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Resources and Energy Quarterly March 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. Each March edition of Resources and Energy Quarterly features a ‘medium term’ (five year) outlook for Australia’s major resource and energy commodity exports. The June, September and December quarter editions of Resources and Energy Quarterly contain a ‘short term’ (two year) outlook. This edition updates the Office of the Chief Economist’s outlook out to 2022–23.

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.

Commodity prices rallied two years ago and to the surprise of many forecasters, including ourselves, they are yet to unwind a substantial part of these gains. Higher iron ore and coal prices and rapidly growing LNG export volumes have bolstered Australia’s resources and energy export earnings. In 2017–18, we are forecasting the value of Australia’s resource and energy exports to reach its highest level on record, $230 billion, in both real and nominal terms.

Beyond the short term, our view remains largely unchanged. In the annual update of our five year forecasts, we project export earnings to decline slightly from current levels, before levelling out at about $212 billion to $216 billion from 2019–20 onwards. In total, the next five years will deliver more than $1 trillion in resources and energy export income.

This compares with average annual export earnings of $72 billion in the decade prior to the onset of the resources boom, validating our long-held view that the mining boom would continue to reap dividends long after the price peak in 2011.

Over the next few years, the prices of some of Australia’s large resource and energy exports are expected to decline. Prices for both iron ore and metallurgical coal — Australia’s two largest resource and energy exports — are expected to be weighed down by increasing supply and declining steel production in China. The price of Australian LNG, set by the oil price, is expected to increase modestly, constrained by price-sensitive shale oil production in the United States and sluggish growth in world oil consumption.

Meanwhile, the ramp up in export volumes — driven by the mining investment boom — is expected to have run its course by the turn of the decade. The last of Australia’s LNG projects is scheduled for completion by the end of the year, while growth in iron ore export volumes will slow from 2018–19. The story is similar for other key resource and energy export commodities including coal, gold and several base metals. In this sense, 2020 will mark the end of the remarkable growth phase of the Australian resources and energy sector.

The Resources and Energy Quarterly has recently undergone a review, resulting in changes in this edition and future editions. We are grateful for the time and input received from stakeholders as part of this process.

Mark Cully

Chief Economist
Department of Industry, Innovation and Science

Resources and Energy Overview

Australia’s resources and energy export earnings to reach record highs in 2017–18.

  • Australia’s resources and energy export earnings are forecast to increase to $230 billion in real terms in
    2017–18 — a record high. The drivers of this increase are broad-based, but LNG is expected to be the largest growth contributor.
  • Export earnings are projected to fall after 2017–18, levelling out at $213-216 billion from 2019–20. Commodity prices are projected to decline, with falls in iron ore and metallurgical coal prices having the largest impact on export earnings.
  • The production phase of the mining boom has been defined by rapid growth in production and export volumes — a legacy which will last for decades to come. By 2020, however, the ramp up in Australia’s exports is expected to have run its course.

Macroeconomic outlook

There is a solid outlook for global economic growth and industrial production, with global inflation still contained.

  • Economic growth around the world has picked up, with the US and ASEAN playing a greater role in bolstering the global economy.
  • Global inflation remains contained overall, with cheaper commodities helping to curb price growth.
  • Although conditions remain strong on balance, rising instability in parts of the world, risks of global trade conflicts, and the need to curb long-running stimulus across the OECD present a complex set of risks.

Steel

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

  • World steel production has been lifted by strong economic growth, an ongoing pickup in industrial production, and robust production in China.
  • China’s steel production and consumption is projected to gradually decline over the outlook period. This reflects a slow-down in construction activity, stricter environmental policies and supply-side reforms.
  • India and other emerging economies are expected to increasingly drive growth in world steel consumption and production.
  • The tariff on steel imports to the US and the threat of escalating protectionist policies presents a risk to the outlook for major steel exporting countries.

Iron Ore

Resilient prices and strong growth in export volumes has supported Australia’s iron ore export earnings in 2017.

  • Australia’s iron ore export earnings grew by 16 per cent to $63 billion in 2017, driven by high prices and growth in export volumes (which rose by 2.5 per cent to 828 million tonnes).
  • Australia’s iron ore export earnings are projected to decrease to $55 billion by 2022–23, as a result of projected price declines.
  • The FOB Australia iron ore price is projected to decline to US$53 a tonne (in real terms) in 2023, as a result of falling steel production in China and a well-supplied seaborne market.
  • The key uncertainty underpinning the outlook for the iron ore price is the pace and magnitude of the decline in China’s steel production, which in turn, largely depends on government policies.

Metallurgical coal

Strong growth in emerging Asia, where few reserves are located, will drive strong growth in steel production and hence metallurgical coal demand.

  • Metallurgical coal prices have stayed at relatively high levels in recent months, as disruptions to Australian export supply continue to leave the seaborne market short. Prices are likely to remain well above the US$100 a tonne mark, and hence above the lows of 2015–16.
  • The prospects for metallurgical coal demand over the medium term are firm. Strong growth in emerging Asia will drive strong growth in steel production and hence metallurgical coal demand.
  • Supply growth will generally keep up with demand, though the ongoing rationalisation of the Chinese coal industry poses a risk to world supply.
  • Export earnings are forecast to be almost $40 billion in 2017–18, before then declining. Earnings should maintain $29 billion over the forecast period.

Thermal coal

Thermal coal producers around the world face a number of headwinds, but Australia’s relatively high quality coal will shield our miners somewhat.

