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Resources and Energy Quarterly September 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.

Australia’s resource and energy exports are estimated at a record $349 billion in 2021–22, up from $310 billion in 2020–21. In 2022–23, exports are forecast to decline by 14% to $299 billion.

The rollout of COVID-19 vaccines in advanced nations is allowing a strong rebound in the services side of the world economy. However, a new surge in cases (of the delta strain) in many nations is inhibiting a full global recovery, including in the automotive sector where semi-conductor chip shortages have forced some renewed plant closures. Container shortages and other supply chain blockages are also impacting adversely on global trade and output, and contributing to upward price pressure.

Australian iron ore earnings are (still) forecast to decline sharply in the outlook period, after topping the $150 billion mark – the first time ever for an Australian commodity – in 2020–21. The global economic recovery and constrained supply saw prices exceed US$200/tonne in the middle of 2021, but the Chinese government’s efforts to limit the country’s 2021 steel output (to 2020 levels) has seen the price decline dramatically in the September quarter. The ongoing recovery in Brazilian supply is set to impact adversely on prices in the outlook period.

Both a stronger outlook for base metals and coal, and the noticeable decline in the Australian dollar over the past three months, have more than offset the impact on export earnings of the modest downward adjustment we have made to our iron ore price forecasts. Lithium exports – of spodumene concentrate and refined chemicals – are expected to almost match zinc exports in 2022–23, as the race to make the world auto fleet electric gathers pace. And exporters of aluminium, nickel, zinc and copper are benefiting from the global move to low emission technologies.

Thermal coal prices have surged in China, as critical shortages emerge. Seaborne thermal coal prices have risen to their highest level in more than a decade. High demand from steel producers and problems with Mongolian supply has also seen Australian metallurgical coal prices reach multi-year highs, more than regaining all of the reduction in export earnings following China’s informal import restrictions.

There are downside risks to these extremely strong export earnings forecasts. They include a potential for a spike in global inflation and a risk of higher interest rates in response. New, vaccine-resistant strains of the coronavirus, and the risk of delays in the rollout of effective COVID-19 vaccines to the world’s population, also pose significant risks. Another downside risk is the extent of any further disruptions to Australian resource and energy commodity trade with China.

Overview

Australia’s resource and energy export earnings to again reach a new record in 2021-22

  • The outlook for Australia’s mineral exports remains strong, as the world economy rebounds from the impact of the COVID-19 pandemic. High prices across a number of resource and energy commodities, and a weaker Australian dollar are driving a surge in export earnings. Some moderation in prices is likely in 2022, as supply rises and demand growth moderates.
  • In 2020–21, export earnings reached a record $310 billion. Earnings are forecast to rise a further 13% in 2021–22 to $349 billion, before falling back to around $300 billion in 2022–23.
  • The rollout of COVID-19 vaccines in advanced nations is allowing a strong rebound in services in the world economy, joining the ongoing recovery in industrial production. However, a new surge in cases (of the delta strain) in many countries, container shortages and other supply chain blockages, is inhibiting a full global recovery and contributing to upward price pressure.

Macroeconomic outlook

Global economic growth to reach 6.0% in 2021, underpinned by successful vaccine rollout and ongoing fiscal support

  • The world economy is forecast to grow by 6.0% in 2021. However, renewed outbreaks of COVID-19 variants, continued supply chain issues and rising (and persistent) inflation, all present risks to the global recovery in the second half of 2021 and in 2022.
  • A strengthening recovery in advanced economies is offsetting weaker growth across developing and emerging economies. World economic growth is forecast to moderate to 4.9% in 2022 and 3.5% in 2023, as levels of pent up demand and government support normalise
  • The growing divergence in the recoveries of different economies reflects relative progress in the rollout of COVID-19 vaccinations, and of the level of fiscal and monetary support being provided by governments in response to the pandemic.

Steel

Global steel output tracking significantly above pre COVID levels

  • World demand for steel is forecast to grow by 5.8% in 2021, reflecting the ongoing recovery now underway in most major economies following COVID-19 lows. More moderate growth is likely in 2022 and 2023.
  • The slowdown in the recovery after 2021, and renewed outbreaks (and variants) of the pandemic, present key risks to global growth and steel consumption in the second half of 2021 and beyond.
  • Strong demand for steel in the midst of still-recovering supply chains continues to see elevated prices for most steel products across the US, EU and Asia in the September quarter. Prices are still expected to ease from the second half of 2021, as this demand impulse recedes and supply chains normalise.

