Further Information
© Commonwealth of Australia 2016
For more information on data or government initiatives please access the
report from the Department’s website at:
ISSN 1839-5007 [ONLINE]
www.industry.gov.au.
Chapter Authors
Macroeconomic outlook: Mark Gibbons, Marco Hatt and Monica Philalay
Resources and energy overview: Kate Penney
Steel and iron ore: Marco Hatt
Vol. 5, no. 3
This work is copyright. Apart from any use as permitted under the
Copyright Act 1968, no part may be reproduced or altered by any process
without prior written permission from the Australian Government. Requests
and inquiries concerning reproduction and rights should be addressed to:
Department of Industry, Innovation and Science, GPO Box 9839, Canberra
ACT 2601 or by emailing chiefeconomist@industry.gov.au
Metallurgical and thermal coal: Ben Witteveen
Gas: Gayathiri Bragatheswaran and Nicole Thomas
Oil: Kieran Bernie
Uranium: Geoff Armitage
Gold and copper: Nikolai Drahos
Aluminium, alumina and bauxite: Thuong Nguyen
Nickel and zinc: Monica Philalay
Acknowledgements
The authors would like to acknowledge the contributions of:
Ross Lambie
Nicole Thomas
Allison Ball
David Whitelaw
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Inja Ahn
Laura Jones
Katya Golobokova
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Resources and Energy Quarterly March 2016
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2
Contents
Foreword
4
Executive summary
5
Macroeconomic outlook
7
Resource and energy overview
15
Steel
32
Iron ore
41
Metallurgical coal
49
Thermal coal
57
Gas
71
Oil
80
Uranium
89
Gold
96
Aluminium, alumina and bauxite
105
Copper
117
Nickel
126
Zinc
135
Trade summary charts
143
Appendix
150
Foreword
In the six months since our last medium term Resource and Energy
Quarterly the outlook for most commodities has deteriorated. In the
December quarter 2015, prices across a broad range of commodities
declined faster and further than we or many other market analysts
anticipated. The price of oil and iron ore fell to levels not recorded since
the early 2000s, essentially reversing much of the price gains achieved
when prices peaked in 2011.
Despite some gains in early 2016—including iron ore which posted its
largest single day increase on record—the forecast for most commodities
is for lower prices in 2016.
In response to deteriorating market conditions, which were reflected in
declining commodity prices, producers undertook significant cost cutting
measures in 2015. Many large coal and iron ore producers announced
material cuts to employee numbers and service contracts. Surprisingly
there were few closures in Australia, and the supply of LNG and iron ore
increased in 2015.
volumes over the medium term.
In general, Australia’s suppliers are well placed to satisfy demand for
resources and energy over the medium term. A legacy of the investment
phase of the commodity boom is the increased productive capacity of iron
ore and LNG, which is now translating into additional supply for these
commodities. However, the relatively limited capital investment in other
commodities, especially metals, is expected to materialise into a decline in
Australia’s production of these commodities over the medium term.
There is no doubt that the current challenging market conditions for
resource and energy exports are likely to continue for the next few years.
However, Australian producers have in the past demonstrated their ability
to respond and adapt to changing market dynamics. They will need to
continue doing so to ensure they remain competitive in what is expected to
be an often volatile market over the outlook period. Australia’s earnings
from resources and energy exports are projected to reach $208 billion (in
2015–16 dollar terms) by 2020–21.
This Resource and Energy Quarterly highlights several factors that are
likely to be major determinants of Australia’s resource and energy
commodity exports in the medium term.
Over the last decade, growth in global commodity markets was driven by
China’s economic transformation. China’s economy is now in the process
of transitioning from infrastructure investment and manufacturing led
growth to growth driven by domestic consumption. While the growth rate
for China’s resource and energy imports are projected to fall, China is
expected to remain a key market for Australia.
Mark Cully
Chief Economist
Department of Industry, Innovation and Science
Following COP21 at the end of last year, energy commodities are likely to
be increasingly affected over the medium term by policies aimed at
reducing carbon emissions. As policies to curb emissions are more
extensively implemented, the rate of growth in the consumption of oil, coal
and gas are projected to fall, although their overall consumption is
expected to increase.
Increasing demand, particularly in highly populated, emerging economies
in Asia, is expected to support an increase in Australia’s commodity export
Resources and Energy Quarterly March 2016
4
Executive Summary
Despite the current challenging market environment, the outlook for
Australia's resource and energy exports over the medium to long term is
optimistic. Consumption of most commodities is projected to increase over
the medium term, particularly in Asian markets, as a result of increasing
urbanisation and the expansion of manufacturing capacity in these highly
populated economies. However, the outlook for commodity consumption is
increasingly characterised by uncertainty. Economic growth in China, the
key driver of commodity consumption over the past decade, is slowing;
emerging economies are showing signs of weakness; and policy change,
particularly in energy markets, is encouraging a rapid diversification of the
energy mix.
China’s economic transition will affect its patterns of commodity trade,
shifting away from demand for resources and energy commodities towards
consumer goods and food. Despite the slowing in economic growth, China
is expected to remain a major engine of global growth. As a result, the
growth in consumption of resource and energy commodities in China is
expected to plateau or decline moderately over the medium term rather
than fall sharply. The pace of China’s transition has occurred more rapidly
than many market observers had expected. Should the Chinese economy
grow at a slower pace than assumed and the economic transition occur at
a faster rate than expected, the consumption and price projections for each
commodity in this outlook are likely to be overstated.
While there is potential for a reasonable rate of growth in emerging
economies, low commodity prices and high debt levels may limit the ability
of these economies to meet this potential and drive growth in commodity
demand. Many emerging economies are net exporters of commodities,
particularly in East Asia, Africa and Latin America and their economic
growth has been affected by the sharp declines in commodity prices.
Private debt held by commodity producers and other key sectors in
emerging economies has also risen sharply. Record levels of debt are
expected to limit the economic growth prospects in these economies by
increasing the risk of defaults, reducing productivity, and amplifying
exchange rate risks given that most of the debt is denominated in US
dollars.
Resources and Energy Quarterly March 2016
The implementation of plans associated the Conference of Parties (COP)
21 will be a key driver of energy consumption and the energy mix over the
medium term. Given that most of the plans signal an intention to increase
the use of renewables and nuclear power, growth in the use of oil, coal and
gas is projected to slow considerably. Unexpected changes in government
policy may have a significant effect on the commodity consumption
assessments made in this set of projections.
A divergence in prices between metal and bulk commodities is expected
over the medium term with prospects for metals a lot better than for prices
of bulk commodities (iron ore and coal). For some commodities, prices are
forecast to start increasing soon while others are expected to have a little
further to fall. The changes to commodity prices over the medium term are
unlikely to be smooth. Greater economic uncertainty and increased
geopolitical instability have affected sentiment and contributed to increased
commodity price variability over the past year. Commodity prices are
expected to continue to remain volatile over the short to medium term in
response to both this ongoing uncertainty and changes in market
conditions.
Investment in Australia’s LNG and iron ore supply capacity over the past
few years is expected to lead to a significant boost in production and
exports of these commodities over the short and medium term. Australia’s
LNG exports are projected to triple from 2014–15 by 2020–21 and iron ore
exports are projected to increase 23 per cent. However, because of the
relatively limited investment in other commodities, especially metals,
production of these commodities in Australia are generally projected to
moderate.
Given the supply capacity now in place globally, Australian producers will
need to focus on remaining highly competitive in order to maintain market
share, which highlights the need for Australia to remain a relatively low
cost, reliable supplier of resource and energy commodities.
Australia’s earnings from resources and energy exports are forecast to
decline by 7 per cent from 2014–15 to $160 billion in 2015–16 and grow at
an annual average rate of 3 per cent to $208 billion (in 2015–16 dollar
terms) by 2020–2021.
5
At a glance
Commodity demand will underpinned by urbanisation
and industrialisation in emerging economies
China’s economic transition is a key risk to the
growth profile
Low commodity prices and rising debt could reduce
potential consumption growth in emerging economies
Price dynamics are projected to diverge
across commodities
Commodity Export Earnings in
2020–21 (2015–16 dollar terms)
$72 billion
Iron ore
$42 billion
LNG
$19 billion
Metallurgical coal
$14 billion
Thermal coal
$14 billion
Aluminium, alumina and bauxite
$12 billion
Gold
$9 billion
Copper
$3 billion
Nickel
$3 billion
Zinc
$1 billion
Uranium
$1 billion
Crude oil
The financial pressure on producers has continued
to intensify
Australia’s investment in iron ore and LNG has it well
placed to meet demand in these markets
A thin investment pipeline and mine closures could limit
growth in other commodities
Australia’s resource and energy exports are projected
to reach $208 billion in real terms by 2020–21
Resources and Energy Quarterly March 2016
6
The global economy
Figure 1.1: Global GDP growth
Global economic growth—estimated at 3.1 per cent in 2015—is forecast
to increase to 3.4 per cent in 2016 and 3.6 per cent in 2017. Emerging
economies are forecast to grow by 4.7 per cent in 2016 and 5.0 per cent
in 2017, while advanced economies are forecast to grow by 2.1 per cent
in both 2016 and 2017.
The projected pickup in global growth in the next two years—despite the
ongoing slowdown in China—primarily reflects forecasts of a gradual
improvement of growth rates in countries currently in economic distress,
notably Brazil, Russia, and some countries in the Middle East. However,
the projected partial recovery is vulnerable to new economic or political
shocks.
Risks to the global outlook remain tilted to the downside and relate to
ongoing adjustments in the global economy. These adjustments include
a general slowdown in emerging economies, China’s rebalancing, lower
commodity prices, and the gradual reduction of very accommodative
monetary conditions in the United States. If the challenges associated
with these adjustments are not successfully managed, the prospects for
global growth could be derailed.
Over remainder of the outlook period, global economic growth is
projected to average 3.9 per cent, supported by 5.2 per cent growth in
emerging economies and 2.0 per cent growth in advanced economies.
China and India are projected to grow on average by 6.2 per cent and
7.7 per cent respectively, while the United States and the European
Union are projected to grow on average by 2.2 per cent and 1.9 per cent,
respectively.
A more detailed discussion on the economic outlook for key economies
follows.
5
Per cent
4
3
2
1
0
2001
2006
2011
2016
2021
Source: Bloomberg (2016) IMF; Department of Industry, Innovation and Science
Figure 1.2: GDP growth, key economies
15
10
Per cent
In advanced economies, a modest recovery in growth is expected to
continue over the next two years. The forecasts for emerging economies
is diverse but in many cases weaker growth rates are expected. The
slowdown and rebalancing of the Chinese economy, decline in
commodity prices, and strains in some large emerging market
economies will continue to weigh on growth prospects in 2016 and 2017.
6
5
0
-5
-10
2001
2006
2011
2016
European Union
United States
Japan
China
South Korea
India
2021
Source: Bloomberg (2016) IMF; Department of Industry, Innovation and Science
Resources and Energy Quarterly March 2016
8
Table 1.1: Key world macroeconomic assumptions
2015
2016 a
2017 a
2018 a
2019 a
2020 a
2021 a
1.9
2.1
2.1
2.2
2.0
1.9
1.9
United States
2.5
2.6
2.6
2.7
2.2
2.0
2.0
Japan
0.6
1.0
0.3
0.7
0.9
0.7
0.7
European Union 28
1.8
1.9
1.9
1.9
1.9
1.9
1.9
Germany
1.5
1.7
1.7
1.3
1.3
1.3
1.3
France
1.1
1.3
1.5
1.7
1.9
1.9
1.9
United Kingdom
2.2
2.2
2.2
2.2
2.2
2.1
2.1
South Korea
2.7
3.2
3.6
3.6
3.6
3.6
3.6
New Zealand
2.2
2.4
2.4
2.5
2.5
2.5
2.5
4.2
4.7
5.0
5.1
5.2
5.3
5.3
6.6
6.3
6.2
6.4
6.6
6.6
6.6
South East Asia d
4.7
5.1
5.4
5.5
5.5
5.5
5.5
China e
6.9
6.3
6.0
6.1
6.3
6.3
6.3
Chinese Taipei
2.2
2.6
2.9
3.1
3.1
3.2
3.2
India
7.3
7.5
7.5
7.6
7.7
7.7
7.7
-0.3
-0.3
1.6
2.8
2.9
3.0
3.0
2.9
3.8
4.4
4.1
4.2
4.1
4.1
3.1
3.4
3.6
3.9
4.0
4.0
4.0
0.1
1.1
1.8
2.2
2.3
2.4
2.4
Economic growth b
Advanced economies
Emerging economies
Emerging Asia
Latin America
Middle East
World c
Inflation rate b
United States
Notes:
a Assumption
b Change from previous period
c Weighted using 2012 purchasing power parity (PPP) valuation of country gross domestic product by IMF
d Indonesia, Malaysia, the Philippines, Thailand and Vietnam
e Excludes Hong Kong
Source: IMF (2015) World Economic Outlook; Department of Industry, Innovation and Science
Resources and Energy Quarterly March 2016
9
United States
Despite the political uncertainty surrounding the upcoming elections, the
US economy showed encouraging signs that it was on track to continue
expanding in early 2016.
The labour market has started the year stronger. The labour force
participation rate increased to 63 per cent in March 2016, which is its
average since 1950, the employment to population ratio continued to
move higher and the unemployment rate continued its decline from postGFC highs. While March non-farm payrolls were lower than February,
the increase in employment was relatively strong at 215,000 people.
Figure 1.3: US key contributions to annual GDP growth
by expenditure
8
Percentage points
The outlook for key economies
6
4
2
0
-2
-4
-6
1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Although business investment is not performing as well as other areas of
the economy, manufacturing production grew at an increasing rate in the
first two months of 2016, giving rise to optimism the business sector may
finally be stabilising.
Financial stability also appears to have improved, and confidence is
rising. Household income is lifting from a low base as a result of greater
employment, and there is hope that this will allow private consumption to
replace government spending and close the fiscal deficit.
The volatility in financial markets has recently subsided and the US
Federal Reserve has begun to raise interest rates after nine years of
historic lows to reduce the risk of inflation and asset bubbles.
Economic growth in 2016 is expected to be solid, with further gradual
reductions expected in the unemployment rate. Low unemployment,
ample bank lending and low interest rates will provide a solid and
favourable environment for the US economy in 2016, although political
uncertainties may create some risks. Economic growth is forecast to be
around 2.2 per cent a year out to 2021.
Private investment
Government consumption
Source: Bloomberg (2016) US Bureau of Economic Analysis
Figure 1.4: Quarterly change in US labour market statistics
2,000
Thousand people
Consumption growth has picked up pace, with low interest rates
encouraging higher borrowing and spending. The growth in consumer
spending increased in January 2016 as a result of real consumption
expenditure on energy services and durable goods.
Personal consumption
Net exports
GDP
1,500
1,000
500
0
-500
-1,000
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Mar-16
Employed persons
Unemployed persons
Working age population not participating in the labour force
Source: Bloomberg (2016) Bureau of Labor Statistics
Resources and Energy Quarterly March 2016
10
A major challenge for China’s government in the medium term is
balancing economic growth against rising debt. Total Chinese debt
(including government, household and corporate) increased from 150
per cent of GDP in 2005 to nearly 250 per cent of GDP in 2015. This is
high for an emerging economy, with debt rising sharply in recent years
as a result of huge government investments following the Global
Financial Crisis. The high level of debt is yet to be seriously addressed,
with the Government prioritising economic growth in 2015 and 2016.
China’s growth has been constrained by several emerging issues.
Overdevelopment in China’s real estate market has created oversupply
in the housing stock and led to fears of significant losses among
developers and homeowners. At the same time, excessive growth in
China’s stock market led to a sharp correction in mid-2015, when equity
values fell by around one-third. Stock prices have continued to decline in
early 2016. These issues threaten to impose a softer and more volatile
growth outlook on China, potentially creating downside risks for the
global economy.
China has recently announced wide-ranging plans for economic reforms,
coupled with a growth target of 6.5–7.0 per cent on average over the
next five years. China’s reform agenda includes more measures to
manage financial instability and a greater focus on high-value
technology and innovation. A shift in China’s consumption and fuel mix
is already underway, with plans to cut energy consumption per unit of
GDP by 15 per cent through greater efficiency and a more rapid shift
towards gas and renewable power. While this may reduce demand for
some commodities, successful reform will also build a more resilient
Chinese economy, with commensurate opportunities for many Australian
exporters.
20
Percentage points
China’s economy continues to grow solidly, but a range of risks in stock
and housing markets have surfaced. The Chinese economy grew by 6.9
per cent in 2015. Growth was supported by an improving trade position,
but other sources of growth—including industrial production, business
investment, and retail sales—have weakened. This potentially
complicates China’s long-planned shift towards consumption-led growth.
Figure 1.5: China’s contribution to annual GDP growth
by expenditure
15
10
5
0
-5
1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Final consumption expenditure
Gross capital formation
Net exports
GDP
Source: CEIC (2016) National Bureau of Statistics China
Figure 1.6: Private and public debt in China
300
250
Per cent of GDP
China
200
150
100
50
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Corporate debt
Household debt
Bank debt
Government debt
Source: Bloomberg Intelligence (2016)
Resources and Energy Quarterly March 2016
11
India is becoming increasingly important to the global economy, with
signs that it is beginning to tap into its enormous potential. India’s
economy grew by 7.3 per cent in 2015.
Figure 1.7: India’s contribution to annual GDP growth
by expenditure
15
Percentage points
India
India benefited strongly from the fall in oil prices in 2015. This fall led to
a strong rise in consumer purchasing power, and reduced the need for
spending on fuel subsidies. Low interest rates and readily available
loans are also contributing to improved company profits, with key
industries such as banking and automotive manufacturing major
beneficiaries.
10
5
0
2013
While growth has been generally solid in recent years, there are hints of
weakness. Industrial production edged down by 1.5 per cent in January
2016. India is heavily dependent on agriculture—which accounts for 50
per cent of the country’s employment—and it is therefore vulnerable to
drought and other adverse weather conditions.
India’s ability to achieve this growth will be constrained by its weak fiscal
outlook. The fiscal deficit remains stuck at just under 4 per cent of GDP,
which is relatively high given overall tax collection amounts to only 11
per cent of GDP. Rising public service wages and poor performances by
state-owned banks and power utilities are imposing significant budget
costs on all levels of Indian government, and pressure is growing to sell
stakes in hundreds of state-owned enterprises in order to raise funds.
Given India’s stage in the development cycle and need to develop
infrastructure, it is likely that strong medium-term growth will generate
significant demand for key commodities including coal and iron ore.
Private consumption
Gross capital formation
GDP
2015
Government consumption
Net exports
Notes: Components may not add to total due to statistical discrepancy
Source: Bloomberg (2016) India Central Statistical Organisation
Figure 1.8 Government debt in India
US$ billion
Over the medium term India’s growth is expected to remain at around
7.7 per cent. Much of India’s future progress will depend on the
successful implementation of highly complex tax and economic reforms.
However, India has already achieved notable success in lifting millions
from poverty, and further income growth may build on this process and
create the revenue for critical investments in infrastructure and
education.
2014
50
40
30
20
10
-10
-20
-30
-40
Jul-10
Jul-11
Jul-12
Exports
Jul-13
Imports
Jul-14
Jul-15
Trade deficit
Source: CEIC (2016)
Resources and Energy Quarterly March 2016
12
Japan’s GDP grew by 0.6 per cent in 2015, supported by a 2.7 per cent
increase in exports. Exports represent 17 per cent of Japan’s economy.
Partially offsetting the growth in exports was a 1.3 per cent decline in
household private consumption expenditure.
While Japan’s exports grew in 2015 as a whole, growth slowed in the
latter half of the year, reflecting weaker demand from China and other
Asian countries. In February 2016, Japan’s exports were down for a fifth
consecutive month.
Figure 1.9: Japan’s key contributors to annual GDP growth
by expenditure
Percentage points
Japan
The Japanese economy is forecast to grow by 1.0 per cent in 2016,
reflecting fiscal support, lower oil prices, accommodative financial
conditions and rising incomes. However, this growth is not expected to
be sustained over the medium term. In the five years to 2021, Japan’s
average annual growth rate in GDP is projected to be 0.7 per cent.
6
4
2
0
-2
-4
-6
-8
1997
South Korea
The South Korean economy was hit by two shocks in 2015—an
outbreak of Middle East Respiratory Syndrome (MERS) and a slowdown
in demand from China and other Asian countries. While the MERS
outbreak has been resolved, weaker demand from Asia remains a
headwind to growth.
Nevertheless, a pick-up in private consumption is forecast to increase
economic growth to 3.2 per cent in 2016. Over the medium term, South
Korea’s economy is projected to average 3.6 per cent growth a year.
2001
2003
2005
2007
2009
2011
2013
2015
Private demand
Public demand
Net exports
Gross fixed capital formation
Public investment
GDP
Notes: Components may not add to total due to statistical discrepancy
Source: Bloomberg (2016) Economic and Social Research Institute Japan
Figure 1.10: South Korea’s contribution to annual GDP growth
by expenditure
Percentage points
South Korea’s economy expanded by 2.6 per cent in 2015, supported by
3.6 per cent growth in investment, and 2.1 per cent growth in private
consumption. Partially offsetting the growth in 2015 was an 18.4 per cent
decline in net exports as imports grew faster than exports. An
appreciation in the South Korean won contributed to the weakened trade
position. In trade weighted terms, the South Korean won increased by 13
per cent between 2010 and the December quarter 2015.
1999
15
10
5
0
-5
-10
-15
-20
1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Private consumption
Government consumption
Gross fixed capital formation
Net exports
GDP
Source: Bloomberg (2016) Bank of Korea
Resources and Energy Quarterly March 2016
13
GDP in the European Union (EU) increased by 1.8 per cent in 2015.
Growing private consumption was supported by lower oil prices and
stronger domestic financial conditions. Weaker global growth and trade
affected EU exports, particularly in Germany where the impact of
slowing Chinese economic activity in its automobile industry has been
quite pronounced. However, future export growth will be supported by
the lagged effect of a recent depreciation in the real effective exchange
rate of the Euro and a gradual recovery in world demand for its exports.
Figure 1.11: EU contribution to annual GDP growth by expenditure
5
Percentage points
Europe
-1
-3
1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Households final consumption
Government final consumption
Gross capital formation
Net exports
GDP
Notes: Components may not add to total due to statistical discrepancy
Source: Bloomberg (2016) Eurostat
Figure 1.12: Base money in the Euro Zone
2,000
1,600
Billions of Euros
However, there is debate about the effectiveness of QE and how much
room the ECB has left to move. Further, the EU faces many persistent
economic and geopolitical challenges and uncertainties that will drag on
growth, including high unemployment, an unresolved debt crisis in
Greece, a migrant crisis and the possibility of the departure of the UK
from the EU (Brexit). The referendum on a Brexit will take place in June
2016. The UK is the second largest economy in the EU, and has strong
trade, investment and financial links to the Netherlands, Ireland, Cyprus,
Germany, France and Spain. A Brexit could shift the balance in the EU
towards more protectionist policies; traditionally the UK has been in the
EU bloc that supports more liberal trade policies.
1
-5
Over the medium term, economic growth in the EU is projected to
continue to grow at a moderate pace, with output projected to increase
at an average annual rate of 1.9 per cent to 2021.
EU’s economic prospects will be supported by a package of stimulus
measures announced by the European Central Bank in early March
2016, including expanded quantitative easing (QE) and further cuts to
sub-zero interest rates.
3
1,200
800
400
0
Mar-06
Mar-08
Mar-10
Mar-12
Mar-14
Mar-16
Source: Bloomberg (2016) European Central Bank
Resources and Energy Quarterly March 2016
14
This set of projections has been prepared against a backdrop of
continued softness in commodity prices because of weaker demand
and a slow supply response. Prices have continued to decline faster and
further than expected over the past six months.
Despite a short term rally in prices in early 2016, the prospects for
prices over the medium term are generally weaker than when the
September 2015 edition of the Resources and Energy Quarterly was
compiled. This in part reflects:
• Further evidence of a more rapid slow down in consumption growth
as China’s economy transitions faster than expected
• A continued appreciation of the US dollar relative to other currencies,
which has provided temporary relief to high-cost producers
• Cost cutting activities that have continued to reduce the price
required for companies to remain viable over the short to medium
term.
Some of the largest revisions to the price outlook have been made to
iron ore, metallurgical coal, gold and oil. Since Australia’s LNG contracts
are linked to oil prices, the value of LNG exports have also declined as a
result of these revisions. Although revisions have been made to the
prices of these commodities in most years, the changes are typically
larger in the later years of the projection period where the outlook is
more uncertain.
The downward revision to the price projections will have been partially
offset by a assumed lower Australian dollar–US Dollar exchange rate in
the March 2016 edition of the report relative to the September 2015
edition.
Resources and Energy Quarterly March 2016
Figure 2.1: Changes to the resources and energy export earnings
outlook
300
250
A$ billion
Revisions to the outlook
200
150
100
50
0
2015–16
2016–17
Mar-15
2017–18
2018–19
Sep-15
2019–20
2020–21
Mar-16
Source: Department of Industry, Innovation and Science (2015) Resources and Energy
Quarterly September edition; Department of Industry and Science (2015) Resources and
Energy Quarterly March edition
The volume of exports for some commodities has also been revised
down because of:
• The announced closure of capacity, either as a result of reduced
project viability or the exhaustion of economic resources
• Delays to new project development that have pushed the timing of
first production beyond the outlook period
• Changes to production plans that reduced the projected production
profile at existing operations.
The largest changes to the export volume outlook have been made to
zinc and copper, where the closure of older operations and temporary
cessation of activities at some operations is not expected to be offset by
the development of new capacity.
As a result of these price and volume revisions, the value of Australia’s
resources and energy export earnings have been revised down
substantially since the March 2015 edition.
16
While consumption growth is projected to grow modestly across the
commodities, supply trends across the bulk materials and metals are
expected to differ over the medium term. As a result, projections for
commodity prices over the medium term diverge. The prices of some
commodities appear to have reached a low in prices, while others are
expected to decline further. Regardless of where each commodity is in
its price cycle, the overall prospects for Australia’s resources and energy
exports remains encouraging, providing producers continue to focus on
remaining competitive.
Prices
The commodity price cycle has clearly been in a downturn since 2011,
as the factors that supported the rapid increase in prices over the
previous decade subside. Growth in commodity demand is beginning to
slow at the same time as the substantial investment in new projects is
translating into additional supply. The pace of the decline in prices has
varied across commodities, with some recording a relatively smooth
transition such as thermal coal, while others have been subject to
sharper movements such as iron ore.
The price of most commodities increased substantially in early March
2016, which has largely been attributed to expectations that China would
stimulate the economy through monetary and fiscal policy measures
following statements made at the National People’s Congress. Some of
the key targets included lifting the fiscal deficit to GDP target from 2.3
per cent in 2015 to 3 per cent in 2016 and increasing the money supply
(M2) growth target from 12 per cent in 2015 to 13 per cent in 2016. The
stimulus measures are expected to include infrastructure investment,
which typically has a positive effect on commodity prices.
200
GFC
2013–14 = 100
Market conditions for Australian producers have been challenging over
the past few years because of falling commodity prices and increasing
competition from new supply capacity overseas. Producers are unlikely
to get much relief over the outlook period, with these conditions
expected to persist over the medium term.
Figure 2.2: Commodity price movements
160
120
China joins
WTO
80
40
Supply response and
price moderation
0
Base metals
Bulk commodities
Notes: bulk commodities are based on export price movements.
Source: RBA (2016) Index of Commodity Prices December 2015, Table I2
Figure 2.3: Iron ore price volatility
25
20
15
10
Per cent
Market summary
5
0
-5
-10
-15
-20
2008
2010
2011
2012
2013
2014
2015
2016
Source: Bloomberg (2016) Iron ore spot price 62 per cent CFR Qingdao
Resources and Energy Quarterly March 2016
17
The largest price increase over the March quarter 2016 was recorded in
iron ore, which surged 20 per cent in one day to reach US$61 a tonne
(FOB) on 7 March. This was the largest daily increase on record since the
spot market was established in 2009 and represented an increase of 55
per cent since the start of the year. Prices have since declined but remain
well above the levels recorded at the beginning of the year.
Short term price rally unlikely to be sustained
In the short term, the recent increases in commodity prices are unlikely to
be sustained. The underlying fundamentals of the market have not
changed dramatically as a result of China’s recent announcements—the
prospects for any major recovery in China’s consumption remain weak and
markets continue to be well supplied.
In general, a sustained period of low prices, relative to the height of the
boom, is projected over the medium term. Consumption growth is
projected to continue to moderate as China’s economy transitions from
investment-led to consumption-led growth. In addition, the supply response
to lower prices is projected to remain slow. The expected closure of
capacity as losses at high-cost operations accumulate may provide some
upward momentum to prices towards the end of the outlook period.
However, the industry’s success at rapidly reducing costs has also
reduced the price required to remain viable, which will limit the extent of
any increase in prices.
A divergence in prices is projected to occur
The prospects for an increase in price in the medium term appear to be
better for metals (zinc, nickel, copper and aluminium) than for the bulk
materials (coal and iron ore). In the markets for metals, supply is projected
to be constrained by the closure of capacity because of the exhaustion of
economic resources or declining ore grades. Further, the change in
technology required to process some of the lower grade ores, such as the
change from nickel sulphide to laterite ores, will contribute to increased
production costs over the medium term.
As a result, the price dynamics for commodities are expected to diverge
over the medium term. For some commodities, prices are forecast to start
increasing soon while others are expected to have a little further to fall.
smooth. Greater economic uncertainty and increased geopolitical instability
have affected sentiment and contributed to increased commodity price
variability over the past year. Commodity prices are expected to continue
to remain volatile over the short to medium term in response to both this
ongoing uncertainty and changes in market conditions.
The variability has been particularly evident in iron ore. Analysis of the
daily percentage change in spot iron ore prices indicated that the average
daily percentage change from 2009–2015 was 1.1 per cent. Since the start
of 2016 it has been 2.5 per cent.
Consumption
Commodity markets are currently characterised by greater uncertainty in
consumption than supply. Accordingly, it is important to understand the key
drivers of commodity demand and the major risks to the consumption
outlook.
Resources and energy commodities are widely used in modern
economies. The patterns of use are heavily influenced by economic,
political and technological developments. At the broadest level, economic
growth and population dynamics are the key drivers of resource and
energy use. Beneath these, is the pace of industrial development,
especially the expansion in metals and energy intensive manufacturing,
and the rate of construction and infrastructure activity. Apart from growth in
total population numbers, the level of urbanisation is important, as well as
income growth and the rise in demand for consumer durables that it brings,
including goods such as motor vehicles, that are resources and energy
intensive in both their production and their use.
The structure of economic growth will be important
The intensity of commodity use typically accelerates as an economy starts
to develop and invest in hard infrastructure such as roads, rail, airports,
houses and factories. As an economy starts to mature, the less resource
intensive services sector tends to play a larger role. Consequently,
resource and energy commodity use usually declines gradually as an
economy develops.
The changes to commodity prices over the medium term are unlikely to be
Resources and Energy Quarterly March 2016
18
Similarly, basic access to electricity allows for the introduction of
mechanical power or replaces the need for manual labour, which is
fundamental to the establishment of a low-cost manufacturing base that
is globally competitive. It can also create opportunities for improving
transportation and communication systems that enable the exchange of
ideas and information. As an economy develops, growth in electricity
use typically slows as activity becomes structured around less energyintensive sectors, such as services, and they can afford to invest in
energy saving technologies.
Figure 2.4: Steel intensity
Kilograms per person
1,400
The intensity of metals and electricity usage per person in emerging
economies remains well below that of advanced economies. Given the
relatively low use and large populations in many of these emerging
economies, even small increases in per person usage should translate
into large increases in total consumption.
1,200
1,000
800
600
400
200
0
0
10
20
30
40
50
GDP per person (thousands of PPP international dollars)
China
India
Japan
South Korea
60
USA
Source: World Steel Association (2016); IMF (2016) World Economic Outlook
Figure 2.5: Electricity intensity and population
1,400
OECD countries typically have small populations
that consume a lot of electricity per person.
12,000
1,200
10,000
1,000
8,000
800
Conversely developing countries have larger populations
that consume small volumes of electricity per person.
6,000
600
4,000
400
2,000
200
0
millions
Kilowatt hours
14,000
0
United
States
South Korea
Australia
Japan
Germany
China
India
Electricity consumption per person
Brazil
Thailand
Vietnam
Indonesia
Pakistan
Bangladesh
Population (rhs)
Source: IEA (2015) World Energy Balances, indicators table
Resources and Energy Quarterly March 2016
19
In emerging economies, particularly China, India, and countries in
Southeast Asia and Africa, large numbers of people are migrating to
cities in search of improved employment prospects and better access to
health and education services. The transfer of labour from rural to urban
areas requires substantial investment in new housing and infrastructure
to support the growing population base. This will continue to support
demand for construction materials including steel, aluminium, nickel and
copper.
In 2015, an estimated 54 per cent of the world population lived in urban
areas. Over the next five years an estimated 455 million people, the
equivalent of the current populations of the United States and Japan
combined, are projected to migrate to cities.
Economic growth likely to be strongest in countries with large workingage populations
Historically, economic growth has been strong in economies that have a
large percentage of the population in the working age category—roughly
between the ages of 15 and 65 years. Figures 2.7 to 2.10 show the
structure of the population in China, India, ASEAN and Africa in 2015
and 2020 in terms of the number of males and females by different age
groups. It is reasonable to expect large increases in the working age
populations in some of these economies. For example, in India the size
of the working age population is projected to increase by 7 per cent, or
65 million people, over the medium term.
Should the historic relationship between economic growth and the labour
force persist over the medium term, the population profiles of these
economies suggest that high rates of growth are likely to persist over the
outlook period.
Figure 2.6: Rural-urban population, selected countries and regions
Million people
Urbanisation will support the development of infrastructure
1,600
1,400
1,200
1,000
800
600
400
200
0
China
2015
China
2021
India
2015
India ASEAN ASEAN Africa
2021 2015 2021 2015
Urban
Africa
2021
Rural
Source: United Nations (2014) World Urbanization Prospects: The 2014 Revision,
File 19 and 20
Rising household incomes to support growth in consumables
Strong economic growth and urbanisation are expected to contribute to
rising household incomes and a growing middle class in emerging
economies. These developments may facilitate an increase in consumer
spending, especially in resource intensive consumer goods such as air
conditioners, electronics and automobiles. However, this outcome is
highly dependent on the existence of a strong social safety net. In
economies with a limited provision of social security, healthcare and
education, households are likely to save more, which will reduce the
share of income available for consumption.
While demographic changes may have significant effects in some
economies, these changes are likely to become less favourable to
economic growth prospects in Asia as the populations of economies in
the region age. For example, China’s economy is beginning to confront
an ageing population, as the effects of the one child policy come
through. As a result, the Chinese economy will need to rely more on
increases in productivity and innovation to sustain growth rather than
increases in the labour supply.
Resources and Energy Quarterly March 2016
20
Figure 2.7: China population profile
Figure 2.8: India population profile
100+
90–99
80–89
70–79
60–69
50–59
40–49
30–39
20–29
10–19
0–9
100+
90–99
80–89
70–79
60–69
50–59
40–49
30–39
20–29
10–19
0–9
2020
2015
150
100
50
0
Million people
50
100
150
2020
2015
150
100
50
0
Million people
50
100
Source: United Nations (2015) World Population Prospects: The 2015 Revision
Source: United Nations (2015) World Population Prospects: The 2015 Revision
Figure 2.9: ASEAN population profile
Figure 2.10: Africa population profile
100+
90–99
80–89
70–79
60–69
50–59
40–49
30–39
20–29
10–19
0–9
100+
90–99
80–89
70–79
60–69
50–59
40–49
30–39
20–29
10–19
0–9
2020
2015
80
60
40
20
0
20
Million people
40
60
Source: United Nations (2015) World Population Prospects: The 2015 Revision
Resources and Energy Quarterly March 2016
80
150
2020
2015
300
200
100
0
Million people
100
200
300
Source: United Nations (2015) World Population Prospects: The 2015 Revision
21
Energy markets are changing and the fuel mix is diversifying
Box 2.1: Commodity consumption projection uncertainties
The markets for energy commodities are changing and growth in
consumption is moderating, primarily reflecting the pace of China’s
structural transition, and the increased implementation of energy-related
policies, such as energy efficiency measures. Energy policies aimed at
meeting environmental and energy security objectives are facilitating the
increased diversification of the global energy mix.
