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Resources and Energy Quarterly December 2017

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 2018–19.

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 resumed their decline in the December quarter 2017 — although their impact on export earnings was offset by a depreciation in the Australian dollar. Nonetheless, resources and energy export earnings are forecast to grow in 2017–18, to reach a (nominal) record of $214 billion, driven by growing LNG and iron ore export volumes. In 2018–19, prices are expected to weigh more heavily on export earnings, which are forecast to decline to $200 billion.

Between 2016–17 and 2018–19, LNG is expected to add $14 billion to Australia’s export earnings, while coal and iron ore are forecast to subtract $11 billion and $10 billion, respectively.

Growing LNG export volumes, attributed to the completion of the three remaining LNG projects currently under construction — Wheatstone, Ichthys and Prelude — will underpin growth in LNG export earnings out to 2018–19, while declining iron ore and coal prices are expected to drive the forecast decline in overall resources and energy export earnings.

Steel production cuts in China have placed downward pressure on the price of Australia’s biggest export — iron ore — in the December quarter. Continued moderation in Chinese steel production, coupled with increased supplies from both Australia and Brazil, are expected to weigh further on iron ore prices over the next two years. Coal prices — both thermal and metallurgical — are also forecast to weigh heavily on Australia’s export earnings in the next two years, due to rising global supply and moderating demand.

The outlook for base metals prices are generally more optimistic than for iron ore and coal (although mixed across the individual commodities). Strong growth in global industrial production — particularly the manufacturing of stainless steel, vehicles and aluminium-based packaging — and infrastructure development, particularly in China, has boosted demand.

The mining industry continues to account for a respectable share of Australia’s overall economic growth in 2017. However, declining investment (from a very high base) in the oil and gas sector, coupled with declining export values, could see the mining industry make a smaller contribution to overall economic activity in the coming two years.

This edition of the Resources and Energy Quarterly contains a special chapter on Resources and Energy Major Projects. The chapter reveals that while mining investment activity is likely to continue to decline in the short-term, a slight uptick in projects that have been publicly announced or under feasibility, points to a bottoming in the investment cycle, beyond 2017–18. Recent increases in exploration activity also have the potential to translate to higher investment in the longer term.

Mark Cully

Chief Economist
Department of Industry, Innovation and Science

Resources and Energy Overview

Resources and energy export values are forecast to reach a record $214 billion in 2017–18, before declining

  • Global economic growth, industrial production and manufacturing output gathered pace in 2017, indicative of a positive environment for commodity demand.
  • Commodity prices, however, continued their downward trend in the December quarter 2017. Prices are forecast to decline by 2.0 per cent in 2017–18 and by a further 10 per cent in 2018–19, largely weighed down by the steel-making commodities iron ore and metallurgical coal. Demand for steel is expected to soften in China, the world’s largest steel producing country.
  • Australia’s resources and energy export volumes are expected to continue to grow at a robust pace over the next two years, driven by LNG and, to a lesser extent, iron ore.

Macroeconomic outlook

Global economic growth, industrial production and manufacturing output gathered pace in 2017, indicative of a positive environment for commodity demand

  • The global upswing in economic activity is strengthening, with global growth forecast to rise to 3.6 per cent in 2017 and 3.7 per cent in 2018 and 2019.
  • The potential for a lower Chinese growth path and uncertainty around the US economy represent risks to the outlook.

Steel

Global steel production and consumption forecast to be weighed down by the effects of slowing growth in China.

  • Robust growth in world steel production and consumption in 2017 was supported by stimulatory policies in China (aimed at maintaining firm economic growth), and growing momentum in economic activity in the rest of the world.
  • The pace of production and consumption growth is forecast to slow in 2018 and 2019, as the gradual effects of economic reforms and increasingly stringent environmental regulations in China outweigh an ongoing pick-up in growth elsewhere in the world.

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 grew by 31 per cent to $63 billion in 2016–17, but are forecast to fall to $52 billion in 2018–19, as the impact of lower prices more than 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.
  • The outlook for the iron ore price is sensitive to the pace and magnitude of the decline in China’s steel production, which in turn, largely depends on government policy.

Metallurgical coal

Australia’s exports of metallurgical coal are expected to ease slightly from the current strong level.

  • Metallurgical coal prices have been relatively steady in recent months, after a year of wild swings due to supply problems and strong demand.
  • Chinese demand has held up in the face of the high prices of recent months, as some steel mills bought ahead of the winter curtailment.
  • Supply is steadily recovering, and expansions are expected in 2018.
  • In 2017–18, Australian metallurgical coal exports are forecast to be 192 million tonnes, and then rise to 192.5 million tonnes in 2018–19.

Thermal coal

Australia’s exports of thermal coal are expected to pick up marginally, supported by supply constraints elsewhere.

  • Thermal coal prices have remained at the relatively high levels reached late in the September quarter, at over US$90 per tonne.
  • Stronger world demand remains a feature of the market, as the world economic recovery consolidates.
  • Supply remains constrained, as China conducts safety inspections and industrial action impacts on Australian output.
  • In 2017–18, Australia’s exports are forecast to rise marginally from 2016–17, and see further minor gains to 203 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 $36 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 annual export capacity to 88 million tonnes.
  • LNG contract prices — under which most Australian LNG is sold — are forecast to increase in line with oil prices. High LNG spot prices in Asia are likely to be attractive to Australian exporters in the short-term, but are expected to decline from their present level.
  • LNG is forecast to overtake metallurgical coal as Australia’s second largest resource and energy export in 2018–19.

