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Resources and Energy Quarterly September 2017

The Resources and Energy Quarterly represents the Office of the Chief Economists’ estimates and forecasts of Australia’s resources and energy commodity production and export volumes and export values. This edition updates the Office of the Chief Economist’s outlook for Australia’s resource and energy production and exports out to 2018–19.

Underpinning the forecasts contained in the Resources and Energy Quarterly is the Office of the Chief Economist’s outlook for global commodity prices, consumption and supply. The forecasts for Australian mine and refinery production and commodity exports are reconciled with this global context.

The global environment in which Australia’s producers compete can change rapidly. Each edition of the 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 September quarter was one of typical significant volatility in resource and energy commodity prices. Prices for steel-making raw materials and some of the base metals rose notably through most of the quarter, before suffering a sharp setback in the second half of the month of September. As usual, the swings related largely to moves in market sentiment in relation to the Chinese economy.

It appears that some resource commodity markets are, and will be in the next year at least, experiencing more intense seasonality: Chinese steel and aluminium makers stepped up their purchases of raw materials in the June–August period, as they prepared for the curtailment of a very significant part of Chinese production in the approaching winter.

Buoyant prices for steel-making commodities and thermal coal, and increased LNG export volumes, are expected to see Australia’s resource and energy export earnings increase by 2 per cent in 2017–18, to a record $211 billion.

For the first time in around seven years, industrial production is currently uniformly firm in the Advanced economies, Emerging economies and in Africa and the Middle East. This has helped propelled resource commodity prices higher.

Unfortunately, the high prices that have bolstered Australia’s resources and energy export earnings in 2016–17 and (in early) 2017–18 are not expected to last. The combination of both slowing demand growth from China’s steel sector and increased global supplies, are expected to lower export unit values in 2018–19.

Overall, the value of Australia’s resource and energy exports is forecast to fall by around $10 billion in 2018–19 to around $201 billion.

In this edition of the Resources and Energy Quarterly, we have a special focus on India, specifically the prospects for Indian resource and energy commodity usage over the next twenty years. While the prospects are good, they won’t be on the same scale that we have seen from China over the past decade or so. India will be able to supply some of its own requirements, but will need to import large amounts of some commodities. Australia stands to benefit, particularly as the world’s largest exporter of metallurgical coal: India has little resources of this commodity and a strongly growing need.

Mark Cully

Chief Economist
Department of Industry, Innovation and Science

Resources and Energy Overview

Commodity prices regained some of the June quarter’s sharp losses in the September quarter.

  • A uniform strengthening in the main economies propelled resource commodity prices higher in the September quarter.
  • Chinese metal producers are going full tilt ahead of forced winter shutdowns/cutbacks.
  • Prices and thus export earnings will drift lower over the forecast period, as supply rises and demand growth moderates.

Macroeconomic outlook

The global economic recovery is firming, with output forecast to grow by 3.5 per cent in 2017, and 3.6 per cent in 2018.

  • The ongoing recovery in the global economy is being supported by continued loose monetary conditions and rising business confidence.
  • A sharp escalation of geopolitical tensions over North Korea’s missile program could derail the global economic recovery.
  • Rising debt levels in China and the uncertainty of fiscal policy in the United States, pose additional risks to the global outlook.

Steel

Declining steel production in China is expected to be outweighed by growth in the rest of the world, particularly in India.

  • Robust world steel production in 2017 to date has been supported by an ongoing pickup in global economic growth, and strong steel production in China — in response to high prices.
  • However, China’s steel production and consumption is forecast to decline in 2018 and 2019, as a result of a renewed focus on managing financial risks and progressing supply-side reforms.
  • Outside of China, firm economic growth is expected to continue to support steel production and consumption, particularly in India, supporting import demand for Australia’s two largest commodity exports — iron ore and metallurgical coal.

Iron Ore

The value of Australia’s iron ore export earnings is forecast to decline, due to lower prices and despite higher volumes.

