Prices remain relatively low, but higher demand and flat or falling output, is expected to push them up to above US$37 a pound by 2021.
  • Uranium production in Australia is expected to decline over the outlook period, as output winds down at the Ranger mine ahead of its scheduled closure in 2020.
  • Australia’s uranium export earnings are expected to remain roughly steady over the outlook period, albeit with a fall in 2020 as output ceases from Ranger.

Gold

Australia’s gold export earnings to peak in 2019-20 at $25 billion, driven by higher prices and strong export volumes.

  • Australian gold prices are forecast to rise to a record annual average high of A$2,042 an ounce in 2020, as trade tensions and geopolitical risks push up US dollar gold prices and as the Australian dollar weakens.
  • Australia’s gold exports are forecast to hit a record high of $25 billion in 2019–20, reflecting expected rises in gold prices and a rise in export volumes to 368 tonnes.
  • China’s restrictive gold import licence policy represents a notable risk to Australia’s gold exports.

Aluminium, alumina and bauxite

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

  • Trade tensions between the US and China, and growing aluminium supply, are expected to drive aluminium prices lower in 2020 and 2021, to average US$1,700 and US$1,615 a tonne, respectively. Alumina prices are also forecast to fall over the outlook period, to average US$330 a tonne in 2021.
  • With no planned expansions to smelter or refinery capacity in Australia until after 2020–21, annual output is forecast to remain steady at 1.6 million tonnes for aluminium and 20 million tonnes for alumina over the outlook period.
  • Due to lower forecast prices, the total value of Australian exports of aluminium, alumina and bauxite is expected to fall to $13 billion in 2020–21, after reaching a peak of $16 billion in 2018–19.

Copper

Copper export earnings to grow, supported by higher production and positive price trends.

  • Trade tensions and reduced economic activity have led to recent volatility in copper prices. Looking forward, growing consumption is expected to support prices reaching a forecast US$6,620 a tonne in 2021, up from US$6,525 a tonne in 2018.
  • Australia’s copper exports are expected to grow, due to higher production from Australia’s existing mines and new projects. Export volumes are forecast to increase from 934,000 tonnes in 2018–19 to 985,000 tonnes in 2020–21 (metal content terms).
  • Australia’s copper export earnings are forecast to reach just over $10 billion in 2020–21, up from $9.8 billion in 2018–19, supported by growing production and higher prices.

Nickel

Expanding domestic production and higher prices expected to boost export earnings.

  • Nickel prices have shown recent resilience, rising in the September quarter with healthy consumption growth and concerns around world production. In 2019, nickel prices are forecast to average US$13,800 a tonne, increasing to US$16,500 a tonne in 2021.
  • There are a number of development projects underway that are expected to support Australia’s mine production reaching 207,000 tonnes in 2020–21. Refined production is expected to increase to 141,000 tonnes in 2020–21, capacity expansions are undertaken in Western Australia.
  • Australia’s total nickel export earnings are forecast to increase from $3.6 billion in 2018–19 to $5.6 billion in 2020–21. Expanding production and, to a lesser extent, higher prices are expected to facilitate this growth.

Zinc

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

  • Zinc prices have been volatile in 2019. In April, prices eclipsed US$3,000 per tonne, owing to an acute stock shortage, but have since dropped to three-year lows, reflecting trade tensions and supply growth. Prices are expected to decrease over the forecast period, as robust production growth boosts inventories and China’s slowing economy shrinks demand for the metal.
  • The rich lodes and tailings of the Mt Isa region are forecast to propel Australia’s mined production to 1.5 million tonnes in 2019—20, before production tapers off as a mix of smaller mines hit lower grades and some reach end of life.
  • The value of Australia’s zinc exports is forecast to decline from $4.0 billion in 2018-19 to $3.0 billion in 2021—21, due to softer prices.

Lithium

The value of lithium exports to fall slightly, as lower prices offset higher export volumes.

  • Surging supply has seen the price of lithium hydroxide fall 33 percent year on year — from $US18,000 a tonne in 2018 to around US$12,000 a tonne in 2019. Further falls are expected over the outlook period.
  • Australian lithium production is expected to increase from an estimated 288,000 tonnes in 2018–19 to around 358,000 tonnes by 2020–21, as the Greenbushes mine is upgraded and several newer mines ramp up.
  • Export values hit an estimated record high of $1.4 billion in 2018–19 but are forecast to fall to $1.3 billion by 2020–21 due to lower prices.

Mining productivity special topic

  • Multifactor productivity, the conventional measure of productivity, in Australia’s mining sector declined substantially and remained low during the price and investment phases of the mining boom (2004 to 2017)
  • Low productivity growth, even after the industry ramped up production, contradicts evidence of the sector operating at the innovation frontier, deployment of efficiency measures, and large-scale technology use.
  • An experimental proxy measure of mine-level productivity — the output-cost index — for iron ore and metallurgical coal suggests productivity in both industries is improving. Iron ore mines, in particular, have experienced consistent productivity growth since 2008.