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Further informationFor more information on data or government initiatives please access the report from the Department’s website at: www.industry.gov.au/oce

EditorDavid Thurtell

Chapter AuthorsResource and energy overview: David Thurtell

Macroeconomic overview, oil: Nathan Pitts COVID-19 policy responses: Nathan Pitts, Jeremy Coghlan, Matt Boyce, Monica Philalay

Steel, iron ore, uranium: Mark Gibbons

Metallurgical and thermal coal: Nikolai Drahos

Gas: Monica Philalay

Gold, aluminium, alumina and bauxite: Thuong Nguyen

Copper: Kate Martin

Nickel: Matt Boyce and Kate Martin

Zinc, lithium: Caroline Lewis

AcknowledgementsThe authors would like to acknowledge the contributions of:

Melissa Bray, Lou Brooks, Lauren Pratley, Ken Colbert, Russ Campbell

Cover image source: Shutterstock

ISSN 1839-5007

Vol. 10, no. 2

© Commonwealth of Australia 2020

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AttributionContent contained herein should be attributed as follows:

Department of Industry, Science, Energy and Resources, Commonwealth of Australia Resources and Energy Quarterly March 2020. The Commonwealth of Australia does not necessarily endorse the content of this publication.

Requests and inquiries concerning reproduction and rights should be addressed to [email protected]

Disclaimer The views expressed in this report are those of the author(s) and do not necessarily reflect those of the Australian Government or the Department of Industry, Science, Energy and Resources.

This publication is not legal or professional advice. The Commonwealth of Australia does not guarantee the accuracy or reliability of the information and data in the publication. Third parties rely upon this publication entirely at their own risk.

Attribution 4.0 International LicenceCC BY 4.0

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Contents

Foreword 4

About the edition 5

Overview 6

Macroeconomic Outlook 15

Steel 26

Iron Ore 32

Metallurgical Coal 40

Thermal Coal 51

Gas 66

Oil 79

Uranium 90

Gold 96

Aluminium 106

Copper 117

Nickel 125

Zinc 132

Lithium 141

Resources insights

Trade summary charts and tables 148

Appendix A: Definitions and classifications 156

Appendix B: Glossary 158

Appendix C: Contact details 164

Oil8.1: Oil price and LNG export earnings scenario analysis 87

Macroeconomic Outlook2.2: Macroeconomic assumptions underpinning this publication 23

Macroeconomic Outlook2.1: COVID-19 policy responses 18

4

Foreword After 11 years of growth, the world is facing a COVID-19-induced downturn of a breadth and scale that now seems likely to be much larger than assumed in the March 2020 Resources and Energy Quarterly. The previous major global downturn — the global financial crisis (GFC) — affected resource and energy commodities dramatically, but China’s infrastructure drive and a weaker Australian dollar helped provide Australia with a lifeline of sorts.

History might not repeat, but it can rhyme. The current global downturn is affecting commodities in a wide variety of ways, but the overall export outlook is still relatively strong. Export earnings are estimated to set an all-time record in 2019–20. Gold — a safe haven in uncertain times — is set to be a strong performer, with prices surging to an 8-year high, and export earnings now on track to set a new record (of almost $32 billion) in 2020–21. While normally vulnerable during downturns, iron ore earnings have been resilient in recent months, with a strong outlook for prices. The COVID-19 pandemic appears to have affected both sides of the iron ore market: demand disruptions have run up against supply problems localised in Brazil, where COVID-19-related lockdowns have derailed efforts to recover from shutdowns in the wake of the Brumadinho tailings dam collapse. Our earlier forecast for Australian iron ore export earnings to top $100 billion in 2019-20 appears to have been achieved.

COVID-19 has resulted in sharp price falls for other commodities, notably energy. The most significant impacts have fallen on oil producers, with the average Brent crude price expected to plunge by about 40 per cent in 2020. Many oil producers are likely to operate at a loss through much of 2020, with potentially significant implications for the high cost producers. Given the huge price swings induced by large changes in demand and supply, we have constructed scenarios to consider the relatively wide range of possibilities going forward. LNG prices, which were already in a downward cycle, have declined at an accelerated pace since the COVID-19 outbreak began. Coal prices, which fell sharply in 2019, declined further in the June quarter, and are likely to remain low through the rest of 2020.

Base metals have also been significantly impacted, with a sharp fall in vehicle output/sales affecting their outlooks.

Commodity markets overall remain subject to a combination of lower consumer demand and government-imposed lockdowns, which have set back production schedules. However, an emerging wave of stimulus measures should offer a significant (though unpredictable) upside. Unlike downturns in previous decades, this downturn was not due to the bursting of excesses built up in the financial system (the GFC of 2008–09) or in equity markets (Tech stock crash of 2000). It also differs from the 1970s recessions (which were induced by the OPEC oil crises), which helped contribute to stagflation and forced a wholesale restructure of the world’s energy system. It has been imposed as a result of a health crisis as governments around the world have shut down large parts of their economies to suppress the spread of COVID-19. While restrictions are now easing, some households are likely to remain cautious, keeping demand subdued. In line with OECD forecasts, we assume world economic growth declines by 5.5–6.5 per cent in 2020, with growth of 4.5–5.5 per cent resuming in 2021; however, the level of global economic activity doesn’t return to pre-COVID-19 levels until 2022.

On balance, our export earnings forecast has been revised down — but not by an alarming amount. Our previous forecast was for commodity earnings to reach $299 billion in 2019–20 and then fall modestly. In this edition, we estimate Australia earns $293 billion in 2019–20, and forecast exports of about $263 billion in 2020–21 and $255 billion in 2021–22. To give this better context: $293 billion is still the largest resource and energy export figure in Australian history, and $263 billion is third highest. Resource and energy earnings will be almost 50 per cent higher — in real terms — than earned in 2008–09, during the GFC.

This forecast comes with significant risks: a second outbreak of COVID-19, another surge in trade tensions, or an unexpectedly slow global recovery. But on balance, it remains likely that parts of the service sector will bear the brunt of the downturn, and commodities will once again buffer the Australian economy against external headwinds.

Resources and Energy Quarterly June 2020

About this edition The Resources and Energy Quarterly (REQ) contains the Office of the Chief Economist’s forecasts for the value, volume and price of Australia’s major resources and energy commodity exports.

A ‘medium term’ (five year) outlook is published in the March quarter edition of the Resources and Energy Quarterly. Each June, September and December edition of the Resources and Energy Quarterly features a ‘short term’ (two year) outlook for Australia’s major resource and energy commodity exports. The December Resources and Energy Quarterly also includes the annual Major Projects update.

Underpinning the forecasts/projections contained in the Resources and Energy Quarterly is the Office of the Chief Economist’s outlook for global resource and energy commodity prices, demand and supply. The forecasts/projections for Australia’s resource and energy commodity exporters are reconciled with this global context.

The global environment in which Australia’s producers compete can change rapidly. Each edition of the Resources and Energy Quarterly factors in these changes, and makes appropriate alterations to the forecasts/projections by estimating the impact on Australian producers and the value of their exports.

In this report, commodities are grouped into two broad categories, referred to as ‘resources’ and ‘energy’. ‘Energy’ commodities comprise metallurgical and thermal coal, oil, gas and uranium. ‘Resource’ commodities in this report are all other mineral commodities.

Unless otherwise stated, all Australian and US dollar figures in this report are in nominal terms. Inflation and exchange rate assumptions are provided in tables 2.1 and 2.2 in the macroeconomic outlook chapter.

Data in this edition of the Resources and Energy Quarterly is current as of 17 June 2020.

Resources and Energy Quarterly publication schedule

Publication Expected release date Outlook period final year

September 2020 28 September 2020 Australian data: 2021–22 World data: 2022

December 2020 21 December 2020 Australian data: 2021–22 World data: 2022

March 2021 29 March 2021 Australian data: 2025–26 World data: 2026

June 2021 28 June 2021 Australian data: 2022–23 World data: 2023

Source: Department of Industry, Science, Energy and Resources (2020)

5Resources and Energy Quarterly June 2020

1.1 Summary The COVID-19 pandemic has resulted in a sharp weakening in the

world economy, and consequent commodity price falls have been a function of the supply response. With supply now being cut and usage recovering, price falls for most resource commodities seem to be over.

Iron ore prices have recovered the losses of the first four months of 2020, as supply problems offset demand worries. Coal and base metal prices have declined as falling demand outpaces supply cuts.

Offsetting the impact of generally weaker prices, both higher export volumes and a lower-than-expected Australian dollar are estimated to have seen Australia’s resource and energy exports reach a record $293 billion in 2019–20. Despite slightly higher export volumes, price weakness is likely to cut export earnings significantly over the outlook period (to 2021–22).