Most of the commodity consumption projections contained in this outlook
rely on the assumption that economic growth in China and emerging
economies will be relatively strong over the outlook period. If growth in
these regions differ to the assumptions, the consumption profiles of most
commodities will differ.
At the Conference of Parties (COP) 21 meeting in December 2015, the
Intended Nationally Determined Contributions (INDCs) submitted by
participating countries outlined their CO2 reduction targets and plans.
The implementation of these plans will be a key driver of energy
consumption and the energy mix over the medium term. Given that most
of the plans signal an intention to increase the use of renewables and
nuclear power, growth in the use of fossil fuels is projected to slow
considerably.
China
The recent decline in energy prices has not stimulated a rapid increase
in oil, coal and gas consumption as many had expected. This reflects
slowing growth in energy usage, the slow transfer in prices to consumers
and some countries, such as India the United Arab Emirates and
Indonesia, taking the opportunity to unwind subsidies, particularly for oil.
Despite these changes, there is no need to be overly pessimistic about
the future prospects for the resources and energy sector. China will
continue to remain a major engine of growth in the world economy over
the medium term. While the level of growth in the economy is
moderating, it is growing from a larger base. As a result, the growth in
consumption of resource and energy commodities in China is expected
to plateau or decline moderately over the medium term rather than fall
sharply.
Low energy prices and the expectation that they will prevail for some
time, and limited access to finance have reduced the interest in
developing new energy projects. Instead, companies are selling assets
to generate cash rather than operate or buy assets or develop them.
This pullback in investment will have varied effects on world energy
markets. In the oil and gas sector, where projects have long lead times
and high capital costs, ongoing investment is required to maintain
production levels. A likely consequence of this not occurring is an
increased dependence on OPEC and Russia for oil supply.
Policy, substitution and technology change remain the major risks to the
consumption outlook for commodities
Unexpected changes in government policy, particularly those relating to
economic growth and the energy mix, may have a significant effect on
the commodity consumption assessments made in this set of
projections.
Resources and Energy Quarterly March 2016
Economic growth in China, the key driver of growth in commodity
demand over the past decade, is slowing as it transitions from
investment-led growth to a model of consumption-led growth. China’s
economic transition will affect its patterns of commodity trade, shifting
away from demand for resources and energy commodities towards
consumer goods and food.
The pace of China’s transition has occurred more rapidly than many
market observers had expected. The consumption assessments in this
outlook have been based on an average growth rate of 6.2 per cent over
the next five years. Should the Chinese economy grow at a slower pace
than assumed and the economic transition occur at a faster rate than
expected, the consumption and price projections for each commodity are
likely to be overstated.
Emerging economies
While there is potential for a reasonable rate of growth in emerging
economies, there are critical factors that present a substantial downside
risk to these assumptions over the outlook period.
22
Box 2.1 Commodity consumption projection uncertainties
(continued)
The first is that many emerging economies are net exporters of
commodities, particularly in East Asia, Africa and Latin America and
their economic growth has been affected by the sharp declines in
commodity prices. This has reduced government revenues and
expenditure, which has spilled-over into other sectors of the economy.
As economic growth in these economies slows, their commodity
consumption growth may also slow or decline, which in the absence of
substantial growth in consumption elsewhere is likely to put further
downward pressure on prices. With prices forecast to remain subdued
over the short term, the prospects for a rapid increase in growth in these
emerging economies is limited, which will have flow-on effects for
household income and infrastructure investment in these regions.
The second is that private debt held by commodity producers and other
key sectors in emerging economies has also risen sharply. Record
levels of debt are expected to limit the economic growth prospects in
these economies by increasing the risk of costly defaults, reducing
productivity, and amplifying exchange rate risks given that most of the
debt is denominated in US dollars.
These factors pose significant challenges to the ability of emerging
economies to reach potential economic growth and drive growth in world
commodity consumption in the medium term.
If policies are implemented that encourage growth in non-resource
intensive parts of the economy, consumption growth will be much lower
than projected. Similarly, any policy that facilitates a more aggressive
transition away from oil, coal and gas will reduce their consumption
outlook.
Substitution is also an issue for non-energy resources. Each commodity
has special characteristics that result in their use in certain applications.
However, some commodities have similar properties that allow for
substitution in some applications. With divergence in commodity prices
and changes in government policy, some consumers are exploring
substitution possibilities. For example, in China new standards for lowvoltage aluminium alloy power cables for use in buildings may reduce
the demand for copper in the construction sector.
Technological developments, particularly those that reduce the cost of
use, may also significantly change the consumption outlook. In the
energy sector, large reductions in the cost of battery storage,
renewables or carbon capture and storage could promote a more rapid
diversification of the world energy mix than currently projected.
Production
The financial pressure on companies is increasing
Over the past few years world production of resources and energy
commodities has outpaced consumption growth. The subsequent
decline in prices has reduced the viability of many operations and
increased the financial pressure on companies. As a result, many
operations have scaled back production or been placed on care and
maintenance. More recently, a few large companies have filed for
bankruptcy such as Arch Coal and Alpha Resources in the US. As
financial losses continue to accumulate, there is an increasing possibility
that further closures will occur or more companies will fail.
To minimise the growing financial pressure, companies have sought to
cut costs through reduced exploration activity, investment and
workforces. These measures have generally been very effective, with
the cost structure of the industry changing rapidly, which has delayed
any major supply response.
Resources and Energy Quarterly March 2016
23
The ability of the industry to continue to cut costs is uncertain, as is the
precise point at which the supply response in the form of closures will
occur for each commodity. In markets where prices are forecast to remain
low, the absence of any further cost cutting is expected to contribute to
further closures over time.
over the medium term. For example, Indonesia’s coal production is
projected to decline over the outlook period because of government
policies to curb illegal mining and conserve domestic resources. Policies
aimed at increasing self-sufficiency may also affect trade patterns by
encouraging increased use of domestic resources rather than imports.
Supply trends between bulk commodities and metals are diverging
Land access and the need for a social licence to operate may also have an
effect on resource development. Opposition to commodity projects can add
costs in terms of community engagement and managing conflict, and
potentially prevent projects from going forward.
World bulk commodity markets are generally projected to remain wellsupplied over the medium term as the large-scale investment in new iron
ore, LNG and coal capacity over the last decade materialises into new
production. Although some high-cost capacity is at risk of closure,
production of these commodities is expected to grow steadily over the
projection period.
Conversely, supply of metal commodities is projected to tighten over the
outlook period because of the closure of older mines as they reach the end
of their economic life, limited investment in new capacity relative to bulk
commodities, declining ore grades, and infrastructure constraints.
Resource quality is declining, particularly in metals
Over the medium term, production of some metals, is expected to be
affected by declining resource quality. For example, copper ore grades in
Chile, the world’s largest producer of mined copper, have been declining.
As a result, producers have had to increase output to just maintain copper
production. Lower ore grades could limit the ability to increase production
to meet growing consumption requirements over the medium term.
Declining ore grades typically increase the cost of production because of
the need for additional or more complex processing. Further, technical
difficulties associated with processing lower quality ore has contributed to
delays in the commissioning of new capacity. For example, large nickel
laterite projects have faced technological difficulties and high capital costs
associated with high pressure acid leaching (HPAL) operations.
To maintain production and manage costs, companies are investigating
opportunities to increase productivity. If they are not successful in
achieving this, the supply in metals markets may be tighter than projected.
Policies and community pressure may limit production growth and trade
Production of some commodities may be limited by government policies
Resources and Energy Quarterly March 2016
Australia’s resources and energy sector
The mining sector is an integral part of the economy
Australia is a major global producer and exporter of mineral commodities.
Australia holds the largest known reserves of uranium in the world and is in
the world’s top five for deposits of copper, gold, bauxite, lead, zinc, nickel
and lithium. Australia is the largest exporter of iron ore and coal in the
world and is projected become the largest exporter of LNG in the next five
years.
The mining sector is Australia’s second largest industry, accounting for 9
per cent of the economy. The size and importance of the sector have
increased considerably since the beginning of the mining boom, when it
accounted for around 7 per cent of Australia’s GDP.
Australia was a major beneficiary of the mining boom
Australia was a key beneficiary of the price and investment phases of the
resources boom that began in the mid-2000s. The decade-long increase in
commodity prices contributed to a large and sustained increase in
investment in Australia’s resources and energy sectors. In September
2011, Australia’s terms of trade reached its highest level in 140 years.
Overall, the increase in Australia’s terms of trade was higher than other
resource exporting countries.
The factors that led to the investment boom are now at various stages of
unwinding and along with declining terms of trade, investment in
Australia’s resources and energy sectors is declining. From the lofty peaks
of the investment phase in 2011, the number of projects under construction
has fallen substantially.
24
Conditions are challenging but the sector can adjust
There is no doubt that the current market conditions for resource and
energy exports are challenging and likely to be so for the next few years.
Australian producers have in the past demonstrated their resilience and
ability to respond to changes in market dynamics. The industry has been
able to rapidly change its cost structure, achieving large cost reductions
over the course of a few years. For example, the cost of producing
thermal coal at some Australian operations was halved between 2010
and 2015.
Although Australian producers have been successful in cutting costs,
they will need to continue to find ways to innovate and improve efficiency
along the supply chain to ensure that they remain competitive.
Figure 2.11: Terms of trade for major commodity exporters
Terms of trade (2000=100)
A legacy of the investment phase of the boom is the increased
productive capacity, particularly iron ore and LNG, which is now
translating into additional supply for these commodities. The relatively
limited investment in other commodities, especially metals, is expected
to become evident over the medium term, where Australia’s production
of these commodities will decline slowly as older operations are closed.
Overall, Australia remains well-placed to meet future increases in
demand for resource and energy commodities, particularly in the Asian
region.
Mineral exploration declined across all states during 2015. The largest
fall was recorded in Western Australia, down by $202 million (19 per
cent). Exploration in Queensland declined by $118 million (30 per cent).
This reflects the relatively large decline in exploration for iron ore in
Western Australia and coal in Queensland.
200
180
160
140
120
100
80
2000 2001 2003 2004 2006 2007 2009 2010 2012 2013 2015
Australia
South Africa
Canada
Brazil
Source: ABS (2016); Statistics Canada (2016); Oxford Economics (2016); South African
Reserve Bank (2016)
Figure 2.12: Australia’s thermal coal cost
US$ a tonne
Exploration expenditure has declined rapidly
The Australian exploration industry is one of the most sophisticated and
successful in the world. However, Australian exploration companies are
struggling to maintain exploration expenditure in an environment of low
commodity prices. In 2015, Australia’s minerals exploration expenditure
fell 22 per cent to $1.4 billion and metres drilled fell 3 per cent to 5,900
kilometres, the lowest level since the early 2000s. Petroleum exploration
declined by 43 per cent to $2.7 billion in 2015.
220
160
140
120
100
80
60
40
20
0
0
50
100
150
Cumulative production, million tonnes
1995
2000
2005
2010
200
2015
Source: AME Group (2016)
Resources and Energy Quarterly March 2016
25
Exploration targeting new and existing deposits both declined by 22 per
cent in 2015. However, the value of exploration fell by a larger dollar
value, declining by $280 million in 2015.
Figure 2.13: Australia’s exploration expenditure
Given the projected weakness in commodity prices, a pick-up in
investment activity is unlikely. Companies are increasingly looking to sell
or buy assets instead of developing new projects. Although investment
has slowed, some projects are still likely to be developed towards the
end of the outlook period as existing operations reach the end of their
economic life. However, it is more likely that these will be brownfield
expansions rather than new projects.
While there is unlikely to be major investment in new projects over the
medium term, companies will still need to invest capital to maintain their
operations—sustaining capital expenditure. This is expected to limit the
decline in capital expenditure over the medium term. However, given the
financial pressures in the sector, there may be some incentive to defer
these investments.
This is of particular concern in the gas sector, where the commencement
of LNG exports from the eastern market has rapidly increased the level
of supply required. Despite high domestic gas prices and the depletion
of existing fields, investment is being constrained by low international
prices and the limited availability of capital. If new supply is not
developed over the next few years, there is a risk of shortfalls in
production capacity in the medium to longer term.
2000
2003
2006
Petroleum
2009
2012
2015
Mineral
Source: ABS (2016) Actual and Expected Private Mineral Exploration, Australia,
cat. no. 8412.0
Figure 2.14: Mining capital expenditure
A$ billion
Australia’s mining capital expenditure reached a record in 2011 and is
unlikely to be on this scale again as low prices, driven by well-supplied
markets, and tighter access to finance reduced the incentive to invest.
Now that most of the large, high-value, LNG projects have been
completed, the stock of investment in Australia has been largely drawn
down. In 2015, mining industry capital expenditure was $65 billion, down
22 per cent from 2014.
A$ million
New investment to continue to decline over medium term
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
100
90
80
70
60
50
40
30
20
10
0
2000
2003
Buildings & structures
2006
2009
2012
2015
Equipment, plant & machinery
Source: ABS (2016) Private New Capital Expenditure and Expected Expenditure,
Australia, cat. no.5625.0
Resources and Energy Quarterly March 2016
26
Employment to decline as sector moves into less labour-intensive
production phase
Figure 2.15: Mining sector employment
300
The mining sector employed around 227,000 people in 2015, or around
2 per cent of the workforce. Notwithstanding the recent reductions in
employment as part of cost cutting activities, the sector’s workforce is
still more than twice the size it was before the mining boom. The sector
is a large employer of indigenous Australians, pays high wages and
employs large numbers of skilled workers such as engineers, geologists
and surveyors and young apprentices.
Thousand people
250
Employment in the mining sector is not expected to rebound
substantially over the medium term as the labour-intensive investment
phase winds-up. Although increased production is likely to create new
employment opportunities in the sector, it will not offset the decline in
construction labour.
200
150
100
50
0
2000
The focus on improving productivity is starting to get results
In order to remain viable and competitive, the industry has focused on
improving productivity. The results of these efforts are becoming
evident—the sector’s MFP increased by 5.4 per cent in 2014–15. The
turnaround was largely the result of a 22 per cent increase in labour
productivity, with little growth in capital productivity recorded to date.
Over the medium term, the productivity of the sector is expected to
continue to improve as companies focus on ways to increase operational
efficiency and find innovative ways to do business. The Australian
mining industry has a strong history of innovation, and has developed
many specialised technologies to increase productivity.
2006
2009
2012
2015
2009–10
2014–15
Source: ABS (2016) Labour Force Australia, cat. no. 6291.0.55.003
Figure 2.16: Australia’s mining productivity
250
2013–14 = 100
The productivity of the sector declined substantially during the price and
investment phases of the boom. This was likely the result of the
targeting of lower quality ore during the period of high prices and the lag
between increased capital investment—reported in the year it is spent—
and growth in output—which can occur several years after the
investment expenditure is made. Between 2000–01 and 2009–10
multifactor productivity (MFP) in the mining sector declined by 31 per
cent. The trend of lower productivity was observed across the sector
more broadly and was not unique to Australia.
2003
200
150
100
50
0
1989–90
1994–95
1999–00
Multifactor productivity
Capital productivity
2004–05
Labour productivity
Source: ABS (2015) Estimates of Industry Multifactor Productivity, cat. no. 5260.0.55.002
Resources and Energy Quarterly March 2016
27
The sector has invested heavily in research and development (R&D)
over the past decade. In 2013–14, mining business expenditure on R&D
was around $2.8 billion. This was the equivalent of $1 in every $6.70 of
business R&D expenditure in Australia.
Figure 2.17: Changes in supply competition in Australia’s major
LNG markets (Herfindahl-Hirschman Index)
12,000
The mining equipment, technology and services (METS) sector also
plays a crucial role in ensuring the Australian industry is innovative, agile
and knowledge intensive.
Market opportunities are emerging but Australia will need to be
competitive
10,000
Despite the challenging market environment, the outlook for Australia's
resource and energy exports over the medium to long term is optimistic.
This view is based on projected increasing demand, particularly in Asian
markets, and the opening-up of new market opportunities following the
signing of Free Trade Agreements with Japan, South Korea and China.
In addition, competitive conditions in major commodity export markets
have not remained static. Given the supply capacity now in place
globally, Australian producers will need to focus on remaining highly
competitive, which highlights the need for Australia to remain a relatively
low cost, reliable supplier of resource and energy commodities.
This is particularly evident in LNG where the number of buyers and
suppliers has increased substantially—from 25 in 2000 to 48 in 2014.
LNG buyers, who previously had only a limited number of options for
sourcing LNG, now have access to a growing range of suppliers across
many regions. As a result, there has been a general increase in the
diversification of LNG supply in consuming countries, as measured by
the Herfindahl-Hirschman Index, which quantifies the degree of
concentration in a market.
HHI
However, this outlook is largely dependent on increasing urbanisation
and the expansion of manufacturing in emerging, highly populated Asian
economies over these time frames. Policy decisions relating to
economic growth and the energy mix will also have a considerable
bearing on the demand for commodities from Australia.
8,000
6,000
4,000
2,000
High
concentration
Moderate
concentration
0
1990
Japan
1995
2000
South Korea
2005
China
2010
2015
India
2020
EU
Source: Department of Industry, Innovation and Science (2016) Gas Market Report 2015
Resources and Energy Quarterly March 2016
28
Australia’s export earnings to rise modestly over the medium term
Australia has long been a reliable exporter of resource and energy
commodities, based on many valued trading partnerships that have
been developed over the past 50 years. The share of Australia’s
resources and energy trade with China increased substantially over the
past decade, from 10 per cent in 2004–05 to 38 per cent in 2014–15.
The share of traditional markets for Australia’s resources and energy
exports, such as Japan and South Korea, has remained relatively stable.
Figure 2.18: Resources and energy exports, by destination
Other
European Union
India
South Korea
Japan
Resources and energy commodities account for 54 per cent of
Australia’s total exports. The volume of exports have increased
substantially over the past few years as new projects developed during
the investment phase of the boom were completed. In 2014–15,
resources and energy exports were worth $172 billion.
Over the medium term, the outlook for Australia’s exports is more
moderate. Although the prices for Australia’s largest commodity
exports—iron ore and coal—are projected to increase, they are
expected to remain well below the prices recorded over the past few
years. Further, the volume of metals exports are projected to decline
toward the end of the outlook period as older operations are closed.
The strongest growth in earnings is projected to come from LNG, where
the development of new capacity on the east coast is expected to
contribute to LNG exports more than tripling between 2014–15 and
2020–21.
Australia’s earnings from resources and energy exports are projected to
reach $208 billion (in 2015–16 dollar terms) by 2020–21. Earnings from
resources exports are projected to total $121 billion (in 2015–16 dollar
terms), while earnings from energy are projected to total $87 billion.
0
10
20
30
40
50
Per cent
2014–15
2004–05
Source: ABS (2016) International Trade, Australia, cat. no. 5465.0
Figure 2.19: Australia’s resources and energy export earnings
140
2015–16 A$ billion
In 2015–16, Australia’s earnings from resources and energy exports are
forecast to decline by 7 per cent to $160 billion as higher volumes for
most commodities and the effect of a lower Australian dollar is more
than offset by forecast lower prices.
China
120
100
80
60
40
20
0
1990–91 1995–96 2000–01 2005–06 2010–11 2015–16 2020–21
Energy
Resources
Source: ABS (2016) International Trade, Australia, cat. no. 5465.0; Department of
Industry, Innovation and Science
Resources and Energy Quarterly March 2016
29
2015–16 f
Figure 2.20: Australia’s major resources and energy commodity exports
volume
EUV
value
Iron ore and pellets
8
–15
–8
Metallurgical coal
–1
–10
–11
LNG
43
–26
6
Gold
9
10
20
Thermal coal
—
0
–4
–4
Copper
1
–11
–10
A$5.8b
A$6.4b
Alumina
2
–10
–8
A$5.4b
A$8.7b
Crude oil
—
0
–38
–38
Aluminium
–3
–2
–4
A$2.4b
A$3.6b
Nickel
–17
–19
–33
A$2.2b
A$3.1b
Zinc
–29
—
0
–30
Lead
–8
–12
–19
A$50.0b
A$54.5b
A$19.4b
A$21.8b
A$18.0b
A$16.9b
A$15.6b
A$13.0b
A$15.4b
A$16.1b
A$7.6b
A$8.5b
A$3.7b
A$3.8b
A$1.5b
A$1.9b
0
10
20
30
40
A$ billion
2015–16 f
50
60
Per cent
2014–15
Source: ABS (2016) International Trade, Australia, cat. no. 5465.0; Department of
Industry, Innovation and Science
Resources and Energy Quarterly March 2016
70
Notes: f Forecast; EUV is export unit value
30
Table 2.1: Outlook for Australia’s resources and energy commodities
unit
2014–15
2015–16 f
2016–17 f
2017–18 z
2018–19 z
2019–20 z
2020–21 z
Resources and energy
A$m
171,972
160,077
166,132
196,653
216,773
225,989
232,050
– real b
A$m
174,438
160,077
163,820
190,131
204,595
207,706
207,752
Energy
A$m
66,831
60,980
61,327
75,506
85,271
90,903
96,684
– real b
A$m
67,790
60,980
60,473
73,002
80,480
83,549
86,560
Resources
A$m
105,141
99,097
104,805
121,147
131,502
135,086
135,366
– real b
A$m
106,649
99,097
103,347
117,129
124,115
124,157
121,192
Value of exports
Notes: b In current financial year Australian dollars; f Forecast; z Projection
Source: ABS (2016) International Trade, cat.no 5465.0; Department of Industry, Innovation and Science
Table 2.2: Australia’s resources and energy commodity exports, by selected commodities
Volume
Alumina
Aluminium
Copper
Gold
Iron ore
Nickel
Zinc
LNG
Metallurgical coal
Thermal coal
Oil
Uranium
Value (real)
unit
2014–15
2020–21 z
CAGR
unit
2014–15
2020–21 z
CAGR
kt
kt
kt
t
Mt
kt
kt
Mt
Mt
Mt
kbd
t
17,363
1,432
1,009
278
748
328
1,720
25
188
205
261
5,515
17,903
1,261
978
292
916
295
992
75
198
216
268
9,450
0.5
–2.1
–0.5
0.8
3.4
–1.7
–8.8
20.1
0.9
0.9
0.5
9.4
A$m
A$m
A$m
A$m
A$m
A$m
A$m
A$m
A$m
A$m
A$m
A$m
6,444
3,878
8,590
13,235
55,301
3,634
3,117
17,137
22,126
16,288
818
540
7,164
3,909
9,059
11,769
71,585
2,963
2,627
42,183
19,299
13,794
812
934
1.8
0.1
0.9
–1.9
4.4
–3.3
–2.8
16.2
–2.3
–2.7
–0.1
9.6
Notes: z Projection. CAGR is compound annual growth rate, in percentage terms
Source: ABS (2016) International Trade, cat.no 5465.0; Department of Industry, Innovation and Science
Resources and Energy Quarterly March 2016
31
In 2016, global steel production is forecast to decline for a second
consecutive year because of lower production in China. However,
production is projected to increase slowly from 2017, as output in India
and large advanced economies expands. Despite the expected return to
growth, global steel production is projected to be lower in 2021 than it
was in 2014—with lower production in China to be only partly offset by
increased production elsewhere.
Figure 3.1 Annual growth in world steel production
100
Million tonnes
Market summary
50
0
-50
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
China
China’s steel production is projected to decline by 100 million tonnes
between 2015 and 2021
European Union
United States
China
Japan
South Korea
India
China’s steel production is estimated to have declined by 2.1 per cent to
806 million tonnes in 2015, following relatively steady production in
2014. Despite the slowdown in China’s steel production, consumption
has declined faster, and for longer. This contributed to lower steel prices
in China and a rapid increase in China’s steel exports. China’s net
exports of crude steel were an estimated 101 million tonnes in 2015—
more than double the volume exported three years earlier and
equivalent to 6 per cent of global production.
Rest of world
World
The Chinese Government has announced that it intends to reduce steel
capacity by between 100 and 150 million tonnes over the next three to
five years. Achieving this target depends on the central government
ensuring local governments implement the necessary policies, which
may result in job losses.
1200
120
1000
100
800
80
600
60
400
40
200
20
0
Million tonnes
Figure 3.2: China’s steel production, consumption and net exports
Million tonnes
Partly responsible for the sharp increase in China’s steel exports was
the slow response of China’s state-owned steel producers to lower
prices. In 2015, it is estimated that 21 per cent of China’s steel
producers (weighted by output) operated at a cash loss compared with 6
per cent and 4 per cent of producers in Japan and India, respectively.
China’s steel exports are projected to moderate over the medium term,
as the government curbs production at the most inefficient steel mills.
Source: Bloomberg (2016) World Steel Association; Department of Industry, Innovation
and Science
0
2007
2009
2011
Production (lhs)
2013
2015
2017
Consumption (lhs)
2019
2021
Exports (rhs)
Source: Bloomberg (2016) World Steel Association; Department of Industry, Innovation
and Science
Resources and Energy Quarterly March 2016
33
Figure 3.3 China residential building activity
1,600
Million square metres
On balance, China’s steel production is forecast to decrease by 3.1 per
cent in 2016, with the rate of decline moderating over the remainder of
the projection period. This assessment is sensitive to the ability of the
government to reduce production as well as domestic demand
conditions.
China’s steel consumption is estimated to have decreased by 4.8 per
cent in 2015—the fastest rate in more than 15 years. Most of the decline
in China’s steel consumption in 2015 was attributable to lower steel use
in construction, although demand for use in railways, machinery and
shipbuilding also contracted. This was partially offset by a moderate
increase in steel demand in the production of automobiles and
household appliances. Automobiles and household appliances
collectively represent around 9 per cent of China’s steel consumption.
While growth in construction fixed asset investment continued to
improve in the first two months of 2016, significant over-investment
during the past few years is expected to dampen construction activity
over the medium term. In particular, China’s property sector is wellsupplied and a drawdown in surplus housing stock will take time.
Between 2009 and 2015, China started construction of 8760 million
square metres of residential floor space, but only sold 7072 million
square metres (see Figure 3.3).
China is expected to continue to invest in infrastructure over the short to
medium term. Notably, the thirteenth Five-Year Plan (2016–2020)
included planned expenditure of US$538 billion on new rail tracks.
Increased domestic consumer spending is expected to support higher
manufacturing activity. However, growth in steel demand from these
sectors is unlikely to outweigh falling demand from the construction
sector, which accounts for the majority of China’s steel use.
Resources and Energy Quarterly March 2016
1,200
1,000
800
600
400
200
0
2009
2010
2011
Residential buildings sold
2012
2013
2014
2015
Residential buildings newly started
Source: Bloomberg (2016) National Bureau of Statistics China
Figure 3.4 Annual growth in China’s construction fixed asset
investment and steel consumption
50
40
Per cent
China’s steel consumption is projected to continue to decrease each
year over the medium term, although the rate of decline is expected to
moderate. By 2021, China’s steel consumption is projected to be 14 per
cent lower than its 2014 peak. Underpinning China’s declining demand
for steel is a slowdown in residential property construction and, more
broadly, the Government’s objective of steering the economy away from
relatively steel-intensive investment-led growth toward a less steelintensive consumption-led growth path.
1,400
30
20
10
0
-10
2000
2003
Steel consumption
2006
2009
2012
2015
Construction fixed asset investment
Source: Bloomberg (2016) World Steel Association; Bloomberg (2016)
National Bureau of Statistics China
34
India’s steel production increased by 3.5 per cent to 90 million tonnes in
2015. This growth was supported by anti-dumping duties and import
taxes on certain steel products introduced in late 2015. Prior to the
introduction of these measures, low-cost steel imports from China were
forcing India’s steelmakers to limit output. However, imports have now
begun to fall, declining by 22 per cent in 2015.
Steel production in India is projected to continue to grow at an average
rate of 7 per cent a year over the medium term, supported by investment
in new production capacity. However, this rate is significantly lower than
would be implied by Indian Government targets. The Indian Government
has announced an ambitious steel production target of 300 million
tonnes a year by 2025, which would require an average annual increase
in production of 13 per cent.
While this rate of growth is not unprecedented—China’s steel production
grew at a similar rate over the last decade—India is not projected to
reach this target. This is largely because India is a relatively high cost
steel producer (higher than Australia and China), and does not have the
advantages that China has in terms of transport infrastructure and
access to low-cost financing. As a result, producers are subject to tough
import competition. The reduced availability of domestic iron ore for steel
making because of mining restrictions in key locations may also limit
India’s production growth.
In addition, it is uncertain whether there will be sufficient domestic
demand to support the level of steel production that has been targeted.
Assuming all of India’s steel production under the Government’s target is
consumed domestically, it would result in India’s steel intensity
increasing to more than 200 kilograms per person in 2025, from an
estimated 70 kilograms in 2015.
Resources and Energy Quarterly March 2016
India’s projected steel demand implies a steel intensity of 97 kilograms
per person in 2021. This remains well below that of OECD countries,
which consumed 414 kilograms of steel per person in 2014. India’s
relatively low steel consumption per person reflects its limited
urbanisation to date, with increases in steel intensity largely determined
by the rate at which a country urbanises and industrialises.
Figure 3.5: India’s monthly steel production and imports,
year-on-year change
100
10
50
5
0
0
-50
Per cent
India’s steel production is projected to increase, but by less than
government targets
Nevertheless, India’s steel consumption is projected to grow rapidly,
underpinned by strong economic growth, urbanisation, investment in
infrastructure and the expansion of its manufacturing base.
Per cent
India
-5
-100
-10
Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16
Steel imports (lhs)
Steel production (rhs)
Source: Bloomberg (2016) World Steel Association; Bloomberg (2016)
US Department of Commerce
35
Japan
Figure 3.6 Growth in Japan’s steel exports and production
Weak domestic demand and competition from China has weakened
Japan’s steel production
4
Japan’s steel production declined by 5 per cent to 105 million tonnes in
2015, because of lower demand both domestically and for Japan’s steel
exports. Domestically, there has been weak activity in both the
construction and manufacturing sectors. Housing starts, represented by
total floor space, fell for the second year in a row in 2015, while
manufacturing production declined slightly.
Million tonnes
2
-2
-4
Japan is the world’s second largest net exporter of steel. In 2015, it
exported 41 million tonnes of iron and steel products. However, lower
demand from China has reduced the demand for Japanese steel.
Japan’s steel production is forecast to increase by 2.1 per cent in 2016,
reflecting an assumed increase in economic growth. Japan’s steel
production is then projected to grow at an average rate of 0.7 per cent
over the remainder of the projection period. This growth rate aligns with
weak domestic demand conditions over the medium term and assumes
no further intensification of competition from Chinese steel exports.
0
-6
2011
2012
Steel exports
2013
2014
2015
Steel production
Source: Bloomberg (2016) Ministry of Finance Japan; Bloomberg (2016)
World Steel Association
Figure 3.7 Activity in major steel using sectors in South Korea
South Korea’s crude steel production declined by 2.6 per cent in 2015
despite improved domestic demand conditions. Building permits by floor
area increased by 34 per cent in the year to November 2015 and vehicle
production increased by 0.7 per cent to 4.6 million units in 2015.
While domestic demand for steel improved in 2015, steel exports fell by
9 per cent, with South Korean exporters facing tough competition from
Chinese steel manufacturers.
200
Million square metres
South Korea’s steel production weakened in 2015, reflecting weak
demand for steel exports
5
4
150
3
100
2
50
Millions
South Korea
1
0
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Building permits (lhs)
Vehicle production (rhs)
Source: Bloomberg (2016) Bank of Korea; Bloomberg (2016) Korea Automotive
Manufacturers Association
Resources and Energy Quarterly March 2016
36
US steel production fell in 2015, reflecting a draw down on inventories
and low export demand
US steel production declined by 10 per cent in 2015, despite strong
domestic demand conditions stemming from improved construction and
manufacturing activity. The Dodge Index of New Construction Starts
averaged 12 per cent higher in 2015 than in 2014, while industrial
production in manufacturing increased by 2.0 per cent. A draw down in
inventories and lower export demand put downward pressure on US
steel production in 2015. Steel product inventories fell by 16 per cent to
8.3 million tonnes, while exports fell by 17 per cent to 9 million tonnes.
US steel product imports declined by 13 per cent in 2015, suggesting
that domestic consumers did not substitute domestic production with
imported production. Despite this, in February 2016 the US Government
imposed preliminary duties on imports of cold-rolled steel on seven
countries, including a 266 per cent duty on Chinese steelmakers. In
addition, the US Government has announced its intention to introduce
anti-dumping duties on certain hot-rolled steel products from seven
countries, including Australia. Australia exported approximately 313,000
tonnes of crude steel equivalent to the United States in 2015, equivalent
to 6 per cent of Australian steel production.
Steel production in the US is projected to grow at an average annual rate
of 2.5 per cent over the medium term reflecting an expected continuation
of the US economic recovery.
14
12
Million tonnes
United States
Figure 3.8 United States steel inventories and exports
10
8
6
4
2
0
2011
2012
2013
Steel products inventory
2014
2015
Steel exports
Source: Bloomberg (2016) Metals Service Centre Institute; Bloomberg (2016)
US Census Bureau
Figure 3.9 European Union steel production and consumption
Million tonnes
South Korea’s steel production is forecast to fall a further 0.8 per cent in
2016, then average 2.4 per cent growth over the remainder of the
projection period. This growth rate aligns with moderate domestic
demand conditions over the medium term and assumes no further
intensification of competition from Chinese steel exports.
200
180
160
140
120
100
80
60
40
20
0
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Production
Consumption
Source: Bloomberg 2016 (World Steel Association); Department of Industry, Innovation
and Science
Resources and Energy Quarterly March 2016
37
European Union
Figure 3.10 Australia’s steel imports by source country
EU steel production fell in 2015 because of import competition
3.5
Steel production in the EU—collectively the world’s second largest steel
producer—decreased by 1.9 per cent in 2015, despite a 2.4 per cent
increase in consumption. Domestic demand growth was supported by
higher industrial production and construction activity.
Million tonnes
3.0
Domestic production was displaced by imports in 2015, which grew 27
per cent in 2015. Putting further downward pressure on EU steel
production was lower export demand, which fell by 5 per cent in the
year. The European Trade Commissioner, Cecilia Malmstrom, attributed
competing steel exports from China to the weakened EU trade position.
2.5
2.0
1.5
1.0
0.5
0.0
2000
Steel production in the EU is forecast to increase by an average1.8 per
cent a year over the medium term, reflecting assumed moderate
economic growth in the region.
2002
2004
2006
2008
2010
2012
2014
Japan
China
Chinese Taipei South Korea
NZ
Malaysia
Rest of world
Source: ABS (2016) International Trade, Australia, cat. no. 5465.0
Australia
Australia’s steel production increased by 8 per cent in 2015 to 4.9 million
tonnes. In 2015, Australia imported 2.9 million tonnes of crude steel,
down by 5 per cent on 2014, while exports increased by 24 per cent to
0.9 million tonnes. This implies apparent steel consumption in Australia
increased slightly to 7.0 million tonnes in 2015.
There are two companies that produce crude steel in Australia—
Bluescope and Arrium, with a total of five steel plants between them.
Bluescope owns Port Kembla, which accounts for over half of Australia’s
crude steel production (Figure 3.13). Arrium owns the remaining four
steel plants. Arrium’s Whyalla steel plant accounts for 21 per cent of
Australia’s crude steel production and is currently facing financial
difficulty.
Figure 3.11 Unit price of Australia’s steel imports by source
2,000
1,600
A$ a tonne
Australia’s steel production has been displaced by Japanese imports.
Low sector profitability suggests this trend will continue.
1,200
800
400
0
2000
2002
2004
Japan
2006
China
2008
2010
2012
2014
Rest of world
Source: ABS (2016) International Trade, Australia, cat. no. 5465.0
Resources and Energy Quarterly March 2016
38
The unit price of steel imports into Australia increased by 18 per cent in
2015. This was largely underpinned by a depreciation in the Australian
dollar, which averaged US 0.75 cents in 2015, 17 per cent lower than in
2014. The unit price of steel imports from China fell by 5 per cent in
2015, but this followed a 28 per cent increase in unit prices in 2014.