Iron ore

Australia’s iron ore export earnings reached another new record in 2020–21

  • Australia's iron ore export earnings reached a record $153 billion in 2020–21. The fall in prices from the second half of 2021 is forecast to lead to lower export earnings, of $132 billion in 2021–22 and $99 billion by 2022–23.
  • Iron ore prices have now retraced significantly from the highs of over US$230 a tonne seen in May. Falling domestic demand for steel in China – due to a softening in construction activity and ramp up of a number of key government policies to limit energy use and emissions – has seen prices fall to US$120/tonne by mid-September.
  • Australian export volumes are expected to grow steadily, from 868 million tonnes in 2020–21 to 939 million tonnes by 2022–23. This reflects the commencement of several new mines in Western Australia.

Metallurgical coal

Australia’s metallurgical coal prices have lifted strongly in recent months

  • Metallurgical coal prices have lifted sharply, as supply shortages meet rebounding global industrial production. The Australian premium hard coking coal (HCC) price is forecast to ease from an average US$162 a tonne in 2021 to US$159 a tonne in 2022 and US$152 a tonne by 2023.
  • Australia’s exports are forecast to rise from 171 million tonnes in 2020–21 to 186 million tonnes by 2022–23. Supply chains disrupted by China’s informal import restrictions have largely reorganised.
  • Australia’s metallurgical coal export values are forecast to reverse most of their recent decline, rebounding from $23 billion in 2020–21 to $30 billion by 2022–23.

Thermal coal

Australia’s thermal coal export earnings have risen as the global economy recovers

  • Thermal coal spot prices have increased strongly in recent months, as Asian demand grew amidst an unusually hot northern summer. The Newcastle benchmark price is forecast to average US$101 a tonne in 2021, easing slowly to US$71 a tonne by 2023.
  • Australian thermal coal exports declined from an all-time high 213 million tonnes in 2019-20 to 192 million tonnes in 2020–21, as a result of COVID-19. Exports are expected to recover to 212 million tonnes by 2022–23, as Asian economies return to normal conditions.
  • Export values are forecast to rise from $16 billion in 2020–21 to $24 billion in 2021–22, before easing back to $19 billion in 2022–23.

Gas

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

  • Asian LNG spot prices and oil-linked contract prices are expected to moderate in 2022 and 2023, as the LNG market remains well supplied and oil prices stabilise above US$65 a barrel.
  • Australian export volumes are forecast to increase by 5.4% to 82 million tonnes in 2021–22, as technical issues are resolved at the Prelude and Gorgon LNG plants. Export volumes are forecast to be slightly higher in 2022–23.
  • Australia’s LNG exports earnings are forecast to increase from $30 billion in 2020–21 to $56 billion in 2021–22, as oil-linked contract prices rise sharply.

Oil

Oil prices to remain around $US70 a barrel over the outlook

  • The Brent crude oil price is forecast to remain at about US$70 a barrel for the remainder of 2021, as global consumption continues to recover and outpaces global production. Brent crude prices are forecast to average US$68 a barrel in 2021, up from US$42 a barrel in 2020.
  • Australian crude oil and feedstock exports declined to 276,000 barrels a day in 2020-21. Exports are forecast to increase to 295,000 barrels a day in 2021-22 before returning to 282,000 barrels a day in 2022-23.
  • Australian oil export earnings declined to $7.4 billion in 2020-21, reflecting low prices early in the year. Higher prices are expected to lift earnings to $11.2 billion in 2021–22.

Uranium

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

  • On balance, uranium prices are expected to grow over the forecast period, growing from US$30 a pound in 2020 to US$41.70 a pound by 2023. 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 their output rapidly should prices surge.
  • Australian production is forecast to decline from 2021, as the number of active uranium mines falls from three to two.
  • Uranium export values are forecast to increase from a low of $465 million in 2021–22, to reach $551 million by 2022–23.