1.2 Export values Australia’s export values estimated at a record $293 billion in 2019–20 The Office of the Chief Economist’s (OCE) Resources and Energy Export Values Index in the June quarter 2020 was 5.9 per cent below the June quarter 2019; an 8.2 per cent fall in prices was partly offset by a 2.3 per cent rise in volumes. Financial year 2019–20 is estimated to have set a record $293 billion of resource and energy exports (Figure 1.1), as a 4.2 per cent rise in volumes (on 2018–19) added to the impact of a 0.5 per cent price lift. In the outlook period, low prices and Australian dollar gains will likely more than offset the higher export volumes: exports are forecast at $263 billion in 2020–21 and $255 billion in 2021–22 (Figure 1.2).

Ongoing weakness in the Australian dollar is helping to support earnings In Australian dollar terms, the OCE’s Resources and Energy Commodity Price Index fell by 5.6 per cent (preliminary estimate) in the June quarter, and was 8.2 per cent lower than a year ago. In US dollar terms, the index fell by 6.8 per cent in the quarter, and was 14.8 per cent lower than a year ago. The index of prices for resource commodity exports (Australian dollar terms) rose by 6.4 per cent in the year to the June quarter 2020, while energy commodity prices fell by 26.2 per cent (Figure 1.3).

Figure 1.1: Australia’s resource and energy export values/volumes

Source: ABS (2020) International Trade in Goods and Services, 5368.0; Department of Industry, Science, Energy and Resources (2020)

Figure 1.2: Annual growth in Australia’s resources and energy export values, contributions from prices and volumes


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Figure 1.3: Resource and energy export prices, AUD terms

Notes: The export price index is based on Australian dollar export unit values (EUVs, export values divided by volumes); the export price index is a Fisher price Index, which weights each commodity’s EUV by its share of total export values. Source: ABS (2020) International Trade in Goods and Services, 5368.0; Department of Industry, Science, Energy and Resources (2020)

1.3 Macroeconomic, policy, trade and other factors The impact of the COVID-19 pandemic now seems likely to be much larger than estimated in our previous (March) forecast, notwithstanding the measures taken by governments and central banks in recent months. Initially thought to be largely concentrated in China, the impact now appears set to result in the worst contraction in the world economy since the 1930s. While focused largely on the retail, education, travel and hospitality sectors, the (metal-consuming) manufacturing sector is expected to feel the impact of weaker household and business finances.

The direct impact of the COVID-19 outbreak in China in February-March 2020 is now being added to by indirect effects, as pandemic-related economic slowdowns impact on the economies of China’s largest customers, including the US, EU, and Japan. The Chinese government is launching infrastructure projects and taking measures to boost consumer and business spending, some of which will lift resource commodity usage.

So far, the COVID-19 pandemic’s deepest impact on the commodity sector has been on energy, particularly oil-based products used in transportation. Temporary and permanent changes affecting energy usage could arise from the pandemic: in the short term, commuters are likely to continue to avoid public transport, and the buses/trains that do operate will each shift fewer people. Long-haul airline travel could take some years to recover, once nations remove bans on incoming visitors. A sustained rise in office staff working from home may also lower oil usage, though higher demand for home heating/cooling may see more gas and thermal coal consumed.

Supply issues have been influential in resource and energy commodity markets, exacerbating the fall in demand in some, while offsetting it in others. OPEC+ was reluctant to react to falling oil demand and kept production high for so long that fifteen year price lows were reached on some oil types. At the time of writing Australia has not had to close mines due to COVID-19 related outbreaks, however, mines in a number of other countries have been forced to close. Some have re-opened, but new outbreaks may see closures. Low prices are now forcing miners to examine the economics of cutbacks or closures: trying to weigh-up closure costs against the timing and strength of a price recovery.

Renewed trade tensions pose a significant risk to both world growth and resource and energy commodity trade over the outlook period. The COVID-19 outbreak has raised questions around China’s ability to fulfil its side of the US-China Phase One trade deal, leading to speculation that the US may call off the deal and/or impose new conditions. Separately, there are also some concerns that pandemic-induced weakness in many nations’ traded goods sectors could boost protectionist tendencies.

We have assumed that a second wave of coronavirus infections is avoided in China — and other major nations — in 2020. Assuming the worst of the global COVID-19 outbreak has passed by the end of 2020, it is expected that world GDP will contract by 5.5–6.5 per cent in 2020, before growth of about 4.5–5.5 per cent is recorded in 2021. World GDP growth is then assumed to moderate in 2022. Infrastructure spending over the outlook period will be resource commodity intensive.

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1.4 Prices The iron ore price has consolidated in a US$81-104 a tonne range since the March 2020 Resources and Energy Quarterly. Supply disruptions in Brazil and, to a lesser extent, Australia have offset the impact of lower global demand arising from the COVID-19 outbreak. The price is likely to drift lower over the second half of 2020 (Figure 1.4), as growth in Chinese steel output eases and Brazilian iron ore supply rises.

After holding during the March quarter 2020, the prices of metallurgical and thermal coal dropped sharply in the June quarter 2020. Metallurgical coal prices fell as the lockdown implemented by the Indian Government impacted on steel production and port operations in that nation. A modest rise in prices is likely over the outlook period, as high-cost mines shut and demand recovers. Weaker demand from Asian coal-fired power utilities has put pressure on the thermal coal price. Prices are likely to rebound modestly over the outlook period, as demand recovers (Figure 1.4).

Oil prices dipped sharply in April, as OPEC+ members failed to agree on production cuts in the face of a collapse in demand. Oil demand fell sharply as movement restrictions took effect in the economies of major consuming nations. Once the market saw evidence of production cuts by major producers, the price staged a partial recovery. The price should recover further, but seems destined to be capped at the US$60 a barrel mark, as US producers swing back into the market. The value of Australian LNG exports is expected to dip sharply in 2020–2021, as 75 per cent of our LNG is sold under contract at prices linked to the price of oil.

The gold price pushed above the US$1,700 an ounce mark — a 7-year high — in mid-April, on the back of declining bond yields and rising safe haven demand. Price strength during the second half of 2020 is likely to attract strong scrap supply and deter jewellery demand in price-sensitive markets such as India and China. Further out, the price is likely to decline as equity markets recover and bond yields rise. Base metal prices have declined significantly on the back of the COVID-19 pandemic. Nickel and zinc have been particularly hard hit. Base metals should rebound once industrial activity starts to recover from COVID-19 shutdowns (Figure 1.5).

Figure 1.4: Bulk commodity prices

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Notes: Prices are in US dollars, and are the international benchmark prices Source: Bloomberg (2020); Department of Industry, Science, Energy and Resources (2020)

Figure 1.5: Base metal prices

Notes: Prices are in US dollars, and are the international benchmark prices Source: Bloomberg (2020); Department of Industry, Science, Energy and Resources (2020)

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1.5 Export volumes Export volumes to grow, driven by growing energy exports The OCE’s Resources and Energy Export Volumes Index (preliminary estimate) rose by 10.2 per cent in the June quarter 2020 from the March quarter 2020, and was 2.3 per cent higher than a year before. Resource commodity volumes rose by 4.6 per cent over the year since June 2019, and energy commodity volumes fell by 2.5 per cent over the same period. Resources export volumes are expected to show modest growth in the outlook period, while energy exports will likely tend to stagnate.

1.6 Contribution to growth and investment Mining industry continues to support economic growth Australia’s real Gross Domestic Product (GDP) fell by 0.3 per cent in the March quarter 2020, but rose by 1.4 per cent through the year. The mining industry directly accounted for 25 per cent of the growth in Australia’s GDP in the year to the March quarter 2020. Mining value-added rose by 1.0 per cent in the March quarter to be 4.1 per cent over the previous twelve months, driven by growth in iron ore mining.

After being a significant contributor to mining industry value-added growth in the last year or two, the coal mining sector failed to contribute to growth in the March quarter. In the coming year, it is likely that this sector will make a much smaller contribution to GDP growth, as low prices and mine closures and cutbacks impact on the sector’s output.

Mining investment is picking up The ABS Private New Capital Expenditure and Expected Expenditure survey shows that investment by Australia’s mining industry was $8.0 billion in the March quarter 2020, up 8.8 per cent over the last year.

Higher commodity prices in the past two years appear to have encouraged some recovery in capital spending over the most recent quarters. This has been led by growth in investment by the metal ore mining sector (Figure 1.6), which may have been encouraged by surging iron ore prices in mid and late 2019 and in early 2020.

Figure 1.6: Mining industry capital expenditure by commodity

Notes: Other mining includes non-metallic mineral mining and quarrying and exploration and other mining support services; chart data is in nominal terms Source: ABS (2020) Private New Capital Expenditure and Expected Expenditure, 5625.0

Expenditure across the mining sector as a whole was driven by higher investment in machinery and equipment, which was up by 25 per cent over the year to the March quarter (Figure 1.7).