  • Australia’s iron ore export earnings increased by 32 per cent to $63 billion in 2016–17, driven in large part by higher prices.
  • The value of Australia’s iron ore exports is forecast to decrease to $54 billion in 2018–19, as the impact of forecast lower prices offsets growth in volumes.
  • The iron ore price is forecast to decline to US$49 a tonne (FOB Australia) in 2019, due to growing low-cost supply from Australia and Brazil and moderating demand from China.
  • Australia’s iron ore export volumes are forecast to rise from 819 million tonnes in 2016–17 to 887 million tonnes in 2018–19, as a result of ongoing productivity gains and new additions to capacity.

Metallurgical coal

Australia’s metallurgical coal export earnings hit record high in 2016–17.

  • Global metallurgical coal spot prices are estimated to have risen to an average of around US$190 a tonne in the September quarter, due to production disruptions in Australia and China and strong import demand from China.
  • Over the outlook period, prices are forecast to decline, as operations return to normal.
  • Export earnings for 2016–17 hit a record $35 billion, driven by high prices.
  • Robust prices are expected to contribute to continued strong export earnings in 2017–18, but moderating prices thereafter are expected to result in declining earnings in 2018–19.

Thermal coal

Australia’s thermal coal export earnings forecast to stay robust.

  • Thermal coal exports totalled $19 billion in 2016–17. The value of export earnings are forecast to be little changed in 2017–18.
  • After declining over most of the first half 2017, prices rose sharply from mid-July, due to both stronger than expected import demand and industrial action affecting exports from key Australian mines.
  • Spot prices are expected to decline from recent highs, dropping to US$69 a tonne in 2019, as industrial action eases and demand softens in key markets such as China.
  • In 2017–18, Australia’s exports are forecast to remain broadly unchanged and then decline by 2.0 per cent to 198 million tonnes, in 2018–19.

Gas

The value of Australia’s LNG exports is forecast to increase, driven by higher volumes and prices.

  • The value of Australia’s LNG exports is forecast to increase from $22 billion in 2016–17 to $35 billion in 2018–19, driven by higher export volumes and, to a lesser extent, higher prices.
  • 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 is forecast to overtake metallurgical coal as Australia’s second largest resource and energy export in 2018–19.
  • LNG contract prices — under which most Australian LNG is sold — are forecast to increase in line with oil prices.
  • The outlook for LNG export earnings is not without risks. Australia faces increasing competition in export markets. Oil prices are also a key sensitivity.

Oil

Increased condensate production is expected to support higher export petroleum export earnings over the outlook period.

  • Australia’s crude oil and condensate export earnings are forecast to increase to from $5.5 billion in 2016–17 to $7.3 billion in 2018–19, an annual increase of 10 per cent. Higher production and realised price are expected to support this.
  • Australia’s rate of crude oil and condensate export volumes is forecast to reach 224,000 barrels a day in 2017–18, before expanding 16 per cent to 259,000 barrels a day in 2018–19, as oil field decline is offset by higher condensate production from new LNG projects.
  • Oil prices are expected to increase modestly over the next two years, the Brent spot price is forecast to average US$52 a barrel in 2017 and to gradually rise to an average US$55 a barrel in 2019.

Uranium

Australia’s uranium exports fell in 2016–17 due to supply disruptions, but are expected to recover.

  • Uranium markets remain oversupplied, with prices expected to remain low on average at $US22 a pound in 2017. Prices should lift over time as production cutbacks take effect and Asian demand rises.
  • Supply disruptions are expected to reduce Australian uranium production to 6,986 tonnes in 2017–18. This should rebound to 7,950 tonnes in 2018–19 as supply resumes.
  • Australia’s uranium exports are expected to pick up from $857 million in 2017–18 to just over $1 billion by 2018–19, supported by rising production and prices.

Gold

Rising gold prices boost the value of Australia’s gold exports in 2017–18.