Oil

Petroleum exports forecast to rise, as declining crude oil production is outweighed by condensate production.

  • Australia’s crude oil and condensate exports are forecast to increase from $5.5 billion in 2016–17 to $6.0 billion in 2017–18, driven by higher oil prices. Further increases are expected in 2018–19, as higher condensate production supports forecast export earnings of
    $7.0 billion.
  • Over the outlook period, Australia’s production will be characterised by decreasing crude oil production, which will be offset by higher condensate production, related to several new LNG projects.
  • World oil prices are forecast to steadily increase over the outlook period, as constrained world production continues under the OPEC Production Agreement and world consumption grows, particularly in emerging Asia.

Uranium

Australia’s uranium production is forecast to remain largely stable, with some recovery in prices expected.

  • Uranium spot prices remained low in 2017, at just under $US22 a pound, but are expected to recover to around $US27 a pound in 2018 and $US29 a pound in 2019, as market conditions tighten slightly.
  • Upgrades at the Olympic Dam facility are expected to impose a temporary disruption on mine output, which will reduce Australian uranium production to 6,990 tonnes in 2017–18.
  • Rising demand in Asia and an increase in output at Olympic Dam should support a rebound to 7,100 tonnes in 2018–19.
  • Australia’s uranium export earnings are expected to increase from just under $600 million in 2016–17 to around $635 million in 2017–18 and 2018–19, with an easing in export contract prices offsetting the impact of higher spot prices.

Gold

Australia’s gold production is forecast to increase, driven by new gold projects and mine expansions

  • Having averaged about US$1259 a troy ounce in 2017, the gold price is expected to average US$1,250 a troy ounce in 2018 and decline to US$1,205 a troy ounce in 2019.
  • The fall in gold prices will be driven by rising real US Treasury bond yields, as the US Federal Reserve tightens monetary policy.
  • The value of Australia’s gold exports is forecast to decrease from $18 billion in 2016–17 to $17 billion in 2017–18 and $16 billion in 2018–19.

Aluminium, alumina and bauxite

The value of Australia’s aluminium exports is forecast to increase, driven by high prices.

  • The value of Australia’s aluminium exports is forecast to increase by 19 per cent in 2017–18, to $3.8 billion, driven by high prices and stable export volumes.
  • Crackdowns on air pollution and illegal capacity in China are likely to push aluminium prices higher in 2018
    and 2019.

Copper

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

  • World prices are expected to average US$6,340 a tonne in 2018 and US$6,490 a tonne in 2019, driven by steady demand from China and global industrial production.
  • The value of Australia’s copper exports is forecast to increase from $7.5 billion in 2016–17 to $8.7 billion by 2018–19. Growth in export earnings will be supported by higher export volumes and higher copper prices.
  • Australia’s copper exports are forecast to rise from 921,000 tonnes in 2016–17 to 994,000 tonnes in
    2018–19, supported by new mines and expansion projects over 2018 and 2019.

Nickel

Australia’s nickel production and exports are expected to rise, with demand supported by rising stainless steel production.

  • Global market conditions for nickel are strong, supported in the short-term by higher stainless steel production, and in the long-term by higher lithium-ion battery production.
  • Australian mine production is expected to fall to 176,000 tonnes in 2017–18 before recovering slightly to 183,000 tonnes in 2018–19.
  • Australia’s nickel export earnings are forecast to fall slightly to $2.1 billion in 2017–18, before rebounding to $2.3 billion in 2018–19.

Zinc

Australian zinc production and exports are expected to rise from current low levels, as conditions improve for zinc miners.

  • High prices are expected to drive a rise in mine supply during 2018, but the outlook for refined supply is somewhat less clear.
  • Rising prices are expected to boost Australia’s export earnings by 11 per cent to $3.0 billion in 2017–18. Production growth is forecast to push earnings up
    4 per cent to $3.1 billion in 2018–19.

Resources and Energy
Major Projects

Note: Corrections were made to Chapter 15 (Major Projects) on 10 January 2018. As a result, some numbers reported in the text and tables have changed from the original report published on 8 January 2018.

The number of committed projects increases, buoyed by renewed optimism for market conditions.

  • The number of committed projects has increased over the past 12 months, driven by an increase in the number and value of copper, gold, nickel and other minor commodity projects.
  • Publically announced projects and projects progressing to the feasibility stage have also increased, in line with higher exploration expenditure and higher commodity prices.
  • The value of committed projects is expected to fall sharply in 2018, driven by the scheduled completion of the three remaining LNG mega-projects, with a combined value of around $100 billion.
  • New, large-scale projects are expected to drive investment in 2022 and beyond. Over two-thirds of possible investment in 2022 and 2023 is attributed to just nine new large-scale projects in gas, coal and iron ore.

Further Information

Trade Summary Charts and Tables

Appendix

Forecasting Methodology