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Resources and Energy Quarterly September 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.

In the June 2020 Resources and Energy Quarterly (REQ) we pointed out that “unlike downturns in previous decades, this downturn was not due to the bursting of excesses built up in the financial system…or in equity markets…. It also differs from the 1970s recessions…which helped contribute to stagflation and forced a wholesale restructure of the world’s energy system.” An inference was that the current downturn would likely be sharp but short relative to those earlier episodes, particularly if COVID-19 containment measures were successful, and large fiscal and monetary stimulus took effect. And, so far, the downturn in output of the world’s industrial sector — the main consumer of energy and resource commodities — has indeed been sharp but relatively short.

Probably the most notable development since the last REQ has been the sharp rebound in the Chinese economy — the world’s biggest consumer of resource and energy commodities. The rebound is the result of the almost complete eradication of COVID-19 in China, the subsequent easing of containment measures, and policy efforts to offset the impacts of the global COVID-19 pandemic.

The other notable development of the past several months has been the spread of COVID-19 in the United States. The high prevalence of COVID-19 in the US compared to other major economies has contributed to recent US dollar weakness; this weakness has boosted the US dollar price of commodities but had an adverse impact on the local currency returns of our exporters as the A$/US$ has risen. The US share market appears to have shrugged the effect on the US economy of the COVID-19 outbreak. But the large US ‘tech’ companies — which dominate the US share market — have benefitted disproportionately from a surge in domestic and offshore investor interest as the pandemic forces people around the world to work, learn, shop and socialise online.

In the outlook period, resource and energy commodity exports are likely to remain a major source of support to the Australian economy as it recovers from the largest global contraction since World War II. In line with IMF forecasts, we assume the world economy contracts by about 5 per cent in 2020, but grows by 5.4 per cent in 2021. Iron ore earnings remain extremely high, after setting an all-time record in 2019–20: strong demand from China has added to the impact of supply problems in Brazil, where COVID-19-related workplace issues have derailed efforts to recover from shutdowns in the wake of the Brumadinho tailings dam collapse. After topping $102 billion in 2019–20, Australian iron ore export earnings are forecast to be $97 billion in 2020–21. Gold has lifted even higher since our last report, and export earnings are on track to set a new record (of about $31 billion) in 2020–21. Base metals have recovered further, and the prices of copper and nickel are now back to pre-COVID-19 levels. Both have relatively constrained long term supply prospects against a backdrop of healthy demand, especially for use in new age technologies.

The prices of energy commodities are steadily recovering, as global demand recovers and supply cuts cause markets to tighten. Data show that China took advantage of low prices to stockpile oil and LNG in the June quarter 2020, helping to put a base under prices. The ‘baseline’ forecast scenario adopted for the oil price in the June 2020 REQ appears likely to be the most accurate of the four scenarios we constructed. As a result of the direct (but lagged) link between oil prices and LNG contract prices, Australian LNG export revenues are still forecast to fall sharply in 2020–21. Spot LNG prices are recovering strongly as (mainly US) supply is cut back and demand picks up. Coal prices have steadied at low levels, and are likely to edge higher through 2020–21 as supply cuts and rising demand depletes inventories.

Resource and energy exports are forecast to be $256 billion in 2020–21, but fall to $252 billion in 2021–22. Resource and energy exports are therefore expected to continue to make an important contribution to the Australian economy during the outlook period. The forecasts have notable risks on both sides: on the downside, a COVID-19-induced, protracted economic slump in the US would hurt Asia (and thus Australia) as its major supplier of manufactures. An upside risk is potential for a successful COVID-19 vaccine and/or treatment that would boost business and consumer confidence, and lift economic activity once a sufficient number of vulnerable people have been inoculated.

Overview

Australia’s resource and energy export earnings decline from 201920 record.

  • The world economy is showing some recovery from the impacts of the COVID-19 pandemic. Supply cutbacks — some voluntary and some due to COVID-19 related workforce problems — have cut inventories and so helped to raise prices.
  • Iron ore prices have made a 6-year high and gold is at all-time high. Thermal coal prices remain weak, due to excess supply and power utilities switching to gas. US dollar weakness has helped base metal prices recover most of their COVID-19 pandemic losses.
  • Australia’s resource and energy exports in 2020–21 and 2021–22 are forecast to fall noticeably from the record $290 billion registered in 2019–20. A stronger Australian dollar and low energy prices are likely to more than offset the impact of stronger gold exports.

Macroeconomic outlook

World economic activity is expected to fall in 2020 due to COVID-19 and the associated containment measures.

