Commodity forecasts and future export prospects Tim Bradley General Manager Economics Advice Service, Office of the Chief Economist October 2016 1

REQ September 2016 Australia’s major resources and energy exports, 2015–16 and 2016–17f

•

Australia’s resources and energy exports are forecast to increase by 12 per cent in 2016-17 to $176 billion

Iron ore +35%

Metallurgical coal

+41%

LNG Gold

+4%

Thermal coal

Despite challenging conditions for Australian producers, the short term outlook is for moderate growth

–4% –2%

Copper

0%

Alumina Crude oil

Higher export earnings will be supported by: - continued growth in the volume of most bulk commodity exports - additional production and new capacity coming online from LNG projects

2

Aluminium

+13%

+6% +13%

Zinc

–11%

Nickel

–14%

0

10

20

30

40

50

$ billion Source: ABS (2016) International Trade in Goods and Services, 5368.0; Department of Industry, Innovation and Science (2016)

•

60

Resources and energy export earnings revision Generally a more positive outlook than 6 months ago

200

Largest upward revisions were for metallurgical coal and iron ore

A$ billion

190

Reflects unexpected persistence in the effects from the housing stimulus in China, and weather and infrastructure related supply disruptions

180

170

160

150 2010-11

2011-12

2012-13

Mar–16 forecast

2013-14

2014-15

2015-16

2016-17

Sep–16 forecast

Source: Department of Industry, Innovation and Science (2016) Resources and Energy Quarterly September edition

•

3

How did we get here? RBA Index of Commodity Prices +170%

180 Index (2014-15 = 100)

160 140 120 100

Commodity prices grew by 170 per cent between 2004 and 2011

80 60 40 20 0 Sep-1996

•

Sep-2000

Sep-2004

Sep-2008

Sep-2012

Sep-2016

Source: RBA (2016) Index of Commodity Prices

Iron ore cost curve

Growth in commodity prices were underpinned by: - rapid economic growth in China - an initially slow supply-side response - a depreciation of the US dollar against most currencies Over the course of a decade there have been significant gains in output and efficiency

Source: AME Group (2016) Note: Cost curves represent the cash cost of mining, processing, administration and support, royalties and freight (to the port)

•

•

4

Where are we in the commodity price cycle? Average annual growth in prices and export volumes 2002–03 to 2011–12

2011–12 to 2015–16

30%

Metallurgical coal

Copper

30%

Iron ore

20%

Average annual change in EUV, per cent

20%

Oil Uranium

Thermal coal 10% Zinc

LNG Nickel

0% Alumina Aluminium -10%

-20%

Average annual change in EUV, per cent

Gold

Zinc

Uranium

10% Gold Aluminium

Alumina

LNG

0% Nickel

Thermal coal

Copper -10% Oil

-20% Metallurgical coal

-30% -30%

-20% -10% 0% 10% 20% Average annual change in volume, per cent

30%

-30% -30%

-20% -10% 0% 10% 20% Average annual change in volume, per cent

Source: ABS (2016) International Trade in Goods and Services, 5368.0; Department of Industry, Innovation and Science (2016) Notes: Size of bubbles reflects total export values in last period relative to other commodities in the period

5

Iron ore

30%

Shifting (iron)sands Share of export values by commodity

100

Per cent

80 60

Export earnings have increased 355 per cent over the last two decades

40 20 0 Iron ore

Thermal coal

Metallurgical coal

Gold

Other

Bulk commodities have increasingly formed a large share of exports, both by value and volumes

LNG

Share of export volumes by commodity 100

Per cent

80

While iron ore and coal accounted for 52 per cent of export earnings in 2015–16, they accounted for 95 per cent of export volumes

60 40 20 0 1995–96 Iron ore

•

•

6

1999–00 Thermal coal

2003–04 Metallurgical coal

2007–08

2011–12

Bauxite, Alumin and Aluminium

Source: Department of Industry, Innovation and Science (2016) Notes: Volumes exclude oil and gas

2015–16 Other

Chinese demand has been the key driver of growth •

Principal markets for Australia’s resources and energy exports

Resources exports have grown 88 per cent (+$46 billion) Energy exports have grown 51 per cent (+$20 billion)

70

•

60

Energy exports in 2015–16: $59.5 b

50

Resources exports in 2015–16: $97.6 b

Resources exports to China are over 5 times what they were a decade ago (+$45 billion)

•

$ billion

•

40 30 20 10

Energy exports to China are over 9 times what they were a decade ago (+$9 billion)

China

India

Japan

7

EU28

Energy

Source: ABS (2016) International Trade in Goods and Services, 5368.0

2015–16

2005–06

2015–16

2005–06

2015–16

2005–06

South Korea Other Asia

Resources

•

2015–16

2005–06

2015–16

2005–06

2015–16

2005–06

2005–06

2015–16

0

•

Rest of world

Exports of Australia’s bulk resources and energy commodities Increased volumes to drive iron ore earnings

LNG will be the key driver of growth in Australian exports

•

800

80

600

60

400

40

5

200

20

0

0

20

40

15

30 10

20 10 0 2006–07 2008–09 2010–11 2012–13 2014–15 2016–17

Australia’s export earnings to increase amidst global metallurgical coal price rally

40

150

30

100

20

50

10 0 Volume

8

A$ billion

Million tonnes

200

2010–11

2012–13

2014–15

2016–17

Value (rhs)

Source: ABS (2016) International Trade, Australia, cat. no. 5465.0; Department of Industry, Innovation and Science

•

2014–15

2016–17

Value (rhs)

Thermal coal exports volumes forecast to increase despite decline in earnings

50

0

2012–13

•

250

2008–09

2010–11 Volume

•

2006–07

2008–09

Value (rhs)

Million tonnes

Volume

0 2006–07

250

50

200

40

150

30

100

20

50

10 0

0 2006–07

2008–09

2010–11 Volume

2012–13

2014–15

Value (rhs)

2016–17

A$ billion

50

A$ billion

100

25 Million tonnes

1000 60

A$ billion

Million tonnes

•

Outlook for Australia’s resource exports Average annual growth in prices and export volumes, 2015–16 to 2020–21 30%

Average annual change in EUV, per cent

20% Zinc Alumina

Oil

Aluminium 10% Iron ore Copper Metallurgical coal 0%

Uranium Gold -10%

-20% -30%

LNG

Thermal coal

-20%

-10% 0% 10% Average annual change in volume, per cent

20%

Source: ABS (2016) International Trade in Goods and Services, 5368.0; Department of Industry, Innovation and Science (2016) Notes: Size of bubbles reflects projected export values in 2020–21

9

30%

Major risks to the short run outlook

China

Emerging economies

Developed economies

Slowing economic growth

Slowdown in growth

Outcome of the US election

Transition toward consumption-led growth

US Federal interest rate Global uncertainty

Reversal of the recent improvement in China’s housing market

10

Further information

Tim Bradley General Manager, Economics Advice Service Phone:

02 6102 9877

Email:

[email protected]

Follow us @economist_chief

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industry.gov.au

Australia’s major resource regions

Pilbara — Iron ore Share of national production (per cent)

Bowen Basin – Met and Thermal Coal 95

Share of national production (per cent)

WA Goldfields — Gold Share of national production (per cent)

Hunter — Met and Thermal Coal 49

Share of national production (per cent)

Copper (NSW, QLD, SA, WA)

Source: ABS 5204.0 table 5; ABS Census 2011; Cost curve estimates from AME.

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