Resources: Boom Continues, But Slowing

Australia's mineral and energy exports will rise at a slower pace of 4.6% to $208.32 billion Australian in 2012-13, as demand for commodities slows in Asia and in China in particular.

That will be after an 11% rise in the year to June 30 this year to A$199.17 billion, according to forecasts issued by the Bureau of Resources and Energy Economics in its Resources and Energy Quarterly publication out yesterday.

While volumes of coal and iron ore and other commodities (such as LNG) will rise, the increases will be slower than seen in previous years (Except 2011 when coal and iron ore exports were hit by cyclones and floods).

But prices will fall for iron ore, metallurgical (coking) and thermal coal in coming years as demand slows and supplies expand.

Iron ore prices will be down 8% this year, coal and metals prices will lose 6%.

"Over the medium term, the outlook for energy and minerals commodity exports remains robust," the Bureau said.

By 2016-17, the Bureau sees Australia's resources and energy commodity export earnings reaching a record $225 billion (in 2011-12 dollars).

In all export revenues are expected to top $1 trillion over the next five years, according to yesterday's report.

The growth in resources and energy export earnings over the next five years will be "underpinned by increases in export earnings for most commodities, including LNG, iron ore and thermal coal," according to the Bureau

"Despite projections of lower commodity prices relative to 2010-11 over the medium term, increased resources and energy export earnings are projected to be underpinned by substantially greater export volumes for most commodities," said Professor Grafton, BREE's Executive Director and Chief Economist, in a statement.

A large proportion of increases in export earnings are expected to come from LNG, with eight projects (including the almost complete Pluto project) under construction.

Export volumes are forecast to increase from 20 million tonnes on LNG in the year to June 2012 to over 60 million tonnes in 2016-17, while export earnings for LNG are also forecast to treble over the same period to $30 billion.

"The growth in Australia's LNG industry over the next five years is underpinned by over $175 billion worth of investment to expand capacity in Western Australia, Queensland and the Northern Territory,' said Professor Grafton.

Between 2011-12 and 2016-17 export volumes are forecast to increase for iron ore (62%), metallurgical coal (47%), thermal coal (65%), copper ores and concentrates (77%) and alumina (29%).

'The increase in Australia's export volumes for most commodities reflects commitments by the industry to increase production and expand infrastructure capacity over the medium term,' said Professor Grafton.

In 2010-11 the overall index of Australian mine production increased by 5% compared with 2009-10.

This includes a 13% increase in metals and other minerals production that was offset by a 3% fall in the production of energy commodities, primarily coal due to flooding in Queensland.

Total Australian mine production is forecast to increase by 6% in 2011-12, relative to 2010-11, primarily due to a 7% increase in the output of energy commodities, particularly thermal and metallurgical coal.

Another contributing factor to this growth will be a forecast 6% increase in the production of metals and other minerals, underpinned by rising iron ore, nickel and zinc production.

"Export earnings from energy and minerals commodity exports increased by 25% in real terms (in 2011-12 dollars) between 2009-10 and 2010-11, reaching $185 billion in 2010-11," the Bureau forecasts.

"Of this total, export earnings from minerals commodities contributed $113 billion, accounting for about 61 per cent of the total.

"Export earnings from energy commodities accounted for a smaller share, 39 per cent, and contributed approximately $72 billion in real terms to the total value of Australian energy and minerals exports."

In 2011-12, the total export earnings for energy and mineral commodities are forecast to increase by 8% to $199 billion supported by increases in the export values for both energy and mineral commodities.

The Bureau says energy commodity export earnings are forecast to grow by 7% to $77 billion (in 2011-12 dollars) as a result of strong increases in export earnings from thermal coal (up 28% to $17.8 billion), LNG (up 13% to $12 billion), oil (up 7% to $12.6 billion) and metallurgical coal (up 4% to $31 billion).

Mineral commodity export earnings are forecast to increase by 8% to $122 billion as a result of increases in the export values of gold (up 33% to $17.3 billion), alumina (up 14% to $6 billion), copper (up 7% to $9 billion) and iron ore (up 2% to $59.7 billion).

Partially offsetting the increased export earnings for mineral commodities will be lower forecast export earnings for aluminium (down 9% to $3.8 billion) and zinc (down 8% to $2.2 billion).