Forward expectations (Figure 1.8) suggest that mining companies will invest an estimated $38 billion for the year over 2019–20, up by about 15 per cent, with investment in the following year expected to be largely stable.

Strong prices for gold, iron ore and other minerals are leading to new investment plans, including the re-opening of mines. However, investment in new greenfield projects remains well below the levels of the previous decade.

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Figure 1.7: Mining industry capital expenditure by type, quarterly

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Figure 1.8: Mining industry capital expenditure, fiscal year

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Data on exploration spending (adjusted for inflation) suggests that a recovery in mining capital expenditure is underway (Figure 1.9). Exploration spending for all commodities reached $1.0 billion in the March quarter 2020, up 19 per cent on March quarter 2019.

Figure 1.9: Mining capital expenditure vs exploration, quarterly

Notes: Chart data is in real terms Source: ABS (2020) Private Capital Expenditure Survey, Mining, Chain Volume measure, 5625.0

1.7 Revisions to the outlook At $293 billion, the estimate for Australia’s resources and energy export earnings in 2019–20 is $6 billion lower than forecast in the March 2020 Resources and Energy Quarterly (Figure 1.10).

In 2020–21, relatively weak resource and energy commodity prices — virtually across the board — and lower coal exports, are expected to drive a sizable fall in export earnings. Export earnings are now forecast to be $263 billion, and then fall modestly further to $255 billion in 2021–22, down $13 billion and $20 billion from the March quarter 2020 Resources and Energy Quarterly forecasts, respectively.

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Figure 1.10: Resource and energy exports, by forecast release

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Table 1.1: Outlook for Australia’s resources and energy exports in nominal and real terms

Annual percent change

Exports (A$m) 2018–19 2019–20s 2020–21f 2021–22f 2019–20s 2020–21f 2021–22f Resources and energy 281,188 292,697 263,231 255,199 4.1 –10.1 –3.1 – realb 286,471 292,697 258,132 244,989 2.2 –11.8 –5.1 Energy 132,717 114,859 86,718 95,400 –13.5 –24.5 10.0 – realb 135,210 114,859 85,038 91,584 –15.1 –26.0 7.7 Resources 148,471 177,838 176,512 159,799 19.8 –0.7 –9.5 – realb 151,261 177,838 173,093 153,405 17.6 –2.7 –11.4

Notes: b In 2019–20 Australian dollars; s estimate; f forecast. Source: ABS (2019) International Trade in Goods and Services, 5368.0; Department of Industry, Science, Energy and Resources (2020)

Table 1.2: Australia's resource and energy exports, selected commodities

Prices Export volumes Export values, A$b Unit 2019–2020s 2020–21f 2021–22f Unit 2019–20s 2020–21f 2021–22f 2019–20s 2020–21f 2021–22f

Iron ore US$/t 78 77 66 Mt 852 893 912 103 97 81 Metallurgical coal US$/t 145 121 140 Mt 182 180 187 35 25 29 LNG A$/GJ 11.4 8.3 8.7 Mt 79 80 80 47 35 36 Thermal coal US$/t 63 55 64 Mt 213 210 216 20 16 17 Gold US$/oz 1,558 1,587 1,534 t 362 418 427 27 32 30 Alumina US$/t 282 276 284 Mt 17,799 17,861 17,897 7.5 7.4 7.5 Copper US$/t 5,644 5,818 6,150 Kt 925 909 966 9.6 9.2 9.9 Oila US$/bbl 52 43 48 Kb/d 292 300 299 9.0 6.8 8.6 Aluminium US$/t 1,713 1,676 1,717 Kt 1,384 1,384 1,385 3.6 3.4 3.3 Zinc US$/t 2,189 2,035 2,100 Kt 1,435 1,532 1,598 3.5 3.2 3.3 Nickel US$/t 13,898 13,404 14,843 Kt 282 333 374 4.3 5.9 6.8 Lithium US$/t 511 415 423 Kt 1,367 948 983 1.0 0.6 0.7 Uranium US$/lb 28 38 47 t 7,270 6,500 5,800 0.6 0.7 0.7

Notes: a Export data covers both crude oil and condensate; s estimate; f forecast. Price information: Iron ore fob (free-on-board) at 62 per cent iron content estimated netback from Western Australia to Qingdao China; Metallurgical coal premium hard coking coal fob East Coast Australia; Thermal coal fob Newcastle 6000 kc (calorific content); LNG fob Australia's export unit values; Gold LBMA PM; Alumina fob Australia; Copper LME cash; Crude oil Brent; Aluminum LME cash; Zinc LME cash; Nickel LME cash; Lithium spodumene ore. Source: ABS (2020) International Trade in Goods and Services, Australia, Cat. No. 5368.0; LME; London Bullion Market Association; The Ux Consulting Company; US Department of Energy; Metal Bulletin; Japan Ministry of Economy, Trade and Industry; Department of Industry, Science, Energy and Resources (2020)

14


2.1 Summary The COVID-19 pandemic is reducing global economic growth and

industrial production, with the OECD expecting the greatest global impacts in the second quarter of 2020. However, the recovery is expected to be unsteady and uneven across countries.

The OECD expects that world economic activity will contract by 6.0 per cent in 2020, before growth of 5.2 per cent is recorded in 2021.

Governments have introduced containment measures to protect public health, as well as widespread stimulatory fiscal policies, and central banks have pushed down interest rates globally.

2.2 Global economic outlook In April, the IMF forecast the global economy to contract by 3.0 per cent in 2020, as governments implemented containment measures to limit the health impacts of the COVID-19 pandemic. However, in recent weeks the IMF has flagged a further downward revision to this forecast in the next release on 24 June — after this edition of Resources and Energy Quarterly was finalised. The OECD updated their growth forecasts on 10 June and estimated that, if a major second outbreak of COVID-19 is avoided, economic activity would contract by 6.0 per cent in 2020. The Resources and Energy Quarterly publication usually uses IMF economic growth forecasts. However, in this edition, OECD forecasts are used to provide more timely estimates of the economic impacts of COVID-19.

The June OECD release also provided a set of forecasts which assume that a widespread second COVID-19 outbreak occurs before 2021. In this scenario, economic activity is expected to contract by 7.6 per cent in 2020. However, this edition of Resources and Energy Quarterly assumes that a global second wave is avoided, and uses the first set of OECD forecasts. A summary of the assumptions underpinning this publication can be found in Box 2.2.

The OECD’s single wave forecasts rely on the gradual removal of containment measures by various governments from the second quarter of 2020. As a result of the pandemic receding, world growth is forecast at 5.2

per cent in 2021 (Figure 2.1). Despite this, economic activity in 2021 is still forecast to be below pre-COVID-19 levels. The OECD’s forecasts assume that the economic impacts of the pandemic are largest in the second quarter of 2020 in most countries. The expected recovery, and above average growth projected in 2021, will depend on the efficacy of containment measures and stimulus and recovery policies. During early 2020, governments introduced a range of policies designed to limit the economic impact of containment measures. These policies have largely focused on supporting employees affected by job losses, and supporting affected businesses. To stimulate economic activity, central banks have also cut official interest rates from already low levels, and several central banks have also introduced or ramped up quantitative easing (see Box 2.1).

Figure 2.1: GDP growth

Source: Bloomberg (2020), OECD (2020)

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Industrial production fell sharply early in 2020, although there are signs that the largest impacts have passed in some countries. The global manufacturing Purchasing Managers Index (PMI) increased marginally to 42.4 in May (Figure 2.2). Despite this increase, the index remained below 50, indicating month-on-month contraction. Manufacturing output declined for all countries other than China. Despite the Chinese PMI being above 50, the month-on-month expansion is marginal as industrial activity is being negatively affected by sluggish export demand. Consumer demand is expected to be constrained throughout 2020, with the recovery in global industrial production expected to be gradual.

Figure 2.2: Manufacturing PMI

Source: Bloomberg (2020)

The global services PMI increased to 35.2 in May. This value was the second lowest reading on record, reflecting falling employment, new business and new export orders. The effects of COVID-19 on the services sector are likely to flow through and reduce demand for manufactured products.

In March 2020, global merchandise trade volumes fell by 1.4 per cent month-on-month, the largest decline since the global financial crisis. Trade has been affected by the supply disruptions posed by containment measures, and by falling consumer confidence. Eurozone exports fell by 9.0 per cent, more than offsetting the ongoing recovery in Asian export volumes. Historically, changes in growth in global trade volumes are closely linked to growth in industrial production (Figure 2.3). The decline in trade and industrial production seems likely to be at least as large as in the global financial crisis. We expect that global industrial production will recover slowly in the second half of 2020, as production disruptions from COVID-19 abate and consumer confidence gradually recovers.