Offsetting this, the unit price of steel imported from Japan and the rest of
the world rose in 2015.
Steel producers in Australia and in most major steel producing countries
were operating at a loss in 2015 (Figure 3.12), due to lower prices. The
financial performance of Australian steel producers was weaker than the
world average in 2015. This was due to Australian producers receiving
lower revenue per tonne of steel than the world average.
US$ a tonne
Despite concerns about the effect of low-cost Chinese steel on
Australian producers, the volume of steel imports from China fell by 19
per cent in 2015. By volume, almost all of the increase in steel imports
into Australia came from Japan. Although China has been Australia’s
second largest source of steel imports for some time (Figure 3.10), the
volume of steel imports from China has been relatively stable over the
last decade, with most of the growth in Australia’s steel imports over this
period being sourced from Japan.
Figure 3.12 Steel plant production margins by country
600
500
400
300
200
100
0
Revenue
Cost
Notes: Costs are cash costs before credit plus depreciation costs
Source: AME Group (2016)
Figure 3.13 Australia’s crude steel production
10
Million tonnes
Given recent financial difficulties and low profitability in the sector as a
whole, Australia’s steel production is projected to fall to 4.1 million
tonnes by 2021,18 per cent lower than in 2015. However, if international
steel prices recover from their recent lows or if Australian steel plants
are able to cut costs further, steel production may not fall as projected.
8
6
4
2
0
1995
1998
2001
2004
2007
2010
Port Kembla Whyalla
Newcastle
Laverton
Projection
Waratah
2013
2016
2019
Sydney
Source: Company reports (various years)
Resources and Energy Quarterly March 2016
39
Table 3.1: World steel consumption (Mt)
2015
2016 f
2017 f
2018 z
2019 z
2020 z
2021 z
European Union 28
166
171
175
180
185
189
193
United States
128
135
143
152
157
160
161
18
12
10
10
10
10
10
Crude steel consumption
Brazil
Russia
41
37
36
36
35
35
34
China
705
684
675
666
657
648
640
Japan
73
74
72
72
73
73
73
South Korea
59
56
57
57
58
58
59
India
90
98
105
114
123
133
144
1,613
1,587
1,596
1,611
1,624
1,634
1,643
World steel consumption
Notes: f Forecast; z Projection
Source: World Steel Association (2016); Department of Industry, Innovation and Science
Table 3.2: World steel production (Mt)
2015
2016 f
2017 f
2018 z
2019 z
2020 z
2021 z
Crude steel production
European Union 28
166
169
173
176
179
181
184
United States
79
82
85
89
91
91
91
Brazil
33
27
25
25
24
24
25
Russia
71
69
69
69
68
68
68
China
806
781
757
735
725
715
706
Japan
105
107
107
107
109
110
111
South Korea
70
69
71
72
74
76
78
India
90
97
103
111
118
127
136
1,629
1,598
1,606
1,622
1,635
1,645
1,654
World steel production
Notes: f Forecast; z Projection
Source: World Steel Association (2016); Department of Industry, Innovation and Science
Resources and Energy Quarterly March 2016
40
In 2015–16, lower prices are forecast to result in falling iron ore export
revenue in Australia for the second consecutive year. However, a
combination of increased export volumes and slightly higher prices is
projected to result in iron ore export earnings increasing over the
remainder of the projection period, to reach $72 billion (in 2015–16 dollar
terms) in 2020–21. This represents a 29 per cent increase in export
earnings relative to 2014–15, although earnings are expected to remain
7 per cent below their 2013–14 peak.
Expected closures of high cost mines and commissioning of new low
cost capacity is projected to result in Australia and Brazil continuing to
increase their share of international trade in iron ore over the medium
term.
Figure 4.1: Iron ore prices
2016 $US a tonne
Market summary
200
180
160
140
120
100
80
60
40
20
0
2000
2003
2006
2009
China CFR
Prices
The price of iron ore averaged US$42 a tonne in the December quarter
2015, 77 per cent lower than in the March quarter 2011. Prices are
projected to be higher over the projection period, but remain well below
levels recorded during the height of the mining boom.
Although these closures will provide some support to prices, new low
cost capacity being developed, particularly in Australia and Brazil,
should limit any price increase. If high cost capacity takes longer to be
closed than anticipated, or if costs at new or existing mines can be
reduced further, prices may stay lower for longer.
2015
2018
2021
Australia FOB
Source: Bloomberg (2016) Metal Bulletin; Department of Industry, Innovation and Science
Figure 4.2: Percentage of loss making global iron ore production
30
While prices briefly rebounded to US$61 a tonne in early 2016,
increasing global supply coupled with lower demand from China’s steel
sector is forecast to result in prices softening by end of the year to
average US$45 a tonne in 2016.
25
20
Per cent
At current prices, a number of high-cost producers—mostly outside of
Australia—are making large losses on each tonne of iron ore produced.
A sustained period of lower prices over the projection period is expected
to result in the closure of high-cost capacity as the financial losses of
these companies begin to accumulate.
2012
15
10
5
0
-5
2007
2009
2011
2013
2015
2017
2019
2021
Source: AME Group (2016); Department of Industry, Innovation and Science
Resources and Energy Quarterly March 2016
42
World trade in iron ore
Figure 4.3: Annual growth in global iron ore imports
International trade in iron ore is projected to continue to grow, but at a
modest pace
Thousand tonnes
While global iron ore demand is projected to remain relatively flat,
continued displacement of domestically produced iron ore in China with
seaborne iron ore is expected to result in a modest increase in
international trade. Reflecting this, global iron ore trade is projected to
increase by 1.3 per cent a year between 2015 and 2021, to reach 1.6
billion tonnes.
200
Export growth is projected to come almost entirely from Australia and
Brazil. The share of world trade coming from these two countries is
projected to increase from 52 per cent and 25 per cent in 2015 to 58 per
cent and 31 per cent in 2021, respectively. Import growth is projected to
largely come from China and India and, to a lesser extent, the United
States and Japan.
China is projected to remain the largest source of growth in iron ore
imports over the medium term because of the expected continued
displacement of domestic production, which is relatively high cost and
lower quality compared with seaborne iron ore). China’s imports are
projected to reach 1.0 billion tonnes in 2021, up from an estimated 968
million tonnes in 2015, despite slowing demand from the domestic steel
industry. China is expected to import 98 per cent of its iron ore needs by
2021—up from 83 per cent in 2015.
This assessment assumes that most of China’s high-cost capacity will
be closed. China has significant iron ore reserves—estimated at 7 billion
tonnes after adjusting for iron content—but the low grades require extra
processing to make them suitable for steelmaking, which increases the
cost of production. If China’s iron ore production doesn’t continue to slow
as projected, growth in global seaborne trade could be as little as half of
what has been projected, prices would be lower and Australia’s exports
would grow less than expected.
100
50
0
-50
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
China
India
Japan
United States
Rest of world
World
Source: Bloomberg (2016) World Steel Association; Department of Industry, Innovation
and Science
Figure 4.4: Monthly trends in China’s iron ore imports
and production
100
Million tonnes
China and India are projected to be the drivers of global iron ore import
growth
150
80
60
40
20
0
Jan-13
Jun-13 Nov-13 Apr-14 Sep-14 Feb-15
Imports
Jul-15
Dec-15
Domestic production
Notes: Production has been adjusted to world average iron content.
Source: Bloomberg (2016) China Customs; Bloomberg (2016) Antaike Information
Development); Department of Industry, Innovation and Science
Resources and Energy Quarterly March 2016
43
The United States is also projected to transition to becoming a net
importer of iron ore, importing 20 per cent of its iron ore needs in 2021.
This reflects continued moderate growth in US steel production coupled
with expectations for lower iron ore mine capacity over the medium term.
Iron ore exports from Australia and Brazil are projected to increase, but
fall from the rest of the world
The rapid decline in iron ore prices since they peaked in 2011 has
contributed to a rapid increase in the number of loss-making operations.
With prices expected to stay low over the medium term, many higher
cost operations are likely to close. In addition, new low cost capacity is
expected to be commissioned over the projection period, which is
expected to further displace higher cost producers. With most of the low
cost production expected to come from Australia and Brazil, these two
countries are projected to increase their share of global iron ore exports
from a combined 77 per cent in 2015 to 90 per cent in 2021.
Australia’s iron ore exports are forecast to increase by 10 per cent to
846 million tonnes in 2016, and to continue to increase over the
projection period to reach 926 million tonnes in 2021. Growth in supply
from Australia in the short term is largely attributable to the anticipated
increase in production from Roy Hill as it approaches capacity. The first
shipment of iron ore from Roy Hill left Port Hedland in December 2015,
following several months of delays.
Resources and Energy Quarterly March 2016
250
Million tonnes
While India is projected to become a significant source of growth in
seaborne iron ore demand over the medium term, this may not
eventuate if government mining restrictions are lifted or export duties are
reduced. In addition, the Indian Government may introduce policies to
ensure that it is self-sufficient in iron ore. Finally, there is some
uncertainty around the projections for India’s steel production, which
determines the level of domestic demand.
Figure 4.5: India’s projected iron ore deficit
200
150
100
50
0
2007
2009
2011
2013
Iron ore production
2015
2017
2019
2021
Iron ore consumption
Source: Bloomberg (2016) World Steel Association; Department of Industry, Innovation
and Science
Figure 4.6 Iron ore exports — Australia, Brazil and the rest
of the world
1,000
Million tonnes
India is projected to transition from being a net exporter of iron ore in
2014 to importing 46 million tonnes of iron ore in 2021. While India has
significant reserves of iron ore—estimated at 8.1 billion tonnes at 64 per
cent iron content—the high cost of production coupled with output caps
in the key producing regions of Karnataka, Odisha and Goa mean that it
is unlikely that India will be able to produce sufficient quantities of iron
ore to meet demand from its growing steel industry.
800
600
400
200
0
2007
2009
2011
Australia
2013
Brazil
2015
2017
2019
2021
Rest of world
Source: Bloomberg (2016) World Steel Association; Department of Industry, Innovation
and Science
44
While there are still issues with commissioning at the processing plant,
Hancock Prospecting is targeting early 2017 to be at full capacity.
Australia’s iron ore exports over the medium term are projected to be
supported by an expansion of production from Australia’s largest iron ore
miner, Rio Tinto. Rio Tinto is expected to commission its Koodaideri and
Turee Syncline projects—both currently undergoing feasibility studies—in
the next few years, while production at Rio Tinto’s Hamersley mines is
expected to increase following capacity expansions.
While Australia’s largest iron ore mines are generally low cost and are
anticipated to remain viable over the projection period, an extended period
of low prices is expected to result in closures at smaller, high cost mines.
For example, Pluton Resources’ Cockatoo Island project went into care
and maintenance in August 2015 due to financial difficulties. In addition,
Gindalbie’s Karara iron ore mine—which mainly produces low value
magnetite—has been running at a loss and is at risk of closing following a
decision by Chinese partner Ansteel to withdraw funding support.
Brazil’s iron ore exports are forecast to grow by 7 per cent in 2016 and by
5 per cent a year on average over the remainder of the projection period,
despite the temporary closure of the BHP Billiton and Vale joint-owned
Samarco mine. In November 2015, iron ore production ceased at Samarco
because of a catastrophic tailings dam burst. The mine, which has a
productive capacity of 32 million tonnes a year, may take several years to
obtain the necessary environmental approvals to recommence operation.
The Samarco mine is projected to remain closed over the medium term. If
it reopens earlier, Brazil’s iron ore production would increase faster than
projected.
The projected growth in iron ore production in Brazil is underpinned by
new, low cost capacity being completed. In particular, operations at Vale’s
S11D expansion at the Carajás complex are scheduled to begin in 2016.
Production at S11D is expected to increase over several years to
eventually reach 90 million tonnes a year. S11D is the world’s largest iron
ore mining project and is expected to deliver ore at low cost. However, as
is expected in Australia and the rest of the world, new low-cost capacity in
conjunction with soft growth in global demand is expected to result in some
closures at smaller, high cost Brazilian operations.
Resources and Energy Quarterly March 2016
Australia
Exploration activity continued to decline through 2015
Iron ore exploration fell 49 per cent year-on-year in the December quarter
2015 to $75 million. The value of expenditure on iron ore exploration
activity was at its lowest level since the March quarter 2007.
Iron ore exploration activity has declined from the very high levels recorded
during the height of the mining boom. The substantial fall in iron ore prices,
from over US$180 a tonne in early 2011 to US$51 a tonne as of 31 March
2016 has reduced the feasibility of new (and existing) iron ore projects,
and therefore limited the interest in further exploration. A recovery in iron
ore exploration expenditure over the medium term is unlikely given that
iron ore prices are projected to remain low.
Export values are projected to pick up over the medium term
In 2015–16, Australia’s iron ore exports are forecast to increase by 8 per
cent to 811 million tonnes supported by a rapid increase in production.
Exports are projected to continue to increase over the medium term to
reach 916 million tonnes in 2020–21.
Despite higher volumes, the value of Australia’s iron ore exports is forecast
to decline by 8 per cent in 2015–16 to $50billion. This reflects forecast
lower prices. The assumed depreciation of the Australian dollar relative to
2014–15 is expected to provide some offset to lower prices. In Australian
dollar terms, iron ore prices are forecast to fall by 17 per cent in 2015–16
compared with the 27 per cent decline in US dollar terms.
Iron ore export values are projected to increase to $72 billion (in 2015–16
dollar terms) in 2020–21. This primarily reflects projected higher volumes,
with some additional support from slightly higher prices and a slight
depreciation in the Australian dollar. In 2015–16 Australian dollar terms,
iron ore prices are projected to increase by 5 per cent per year between
2015–16 and 2020–21.
45
Figure 4.8 Australia’s iron ore exports
175
300
150
250
125
200
100
150
75
100
50
50
25
0
Mar-2010
0
Jun-2011
Sep-2012
Iron ore exploration
Dec-2013
Mar-2015
Iron ore FOB price
Source: ABS (2016) Mineral and Petroleum Exploration, cat. no. 8412.0;
Bloomberg (2016) Metal Bulletin
Resources and Energy Quarterly March 2016
1,000
100
800
80
600
60
400
40
200
20
0
1995–96
2000–01
2005–06
Volume
2010–11
2015–16
2015–16 A$ billion
200
350
Million tonnes
400
US$ a tonne
A$ million
Figure 4.7: Australia’s iron ore exploration
0
2020–21
Value
Source: ABS (2016) International Trade, Australia, cat. no. 5465.0; Department of
Industry, Innovation and Science
46
Table 4.1: World iron ore imports (Mt)
2015
2016 f
2017 f
2018 z
2019 z
2020 z
2021 z
European Union 28
141
136
135
134
131
129
129
Japan
132
131
130
131
133
135
136
China
968
1,023
1,027
1,020
1,024
1,023
1,019
South Korea
75
67
69
71
72
74
76
India
28
25
28
32
36
40
46
Iron ore imports
Notes: f Forecast; z Projection
Source: World Steel Association (2016); Department of Industry, Innovation and Science
Table 4.2: World iron ore exports (Mt)
2015
2016 f
2017 f
2018 z
2019 z
2020 z
2021 z
Australia
767
846
881
906
908
910
926
Brazil
366
393
416
436
458
480
503
India
6
5
4
3
2
0
0
52
43
44
44
45
45
43
1,476
1,480
1,521
1,554
1,574
1,584
1,596
Iron ore exports
Ukraine
World trade
Notes: f Forecast; z Projection
Source: World Steel Association (2016); Department of Industry, Innovation and Science
Resources and Energy Quarterly March 2016
47
Table 4.3: Iron ore outlook
unit
2015
2016 f
2017 f
2018 z
2019 z
2020 z
2021 z
– nominal
US$/t
49.1
45.0
56.0
61.4
63.9
64.3
64.7
– real d
US$/t
49.7
45.0
55.0
59.0
60.0
59.0
58.0
2014–15
2015–16 f
2016–17 f
2017–18 z
2018–19 z
2019–20 z
2020–21 z
World
Prices b
Iron ore c
unit
Australia
Production
Iron and steel gs
Mt
4.74
5.07
4.87
4.67
4.49
4.31
4.15
Iron ore
Mt
781.4
855.4
897.4
928.1
941.4
943.1
947.4
Mt
0.92
0.89
0.91
0.87
0.83
0.80
0.77
– nominal value
A$m
719
692
685
657
631
606
583
– real value h
A$m
729
692
675
635
596
557
522
Mt
747.7
811.0
861.5
893.0
906.5
909.7
916.4
– nominal value
A$m
54,519
49,993
56,480
69,898
76,762
78,849
79,957
– real value h
A$m
55,301
49,993
55,694
67,580
72,450
72,470
71,585
Exports
Iron and steel gs
Iron ore
Notes: b Fob Australian basis c Spot price, 62% iron content basis; d In current calendar year US dollars; g Crude steel equivalent. Crude steel is defined as the first solid state of
production after melting. In ABS Australian Harmonized Export Commodity Classification, crude steel equivalent includes most items from 7206 to 7307, excluding ferrous waste and
scrap and ferroalloys; h In current financial year Australian dollars; f Forecast; s Estimate; z Projection
Source: ABS (2016) cat. no. 5368.0; World Steel Association (2016); AME Group (2016); Company Reports
Resources and Energy Quarterly March 2016
48
The outlook for Australia’s metallurgical exports is broadly positive.
Exports are forecast to increase over the medium term, supported
primarily by an increase in imports from emerging economies such as
India. Prices are also projected to increase moderately from 2018,
underpinned by an increase in global steel production. Over the outlook
period Australia’s exports are projected to increase by an average 1.6
per cent a year to 199 million tonnes and export values to around $19
billion in 2020–21(in 2015–16 dollar terms).
Figure 5.1: Metallurgical coal benchmark prices, FOB Australia
400
2016 US$ a tonne
Market summary
350
300
250
200
150
100
50
0
Mar-05 Jun-07 Sep-09 Dec-11 Mar-14 Jun-16 Sep-18 Dec-20
Metallurgical coal prices
Metallurgical coal prices are projected to fall through 2016 and 2017
before increasing to 2021
Although lower prices affected the profitability of all producers in 2015, it
was particularly evident in the United States where the combination of
low prices and an appreciating dollar, relative to most currencies, forced
large capacity cuts. Outside of the US, a fall in the exchange rate of
many producing countries somewhat cushioned the effect of low prices
on margins and helped maintain production levels.
Australian benchmark prices for high-quality metallurgical coal delivered
in the June quarter 2016 settled at US$84 a tonne, up from US$81 a
tonne in the March quarter 2016.
World metallurgical coal markets are forecast to remain well supplied in
2016 because of weaker demand for imported coal. For 2016 as a
whole, contract prices are forecast to average US$83, a fall of 19 per
cent on 2015.
Resources and Energy Quarterly March 2016
Semi-soft coking
Source: Department of Industry, Innovation and Science (2016)
Figure 5.2: Major metallurgical coal importers
300
250
Million tonnes
Metallurgical coal prices declined through 2015, because of reduced
import demand, principally from China, and a relatively slow supply
response. The prices of steel making raw materials, such as
metallurgical coal, have been adversely affected by the downturn in
China’s residential construction sector and an associated decline in
China’s steel production. Contract prices for low volatility hard coking
coal FOB Australia declined 19 per cent in 2015 to average US$102 a
tonne. Spot prices for premium low volatility hard coking coal declined
23 per cent in 2015 to average US$88 a tonne.
High quality hard coking
200
150
100
50
0
1995
1998
2001
Japan
2004
Korea
2007
India
2010
China
2013
2016
2019
EU27
Source: IEA (2015) Coal Information 2015; Department of Industry, Innovation
and Science
50
Figure 5.3: Major metallurgical coal exporters
350
300
Million tonnes
Over the medium term, metallurgical coal consumption is projected to
increase in emerging economies as they develop new steel production
capacity. At current prices of around US$80 a tonne, a large proportion
of world metallurgical coal production is estimated to be unprofitable. As
a result, supply from several countries is projected to fall over the
medium term as higher cost producers are forced to close. As this
occurs the fall in production is expected to provide some support to
prices. However, some of the steel production targets in emerging
economies, particularly India, are ambitious. Although metallurgical coal
imports in these economies is projected to increase over the medium
term, the rate of growth may be slower than expected and limit the
upside potential for prices.
250
200
150
100
50
0
From 2018 metallurgical coal contract prices are projected to increase
by around 1 per cent a year to average US$80 a tonne (in 2016 dollar
terms) in 2021.
World trade
1999
2002
2005
Australia
2008
2011
Canada
2014
2017
US
2020
Russia
Source: IEA (2015) Coal Information 2015; Department of Industry, Innovation
and Science
World trade to grow through the medium term
Countries like India are expected to invest heavily in infrastructure and
residential housing through the medium term, which is projected to
support steel production growth through to 2021 and beyond. Partially
offsetting this growth is a projected fall in China’s steel production and
subdued, or declining, growth in some of the OECD economies, where
infrastructure growth is stable and steel consumption per person is
falling.
China’s imports are projected to decline because of a projected decline
in steel production and increased use of domestic metallurgical coal.
However, on a monthly basis, China’s imports are likely to be variable
and highly sensitive to price movements over the outlook period.
Resources and Energy Quarterly March 2016
Figure 5.4: China’s metallurgical coal imports, monthly
9
8
Million tonnes
Trade in metallurgical coal is driven by developments in world steel
production. Over the medium term emerging economies are projected to
drive global metallurgical coal consumption and trade as they develop
new steelmaking capacity to support economic growth and urbanising
populations.
7
6
5
4
3
2
1
0
Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 Feb-13 Feb-14 Feb-15 Feb-16
Source: CEIC (2016)
51
In the short term, the commissioning of several new mines and
increased production at existing mines, particularly in Australia, are
expected to increase the supply of metallurgical coal to world markets.
Several mines started operating in 2015, including Maules Creek in
Australia and the Haju mine in Borneo.
Figure 5.5: China’s monthly imports of metallurgical coal,
by source
World trade in metallurgical coal is forecast to decline by 3 per cent in
2016 to 289 million tonnes because of forecast lower imports into China.
However, over the medium term trade in metallurgical coal is projected
to increase by 3 per cent a year on average to reach 326 million tonnes
in 2021, supported by import growth from emerging economies.
Million tonnes
9
8
7
6
5
4
3
2
1
0
Apr-12
Jan-13
Australia
Oct-13
Mongolia
Canada
Jul-14
Apr-15
Russia
Other
Source: IHS Inc (2016); Department of Industry, Innovation and Science
Table 5.1: Metallurgical coal trade
2015
2016 f
2017 f
2018 z
2019 z
2020 z
2021 z
European Union 28
43
44
45
46
46
47
48
Japan
48
49
49
49
50
51
51
China
53
48
45
44
43
43
42
South Korea
32
34
35
37
38
39
40
India
47
51
56
60
64
68
73
Australia
186
183
186
192
195
198
200
Canada
29
28
27
26
26
25
25
United States
55
51
48
46
44
41
39
Metallurgical coal imports
Metallurgical coal exports
Russia
World trade
22
22
23
23
24
24
26
299
289
305
310
316
322
326
Notes: f Forecast; z Projection
Source: IEA (2015) Coal Information 2015; Department of Industry, Innovation and Science
Resources and Energy Quarterly March 2016
52
World metallurgical coal imports
China’s imports to decline
China, once the main driver of global trade in metallurgical coal, is
estimated to have imported 53 million tonnes in 2015, a decline of 18 per
cent on 2014. In 2016, China’s imports are forecast to decrease a further 9
per cent to 48 million tonnes owing to a forecast fall in China’s steel
production and an increase in the use of domestic coal.
Over the medium term, China’s steel production is projected to decrease
as high cost, high-polluting producers are forced to close. The Chinese
government has announced plans to consolidate steel production and
close between 100–150 million tonnes of steel production capacity over the
medium term.
China’s most efficient steel production capacity is located on the eastern
seaboard, close to sea ports. These mills are most likely to survive the
consolidation of China’s steel industry. Although the use of domestic coal
in coastal plants is expected to increase, it is unlikely to completely
displace imports. As a result, China is expected to remain a major importer
of metallurgical coal over the medium term despite the projected decline in
total imports.
China’s domestic production of metallurgical coal is expected to continue
to displace imports over the medium term. In 2015, around 90 per cent of
China’s metallurgical coal consumption was supplied from domestic mines
and this rate is expected to rise over the medium term. The Chinese
Government has invested heavily in rail infrastructure and over the next
five years the cost of transporting metallurgical coal internally is expected
to fall and reduce the competitiveness of imported coal.
production. In 2015, India was the only major steel producing country to
record an increase in production. The Indian government is investing
heavily in infrastructure, to meet the demands of an urbanising population
and growing manufacturing base. To facilitate the growth in infrastructure
the government has ambitious plans to triple steel production by 2025.
India has limited metallurgical coal resources, which are typically of low
quality, and hence relies heavily on imports. India’s imports of metallurgical
coal are projected to increase on average by 8 per cent a year to 73 million
tonnes in 2021. India is also expected to overtake Japan as the world’s
largest importer of metallurgical coal in the next two years.
If India’s steel production increases at a slower rate than projected, the
growth in its metallurgical coal imports will be overstated.
Japan’s imports to increase
In 2016, Japan is forecast to import 49 million tonnes of metallurgical coal,
an increase of 2 per cent on 2015. Over the medium term Japan’s imports
of metallurgical coal are projected to increase by 1 per cent a year,
supported by growth in Japan’s steel intensive exports. Japan’s steel
production has declined over the past decade, displaced by lower cost
producers in China.
European Union and South Korea imports to increase
Imports into the European Union and South Korea are projected to
increase to 48 million tonnes and 40 million tonnes, respectively, by 2021,
supported by growing steel production in both economies.
China’s imports are expected to become more variable over the medium
term as steel mills respond to the relative difference in price between
domestic and international supply. Over the medium term China’s imports
of metallurgical coal are projected to decrease by 5 per cent a year on
average to 42 million tonnes in 2021.
India’s imports to increase
India’s imports of metallurgical coal are estimated to have increased 3 per
cent in 2015 to 47 million tonnes, underpinned by increased steel
Resources and Energy Quarterly March 2016
53
In 2015, US exports of metallurgical coal are estimated to have declined
4 per cent to 55 million tonnes. Low prices led to the idling of some
mines and large cost reductions at several other operations, including
some producers who halved their workforce. US producers have been
affected by an appreciating dollar, relative to other producing countries.
US metallurgical coal producers also have comparatively high transport
costs to Asian markets. While the expansion of the Panama Canal may
facilitate increased exports to Asian markets, US metallurgical coal
production is primarily located in the central and eastern states and must
first be internally transported long distances to the sea ports on the west
coast. Over the medium term US exports are projected to decline 5 per
cent a year to 39 million tonnes in 2021.
Canada’s exports of metallurgical coal are estimated to have declined 6
per cent in 2015 to 29 million tonnes, driven by capacity cuts and low
profitability. Over the medium term Canada’s metallurgical coal exports
are projected to decline by 3 per cent a year to 25 million tonnes in 2021.
Australia to increase export volumes
In 2015, Australia’s exports of metallurgical coal declined slightly to 186
million tonnes because of weaker import demand. As a result of lower
prices, there were temporary production cuts at several operations
including Ulan, Dawson and Goonyella.
Despite the tough operating conditions several mines are expected to
begin operating in 2016 and 2017, including the Grosvenor (5 million
tonnes a year), Isaac Plains (2.8 million tonnes) and Eagle Downs (4.5
million tonnes) mines. The output from these mines and continued
productivity enhancements at existing mines is projected to increase the
Resources and Energy Quarterly March 2016
200
150
100
50
0
2002–03 2005–06 2008–09 2011–12 2014–15 2017–18 2020–21
Source: Department of Industry, Innovation and Science
Figure 5.7: Australia’s metallurgical coal exports
250
50
200
40
150
30
100
20
50
10
0
2015-16 A$ billion
North American exports to decline through the medium term
250
Million tonnes
In 2015, low prices led to several mine closures around the world and
encouraged companies to cut costs. Despite the difficult conditions
several mines were commissioned in 2015, offsetting some of the
decline in capacity. Over the medium term, growth in world metallurgical
coal exports is expected to be underpinned by capacity expansions and
improved efficiency at existing operations, particularly in Australia.
Figure 5.6: Australia’s metallurgical coal production
Million tonnes
World metallurgical coal exports
0
1999–
00
2002–
03
2005–
06
2008–
09
Volume
2011–
12
2014–
15
2017–
18
2020–
21
Value (rhs)
Source: ABS (2016) International Trade, cat. no 5465.0; Department of Industry,
Innovation and Science
54
competitiveness of Australian metallurgical coal production over the
medium term.
Australia’s exports of metallurgical coal are projected to increase by an
average 1.6 per cent a year, to 200 million tonnes in 2021. The projected
increase in world trade will provide opportunities for Australian coal
exporters, particularly with an expected decline in exports from North
America. However, this is contingent on producers achieving continued
cost and productivity improvements.
The viability of new projects in Mozambique is declining
Over the medium term Australia’s exports of metallurgical coal are
projected to increase by an average 2 per cent a year to 199 million tonnes
in 2020–21, supported by increased production and demand. The value is
projected to decline in the short term and then increase from 2018–19 to
$19 billion in 2020–21 (in 2015–16 dollar terms), supported by a projected
increase in the price and export volumes.
This assessment is contingent on an increase in imports into emerging
Asian markets. If imports grow at a slower rate than projected, Australia’s
exports will be lower than this assessment.
Although there are prospects for new metallurgical coal projects in
Mozambique, these are not expected to materialise over the medium term
because of the relatively high cost and persistently low prices. Over the
past six months, a number of projects in Mozambique have stalled.
Nonetheless, exports from Mozambique are projected to increase over the
medium term as production from Indian-owned mines increases to meet
rising consumption. These mines are high-cost and operating below
capacity. As a result, this outlook is contingent in strong demand growth
from India and higher prices over the outlook period.
Australia’s production and exports projected to grow
Australia’s exports to increase through to 2020–21
In 2015–16, Australia’s production of metallurgical coal is forecast to fall 7
per cent to 181 million tonnes. Over the medium term Australia’s
production of metallurgical coal is projected to grow by an average 2 per
cent a year to 202 million tonnes in 2020–21, supported by additional
capacity and an increase in output from existing mines.
Despite falling prices, Australia increased its share of world trade in
metallurgical coal from 56 per cent in 2014 to 62 per cent in 2015. The
increase in Australia’s share came at the expense of US and Canadian
producers. Australia‘s exports of metallurgical coal are forecast to
decrease slightly in 2015–16 to 186 million tonnes as a result of lower
import demand. Lower prices and export volumes are forecast to
contribute to a 11 per cent fall in export earnings to $19 billion in 2015–16.
Resources and Energy Quarterly March 2016
55
Table 5.2: Metallurgical coal outlook
Units
2015
2016 f
2017 f
2018 z
2019 z
2020 z
2021 z
- nominal
US$/t
102.1
82.8
79.8
81.3
84.0
87.3
89.5
- real d
US$/t
103.3
82.8
78.3
78.1
78.9
80.1
80.2
Units
2014–15
2015–16 f
2016–17 f
2017–18 z
2018–19 z
2019–20 z
2020–21 z
Mt
192.8
180.7
187.6
191.9
196.7
200.4
201.9
Mt
187.7
186.0
184.1
188.4
193.2
196.9
198.5
- nominal value
A$m
21,813
19,441
17,202
17,125
18,190
19,176
21,556
- real value e
A$m
22,126
19,441
16,962
16,557
17,168
17,625
19,299
World
Contract prices b
Australia
Production
Export volume
Notes:
b Fob Australian basis
d In current calendar year US dollars
e Contract price assessment for high-quality hard coking coal
f Forecast
s Estimate
z Projection
Source: ABS (2016) International Trade, cat.no 5465.0; Company Reports; Department of Industry, Innovation and Science
Resources and Energy Quarterly March 2016
56
The outlook for growth in Australia’s thermal coal exports is moderate
because of lower or slowing import demand in major importing countries
such as China, Japan and India, and slowing domestic production.
However, Australia is projected to increase its share of world thermal
coal exports and become the world’s largest exporter over the medium
term as lower prices, increased domestic use and infrastructure
constraints limit growth from other key suppliers. Australia’s thermal coal
exports are projected to increase marginally to 216 million tonnes by
2020–21. Over this period, earnings from these exports are projected to
be around $14 billion (in 2015–16 dollar terms).
Figure 6.1: Thermal coal spot prices
140
120
US$ a tonne
Market summary
100
80
60
40
20
0
Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15
Coal prices
Thermal coal prices declined through 2015 as a result of both lower
demand for imported coal and a slow supply response. Newcastle free
on board spot prices for 6,000 kilocalorie coal fell 18 per cent to average
US$58 a tonne in 2015. World coal trade declined by an estimated 8 per
cent in 2015, the first decline in more than two decades. While the
supply of world coal also contracted it declined at a much slower rate.
The combination of slowing demand for imported coal and increased
competition among suppliers is forecast to lead to a further fall in prices
in 2016. Benchmark prices for the Japanese Fiscal Year 2016 (JFY,
March 2016 to April 2017) are forecast to settle at US$59 a tonne, 13
per cent lower than in 2015.
Over the medium term thermal coal prices are projected to increase
marginally as demand from India and Southeast Asia increases and
offsets falls in the OECD and China. While prices are projected to
increase, cost cutting and the assumed depreciation of the Australian
dollar are likely to reduce the price required for production to be viable
and limit the magnitude of the price rebound. The JFY contract price is
projected to decline to around US$54 a tonne (in 2016 dollar terms) in
2018 before increasing to around US$56 a tonne in 2021.
Resources and Energy Quarterly March 2016
Richard's Bay 6000kcal
QHD 5800kcal
Source: IHS Inc (2016)
Figure 6.2: JFY thermal coal prices
160
140
2016 US$ a tonne
Coal prices are forecast to decline through to 2018 before increasing
slightly to 2021.
Newcastle 6000kcal
120
100
80
60
40
20
0
2000
2003
2006
2009
2012
2015
2018
2021
Source: Department of Industry, Innovation and Science (2016)
58
Import demand for coal and consequently spot prices are likely to be
more variable over the medium term. Large coal consumers like China
and India typically only import coal to meet shortfalls in domestic supply,
or if the price of international coal is below the local price, which means
they are particularly sensitive to price movements. As a result, their
imports are likely to fluctuate through the medium term as they take
advantage of low prices or temporary shortfalls to purchase coal on the
spot market.
Figure 6.3: World electricity capacity under construction
or approved
400
350
300
Gigawatts
The risks to this price outlook are primarily on the downside. Many
countries, including large coal consumers like the US and China, are
introducing policies designed to reduce the use of coal. The introduction
of policies that are intended to achieve a more rapid transition away from
coal could put further downward pressure on prices.
250
200
150
100
50
0
Coal
Hydro
Gas
OECD
World trade
Nuclear
In 2015, world trade in thermal coal is estimated to have declined by 8
per cent to 1.1 billion tonnes, driven by a sharp fall in China’s imports.
Over the medium term global demand for imported coal is projected to
rise slightly, supported by an increase in imports from India and other
emerging economies, particularly in Southeast Asia.
Figure 6.4: Major thermal coal importers
Resources and Energy Quarterly March 2016
Million tonnes
Source: Enerdata (2016), www.enerdata.net
Offsetting the increase in coal imports from emerging economies is an
expected fall in OECD imports. Within the OECD governments are
implementing policies designed to reduce pollution generated from coalfired power and increase the share of renewable electricity.
Oil
Non-OECD
World trade growth to be moderate
The development of cheap and reliable electrical generation capacity is
essential for economic expansion and increasing living standards in
emerging economies. Coal-fired power is often chosen to meet the
power requirements of emerging economies, as coal is both plentiful and
low-cost, and provides reliable base-load generation. There are around
370 gigawatts of new coal-fired generation capacity under construction
or approved in non-OECD countries, which is almost equal to the
investment across all technologies in the OECD. As electrical capacity
expands in non-OECD countries, their coal consumption and imports are
expected to increase.