Amid the welter of fresh views and data on the outlook for commodities, BREE looked at iron ore which was in the news this week with the market overreaction to the statement from a senior BHP executive that growth in China's demand was "flattening".

BREE is much more confident about the outlook than a lot of people.

Australia's iron ore and metallurgical coal export volumes are projected to increase at an average annual rate of 11% and 8% respectively, out to 2016-17 due to significant capacity expansions which are currently under construction.

The growth in export volumes is projected to result in export earnings (in 2011-12 dollars) in 2016-17 reaching $77 billion for iron ore and $30 billion for metallurgical coal.

Over the remainder of 2012, iron ore prices are forecast to ease as production increases from new projects in Australia and growth in Asian steel production weakens.

Further price decreases are expected to be limited by an expected reduction in exports from India.

For 2012 as a whole, iron ore contract prices are forecast to average around US$140 a tonne (on a 62% iron content basis, free on board Australia) or a fall of 9% compared with 2011 (US153 a tonne).

Over the remainder of the outlook period (2013 to 2017) contract prices are projected to ease gradually, averaging US$109 a tonne (in 2012 dollars) in 2017.

"The projected fall in prices largely reflects the effect of considerable expansions to supply that are scheduled for completion over the medium term." BREE said.

"In 2012, Australian exports are forecast to increase by 12 per cent from the previous year to total 493 million tonnes.

"The increase is supported by a forecast increase to production at a number of mines including those operated by Rio Tinto, and the ramp up of production at BHP Billiton's Rapid Growth Project 5.

"The value of Australia's iron ore exports in 2011-12 is forecast to increase by 2 per cent to $59.7 billion, compared with 2010-11.

"This is largely attributable to an increase in export volumes being partially offset by the appreciation of the Australian dollar and a slight decline in prices from the previous corresponding period.

"Over the medium term, growth in export volumes from capacity expansions at a number of mines will underpin an increase in export values.

"However, the positive effect of higher export volumes on export earnings will be partly offset by projected declines in contract prices over the remainder of the outlook period.

"Export volumes of iron ore are projected to increase at an average annual rate of 11 per cent, to reach 767 million tonnes.

"Export earnings are projected to increase to $77 billion (in 2011-12 dollars), representing average growth of 4 per cent a year over the outlook period.

"Expansions and greenfield developments in Australia are expected to account for the majority of growth in global iron ore exports over the outlook period.

"Australia's exports of iron ore are forecast to increase at an annual average of 10 per cent over the outlook period, to total 779 million tonnes in 2017.

"Prices for metallurgical coal in the March quarter were settled at around US$235 a tonne, a decrease of 18 per cent from the December quarter price of US$285 a tonne.

"The decrease in prices is largely a combination of weaker import demand growth from large steel producing economies and increased exports from Queensland as mines return to normal production rates after weather disrupted production in late 2010 and early 2011.

"These factors are expected to continue to negatively influence metallurgical coal prices for the remainder of 2012, resulting in a 23 per cent decrease in average contract prices year-on-year, to US$221 a tonne.

"Over the remainder of the outlook period, metallurgical coal prices are projected to moderate further with substantial supply increases from Australia, Canada, Mongolia and Mozambique.

"Australia's metallurgical coal export volumes in 2011-12 are forecast to increase by 6 per cent to 148 million tonnes which is expected to result in an increase in export earnings by 1 per cent to $31 billion.

"Over the outlook period, export volumes are forecast to rise by 8 per cent a year to 218 million tonnes in 2016-17. Australia's export earnings from metallurgical coal are projected to total $30 billion (in 2011-12 dollars) in 2016-17.

"In 2012, China's steel consumption is forecast to increase by 5 per cent, relative to 2011, to total 657 million tonnes.

"Over the remainder of the outlook period (2013 to 2017), China's steel consumption is projected to increase due to significant government investment in steel-intensive infrastructure such as highways and rail networks linking the less-developed provinces in western China to demand centres in the east.

"In addition, in the first half of the outlook period, China's steel consumption is expected to be boosted by the construction of the first phase of the affordable social housing program, which aims to build 36 million units of subsidised apartments by 2015.

"Between 2013 and 2017, China's steel consumption is projected to average 4 per cent a year to reach 812 million tonnes in 2017," BREE said in its latest quarterly.