Figure 2.3: Industrial production and world merchandise trade

Source: CPB Netherlands Bureau for Economic Policy Analysis (2020)

The forecasts published in Resources and Energy Quarterly are point estimates. With the outlook for resources and energy sectors clouded by COVID-19, there is considerable uncertainty regarding the economic growth and industrial production forecasts underpinning this publication. Some scenario analysis for the short-term outlook for Australian LNG exports has been included in this edition (see Box 8.1 of the oil chapter).

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Box 2.1: COVID-19 policy responses As the COVID-19 pandemic progressed around the world (Figure 2.5), governments have introduced containment measures which, of necessity, prevent or reduce some forms of economic activity. To try to ameliorate the economic impacts of containment measures, governments around the world have implemented large scale fiscal and monetary stimulus to cushion the impacts on growth. The IMF estimates that the total global fiscal package is around $9.0 trillion. Direct budget support is estimated at $4.4 trillion, and additional public sector loans and equity injections, guarantees, and other non-direct fiscal operations (such as non-commercial activity of public corporations) amount to another $4.6 trillion. With some fiscal stimulus packages likely to focus on infrastructure investment, there could be benefits for Australian commodity exports. The impacts of global containment measures are forecast to remain the key driver of global economic growth and industrial production throughout 2020. A summary of the containment measures and stimulus packages is provided in Table 2.1 below, and the ‘stringency’ of government containment measures over time can be seen in Figure 2.4.

Table 2.1: Summary of COVID-19 policy responses in key countries and regions Country COVID-19 containment measures Fiscal policy stimulusa Monetary policy stimulus

China Containment measures vary by jurisdiction. Wuhan lockdown from 23 Jan to 8 Apr. All lockdowns ended or relaxed by early April.

US$608 billionb 4.1 per cent of GDP

Rates cut from 4.15% to 3.85%. No QE.

US Containment measures vary by jurisdiction. Stay-at-home orders came into effect over late March and early April, and began lifting in late April.

US$2,790 billion 13 per cent of GDP

Rates cut from 1.75% to 0.25%. Unlimited QE. BS expansion: +13.6%

EU27 Containment measures vary by country. Italy lockdown from 10 Mar to 4 May. Spain lockdown from 14 Mar to 4 May.

US$646 billion 4.3 per cent of GDP

Rates steady at 0.0%. QE target of €1,350 billion, operating until at least June 2021. BS expansion: +7.7%

Japan A state of emergency implemented on 7 April and lifted on 25 May. However, no nationwide lockdown — stay-at-home policies largely based on voluntary compliance.

US$2,150 billion 42 per cent of GDP

Rates steady at –0.1%. Unlimited QE. BS expansion: +12.1%

India Nationwide lockdown from 24 March extended to 30 June for key containment zones, with services resuming in a phased manner starting from 8 June.

6.2 per cent of GDPc Rates cut from 4.75% to 4.0%. No QE.

South Korea No nationwide lockdown or movement restrictions, with containment measures focused on extensive testing and contact tracing.

US$64 billion 3.9 per cent of GDP

Rates cut from 1.25% to 0.5%. Unlimited QE.

Notes: The Australian government’s economic support package consists of fiscal and balance sheet support, and accounts for 13.3 per cent of forward estimates of GDP. Direct fiscal measures are equivalent to around 6.9 per cent of GDP. a Estimates are indicative only. Estimates are based on discretionary fiscal measures summarised in the IMF policy tracker at 12 June 2020, and may not fully reflect all fiscal policies taken in response to COVID-19. Where the IMF does not provide an estimate for per cent of GDP, this is estimated by dividing the announced fiscal stimulus packages by 2019 GDP levels (as estimated by the OECD. b Value is for announced discretionary fiscal measures. The IMF expects the overall public sector expansion to be significantly higher. c Announced values are not presented by IMF. Share of GDP is an IMF estimate. ‘QE’ above refers to ‘quantitative easing’ — a program in which a central bank purchases financial assets (including government bonds) on the open market in order to inject additional cash into the economy. ‘BS expansion’ above refers to the increase in assets held on the national central bank’s balance sheet, when compared with a year earlier. Source: Published official sources and media reports (various as at 12 June); Australian Treasury (2020); HSBC (2020); IMF (2020); OECD (2020).


Figure 2.4: Oxford COVID-19 Government Response Stringency Index

0

20

40

60

80

100

Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20

Inde

x

Australia China United States Japan South Korea India

Notes: The index is a composite measure of nine indicators and scaled from 0 to 100. The policy and response categories relate to school closures, workplace closures, cancelled public events, restrictions on gatherings, closure of public transports, public information campaigns, stay-at-home measures, restrictions on travel, testing policy and contract tracing. Notes: The index measures the stringency of government responses to COVID-19 such as school closures, travel bans, etc. on a scale from 0 to 100.

Source: Oxford COVID-19 Government Response Tracker, Blavatnik School of Government (2020)

Figure 2.5: Timeline of major events in the COVID-19 pandemic

Source: WHO (2020); John Hopkins University (2020); Published official sources and media reports (various, as at 17 June 2020)


2.3 Major trading partner economic outlook

Chinese economic growth to be affected by sluggish export demand In the first quarter of 2020, Chinese GDP fell by 6.8 per cent year-on-year. This is the largest decline since China started publishing these statistics in 1992. The OECD expects that the disruptions posed by COVID-19 are largest in the March quarter of 2020, before the economy recovers over the rest of 2020. In 2020, Chinese GDP is forecast to fall by 2.6 per cent.

Chinese industrial production contracted at a record pace in January and February 2020, as containment measures and supply chain disruptions reduced production. In April and May, industrial production returned to positive year-on-year growth, up 3.9 per cent and 4.4 per cent respectively. This was largely driven by downstream sectors, including automobile and electronics production.

The official Chinese manufacturing PMI fell to 50.6 in May, marginally lower than the 50.8 recorded in April. In future months, Chinese PMI readings are likely to be affected by sluggish export demand: the export orders sub-index was a historically low 35.3 in April. As a result of low global demand, Chinese exports in May fell by 3.3 per cent year-on-year.

For the majority of 2019, Chinese trade was negatively affected by tensions with the US. Before the COVID-19 pandemic, there were signs that these tensions were easing, with the US-China Phase-One trade deal reached in December 2019. This agreement is expected to reduce trade barriers between the two countries, to the benefit of global supply chains. However, there is significant uncertainty regarding the ability of China to meet 2020 purchase targets laid out in the agreement, and consequently, what effect this might have on trade relations between the two nations. Re-escalation of trade tensions between China and the US is a risk to global economic growth.

On 22 May 2020, the Chinese government announced a fiscal stimulus package totalling US$506 billion to support the economy following the COVID-19 pandemic. This fiscal stimulus announcement has also been accompanied by interest rate cuts by the People’s Bank of China (PBOC).

The PBOC has also cut the bank reserve requirement ratio, increased the money supply, and provided funds to increase the capacity of commercial banks to lend to small businesses. As a result, Chinese bank lending reached a new record high in the first quarter of 2020. In 2021, the OECD expects Chinese economic growth to recover to 6.8 per cent.

High US unemployment to affect global consumer demand The OECD expects US GDP to fall by 7.3 per cent in 2020. An annualised 3.5 per cent decline was recorded in the first quarter of 2020. With state governments generally introducing quarantine measures in March or April, economic activity is expected to fall significantly in the second quarter of 2020. As at 17 June 2020, some states have wound back quarantine measures, but the extent to which this is occurring varies by state.

The US unemployment rate was around 13 per cent in May (Figure 2.6), down slightly from 15 per cent in April — which was the highest monthly unemployment rate since records began in 1948. Although unemployment remained historically high, the falling unemployment rate reflected the gradual recovery in economic activity.

Figure 2.6: US initial jobless claims and unemployment rate


3

5

7

9

11

13

15

0

1

2

3

4

5

6


Per c

ent

No.

of c

laim

s (a

v. m

onth

ly,

milli

ons)

Initial jobless claims Unemployment Rate (rhs)


A large proportion of the US citizens who were unemployed in May reported being temporarily laid off, suggesting that the unemployment rate will fall relatively quickly as containment measures ease. However, current low employment in the services sector is likely to push down US consumer demand for most of 2020, particularly for large consumer durables.

US industrial production fell by 11 per cent in March, the largest month-on-month decline on record. Manufacturing output fell by 14 per cent, with production of motor vehicles and parts falling by 70 per cent.

The US government has introduced around US$3 trillion worth of stimulus to address the impacts of COVID-19. The largest package was signed in late March, and committed US$2 trillion for household payments, support for local and state governments, and financial assistance for large businesses, including aircraft producers and airlines. In 2021, the OECD has forecast US economic growth to recover to 4.1 per cent.

Eurozone activity to fall substantially In the March quarter 2020, Euro area GDP fell by 3.1 per cent on an annual basis. Italy was one of the first countries outside East Asia to have widespread COVID-19 outbreaks, entering a nationwide lockdown on 10 March. The further spread of COVID-19 and the introduction of containment measures across other EU member states are likely to lead to declines in EU GDP in the June quarter 2020. The OECD expects the economy of the Eurozone to contract by 9.1 per cent in 2020.