  • The COVID-19 outbreak, and subsequent containment measures, has significantly reduced global industrial production and economic growth. The IMF is assuming that the largest impacts occurred in the June quarter, but the recovery is expected to be unsteady and uneven across nations.
  • Governments have imparted fiscal stimulus to support businesses and workers, while central banks around the world have pushed down official interest rates and bought vast amounts of debt.
  • The IMF expects that world economic activity will contract by 4.9 per cent in 2020, before growing by 5.4 per cent in 2021.

Steel

World steel production is falling sharply due to COVID-19.

  • World steel usage is expected to fall by 6.1 per cent in 2020, as a result of the COVID-19 pandemic and associated economic downturn. Construction, manufacturing and other steel-intensive sectors continue to face challenging conditions, including forced closures in some nations.
  • World steel consumption is forecast to rebound in 2021 as the global economy recovers, growing by 4.2 per cent and by 4.0 per cent in 2022.
  • Steel output is forecast to follow a similar trend, falling by 4.0 per cent in 2020 before rising by 4.5 per cent in 2021 and 4.0 per cent in 2022.

Iron ore

Australia’s iron ore export earnings exceeded $100 billion in 2019-20.

  • The iron ore price has spiked repeatedly in recent months, due to supply disruptions in Brazil and surprisingly robust demand in China.
  • The iron ore price is forecast to be around US$100 a tonne over the final quarter of 2020, before easing to around US$80 a tonne by the end of 2021 and US$75 a tonne by the end of 2022.
  • Export volumes are expected to grow from an estimated 860 million tonnes in 2019–20 to 905 million tonnes by 2021–22.
  • Australia’s iron ore export values rose from $78 billion in 2018–19 to $102 billion in 2019–20, on the back of growing volumes, strong prices and a low Australian dollar. Falling prices are expected to push export earnings down to $80 billion by 2021–22.

Metallurgical coal

Australia’s earnings to fall as world’s steelmakers need less metallurgical coal.

  • Metallurgical coal prices have fallen sharply in recent months, reaching four year lows as a result of the demand-side impacts of COVID-19. The Australian premium hard coking coal (HCC) price is forecast to average US$128 a tonne in 2020, down from US$179 a tonne in 2019.
  • Australia’s export volumes are forecast to edge down by around 5 million tonnes in 2020–21 to 172 million tonnes due to lower global demand, before lifting in 2021–22, as world steel production recovers.
  • Australia’s metallurgical coal exports are forecast to fall sharply in 2020–21, to $23 billion from $35 billion in 2019–20. They are forecast to recover partially to $28 billion in 2021–22, as prices and volumes lift.

Thermal coal

Australia’s thermal coal export earnings to decline as the seaborne market contracts.

  • Thermal coal spot prices have continued to fall, as the impact of COVID-19 drives a contraction in seaborne trade. The Newcastle benchmark price is forecast to average US$54 a tonne in 2020, before slowly rising to US$65 a tonne in 2022.
  • The bulk of production cuts in 2020 are expected to come from Indonesia, Columbia and the US. Australia’s exports are forecast to decline from 213 million tonnes in 2019–20 to 208 million tonnes in 2020–21, as Australian producers cut output in response to low prices. As prices gradually rise again, Australian exports are expected to grow to 221 million tonnes in 2021–22.
  • Australia’s thermal coal exports are forecast to fall from $20 billion in 2019–20 to $15 billion in 2020–21, before a partial recovery to $17 billion in 2021–22 driven by slow gains in prices and a strong recovery in volumes.

Gas

Low oil and spot LNG prices are expected to weigh on Australia’s LNG export earnings.

  • Asian LNG spot prices and oil-linked contract prices are expected to gradually recover over the next two years, as the impacts of COVID-19 ease and demand catches up to global LNG supply capacity.
  • Australia’s LNG exports reached 79 million tonnes in 2019–20, but are forecast to decline to 76 million tonnes in 2020–21, reflecting the impacts of COVID-19 as well as technical issues at the Prelude and Gorgon LNG plants. Australian LNG export volumes are forecast to recover to 80 million tonnes in 2021–22.
  • Australia’s LNG exports earnings are forecast to decline sharply, from $48 billion in 2019–20 to $31 billion in 2020–21, due to weak prices and export volumes, before a partial recovery to $37 billion in 2021–22.

Oil

Oil prices to recover gradually from current low levels.

  • Oil prices were extremely volatile early in 2020, due to the impacts of COVID-19, but are forecast to be relatively steady for the rest of 2020. A gradual recovery in consumption is expected to lift Brent crude prices from US$45 a barrel in the December 2020 quarter to US$59 a barrel by the December 2022 quarter.
  • Australian crude oil and feedstock exports are estimated to have risen to 295,000 barrels a day in 2019–20. Exports are expected to peak at 300,000 barrels a day in 2020–21, before falling marginally in 2021–22.
  • Low prices are expected to lead to Australian export earnings falling by 25 per cent to $6.8 billion in 2020–21. An uptick in prices is expected to lift earnings to $8.6 billion in 2021–22.

