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How will the mining boom look a year from now?

The Bureau of Resources and Energy Economics (BREE) released their September quarter update on the resources and energy sector this week which revealed a fairly upbeat assessment of Australia’s resource driven exports sector. 

The BREE update highlights that prices for key Australian commodities are falling and further falls are expected.  Providing some counterbalance to the lower prices is expectation that export volumes are likely to increase for several years to come at least.

According to the report, “The net result is that the value of resource and energy exports in 2011–12 are expected to be 8 per cent higher than in 2010–11 and to total $193 billion”.  The report goes on to forecast a 2 percent fall in the value of resources and energy exports in 2012/13 to $189 billion.  A 2 percent fall isn’t too bad considering how steeply revenue has risen in recent times.

The report comes at a time when the Australian resources sector is the centre of attention for all the wrong reasons, with prices for Australia’s two largest exports recording significant falls from their peaks.

Iron ore prices, which were as high as $US180/tonne a year ago, fell as low as $US86/tonne earlier this month (since that time prices have moved back above $US100/tonne) and hard coking coal prices have fallen 25 percent since June to around $US150/tonne without any sign of an improvement just yet.

Two things are worth highlighting before we go any further.

  • Iron ore and coal (both metallurgical (coking) coal and thermal coal) are by far the most important resource exports for Australia, with the export value estimated to be worth about $111 billion over the 2011/12 financial year; that’s more than the value of all the other major commodities combined (see graph below).
  • Additionally, China is an extraordinarily important trading partner, particularly when it comes to Iron ore.  China accounts for 18 percent of Australia’s exports, the largest proportion of any nation beating out the US (11 percent) and Japan (8 percent).  Focussing specifically on resource exports only, China’s share jumps to a whopping 41 percent (approx. $46.6 billion) of all resource exports out of Australia. Ten years ago China’s share of Australian resource exports was just 7 percent.

With China such an important trading partner, particularly for iron ore (see graph below showing value of iron ore exports by country), the economic fundamentals of China are intrinsically linked to Australia’s economic prosperity.

BREE has put forward what seems to be an optimistic forecast for Chinese economic growth, suggesting the Chinese economy will grow by 8.5 percent in 2013 (BREE are using the projections put forward by the IMF in their July World Economic Outlook.)

Most economists are putting Chinese economic growth at a lower 7.5 percent for 2013.  Even at this lower rate of forecast growth, the rate of growth is still quite spectacular.

The strong economic growth in China implies that demand for steel making ingredients (iron ore and coking coal) should remain robust despite the recent weakness in prices.

BREE are forecasting an 8% increase in the volume of iron ore exports over the 2012/13 financial year and a 27% fall in the price of iron ore over the same time frame, providing a net reduction in iron export revenues of 16%.

The markets for coal are quite different, with Japan being the major trading partner for both coking and thermal coal.  The economic outlook for Japan certainly isn’t as strong as China’s with the IMF forecasting economic growth of just 1.5% in 2013 after 2.4% growth in 2012.

Exports for thermal coal is driven by demand for electricity production and BREE expects increasing demand across Asia to support a 14 percent increase in thermal coal exports (by volume) next year and an 11 percent reduction in prices (net increase of 11 percent export revenue for 2012/13).

Part of the demand increase will come from Japan where most of the nuclear power plants are being shut down in the wake of the 2011 tsunami.

Australia is the world’s largest exporter of metallurgical coal; in 2012 BREE forecasts that exports of metallurgical coal will increase by 14 percent compared with 2011.  The bulk of Australia’s coking coal is extracted from Queensland where it has just been announced mining royalties will increase from 10 percent to 12.5 percent for coal sold at between $100 to $150 per tonne (a 15 percent royalty will apply for coal prices higher than that).

BREE is forecasting a 12 percent increase in the volume of metallurgical coal exports over the 2012/13 financial year but a 28 percent reduction in prices, resulting in a net 15 percent decline in export value.

The export commodities that are forecast to see the greatest rise in export value are Bunker Fuel (up 112 percent on the back of significant price rises), LNG (up 36 percent due to higher volumes and prices), Alumina (up 29 percent due to higher volumes and prices) and LPG (up 15 percent).

While the overall outlook for the resources sector isn’t quite as rosy as what it has been over the last couple of years, the forecast from BREE suggests much of the price falls will be made up by increases in volumes.

BREE is also placing a large amount of faith in the IMF economic growth projections for China and a level of stimulus from the Chinese Government which may be overstated considering recent statements from the Chinese Government.  Whether or not these assumptions prove to overly optimistic is yet to be seen.

At the same time that we are seeing some weakness spread through the resources sector we are also seeing an increasing level of complexity and costs surrounding Government royalties and taxes on the sector.  That’s not going to help Australia’s competitiveness or attractiveness during this softening of the commodities cycle.



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About

Tim heads up the Core Logic RP Data research and analytics team, analysing real estate markets, demographics and economic trends across Australia. Visit www.corelogic.com.au


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