Other
renewables
1000
900
800
700
600
500
400
300
200
100
0
2000
EU 27
2003
2006
Japan
2009
South Korea
2012
India
2015
China
2018
2021
ASEAN
Source: IEA (2015) Coal Information 2015; Department of Industry, Innovation and Science
59
At the COP 21 international climate talks in December 2015, 160
countries lodged Intended Nationally Determined Contributions (INDCs),
which outlined their CO2 reduction targets and plans, some of which
targeted the use of coal. Alongside the INDCs, the OECD announced a
plan to limit investment in coal-fired power and several large banks
stated they will no longer invest in coal related projects. The
implementation of these plans is unlikely to affect the imports of coal in
emerging economies over the medium-term as developing alternative,
reliable and affordable energy sources is likely to occur over a longer
timeframe.
Figure 6.5: Major thermal coal exporters
1000
Million tonnes
The widespread implementation of these policies is likely to reduce coal
consumption in the OECD.
800
600
400
200
0
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
Although coal consumption is expected to slow over the next five years it
is projected to remain the dominant source of electricity over the medium
term in most countries.
South Africa
Colombia
Russia
Australia
Indonesia
In line with growth in consumption, world trade in coal is projected to
increase by an average 1.5 per cent a year to 1.1 billion tonnes in 2021.
Sources: IEA (2015) Coal Information 2015; Department of Industry, Innovation
and Science
World thermal coal imports
Figure 6.6: China’s annual electricity generation
China’s imports of thermal coal to decline over the medium term
Growth in China’s electricity use to slow
Over the past several decades China’s electricity use was driven by
strong growth in the industrial sector, which was supplied by large,
reliable and relatively cheap coal-fired power stations. In 2014, the
industrial sector accounted for 70 per cent of China’s electricity
consumption while the commercial and residential sectors accounted for
20 per cent and 10 per cent, respectively. In the OECD the split is
approximately equal.
Resources and Energy Quarterly March 2016
6,000
Billion kilowatt hours
In 2015, China’s thermal coal imports declined by 30 per cent to 156
million tonnes, driven down by moderating growth in electricity
consumption, a rise in renewable electricity generation and an increase
in domestic coal use. Over the medium term these three factors are
expected to weigh on China’s coal imports, which are projected to
contract by 5 per cent a year to around 120 million tonnes in 2021.
5,000
4,000
3,000
2,000
1,000
0
1996
1999
2002
Thermal
2005
Nuclear
2008
Hydro
2011
2014
Wind
Source: CEIC (2016)
60
In late 2015, China’s National Energy Administration (NEA) announced
that the share of coal-fired generation in the electricity mix is expected to
fall from 64.4 per cent in 2015 to 62.6 per cent in 2016. Offsetting the
decline in coal-fired power is a planned increase in the use of
renewables.
The State Council also announced plans to upgrade the coal-fired
generation fleet and implement mandatory efficiency targets. The
upgrades are scheduled for completion by 2020. Under the new rules
and following the upgrades, existing coal-fired power stations must
consume less than 310 grams of coal per kilowatt hour of output and
new coal-fired power plants less than 300 grams per kilowatt hour. Coalfired power plants that do not meet the requirements will be closed. The
Government estimates that the upgrades will reduce coal consumption
by around 100 million tonnes a year. In order to meet the new guidelines
and for the upgraded plants to operate efficiently, China’s consumption
of higher grade coal is expected to increase.
Coal-fired power plants account for around half of China’s coal
consumption, with the other half used by households, for cooking and
heating, and industry. China’s government has committed to replacing
coal-fired heating stoves with electricity or gas in 400 villages in 2016
and plans to eliminate coal-fired heating stoves across the country by
2020. The implementation of this policy is likely to significantly reduce
the use of coal as a source of energy in the residential sector.
800
600
Gigawatts
China plans to diversify its energy mix
Figure 6.7: China’s electricity generating capacity >50MW
400
200
0
Coal
Hydro
Operational
Nuclear
Gas
Under construction
Oil
Other
renewables
Approved
Source: Enerdata (2016), www.enerdata.net
Figure 6.8: China’s quarterly imports by source
80
Million tonnes
As China’s economy rebalances from investment to consumption led
growth and the service sector increases its share of activity, growth in
the energy intensive industrial sector is expected to slow and contribute
to slowing growth in electricity use. The commercial and residential
sectors are significantly less energy intensive and as they grow, the
overall energy intensity of China’s economy is expected to fall.
60
40
20
0
Mar-11
Dec-11
Sep-12
Indonesia
Jun-13
Australia
Mar-14
Dec-14
Sep-15
Other
Source: IHS Inc (2016)
Resources and Energy Quarterly March 2016
61
China’s coal requirements to be increasingly met by domestic supply
despite low profitability
• Suspending the approval of any new coal mines for three years
(2016–2019).
Reduced offer prices for domestic consumers, the devaluation of the yuan
and a decline in domestic coal transportation costs have reduced the
competitiveness of imported coal.
• A plan to cut 1.3 million jobs from the coal industry.
Large investment in new rail capacity has contributed to a reduction in the
cost of transporting coal from the northern and western provinces (Inner
Mongolia, Shanxi, Xinjiang) to east coast power stations. For example, in
Inner Mongolia the rail network has grown from around 6,000 kilometres in
2005 to 10,000 kilometres in 2015. The removal of bottlenecks has led to
freight charges falling by around one-third between 2012 and 2015 and an
increase in the reliability of the network.
India’s thermal coal imports are projected to increase through to 2021
Improvements in China’s electricity transmission infrastructure have also
made it possible to transmit power long distances. This means that rather
than shipping coal from northern mines to the coast, coal can be used at
plants located near the mine and the electricity transmitted to customers
around the country. One ultra-high-voltage line from Inner Mongolia to
Shandong has removed the need to transport 7.5 million tonnes of coal a
year.
Offsetting some of these gains favouring domestic production is the
decline in shipping rates. In late 2015, the Baltic Dry Index fell to an alltime low of 471, down from a high of 11,793 in 2008. At current prices it is
still possible for producers such as Australia and Indonesia to export coal
competitively to coastal power stations in China.
It is estimated that around 90 per cent of China’s coal industry operated at
a loss in 2015. In order to cut production and encourage consolidation,
China’s authorities have eliminated more than 200 million tonnes of coal
mining capacity over the past several years, including 70 million tonnes in
2015.
Through late 2015 and early 2016, the Chinese Government announced a
series of plans designed to further consolidate coal production and remove
high cost capacity. These policies include:
The planned government job cuts are in addition to redundancies
announced by individual coal companies.
In 2015, India overtook China as the world’s largest coal importer. Imports
increased by 2 per cent to an estimated 191 million tonnes. India’s coal
imports have been supported by a rapid increase in the development of
new coal-fired generation capacity and the inability of domestic production
to keep up with demand. Although Coal India Limited (CIL)—which
accounts for around 80 per cent of India’s total coal output—announced
that they had significantly increased production in 2015, they did not meet
their annual production target of 450 million tonnes.
India’s coal consumption is projected to increase substantially over the
medium term, supported by greater electrification, a growing economy, and
an expanding manufacturing base.
There are currently 240 million Indians without access to electricity and
India’s electricity use per person is still one-third of the world average and
slightly lower than the average in Africa. In an effort to address the
disparity, the government plans for all Indian villages to have 24 hour
access to electricity within the next five years. In addition, the Make-inIndia campaign, designed to develop world class manufacturing
infrastructure, will require improved electricity availability and reliability.
Although the planned expansion of the manufacturing base should
increase India’s electricity consumption, progress has been slow and the
sector has underperformed—India’s manufacturing sector contracted 2.3
per cent in November 2015. While India’s manufacturing sector is
expected to continue growing in the medium term, the rate of that growth is
likely to vary and may not support consistently strong growth in India’s
electricity consumption over the medium term.
• A plan to close more than 1,000 coal mines in 2016, which will remove
around 60 million tonnes of production capacity.
Resources and Energy Quarterly March 2016
62
India has large coal reserves but the deposits are typically low quality
and there are considerable hurdles to develop new mines. Further, there
are significant infrastructure bottlenecks which restrict India’s ability to
cheaply and reliably transport domestically produced coal. The IEA
reports that on average a tonne of coal must travel more than 500
kilometres before it is converted to electricity.
Despite plans to increase production, India’s domestic production of coal
is not expected to meet the increase in demand over the medium term.
As such, India’s coal imports are projected to increase on average by
around 6 per cent a year to 260 million tonnes in 2020. Imports may also
be supported by recently announced plans to develop coal mines in
South Africa.
India’s coal imports are very sensitive to price, in large part because of
the weak financial position of the electricity sector. As a result, monthly
imports fluctuate in response to price movements and customers appear
willing to import from a number of sources.
Resources and Energy Quarterly March 2016
350
300
Gigawatts
To meet its growing coal needs, the Indian Government announced
plans to increase domestic coal production, improve rail transport and
speed up approvals. The Power and Coal Minister has also announced
an ambitious plan to make India self-sufficient in coal by 2017, except to
meet the requirements of power plants located near coastal areas. In
order to reach these goals, the government has set CIL a production
target of around 900 million tonnes by 2020. In order to meet this target
CIL will need to increase production by around 20 per cent a year. In
2015, which was considered a successful year, production increased by
11 per cent. Singareni Collieries Company Limited (SCCL), another
major Indian coal producer, has also announced plans to open ten new
thermal coal mines in 2017, which are expected to produce a combined
13 million tonnes a year.
Figure 6.9: India’s electricity generating capacity >50MW
250
200
150
100
50
0
Coal
Hydro
Operational
Nuclear
Gas
Under construction
Oil
Other
renewables
Approved
Source: Enerdata (2016) www.enderdata.net
Figure 6.10: India’s quarterly electricity generation
300
Billion kilowatt hours
The government is promoting the development of a range of generation
technologies to meet increasing electricity needs. Coal will play a major
role with 134 gigawatts of coal-fired capacity currently under
construction or approved. However, the government is also promoting
the development of renewable technologies. In February 2016, the
Indian Government announced that the clean energy tax on coal, applied
to domestic and imported coal, would double to 400 Rupees.
250
200
150
100
50
0
Mar-11
Dec-11
Sep-12
Thermal
Jun-13
Mar-14
Hydro
Nuclear
Dec-14
Sep-15
Source: CEIC (2016)
63
Nuclear restarts to contribute to a decline in Japan’s imports
Following the Fukushima nuclear accident in March 2011, Japan’s
utilities substituted from nuclear to conventional thermal power, which
includes: coal, oil and gas. As a result, Japan’s conventional thermal
power generation increased 61 per cent from 2011 to December 2015
and currently provides 90 per cent of Japan’s power. To support the high
utilisation of conventional thermal power, Japan’s coal imports increased
5 per cent in 2015 to around 144 million tonnes.
Over the medium term, Japan’s coal consumption is projected to decline
as nuclear power plants are restarted and existing coal-fired plants are
replaced with high efficiency, low emission coal-fired technologies. The
Government has announced plans for nuclear energy to provide 22 per
cent of Japan’s electricity and renewables 44 per cent (up from 1 per
cent in 2010) by 2030. Under these plans the share of electricity
provided by coal-fired power stations is expected to fall from 30 per cent
in 2015 to around 26 per cent in 2030.
Over the medium term, coal-fired power will remain an important source
of energy for Japan. There are currently 41 coal-fired power plants under
construction and once completed these new plants will provide 20.5
gigawatts of power (out of total installed capacity of 320 gigawatts).
These new plants will largely replace existing coal-fired power stations
based on older technology and as a result will increase the overall
efficiency of Japan’s coal-fired fleet. Japan’s coal imports are projected
to decrease by around 2 per cent a year on average to 130 million
tonnes in 2021.
South Korea’s imports to increase slightly
In 2015, South Korea’s coal imports increased 5 per cent to 102 million
tonnes, supported by increased economic growth. In March 2016, the
South Korean Government changed the tax structure for imported coal.
Coal is now taxed in three tiers instead of two, with the rate for high
energy imported coal effectively being increased.
Resources and Energy Quarterly March 2016
Figure 6.11: Japan and South Korea’s quarterly imports
80
70
Million tonnes
For example, reduced freight rates encouraged increased imports from
Colombia, which had not previously been a major import source, in late
2015/early 2016. Over the medium term India is likely to use imports to
reduce their energy security risk by maintaining stockpiles and
smoothing temporary shortfalls in supply.
60
50
40
30
20
10
0
Jun-11
Mar-12
Dec-12
Japan
Sep-13
Jun-14
Mar-15
Dec-15
South Korea
Source: IHS Inc (2016)
Figure 6.12: Japan’s power generation by fuel, 2013
Nuclear
Other renewables
Hydro
Bioenergy
Oil
Coal
Gas
0
5
10
15
20
25
Per cent
30
35
40
Source: Enerdata (2016), www.enderdata.net
64
Over the medium term, South Korea’s imports of thermal coal are
projected to increase by 1 per cent a year to 114 million tonnes in 2021.
South Korea currently has 20 new coal-fired power plants under
construction or planned for completion by 2021. These new power plants
are based on more efficient technology than existing plants and will
reduce the rate of growth in imports. While there is a larger role planned
for gas and renewables over the medium term, in the absence of nuclear
power, coal is likely to remain a key energy source for South Korea.
ASEAN to become a new source of import growth
The Association of Southeast Asian Nations (ASEAN) is emerging as an
important source of coal import growth as they invest in new coal-fired
generation capacity to meet increasing electricity consumption. Energy
consumption has grown strongly over the past decade in Southeast
Asia, supported by rapid urbanisation, increasing household incomes
and a growing manufacturing base. Between 2000 and 2013, around 90
million people in Southeast Asia moved into a town or city and demand
for energy increased by more than 50 per cent.
Vietnam, traditionally an exporter of coal, started importing coal to meet
rising demand from the power sector. In 2015, Vietnam’s coal imports
increased 50 per cent to 3 million tonnes. Over the medium term
Vietnam’s imports are projected to increase by 13 per cent a year to 23
million tonnes in 2021. Vietnam predominately sources coal from
Australia and Russia.
However, there is considerable uncertainty in the projected growth rate
of Vietnam’s coal imports. In January 2016 the Government announced
that they would no longer develop 44 gigawatts of planned coal-fired
power. Shortly after this announcement, the Government signed
agreements to build two 1.2 gigawatt coal-fired power stations. These
new stations are in addition to 17 gigawatts of coal-fired power capacity
currently under construction. Given the investment in train, Vietnam’s
coal use and imports are likely to increase over the medium term, before
the effects of the new policy materialise.
Resources and Energy Quarterly March 2016
Figure 6.13: ASEAN electricity generating capacity >50MW
140
120
Gigawatts
This is expected to reduce the competitiveness of high energy coal and
may discourage its use. However, even with the additional tax, coal is
still more competitive than gas.
100
80
60
40
20
0
Coal
Hydro
Operational
Nuclear
Gas
Under construction
Oil
Other
renewable
Approved
Source: Enderdata (2016), www.enerdata.net
Malaysia is rapidly expanding its coal-fired generation capacity with
around 5.2 gigawatts of coal-fired power under construction. Coalfired power currently accounts for around 17 per cent of Malaysia’s
energy generation and over the long term the International Energy
Agency estimates that the share of coal will increase to around 60 per
cent. To accommodate this growth Malaysia’s imports are projected to
increase by 4 per cent a year to 31 million tonnes in 2021. Malaysia
was a larger export destination than India for Australia in 2015.
Other Southeast Asian countries with rapidly expanding coal-fired
capacity include the Philippines with 5.8 gigawatts and Myanmar with
4.4 gigawatts. To meet the growing demand for coal-fired power coal,
imports into Southeast Asia are projected to grow rapidly over the
medium term.
65
World thermal coal exports
Figure 6.14: Indonesian electricity generating capacity >50MW
Increased controls on coal exports to conserve domestic reserves for
local consumption and reduce unlawful mining contributed to the
reduction in Indonesia’s exports. Indonesia has plans to build 35
gigawatts of new power stations, mainly coal-fired, by 2019. This growth
in coal-fired power is expected to increase Indonesia’s coal consumption
from approximately 80 million tonnes a year in 2015, to between 90 and
110 million tonnes in 2016 and up to 190 million tonnes in 2019. To meet
the expected increase in demand the Ministry of Energy and Mineral
Resources announced that coal producers need to set aside 86 million
tonnes of production in 2016. The increase in the domestic market
obligation is expected to reduce the volume of coal Indonesian
producers can make available for export.
Indonesian exports were also affected by poor profitability and lower
coal production, which fell 18 per cent to 376 million tonnes. Coal
production was affected by government plans to consolidate the industry
and reduce illegal mining. The government closed mines that do not
comply with regulations and increased royalties and administration fees
on small to medium producers, to encourage consolidation within the
industry.
Over the medium term, the effect of falling export demand and falling
production are projected to contribute to Indonesia’s thermal coal
exports falling on average 1 per cent a year to around 280 million tonnes
in 2021.
45
40
35
30
25
20
15
10
5
0
Coal
Hydro
Operational
Nuclear
Gas
Oil
Under construction
Other
renewables
Approved
Source: Enerdata (2016), www.enerdata.net
Figure 6.15: Indonesia’s thermal coal exports
450
400
Million tonnes
In 2015, Indonesia’s thermal coal exports declined 27 per cent, or 112
million tonnes, to an estimated 296 million tonnes. Exports were
adversely affected by weaker import demand in the key markets of
China and India, lower production and a stricter export licensing regime.
Low coal prices also encouraged consumers to substitute away from
Indonesia’s low energy coal. Indonesian coal is typically high in moisture
which lowers the energy content, meaning more coal has to be used to
generate the same amount of energy produced from higher quality
coals.
Gigawatts
Indonesia’s exports to decline
350
300
250
200
150
100
50
0
2006
2008
2010
2012
2014
2016
2018
2020
Source: IEA (2015) Coal Information 2015; Department of Industry, Innovation
and Science
Resources and Energy Quarterly March 2016
66
Columbia’s exports to increase rapidly
Columbia’s thermal coal exports are estimated to have increased 2 per
cent to 81 million tonnes in 2015. Columbia’s exports benefited from low
bulk shipping rates and production costs, which meant producers could
deliver coal to Western Europe 15 per cent cheaper than Russian
producers, the next lowest cost providers, and considerably cheaper than
Polish and Czech producers.
Traditionally, the majority of Columbia’s exports have been directed to the
United States and Europe. However, low freight rates allowed Columbia to
competitively deliver coal to India in 2015. As consumption falls in
Columbia’s traditional markets, exports to India and Southeast Asia are
expected to increase.
Columbia’s exports have also benefited from its low cost structure which
means producers are still profitable at current prices. Columbia’s coal is
high quality and production is consolidated, which provides economies of
scale. Columbia’s coal is produced from nine, large open cut mines at an
average cost of US$44 a tonne, unlike the many small mines in the US
and Australia.
Over the medium term, Columbia’s exports are projected to increase 9 per
cent a year to 123 million tonnes in 2021, supported by an increase in
output. However, labour and environmental issues remain a major risk to
Columbia’s exports. Columbia’s coal production is regularly interrupted by
labour disputes—one was narrowly avoided in the first quarter of 2016—
and ongoing issues may reduce the growth in exports. For example, in
2013 workers at the Cerrejon mine went on strike for 32 days, which cut
annual production at the mine by around 2.5 million tonnes. Some
estimates suggest that strike action in 2016 could reduce Columbia’s
exports by around 2.8 million tonnes.
Eskom, South Africa’s publicly-owned utility, announced that power cuts
are likely to last several years, until additional electrical capacity can be
built.
A lack of infrastructure investment has resulted in bottlenecks and capacity
constraints in South Africa’s transport network. For example, the railway to
the Richards Bay export terminal is currently operating at 85 per cent
capacity and without an expansion the railway will reach capacity shortly.
Without further investment in infrastructure, coal exports are likely to be
unable to keep up with demand and may be displaced by other exporters,
such as Columbia.
Low prices have encouraged producers such as Glencore, to cut
production. In July 2015, Glencore announced that its Optimum mine will
cease production and Anglo American has announced plans to sell their
coal assets.
Over the medium term South Africa’s exports are projected to grow on
average by 3 per cent a year to 90 million tonnes in 2021, supported by an
increase in production at existing mines and strong demand growth from
India. A key risk to this assessment is the ability of South African
producers to overcome power cuts and infrastructure constraints.
Australia’s exploration, production and trade
Coal exploration continues to decline
Lower coal prices have reduced the incentive to invest in exploration and
many producers have reduced their exploration activity to reduce costs.
Australia’s coal exploration fell 19 per cent in the December 2015 quarter
to $63 million. For the full year 2015 exploration fell 37 per cent to $213
million.
South Africa’s exports to be constrained by infrastructure
Australia’s coal production to increase by 4 per cent in 2015–16
South Africa’s coal exports are estimated to have remained at 76 million
tonnes in 2015, as a fall in European demand was offset by an increase
from India. South Africa’s exports were constrained by power cuts,
infrastructure and low prices.
In 2015–16, Australia’s coal production is forecast to increase 4 per cent to
260 million tonnes, supported by increased production at existing
operations and the start of several new mines. Despite the low prices new
capacity was commissioned in 2015, including Maules Creek, which will
increase production through the short term.
South Africa’s coal exports have been affected by a shortfall in electricity to
critical infrastructure, such as rail and seaports. At the start of 2016,
Resources and Energy Quarterly March 2016
67
Australia’s coal production is projected to grow by around 1 per cent a
year on average, from 2017–18 to around 260 million tonnes in 2020–
21. Given the low price and ample of supply of coal on world markets,
Australian producers are not expected to develop new mines over the
medium term. There are a number of thermal coal mines for sale in
Australia, so companies that plan to increase production are more likely
to purchase existing operations that have lower set-up costs.
Development of the Watermark and Carmichael coal mines is currently
progressing, with the Carmichael coal mine recently obtaining lease
approval from the Queensland Government. However, production from
both mines has not been included in this assessment of Australia’s
projected coal production as both Watermark and Carmichael are
expected to be commissioned outside the timeframes of this outlook.
Australia’s exports to increase through to 2020–21
The projected increase in world trade will provide opportunities for
Australian coal exporters, particularly with the expected decline in
exports from Indonesia.
Resources and Energy Quarterly March 2016
400
200
320
150
240
100
160
50
80
0
Dec-10 Sep-11 Jun-12 Mar-13 Dec-13 Sep-14 Jun-15
Exploration expenditure
US$ a tonne
A$ million
250
0
Hard Coking Coal contract (rhs)
Newcastle spot (rhs)
Source: ABS (2016) Mineral and Petroleum Exploration, cat. no. 8412.0; IHS Inc (2016);
Department of Industry, Innovation and Science
Figure 6.17: Australia’s thermal coal exports
250
25
200
20
150
15
100
10
50
5
0
2004–05
2015–16 A$ billion
In 2016–17, Australia’s thermal coal production is forecast to decline
moderately to 254 million tonnes as the closure of several mines, largely
due to the exhaustion of resources, more than offsets an increase in
output from newly commissioned operations.
Figure 6.16: Australia’s coal exploration expenditure
Million tonnes
Although operating conditions are challenging there have been few mine
closures in Australia. Australian producers have sought opportunities to
cut costs through reduced exploration and investment, and renegotiating service contracts, like rail, in order to remain viable. Some
producers, like Glencore, have also announced production cuts. To date,
the Australian coal industry has been able to remain competitive relative
to other producers and avoid large scale closures, but many operations
are not making a cash return at current prices. In an environment of low
prices it is possible that further mine closures or production cuts will be
announced over the outlook period. Cockatoo Coal’s Baralaba coal mine
was put into care and maintenance at the end of 2015 after the company
went into administration. However, the company was able to obtain
$100 million in credit, to restructure and restart operations at their
Baralaba mine in 2016.
0
2007–08
2010–11
Volume
2013–14
2016–17
2019–20
Value (rhs)
Source: ABS (2016) International Trade, cat. no 5465.0; Department of Industry,
Innovation and Science
68
However, there are many suppliers to world markets and Australian
producers will need to remain a competitive supplier of coal to maintain
market share.
Despite the challenging conditions that affected the export market in 2014–
15 Australia managed to increase market share in some key export
markets, including Japan and China.
In 2015–16, Australia’s exports of thermal coal are forecast to increase to
205 million tonnes, supported by increased production. The value of these
exports is forecast to decrease slightly to $15 billion, weighed down by
lower prices.
Australia’s thermal coal exports are projected to increase marginally over
the medium term to around 216 million tonnes in 2020–21, supported in
part by increased exports to Southeast Asia. Export earnings are projected
to decline to around $14 billion (in 2015–16 dollar terms) in 2020–21,
because of a projected decline in the price expressed in real terms.
Resources and Energy Quarterly March 2016
69
Table 6.1: Thermal coal
World
Contract prices b
– nominal
– real c
Coal trade
Imports
Asia
China
Chinese Taipei
India
Japan
South Korea
Europe
European Union
27
other Europe
Exports
Australia
Colombia
Indonesia
Russia
South Africa
United States
Australia
Production
Export volume
– nominal value
– real value d
unit
2015
2016 f
2017 f
2018 z
2019 z
2020 z
2021 z
US$/t
US$/t
Mt
68
69
1,059
59
59
1,054
57
56
1,053
56
54
1,064
59
55
1,085
61
56
1,094
62
56
1,100
Mt
Mt
Mt
Mt
Mt
Mt
Mt
735
156
61
191
144
102
241
745
148
62
204
138
106
228
762
140
63
215
137
107
212
781
138
63
229
137
107
207
805
130
64
242
136
111
201
818
122
66
254
135
113
195
825
118
66
260
130
114
193
Mt
187
173
155
147
142
135
132
Mt
54
55
57
60
60
61
62
Mt
Mt
Mt
Mt
Mt
Mt
202
81
296
135
76
25
203
83
290
137
78
23
210
95
289
140
81
20
211
112
286
141
83
18
212
116
284
142
85
17
215
122
283
143
89
16
217
123
280
145
90
15
unit
2014–15
2015–16 f
2016–17 f
2017–18 z
2018–19 z
2019–20 z
2020–21 z
Mt
Mt
A$m
A$m
249.4
204.5
16,057
16,288
259.5
204.6
15,435
15,435
253.7
207.0
13,836
13,644
255.0
210.4
13,697
13,243
255.6
211.5
13,977
13,192
257.1
213.5
14,785
13,589
259.3
216.1
15,407
13,794
Notes: b Japanese Fiscal Year (JFY), starting April 1, fob Australia basis. Australia–Japan average contract price assessment for steaming coal with a calorific value of 6700 kcal/kg gross air
dried; c In current JFY US dollars; d In current financial year Australian dollars; f Forecast; z Projection
Source: ABS (2016) International Trade, cat.no 5465.0; IHS Inc (2016); IEA (2015) Coal Information 2015; Coal Services Pty Ltd; Queensland Department of Natural Resources and Mines;
Company Reports
Resources and Energy Quarterly March 2016
70
Prices
Some recovery in contract prices, but spot prices to remain low
Globally, the majority of long term LNG contracts remain linked to oil
prices. As a result of the recent reduction in oil prices, the price of
contracted LNG delivered into Asia has been declining since 2014.
Average prices for LNG delivered into Japan declined by 48 per cent
between January 2015 and January 2016 to US$7.39 a gigajoule, as the
lagged effect of oil prices flowed through. The Brent crude oil price is
forecast to continue declining in the short term (2016) to US$36.60 a
barrel, before recovering to US$59.80 a barrel in 2016 dollar terms by
2021.
Regional LNG contract prices are expected to become more variable
over the medium term as Asian imports from the United States increase.
These contracts are not linked to oil, as they are based on the price of
gas at the Henry Hub in the United States. This change in pricing
mechanism may be the start of a broader move away from oil-linked
pricing in the Asian market, potentially towards an Asian hub, which
would reflect the dynamics of supply and demand in the region.
However, this is a long term process. Even a move towards hybrid
pricing in the interim would not be expected to have a significant effect
on the prices for Australia’s LNG over the projection period, given many
projects have only recently entered into long-term contracts.
Resources and Energy Quarterly March 2016
20
125
100
15
75
10
50
5
0
Sep-13
25
US$ a barrel
Australia’s LNG exports are projected to triple by 2021. Despite strong
demand growth in the Asian LNG market, competition is expected to
intensify as new supply capacity comes online, particularly in the United
States. As a result, prices are projected to remain low in the medium
term. Over the outlook period, global LNG markets are expected to
become increasingly fragmented and less predictable as a result of an
increase in the number of smaller and more flexible buyers. These
factors suggest sellers will operate in a more challenging environment, in
which prospects for new supply other than projects already committed
will remain limited.
Figure 7.1: Global price indices
US$ a gigajoule
Market summary
0
Mar-14
Sep-14
Mar-15
Sep-15
Japan landed LNG
China landed LNG
Northeast Asia Spot LNG (ANEA)
Japan Customs-cleared Crude (rhs)
Source: Argus Media (2016); Petroleum Association of Japan (2016)
Spot LNG prices are expected to remain low over the medium term, as a
result of the growth in excess supply capacity in global LNG markets.
Given the forecast increase in oil prices from current lows, contract and
spot LNG prices are expected to diverge, with the spot price remaining
lower than oil-linked contract prices. Globally, volumes of LNG traded in
spot and short term markets increased from around 5 per cent in 2000 to
around 30 per cent in 2014, with growth in these market segments
expected to continue. This growth is supported by uncertainties in longer
term gas demand as a result of environmental policies and price
competitiveness of other fuels. Consistent with the changes in LNG
contract pricing, this outcome is unlikely to have a significant impact on
export earnings for Australia over the projection period because the
majority of Australia’s LNG is traded under existing long term contracts.
72
After several years of no growth in LNG trade because of demand
constrained by supply capacity and high prices for both contract and
spot LNG, traded volumes of LNG are now increasing as new capacity
comes on line from a number of projects. Global LNG imports in 2015
increased only 0.06 per cent from 2014 to 240 million tonnes, but are
projected to grow at a faster pace over the medium term as new projects
commence.
LNG imports in the Asian region are expected to drive LNG growth over
the outlook period, to increase from 167 million tonnes in 2015 to
246 million tonnes in 2021. While Japan will remain the largest Asian
market, the role of China is expected to increase, overtaking South
Korea to become the second largest market by the end of the decade.
LNG demand growth is also expected to be led by strong growth in India
and a range of smaller and emerging importers in the rest of Asia, as
well as a recovery of LNG demand in Europe.
Figure 7.2: Global LNG import outlook
Million tonnes
World LNG imports
400
350
300
250
200
150
100
50
0
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Japan
South Korea
China
Rest of Asia/Pacific
Europe
Rest of the world
Source: Nexant (2016), Department of Industry, Innovation and Science (2016)
Growth plateauing or falling in foundation markets
LNG demand in Japan has reached its peak, and declined by 5 per cent
in 2015. Japan’s demand is projected to continue to decline over the
medium term, at an average annual rate of 2.7 per cent to around 72
million tonnes by 2021. This reflects the restart of nuclear power plants
and strong competition from alternative energy sources in electricity
generation. Nevertheless, Japan is still expected to remain the largest
single importer of LNG globally.
Australia’s LNG exports to Japan increased marginally in 2015 and
continued to account for the majority of Australia’s LNG exports at
around 80 per cent. While the share of Australia’s exports to Japan is
projected to decline, Japan is expected to remain Australia’s largest
LNG market, constituting around 37 per cent of Australia’s total LNG
exports in 2021.
South Korea, currently the second largest importer, is expected to be
overtaken by China to become the third largest single importer by 2019.
Although its LNG volumes are projected to plateau, the share of supply
from Australia and the United States is increasing, offset by reductions in
imports from Qatar, Indonesia and Oman.
Resources and Energy Quarterly March 2016
China a key driver of LNG demand growth, despite projected increases
in domestic gas production and pipeline gas
Natural gas demand in China is expected to grow rapidly, largely
because of government policies. China’s Government has made a
commitment to increase the current gas-fired power generation share
from 6 per cent to 10 per cent by 2020 and is promoting the use of
natural gas vehicles (through subsidies and highway toll exemptions) to
reduce air pollution and greenhouse gas emissions.
Although China is also sourcing gas from domestic sources and
international pipelines, its LNG imports are projected to increase at an
average annual rate of 17 per cent to reach 56 million tonnes in 2021.
The outlook for China’s LNG demand will depend largely on changes in
gas supply from domestic gas production (conventional and
unconventional), infrastructure and international pipeline connections.
73
India’s gas demand is expected to increase strongly over the projection
period as a result of strong economic growth, and plans to increase
electrification and lower carbon emissions. These factors are expected
to increase the share of gas in the electricity generation fuel mix.
Nearly half of India’s total gas demand is expected to be supplied by
LNG, as a result of the poor outlook for indigenous production, and
limited prospects for international pipeline imports due to geopolitical
and economic factors. India currently has four regasification terminals
with total annual capacity of 25 million tonnes, which is projected to
almost double to around 47 million tonnes by 2020. As a result, LNG
imports are projected to grow at an average annual rate of around 19
per cent over the medium term, to reach 27 million tonnes in 2021.
While the outlook for India is positive, there remain many barriers to
greater gas penetration. For example, the domestic market is very
sensitive to price and competition from alternative energy sources, and
gas distribution infrastructure must be expanded significantly. The extent
to which domestic production can increase will also have an effect on
the extent to which India will need to rely on imported LNG to meet its
gas needs.
Demand growth in the rest of Asia is spread across a large number of
countries, including Singapore, Pakistan, Indonesia and Malaysia. This
growth is driven by a range of county-specific factors, but has
implications for the dynamics of the LNG market. The growing numbers
of LNG importers, each with a relatively small market share in the rest of
Asia, is expected to accelerate market fragmentation and at the same
time support increasing competition and liquidity in global LNG markets.
60
50
Million tonnes
Demand in the rest of Asia, led by India
Figure 7.3: China’s LNG import outlook
40
30
20
10
0
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Australia
ASEAN
Middle East
North America
Other
Source: Nexant (2016); Department of Industry, Innovation and Science (2016)
Figure 7.4: Japan’s LNG import outlook
Million tonnes
LNG from Australia will be a large contributor to China’s overall LNG
consumption. Australia’s LNG exports to China are projected to account
for 45 per cent of China’s LNG imports in 2021, compared with 22
per cent in 2015.
100
90
80
70
60
50
40
30
20
10
0
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Australia
ASEAN
Middle East
North America
Other
Source: Nexant (2016); Department of Industry, Innovation and Science (2016)
Resources and Energy Quarterly March 2016
74
A recovery in Europe’s LNG import demand
There are poor prospects for growth in overall gas demand in Europe, a
consequence of a sluggish economic outlook and continued penetration of
renewables in the energy mix. However, Europe is projected to have a
strong recovery in LNG demand by 2021 as a result of falling domestic gas
production (particularly in the Netherlands), and a desire to diversify from
dominant Russian pipeline supply.
World LNG exports
Excess supply capacity expected to grow
In 2015, Qatar remained the world’s largest LNG exporter, followed by
Malaysia and Australia. Increases to global LNG production were
supported by increased production in Australia, PNG and Indonesia.
Over the projection period, excess LNG supply capacity is expected to
continue to grow as a result of the large number of projects coming online.
Global LNG supply capacity is projected to increase on average by 7
Next wave of supply coming from the United States
As a result of the expansion of shale gas production, the United States is
likely to become the third largest exporter of LNG by 2021, behind
Australia and Qatar. Total LNG export capacity in the United States is
expected to reach almost 72 million tonnes, which is around 12 per cent of
its projected total gas consumption in 2021.
Sabine Pass (currently the largest LNG development in the US) exported
its first LNG shipment in February 2016. At completion, Sabine Pass is
expected to have annual capacity of 27 million tonnes. The Cove Point,
Cameron, Freeport and Corpus Christi projects are expected to provide the
remaining 45 million tonnes a year capacity over the outlook period. There
is also potential for further capacity additions in the United States beyond
the outlook period, with an additional eight LNG export facilities or
expansions proposed to the Federal Energy Regulator for approval.