Eurozone industrial production in April fell by a record 17 per cent month-on-month, as COVID-19 containment measures impacted on activity. Germany, a key manufacturing country in the EU, registered a 21 per cent fall. The Eurozone manufacturing PMI in May increased to 39.4 from 33.4 in April (Figure 2.7), although the May reading still indicated month-on-month contraction, reflecting falling new orders and output. The May services PMI rose to 30.5, up from the record low of 12.0 in April. Ongoing weakness in the services industry suggests that commodity demand will be indirectly affected in future months.

Figure 2.7 Eurozone GDP and PMI

Source: Bloomberg (2020), IHS Markit (2020)

In March 2020, the European Central Bank introduced a pandemic emergency purchase programme that targets securities, and ramped up their quantitative easing programme introduced in 2019. Many member country governments have introduced fiscal stimulus packages, despite high debt levels.

On 31 January 2020, the UK formally left the EU, and a trade agreement between the two economies is being negotiated. The outcome of these negotiations will have implications for EU and UK growth.

The OECD expects the Eurozone to grow by 6.5 per cent in 2021.

Japanese GDP to fall despite significant fiscal stimulus measures In the March quarter 2020, Japanese GDP declined by an annualised 2.2 per cent, reflecting lower consumption and exports. This was the second consecutive quarter of negative economic growth, indicating that the Japanese economy is in a technical recession.

-4.5

-3.0

-1.5

0.0

1.5

3.0

4.5

35

40

45

50

55

60

65

Mar-08 Mar-10 Mar-12 Mar-14 Mar-16 Mar-18 Mar-20

Qua

rterly

per

cent

age

chan

ge

Inde

x

Eurozone Composite PMI Eurozone GDP (rhs)


Economic activity is expected to fall by more in the June quarter, as exports fall further and consumption is affected by the state of emergency in place from 7 April to 25 May. The OECD forecasts Japanese GDP to fall by 6.0 per cent in 2020.

Figure 2.8: Japanese industrial production and machinery orders

-60

-45

-30

-15

0

15

30

45

60

-40

-30

-20

-10

0

10

20

30

40


Annu

al p

er c

ent c

hang

e

Annu

al p

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ent c

hang

e

Industrial Production Japanese machinery orders (rhs)


In response to the downturn, the Japanese government has ramped up fiscal stimulus packages, building on the December 2019 package that pre-dates the COVID-19 pandemic, which was designed to build on the stimulatory impacts of the 2020 Tokyo Olympic Games. Following the spread of COVID-19 and the subsequent delay of the Tokyo Olympic Games until July 2021, the Japanese government has increased the size of their announced stimulus packages. New measures include a universal cash payment and support for medium and small businesses. In 2021, the Japanese economy is forecast to grow by 2.1 per cent by the OECD.

Constrained South Korean exports to weigh on economic activity

South Korean economic activity is forecast by the OECD to contract by 1.2 per cent in 2020. Economic output fell by 1.4 per cent in the March quarter. This contraction was driven by a steep decline in consumer spending and lower exports as global supply chains were disrupted. Although quarantine measures are easing, sluggish global demand is expected to constrain South Korean exports.

Beyond 2020, economic growth in South Korea will depend on the world economic recovery and trade tensions. In 2019, heightened trade tensions between South Korea and Japan disrupted regional supply chains, and weighed on both economies. In June 2020, the South Korean government announced that it was re-opening its WTO complaint against Japan that was halted in November 2019. A renewal of South Korean-Japan trade tensions poses significant risks to Japanese and South Korean economic activity.

South Korea was also impacted by US-China trade tensions in 2019. US-China tensions began easing late in 2019, before the COVID-19 pandemic. Economic growth is forecast by the OECD to be 3.1 per cent in 2021.

Stringent lockdown measures to affect Indian growth

In April 2020, the Indian government introduced containment measures including locking down the country for an initial three weeks, before extending it until June 30 for certain areas in the country. These stringent lockdown measures are expected to weigh heavily on economic growth over the first half of 2020 (Figure 2.9).

The Reserve Bank of India has introduced further stimulatory monetary policy measures following five consecutive rate cuts in 2019 to address financial sector stress.

The OECD expects the Indian economy to contract by 3.7 per cent in 2020. Indian economic growth is then forecast to resume, with the economy expected to grow by 7.9 per cent in 2021.


Figure 2.9 Indian GDP growth


Box 2.2: Macroeconomic assumptions underpinning this publication Forecasts published in the Resources and Energy Quarterly are point estimates, with the accuracy of these forecasts highly dependent on the assumptions made regarding the COVID-19 pandemic and the associated economic impacts.

This publication uses OECD economic growth forecasts, made in June 2020. More specifically, this publication uses the OECD forecasts where a second wave of COVID-19 infections are avoided over the outlook period. World economic activity is forecast to contract by 6.0 per cent in 2020 before rising by 5.2 per cent in 2021. These growth forecasts are dependent on advanced economies generally lifting domestic containment measures in the June quarter of 2020, with some developing countries relaxing containment measures later in 2020. Some international containment measures are expected to persist throughout 2020, as governments strive to prevent second waves of COVID-19.

0

2

4

6

8

10

12


Annu

al p

er c

ent c

hang

e


Table 2.2: Key OECD GDP assumptions Per cent

Economic growthb

OECD economies

2019

1.7

2020a

-7.5

2021a

4.8

United States 2.3 -7.3 4.1

Eurozone 1.3 -9.1 6.5

Germany

France

0.6

1.5

-6.6

-11.4

5.8

7.7

United Kingdom

Japan

South Korea

1.4

0.7

2.0

-11.5

-6.0

-1.2

9.0

2.1

3.1

Australia 1.8 -5.0 4.1

New Zealand 2.2 -8.9 6.6

Non-OECD economies 3.5 -4.6 5.6

Chinad 6.1 -2.6 6.8

Indonesia 5.0 -2.8 5.2

India 4.2 -3.7 7.9

Worldc 2.7 -6.0 5.2

Notes: a Assumption; b Year-on-year change; c Calculated by the OECD using purchasing power parity (PPP) weights for nominal country gross domestic product; d Excludes Hong Kong. Sources: Bloomberg (2020); Department of Industry, Science, Energy and Resources (2020): OECD (June 2020).


Table 2.3: Exchange rate and inflation assumptions

2019 2020a 2021a 2022a

AUD/USD exchange rateb

Inflation rate

0.72

0.66

0.70

0.72

United States 1.8 0.6 2.2 2.3

2018–19a 2019–20a 2020–21a 2021–22a

Australia 1.6 1.9 2.0 2.1

Notes: a Assumption; b Average of daily rates; The inflation rate for Australia is used to convert Australian export values to real 2019–20 dollars; The inflation rate for the United States is used to convert commodity prices denominated in USD to real 2020 dollars. Sources: Department of Industry, Science, Energy and Resources (2020); Bloomberg (2020) Survey of economic forecasters.


3.1 Summary World steel usage is expected to fall by 6 per cent in 2020, due to the

COVID-19 pandemic and resulting economic downturn. Construction, manufacturing and other steel-intensive sectors face challenging conditions, including forced closures in some nations.

World steel consumption is forecast to rebound by 5.0 per cent in 2021 and 4.0 per cent in 2022, as the global economy recovers.

Steel output is forecast to follow a similar trend, falling by 4.0 per cent in 2020 before rising by 4.5 per cent in 2021 and 4.0 per cent in 2022.

3.2 World consumption and production Steel markets face significant pressure from a range of factors. Steel markets have been significantly affected by the COVID-19 outbreak, with production and consumption falling sharply in recent months. World steel production fell by 6 per cent through the year to March 2020, with significant variation by country (see Figures 3.1 and 3.2). Over the year to March, output fell by 20 per cent in the EU, 14 per cent in India, 10 per cent in Japan, 8 per cent in South Korea and 6 per cent in the US. China recorded a smaller drop of 1.7 per cent through the year.

COVID-19 induced forced closures have affected numerous furnaces around the world. Other producers have purposely cut supply, in response to expected falls in steel demand. Consumer spending has fallen virtually everywhere, with automotive sales across most of the OECD down by more than half in the wake of containment measures imposed in February and March.

At the time of writing, some markets are showing early signs of recovery. This reflects a widespread fall in coronavirus infection rates, with containment restrictions in some countries beginning to ease. Car factories owned by BMW and Volkswagen restarted production in early May, though many more automotive producers currently remain on hiatus. Automotive sales are expected to pick up slowly over coming months, with a return to normal sales by early 2021.