  • The gold price is expected to average US$1,260 a troy ounce in 2017, supported by lower real US treasury bond yields, safe-haven demand and a weaker than expected US dollar over the rest of 2017. The gold price is expected to decline to US$1,190 a troy ounce in 2019, driven by higher real yields.
  • The value of Australia’s gold exports is forecast to decrease from $18 billion in 2016–17 to $17 billion in 2018–19. Lower export earnings will be weighed down by lower gold prices while export volumes are expected to remain relatively flat.
  • Australia’s gold exports are forecast to be little change over the forecast period, rising from 334 tonnes in 2016–17 to 335 tonnes in 2018–19.

Aluminium, alumina and bauxite

The value of Australia’s aluminium and alumina export earnings are forecast to increase in 2017–18, driven by higher prices.

  • Aluminium and alumina prices are forecast to rise until early 2018, on the back of production cuts in China over the 2017–18 winter season.
  • The value of Australia’s aluminium exports is forecast to increase from $3.2 billion in 2016–17 to $3.8 billion in 2017–18.
  • Likewise, the value of Australia’s alumina exports is forecast to rise strongly, from $6.7 billion in 2016–17 to $7.8 billion in 2017–18.
  • With a return to pre-outage production levels at Portland Aluminium, Australia’s aluminium production is forecast to recover to normal capacity of 1.6 million tonnes in 2017–18.
  • Regulatory changes in China are likely to pose short-term challenges to Australia’s aluminium, alumina and bauxite exports.

Copper

The value of Australia’s copper exports is forecast to increase, supported by higher volumes.

  • World prices are expected to average US$6,050 per tonne in 2017, supported by steady demand from China and stronger industrial production. Copper prices are expected to decline to US$5,630 per tonne in 2018, as a result of firm growth in mine supply and increase thereafter as consumption growth outpaces supply in 2019.
  • The value of Australia’s copper exports is forecast to increase from $7.5 billion in 2016–17 to $8.3 billion by 2018–19. Growth in export earnings will be supported by higher export volumes, while copper prices are forecast to rise in 2019.
  • Australia’s copper exports are forecast to rise from 922,000 tonnes in 2016–17 to 1.0 million tonnes in 2018–19, supported by new mines and expansion projects over 2018 and 2019.

Nickel

Mine closures have temporarily reduced Australia’s nickel export volumes.

  • Australia’s nickel export earnings declined by 20 per cent to $2.3 billion in 2016–17, largely reflecting a decline in export volumes.
  • Earnings are forecast to fall slightly to $2.2 billion in 2017–18, before recovering in 2018–19 as prices rise and production ramps up at Independence Group’s Nova mine.
  • Export volumes fell by 31 per cent to 172,000 tonnes in 2016–17, as production at Queensland Nickel’s Yabulu refinery ceased and several mines were closed in Western Australia. Volumes are expected to lift to 194,000 tonnes by 2018–19.
  • The nickel price is forecast to fall by around 1 per cent to $US9,671 per tonne in 2017, but subsequently increase in 2018 and 2019.

Zinc

Strong market fundamentals are pushing up the value of Australian zinc exports.

  • Market fundamentals continue to strengthen for zinc producers, with the price lifting over the past 12 months to 10-year highs.
  • Export earnings are forecast to decline slightly to $2.66 billion in 2017–18, due to falls in zinc production. A recovery in Australian production is expected to lift zinc exports to $2.83 billion in 2018–19.
  • Australia’s ability to capitalise on high prices has been hampered by mine closures over the past two years. Exports of zinc (metallic content) are expected to bottom out at 959,000 tonnes in 2017–18, before recovering to 1,118,000 tonnes in 2018–19, as three new mines commence operation.

India

The world’s other population superpower could become quite a large consumer of resource commodities in the next two decades.

  • Metal usage is set to rise over the next twenty years, as India becomes wealthier and intensity of use picks up.
  • Indian demand will not match that of China over recent years.
  • India will need to import large amounts of metallurgical coal, most likely from Australia.

Further Information

Trade Summary Charts and Tables

Appendix