Figure 7.6: Global existing and new liquefaction capacity
Figure 7.5: South Korea LNG import outlook
45
40
35
30
25
20
15
10
5
0
100
Million tonnes
Million tonnes
per cent a year over the outlook period to around 400 million tonnes by
2021. The bulk of this increase in capacity will come from projects in
Australia and the United States.
80
60
40
20
0
Australia
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Australia
ASEAN
Middle East
North America
Other
Source: Nexant (2016); Department of Industry, Innovation and Science (2016)
Resources and Energy Quarterly March 2016
North
America
Middle
East
Existing capacity in 2015
Africa
S.E. Asia
Other
Additional capacity by 2021
Notes: Nameplate reduced by 6 per cent for plant maintenance
Source: Nexant (2016); Department of Industry, Innovation and Science (2016)
75
LNG exports from the United States are likely to be competitive in the
Asian market. Shipping costs from the United States are expected to
remain low as a result of the low oil prices and excess LNG supply
capacity, while the expansion of the Panama Canal should facilitate a
slightly shorter route to Asia.
Further growth of LNG production in Asia and Africa
In addition to the supply from Australia and the United States, further
increases in LNG production are projected over the outlook period from
Malaysia and Africa.
Malaysia is expected to begin production from the world’s first ever
floating LNG (FLNG) plant in 2016. This plant has a life of twenty years
and annual capacity of 1.2 million tonnes. Train 9 of Petronas’s Malaysia
LNG project, which is Malaysia’s largest LNG development, is also
expected to come online in 2016, adding a further 3.6 million tonnes of
annual LNG capacity. However, most of the supply from Malaysia is
expected to meet domestic requirements.
LNG production from Africa is projected to increase over the outlook
period. A restart of the Angola LNG plant in 2016 will substantially
increase LNG export capacity by 5.2 million tonnes a year (around 15
per cent of current export capacity from Africa). In 2019, Africa’s first
FLNG project is expected to come online—Cameroon FLNG, with
annual capacity of 1.2 million tonnes.
The growth and diversification of LNG markets is being supported by
more flexible methods of producing and importing LNG: FLNG and
floating storage and regasification units (FSRUs). These new
technologies are described in detail in Box 7.1.
Australia’s gas production and exports
Rapid increases in production to fuel LNG exports
Over the outlook period Australia’s gas production is projected to
increase 12 per cent a year on average to 147.6 billion cubic metres in
2020–2021. Most of the increase in gas production will be to support
additional LNG export capacity, from Australia’s western, northern and
eastern markets.
Resources and Energy Quarterly March 2016
Box 7.1: Floating LNG (FLNG) and floating storage and
regasification units (FSRUs)
FLNG facilitates the development of offshore natural gas, without the
need for it to be piped onshore for processing or liquefaction. All
required equipment is built on board the vessel. Gas is extracted from
the seabed, processed, liquefied and stored on a floating facility that is
permanently moored over the field. LNG is then offloaded to a dedicated
LNG vessel and taken directly to market. Once the gas source is
depleted the vessel can be transported to another gas field, reducing
decommissioning costs.
Given the cost efficiencies FLNG methodology is designed to achieve, it
can be an attractive option to monetise stranded gas from marginal or
remote fields—gas that under normal circumstances may not be
financially viable to extract.
Currently there are a number of FLNG developments planned or under
construction, including the world’s largest in Australia—Shell’s Prelude
FLNG project based in the Browse Basin, which is due for completion in
2017. The world’s first operational FLNG development will be Petronas’s
FLNG Kanowit, which is expected to come online in Malaysia later this
year. FLNG facilities are also being built to develop reserves in
Indonesia and Africa.
FSRUs facilitate floating regasification and can transport, store, and
regasify LNG on board. Floating regasification also requires either an
offshore terminal, which typically includes a buoy and connecting
undersea pipelines to transport regasified LNG to shore, or an onshore
dockside receiving terminal. An FSRU can be purpose-built or be
converted from a conventional LNG vessel.
Floating regasification is a cost effective regasification option compared
to the construction of onshore regasification plants, especially for smaller
and seasonal markets that do not require large amounts of gas. It can
also serve as a temporary solution while permanent onshore facilities
are constructed (a particularly attractive option for developing countries).
FSRUs are expected to grow in popularity over the projection period. In
2016 and 2017 four floating terminals with total capacity of 0.03 million
tonnes a day are expected to be deployed. These terminals will be
located in India, the Dominican Republic, Colombia and the Philippines.
76
Much of this increase is expected to occur in 2015–16, with Australia’s
gas production forecast to increase 26 per cent to 83.2 billion cubic
metres in 2015–16. This is largely driven by production from Gladstone,
with the continued increase in exports from QCLNG, GLNG and APLNG.
In addition, Gorgon shipped its first cargo on 14 March and will be the
largest contributor to Australia’s new LNG capacity over the outlook
period, at 15.6 million tonnes a year.
Additional capacity is expected to come online in Gladstone later in
2016, through trains 2 of the GLNG and APLNG projects, which are
expected to add annual capacity of 8.4 million tonnes to bring capacity in
Australia’s eastern market to 25.3 million tonnes.
However, most of the growth in gas production over the outlook period is
expected in the western market, where gas production is projected to
nearly double in the next five years. In addition to the Gorgon project,
increases in production will be driven by the start-up of the Prelude, and
Wheatstone LNG projects, expected to come online by 2017, bringing
total capacity in the western market to 48.7 million tonnes.
Export capacity in the northern market will increase to 12.6 million
tonnes once the Ichthys project is completed in 2017 which will export
LNG from Darwin.
Australia’s LNG exports are projected to increase at an average annual
rate of 16 per cent to 75.2 million tonnes by 2020–21, below nameplate
capacity due to strong global competition. Export volumes represent the
majority of projected gas production in 2020–21, accounting for 51 per
cent of total production.
Over the same period, earnings from these exports are projected to
reach $42.2 billion (in 2015–16 dollar terms) in 2020–21. Export values
over the projection period are lower than previously forecast due to
lower oil price projections which flow through to LNG prices.
The oil price is expected to be the most significant risk affecting the
outlook for Australia’s LNG export earnings. Given the existence of long
term supply contracts for much of this capacity, the risk to export volume
projections is relatively low.
Table 7.1: Australia’s LNG capacity
Project
Capacity
(Mtpa)
Start-up
(year)
16.3
1989
4.3
2012
15.6
2016
Wheatstone
8.9
2017
Prelude Floating LNG
3.6
2017
Darwin LNG
3.7
2006
Ichthys
8.9
2017
8.5
2014
Train 1
4.5
2015
Train 2
4.5
2016
Train 1
3.9
2015
Train 2
3.9
2016
Western market
North West Shelf (NWS)
Pluto
Gorgon
Northern market
Eastern market
Queensland Curtis LNG (QCLNG)
Australia Pacific LNG (APLNG)
Gladstone LNG (GLNG)
Total capacity
(existing and under construction)
86.6
Source: Company reports
Resources and Energy Quarterly March 2016
77
Figure 7.8: Australia’s gas production outlook by type
160
160
140
140
Billion cubic metres
Billion cubic metres
Figure 7.7: Australia’s gas production outlook by market
120
100
80
60
40
20
120
100
80
60
40
20
0
0
2014–15 2015–16 2016–17 2017–18 2018–19 2019–20 2020–21
Eastern market
Western market
2014–15 2015–16 2016–17 2017–18 2018–19 2019–20 2020–21
Northern market
Conventional
CSG
Source: Company reports; Department of Industry, Innovation and Science (2016)
Figure 7.9: Australia’s LNG exports by volume and value
Figure 7.10: Australia’s LNG export outlook by destination
49
80
70
42
70
60
35
50
28
40
21
30
20
14
10
7
0
0
2014–15
2016–17
Volume
2018–19
2020–21
Value (rhs)
Source: ABS (2016) International Trade Statistics Service, 5464.0; Department of
Industry, Innovation and Science (2016)
Resources and Energy Quarterly March 2016
Million tonnes
80
2015-16 A$ billions
Million tonnes
Source: Company reports; Department of Industry, Innovation and Science (2016)
60
50
40
30
20
10
0
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Japan
South Korea
China
Other
Source: Nexant (2016); Department of Industry, Innovation and Science (2016)
78
Table 7.2: LNG outlook
unit
2014–15
2015–16 f
2016–17 f
2017–18 z
2018–19 z
2019–20 z
2020–21 z
Natural gas production b
Bcm
66.0
83.2
105.6
135.0
144.8
145.9
147.6
– Eastern market
Bcm
24.9
39.7
50.8
51.6
52.7
53.4
55.1
– Western market
Bcm
40.4
42.8
54.2
75.6
80.5
80.6
80.5
– Northern market c
Bcm
0.7
0.7
0.7
7.8
11.6
12.0
12.0
LNG export volume
Mt d
25.0
35.8
50.7
68.1
74.0
74.3
75.2
– nominal value
A$m
16,895
17,970
22,621
33,885
40,609
44,210
47,117
– real value e
A$m
17,137
17,970
22,307
32,762
38,328
40,633
42,183
– nominal value
US$/MMBtu
11.3
7.3
6.6
7.3
7.9
8.6
9.0
– real value e
US$/MMBtu
11.4
7.3
6.5
7.0
7.5
7.9
8.1
– nominal value
A$/GJ
12.8
9.5
8.5
9.4
10.4
11.3
11.9
– real value e
A$/GJ
13
9.5
8.3
9.1
9.8
10.4
10.6
Australia
LNG export unit value g
Notes: b Production includes both sales gas and gas used in the production process (i.e. plant use) as well as ethane; c Gas production from Bayu-Undan Joint Production Development Area is not
included in Australia’s production. Browse basin production associated with the Ichthys project is classified as Northern market; d 1 million tonnes of LNG is equivalent to approximately 1.36 billion
cubic metres of gas; e In current financial year Australian dollars.; g 1 MMBtu is equivalent to 1.055 GJ; f Forecast; z Projection
Source: ABS (2016) International Trade, cat.no 5465.0; Company reports
Resources and Energy Quarterly March 2016
79
Australia’s exports of oil and condensate are projected to increase to
2018–19 as new LNG projects with associated liquid production come
online. However, export earnings will decline in the near term as a result
of continued low oil prices, before increasing between 2016–17 and
2018–19 as global stocks begin to decline and oil prices recover slightly.
Towards the end of the outlook period, Australia’s crude oil and
condensate export volumes and values will decrease as natural decline
weighs on production.
Figure 8.1: Weekly oil prices
80
2016 US$ a barrel
Market summary
Prices
Oil prices to remain low until stocks begin to decline
Global stocks of crude oil continued to build in 2015 as additional supply
outweighed growth in demand. While the pace of stock builds is likely to
slow considerably, stocks are expected to rise further in 2016. As a
result, oil prices are forecast to remain near current levels in the short
term, with WTI averaging US$35 a barrel in 2016, and Brent, US$37 a
barrel.
Stocks are forecast to decline in 2017 as consumption begins to exceed
supply, leading to a rise in prices. Oil prices are projected to increase
more slowly over the remainder of the outlook period in line with
returning supply growth. In real terms, the price of WTI is projected to
increase to US$58 a barrel in 2021, and Brent, US$60 a barrel.
Oil prices remain subject to considerable uncertainty over the outlook
period due to a number of factors. These include: the extent of the
economic slowdown in China; the timing and pace of returning supply
from Iran; and the effects of recent cuts to exploration and development
expenditure.
Resources and Energy Quarterly March 2016
40
20
0
Feb-15
May-15
Aug-15
Brent
Nov-15
Feb-16
WTI
Source: Bloomberg (2016); US Bureau of Labor Statistics (2016) CPI Detailed Report
Dec 2015
Figure 8.2: US stocks of crude oil and refined products
1.4
Billions of barrels
After increasing in the first half of 2015, oil prices fell in the second half
of the year as the effects of strong OPEC supply, weakening demand
conditions, and the prospect of returning Iranian supply drove prices to
seven-year lows. On an annual basis, West-Texas Intermediate (WTI)
declined by 47 per cent in 2015 to average US$49 a barrel. Brent also
fell by 47 per cent, to average US$53 a barrel for the year.
60
1.3
1.2
1.1
1.0
0.9
Jan Feb Mar Apr May Jun
Jul
Range 2010–13
2015
Aug Sep Oct Nov Dec
2014
Average 2010–13
Notes: Excludes Strategic Petroleum Reserve stocks.
Source: Energy Information Administration (2016)
81
World oil consumption increased by 1.8 per cent in 2015 to average
94.5 million barrels a day, the highest rate of annual growth in five years.
Stronger growth was the result of increased consumption in OECD
economies, particularly those in Europe, which experienced
exceptionally cold weather in the first quarter of the year, leading to
increased demand for heating.
Global consumption is expected to continue to increase in the medium
term, but growth is expected to slow. World oil consumption is projected
to increase by 1.2 per cent a year over the outlook period, to average
101.6 million barrels a day in 2021.
Figure 8.3: Annual oil prices
140
120
2016 US$ a barrel
World oil consumption
Slower growth in China will be offset by increased consumption by nonOECD economies in Asia and the Middle East, particularly India, where
continued growth in vehicle numbers and infrastructure will drive
demand.
Improved transport efficiency drives decline in OECD consumption
Increased vehicle efficiency is expected to reduce OECD demand over
the medium term, with consumption declining by 0.4 per cent a year to
average 45.1 million barrels a day by the end of the outlook period.
In the United States, efficiency improvements are projected to outweigh
modest growth in the stock of vehicles, resulting in consumption
declining towards the end of the outlook period.
Resources and Energy Quarterly March 2016
60
40
0
2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021
Brent
WTI
Source: Bloomberg; US Bureau of Labor Statistics (2016) CPI Detailed Report Dec 2015
Figure 8.4: World oil consumption
60
Million barrels a day
Demand growth in China is projected to slow over the medium term.
Slower growth is the result of a transition away from heavy
manufacturing industries towards consumer-focused sectors, which
consume oil less intensively. Despite slower growth, China is still
projected to provide the largest contribution to global growth over the
medium term.
80
20
Non-OECD economies continue to drive global consumption but
patterns of growth change
Growth in world oil consumption is expected to be driven by increased
consumption in non-OECD economies over the medium term, but the
distribution of incremental consumption within the group is likely to differ
from earlier patterns.
100
50
40
30
20
10
0
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
OECD
Non-OECD
Source: International Energy Agency (2016) Medium-Term Oil Market Report
82
Global oil production grew by 2.8 per cent in 2015 to average 96.4
million barrels a day, an annual increase of 2.6 million barrels a day, the
largest since 2004. The increase in world production was largely the
result of continued but slower production growth in the United States in
the first half of the year, and a strong increase in OPEC supply.
World oil production is expected to remain relatively flat in 2016, with
slower growth in OPEC supply just outweighing a decline in non-OPEC
supply. From 2017 onwards, global production is projected to increase
by 0.8 per cent a year to reach 100.5 million barrels a day in 2021.
Unconventional production declines but the US remains the largest
source of incremental non-OPEC supply
Low oil prices and tighter credit conditions are expected to cause
unconventional production in the United States to contract sharply in the
near term, prompting total production to fall to 12.3 million barrels a day
in 2017. To some extent, declining unconventional production will be
offset by additional production associated with a number of conventional
offshore projects coming online in the Gulf of Mexico.
Returning supply from Iran drives OPEC production growth
OPEC supply is projected to continue to increase in the medium term,
but growth will progressively slow over the outlook period. Production by
OPEC members is forecast to increase by 1.9 per cent in 2016, before
slowing to an annual increase of 0.5 per cent in 2021.
Increases in OPEC output will be driven by the return of supply from
Iran, which is forecast to increase by almost 0.5 million barrels a day in
2016. Supply from Iran will increase further in 2017 before growth slows
as technical constraints emerge.
Resources and Energy Quarterly March 2016
7
Litres per 100 kilometres
World oil production
Figure 8.5: Average fuel consumption of new vehicles in the EU28
6
5
4
3
2
1
0
2002
2004
2006
2008
2010
2012
2014
Source: International Council on Clean Transport (2016) European Vehicle Market
Statistics 2015/16
Figure 8.6: Change in world oil production
3
Million barrels a day
In Europe, the long-term transition from gasoline to diesel-powered
vehicles and other efficiency gains are expected to compound the effects
of slower economic growth towards the end of the outlook period.
Declining consumption by economies in Europe is projected to account
for around 60 per cent of the contraction in OECD consumption over the
medium term.
2
1
0
-1
-2
2012
2013
2014
OPEC
2015
2016
2017
2018
Non-OPEC
2019
2020
2021
Total
Source: International Energy Agency (2016) Medium-Term Oil Market Report
83
While growth in OPEC supply is projected to continue in the medium
term, persistently lower oil prices place considerable pressure on the
group’s decision to defend market share.
Many OPEC members currently face a fiscal break-even price of oil (the
price needed to balance the national budget) well above the going
market price because of large capital expenditures made during the
period of sustained higher oil prices. As a result, OPEC members are
now under increasing pressure to implement measures aimed at
minimising their fiscal deficits.
Saudi Arabia, which controls almost all OPEC spare capacity and thus
largely dictates OPEC policy, recently introduced a 50 per cent increase
in the price of gasoline. Kuwait is also considering a similar increase,
despite having one of the lowest fiscal break-even prices in OPEC.
Increased fiscal pressure in OPEC economies creates a degree of
uncertainty about the ability and conviction within OPEC to produce
below fiscal break-even prices over the longer-term, particularly for the
non-Gulf states, which have comparatively smaller financial reserves.
Supply tightness may emerge in the future
Global production is projected to continue to increase over the medium
term but some uncertainty exists over the full effect of recent cuts to
exploration and development expenditure.
Oil companies reduced capital expenditure on exploration and
development by 24 per cent in 2015, equivalent to the deferral of around
20 billion barrels of reserves. Similar cuts are also expected in 2016.
600
Thousand barrels a day
Domestic fiscal considerations put OPEC decision to defend market
share under pressure
Figure 8.7: Change in production from shale regions in the US
400
200
0
-200
-400
Feb-08
Feb-10
New wells
Feb-12
Feb-14
Existing wells
Feb-16
Net change
Notes: covers Bakken, Eagle Ford, Haynesville, Marcellus, Niorara, Permian and Utica
Source: Energy Information Administration (2016)
Figure 8.8: Oil production in Iran
5
Million barrels a day
However, the timing and pace of returning supply from Iran is subject to
a number of uncertainties. These include the volume of oil currently in
storage, internal capacity to mitigate decline rates and meet technical
challenges, and the level of future foreign investment.
4
3
2
1
0
Dec-06
Dec-09
EU oil embargo
Dec-12
Production
Dec-15
Average 2006–2011
Source: International Energy Agency (2016) Monthly Oil Market Report
Resources and Energy Quarterly March 2016
84
Australian production and exports
Australia produced 340 thousand barrels of crude oil and condensate a
day in the December quarter, down 5.5 per cent on a year-on-year
basis. The decline in production was largely the result of lower
production from the Gippsland Basin Joint Venture, which was affected
by industrial action related to a new enterprise agreement.
The volume of Australian exports of crude oil and condensate also
declined in the December quarter, falling by 11 per cent on a year-onyear basis to 270 thousand barrels a day in line with lower production.
Condensate production associated with new LNG projects drives growth
Australian production is forecast to remain relatively flat in 2015–16, in
line with weaker production in the December quarter and a downward
revision to the outlook for the new Balnaves project, which is now only
expected to operate for two years.
Domestic production is projected to increase to 390 thousand barrels a
day in 2018–19 as additional condensate associated with the Gorgon,
Prelude and Ichthys projects comes online. Production is expected to
decline thereafter, falling to 338 thousand barrels a day by the end of the
outlook period.
Export volumes are expected to follow production over the medium term,
increasing to 310 thousand barrels a day in 2018–19 as additional output
from new projects is shipped to nearby trading hubs in Asia. The volume
of exports is then projected to decline, falling to 268 thousand barrels a
day in 2020–21 in line with lower production.
30
20
Per cent of GDP
If recent cuts to capital expenditure fail to account for this, producers
may struggle to merely maintain current levels of production, leading to a
supply deficit.
Figure 8.9: Fiscal balance of Saudi Arabia
10
0
-10
-20
-30
1995
2000
2005
2010
2015
2020
Source: International Monetary Fund (2015) World Economic Outlook.
Figure 8.10: Australian petroleum production
800
Thousand barrels a day
Estimates from the International Energy Agency suggest that 85 per cent
of the investment required to meet demand for oil and gas over the
longer-term is simply devoted to offsetting natural decline at existing
fields.
700
600
500
400
300
200
100
0
2000–01
2005–06
Crude oil
2010–11
2015–16
Condensate
2020–21
LPG
Source: Department of Industry, Innovation and Science (2016)
Resources and Energy Quarterly March 2016
85
Low oil prices reduce investment and dampen prospects for future
growth
Expenditure on petroleum exploration and development continued to fall
in the December quarter in line with lower oil prices and the global
decline in upstream investment. Exploration and development
expenditures totalled $482 million for the quarter, 60 per cent lower than
the average for the two-year period prior to June 2014.
Australian production will increase in the near term as additional output
from committed projects comes online but will begin to contract towards
the end of the outlook period. This contraction is likely to continue over
the longer-term as a result of natural decline and the fall in upstream
investment.
500
15
400
12
300
9
200
6
100
3
0
2000–01
2005–06
Volume
2010–11
2015–16
Value (rhs)
2015–16 A$b
Export earnings are forecast to fall to $5.0 billion in 2016–17, before
growing to $8.3 billion (in 2015–16 dollar terms) in 2018–19 as volumes
increase. The value of Australian exports is projected to decline
thereafter, falling to $7.8 billion in 2020–21.
Figure 8.11: Australian exports of crude and condensate
Thousand barrels a day
The value of Australian exports of crude oil and condensate will continue
to decline in the near term as significantly lower prices compound flat
production.
0
2020–21
Source: ABS (2016) International Trade Statistics Service, cat. no.5464.0 ;Department of
Industry, Innovation and Science (2016)
Figure 8.12: Australian petroleum exploration expenditure
Australian refineries facing increasing regional competition
No further closures are assumed over the outlook period, but domestic
production of refined products is forecast to decline sharply in the near
term as a result of recent closures, falling by 22 per cent in 2015–16 to
413 thousand barrels a day.
2.0
125
1.6
100
1.2
75
0.8
50
0.4
25
0.0
Dec-10
Dec-11
Dec-12
Expenditure
Dec-13
Dec-14
US$ a barrel
The majority of this additional refining capacity will be installed in the
Asian region, placing further pressure on Australia’s older and less
efficient refineries.
A$ billion
After falling to a six-year low of 3 million barrels a day in 2014, surplus
global refining capacity is projected to increase to 5 million barrels a day
in 2021 as nearly 8 million barrels a day of new capacity is added over
the outlook period.
0
Dec-15
WTI (rhs)
Source: ABS (2016) Mineral and Petroleum Exploration Australia, cat. no.8412.0
Resources and Energy Quarterly March 2016
86
Increasing reliance on imports of refined products
Australian consumption is projected to increase in the medium term, as
continued economic growth in GDP outweighs the effect of a moderate
increase in prices, reaching 1,019 thousand barrels a day by 2021. As a
result, the volume of imported refined products is projected to increase
over outlook period, growing by 3.4 per cent a year to 721 thousand
barrels a day in 2021.
Australia’s reliance on imported refined products has increased
significantly over the last 15 years in line with continued economic
growth and declining refining capacity. At the turn of the millennium,
imports of refined products represented 11 per cent of domestic
consumption; by 2014–15, this share had risen to 53 per cent.
Figure 8.13: Australian imports of refined products
53%
60
Share of consumption, per cent
Domestic refining capacity has declined by one-third in the last two
years as refining activities ceased at the Kurnell and Bulwer Island
facilities. Refining capacity in Australia is now around 443 thousand
barrels a day, just over half the capacity in place prior to closure of Port
Stanvac in South Australia in 2003.
50
40
30
20
10
0
1999–00
2002–03
2005–06
2008–09
2011–12
2014–15
Source: ABS (2016) International Trade Statistics Service, cat. no.5464.0; Department of
Industry, Innovation and Science (2016)
50
80
40
60
30
40
20
20
10
Per cent
100
0
1999–00
2002–03
2005–06
Refinery input (rhs)
2008–09
2011–12
Gigaltires
Figure 8.14: Australian refinery feedstocks
0
2014–15
Imports as a share of total input
Source: Department of Industry, Innovation and Science (2016)
Resources and Energy Quarterly March 2016
87
Table 8.1: Oil outlook
World
Unit
2015
2016 f
2017 z
2018 z
2019 z
2020 z
2021 z
Production a
mb/d
96.4
96.5
96.9
97.6
98.6
99.5
100.5
Consumption a
mb/d
94.5
95.5
96.9
98.0
99.4
100.5
101.6
Nominal
US$/bbl
49.4
35.2
44.5
52.0
57.7
61.7
64.9
Real b
US$/bbl
50.0
35.2
43.7
50.0
54.2
56.7
58.2
US/$bbl
53.1
36.6
46.9
54.4
60.0
63.8
66.7
US$/bbl
53.7
36.6
46.0
52.3
56.4
58.6
59.8
Unit
2014–15
2015–16 f
2016–17 z
2017–18 z
2018–19 z
2019–20 z
2020–21 z
Production a
kb/d
328
331
310
383
390
363
338
Export volume a
kb/d
261
261
246
304
310
290
268
Nominal value
A$m
8,656
5,351
5,030
7,556
8,841
8,942
8,753
Real value b
A$m
8,780
5,351
4,960
7,305
8,344
8,219
7,836
kb/d
426
326
326
303
297
299
302
kb/d
57
53
51
62
64
59
55
WTI crude oil price
Brent crude oil price
Nominal
Real b
Australia
Crude and condensate
Imports a
LPG
Production ac
Export volume a
kb/d
36
37
35
43
44
41
38
Nominal value
A$m
807
536
527
793
918
923
907
Real value b
A$m
818
536
520
767
867
848
812
Refinery production a
kb/d
527
413
384
378
372
367
367
Exports ad
kb/d
12
6
10
10
10
10
10
Imports a
kb/d
487
611
637
661
684
705
721
Consumption ae
kb/d
914
940
955
965
982
1,000
1,019
Refined products
Notes: a Number of days in a year is assumed to be exactly 365; b In current financial year Australian dollars; c Primary products sold as LPG; d Excludes LPG; e Domestic sales of
marketable products; f Forecast; z Projection; A barrel of oil equals 158.987 litres
Source: ABS (2016) International Trade Statistics Service, cat. no.5464.0 ; Energy Information Administration (2016); Department of Industry, Innovation and Science (2016)
Resources and Energy Quarterly March 2016
88
89
Market summary
The development of new nuclear capacity in China, India and Russia is
expected to support a 45 per cent increase in Australia’s uranium exports
to reach 9,450 tonnes U3O8 in 2020–21. The increase in demand is also
expected to underpin an increase in uranium spot prices towards the end
of the outlook period and contribute to Australia’s export earnings rising to
$934 million (in 2015–16 dollar terms).
Prices
New capacity to support price growth over the medium term
Unlike most commodities, uranium spot prices increased in 2015 and
averaged US$37 a pound, up 10 per cent relative to 2014. Uranium
consumption growth was less affected by the slowdown in economic
activity because of the rapid development of new nuclear power capacity
over the past few years.
These factors are expected to maintain downward pressure on the spot
price over the short term. Spot prices are projected to average US$32 a
pound in 2016 and decline further to US$31 a pound in 2017. From 2018,
growth in demand is projected to accelerate as new nuclear power plants
are completed in China, India and Russia. As a result, spot prices are
projected to increase to average US$39 a pound (in 2016 dollar terms) by
2021.
This assessment is contingent on new power plants being completed
according to schedule. If there are delays to the commissioning of
reactors, consumption growth is likely to be slower than anticipated and
will limit the extent of any price increases.
Large uranium producers typically sell most of their output through long
term contracts rather than the spot market.
Figure 9.2: Outlook, quarterly uranium prices
Figure 9.1: Uranium prices, monthly
150
160
125
140
100
120
US$ a pound
US$ a pound
However, spot prices declined by 19 per cent from US$36 a pound to
around US$29 a pound between November 2015 and mid–March 2016 as
high inventories in Japan, the United States and Europe reduced demand
while mined and secondary supply continued to increase.
75
50
25
0
Jan-06
100
80
60
40
Jan-08
Jan-10
Spot price
Source: Cameco Corporation (2016)
Resources and Energy Quarterly March 2016
Jan-12
Long term price
Jan-14
Jan-16
20
0
1999
2003
2007
2011
2015
2019
Source: Cameco Corporation (2016); UxConsulting (2016); Department of Industry,
Innovation and Science
90
Consumption
Figure 9.3: World nuclear power generation
3,500
3,000
Terawatt hours
In contrast to the spot price, the UxConsulting long term indicator
contract price remained unchanged between 2014 and 2015 and
averaged US$46 a pound in both years. Long term contracts typically
vary across producers because of differences in contract lengths,
volumes and terms, which are based on market conditions at the time of
signing. Australia’s average export returns are generally much lower
than the world indicator contract price.
China, India and Russia to drive consumption growth
2,500
2,000
1,500
1,000
500
In 2015, world uranium consumption increased by 1.6 per cent to
68,800 tonnes U3O8 compared with 67,700 tonnes in 2014, because of
the completion and start-up of Korea Hydro and Nuclear Power’s ShinWolsong 2 reactor in South Korea and Rosatom’s Rostov 3 reactor in
Russia.
Most of the world’s new nuclear capacity is expected to be developed in
China, India and Russia where energy policies are embracing nuclear
energy to provide low-carbon emitting baseload electricity to their highly
populated economies and growing industrial bases. In 2016, China has
24 nuclear reactors under construction and 42 reactors planned; India
has six reactors under construction and 24 reactors planned; and Russia
has eight reactors under construction and 25 planned. This growth will
be partly offset by the closure of older reactors in Germany, Hungary,
Japan, South Korea, Russia, Sweden, Switzerland, the United Kingdom
and the United States as they reach the end of their economic life.
World uranium consumption in 2016 is forecast to increase by 10 per
cent to 75,600 tonnes, supported by the initial start–up of new reactors in
China as well as moderate output increases at existing reactors in
advanced economies.
Resources and Energy Quarterly March 2016
1994
1999
2004
OECD
2009
2014
2019
Non-OECD
Source: International Energy Agency (IEA); World Nuclear Association (2016);
Department of Industry, Innovation and Science
Figure 9.4: New nuclear capacity
Gigawatts electric
Growth in uranium consumption is driven by the development of new
nuclear power generation capacity. Commissioning a new reactor
requires more uranium for its initial core than operating plants. Annual
requirements decline as a reactor reaches a steady state level of
operation. Most reactors are refuelled at intervals of one to two years,
when a quarter to a third of the fuel assemblies are replaced.
0
70
60
50
40
30
20
10
0
China
Other
Asia
Eastern North Western Africa – South
Europe America Europe Middle America
East
Under construction
Planned
Source: World Nuclear Association (2016)
91
Over the medium term, the large increase in the number of nuclear
power reactors in China, India and Russia is expected to underpin
growth in uranium consumption. While the largest expansion is projected
to occur in these countries, the United States is expected to remain the
largest producer of nuclear power. Although energy policy in the United
States is primarily focused on renewables and gas for electricity
generation, the development of five reactors with a combined capacity of
around 6,200 megawatts combined with its large existing capacity will
contribute to an increase in US uranium consumption.
World uranium consumption is projected to grow at an average annual
rate of 1.5 per cent from 2016 to 2021 and to total 80,900 tonnes in
2021.
Production
Mine production to increase steadily over the medium term
In 2015, world uranium production increased by 7 per cent from 2014 to
71,500 tonnes, largely owing to higher production from Cameco’s Cigar
Lake mine in Canada and incremental increases at existing mines. This
was partially offset by a 19 per cent decline in production at Rio Tinto’s
Rössing mine in Namibia to 1,225 tonnes of U3O8 in 2015 compared
with 2014 because of lower grades and recoveries.
In 2016, world production is forecast to increase by a further 7 per cent
Resources and Energy Quarterly March 2016
Figure 9.5: World uranium consumption (U3O8)
90
Thousand tonnes
80
70
60
50
40
30
20
10
0
1994
1999
2004
2009
2014
2019
Source: International Energy Agency (IEA); World Nuclear Association (2016):
Department of Industry, Innovation and Science
Figure 9.6: World uranium production (U3O8)
30
Thousand tonnes
Units 1 and 2 at the Sendai nuclear plant were the first of Japan’s
nuclear reactors to restart in late 2015, following the post–Fukushima
review of Japan’s energy policies. Kansai Electric Power Company also
restarted units 3 and 4 of the Takahama power plant in early 2016.
However, the district court in Shiga Prefecture, where the plants are
located, ordered the shutdown of the reactors on 10 March in response
to a petition lodged by local residents. While the court’s verdict has been
appealed, it is unclear if units 3 and 4 will be restarted in 2016. More
reactors are expected to come back online in Japan within the next one
to five years, with 24 of the 43 operable reactors in the process of
obtaining approval to restart operation. Despite the resumption of
nuclear power generation, Japan’s output is projected to remain well
below pre-Fukushima (March 2011) levels.
25
20
15
10
5
0
Kazakhstan
Africa
2005
Canada
2010
2015
Other
Australia
2020
Source: Nuclear Energy Agency; UxConsulting (2016); World Nuclear Association (2016)
92
The world uranium supply is increasingly being driven by uranium
inventories held by nuclear utilities and secondary market supplies.
UxConsulting has estimated that there are sufficient inventories held by
nuclear utilities to cover forward demand for around 60 months in Japan,
30 months in both the United States and Europe and around seven
years in China. Consequently, it is expected that uranium producers will
focus on cutting costs rather than increasing production over the
medium term, with high cost production mines likely to scale back or
cease production and new projects to remain on hold until future price
increases improve the commercial viability of those projects.
World uranium production is projected to increase at an average rate of
2.7 per cent a year to 2021 to 87,600 tonnes. This will be underpinned
by continued increases in production at CGN/Swakop Uranium’s Husab
mine in Namibia, Peninsula Energy’s Lance mine in the United States
and Cameco’s Cigar Lake mine in Canada.
Figure 9.7: Uranium supply–demand balance (U3O8)
100
Thousand tonnes
to 77,000 tonnes. Increased production is expected at Rio Tinto’s
Rössing mine and CGN/Swakop Uranium’s Husab mine in Namibia,
Peninsula Energy’s Lance mine in the United States and Cameco’s
Cigar Lake mine in Canada.
80
60
40
20
0
2010
2012
2014
Consumption
2016
2018
2020
Primary production
Source: International Atomic Energy Agency (IAEA); UxConsulting; World Nuclear
Association (2016); Department of Industry, Innovation and Science
70
70
Australia’s uranium exploration expenditure has been declining
60
60
50
50
40
40
30
30
20
20
10
10
Australia’s uranium exploration expenditure decreased by 8 per cent in
2014–15 to $40.6 million, down from $43.9 million in 2013–14. This
decrease was primarily because of a $3 million decline (46 per cent) in
exploration expenditure in Queensland following changes in state
government policies and regulations on uranium mining. This more than
offset a 17 per cent increase in exploration expenditure in Western
Australia.
Australia’s production to increase despite the wind-up of Ranger
In 2015–16, Australia is forecast to produce 7,835 tonnes of U3O8, up 21
per cent from 6,496 tonnes in 2014–15. This increase in production is
the result of Quasar Resources’ Four Mile mine in South Australia
restarting production in September quarter 2015, increased production
Resources and Energy Quarterly March 2016
A$ million
Australia’s exploration, production and exports
0
Dec-09
Dec-10
Dec-11
Dec-12
Exploration expenditure
Dec-13
Dec-14
US$ a pound
Figure 9.8: Australia’s uranium exploration
0
Dec-15
Uranium price (rhs)
Source: ABS (2016) Mineral and Petroleum Exploration, cat. no. 8412.0; Cameco
Corporation (2016)
93
14
12
10
8
6
4
2
0
1999–00
2004–05
2009–10
2014–15
2019–20
Source: Company reports (2016)
Figure 9.10: Australia’s uranium exports
14
1,400
In 2015–16, Australia is forecast to export around 8,007 tonnes of U3O8,
45 per cent higher than in 2014–15. These exports are expected to be
destined for principal markets in North America, Western Europe and
South–East Asia. It is anticipated that Australia’s exports to China will
continue to grow over the outlook period to 2020–21, as the 24 nuclear
facilities currently under construction are completed and China continues
to build its strategic uranium inventory. In 2015–16, export values are
forecast to increase by 84 per cent to around $980 million supported by
higher volumes and the effects of a lower exchange rate
12
1,200
10
1,000
Over the medium term, Australia’s uranium exports are projected to
increase to around 9,450 tonnes. Export earnings are projected to
increase to $934 million (in 2015–16 dollars), underpinned by projected
increased volumes and long term sales contracts.