Figure 3.1: Steel production, monthly change

-30

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-10

0

10

20

Mar-2016 Mar-2017 Mar-2018 Mar-2019 Mar-2020

Year

-on-

year

per

cen

t cha

nge

EU US India Japan China

Notes: Monthly average for integrated basic oxygen furnace (BOF) steel mills

Source: Bloomberg (2020) China BOF Steel Profit Index

Figure 3.2: Steel production by region

0

200

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600

800

1,000

1,200

2004 2007 2010 2013 2016 2019 2022M

illion

tonn

esEuropean Union India ChinaJapan United States ROW

Source: World Steel Association (2020); Bloomberg (2020)


China’s importance to global steel markets is likely to rise even further

Conditions in steel markets have become more mixed, with the COVID-19 outbreak affecting different countries in different ways. In the US, declines in steel demand and supply are expected to persist for some time, with the country now recording the highest number of both COVID-19 infections and deaths in excess of 100,000. The Institute of Supply Management’s Manufacturing Index fell to an 11-year low of 41.5 in April, indicating an accelerating decline in manufacturing conditions in the US.

Signs are more positive in China, with steel inventories falling across the country in late April and early May. Some of this drawdown may be a result of stimulus measures — notably the temporary waiver of tolls across China’s highway network, which is intended to encourage production and shipment of commodities and industrial goods. This measure has proved particularly beneficial for high-weight products including steel rebar. China’s Manufacturing Purchasing Manager’s Index has also rebounded, with the index now marginally positive (at 50.8 in April 2020), suggesting that Chinese manufacturing output is growing modestly (a reading above 50 indicates expansion). At the time of writing, steel production across much of China has recovered and is close to levels recorded just before the COVID-19 outbreak.

Much of this output growth remains dependent on anticipated stimulus measures, with domestic spending on steel-intensive products down sharply in the wake of COVID-19 and the spring festival holidays. Vehicle markets in China remain depressed, with sales falling by 42 per cent in the March quarter. Consumer spending — including on whitegoods — remains well below the levels of late 2019. With steel export markets also in decline, it is likely that stimulus measures will remain important to Chinese steel markets over the remainder of 2020 and potentially 2021.

Risks remain to Chinese steel output — including if there was a second wave of COVID-19, an excessive build-up of unsold steel products, and a lack of further government stimulus. However, with other countries still undergoing sharp falls in output, China has become increasingly important to global steel supply and use (Figures 3.3 and 3.4).

Figure 3.3: Steel consumption growth by region

-25

0

25

50

-25 0 25 50

2020

-202

2 (to

tal p

er c

ent g

row

th

over

per

iod)

2017-2019 (total per cent growth over period)

China (876 Mt)

ROW (482 Mt)

India

USA

Sth KoreaEU

Japan


Figure 3.4: Steel production growth by region

-25

0

25

50

-25 0 25 50

2020

-202

2 (to

tal p

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ent g

row

th

over

per

iod)

2017-2019 (total per cent growth over period)

ROW(593 Mt)

India

EU)

Japan Sth. Korea

Other Europe China

(1,012 Mt)



Steel markets are expected to be disrupted and volatile for some time Although the impacts of COVID-19 were initially heaviest in China and surrounding countries (see Figure 3.5), at the time of writing the highest infection rates are evident in Europe and America. Economies across these regions remain subject to strict containment measures, though these have begun to be lifted in some countries.

While containment measures remain, they will continue to affect steel demand. Steel-intensive products such as whitegoods, cars and housing represent the largest sources of consumer discretionary spending, and the easiest to cut as consumers face more uncertainty. Auto sales are being impacted in divergent ways: less commuting as some office staff work remotely, but a tendency for remaining commuters to avoid public transport and drive to work. Lower consumer spending is driving second-round effects, including deferred machinery and equipment orders and reductions in capital spending, which could last into 2021 and beyond.

Steel inventories in most countries (except China) are expected to keep rising. As falls in consumer spending flow through to steel prices, profit margins for steelmaking are also likely to be squeezed, with the impact on margins exacerbated by a failure of iron ore prices to fall in line with other commodities (see the Iron Ore chapter). Further cuts in ex-China steel output are thus expected over the outlook period. High input prices are also adding to the expense of restarting production at furnaces that are currently on hiatus. This pressure may ease if iron ore prices soon fall. However, steelmakers will likely respond cautiously, given the scale of uncertainties and the risk of potential further outbreaks of COVID-19.

In the short term, steel demand is expected to remain soft as a result of low consumer spending across OECD countries. As the COVID-19 pandemic passes, steel output is expected to recover in 2021, with growth thereafter led by Asian economies. India and Vietnam have developed plans to develop their domestic steel industries. And while the COVID-19 outbreak may stall these plans in 2020 (particularly in India, where containment measures led to a 90 per cent fall in steel demand in April), it is unlikely to prevent progress in the longer term.

Figure 3.5: China’s steel consumption, production and net exports

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900

1,200

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2004 2007 2010 2013 2016 2019 2022

Milli

on to

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Milll

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tonn

es

Steel production Steel consumption Implied net exports

Source: Bloomberg (2020) World Steel Association; Department of Industry, Science, Energy and Resources (2020)

OECD nations may ultimately suffer the largest impacts Steel production across most OECD nations was facing difficulties even before the COVID-19 outbreak. A string of high-profile closures and output falls occurred in 2019, as a result of trade tensions and soft demand. The COVID-19 outbreak could accelerate these trends, leading to further decline over the next two years.

The downturn appears to be particularly significant in Japan, with the country’s largest steel maker, Nippon Steel, announcing plans to suspend operations at the Muroran and Kokura blast furnaces. This follows a string of other cutbacks and freezes in Japan over 2019 and 2020.

It is likely that conditions will improve for OECD steelmakers after 2020. However, the COVID-19 pandemic is expected to continue to affect the global economy over the full outlook period, with steel demand recovering gradually and potential setbacks along the way.


Table 3.1: World steel consumption and production

Million tonnes Annual percentage change

Crude steel consumption

China 2019

898

2020f

826

2021f

859

2021f

886

2020f

-8.0

2021f

4.0

2022f

3.2 gEuropean Union 27

United States 207

115

198

114

201

117

204

120

-4.3

-0.6

1.9

2.8

1.5

2.3

India 112 102 112 120 -8.7 9.0 7.0

Japan Russia

70

47

72

47

71

46

69

45

2.4

-1.6

-1.8

-2.1

-1.5

-1.8

South Korea 56 59 58 57 5.1 -1.4 -1.2

Brazil 7 20 21 22 183.1 4.5 3.6

World steel consumption Crude steel production

1901

2019

1787

2020f

1877

2021f

1952

2021f

-6.0

2020f

5.0

2021f

4.0

2022f

China 993 959 988 1 015 -3.5 3.1 2.8

European Union 28 149 147 150 153 -1.0 2.2 2.0

India 111 105 114 121 -5.2 7.8 6.7

Japan 99 98 97 96 -1.0 -1.2 -1.1

United States 88 87 90 93 -0.8 3.3 3.0

Brazil 32 33 34 35 2.4 2.4 2.2

Russia 72 72 72 71 1.1 -1.2 -1.1

South Korea 71 70 69 68 -2.1 -1.1 -1.0

World steel production 1845 1771 1851 1925 -4.0 4.5 4.0

Notes: f Forecast; g European Union 27 encompasses the aggregate output and demand for the 27 states which comprise the European Union.

Source: World Steel Association (2020); Department of Industry, Science, Energy and Resources (2020)


4.1 Summary Iron ore prices have held up through the early stages of the COVID-19

pandemic, despite a global economic downturn and a significant fall in steel demand in many countries. This reflects ongoing supply disruptions in Brazil and surprisingly robust demand in China.

In 2020, the iron ore price is forecast to average about US$79 a tonne free on board (FOB) Australia. Growing supply is expected to reduce the iron ore price to an average of US$65 a tonne by 2022.

Export volumes are expected to grow from an estimated 852 million tonnes in 2019–20 to 915 million tonnes by 2021–22. This reflects the commencement of several new mines in Western Australia.

Australia’s iron ore export values are estimated to have risen from $78 billion in 2018–19 to $103 billion in 2019–20, on the back of growing volumes, strong prices and a low Australian dollar. Falling prices are expected to push export earnings down to $81 billion by 2021–22.

4.2 Prices Iron ore prices remain strong due to supply disruptions Persistent supply disruptions have kept iron ore prices above US$80 a tonne in May and June. This has occurred in marked contrast to prices for metallurgical coal, which is the other primary component of steel. Although both commodities are linked to the steel supply chain, market conditions between them have varied markedly in recent months. This largely reflects conditions in China, which produces a large amount of coal, but which remains highly dependent on imports to meet its iron ore needs. Chinese import demand has remained robust as South African exports remained subdued and Brazilian exports faced more disruptions.