Uranium

Australia’s uranium production and exports are set to decline from 2021.

  • Uranium prices are expected to hold steady over the rest of 2020, reflecting a resumption of output from Canada’s Cigar Lake mine. The pause in output from this mine — which accounts for around 10 per cent of global supply — drove a surge in prices in early 2020.
  • Australian production is set to decline from 2021, due to the closure of the Ranger uranium mine.
  • The value of Australia’s uranium exports is expected to fall, with marginal price growth partially offsetting falling production. Export earnings are expected to shift down from $688 million in 2019–20 to $629 million by 2021–22.

Gold

Australia’s gold exports are forecast to reach a record $32 billion in 2020-21.

  • Due to the COVID-19 pandemic and its impacts, the gold price is forecast to record an annual record high in 2020, averaging about US$1,770 an ounce. An expected global economic rebound is projected to see the gold price slide to around US$1,620 an ounce in 2022.
  • Australia’s gold mine production is forecast to reach a record 384 tonnes in 2021–22, as record prices encourage an expansion in production.
  • The value of Australia’s gold exports is forecast to reach a record $31 billion in 2020–21, driven by higher prices and export volumes, before declining to around $28 billion in 2021–22, as gold prices ease back.

Aluminium, alumina and bauxite

Australia’s aluminium, alumina and bauxite export earnings to decline, due to slowing demand and increasing supply.

  • The global aluminium industry is facing challenging conditions caused by the impacts of COVID-19, with slowing demand and rising inventory levels. Aluminium prices are forecast to average US$1,600 a tonne in 2020, before recovering to US$1,760 a tonne in 2022.
  • Annual Australian output is expected to be broadly steady over the outlook period, remaining at around 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 fall by 9.2 per cent in 2020–21 to $12 billion, and then hold steady in 2021–22, affected by low aluminium and alumina prices and declining bauxite export volumes.

Copper

Copper export earnings reach $10 billion and expected to stay high.

  • Despite recent price strength, copper prices are forecast to average US$5,980 a tonne in 2020, slightly lower than 2019, due to the economic downturn. Improving consumption is expected to lift prices to US$6,620 a tonne in 2022.
  • Australia’s copper exports are forecast to rise from 928,000 tonnes in 2019–20 to 942,000 tonnes in 2021–22 (in metal content terms), as output from existing mines expands and new mines start-up.
  • After reaching $9.9 billion in 2019–20, Australia’s export earnings are forecast to rise 4 per cent a year to a forecast $11 billion in 2021–22.

Nickel

Export earnings to be lifted by higher domestic production and recovering prices.

  • Lower consumption and an oversupplied market are expected to see nickel prices average US$13,100 a tonne in 2020, down 5 per cent on 2019. Prices are expected to recover to a forecast US$15,300 a tonne in 2022, fuelled by strong consumption growth.
  • New projects and expansions are expected to lift Australia’s export volumes from 246,000 tonnes in 2019–20 to a forecast 335,000 tonnes in 2021–22.
  • Australia’s nickel export earnings are expected to rise with higher export volumes and strengthening prices, reaching a forecast $5.8 billion in 2021–22, up from $3.7 billion in 2019–20.

Zinc

Prices are expected to grow modestly before supply growth tempers price gains.

  • Zinc prices are expected to soften over the remainder of 2020, despite some COVID-19 supply concerns. Prices are expected to increase from the forecast average of US$2080 a tonne for 2020 to US$2,110 a tonne in 2021, before declining modestly to average US$2,025 a tonne in 2022 as new supply enters the market.
  • Australia’s zinc mine production is projected to increase from 1.4 million tonnes (metallic content) in 2019–20 to 1.6 million tonnes in 2021–22.
  • Australia’s zinc export earnings are forecast to decline from $3.6 billion in 2019–20 to around $3.1 billion in 2020–21 and $3.2 billion in 2021–22, as the Australian dollar appreciates and prices ease slightly.

Lithium

Australian lithium producers still face difficult price conditions, but new offtake agreements have been signed.

  • The spot spodumene price (delivered to China) fell by 8.2 per cent to US$390 a tonne between June and August 2020. Prices are forecast to rise to US$588 a tonne by 2022, based on rising electric vehicle uptake and government stimulus packages (in response to the COVID-19 pandemic).
  • Australian lithium production is expected to rise from 231,000 tonnes (lithium carbonate equivalent) in 2019–20 to 248,000 tonnes in 2021–22 based on production tied to new offtake agreements.
  • After falling from $1.1 billion in 2019–20 to $1.0 billion in 2020–21, Australian lithium export earnings are forecast to increase to $1.3 billion by 2021–22.