Thousand tonnes
Nuclear power growth in China to drive Australia’s uranium exports
8
800
6
600
4
400
2
200
0
1999–00
2015–16 A$ million
ERA’s decision not to proceed with the Ranger 3 Deeps project in June
2015 will result in the mine not recommencing production in the medium
term. However, ERA will continue to process its ore stockpile over the
medium term. There are several uranium mines currently under
development in Australia that are expected to support growth in uranium
production in the medium to long term. These include Toro Energy’s
Wiluna and Vimy Resources’ Mulga Rock projects in Western Australia.
Australia’s production is expected to be marginally impacted in 2020–21
by the anticipated closure of ERA’s Ranger facility in January 2021. The
Gunjeihmi Aboriginal Corporation advised ERA in late 2015 that the
Mirarr Traditional Owners do not support an extension to the Ranger
Authority. ERA is currently reviewing its business operations and is due
to complete its review in March quarter 2016. Australia’s uranium
production is projected to increase to around 9,450 tonnes of U3O8 in
2020–21, around 21 per cent higher than 2015–16.
Figure 9.9: Australia’s uranium production
Thousand tonnes
from the ERA Ranger facility and record production at the BHP Billiton
Olympic Dam mine following production disruptions at both operations
during 2014–15. In the short term, Australia’s uranium production is
forecast to decline moderately to 7,225 tonnes in 2016–17, as
production returns to average levels at the Olympic Dam mine and ERA
Ranger facility.
0
2004–05
2009–10
Volume
2014–15
2019–20
Value (rhs)
Source: Australian Safeguards and Non–Proliferation Office (ASNO); Department of
Industry, Innovation and Science
Resources and Energy Quarterly March 2016
94
Table 9.1: Uranium outlook
World
unit
2015
2016 f
2017 f
2018 z
2019 z
2020 z
2021 z
Production
kt
71.5
76.7
80.1
83.9
85.9
87.2
87.6
Africa b
kt
9.0
11.0
12.7
14.3
15.2
16.4
16.6
Canada
kt
15.7
18.0
18.1
18.6
18.6
18.6
18.6
Kazakhstan
kt
28.1
28.0
28.1
28.1
28.2
28.4
28.6
Russia
kt
3.6
3.6
4.0
4.2
4.3
4.1
4.1
kt
68.8
75.6
84.9
81.1
82.2
84.8
80.9
China
kt
10.0
12.1
15.1
16.3
17.4
19.4
19.4
European Union 27
kt
21.3
20.8
21.1
23.0
20.8
21.3
21.3
Japan
kt
0.2
0.6
1.3
2.3
3.1
3.8
3.8
Russia
kt
5.8
5.9
6.3
6.6
6.8
6.7
6.7
United States
kt
22.8
23.1
22.9
22.9
23.3
23.8
23.8
– nominal
US$/lb
36.5
31.8
31.0
31.0
34.0
39.0
44.0
– real c
US$/lb
36.9
31.8
30.4
29.8
31.9
35.8
39.4
unit
2014–15
2015–16 f
2016–17 f
2017–18 z
2018–19 z
2019–20 z
2020–21 z
Production
t
6,496
7,835
7,225
8,050
9,250
9,600
9,450
Export volume
t
5,515
8,007
7,225
8,050
9,250
9,600
9,450
– nominal value
A$m
532
980
917
1,004
1,073
1,067
1,043
– real value d
A$m
540
980
904
971
1,013
981
934
Average nominal price
A$/kg
96.4
122.4
126.9
124.7
116.0
111.1
110.4
– real d
A$/kg
97.8
122.4
125.2
120.6
109.5
102.1
98.8
Consumption
Spot price
Australia
Notes: b Includes Niger, Namibia, South Africa, Malawi and Zambia; c In current calendar year US dollars; d In current financial year Australian dollars; f Forecast; z Projection
Source: Company Reports (2016); Department of Industry, Innovation and Science; UxConsulting (2016); Australian Safeguards and Non–Proliferation Office (ASNO)
Resources and Energy Quarterly March 2016
95
Market summary
The depreciation of the Australian dollar and rapidly rising gold prices
combined to create favourable conditions for Australian producers in early
2016. This is expected to translate into higher export volumes and values
over the short term. While export volumes are projected to increase over
the next few years, they are expected to decline towards the end of the
outlook period as a number of key mines close. Gold export values are
projected to decline to $11.8 billion (in 2015–16 dollar terms) by 2020–21
because of lower prices. Gold prices are projected to decline as global
economic conditions improve and the US Federal Reserve lifts interest
rates.
Prices
Gold prices continued to slide in 2015
Gold prices declined for a third consecutive year in 2015. The LBMA gold
price declined by 8 per cent to average US$1,160 per troy ounce—the
lowest level since 2009. Investment-driven gold demand recorded a small
increase while fabricated gold consumption—the use of gold in jewellery
and technology—contracted modestly.
Gold prices were supported by a modest rally in investment demand in the
March quarter of 2015 resulting from concerns over a Greece exit from the
Eurozone. However, anticipation of an increase in US interest rates, which
eventuated in December 2015, constrained investment-demand in the
latter part of the year. Higher US interest rates improve the return on US
dollar denominated financial assets which increases the opportunity cost of
holding gold, a non-interest bearing asset.
Prices elevated in the short run, before trending down
Gold prices recovered in early 2016, rising to almost $US1,280 per troy
ounce in March—the highest level in more than a year. Increased demand
for gold as an investment asset was responsible for the rise in prices.
Investor concerns were centred on the health of the global economy,
particularly economic developments in China and the strength of the US
economic recovery.
Figure 10.2: Recent movement in gold prices
Figure 10.1: Quarterly LBMA gold prices
1,300
$US a troy ounce
2016 US$ a troy ounce
2,000
1,600
1,200
800
400
0
2001
1,200
1,100
1,000
Jan-2015
2006
2011
2016
2021
Source: LBMA (2016) Gold Price PM; Department of Industry, Innovation and Science
Resources and Energy Quarterly March 2016
Apr-2015
Daily price
Jul-2015
Oct-2015
Jan-2016
30 day moving average
Source: LBMA (2016) Gold Price PM
97
Over the medium term, gold prices are projected to decline at an
average annual rate of 4 per cent to around $US899 (in 2016 dollar
terms) in 2021 as global economic conditions improve. Investor-demand
is expected to decline as the US economy continues to improve and the
Federal Reserve lifts interest rates. Higher interest rates not only reduce
gold demand by increasing the appeal of other assets, but also by
putting upward pressure on the US dollar. As capital flows to the US
seeking higher returns, the value of the US dollar is expected to rise,
which will make gold more expensive for investors holding other
currencies.
The effect of declining investment demand on prices will be partially
offset by increasing consumption of fabricated gold. Increased fabricated
consumption will be underpinned by lower prices and rising incomes in
key consuming countries such as China and India.
While gold prices are projected to fall over the medium term, the decline
is unlikely to be smooth as a range of factors could trigger temporary
rallies in prices. These include poor economic data emanating from the
United States or China, renewed concerns over possible exits from the
Eurozone, or spikes in the gold imports of major consuming countries.
2,000
120
1,600
100
80
1,200
60
800
40
400
20
0
1995
US$ (Trade Weighted)
US$ a troy ounce
The Federal Reserve’s decision to scale back the speed of US interest
rate rises will also contribute to elevated gold prices over the short term.
While the Federal Reserve signalled four interest rate rises over 2016 at
the end of last year, this was reduced to two at the March meeting of the
Federal Open Market Committee. The persistence of negative interest
rates and the risk of deflation in Europe and Japan may also maintain
the attractiveness of gold as an investment asset.
Figure 10.3: Gold prices and the US dollar
0
2000
2005
Gold price
2010
2015
US$ (Trade Weighted)
Source: LBMA (2016) Gold Price PM; Federal Reserve (2016) US Trade Weighted
Major Currency
Figure 10.4: Effective federal funds rate
20
Effective fed funds rate
Gold prices are likely to remain elevated in the short term in response to
investor uncertainty. Concerns over the global economy are expected to
persist—the US economy has only recently begun to gain momentum
while China’s economic transition still has some way to run.
16
12
8
4
0
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
Source: LBMA (2016) Gold Price PM; US Federal Reserve (2016)
Selected Interest Rates
Resources and Energy Quarterly March 2016
98
Consumption
Figure 10.5: Global gold consumption
Consumption spikes in early 2016 and may remain elevated
5,000
4,000
Tonnes
Global gold consumption remained broadly unchanged in 2015. A
modest decline in fabricated consumption, driven by slowing growth in
China and poor weather in India that squeezed incomes, was offset by
slightly stronger investment demand. Investment consumption was
supported by improved demand from bullion-backed Exchange Traded
Funds (ETFs)—funds traded on the stock exchange where the value
tracks the gold price.
2,000
1,000
In early 2016, investment demand, which represents around a third of
total gold consumption, increased sharply. Demand from gold-backed
ETFs rose 16 per cent over the first two months of the year. In late
February, bullion-backed ETFs purchased the equivalent of almost a
week’s worth of global gold mine production in just two days.
Investment demand was fuelled by concerns about the global economy
and supported by expectations of a more gradual tightening of US
interest rates. With concerns over global economic conditions persisting,
a sustained period of positive economic data may be required to
assuage investor concerns. As a result, gold may continue to hold its
appeal as an investment asset in the short term.
3,000
0
2006
2008
2010
Fabricated
2012
2014
Investment
Source: World Gold Council (2016) Gold Demand Trends Full Year 2015
Figure 10.6: ETF gold holdings
60
Gold consumption driven by investor activity is projected to decline over
the medium term as the US Federal Reserve lifts interest rates. The
Federal Reserve has signalled two rate rises are likely over the course
of 2016. By the end of 2018, the Federal Reserve Board expects the
target level for the federal funds rate to be around 3 per cent, up from its
current rate of just 0.4 per cent. Global economic conditions are
projected to improve over the outlook period, further reducing investment
demand for gold.
56
Million troy ounces
Lower investment demand over the medium term, but fabricated
consumption to grow
52
48
44
40
Jan-2015
Apr-2015
Jul-2015
Oct-2015
Jan-2016
Source: Bloomberg (2016) ETF Gold Holdings
Resources and Energy Quarterly March 2016
99
By contrast, fabricated consumption is projected to increase over the
outlook period. Rising household incomes in emerging economies and
lower gold prices are expected to support jewellery consumption, the
major component of fabricated demand. China and India, which currently
account for more than half of global fabricated consumption, are
projected to be the key drivers of growth. Gold is not only viewed as an
important store of value in these countries, but is also entwined with
cultural and religious practices.
Figure 10.7: Jewellery consumption
3,000
2,500
While fabricated consumption is projected to rise, it is only expected to
do so moderately. Slowing economic growth in China is likely to hamper
the recovery of Chinese jewellery demand, which has contracted over
the last two years. Growth in Indian jewellery consumption is yet to really
take off, having increased just 2.1 per cent a year over the past decade.
2,000
Tonnes
The use of gold in technology—which accounts for 12 per cent of
fabricated demand—may also decline over the medium term. Gold
competes with copper for use in various electronic goods. According to
the World Gold Council, copper has continued to gain market share from
gold as key manufacturers seek to reduce their use of the precious
metal. This has contributed to a 30 per cent decline in gold use in
technological applications over the past decade.
Total
1,500
Rest of World
1,000
India
500
China
0
2005
2007
2009
2011
2013
2015
Source: Thomson Reuters (2016) GFMS Gold Survey
Resources and Energy Quarterly March 2016
100
Total gold supply, which consists of both mine supply and recycled
supply, declined by 3.5 per cent in 2015 to 4258 tonnes. Mine supply
declined as producers in both South America and Africa cut output under
pressure from lower prices. Output also fell in China, the world’s largest
producer. The fall in Chinese production was attributable to reduced
output at copper mines, where gold is often produced as a by-product.
Supply from gold recycling, which makes up around a quarter of total
supply, declined in 2015 in response to lower prices. Recycled gold
consists of gold sold for cash by consumers or other supply chain
participants such as jewellery manufacturers.
Share (per cent)
Global production down in 2015
50
2,000
40
1,600
30
1,200
20
800
10
400
0
0
1980
1985
1990
Mine production to drive growth in global gold supply
Increased mine production will be partially offset by further declines in
recycled supply. Recycled supply has tended to rise and fall with prices
and gold prices are projected to decline over the outlook period.
Declining prices make consumers more likely to continue holding gold
and make reclaiming gold from electronic goods less economic,
although the latter is a relatively minor source of recycled supply.
Australia’s production and exports
Exploration continues to increase
Australia’s gold exploration expenditure increased for a third consecutive
quarter in December 2015, supported by a rise in the value of the
Australian dollar price of gold. The turnaround follows almost two years
of declining or flat exploration expenditure.
Resources and Energy Quarterly March 2016
1995
Share
2000
2005
2010
2015
Gold price (RHS)
Source: Thomson Reuters (2016) GFMS Gold Survey
Figure 10.9: Australia’s gold exploration expenditure
US$ a troy ounce
World gold supply is projected to increase over the next five years,
underpinned by higher mine production. A number of gold projects that
began construction around the time of the 2011–2012 peak in prices will
either commence or approach capacity over this period. For example,
Chesapeake Gold Corp’s Metates mine in Mexico is expected to begin
production around 2018. The mine will be capable of producing an
average of 26 tonnes of gold a year during its first six years of full
production, making it one of the largest mines in the world.
2016 US$ a troy ounce
Figure 10.8: Recycled gold’s share of total supply
2,000
300
1,600
250
200
1,200
150
800
100
400
A$ million
Production
50
0
0
2010
2011
2012
2013
2014
Exploration expenditure (RHS)
2015
Price
Source: LBMA (2016) Gold Price PM; ABS (2015) Mineral and Petroleum Exploration,
cat.no 8412.0
101
Production reaches a 12 year high
Australia’s gold production reached 278 tonnes in 2015—its highest level
in 12 years. Production was supported by higher Australian-denominated
gold prices, which improved operating margins. The Australian dollar
averaged US75 cents in 2015, down from US90 cents in 2014. As a result,
the price received by Australian producers averaged $1,540 per ounce, 10
per cent higher than 2014. For Australian producers, the effect of a
depreciating currency more than compensated for the lower US dollar
denominated gold price.
Increased production was driven by a number of large mines such as
Newcrest Mining’s Cadia Valley Mine in New South Wales and Newmont
Mining’s Boddington Mine in Western Australia.
Australia’s gold production is projected to rise until 2018–19, supported by
a combination of new projects and mine expansions. Two of the largest
new projects are in Western Australia. Dacian Gold’s Mt Morgans Project
will begin production in early 2018, producing an estimated 7 tonnes of
gold a year. Gold Road Resources aims to move its Gruyere Project
(estimated annual production of 8 tonnes) through to production by late
2018.
The closure of a number of mines is expected to reduce Australian
production towards the end of the outlook period. Australia’s seventh and
eighth largest mines, Gold Field’s St Ives and Granny Smith mines in
Western Australia, are expected to close in 2019 and 2020, respectively.
Together these mines produced 21 tonnes of gold in 2015. Australian
production is projected to be 277 tonnes in 2020–21.
A lower Australian dollar relative to the US dollar should support increased
production over the outlook period. In the short term, the assumed weak
exchange rate combined with high gold prices will translate into higher
profit margins for Australian producers. Figure 10.10 shows that, in early
2016, the price Australian producers received for gold climbed to more
than $1,700, a level not seen since the price boom in 2011–12. A lower
dollar will also provide producers with a buffer against the projected
decline in prices over the medium term.
Figure 10.10: US dollar versus Australian dollar gold price
In early 2016 the Australian dollar gold price
climbed to levels not seen since 2011–12…
2,500
1,500
1,000
…despite the decline in prices on the LBMA
Dollars
2,000
500
0
2006
2007
2008
2009
2010
2011
Spot price US$
2012
2013
2014
2015
Spot price AUS$
Source: LBMA (2016) Gold Price PM; Bloomberg (2016) Australian Dollar Spot Price
Resources and Energy Quarterly March 2016
102
Figure 10.11: Australia’s gold production
350
300
250
Tonnes
A number of uncertainties surround the outlook for Australian production,
especially towards the end of the projection period. The projected
decline in gold prices may encourage operators to either reduce
production or delay planned projects. Should this occur, and the
exchange rate does not provide any additional support, Australia’s gold
mine production may decline more rapidly than projected. Alternatively,
current exploration activity may translate into the development of new
projects or the expansion of existing mines, which could contribute to
higher production towards the end of the outlook period.
200
150
Exports to decline
The real value of Australia’s gold exports is forecast to rise by almost 20
per cent to $15.6 billion in 2015–16, supported by the increase in gold
prices in early 2016, a lower Australian dollar and higher volumes.
Export values are projected to decline at an average annual rate of 1.9
per cent to $11.8 billion (in 2015–16 dollars) in 2020–21 as a result of
lower volumes.
50
0
2004–05
2008–09
2012–13
2016–17
2020–21
Source: Department of Industry, Innovation and Science
Figure 10.12: Australia’s gold exports
600
20
500
16
400
12
300
8
200
4
100
0
2000–01
2005–06
2010–11
Quantity
2015–16
2015–16 A$ billion
Australia’s gold exports are forecast to increase by 9 per cent in 2015–
16 to 304 tonnes, supported by higher domestic production. Export
volumes are projected to rise until 2018–19, before declining in line with
Australian production to 292 tonnes in 2020–21. Growth in Australia’s
gold exports is projected to average 0.8 per cent a year over the outlook
period.
100
Tonnes
Demand for Australia’s gold exports over the outlook period will be
underpinned by rising incomes in Asia. Developments in China,
Singapore, India and Thailand are particularly important for Australia
given these countries account for more than 90 per cent of Australia’s
gold exports. Slowing economic growth in China, the largest export
market for Australian gold producers, constitutes a downside risk to the
outlook.
0
2020–21
Values (RHS)
Source: ABS (2016) International Trade, cat.no.5465.0; Department of Industry,
Innovation and Science
Resources and Energy Quarterly March 2016
103
Table 10.1: Gold outlook
World
unit
2015
2016f
2017f
2018z
2019z
2020z
2021z
consumption b
t
2,746
2,810
2,879
2,952
3,030
3,113
3,200
Mine production
t
3,027
3,067
3,119
3,109
3 ,122
3,135
3,164
– nominal
US$/oz
1,160
1,185
1,105
1,045
1,023
1,013
1,003
– real d
US$/oz
1,173
1,185
1,085
1,005
961
930
899
unit
2014—15
2015–16f
2016–17f
2017–18z
2018–19z
2019–20z
2020–21z
Mine production
t
275
286
292
299
305
294
277
Export volume
t
278
304
308
315
321
310
292
– nominal value
A$m
13,048
15,610
15,274
14,851
14,790
14,110
13,146
– real value e
A$m
13,235
15,610
15,061
14,358
13,959
12,969
11,769
– nominal
A$/oz
1,468
1,589
1,565
1,465
1,431
1,414
1,400
– real e
A$/oz
1,489
1,589
1,544
1,416
1,351
1,300
1,253
Fabrication
Price c
Australia
Price
Notes:
b Includes jewellery consumption and industrial applications
c London Bullion Market Association PM price
d In current calendar year US dollars
e In current financial year Australian dollars
f Forecast
z Projection
Source: ABS (2016) International Trade, cat.no.5465.0; London Bullion Market Association (2016) gold price PM; World Gold Council (2016); Department of Industry, Innovation and Science
Resources and Energy Quarterly March 2016
104
Figure 11.1: Annual aluminium prices and stocks
3000
12
The outlook for Australia’s aluminium exports is weak because of slow
domestic production growth, weak demand in Australia’s major export
market, Japan, and growing competition from the Middle East. As a
result, annual exports are projected to fall on average by 2 per cent a
year to 1.3 million tonnes in 2020–21. A projected moderate rise in
aluminium prices because of strong consumption growth, particularly in
automobile manufacturing, and the closure of high-cost capacity over the
outlook period will provide some support to Australia’s earnings from
aluminium exports. Earnings are projected to increase at an average
annual rate of 1.3 per cent to $3.9 billion (in 2015–16 dollar terms) by
2020–21.
2500
10
2000
8
1500
6
1000
4
500
2
Aluminium prices were under pressure in 2015 and early 2016
Low capacity utilisation, weak global demand and a huge build-up of
stocks contributed to a rapid decline in aluminium prices in 2015. The
LME aluminium spot price decreased by almost 11 per cent to average
US$1,663 a tonne in 2015, and reached a low of US$1,432 a tonne in
November 2015. Despite recent increases, prices have remained under
pressure since the start of 2016. Global demand was lower as
commercial activity in China was reduced over the Lunar New Year
holiday in early February. Moreover, production in key producing regions
has continued to increase. Over the remainder of 2016, prices are
forecast to increase gradually as growth in consumption outpaces
growth in production. As a result, the aluminium price is forecast to
average around US$1,600 a tonne in 2016, 4 per cent lower than 2015.
While aluminium prices are not expected to deteriorate materially from
current levels, the chances of a price rally are expected to be limited by
excess capacity in the sector. The rate of new, low-cost, additions to
capacity from China has been faster than expected and is unlikely to
slow in the short term. On the demand side, China’s aluminium-intensive
sectors are slowing, particularly the property sector.
Resources and Energy Quarterly March 2016
0
0
2011
2013
2015
Stocks
2017
2019
2021
Prices
Source: Bloomberg (2016) aluminium LME spot prices; Department of Industry,
Innovation and Science
Figure 11.2: World aluminium consumption
80
70
Million tonnes
Prices
2016 US$ a tonne
Market summary
Weeks of consumption
Aluminium
60
50
40
30
20
10
0
2011
USA
2013
Germany
Japan
2015
2017
South Korea
2019
Rest of World
2021
China
Source: World Bureau of Metal Statistics (2016); Department of Industry, Innovation
and Science
106
The Chinese Government announced plans at the end of 2015 to introduce
a 1 million tonne “Commercial Stockpiling Programme”, whereby
aluminium producers receive a bank loan for 80 per cent of the market
price for holding aluminium from the market for a set period. The
commencement of this policy is yet to be confirmed by Chinese authorities.
Should it be implemented, the amount of aluminium available for trade on
the LME may be reduced and could put some further upward pressure on
prices.
Consumption growth to support prices over medium term
Over the medium term, aluminium prices are projected to increase
moderately as the expected closure of high-cost production capacity
reduces the growth in world aluminium output relative to consumption. The
automobile sector is projected to be the key driver of growth in aluminium
consumption over the medium term, supported by both increased
production and increased aluminium intensity of new motor vehicles to
improve fuel efficiency. In addition, central governments in China and India
have initiated a number of policies that aim to increase spending on
infrastructure such as power transmission capacity.
Production growth is projected to be limited by the closure of high-cost
capacity, particularly in the United States. Annual production growth in
China is also projected to slow from 2018. As a result aluminium prices are
projected to rise at an average annual rate of 1.2 per cent to US$1,702 a
tonne (in 2016 dollar terms) by 2020–21.
Consumption
Strong growth in aluminium consumption continues until 2021
World aluminium consumption grew by 7 per cent in 2015 to 57.1 million
tonnes, supported by strong consumption growth in China and a recovery
in the US automotive sector. Consumption in China, the world’s largest
aluminium consumer accounting for more than 54 per cent of the world
consumption, increased 14 per cent to 31 million tonnes because of
government infrastructure spending and increased automobile production.
Resources and Energy Quarterly March 2016
Consumption in the US, the world’s second largest aluminium consumer,
increased 1.2 per cent to 5.3 million tonnes.
Aluminium consumption will be supported over the medium term through
increased use in the automotive sector. Automakers in China, the US,
Germany, Japan, South Korea and India are using aluminium at an
accelerating rate as they substitute away from other materials for new car
and light truck construction. Aluminium is becoming more attractive in
automobile production as it is a safe and cost-effective way of reducing
vehicle weight and meeting energy-efficiency requirements. The
International Aluminium Institute estimates that the use of aluminium in
each automotive vehicle will grow by 58 per cent within 13 years from an
average of 158 kilograms in 2012 to 250 kilograms in 2025.
The construction sector is also expected to contribute to a projected
increase in aluminium consumption over the medium term. Despite
slowing growth in China’s property sector, initiatives to invest in
infrastructure in emerging economies are likely to increase their demand
for aluminium as they start to develop new housing and electricity
infrastructure. As a result, the demand for aluminium is projected to
increase at an annual rate of 3 per cent to 70.6 million tonnes in 2021.
However, the uptake of alternative materials remains a threat to the growth
in aluminium consumption. The steel industry continues to invest heavily to
demonstrate that high strength steels can be engineered to provide the
same weight savings as aluminium. Moreover, composites, a material
made up of resin and reinforcement, also represent a serious competitor in
the automotive sector. Although composite materials have cost and repair
disadvantages compared to alternatives, their price is declining and they
offer high strength, light weight and corrosion resistance and have low
tooling costs.
107
Production
Figure 11.3: World aluminium production
Production keeps rising
The cost of production has been the key contributing factor to a
geographical shift in aluminium production from industrialised nations to
emerging economies such as China, India and Indonesia. Given the
relatively higher cost of production in the US, a large proportion of
productive capacity has been closed. In 2015, US capacity decreased 7
per cent to 1.6 millions tonnes. Given the moderate outlook for
aluminium prices and the development of more efficient, low-cost
smelters elsewhere, the likelihood of further closures in the US is high.
Over the medium term, substantial new capacity is expected to be built
in China and the Middle East. These plants are larger, more efficient and
lower cost than most existing capacity. China is expected to continue to
add to its capacity over the next five years. Similarly the capacity in the
Middle East is projected to increase significantly, rising from 6.5 million
tonnes in 2015 to 8.3 million tonnes in 2021. As a result, global
aluminium production is projected to increase at an annual rate of about
3 per cent to 70.3 million tonnes in 2021.
70
Million tonnes
Declining aluminium prices have squeezed the margins of aluminium
producers and contributed to worldwide production cuts of around 5.5
million tonnes during 2015. A large proportion of these cuts occurred in
China where smelters have been required to curtail production under the
“Supply Side Reform” policy initiated by the Chinese Government.
However, the curtailments have not been fast enough to adequately
reduce the growth in supply.
80
60
50
40
30
20
10
0
2011
Australia
2013
2015
Canada Russia
USA
2017
Middle East
2019
2021
Rest of world
China
Source: World Bureau of Metal Statistics (2016); Department of Industry, Innovation
and Science
Figure 11.4: Cost components for aluminium production, 2015
100
80
USc a pound
World aluminium production increased 8 per cent in 2015 to 57.4 million
tonnes, driven by increased production from new capacity in China, the
world’s largest producer of aluminium. Production from other sources
also increased substantially. Production in Saudi Arabia rose 26 per cent
to 835,000 tonnes, which contributed to the Middle East accounting for a
bigger share of global production.
60
40
20
0
Australia
China
US
India
Malaysia
Alumina feed
Labour
Power
Admin and support
Consumables
Others
Source: AME Group (2016); Department of Industry, Innovation and Science
Resources and Energy Quarterly March 2016
108
Figure 11.5: Australia’s aluminium production
Production to remain steady
Positive export outlook but challenges ahead
The majority of Australia’s production is destined for export. Although
there are emerging opportunities for Australia from the projected
increase in global demand, exports will be constrained by production
capacity and increased competition from lower cost producers,
particularly from the Middle East. In 2015–16, Australia’s exports are
forecast to decrease 3 per cent to just under 1.4 million tonnes. Export
earnings are forecast to fall 4 per cent to $3.7 billion, driven by low
aluminium prices in the first half of the financial year.
1.5
1.0
0.5
0.0
2010–11
2012–13
2014–15
2016–17
2018–19
2020–21
Source: Department of Industry, Innovation and Science
Figure 11.6: Australia’s aluminium exports
Million tonnes
Over the remainder of the medium term, Australia’s exports are
projected to fall at an average annual rate of 2 per cent to around 1.3
million tonnes in 2020–21. However, the value of these exports is
forecast to increase 1.3 per cent annually to $3.9 billion (in 2015–16
dollar terms) by 2020–21, supported by an increasing price and the
assumed depreciation of the Australian dollar.
2.0
Million tonnes
Australia’s aluminium production is projected to remain stable at around
1.6 million tonnes with no major additions or closure of capacity
scheduled over the medium term. Australia is a relatively costcompetitive producer. However, there is little incentive to invest in new
capacity given the new projects planned to be developed elsewhere.
3
5
2
4
2
3
1
2
1
1
0
A$billion
Australia’s production and exports
0
2010–11
2012–13
2014–15
Volume
2016–17
2018–19
2020–21
Value
Source: ABS (2016) International Trade, cat.no.5465.0; Department of Industry,
Innovation and Science
Resources and Energy Quarterly March 2016
109
Alumina
Figure 11.7: Annual alumina price
450
Market summary
400
2016 US$ a tonne
(FOB Australia)
Although a projected increase in world aluminium production should
support increased world alumina consumption, Australia’s alumina
exports are projected to remain stable, with no expansions or closure of
capacity over the medium term. A projected increase in alumina prices
because of rising production costs are expected to contribute to
Australia’s export values increasing by an average 4 per cent a year to
$7.2 billion (in 2015–16 dollar terms) by 2020–21.
350
300
250
200
150
100
50
Prices
0
Alumina prices were under pressure in 2015 but have stabilised in
early 2016
In the short term, there is expected to be support for a gradual rise in
alumina prices because of steady growth in aluminium production and
expected cuts to alumina refining capacity. However, any increase in
prices will be moderated by a sustained increase in supply. The alumina
price is forecast to increase gradually from a low base to average
US$225 a tonne in 2016 and US$257 a tonne in 2017.
China’s “Supply Side Reform” policy that aims to remove high-cost
capacity could pose a risk to the rebound in alumina prices. If Chinese
producers do not achieve the Government’s 7 million tonnes reduction
target, production will be higher than forecast and put downward
pressure on prices. Furthermore the tightening of loan and credit
facilities in China could limit any price recovery as less financial capital
is available for aluminium smelters to purchase alumina, which may
reduce the growth in alumina consumption.
Resources and Energy Quarterly March 2016
2013
2015
2017
2019
2021
Source: Bloomberg (2016) alumina monthly price; Department of Industry, Innovation
and Science
Figure 11.8: World alumina consumption
150
120
Million tonnes
The FOB Australia alumina price decreased by 9 per cent to average
US$301 a tonne in 2015 because of slower consumption growth and
ample supply. However, prices stabilised at the beginning of 2016 and
rose to average US$209 a tonne in February 2016. This was partly
supported by the curtailment of refining capacity in China following the
introduction of the “Supply Side Reform” policy in late 2015.
2011
90
60
30
0
2011
Australia
2013
Russia
Canada
2015
India
2017
UAE
2019
Rest of World
2021
China
Source: AME Group (2016); Department of Industry, Innovation and Science
110
Rising costs to support prices over the medium-term
Moderate growth in alumina consumption in the medium term
Over the medium term, FOB Australia alumina prices are projected to
increase at an annual average rate of 7 per cent to US$313 a tonne (in
2016 dollar terms) in 2021, largely underpinned by an expected increase in
production costs. Rising energy, labour, transport and financing costs are
likely to contribute to the increased cost of producing alumina over the
medium term. Higher prices are also expected to be supported by stronger
economic growth, and higher aluminium consumption.
Medium term alumina demand is driven by aluminium production. Global
aluminium production is projected to increase at an annual rate of 3 per
cent to more than 70 million tonnes in 2021 because of expanding capacity
in China and the Middle East. As a result, the demand for alumina is
projected to increase at an annual rate of 2 to 3 per cent, in line with
aluminium demand growth, to 150 million tonnes in 2021.
Production
Consumption
Strong growth in alumina consumption in the short term
World alumina consumption grew by 12 per cent in 2015 to 116.4 million
tonnes, supported by strong consumption growth in Asia. Consumption in
China, the world’s largest alumina consumer, accounting for more than 56
per cent of world consumption, increased 22 per cent to 65.4 million
tonnes because of increased aluminium production. Consumption in
Russia, the world’s second largest alumina consumer, increased 2.8 per
cent to 6.9 million tonnes.
In the short term, alumina consumption is forecast to increase by 9 per
cent in 2016 and 2017, driven by strong growth in aluminium production in
China as new capacity is commissioned and suspended capacity is
expected to resume operation in 2017. Furthermore, alumina consumption
from the Middle East is estimated to increase 3 per cent in 2016 and a
further 5 per cent to 11.3 million tonnes in 2017, driven by increased
aluminium production. The Middle East will need to rely on imports to meet
this demand because of limited supply of bauxite in the region. India’s
alumina demand is also forecast to increase, rising from 3.6 million tonnes
in 2014 to 6.8 million tonnes in 2017. New aluminium smelters may not be
able to access sufficient energy, which may limit the growth in aluminium
production and hence alumina consumption.
Resources and Energy Quarterly March 2016
Alumina production to increase rapidly until 2018
World alumina production increased by 5 per cent in 2015 to 118.1 million
tonnes, driven by increased production from new capacity in China, the
world’s largest producer, and other countries in Asia including India,
Indonesia and Vietnam. Production in India, the world’s fourth largest
alumina producer, increased 13 per cent to 5.6 million tonnes.
Alumina production is projected to continue to increase until 2018 as new
projects developed in China reach full capacity. The development of new
capacity in China, estimated at 9 million tonnes a year, will be a key
contributor to the forecast growth in global supply. Outside of China, the
Mempawah project in Indonesia and Nhan Co project in Vietnam are
expected to commence production during 2017, adding a combined output
of 1.6 million tonnes of alumina to the region by 2018. Moreover, the
Emirates Global Aluminium Shaheen refinery project (2 million tonnes a
year) is also expected to begin operation in 2017. Other projects in India,
such as the Lanjigarh refinery in Odisha state, are planned to be
operational in 2017, but may face possible delays due to bauxite
availability. As a result, global alumina production is projected to increase
at an average annual rate of 7 per cent between 2016 and 2018 to 146.6
million tonnes in 2018.
111
Beyond 2018, world alumina production is projected to grow at a slower
pace, about 1 per cent a year, driven by a slowdown in investment,
particularly in China, and the expected increased use of recycling
instead of producing new aluminium. In addition, the remote location of
some of the large-scale and integrated projects like those in western
China, India and the Middle East is expected to increase the cost of
development through increased transportation costs. Reflecting the
location of new capacity, the share of developed economies, such as
Canada and the US, in world supply is likely to be lower. Alumina
production is projected to rise by about 1 per cent a year from 2019 to
2021.
Figure 11.9: World alumina production
160
Million tonnes
Production growth to moderate over the remainder of the medium term
120
80
40
0
2011
Australia’s production and exports
Australia’s alumina production decreased by 8 per cent in 2014–15 to
19.9 million tonnes, driven by the closure of the Gove refinery in the
Northern Territory in 2014. Production is forecast to increase by 2 per
cent in 2015–16 to 20.3 million tonnes, supported by higher production
at Rio Tinto’s Queensland Alumina and Yarwun refineries and refinery
efficiency improvements at Rio Tinto’s Australian refineries. Australia’s
alumina production is projected to remain steady at around 20 million
tonnes a year with no major additions or closure scheduled before 2021.