Prices for iron ore remain robust (Figure 4.1); while demand has been impacted by COVID-19 containment measures, these have been offset by supply problems — including weather issues in Brazil and Australia and the lingering impacts of the Brumadinho dam collapse in 2019. It is expected that supply conditions will improve before the impacts of COVID-19 fully pass, creating a likelihood of weaker prices.

Figure 4.1: China's iron ore port stocks and spot price

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125

0

40

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120

160

200

2015 2016 2017 2018 2019 2020

US$

a to

nne

Milli

on to

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Weekly port stocks Iron ore price 62% CFR (rhs)

Notes: China import Iron ore fines 62% Fe spot (CFR Tianjin port) Source: Bloomberg (2019) Antaike iron ore port stocks and Metal Bulletin

Figure 4.2: Iron ore price spread between grades

Notes: *Benchmark used is 62 per cent iron fines CFR Source: Bloomberg (2019) China import prices

0

15

30

45

60

-60

-30

0

30

60

2015 2016 2017 2018 2019 2020

Pric

e sp

read

Per c

ent d

iffer

ence

to b

ench

mar

k*Discount 58% fine ores Premium 66% fine ores

Spread (rhs)


The FOB Australia iron ore price (62% iron content) remains robust, albeit below its peak in July 2019, when it rose above US$110 a tonne. Supply shortfalls and weather disruptions kept prices above US$80 a tonne over most of the June quarter.

Weather issues and the COVID-19 outbreak (a protracted wet season and operational issues adversely affected Vale’s Northern System in Brazil) have had a significant impact on Brazil’s higher quality iron ore outputs, with supply concerns driving Vale’s premium Brazilian Blends fines product to an 11-month high (see Figures 4.2 and 4.3). The price premium has supported other suppliers of high grade iron ore, including Australia.

Iron ore prices are likely to stay strong as Chinese demand recovers China currently imports more than two-thirds of global seaborne iron ore, and declines in its steel production in late 2019 (see Figure 4.4) had significant implications for iron ore markets. However, Chinese demand for iron ore has thus far proven to be relatively robust, despite the impact of COVID-19 and the shutdown of significant sectors of the Chinese manufacturing industry. At this stage, it is not expected that Chinese demand will fall significantly, though the ongoing decline of consumer spending in OECD nations will increase the dependence of the Chinese steel industry on domestic stimulus measures.

Iron ore prices are expected to largely hold at current levels over the remainder of 2020, as Chinese demand absorbs an expected slow pickup in supply. As the dominant purchasers by far, Chinese importers will likely back away from the seaborne market on moves above US$100 a tonne.

Prices are likely to come under downward pressure after 2020, as supply shifts back towards normal levels. However, a significant global recovery is also expected in 2021, which will likely add to steel demand and provide a floor for prices. The weak demand and poor supply that appear likely to characterise 2020 are thus expected to go into reverse in 2021.

Figure 4.3: Iron ore price by grade and China steel price index

Notes: The OCE forecasts the FOB (free on board) Australia iron ore price, not the benchmark CFR (cost and freight) North China iron ore price. Source: Bloomberg (2019) Metal Bulletin; Department of Industry, Science, Energy and Resources (2020)

Figure 4.4: Iron ore price vs China steel production growth

Notes: China import Iron ore fines 62% Fe spot (CFR Tianjin port) Source: Bloomberg (2020) China import prices; World Steel Association (2020)

0

1,000

2,000

3,000

4,000

5,000

0

25

50

75

100

125

Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20

Ren

min

bi a

tonn

e

US$

a to

nne

CFR 58% CFR 62%CFR 66% FOB 62%China steel price index (rhs)

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60

90

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-5

0

5

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15

2015 2016 2017 2018 2019 2020

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-on-

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cen

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nge

China steel production Iron ore price (rhs)


4.3 World trade Export growth is recovering despite some recent setbacks Exports of iron ore are expected to hold up relatively well in 2020 (see Figure 4.5) as a result of surprisingly robust Chinese demand.

Chinese imports of iron ore rose 13 per cent in April, to 97 million tonnes. Over the first four months of 2020, Chinese iron ore imports were 5.8 per cent higher than in the equivalent period of 2019. This growth partly reflects the impact of supply constraints in early 2019, when a cyclone in the Pilbara and a dam collapse in Brazil significantly affected seaborne markets. However, it also reflects increasing production from steel mills in expectation of higher spending on infrastructure over the rest of 2020.

With weather issues giving way to problems caused by the COVID-19 outbreak, Brazilian iron ore supply remains disrupted. Brazil has become one the world’s worst-affected countries, with a lack of initial containment resulting in a rapid spread of the virus and subsequent containment measures in ten cities across Para — a key iron ore producing state. The containment measures are hampering efforts to restore output, leaving Brazilian exports stagnant at levels well below the long-run average.

Responding to the challenging conditions, Vale has announced that its planned capital expenditure in Brazil will be cut from US$5 billion to US$4.6 billion in 2020. The company has advised that the COVID-19 pandemic has made construction and maintenance unsafe at several sites. Vale has reduced its guidance for iron ore production in 2020 from 340-355 million tonnes to 310-330 million tonnes.

Indian iron ore exports have fallen sharply, due to port closures and labour shortages. Exports from countries such as Ukraine, South Africa and Canada — which have fewer economies of scale than Australia — have also come under pressure in 2020 as a result of the pandemic.

The world retains a significant pipeline of promising iron ore projects, most of which remain in prospect despite delays brought about by the COVID-19 outbreak. However, significant growth in iron ore production is not likely to occur over the next two years.

Figure 4.5: Outlook for global iron ore exports

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Brazil Australia ROW

Source: World Steel Association (2020); Department of Industry, Science, Energy and Resources (2020)

4.4 Australia Australia’s export earnings are set to rise despite short-term setbacks Australia’s iron ore exports have recovered following recent weather disruptions and difficulties in the Pilbara. Export values increased by 36 per cent in March (or 47 per cent through the year) to reach $8.9 billion in the month. This brings output and earnings back to the strong levels seen through most of the second half of 2019.

Most domestic operations are performing strongly. Shipments from Fortescue Metals increased by 10 per cent in the March quarter, reaching 42.3 million tonnes. The company has reported that shipments and payments remain largely unaffected by COVID-19, and Fortescue has raised its 2020 iron ore export target up to 175-177 million tonnes (from 170-175 million tonnes previously) as supply disruptions continue to affect producers elsewhere in the world. The company has reduced its net debt and operating costs, and is predicting a moderate but steady recovery in economic growth in China. Fortescue has announced that no investments


will be cancelled or postponed as a result of the COVID-19 outbreak, though the timing of some payments has been adjusted. Previously announced plans to expand its Port Hedland capacity from 190 million tonnes a year to 210 million tonnes a year remain on track.

In late April, BHP announced plans to increase its export capacity at Port Hedland from 290 million tonnes a year to 330 million tonnes. These plans reflect a general expectation that Chinese steel production will remain robust, with a peak expected around 2025.

New output is expected from significant projects in the Pilbara region of Western Australia, including BHP’s South Flank project (from 2021), Fortescue’s Eliwana project (from 2021), and Brockman’s Maraillana mine (from 2021). This will expand on existing capacity and substitute for falling output elsewhere in the region, where some existing mines are approaching depletion.

With Australian iron ore production now returning to the strong levels of late 2019, and with the Australian dollar having depreciated sharply, export earnings are estimated to have reached a new record of $103 billion in 2019–20. Beyond this, falling US dollar prices and a rising Australian dollar are expected to more than offset the impact of production growth, leading to falls in earnings over the subsequent two years.

Australia’s iron ore export volumes are forecast to grow Export volumes are expected to follow the trajectory of production, increasing from an estimated 852 million tonnes in 2019–20 to 912 million tonnes by 2021–22 (see Figure 4.6).

This volume growth should largely reduce the impact of price drops, leading to still relatively strong export earnings over the next few years.

Iron ore exploration expenditure is solid, but has room to grow Australia’s iron ore exploration expenditure increased by 12 per cent year-on-year to $75.5 million in the March quarter 2020.

Iron ore exploration has benefited from the surge in prices since early 2019, and from generally robust demand from key markets including China.

Figure 4.6: Australia’s iron ore export volumes and values

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Volume Value (rhs)

Source: ABS (2020) International Trade, Australia, 5368.0; Department of Industry, Science, Energy and Resources (2020)

Revisions Forecast export earnings for 2020–21 have been revised up from $86 billion to $97 billion. Forecast earnings for 2021–22 are largely unchanged. The revisions reflect the impact of the COVID-19 outbreak and the resulting weakness in the Australian dollar.


