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Resources and Energy Quarterly June 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.

Australia’s resources and energy export earnings grew rapidly in 2016–17, up by 25 per cent to $205 billion, based on preliminary estimates. However, resource and energy export earnings are forecast to decline marginally in 2017–18 and 2018–19. Declining prices are expected to more than offset the impact of rising export volumes.

The rise in export values in 2016–17 was largely due to an unexpected spike in metallurgical coal and iron ore prices. These steel-making commodities account for over half of Australia’s resources and energy exports by value.

Steel mills in China — the largest consumer of Australia’s iron ore and one of the largest for metallurgical coal — continued to increase output and helped drive steel making commodity prices higher in 2016–17. Metallurgical coal prices were also propelled higher by the now partially-reversed restrictions placed on coal mining operations in China and several temporary disruptions to supply.

Export volumes for the major base metals declined sharply in 2016–17, reflecting a combination of mine and refinery closures, as well as temporary supply disruptions. The drop in base metals production is forecast to turn around modestly in the next two years. This reflects a small number of new mines and the impact of the ramping up of other existing mining operations.

Over the next two years, LNG is forecast to add $14 billion to Australia’s resources and energy exports, while declining coal and iron ore prices are expected to detract $11 billion and $9.8 billion from export earnings, respectively.

Moderating global demand growth, in addition to growing low-cost supply, is putting downward pressure on resource and energy commodity prices, particularly for iron ore but also for metallurgical coal. Iron ore prices have already declined noticeably, while metallurgical coal prices — held up in the June quarter by supply disruptions attributed to Cyclone Debbie — are also falling back.

The volume of Australia’s resources and energy exports is forecast to continue to grow robustly in the next two years. LNG is forecast to be the largest contributor to export volumes growth, with several major projects still yet to be completed or to reach full capacity. Export volumes for metallurgical coal are also expected to grow strongly in 2017–18, as stockpiles built up in the wake of Cyclone Debbie are wound down.

However, investment in Australia’s mining sector has declined rapidly in recent years — and is expected to continue to do so. This is already evidenced in the sharp decline in exploration expenditure, and has contributed to a reduction in employment in the mining industry as a whole. Growth in export volumes 2017–18 and 2018–19 are forecast to be weighed down by falling investment, although the impact of lower investment in the industry will be more apparent beyond the two year outlook horizon.

This edition of the Resources and Energy Quarterly contains a special feature on battery component commodities. Global battery markets have entered a period of rapid growth in recent years, and the Australian mining industry may be well positioned to capitalise on this growth.

Australia has the fourth highest reserves in the world of lithium and the fourth highest of cobalt — both of which are battery component commodities. However, it is not clear yet how far Australia can progress beyond mining and into other parts of the battery supply chain, which are dominated by China. Despite this, the undeveloped state of the supply chain may result in opportunities emerging that are not yet apparent.

Mark Cully

Chief Economist
Department of Industry, Innovation and Science

Resources and Energy Overview

Australia’s resource and energy export values grew by an estimated 25 per cent in 2016–17, driven largely by price increases

Strong growth in metallurgical coal and iron ore prices underpinned an estimated 25 per cent increase in Australia’s resource and energy export values in 2016–17, to reach A$205 billion. However, iron ore prices and metallurgical coal prices have declined sharply in recent weeks, with further declines forecast in the coming quarters.

Growing export volumes — particularly from LNG — are forecast to largely offset the impact of the decline in prices. On balance, Australia’s resource and energy export values are expected to decline slightly: by 1.4 per cent in 2017–18 and by 1.1 per cent in 2018–19.

Macroeconomic outlook

The global economy continues to recover, but questions remain as to the recovery’s sustainability.

Global growth is forecast to reach 3.5 per cent in 2017, and 3.6 per cent in 2018, up from 3.1 per cent in 2016.

Improvements in the global outlook have been primarily driven by ongoing historically low interest rates, relatively low energy prices, and a steady recovery in business confidence. Surveys monitoring the global manufacturing sector appear to have topped out but remain strong. The Eurozone has shown a strong improvement, with manufacturing conditions at a six-year high.

Despite positive outlooks for short term growth, there remain several risks to global growth. Low productivity growth continues to plague many advanced economies, creating a drag on wage growth and weak demand.