Stronger prices to support export earnings
Australia exports more than 86 per cent of its alumina production, which
is largely destined for China, South Korea, and the Middle East. Facing
intense pressure from lower alumina prices and increased competition
from low-cost producers, Australia’s alumina exports decreased 7 per
cent in 2014–15 to 17.4 million tonnes. However, export earnings
increased 11 per cent to $6.4 billion dollars, supported by the
depreciation of the Australian dollar. In 2015–16, Australia’s exports are
forecast to increase 2 per cent to 17.7 million tonnes but earnings are
Brazil
2015
India
USA
2017
2019
Rest of World
2021
China
Source: AME Group (2016); Department of Industry, Innovation and Science
Figure 11.10: Australia’s alumina production
25
20
Million tonnes
Australia’s alumina production to remain steady
Australia
2013
15
10
5
0
2010–11
2012–13
2014–15
2016–17
2018–19
2020–21
Source: Department of Industry, Innovation and Science
Resources and Energy Quarterly March 2016
112
forecast to fall 8 per cent to $5.8 billion because of forecast low alumina
prices in the first half of the year.
Over the medium term, Australia’s exports are projected to remain
stable at almost 18 million tonnes reflecting stable domestic production
and use. However, the value of these exports is projected to increase by
4 per cent a year to $7.2 billion (in 2015–16 dollar terms) by 2020–21,
supported by a projected increase in the alumina price.
20
10
16
8
12
6
8
4
4
2
0
2015–16 A$ billion
Million tonnes
Figure 11.11: Australia’s alumina exports
0
2010–11
2012–13
2014–15
Volume
2016–17
2018–19
2020–21
Value
Source: ABS (2016) International Trade, cat.no.5465.0; Department of Industry,
Innovation and Science
Resources and Energy Quarterly March 2016
113
Bauxite
Figure 11.12: World bauxite production
Market summary
400
The outlook for Australia’s bauxite exports is positive because of strong
domestic production growth, and increasing market opportunities to
China as socio-environmental concerns in bauxite exporting countries
such as Malaysia and Indonesia continue to limit market supply. As a
result, annual exports are projected to rise 36 per cent a year from
2017–18 to 58.7 million tonnes in 2020–21. Export earnings are
projected to increase at an average annual rate of 22 per cent to $2.7
billion (in 2015–16 dollar terms) by 2020–21.
350
Million tonnes
300
250
200
150
100
50
0
Production
2011
2013
2015
2017
2019
2021
Increased import requirements from China to drive production growth
The declining quality of domestic bauxite and the depletion of resources
in China are expected to be the key drivers in increased production for
export. As a result, global bauxite production is projected to increase at
an average rate of 7 per cent a year for the next three years, reaching
352 million tonnes in 2018. Over the medium term, production is
projected to grow at a slower pace of 2 per cent a year, to 374.2 million
tonnes in 2021, driven by a slowdown in investment.
Source: World Bureau of Metal Statistics (2016); Department of Industry, Innovation
and Science
Figure 11.13: Australia’s bauxite production
140
120
Million tonnes
World bauxite production increased 10 per cent in 2015 to 286.5 million
tonnes, driven by increased production from Malaysia (125 per cent),
India (28 per cent), Russia (18 per cent) and Guinea (6 per cent).
Production in Australia, the world’s largest bauxite producer, rose just 3
per cent to 80.9 million tonnes. The increase in Malaysia’s bauxite
production in 2015 reflects stronger exports from Malaysia, as the
Indonesian raw material ban and depreciation of the Malaysian ringgit
improved its competitiveness.
100
80
60
40
20
0
2010–11
2012–13
2014–15
2016–17
2018–19
2020–21
Source: Department of Industry, Innovation and Science (2016)
Resources and Energy Quarterly March 2016
114
Figure 11.14: Australia’s bauxite exports
Australia’s bauxite production remained unchanged in 2014–15 at 80.3
million tonnes, and is forecast to increase slowly to 81.3 million tonnes
by 2016–17). From 2017–18, growth in Australia’s bauxite production is
projected to increase following the commissioning of new projects.
These include Metro Mining’s Bauxite Hills project (1.95 million tonnes a
year) in the second quarter of 2017–18 and Rio Tinto’s South of Embley
project (22.8 million tonnes a year), in the third quarter of 2018–19.
Australia’s production is projected to grow at an annual rate of 12 per
cent to 126.6 million tonnes in 2020–21.
Exports to escalate from 2017–18
The majority (75 per cent) of Australia’s bauxite production feeds
through to domestic alumina refining, and 25 per cent is exported to
overseas markets, mainly China. Although there are emerging
opportunities for Australia from the projected increase in global demand,
exports to date have been constrained by production capacity. In 2015–
16, Australia’s exports are forecast to decrease 3 per cent to 19.7 million
tonnes, while earnings are forecast to increase 10 per cent to more than
$1 billion, driven by the depreciation of the Australian dollar.
Million tonnes
Australia’s production to increase rapidly
60
3
50
3
40
2
30
2
20
1
10
1
0
2015–16 A $billion
Australia’s production and exports
0
2010–11
2012–13
2014–15
Volume
2016–17
2018–19
2020–21
Value
Source: ABS (2016) International Trade, cat.no.5465.0; Department of Industry,
Innovation and Science
Over the remainder of the medium term, growing environmental
concerns in bauxite exporting countries such as Malaysia and Indonesia
will provide opportunities for Australia’s bauxite producers to increase
production for export markets. For example, Malaysia’s government
announced a suspension of bauxite mining in Pahang during January
2016, an area responsible for 70 per cent of Malaysia’s bauxite output,
for three months to address growing environmental concerns and illegal
mining. The increase in exports will be supported by increased
production capacity from the development of the Bauxite Hills and South
of Embley projects. As a result, Australia’s exports are projected to
increase at an average annual rate of 36 per cent from 2017–18 to 58.7
million tonnes in 2020–21. The value of these exports is projected to rise
by 22 per cent a year to $2.7 billion (in 2015–16 dollar terms) by 2020–
21, supported by large increase volumes.
Resources and Energy Quarterly March 2016
115
Table 11.1: Aluminium, alumina and bauxite outlook
World
Primary aluminium
Production
Consumption
Closing stocks b
unit
2015
2016f
2017f
2018z
2019z
2020z
2021z
kt
kt
kt
57,351
57,136
6,643
60,325
59,999
6,929
63,837
62,577
8,229
66,157
64,907
9,478
66,587
66,983
9,083
67,255
68,767
7,571
70,355
70,592
7,571
6.0
6.0
6.8
7.6
7.1
5.7
5.6
US$/t
US$/t
1,663
1,682
1,601
1,601
1,650
1,620
1,681
1,615
1,745
1,639
1,811
1,662
1,899
1,702
US$/t
US$/t
unit
301
304
2014–15
255
225
2015–16f
257
252
2016–17f
298
286
2017–18z
322
302
2018–19z
324
298
2019–20z
349
313
2020–21z
kt
kt
Mt
1,647
19,895
80.3
1,645
20,294
81.3
1,644
20,369
82.7
1,644
20, 369
87.1
1,644
20,369
99.8
1,644
20,369
125.0
1,644
20,369
126.6
kt
214
250
277
304
331
338
345
kt
A$m
A$m
kt
A$m
A$m
kt
A$m
A$m
1,432
3,823
3,878
17,363
6,353
6,444
20,204
934
947
1,395
3,660
3,660
17,718
5,842
5,842
19,694
1,025
1,025
1,367
3,770
3,717
17,903
5,824
5,743
19,671
1,027
1,013
1,340
3,845
3,717
17,903
6,607
6,388
23,598
1,232
1,191
1,313
3,999
3,774
17,903
7,721
7,287
34,845
1,819
1,717
1,287
4,159
3,822
17,903
7,925
7,284
57,251
2,989
2,747
1,261
4,367
3,909
17,903
8,001
7,164
58,719
3,066
2,745
A$m
A$m
11,110
11,269
10,527
10,527
10,621
10,473
11,684
11,296
13,539
12,778
15,073
13,854
15,434
13,818
- Weeks of consumption
Prices World aluminium c
- nominal
- real d
Alumina spot
- nominal
- real d
Australia
Production
Primary aluminium
Alumina
Bauxite
Consumption
Primary aluminium
Exports
Primary aluminium
- nominal value
- real value e
Alumina
- nominal value
- real value e
Bauxite
- nominal value
- real value e
Total value
- nominal value
- real value e
Notes: b Producer and LME stocks; c LME cash prices for primary aluminium; d In current calendar year US dollars; e In current financial year Australian dollars; f Forecast; z Projected
Source: ABS (2016) International Trade, cat.no.5465.0; AME Group (2016); LME (2016); Department of Industry, Innovation and Science; World Bureau of Metal Statistics (2016)
Resources and Energy Quarterly March 2016
116
Market summary
Although world copper consumption is expected to rise over the medium
term, growth in Australia’s copper exports is expected to be subdued. Low
copper prices have been deterring investment in new productive capacity
and there are few major copper projects in the pipeline. Adding to this,
exploration activity remains close to six year lows and a number of
important operations are scheduled for closure towards the end of the
outlook period. Despite lower volumes, the real value of Australia’s copper
exports is projected to increase to $9.1 billion in 2020–21. Export values
will be supported by a projected increase in copper prices resulting from
slowing global production growth and rising global consumption.
Prices
since 2009. Prices fell as a result of a decline in consumption and an
increase in production, which contributed to a build-up of stocks on both
the London Metal Exchange and the Shanghai Futures Exchange.
Demand growth in China, which accounts for around half of global
consumption, slowed to the lowest level since the Global Financial Crisis
and Europe’s copper consumption declined. Production was supported by
a combination of new projects being completed and increased output at
existing mines, mainly in South America and Asia.
Copper prices are forecast to decline in 2016 to average around US$4,790
a tonne. Consumption growth is forecast to remain subdued as global and
emerging economy growth recovers from a six year low. Production is
forecast to continue expanding steadily as a number of large projects
commissioned during the period of high prices around 2011–12 begin or
increase production.
Copper prices hit a six year low in 2015 and are forecast to fall in 2016
Copper prices declined for a fourth consecutive year in 2015. The LME
price fell by 17 per cent to average US$5,678 a tonne—the lowest level
Figure 12.2: Recent movement in copper prices
10
8,000
8
6,000
6
4,000
4
2,000
2
0
0
2001
2005
2009
Stocks (RHS)
2013
2017
Price
Source: LME (2016) spot price; World Bureau of Metal Statistics (2016)
World Metal Statistics
Resources and Energy Quarterly March 2016
2021
7,000
6,500
US$ a tonne
10,000
Weeks of consumption
2016US$ a tonne
Figure 12.1: Annual copper prices and stocks
6,000
5,500
5,000
4,500
4,000
Jan-2015
Apr-2015
Daily
Jul-2015
Oct-2015
Jan-2016
30 day moving average
Source: LME (2016) official cash copper price
118
The upside potential to the forecast for copper prices is expected to
remain weak in the short term because of idle production capacity.
During 2015, producers across Asia, North America, South America and
Africa announced cuts to mined and refined production in response to
lower prices. As long as there are large volumes of underutilised
capacity, higher prices may simply attract new supply to the market,
making any increase in prices difficult to sustain and constraining the
extent of an upside for prices.
Figure 12.3: Copper consumption (million tonnes), 2005 vs 2015
11.5 China
Copper prices are projected to recover over the medium term
Over the medium term, copper prices are projected to increase to
around US$6,360 (in 2016 dollar terms) in 2021. Consumption growth is
projected to increase from its current fourteen year low, supported by
stronger economic growth in emerging economies. Production growth is
projected to slow towards the end of the outlook period, as the number
of mines being developed declines. Other supply-side factors that may
contribute to upward pressure on prices include declining ore grades,
higher environmental standards in key producing countries, and
operational issues associated with the location of many new mines such
as access to reliable power.
The possibility of supply disruptions is expected to remain an ongoing
risk to copper prices over the medium term, especially given that some
new mines are located in areas which are remote or subject to political
instability. These have the potential to put upward pressure on prices,
especially towards the end of the outlook period when there is expected
to be less spare supply capacity in the market. On the consumption side,
economic developments in China are a key risk to outlook.
4.6
4.6
4.5 Asia (excl. China)
3.6
3.6 Europe
3.5
2.9 Americas
Consumption
Copper consumption decreased marginally in 2015
World refined copper consumption declined by 0.3 per cent in 2015 to
22.7 million tonnes—the first contraction in global copper demand since
2001. Europe’s copper consumption declined sharply while consumption
growth slowed in China, the world’s largest consumer. China’s
consumption growth fell to just 1.3 per cent in 2015—well below the
average annual rate of 12 per cent over the past decade.
Resources and Energy Quarterly March 2016
0.2
0.2
2005
Africa
0.2
0.1 Oceania
2015
Source: World Bureau of Metal Statistics (2016) World Metal Statistics
119
Consumption growth to increase over the medium term
Growth in world refined copper consumption is projected to increase
over the outlook period. Strengthening economic growth in emerging
economies is expected to drive much of the increase in copper
consumption. While copper demand tends to plateau in the latter stages
of economic development, it typically increases rapidly as countries
industrialise, driven by infrastructure investment, construction activity
and expanded manufacturing. Overall growth among emerging
economies is assumed to increase from 4.2 per cent in 2015 to 5.3 per
cent by 2021.
Although India only accounts for 2 per cent of global consumption, it is
projected to make an important contribution to demand growth over the
medium term. Increasing copper consumption will be underpinned by
strong economic growth, which is expected to average 7.7 per cent until
2021, as well as investment in power infrastructure. The Indian
Government has committed to providing all Indians with reliable
electricity supply by 2019. The Twelfth Five-Year Plan, which is currently
undergoing a mid-term appraisal, aimed to increase power generation
capacity by around 45 per cent between 2012 and 2017. The
Government’s ‘Make in India’ program, which aims to make India a
major manufacturing hub, could also stimulate demand for copper.
Global and emerging economy copper consumption will be limited by a
slowdown in demand growth in China, the world’s largest consumer.
Weakening activity in China’s real estate sector is expected to weigh on
China’s copper consumption over the medium term. China’s residential
property market is well-supplied, a legacy of China’s decade-long
construction boom. In 2015, new residential floor space started—an
indicator of metal consumption in the construction sector—declined by
15 per cent. While the People’s Bank of China has eased monetary
policy and the Chinese Government has relaxed restrictions on the
property market, residential construction activity is likely to remain
subdued over the medium term. Slowing residential construction may
Resources and Energy Quarterly March 2016
Figure 12.4: Intensity of copper use
25
Consumption per person (kg)
Weaker economic activity, reduced purchases by China’s State Reserve
Bureau, the declining use of copper in financing deals, and slowing
industrial activity were among the factors responsible for the decline in
China’s demand.
South Korea
20
15
10
United States
5
China
Japan
India
0
0
10
20
30
40
50
GDP per person (thousands of PPP international dollars)
60
Source: International Monetary Funds (2016) World Economic Outlook; World Bureau of
Metal Statistics (2016) World Metal Statistics
also reduce copper consumption through its effect on activity in other
important end-use sectors such as household appliances and
electronics.
Despite the projected slowdown in China’s copper consumption,
investment in electricity infrastructure should provide some support to
growth over the medium term. The Chinese Government plans to spend
US$315 billion to improve its power grid infrastructure between 2015
and 2020. This will involve increasing the length of high-voltage
transmission lines to over 1 million kilometres by the end of 2020, more
than double the 2014 level.
The Chinese Government has also introduced a number of measures to
support the automotive sector, which accounts for around 6 per cent of
copper consumption. One of these is a 50 per cent sales tax cut on
small cars, which was introduced in late 2015 and will last until the end
of 2016. Additional stimulus for auto sales is likely this year. In March,
six Chinese provinces, with a combined population exceeding that of the
United States, were preparing to introduce subsidies for light-truck
120
The outlook for China’s copper demand is expected to be clouded by a
number of developments over the past year. The first is the reported
reduction in the use of copper in financing deals, which accounted for
around 1 million tonnes of China’s copper imports in 2014 according to
Goldman Sachs. During 2015, government policies, interest rate
differentials and a depreciating yuan are believed to have affected the
profitability of such financing deals. If China’s copper imports are
adversely affected by these developments, or copper that was
previously used in financing deals enters the market as new supply,
China’s copper import growth could slow further.
Uncertainty also surrounds the actions of China’s State Reserve Bureau
(SRB), which is in charge of building the country’s strategic reserves of
commodities. In January 2016, the SRB was reportedly seeking 150,000
tonnes of domestically refined copper for its stockpiles, with a view to
supporting local producers during the downturn in prices. While this did
little to stimulate prices, the possibility remains that the SRB could
embark on a more sustained stockpiling effort.
Production
Mine production
World mine production continued to grow strongly in 2015, rising by 4.3
per cent to 19.3 million tonnes. The result was underpinned by a
combination of new projects being completed and increased output at
existing mines, mainly in South America and Asia. In South America, the
increase in output was particularly sharp in Peru with production ramping
up or commencing at a number of large new projects. As a result, Peru
overtook China to become the world’s second largest producer. In Asia,
output increased rapidly in Indonesia as a result of strong production
gains at several large established mines. Production more than tripled
at Newmont’s Batu Hijau mine after four years of disrupted output while
Resources and Energy Quarterly March 2016
Figure 12.5: Copper use in China’s vehicle production
80
Thousand tonnes
purchases and other provinces may roll out similar policies. Policies
such as these have the potential to support demand for the sector’s
copper consumption over the short term. Figure 12.5 shows that the
amount of copper used in China’s vehicle production increased in late
2015 after the introduction of the 50 per cent sales tax cut on small cars.
60
40
20
0
Jan-2015
Apr-2015
Jul-2015
Passenger cars
Oct-2015
Jan-2016
Commerical cars
Source: Bloomberg (2016) Bloomberg Intelligence Copper
output climbed sharply at Freeport-McMoRan’s Grasberg mine.
Production expanded in 2015 despite a number of mine suspensions
and production cuts resulting from low prices for both copper and the byproducts generated from copper mining. The most significant production
losses were a result of Glencore suspending operations at its Katanga
mine in the Democratic Republic of Congo and its Mopani operation in
Zambia for 18 months. However, cuts to supply were well below the
level required to match gains from new mines and project expansions.
World mine production is projected to continue growing strongly over the
short term. A number of large projects commissioned during the period
of high prices around 2011–12 are expected to commence or expand
production in 2016 and 2017. MMG’s Las Bambas mine in Peru, which
commenced production in 2015, will be one of the world’s largest copper
mines in its first full year of operation. Grupo Mexico’s Buenavista’s mine
expansion in Mexico will contribute to a doubling in copper production
from the mine in 2016.
121
Production growth is likely to be tempered by further mine suspensions
and production cuts. According to AME Group, production cutback
announcements are expected to reduce output over 2016 and 2017 by
around 833,000 tonnes, or around 2 per cent of projected global
production. Some market observers believe the supply response to low
prices has been delayed, with companies continuing to operate in the hope
of an industry rationalisation and a return to higher prices. As a result,
further cutback announcements are possible.
World mine production is projected to slow towards the end of the outlook
period, as the number of new mines commencing production begins to
decline. The effect of issues such as declining ore grades on production
may become more pronounced towards the end of the outlook period, as
output growth slows. The projected slowdown in growth may be more rapid
if further mine suspensions are announced.
Refined production
with mine production, a number of operations were suspended as a result
of increased financial pressure from low prices. Mine suspensions affected
both conventional refineries and producers that employ solvent extraction–
electrowinning (SX-EW) refining methods.
World refined copper production is forecast to increase in 2016, as new
copper refining capacity is completed. However, production growth will be
limited by the announcement by nine Chinese smelters that they intend to
cut production by a minimum of 350,000 tonnes in 2016—around 1.5 per
cent of total refined production—in response to lower prices. The
suspension of operations at Glencore’s Katanga and Mopani processing
complexes in Africa will also reduce refined production.
Over the medium term, growth in refined production is expected to recover,
driven by increasing global copper consumption and projected higher
prices. Refined production is projected to grow at an average annual rate
of 2 per cent until 2021 to 26 million tonnes.
World refined production increased by just 0.7 per cent in 2015 to 23.1
million tonnes. This represented the weakest annual growth since 2009. As
Figure 12.6: Shares of new production in 2015
Share of new output (per cent)
100
80
These countries accounted for over
90 per cent of new production
60
40
20
0
Peru
Indonesia
Mongolia
Kazakhstan
Brazil
DRC
China
Armenia
Iran
Mexico
Source: World Bureau of Metal Statistics (2016) World Metal Statistics
Resources and Energy Quarterly March 2016
122
Australia’s production and exports
Figure 12.7: Australia’s quarterly copper exploration
Exploration expenditure remains close to decade lows
Mine production to increase before mine closures take effect
Australia’s copper mine production recorded a small increase in 2015,
rising by 0.5 per cent to 971,000 tonnes. Production at one of Australia’s
largest mines, BHP Billiton’s Olympic Dam in South Australia, declined
sharply in the first two quarters of the year as a result of an electrical
failure that forced the closure of a crushing mill. However, this was offset
by production gains at a number of other mines. Oz Mineral’s Prominent
Hill mine in South Australia recorded its highest ever annual output in
2015, producing around 130,300 tonnes of copper.
Australia’s mine production is projected to grow steadily until 2018–19,
supported by a projected increase in prices. Mine production is projected
to decline in 2019–20 and 2020–21 as a result of a number of mine
closures. Sandfire Resources’ Degrussa mine in Western Australia,
Australia’s fourth largest mine in 2015, will cease production in mid2021. A number of other mines, such as Aditya Birla’s Nifty mine in
Western Australia, are also expected to close over the outlook period.
Growth in copper mine production will be constrained by a thin
investment pipeline. No new copper projects have been completed in
more than a year and there are no major projects at the committed stage
of the project development cycle. A slow projected recovery in copper
prices will only serve to further limit the feasibility of new projects.
Declining ore grades—which increase the amount of ore required to be
processed to produce a given level of copper—may also limit mine
production.
Exploration has fallen by around 75 per cent
140
120
100
$A millions
Australia’s copper exploration expenditure increased by 4 per cent to
$31 million in the December quarter 2015. Despite the rise, copper
exploration remains close to its lowest level since the Global Financial
Crisis. Copper exploration expenditure has declined by around 75 per
cent since its June quarter 2012 peak of $120 million.
80
60
40
20
0
2005
2007
2009
2011
2013
2015
Source: ABS (2015) Mineral and Petroleum Exploration, cat. no. 8412.0
exploration expenditure from its current decade low will likely be
required for this to occur.
Refined production to remain steady
Australia’s refined copper production declined by 6 per cent to 481,000
tonnes in 2015. Output growth was constrained by the closure of the
crushing mill at BHP Billiton’s Olympic Dam.
Australia’s refined copper production is projected to remain broadly
stable over the outlook period. Production will be supported by the
extension of operations at Glencore’s Mount Isa Smelter and Townsville
Copper Refinery. The facilities were originally scheduled for closure in
2016 and 2017, respectively, but could remain open until 2022 after
Glencore and the Queensland Government finalised new environmental
licensing conditions late last year.
Uncertainty surrounds the outlook for mine production, especially
towards the end of the projection period. Expectations of rising copper
prices, for example, may trigger greater investment in mine expansions
or new projects, adding to Australian production. However, a pick up in
Resources and Energy Quarterly March 2016
123
Economic developments in China, Japan and India—Australia’s three
largest export markets—will be particularly important for Australian
copper exports. Slowing consumption growth in China, Australia’s
largest export market, is a key risk to the outlook.
Australia’s copper exports (in metal content terms) are projected to
increase over the first few years of the projection period, reaching 1.1
million tonnes in 2018–19. However, declining production in 2019–20
and 2020–21 is expected to reduce copper exports over the last two
years of the outlook period. Copper exports are projected to contract at
an average annual rate of 0.5 per cent to 978 thousand tonnes by 2020–
21.
The value of Australia’s copper exports is projected to increase at an
average annual rate of around 1 per cent to $9.1 billion (in 2015–16
dollar terms) in 2020–21, with the projected increase in copper prices
offsetting the fall in export volumes.
1,200
800
400
0
2004–05
2008–09
2012–13
Mined (metal content)
2016–17
2020–21
Refined
Source: Department of Industry, Innovation and Science
Figure 2.9: Australia’s copper exports
10
2,000
8
1,600
6
1,200
4
800
2
400
0
2004–05
2008–09
2012–13
Quantity (RHS)
2016–17
Thousand tonnes
Australia’s copper exports (in metal content terms) decreased by 2.5 per
cent in 2014–15. A fall in refined copper exports, likely resulting from
reduced output at BHP’s Olympic Dam, was the main driver of the result.
The value of Australia’s copper exports fell by 2.7 per cent in 2014–15,
consistent with the decline in volumes and the copper price.
1,600
Thousand tonnes
Exports to rise and fall with production
Figure 2.8: Mine and refined production
2015–16 A$ billion
The outlook for Australia’s refined production will be heavily shaped by
developments at both Glencore’s facilities in Queensland and BHP
Billiton’s Olympic Dam. Together Glencore and BHP Billiton account for
around 95 per cent of Australia’s refined production. The closure of
Glencore’s Townsville refinery before 2022, for example, would have a
significant effect on Australia’s refined production.
0
2020–21
Value
Source: ABS (2016) International Trade, cat.no.5465.0; Department of Industry,
Innovation and Science
Resources and Energy Quarterly March 2016
124
Table 12.1: Copper outlook
World
unit
2015
2016f
2017f
2018z
2019z
2020z
2021z
– mine
kt
19,265
20,889
21,670
22,725
23,350
23,891
24,575
– refined
kt
23,093
23,474
24,092
24,730
25,004
25,484
26,066
Consumption
kt
22,736
23,195
23,986
24,741
25,265
25,702
26,247
Closing stocks
kt
924
1,204
1,310
1,300
1,038
821
639
2.1
2.7
2.8
2.7
2.1
1.7
1.3
US$/t
5,678
4,786
5,800
6,200
6,650
6,925
7,100
USc/lb
258
217
263
281
302
314
322
US$/t
5,743
4,786
5,695
5,959
6,248
6,355
6,364
USc/lb
260
217
258
270
283
288
289
unit
2014–15
2015–16
2016–17
2017–18
2018–19
2019–20
2020–21
Mine output
kt
954
972
991
1,009
1,032
1,007
957
Refined output
kt
454
520
484
478
478
478
478
– ores and conc. c
kt
2,056
1,838
1,935
2,030
2,116
2,020
1,831
– refined
kt
423
496
458
451
451
451
451
– nominal
A$m
8,468
7,601
7,703
9,106
10,054
10,382
10,119
– real d
A$m
8,590
7,601
7,596
8,804
9,489
9,542
9,059
Production
– weeks of consumption
Price LME
– nominal
– real b
Australia
Exports
Export value
Notes: b In current calendar year US dollars; c Quantities refer to gross weight of all ores and concentrates; d In current financial year Australian dollars; f Forecast; z Projection
Source: ABS (2016) International Trade, cat.no.5465.0; LME (2016) spot price; World Bureau of Metal Statistics (2016) World Metal Statistics; Department of Industry, Innovation and Science
Resources and Energy Quarterly March 2016
125
30,000
25,000
20,000
15,000
10,000
5,000
0
Jan-10
Prices and stocks
Nickel price declined steadily in 2015 owing to persistently high stocks
and a slow production response
Lower prices in the short term but stronger prospects for a recovery in
the medium term
The nickel price continued to fall at the beginning of 2016, reaching a 13
year low of US$7,710 a tonne in mid-February before a short-lived surge
in prices that was observed across most metals. It is unlikely that any
substantial increases in prices can be sustained in the short term
because consumption is forecast to remain subdued, and any increase
in prices is likely to prompt further delays in the suspension of lossmaking operations.
Resources and Energy Quarterly March 2016
Jan-12
Jan-13
LME spot price
Jan-14
Jan-15
Jan-16
90 day moving average
Source: LME (2016) Nickel spot price
Figure 13.2: Nickel prices and LME stocks
2016 US$ a tonne
The LME nickel price declined steadily throughout 2015 to average
US$11,839 a tonne, 30 per cent lower than 2014. Stocks remained
persistently high in 2015 and contributed to the downward pressure on
prices. While the first substantial decline in London Metal Exchange
(LME) stocks since 2011 occurred in the December quarter 2015, the
drawdown was not sustained and stockpiles were replenished to finish
the year at 445,000 tonnes, an increase of 8 per cent year-on-year.
Despite historically low prices and sluggish consumption growth,
producers have been reluctant to substantially reduce production,
because of the need for new projects to generate cash flow, and the
widespread perception that high cost producers in China would be the
first to reduce production.
Jan-11
50,000
45,000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
16
14
12
10
8
6
4
2
Weeks of consumption
Slowing economic activity, particularly in China, has resulted in
historically low nickel prices. This has forced a number of Australian
operations to be placed on care and maintenance due to financial and
operational challenges and is expected to contribute to lower exports in
the short term. Although there are improved prospects for nickel
consumption from emerging economies in the medium term, Australia’s
share of world exports is expected to decrease towards the end of the
medium term as constrained access to ore limits production growth and
higher production from other major suppliers increases competition.
Figure 13.1: Nickel daily price
US$ a tonne
Market summary
0
2000
2005
2010
Stocks (rhs)
2015
2020
Price
Source: LME (2016) Zinc cash settlement price; Department of Industry, Innovation
and Science
127
Prices are forecast to average US$8,838 a tonne for 2016, 25 per cent
lower than 2015.
Box 13.1: Commodities used as financial instruments and shadow
warehouse stocks creating price uncertainty
Despite the temporary rally, it is estimated that 70 per cent of producers
are making a loss at current prices. Reductions in production capacity
will become increasingly likely over time as producers that cannot
sustain the accumulated losses are forced to close. When significant
production cuts occur, supply availability is expected to tighten, which
will support a modest recovery in prices.
Historically exchange stocks have provided a good indication of the
relative supply and demand of a commodity and have helped explain
price movements. However, financial based demand and the increasing
opacity of stocks in shadow warehouses has created additional
uncertainty, volatility and unpredictability in price movements.
For the remainder of the outlook period, there are stronger prospects for
a recovery in prices supported by growth in the transport, infrastructure
and consumer durables sectors, and an expected increase in production
costs. Nickel prices are projected to increase to around US$12,000 (in
2016 dollars) a tonne by 2021.
However, growing stockpiles of nickel outside of LME warehouses may
present a key risk to the price outlook. Although LME stocks declined
marginally at the start of 2016, Shanghai Futures Exchange (SHFE)
nickel stocks increased 33 per cent in first three months of 2016, and
more than six-fold from June 2015 to March 2016. Further, there is
evidence of substantial stocks being held in bonded warehouses for use
as collateral in the shadow lending market—more nickel has been
imported into China than has shown up in SHFE warehouses. If nickel
stocks flow back to LME warehouses from other sources as market
conditions change, this will contribute to a rapid increase in LME stocks
and put substantial downward pressure on prices.
World consumption
Slowing world consumption to continue in the short term
In 2015, world refined nickel consumption increased by 1 per cent to 1.9
million tonnes. This represented a substantially slower rate of growth
compared with the past six years when global consumption grew at an
average annual rate of 9 per cent. Weaker economic activity in China
has been the major contributor to slowing nickel consumption based on
slowing investment in infrastructure and industrial activity, and a wellsupplied residential housing market. While China’s nickel consumption
grew by 3 per cent to 980,000 tonnes in 2015, this is in stark contrast to
growth rates as high as 22 per cent five years ago.
Resources and Energy Quarterly March 2016
Commodities have increasingly been used as financial instruments since
the global financial crisis. Differences in interest rates between importing
and exporting countries created money-making opportunities for
financial investors, which generated financial demand, as opposed to
industrial demand, for commodities. This affected the price dynamics of
commodities including aluminium, copper, nickel and zinc. More recently
the practise has been declining as the performance of other assets, such
as Treasury bonds, improves.
Uncertainty in prices has been further compounded by the increasing
opacity of stocks. The LME system stores metals in hundreds of
warehouses around the world. Historically LME stocks have provided a
good indication of the relative supply and demand for each commodity
and have helped to explain price movements. However, metals are
increasingly being stored outside the LME system in facilities that are
unregulated and are not required to disclose their holdings—referred to
as ‘shadow warehouses’ or ‘ghost stocks’. Shadow warehouses offer a
cheaper alternative to regulated warehouses in addition to shorter wait
times to move metals out of storage.
The reduced visibility of stocks can create substantial uncertainty for
physical consumers and producers. For example, declining stocks at
LME warehouses may not reflect increased consumption or a reduction
in production, but rather the movement of stocks into shadow
warehouses. If a large volume of metal is suddenly transferred back to
LME facilities, stocks will increase rapidly and put downward pressure
on exchange prices. The regular occurrence of these types of
transactions presents a significant downside risk to prices. This occurred
in 2014 during the Qingdao port incident where there were occurrences
of multiple pledging of metals for collateral. This resulted in significant
flows of nickel back to the ‘safety’ of LME warehouses, which halted the
strong price rally that had begun at the start of the year.
128
Nickel is primarily used for stainless steel production, and nickel
consumption has been affected by falling exports of stainless steel from
China because of weak export demand, partly influenced by the
increased adoption of anti-dumping measures in the EU. Nickel
consumption in the EU also contracted, driven by a deliberate draw
down in stocks in the stainless steel sector. Growth in world nickel
consumption is expected to remain slow in 2016 and 2017, with world
consumption forecast to grow by 2 per cent to 2 million tonnes in 2017.
Nickel-based superalloys are used in the manufacture of gas turbines
(used in aircraft, power generation and marine propulsion), and military
and aerospace equipment and vehicles. Although there is strong
potential for considerable growth in usage in these technologies, the
high cost of other alloying metals used along with nickel in superalloys
may moderate usage. The transport sector is expected to grow
considerably over the projection period, supporting nickel consumption
growth in key components of automobiles, trains, aircraft and ships.
Stronger prospects for consumption growth in medium term
The intensity of nickel consumption follows a similar trajectory to that of
steel on the ascent—nickel and steel consumption per person increases
as GDP per person grows. However, nickel use typically continues to
grow as countries become more developed. Nickel is primarily used to
produce austenitic stainless steel, which are a group of corrosion
resistant steels. The high nickel content of the 300 series (8 to 12 per
cent) results in superior thermal and corrosion resistance and a better
surface appearance, and tends to be used in manufacturing and
industrial applications. As such, there is expected to be a divergence in
steel and nickel consumption growth as economies develop, sustained
through increased overall consumption and greater demand for better
quality (more stainless steel intensive) and higher value products, which
will displace lower quality goods.
Figure 13.3: World nickel consumption
2,500
Thousand tonnes
Over the medium term, growth in nickel consumption is not expected to
reach the same rates recorded at the peak of China’s investment-led
growth. However, there are still strong prospects for consumption growth
over the outlook period, supported by the underlying trends of growing
populations, increased urbanisation and an expanding middle class in
emerging economies (described in the overview chapter). Over the
medium term, nickel consumption is projected to increase at an average
annual rate of 3 per cent to 2.2 million tonnes in 2021.
2,000
1,500
1,000
500
0
2010
2012
2014
2016
China
European Union Rest of World
South Korea
Japan
2018
2020
United States
India
Source: International Nickel Study Group (2016)
Towards the end of the outlook period, China, India and other emerging
economies are expected to invest heavily in upgrading infrastructure and
expanding industrial and output capacity. This will support increased
nickel consumption as more stainless steel is used to modernise
infrastructure and industrial buildings, and alloys are used in specialist
engineering, machinery and energy generation.
Resources and Energy Quarterly March 2016
129
World production
Figure 13.4: World mined nickel production
World mine production constrained in the short term, moderate growth in
medium term
Over the medium term, mined production is expected to increase at an
average annual rate of 1 per cent to 2.2 million tonnes in 2021. New
capacity from projects under development is projected to offset planned
closures because of ore depletion in Western Australia and Brazil.
These projects include Nova-Bollinger in Australia with a capacity of
28,000 tonnes and Dumont in Canada with a capacity of 34,000 tonnes.
In Indonesia, production is projected to increase to provide feedstock to
newly built smelters.