Gold

Australia’s gold exports are forecast to reach a record $29 billion in 2021-22

  • Renewed waves of COVID-19 infections in many parts of the world, and an uneven vaccine rollout, is forecast to push the gold price up to US$1,785 an ounce in 2021, after averaging US$1,770 an ounce in 2020. An expected global economic rebound is projected to see the gold price slide to around US$1,635 an ounce in 2023.
  • Australia has overtaken China as the world’s largest gold producing country in the first-half of 2021. Production from new mines and existing mine expansions is expected to boost gold mine production to 378 tonnes in 2022–23.
  • Gold export earnings are forecast at $29 billion in 2021–22, before a decline to $27 billion in 2022–23, as gold prices ease back.

Aluminium, alumina and bauxite

Australia’s aluminium, alumina and bauxite export earnings to rise to $14 billion in 2022–23.

  • Strong Chinese demand and constrained supply pushed the London Metal Exchange spot price for aluminium to a 10-year high of US$2,714 a tonne on 31 August 2021. World demand is expected to remain strong over the outlook period, and is likely to see the primary aluminium price average US$2,384 a tonne in 2021 (up 40% from 2020), and to average over US$2,590 a tonne in 2023.
  • Annual Australian output is expected to be broadly steady over the outlook period, remaining at around 1.6 million tonnes of aluminium and 21 million tonnes of alumina.
  • The total value of Australian exports of aluminium, alumina and bauxite is forecast to increase at an annual average rate of 5.8% between 2021–22 and 2022–23, to reach nearly $14 billion by the end of the outlook period.

Copper

Record copper prices support export earnings and Australia’s development potential

  • Copper prices have surged in 2021, and are expected to retain most of this gain in the years ahead, with demand supported by economic recovery and the expanding use of copper in low-emissions technology. Prices are forecast to ease back from US$9,122 a tonne in 2021, to a still strong US$8,650 a tonne by 2023.
  • Australia’s copper export volumes are expected to increase slightly over the outlook period, from 905,000 tonnes in 2020–21, to around 909,000 tonnes in 2022–23 (in metal content terms).
  • Australia’s copper export earnings are expected to increase as price gains in 2021 are reflected across subsequent years. Export earnings are forecast to rise from $11.4 billion in 2020–21 to $14.4 billion by 2022–23.

Nickel

The market for battery-grade Nickel is expected to tight over the outlook period

  • The nickel price is forecast to average US$18,035 a tonne in 2021, 31% higher than in 2020, driven by strong demand from stainless steel producers and upward revisions to demand for electric vehicle batteries.
  • New projects and expansions are expected to lift Australia’s export volumes from an estimated 181,000 tonnes in 2020–21 to about 260,000 tonnes in 2022–23.
  • Australia’s nickel export earnings are forecast to rise on the back of growing export volumes and higher prices, reaching $5.1 billion in 2021–22 and $4.6 billion in 2022–23, up from $3.8 billion in 2020–21.

Zinc

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

  • The LME zinc spot price is forecast to average US$2,930 a tonne in 2021, with increased government spending on infrastructure helping to support prices. Prices are expected to fall to around US$2,450 a tonne in 2023, as production increases and consumption normalises.
  • Australia’s zinc production is forecast to increase from an estimated 1.3 million tonnes (in metallic content terms) in 2020–21 to 1.6 million tonnes in 2022–23.
  • Australia’s zinc export earnings are forecast to increase from $3.3 billion in 2020–21 to around $4.1 billion in 2021–22 and $3.9 billion in 2022–23. Rising refined production is expected to offset prices.

Lithium

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

  • Spot spodumene prices (delivered to China) rose to US$2,240 a tonne as at September 2021. Spodumene prices are forecast to rise from an average of US$435 a tonne in 2020 up to an average US$1,190 a tonne in 2022 and US$930 a tonne in 2023, with contract pricing under negotiation. Lithium hydroxide prices are forecast to rise from US$9,890 a tonne in 2020 to US$15,160 a tonne in 2023.
  • Australia’s lithium production is forecast to rise from 217,000 tonnes lithium carbonate equivalent (LCE) 2020–21 to 374,000 tonnes LCE in 2022–23.
  • Australia’s lithium export earnings are forecast to increase from $1.1 billion in 2020–21 to $3.8 billion in 2022–23. This will be driven by increased spodumene production, and exports of lithium hydroxide after first production occurred in August 2021.