  • Thermal coal prices have edged up further in recent months, as supply concerns and strong demand keep buyers keen to snap up cargoes.
  • Going forward, strong growth in demand in Emerging Asia will largely offset softer demand in the OECD. Western nations appear likely to continue to push to phase down their thermal coal use in favour of renewables and gas, the latter both for heating and power generation.
  • Supply growth will be dominated by Australia, Russia and the United States, but investors will only reluctantly fund new capacity.
  • Australian export earnings are expected to hit a record $22.9 billion dollars in 2017–18 before declining to
    $17.1 billion in 2022–23.

Gas

Global LNG markets look set to move into a period of overcapacity, as Australia’s and United States’ LNG exports ramp up.

  • The real value of Australia’s LNG exports is forecast to increase from $23 billion in 2016–17 to $39 billion in 2022–23, driven by higher export volumes and, to a lesser extent, higher prices.
  • LNG is forecast to overtake metallurgical coal as Australia’s second largest resource and energy export in 2018–19.
  • The completion of the final three Australian LNG projects under construction will underpin strong growth in export volumes and bring total export capacity to
    88 million tonnes.
  • LNG contract prices — at which most Australian LNG is sold — are projected to increase gradually, in line with oil prices.

Oil

Australia’s petroleum exports forecast to rise, as higher condensate production outweighs declining crude oil production.

  • Australia’s crude oil exports are forecast to increase from $5.6 billion in 2016–17 to $9.3 billion in 2022–23, in real terms, driven by higher export volumes and higher oil prices.
  • Over the outlook period, Australia’s declining crude oil output will be offset by higher condensate output, generated as a by-product of the new LNG projects coming online.
  • World oil prices are projected to increase modestly over the outlook period, to average US$60 a barrel in
    2022–23 (in 2018 dollars). Higher US production and lower consumption growth is expected to limit price increases.

Uranium

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

  • Uranium spot prices remain historically low, but are expected to rise slowly over the outlook period, reaching just over $US38 a pound by 2023. 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 trend down marginally over the next three years, as output from the Ranger mine edges down ahead of the cessation of production in 2021. However, production at the Mulga Rock mine is projected to begin by 2022, leading to some recovery in production by 2023.
  • Australia’s uranium export earnings are forecast to decline slightly over the outlook period, with a rising spot price partly offsetting lower production.

Gold

The value of Australia’s gold exports is forecast to peak in 2019–20 at over $19 billion.

  • Gold prices are forecast to increase to an average of US$1,350 an ounce in 2019, as gold’s status as a safe haven asset fuels investor demand over the short term. Investor demand is then expected to weaken and gold prices are expected to decline to near US$1,270 an ounce by 2020.
  • Further out, gold prices are projected to rise consecutively each year to average near US$1,300 an ounce in 2023, driven by declining world mine supply.
  • The value of Australia’s gold exports is forecast to peak in 2019–20 at over $19 billion, driven by higher prices and export volumes. Export values are projected to decline to $15 billion (in 2017–18 dollar terms)
    by 2022–23.

Aluminium, alumina and bauxite

Environmental regulation in China is the key driver of Australia’s alumina and bauxite exports in the short to medium term.

  • The value of Australia’s aluminium, alumina and bauxite exports is forecast to fall by an average 2.4 per cent annually to $11 billion (in real terms) by 2022–23, as the demand for alumina and bauxite falls.
  • The Chinese Government’s commitment to curb air pollution is expected to close smelters and refineries which fail to meet new environmental regulations. This will reduce demand for Australian alumina and bauxite.
  • Global aluminium markets are expected to be able to absorb the impacts of the United States’ 10 per cent tariffs on imported aluminium without significant disruption.
  • Australian aluminium exporters are likely to benefit from the US tariff exemption, should US aluminium premiums rise.

Copper

Australian export earnings from copper set to rise over the outlook.

  • World prices are expected to increase from an average of US$6,307 a tonne in 2017 to US$8,400 a tonne in 2023, as consumption growth outpaces rising mine and refinery supply in the medium term.
  • Australia’s copper exports are forecast to rise from 920,000 tonnes in 2016–17 to over 1 million tonnes in 2022–23 (in metal content terms), as new mines and expansion projects come online over the outlook period.
  • The value of Australia’s copper exports is projected to increase from $7.7 billion in 2016–17 to $12 billion by 2022–23. Growth in export earnings will be supported by higher export volumes over the short term and higher copper prices over the medium term.

Nickel

Nickel may be entering a new investment phase as a result of higher prices and constrained supply.

  • Global market conditions for nickel remain firm, supported by higher stainless steel production in China and Indonesia. Rising battery use will also help to support nickel demand in the 2020s.
  • Strong demand conditions are expected to encourage development of two large new mines in Australia, lifting domestic mine production from 163,000 tonnes in 2017–18 to 293,000 tonnes by 2022–23.
  • Australia’s nickel export earnings are projected to lift from a low of $2.1 billion in 2017–18 to $2.7 billion
    by 2022–23.

Zinc

Conditions are strong for zinc producers, with Australian production set to rise significantly

  • Zinc prices remain high, due to high demand and low inventories, and are expected to average over $US3,200 a tonne in 2018.
  • Australia’s production is to rise sharply over the next two years, before settling to a slow and steady growth pattern out to 2023.
  • Export values are expected to rise sharply by 2018–19 and then ease off slightly, in line with price movements.