Steel

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

Global steel production grew 4.5 per cent year-on-year in the five months to May 2017, in contrast to a 1.5 per cent contraction over the same period in 2016. Growth has been supported by a broadening pick up in the global economy.

World steel production growth is forecast to moderate to average 1.3 per cent in 2017, 1.0 per cent in 2018 and 0.8 per cent in 2019. A marginal decline in Chinese steel production — as infrastructure and construction activity in that nation slows — is expected to be outweighed by strong steel production growth in the rest of the world, particularly in India.

Iron Ore

Australia’s estimated iron ore exports earnings in 2016–17 increased by 33 per cent from 2015–16 to $65 billion.

Australia’s iron ore export earnings are estimated to have increased by 33 per cent to $65 billion in 2016–17. This represents a large downwards revision from the forecast in the March 2017 Resources and Energy Quarterly, reflecting an earlier than expected decline in the iron ore price.

With demand expected to be steadily outpaced by the growth of low-cost supply, the iron ore price is forecast to decline to US$48 a tonne in 2018 and to US$47 a tonne in 2019.

Australia’s export earnings are forecast to decline to $58 billion in 2017–18, and $55 billion in 2018–19. Modest production growth, from ongoing productivity improvements and capacity additions, is expected to be offset by the impact of a lower iron ore price.

Metallurgical coal

Record export earnings in 2016–17, but forecast declines due to lower prices

Global metallurgical coal spot prices spiked in April, in the wake of the destruction left by Cyclone Debbie in Queensland, the world’s largest metallurgical coal producing region. Important rail links to export ports were cut, tightening the export market. Since April, a return to normal of rail operations has seen prices decline. Prices are forecast to fall modestly further over the rest of the outlook period. Overall export earnings for 2016–17 are estimated to be a record $36 billion. However, due to price declines over the outlook period, export earnings for 2017–18 and 2018–19 are forecast to be lower.

Thermal coal

Export earnings strong amidst higher thermal coal prices

Thermal coal exports are estimated to have added a substantial $19.2 billion to export revenue in 2016–17, and are forecast to remain similar at $19.1 billion in 2017–18. After a price spike from late 2016 to early 2017, thermal coal prices are forecast to gradually decline over the outlook period. The decline in prices will eventually affect Australia’s thermal coal export earnings, especially in 2018–19. Export volumes for 2017–18 and 2018–19 have been revised down from the March 2017 Resources and Energy Quarterly, due to forecast lower thermal coal import demand from South Korea, following a change in energy policy by the new government.

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 an estimated $23 billion in 2016–17 to $37 billion in 2018–19. Growth in export earnings will be supported 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.

Estimated export earnings in 2016–17 are $1 billion lower than forecast in March, with export volumes having been curtailed by several unplanned outages at LNG plants during the first half of 2017. Revisions to export earnings in 2017–18 and 2018–19 (totalling $5.6 billion) reflect a more subdued outlook for both oil prices (to which LNG prices are directly linked) and export volumes.

Oil

Higher oil prices and expanded condensate production lead to increased export earnings over outlook period, reaching $8.1 billion in 2018-19.

Some unusual dynamics appeared in the global oil market during the first half of 2017. The OPEC production agreement — aimed at rebalancing the global oil market — was largely adhered to, while US oil output rose. The OPEC production agreement has been extended beyond 2017, in response to persist high global stocks levels.

The value of Australia’s crude oil and condensate exports is forecast to rise to $6.0 billion in 2017–18 and to $8.1 billion in 2018–19. Forecast earnings have been revised down by $2.2 billion in 2017–18 and $0.7 billion in 2018–19 from the March Resources and Energy Quarterly due to project delays and a more subdued outlook for oil prices.

Uranium

Uranium prices remain historically low, but long-term prospects for suppliers are improving as reactor construction accelerates across Asia.

The uranium market continues to experience low prices and significant oversupply, although some turnaround in conditions now appears to be underway. Production cuts are likely to restrain an inventory build over the next two years, while significant new nuclear power generation capacity is being constructed in China and India.

Australian export volumes are estimated to have edged up to 7,724 tonnes of U308 over 2016–17. However, rising production at the Olympic Dam and Four Mile mines is forecast to support a rise in export volumes to 8,450 tonnes by 2018–19. Export values are expected to fall to $947 million in 2016–17 before recovering to $972 million in 2017–18 and $1 billion in 2018–19.

Gold

Gold prices find support from low real yields and weaker than expected US dollar.