However, low profitability owing to the combination of persistently low
prices and higher costs may result in closures or suspensions of existing
projects, or delays to the commissioning of new projects, and presents a
risk to the mined production projection. As sulphide deposits are
depleted, the share of new production coming from laterite projects is
expected to increase. Laterite deposits are typically lower quality
because of high arsenic and magnesium levels and must therefore be
blended down with higher-quality feed or processed unconventionally.
To date, large laterite projects have faced technological difficulties and
high capital costs associated with high pressure acid leaching (HPAL)
operations, delaying the pace at which new projects, such as Vale’s
VNC in New Caledonia, can increase production to reach nameplate
capacity. Mined supply could be reduced if these and other more
complex laterite projects encounter further technical issues. Laterite
producers, particularly in Greece, New Caledonia, Madagascar and
Brazil, are especially exposed to low prices (estimated to be around 60
per cent of supply in 2020). However, laterite producers in the
Philippines and Indonesia have relatively lower labour and transport
costs, and higher grade ores and are less likely to reduce production in
response to low prices.
Resources and Energy Quarterly March 2016
Thousand tonnes
2,500
2,000
1,500
1,000
500
0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Indonesia
Philippines
Rest of world
Russia
Australia
Canada
Brazil
New Caledonia
Source: International Nickel Study Group (2016)
Figure 13.5: New mined nickel production by ore grades
800
700
Thousand tones
World mined nickel production decreased 3 per cent in 2015 to 2.1
million tonnes, constrained by low prices and ore depletion. Higher
production at existing mines including Lundin’s Eagle mine in the United
States, Ambatovy in Madagascar and VNC in New Caledonia did not
offset reductions in production in Botswana, Indonesia, Russia and
Australia.
3,000
600
500
400
300
200
100
0
2015
2016
Sulphide
2017
Laterite (HPAL)
2018
2019
2020
Laterite (FeNi)
Source: Bloomberg Industries (2016)
130
At the end of 2015, it is estimated that 70 per cent of producers were
making a loss on a cash cost basis. With any significant increases in the
nickel price unlikely to be sustained, the closure of capacity becomes
increasingly likely over time as losses accumulate and operations are no
longer able to be supported by already financially struggling companies.
Any reductions in production from loss-making producers are projected
to be moderated by the commissioning of new smelters and refineries in
Indonesia.
Over the medium term, supply is forecast to increase at an average
annual rate of 2 per cent to 2.1 million tonnes. Much of the new supply
growth is expected to be dominated by new ferronickel, nickel pig iron
and nickel matte production in Indonesia. At the start of 2014, Indonesia
announced plans to encourage the development of the downstream
processing industry. Exports of unprocessed raw materials were banned
and tax discounts provided to companies that were able to show
progress in smelter project development. The results of these policies
are beginning to materialise as newly commissioned smelters begin to
be commissioned. These projects include the PT Sulawesi Mining
Investments smelter with a capacity of 90,000 tonnes and other
ferronickel producers with a combined capacity of more than 100,000
tonnes.
2,500
Thousand tonnes
World refined nickel production decreased by 1 per cent in 2015,
primarily because of lower production in China. Despite low prices, world
production has not slowed by the magnitude required to address the
issues encountered by a well-supplied market because of two key
factors. First, there has been a widely held perception among refined
producers that high-cost producers in China would be the first to stop
production and consequently aid the recovery of the price. While refined
production in China was reduced, it was done so from a high base, and
did not occur at a rate as fast as expected as unanticipated widespread
cost cutting allowed producers to remain viable. Second, continued
production growth has been necessary for some new projects to
generate cash flow and repay construction loans.
Figure 13.6: World refined nickel production
2,000
1,500
1,000
500
0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Rest of world
China
Russia
Australia
Indonesia
New Caledonia
Canada
Source: International Nickel Study Group (2016)
Figure 13.7: Nickel smelter and refinery cash costs
2015 US$ a tonne
Refined production is likely to decrease in response to low prices in the
short term
30,000
20,000
10,000
0
-10,000
-20,000
-30,000
-40,000
-50,000
0
20
Cash costs
40
60
80
Cumulative production, per cent
100
Average nickel price Q4 2015
Source: AME Group (2015); LME (2016) Nickel spot price
Resources and Energy Quarterly March 2016
131
Figure 13.8: Australia’s nickel exploration expenditure
Australia’s exploration expenditure for nickel and cobalt in the December
quarter 2015 decreased 1 per cent relative to the previous quarter, to
$14.6 million. For 2015 as a whole, exploration expenditure was $65.2
million, 27 per cent down from $89.2 million in 2014. The significant
decrease in exploration expenditure reflects the reduced incentive to
explore because of low prices and cost cutting activities by mining
companies.
Strong prospects for Australia’s nickel exports
Strong prospects for growth in the manufacturing, industrial and
transport sectors in emerging economies over the medium term are
expected to support demand for Australia’s nickel exports. However, this
will be moderated by domestic production constraints and the risk of
increased supply competition from additional world production
incentivised by higher prices towards the end of the outlook period.
Australia’s mined production to be supported by a recovery in price over
the medium term
Australia’s mined nickel production is forecast to decrease 12 per cent to
227,000 tonnes in 2015–16 as lower prices result in production cuts. For
example, Panoramic Resource’s Lanfranchi mine was placed on care
and maintenance in November 2015. BHP and Glencore have been
cutting costs to make their operations cash positive. However, a
projected recovery in nickel prices should improve the viability of their
operations and reduce the likelihood of further reductions in production.
Over the medium term, mined production is projected to increase at an
average annual rate of 4 per cent to 279,000 tonnes in 2020–21. The
assumed resumption of operations at Poseidon’s mines at Lake
Johnston, Black Swan and Mt Windarra are projected to support the
increase in production, offsetting the planned closure of BHP’s mines
towards the end of the outlook period.
Resources and Energy Quarterly March 2016
A$million
Exploration expenditure down due to low prices
90
30,000
75
25,000
60
20,000
45
15,000
30
10,000
15
5,000
0
Mar-10
US$ a tonne
Australia’s exploration, production and exports
0
Mar-11
Mar-12
Mar-13
Nickel exploration expenditure
Mar-14
Mar-15
Nickel price (rhs)
Source: ABS (2016) Mineral and Petroleum Exploration , cat.no.8412.0;
LME (2016) Nickel spot price
Australia’s refined production supported by higher prices but constrained
by access to ore in the medium term
Australia’s refined nickel production is forecast to decrease 3 per cent in
2015–16 to 111,000 tonnes, driven by planned outages at BHP’s
Kalgoorlie smelter and Kwinana refinery, and reductions in third party
ore supply at BHP’s Kambalda concentrator. Queensland Nickel’s
Yabulu refinery has temporarily stopped production until July 2016 due
to difficulties importing ore from New Caledonia in addition to ongoing
financial and regulatory issues. Over the medium term, refined
production is projected to increase at an average annual rate of 2 per
cent to 122,000 tonnes in 2020–21, with a projected increase in prices
encouraging higher production. This will be moderated by the ability of
BHP’s refinery and smelter to obtain access to third party ore as their
reserves deplete towards the end of the outlook period.
132
Increasing export volumes and values
Australia’s exports of nickel in 2015–16 are forecast to be 242,000
tonnes, down 10 per cent from 2014–15 due to planned and price
related suspension of operations. Earnings from nickel exports are
forecast to decline 32 per cent to $2.4 billion in 2015–16, due to forecast
lower volumes and prices.
Over the outlook period, Australia’s nickel exports are projected to
increase at an average annual rate of 4 per cent to reach 295,000
tonnes in 2020–21, supported by increased production. Export values
are projected to increase at an average annual rate of 4 per cent to
reach $3 billion (in 2015–16 dollars) in 2020–21, supported by increased
volumes and projected higher nickel prices.
350
14
300
12
250
10
200
8
150
6
100
4
50
2
0
2000–01
2004–05
2008–09
Volume
2012–13
2016–17
2015–16 A$ billion
Thousand tonnes
Figure 13.9: Volume and value of Australia’s nickel exports
0
2020–21
Value (rhs)
Source: ABS (2016) International Trade, cat.no.5465.0; Company reports, Department of
Industry, Innovation and Science
Resources and Energy Quarterly March 2016
133
Table 12.1: Nickel outlook
World
unit
2015
2016f
2017f
2018z
2019z
2020z
2021z
– mine
kt
2,123
2,061
2,198
2,280
2,342
2,352
2,215
– refined
kt
1,955
1,908
1,962
1,997
2,051
2,111
2,074
Consumption
kt
1,891
1,931
1,971
2,023
2,079
2,137
2,202
Stocks
kt
528
504
496
470
442
416
287
14.5
13.6
13.1
12.1
11.1
10.1
6.8
US$/t
11,839
8,838
9,638
10,538
11,438
12,400
13,400
Usc/lb
537
401
437
478
519
562
608
US$/t
11,975
8,838
9,463
10,127
10,747
11,380
12,012
Usc/lb
543
401
429
459
487
516
545
unit
2014–15
2015–16f
2016–17f
2017–18z
2018–19z
2019–20z
2020–21z
– mine cs
kt
258
227
238
275
295
286
279
– refined
kt
115
111
118
120
117
119
122
– intermediate
kt
84
52
40
42
43
43
42
Export volume ds
kt
268
242
255
292
314
308
295
– nominal value s
A$m
3,583
2,439
2,099
2,521
2,894
3,112
3,309
– real value es
A$m
3,634
2,439
2,070
2,437
2,731
2,860
2,963
Production
– weeks of consumption
Price LME
– nominal
– real b
Australia
Production
Notes: b In current calendar year US dollars; c Nickel content of domestic mine production; d Includes metal content of ores and concentrates, intermediate products and nickel metal;
e In current financial year Australian dollars; f Forecast ; s Estimate; z Projection
Source: ABS (2016) International Trade, cat.no.5465.0; Company reports; Department of Industry, Innovation and Science; International Nickel Study Group (2016); LME (2016); World Bureau
of Metal Statistics (2016)
Resources and Energy Quarterly March 2016
134
Market summary
Despite improved prospects for zinc demand in emerging economies in the
medium term, Australian producers will not be able to fully capitalise on
these opportunities as mine closures constrain production. As a result,
Australia’s zinc exports are projected to decline to 1 million tonnes by
2020–21. Australia is not the only major producer to encounter supply
constraints from ore depletions, which is expected to contribute to a
projected recovery in zinc prices over the projection period. Reflecting this,
Australia’s zinc exports are projected to grow at an average annual rate of
4 per cent to reach $2.6 billion (in 2015–16 dollar terms) in 2020–21.
Price and stocks
Zinc price weighed down in 2015 by sluggish consumption and bearish
sentiment
The LME zinc price averaged US$1,933 a tonne in 2015, 11 per cent lower
than 2014. The LME zinc price steadily declined in 2015 due to slowing
consumption, with the exception of short lived price increases in April and
October, after Glencore announced a planned halt at its global operations.
LME stocks decreased 33 per cent in 2015 to 464,000 tonnes. However,
despite tightening supply from ore depletion and price related closures
towards the end of the year, the zinc price was negatively affected by
bearish sentiment affecting commodity markets.
Positive outlook for prices driven by strong consumption growth and
constrained production
Although consumption growth is forecast to remain relatively sluggish in
the short term due to slowing economic activity in China, mine closures
and the suspension of operations are expected to flow through the supply
chain and affect refined production. While LME stocks are expected to
continue to decline, there has been a substantial increase in Shanghai
Future Exchange (SHFE) stocks at the start of 2016 and uncertainty
regarding the magnitude of zinc stocks being held outside of market
warehouses. The zinc price is expected to remain subdued in the first half
of 2016, before making a moderate recovery towards the end of the year to
average US$1,705 a tonne for the year, 13 per cent lower than 2015.
Figure 14.2: Annual zinc stocks
Figure 14.1: Zinc daily price
2,800
Thousand tonnes
2,600
US$/tonne
2,400
2,200
2,000
1,800
1,600
1,400
1,200
Jan-10
Jan-11
Jan-12
Jan-13
LME spot price
Source: LME (2016) Zinc spot price
Resources and Energy Quarterly March 2016
Jan-14
Jan-15
90 day moving average
Jan-16
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
2000
2003
2006
LME
2009
2012
2015
SHFE
Source: LME (2016) Zinc closing stock; SHFE (2016) Zinc deliverable stocks
136
Over the medium term, the zinc price is projected to increase steadily to
average US$2,149 (in 2016 dollar terms) a tonne in 2021. Higher prices
will be supported by constrained production and modest consumption
growth in the automobile and infrastructure sectors. However, the
responsiveness of producers to a substantial price recovery may present
a large risk to the price outlook. As the zinc price reaches around $2,300
a tonne, which stimulated production in 2014, it becomes increasingly
likely that production at existing operations, particularly in China, will
increase rapidly.
World consumption
Automobile and infrastructure sectors to support consumption growth
Refined consumption increased 2 per cent to 13.8 million tonnes in
2015. The rate of growth was slower than recorded in 2014 because of
slowing construction activity and infrastructure investment, particularly in
China, which currently consumes about half the world’s refined zinc.
Over the medium term, consumption is projected to increase at an
average annual rate of 2 per cent to reach 15.9 million tonnes in 2021.
Zinc is considered to be a commodity that grows in consumption as
countries reach the middle and later stages of their economic
development. Consumption of zinc is therefore expected to continue to
be supported by emerging economies in the process of economic
development.
Resources and Energy Quarterly March 2016
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
9
8
7
6
5
4
3
2
1
0
2000
2005
2010
stocks (rhs)
2015
Weeks of consumption
2016 US$ a tonne
Figure 14.3: Annual zinc prices and stocks
2020
price
Source: LME (2016) Zinc cash settlement price; Department of Industry, Innovation
and Science
Figure 14.4: Zinc intensity of use
Refined zinc consumption
(tonnes per capita)
Uncertainty around the magnitude of unreported stocks may present a
large risk to the price outlook. Zinc stocks at the New Orleans LME
warehouse have been highly variable over the last year, with large
volumes of stock appearing in a short period of time. This likely reflects
the decision by stock financiers to seek out the lowest cost storage
rents, resulting in fierce rental competition and the mass movement of
metal into and out of LME warehouses throughout 2015. The constant
movement of zinc holdings has increased the difficultly of accurately
gauging stock levels. As such, the price may be more highly influenced
by unreported zinc stocks rather than any substantial changes to
production or consumption (please refer to Box 13.1 in the nickel note
for further details on unreported stocks).
14
12
10
8
6
4
2
0
0
China
10
20
30
40
50
GDP per capita (‘000 PPP international dollars)
India
Japan
Korea
60
United States
Source: IMF (2016) World Economic Outlook; World Bureau of Metal Statistics (2015)
137
Figure 14.5: Passenger car sales
Consumer spending on high value, zinc-intensive goods, such as
household appliances and other consumer durables is also expected to
increase, driven by rising household incomes in China and India in
particular. Higher incomes, combined with projected low fuel prices, are
also expected to support a rapid increase in automobile production and
sales. The rates of car ownership in emerging economies are relatively
low. For example, there are 84 cars per 1,000 people in China and 17
cars per 1,000 people in India, in contrast to 379 in the United States. In
China, car ownership in rural areas is being encouraged by the
government as congestion is less of an issue. The pace and extent to
which aluminium, which is lighter and helps meet fuel-efficiency
requirements, is substituted for galvanised steel in vehicles presents a
key risk to this assessment. If more countries focus on fuel efficiency,
the substitution could occur more rapidly, reducing the consumption of
zinc for galvanisation.
Continuing upgrades and new investments in mass transit systems are
also expected to underpin increased zinc consumption. Zinc is used to
improve corrosion resistance in train carriage bodies and rails. In India,
corrosion currently reduces the life of rail by half and interferes with daily
operations as tracks are required to be replaced regularly. India’s
Railway Minister announced at the start of the year a $142 billion
investment to expand and modernise the country’s railway system over
the next five years. China has announced plans to build up to 170 new
mass transit system, with 800 billion yuan in rail investments for 2016.
Thousand units
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
2001
China
2003
2005
2007
2009
2011
12 month moving average
India
Japan
South Korea
2013
2015
United States
Source: Bloomberg (2016) International Organisation of Motor Vehicle Manufacturers
Figure 14.6: World zinc consumption
Thousand tonnes
More than half of the world’s zinc produced is used to galvanise steel for
construction. As emerging economies begin to industrialise, urbanise
and generally improve living standards, there will be increased
development of public and residential buildings and the adoption of
better quality construction practises. Steel lasts 12 times longer when
galvanised, and the corrosion resistant property of galvanised steel will
become an increasingly important issue over the medium term,
particularly in areas with high air pollution.
18,000
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
2010
China
2012
Rest of world
2014
2016
United States
India
2018
South Korea
2020
Japan
Source: International Lead and Zinc Study Group (2016); Department of Industry,
Innovation and Science
Resources and Energy Quarterly March 2016
138
World production
Refined production constrained by mined supply
World mined production reduced with closures outweighing new capacity
Refined zinc production increased 5 per cent in 2015 to 14 million
tonnes. Closures and the suspension of smelter operations due to low
prices were offset by the commissioning of new refined zinc capacity,
primarily in China. Vedanta also continued to increase refined production
in India to absorb increased output from their expanding mines.
New projects expected to be completed over the medium term include
Vedanta’s Rampura Agucha project (720,000 tonnes) in India,
Glencore’s 167,000 tonne Hackett River in Canada and Vedanta’s
Gamsberg project in South Africa. Companies that have suspended
operations due to low prices are also likely to restart production as
prices recover. However, increases in mined production will be
constrained by higher levels of production uncertainty associated with
some of the new mines. For example, underground operations, such as
MMG’s 160,000 tonne Dugald River and Vedanta’s underground mines
in India, are more technically complex and have been subject to delays.
Over the forecast period, mined zinc production is projected to grow at
an average annual rate of 4 per cent to reach 15.6 million tonnes in
2021.
Resources and Energy Quarterly March 2016
Figure 14.7: World mined production and base treatment charge
18,000
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
350
300
250
200
150
100
US$ a tonne
World mined zinc production is forecast to remain constrained in the
short term because of reduced production, continued closures and
curtailing of expansion plans. A number of companies have suspended
production to preserve asset values, reduce costs, and increase their
unexpended capital. For example, Glencore announced in October 2015
that it would reduce production by 500,000 tonnes across its operations
in Australia, South America and Kazakhstan. Similarly, Nyrstar
announced reductions of 160,000 tonnes. Other expansion plans that
will temporarily be shelved include Vedanta’s 40,000 tonne Zawar and
30,000 tonne Rajpura Dariba mines, and MMG’s 55,000 tonne Golden
Grove mine. There are also several large mines scheduled for closure
over the course of 2016 because of ore depletion, including MMG’s
Century mine in Queensland and Vedanta’s Lisheen mine in Ireland.
The closure of these two projects will remove 680,000 tonnes of mined
zinc from global production capacity.
Over the medium term, refined zinc production is projected to increase
at an average annual rate of 2 per cent a year to 15.9 million tonnes in
2021. A factor supporting this is expected higher output at newly built
smelters in China. Production growth will be moderated by constrained
mined supply, with some smelters operating at below capacity due to
difficulty in obtaining feedstock. This is already reflected in reduced
benchmark and spot treatment charges observed at the start of 2016
(the fees charged by smelters to process concentrate into metal). The
development of new Chinese smelters will also have size and power
restrictions applied to increase efficiencies and reduce the use of coalbased power generation.
Thousand tonnes
In 2015, zinc mine production increased 1 per cent to 13.4 million
tonnes. Increased production at existing mines was largely offset by the
scaling back or closure of operations owing to ore depletion at major
mines and lower prices. Mine production in China, the world’s largest
zinc producer, slowed in 2015 as a result of low prices and slowing
demand from smelters due to environmental and safety regulations,
which forced a number of operations to close.
50
0
2007
2009
2011
2013
World mine production
2015
2017
2019
2021
Base zinc treatment charge
Source: AME Group (2016); International Lead and Zinc Study Group (2016)
139
Figure 14.8: Australia’s zinc exploration expenditure
Australia’s expenditure on zinc exploration decreased 25 per cent in the
December quarter 2015 relative to the June quarter, to $12.3 million. For
2015 as a whole, exploration expenditure was similar to 2014 at $51
million. While low prices for other commodities have resulted in reduced
investment in exploration as companies cut costs, the expectation of
increased prices has supported sustained exploration expenditure.
A$million
The prospect of higher prices sustains exploration expenditure
Australia’s zinc exports constrained despite emerging opportunities
Australia’s mine production is projected to decrease at an average
annual rate of 1 per cent a year to 926 thousand tonnes in 2020–21.
New mines that are scheduled to be completed, which include MMG’s
Dugald River, KBL’s Sorby Hills and Independence Group’s Stockman
operation, are not expected to outweigh the planned closures of
Endeavour, Cannington, Golden Grove and Jaguar as they reach the
end of their operating life.
Resources and Energy Quarterly March 2016
25
2,500
20
2,000
15
1,500
10
1,000
500
0
Mar-10
0
Jun-11
Sep-12
Dec-13
Zinc exploration expenditure
Mar-15
Zinc price (rhs)
Source: ABS (2016) Mineral and Petroleum Exploration , cat.no.8412.0;
LME (2016) Zinc spot price
Figure 14.9: Australian mine production
Thousand tonnes
Australia’s mined zinc production is forecast to decrease 41 per cent
from 2014–15 to 991,000 tonnes (metal content) in 2015–16. The
substantial reduction in production is primarily driven by the closure of
MMG’s Century mine in December 2015 due to ore depletion and the
suspension or reduction of production at several operations due to low
prices, including Glencore’s Lady Loretta, George Fisher and McArthur
River operations, Perilya’s Broken Hill operation and CBH Resources’
Endeavour operation. In addition, MMG announced that throughput will
be reduced at its Golden Grove operation to preserve asset value, with
milling to focus on zinc ore. As a result, MMG’s copper production is
expected to fall and reduce by-product credits, which will increase its
cash costs.
3,000
5
The projected increase in zinc consumption in emerging economies and
tightening availability of mined zinc will support strong demand for
Australia’s exports. Despite these opportunities, Australia’s export
capacity will be constrained by the closure of mines in the medium term,
particularly MMG’s 500,000 tonne Century mine.
Australian mined production forecast to decrease due to ore depletion
and low prices
30
US$ a tonne
Australia’s exploration, production and exports
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
2005–06
2008–09
Qld
NT
2011–12
NSW
2014–15
WA
Tas
2017–18
2020–21
SA
Source: Company reports; Department of Industry, Innovation and Science
140
Over the medium term, refined zinc production is projected to remain
steady at 501,000 tonnes a year, after an increase in late 2016 and early
2017 supported by ramp up at the Port Pirie smelter.
Export volumes to decrease while export values rise
Australia’s exports of zinc in 2015–16 are forecast to be 1.2 million
tonnes (metallic content), a decrease of 29 per cent from 2014–15. The
significant reduction in exports reflects the closure of MMG’s Century
mine and the suspension of production at Glencore’s operations.
Earnings from zinc exports are forecast to decline by 30 per cent to $2.2
billion because of low volumes and zinc prices.
Australia’s zinc exports are projected to decrease at an average annual
rate of 4 per cent to 1 million tonnes (metallic content) in 2020–21.
Export values are projected to increase at an average annual rate of 4
per cent to reach $2.6 billion (in 2015–16 dollar terms) in 2020–21, as
projected higher zinc prices more than offset lower export volumes.
Resources and Energy Quarterly March 2016
2,000
8
1,500
6
1,000
4
500
2
0
2000–01
2004–05
2008–09
volume
2012–13
2016–17
2015–16 A$billion
Australia’s refined production is forecast to decrease 4 per cent from
2014–15 to 2015–16, to 467,000 tonnes in 2015–16. Production is
expected to be affected by the suspension of activities at Nyrstar’s Port
Pirie smelter while it undergoes redevelopment.
Figure 14.10 Australia’s zinc exports
Thousand tonnes
Australia’s refined production to remain flat
0
2020–21
value (rhs)
Source: ABS (2016) International Trade, cat.no.5465.0; Department of Industry,
Innovation and Science
141
Table 14.1: Zinc outlook
World
unit
2015
2016f
2017f
2018z
2019z
2020z
2021z
– mine
kt
13,417
12,919
13,802
14,430
14,930
15,282
15,603
– refined
kt
13,953
14,171
14,662
15,009
15,351
15,621
15,922
Consumption
kt
13,829
14,261
14,673
14,914
15,204
15,489
15,930
Stocks
kt
1,694
1,604
1,593
1,687
1,835
1,966
1,959
6.4
5.8
5.6
5.9
6.3
6.6
6.4
US$/t
1,933
1,705
1,855
1,979
2,118
2,258
2,398
Usc/lb
88
77
84
90
96
102
109
US$/t
1,955
1,705
1,821
1,902
1,990
2,072
2,149
Usc/lb
89
77
83
86
90
94
97
unit
2014–15
2015–16f
2016–17f
2017–18z
2018–19z
2019–20z
2020–21z
Mined output
kt
1,691
991
813
879
1,001
994
926
Refined output
kt
485
467
496
501
501
501
501
– ore and conc. c
kt
2,919
1,600
920
1,049
1,312
1,296
1,150
– refined
kt
329
477
450
455
455
455
455
– total metallic content
kt
1,720
1,217
879
945
1,068
1,060
992
Export value
kt
Production
– weeks of consumption
Price LME
– nominal
– real b
Australia
Export volume
– nominal
A$m
3,073
2,171
2,221
2,644
3,025
3,051
2,934
– real d
A$m
3,117
2,171
2,190
2,556
2,855
2,804
2,627
Notes: b In current calendar year US dollars; c Quantities refer to gross weight of all ores and concentrates; d In current financial year Australian dollars; f Forecast; z Projection
Source: ABS (2016) International Trade, cat.no.5465.0; Company reports; Department of Industry, Innovation and Science; International Lead Zinc Study Group (2016); LME (2016); World
Bureau of Metal Statistics (2016)
Resources and Energy Quarterly March 2016
142
Figure 15.2: Principal markets for Australia’s total imports,
2014–15 dollars
Figure 15.1: Contribution to GDP, 2014–15 dollars
76 75
80
50
GDP: $1620.1 b
30
40
20
3
6
2
9
9
Imports: $256.4 b
22
14
11
13
11
7
10
8
7
6
43 42
Imports: $196.1 b
40
Per cent
Per cent
GDP: $1614.2 b
6 5
4 4
5 4
3 5
0
0
2004–05
2014–15
2004–05
2014–15
Source: ABS (2016) Australian National Accounts, National Income, Expenditure &
Production, cat. no. 5206.0
Source: ABS (2016) International Trade in Goods and Services, cat. no. 5368.0
Figure 15.3: Principal markets for Australia’s resources and energy
imports, 2014–15 dollars
Figure 15.4: Principal markets for Australia’s total exports,
2014–15 dollars
30
21
40
24
30
Imports: $42.7 b
16
12
10 11
10
7
10
0
1
3
7
Exports: $166.4 b
32
Per cent
Per cent
20
Imports: $27.3 b
23
4
0
27
Exports: $254.6 b
20
20
8
32
17
10
10
11
8 7
7
5
0
7
3
5 4
5
0
Japan
2004–05
2014–15
Source: ABS (2016) International Trade in Goods and Services, cat. no. 5368.0
Resources and Energy Quarterly March 2016
China
South
Korea
United
New
States Zealand
2004–05
India
EU 28
Other
2014–15
Source: ABS (2016) International Trade, Australia, cat. no. 5465.0
144
Figure 15.5: Principal markets for Australia’s resources exports,
2014–15 dollars
60
54
50
Exports: $52.0 b
50
Per cent
Per cent
30
15
15
5
10
9
20
10
2
2
Exports: $66.8 b
30
31
20
7 7
11 9
12
12
7
Exports: $39.0 b
39 40
40
Exports: $105.1 b
40
Figure 15.6: Principal markets for Australia’s energy exports,
2014–15 dollars
10
3
0
15
13
10
6
3
16
12
13
9
8
4
0
China Thailand
India
Japan
2004–05
South
Korea
Other
Asia
EU 28
Other
Japan
South
Korea
2014–15
China
India
2004–05
Other
Asia
European
Union 28
Other
2014–15
Source: ABS (2016) International Trade, Australia, cat. no. 5465.0
Source: ABS (2016) International Trade, Australia, cat. no. 5465.0
Figure 15.7: Proportion of merchandise exports by sector,
2014–15 dollars
Figure 15.8: Proportion of goods and services exports by sector,
2014–15 dollars
80
72
80
70 71 68
Per cent
Per cent
40
20
60 58 59
60
60
14 16 15
18
14 14 14 15
54
40
20
12
13 13 14
12 12 12 12
16 18 17
20
0
0
Rural
Rural
2011–12
Mineral resources
2012–13
2013–14
Other merchandise
2014–15
Source: ABS (2016) Balance of Payments and International Investment Position,
cat. no. 5302
Resources and Energy Quarterly March 2016
2011–12
Mineral
resources
2012–13
Other
merchandise
2013–14
Services
2014–15
Source: ABS (2016) Balance of Payments and International Investment Position,
cat. no. 5302
145
Table 15.1: Principal markets for Australia’s thermal coal exports, 2014–15 dollars
2010–11
2011–12
2012–13
2013–14
2014–15
Japan
A$m
7,459
8,682
7,995
7,718
7,100
China
A$m
1,714
2,872
2,955
3,476
2,737
South Korea
A$m
2,766
3,087
2,796
2,776
2,657
Chinese Taipei
A$m
1,978
1,921
1,720
1,662
1,768
Malaysia
A$m
340
376
280
347
584
Thailand
A$m
204
180
245
290
273
Total
A$m
15,087
18,090
16,715
16,809
16,057
Source: ABS (2016) International Trade, Australia, cat. no. 5465.0
Table 15.2: Principal markets for Australia’s metallurgical coal exports, 2014–15 dollars
2010–11
2011–12
2012–13
2013–14
2014–15
China
A$m
3,090
3,845
4,832
5,990
4,774
Japan
A$m
9,384
9,466
6,249
5,625
4,614
India
A$m
7,771
6,934
4,813
4,921
5,016
South Korea
A$m
4,101
4,111
2,549
2,514
2,381
Chinese Taipei
A$m
1,853
1,972
1,211
1,191
1,142
Netherlands
A$m
1,045
1,360
1,020
1,027
832
Total
A$m
32,707
32,945
23,539
23,785
21,813
Source: ABS (2016) International Trade, Australia, cat. no. 5465.0
Resources and Energy Quarterly March 2016
146
Table 15.3: Principal markets for Australia’s oil and gas exports, 2014–15 dollars
2010–11
2011–12
2012–13
2013–14
2014–15
Japan
A$m
11,569
13,840
15,141
16,271
15,391
China
A$m
3,275
3,896
2,844
1,853
1,980
South Korea
A$m
2,880
1,870
2,276
1,422
1,857
Singapore
A$m
2,063
2,928
2,823
2,350
2,153
Thailand
A$m
1,926
1,048
863
1,679
1,267
India
A$m
1,010
317
185
256
194
Total
A$m
25,966
27,635
27,764
29,895
26,894
2010–11
2011–12
2012–13
2013–14
2014–15
Source: ABS (2016) International Trade, Australia, cat. no. 5465.0
Table 15.4: Principal markets for Australia’s gold exports, 2014–15 dollars
China
A$m
691
4,553
6,254
8,223
6,954
Singapore
A$m
1,219
1,199
987
2,312
3,114
United Kingdom
A$m
3,826
4,831
2,734
651
583
Turkey
A$m
0
68
488
547
157
Thailand
A$m
2,586
1,717
1,328
452
897
Switzerland
A$m
9
36
299
351
15
Total
A$m
14,224
16,517
15,734
13,233
13,048
Source: ABS (2016) International Trade, Australia, cat. no. 5465.0
Resources and Energy Quarterly March 2016
147
Table 15.5: Principal markets for Australia’s iron ore exports, 2014–15 dollars
2010–11
2011–12
2012–13
2013–14
2014–15
China
A$m
43,667
46,431
43,825
58,006
42,103
Japan
A$m
11,300
11,618
9,003
9,830
6,696
South Korea
A$m
6,613
6,909
5,149
6,202
4,047
Chinese Taipei
A$m
2,117
1,917
1,564
1,739
1,297
Indonesia
A$m
0
0
0
112
213
India
A$m
0
0
49
42
109
Total
A$m
63,807
66,974
59,643
75,951
54,519
Source: ABS (2016) International Trade, Australia, cat. no. 5465.0
Table 15.6: Principal markets for Australia’s aluminium exports, 2014–15 dollars
2010–11
2011–12
2012–13
2013–14
2014–15
Japan
A$m
1,534
1,412
1,049
1,133
1,457
South Korea
A$m
949
625
708
693
768
Chinese Taipei
A$m
569
397
476
451
489
Thailand
A$m
355
350
381
308
286
China
A$m
150
203
156
237
50
Indonesia
A$m
284
323
260
199
137
Total
A$m
4,566
4,056
3,424
3,539
3,823
Source: ABS (2016) International Trade, Australia, cat. no. 5465.0
Resources and Energy Quarterly March 2016
148
Table 15.7: Principal markets for Australia’s copper exports, 2014–15 dollars
2010–11
2011–12
2012–13
2013–14
2014–15
China
A$m
2,685
2,667
3,173
4,006
3,646
Japan
A$m
1,494
1,587
1,688
1,652
1,990
India
A$m
1,472
1,550
1,160
961
803
Malaysia
A$m
708
750
707
622
527
South Korea
A$m
1,103
919
458
594
365
Philippines
A$m
200
21
147
290
257
Total
A$m
9,203
9,081
8,406
8,856
8,468
Source: ABS (2016) International Trade, Australia, cat. no. 5465.0
Resources and Energy Quarterly March 2016
149
The forecast and projected export values presented in this report are
dependant on assumptions about the Australian dollar / US dollar
exchange rate, the RBA cash rate and the inflation rate over the outlook
period. Values for these three key assumptions were generated using
the Outlook Economics AUS-M Computable General Equilibrium model
of the Australian economy.
The $AU / US$ exchange rate
A number of factors determine the exchange rate assumptions
estimated by the AUS-M model, of which the most significant are the
interest rate differential between Australia and the United States,
commodity prices and the rates of inflation in Australia and the United
States.
The Australian dollar has depreciated against the US dollar since
reaching parity between 2010–11 and 2012–13. The decline in the
Australian dollar has been largely attributable to falling commodity
prices, as well as a relative improvement in economic conditions in the
United States.
Figure 16.1 Australia’s exchange rate
1.20
1.00
0.80
US$/A$
Key assumptions
0.60
0.40
0.20
0.00
2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021
Source: RBA (2016) Reserve Bank of Australia Bulletin; Department of Industry,
Innovation and Science
The Australian dollar is forecast to average US73 cents in 2015–16,
down from US84 cents in 2014–15, then remain relatively steady at US
72 cents over the remainder of the projection period.
The RBA cash rate
The RBA cash rate declined significantly over the past few years, largely
in response weak domestic economic conditions following the end of the
mining investment boom. The RBA cash rate is assumed to increase
slightly to 2.6 per cent by 2020–21.
The inflation rate
The RBA targets an inflation band of between 2–3 per cent, on average,
over the economic cycle. The rate of inflation is assumed to remain
close to the centre of the RBA target band, falling slightly to 2.2 per cent
by 2020–21.
Resources and Energy Quarterly March 2016
151
Table 6.1: Key macroeconomic assumptions for Australia
unit
2014–15
2015–16 a
2016–17 a
2017–18 a
2018–19 a
2019–20 a
2020–21 a
Inflation rate b
Per cent
2.7
2.5
2.2
2.2
2.2
2.2
2.2
Interest rate d
Per cent
2.4
2.0
1.9
1.9
2.2
2.5
2.6
Exchange rate e
US$/A$
0.84
0.73
0.74
0.73
0.72
0.72
0.72
Notes:
a Assumption
b Change from previous period
c Seasonally adjusted chain volume measures. d Median RBA cash rate
e Average of daily rates
Source: ABS (2015) Consumer Price Index, 6401.0; RBA (2016) Reserve Bank of Australia Bulletin; Department of Industry, Innovation and Science
Resources and Energy Quarterly March 2016
152