The gold price is forecast to average US$1,254 a troy ounce in 2017 — revised higher from the March Resources and Energy Quarterly, due to larger than expected safe-haven demand and a weaker than expected US dollar over much of 2017. Australian dollar gold prices have continued to rise in 2017, favouring local producers. Australian production was lower than expected in the March quarter, as heavy rainfall interrupted several mine operations. However, forecasts for export volumes remain mostly unchanged from the March 2017 Resources and Energy Quarterly, while export values have been revised higher , due to higher than expected world gold prices. Australia’s exports of gold are forecast to stay relatively unchanged at 334 tonnes in 2018–19, worth over $17 billion.

Aluminium, alumina and bauxite

Regulatory changes in China are likely to affect Australia’s aluminium, alumina and bauxite exports.

Australia’s aluminium exports are forecast to return to 1.4 million tonnes a financial year in 2017–18, as the Portland Aluminium’s production is expected to be at least 90 per cent of pre-outage levels in 2017–18 and onwards. The Chinese Government’s decision to both curb aluminium and alumina production in the 2017–18 winter season and remove the illegal production capacity, will significantly increase aluminium prices in the second-half of 2017, and this will improve the earnings for Australian aluminium exports. Export earnings are forecast to increase by 10 per cent in 2017–18, to $3.5 billion (2016–17 dollars). However, export values for Australian aluminium and alumina are forecast to fall in 2018–19, as new capacity additions in China put downward pressure on aluminium and alumina prices.

Copper

Growth in global copper consumption slows in the March quarter.

After rising in the March quarter, world copper prices declined in the June quarter 2017, weighed down by declining demand and higher inventories. The impact of disruptions at a number of major mines in the March quarter were largely offset by new mine supply and expansion projects coming online. Australian production was steady in the March quarter, despite weather-related disruptions impacting several operations. Australia’s copper exports decreased by 18 per cent year-on-year in the March quarter, led by lower exports to Asian destinations. Copper export earnings are forecast to increase by 8.4 per cent in 2017–18 to $8.0 billion, supported by higher prices and volumes.

Nickel

Australia’s nickel export earnings are estimated to have declined by 31 per cent to $2.1 billion in 2016–17.

The estimated decline in nickel export values in 2016–17 largely reflects a decline in export volumes. The cessation of production at Queensland Nickel’s Yabulu refinery, as well as several mine closures in Western Australia, were behind the decline in volumes.

Over the next two years, nickel export values are forecast to increase slowly, supported by the ramping up of production at Independence Group’s Nova mine.

The outlook for nickel prices over the next two years has been revised down, following government policy announcements in the Philippines and Indonesia that are expected to add more supply to the global market. However, demand is expected to remain strong in China — the world’s largest market for nickel — with further drawdowns in global stocks still expected in 2017.

Zinc

Zinc markets are strong at present, but Australian output will be constrained in the short term by recent mine closures.

Zinc producers are experiencing strong conditions. Prices lifted sharply during 2016, amidst strong global demand and following a range of mine closures. 2017 is shaping up as a year of high prices, significant drawdowns in inventories, and efforts to increase extraction at a range of mines around the world.

Australian export volumes are estimated to have fallen in 2016–17, due to mine closures. However, price increases are expected to provide some windfall to producers over the medium term. Exports of zinc (metallic content) are forecast to lift to 1,008,000 tonnes in 2017–18 and 1,169,000 tonnes in 2018–19. Real export earnings are forecast to decline slightly in 2017–18, to $2,426 million before recovering to $2,652 million in 2018–19.

Batteries

Batteries are a powerful enabling technology. Growing global demand for batteries is creating huge opportunities for Australian commodity producers.

Rising demand for renewable energy and electric vehicles is driving significant R&D and strong growth in battery production around the world. Commodities used to make batteries — notably lithium, cobalt and graphite — will consequently be increasingly sought after in the years ahead.

Australia is well placed to capitalise on these developments. Australia is the largest producer of lithium and holds the world’s fourth largest lithium reserves. Australia also has modest reserves of graphite and sizable reserves of cobalt. In each case, there is significant untapped potential, with mining projects progressing rapidly.

Battery markets remain relatively undeveloped, but technological change is occurring extremely rapidly and the future potential for batteries has only begun to be explored.

Further Information

Trade Summary Charts and Tables

Appendix