Table 4.1: World trade in iron ore

Million tonnes

2019 2020f 2021f

Annual percentage change

2022f 2020f 2021f 2022f

Total world trade

Iron ore imports

1,554

1,580

1,688

1,752

1.6

6.8

3.8

China 1,071 1,115 1,231 1,298 4.2 10.4 5.4

European Union 27 137 128 125 125 -7.0 -2.2 0.0

Japan 120 121 120 118 1.2 -1.2 -1.1

South Korea 74 73 72 71 -2.1 -1.1 -1.0

India 5 5 5 5 -6.5 -2.1 0.0

Iron ore exports

Australia

835

866

903

920

3.6

4.3

1.9

Brazil 336 366 372 382 8.9 1.6 2.7

Ukraine 16 16 18 18 -0.1 16.9 -1.8

India 14 11 14 14 -20.0 21.4 1.8

Notes: f forecast Source: World Steel Association (2020); International Trade Centre (2020); Department of Industry, Science, Energy and Resources (2020)


Table 4.2: Iron ore outlook


World Unit 2019 2020f 2021f 2022f 2020f 2021f 2022f

Prices bc

– nominal US$/t 80.1 79.5 71.0 64.8 -0.8 -10.7 -8.8

– real d US$/t 81.8 79.5 69.5 62.0 -2.9 -12.5 -10.8

Australia Unit 2018–19 2019–20s 2020–21f 2021–22f 2019–20s 2020–21f 2021–22f

Production

– Steel hs Mt 6.05 5.78 5.79 5.78 -4.5 0.2 -0.1

– Iron ore Mt 924.2 915.2 925.9 935.8 -1.0 1.2 1.1

Exports

Steel Mt 1.21 0.86 1.00 0.99 -28.8 15.4 -0.1

– nominal value A$m 1 287 917 752 751 -28.8 -17.9 -0.1

– real value hi A$m 1 312 917 738 721 -30.1 -19.5 -2.2

Iron ore Mt 818.0 851.5 892.9 911.9 4.1 4.9 2.1

– nominal value A$m 77,553 102,662 97,017 80,612 32.4 -5.5 -16.9

– real value i A$m 79,010 102,662 95,138 77,387 29.9 -7.3 -18.7

Notes: b fob Australian basis; c Spot price, 62 per cent iron content basis; d In 2020 US dollars; f forecast; h 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; i In 2019–20 Australian dollars. Source: ABS (2020) International Trade in Goods and Services, Australia, 5368.0; Bloomberg (2019) Metal Bulletin; World Steel Association (2020); AME Group (2020); Company Reports; Department of Industry, Science, Energy and Resources (2020)


5.1 Summary Metallurgical coal prices have fallen sharply in recent months, reaching

four year lows as a result of the demand-side impacts of COVID-19. The Australian premium hard coking coal (HCC) price is forecast to average US$126 a tonne in 2020, down from US$179 a tonne in 2019.

Australia’s export volumes are forecast to edge down by around 2 million tonnes in 2020–21 to 180 million tonnes due to lower global demand, before lifting in 2021–22, as world steel production recovers.

Australia’s metallurgical coal export earnings are forecast to fall sharply in 2020–21, from an estimated $35 billion in 2019–20 to $25 billion. They are then expected to stage a partial recovery to $29 billion in 2021–22, as prices and export volumes lift.

5.2 Prices Metallurgical coal prices lifted then fell sharply due to COVID-19 impacts Metallurgical coal prices initially increased on the back of strong demand from China, as the spread of COVID-19 began to accelerate from late January. The COVID-19 pandemic initially curtailed China’s domestic production, and Mongolia’s decision to close its border with China disrupted the crossing of coal trucks, forcing Chinese buyers to turn to the seaborne market to make up the shortfall. The tight supply situation was further exacerbated by weather conditions in Canada, a roof collapse at Anglo American’s Moranbah North mine in Queensland in late January 2020, and the closure of Australia’s main coking coal ports for three days in mid-March due to bad weather. The Australian premium hard coking coal (HCC) spot price moved in the US$150-165 a tonne range over the March quarter of 2020 (Figure 5.1), peaking at US$165 in late March.

From early April, however, metallurgical coal prices went into a sharp descent, with the Australian premium HCC spot price reaching a low of US$107 a tonne around the start of June before lifting slightly. Slowing global economic activity — as a result of the spread of COVID-19 — saw steel production curtailed dramatically across a number of countries, with flow on effects for metallurgical coal demand. Indian steel mills reportedly cut output by 60-70 per cent during India’s lockdown, while a number of

Indian ports declared ‘force majeure’ on the handling of coal. Other major metallurgical coal buyers in North East Asia and Europe also cut steel production. The impact of demand reductions immediately affected output in the US, where high cost producers idled mines. However, as prices fell further, supply-side impacts spread to other major metallurgical coal exporting countries, including Australia (see Section 5.6 Australia).

Figure 5.1: Metallurgical coal prices, monthly

Notes: HCC stands for hard coking coal. PCI stands for pulverized coal for injection. Source: Platts (2020)

The Australian premium HCC spot price is forecast to remain at current low levels of around US$110-120 a tonne over the remainder of 2020, averaging US$126 a tonne for the year as a whole. Buyers have reportedly been deferring cargoes until the second half of the year, which should keep prices low even as demand mounts a modest recovery. China’s ability to continue absorbing metallurgical coal supply also remains in question, especially if Chinese policymakers tighten restrictions on coal imports (see the thermal coal chapter for a discussion of Chinese coal import restrictions).

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Australian HCC Low Vol PCI Semi-soft


From 2021, metallurgical coal prices are expected to begin to recover in line with increasing steel production. The premium Australian HCC price is forecast to average US$145 a tonne in 2022 (Figure 5.2). Chinese demand remains the key risk to the outlook for metallurgical coal prices, due to the sheer size of its domestic coal market and ongoing uncertainty over its import policy. The other key demand-side uncertainty is the pace of the economic recovery in the world’s second largest metallurgical coal importer, India.

5.3 World trade World trade in metallurgical coal is estimated to have been broadly stable in 2019, at around 340 million tonnes. China’s imports increased on the back of robust growth in steel production, but weak growth in steel production outside of China weighed on seaborne demand.

World metallurgical coal trade is forecast to fall by over 30 million tonnes to 309 million tonnes in 2020. India and China are expected to account for around half of the fall, with the rest of the decline spread across other major steel producers, such as Japan, South Korea and Europe.

Production cutbacks are expected to be most severe in the US, but other major exporters are also likely to be affected. The US is a swing supplier, with US producers sitting to the right of the global cost curve (Figure 5.3).

Figure 5.2: Australian premium HCC spot price, quarterly

Source: Platts (2020); Department of Industry, Science, Energy and Resources (2020)

Figure 5.3: Metallurgical coal (including hard coking, PCI and semi-soft) global cost curve, FOB, 2020

Notes: FOB is Free on Board. RoW is rest of world. Source: AME Group (2020); Department of Industry, Science, Energy and Resources (2020)

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Dec-12 Dec-14 Dec-16 Dec-18 Dec-20 Dec-22

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020406080

100120140160

0 50 100 150 200 250 300 350

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Million tonnesAustralia Russia US Canada Mozambique Mongolia RoW


5.4 World imports China may seek to reduce imports after they lifted at the start of 2020 China is the world’s largest steel maker, and imported an estimated 75 million tonnes of metallurgical coal in 2019 — making it the world’s largest metallurgical coal buyer. China’s metallurgical coal imports rose sharply year-on-year in the March quarter 2020, due to surging imports at the start of the year (Figure 5.4). The COVID-19 pandemic initially constrained China’s domestic production, with miners unable to return to work due to restrictions on the movement of people. China’s seaborne imports were further helped by Mongolia’s decision to close its border with China, which disrupted the crossing of trucks carrying metallurgical coal.

In April, however, China’s imports contracted by around 15 per cent, with Chinese mines having resumed operations and steel output remaining flat. China’s seaborne imports, however, were up due to the continued disruptions to Mongolian imports (Figure 5.4) and the fall in seaborne prices, which raised their competitiveness relative to domestic production and attracted irregular buyers — such as inland steel mills — to the seaborne market. China’s metallurgical coal imports are expected to fall to 67 million tonnes in 2020, as imports decline over the rest of 2020.

As the economic impacts of COVID-19 recede, China’s metallurgical coal imports are expected to rise to 76 million tonnes in 2022. Steel production is expected to continue to grow, albeit at a slower pace than forecast in the March Resources and Energy Quarterly. Chinese metallurgical coal production is also expected to lift but is not expected to keep pace with demand growth given that China has limited reserves, particularly of higher quality grades. China’s next phase of supply-side reforms — which aim to increase coal sector efficiency and profitability by replacing unsafe, high-cost mines with safer lower-cost ones — could adversely affect domestic metallurgical coal production, supporting imports. The reforms are aimed at shutting down and stopping the approval of small-scale coal mines, and China’s metallurgical coal output is more reliant on smaller mines than its thermal coal production. Shanxi’s provinicial government is planning to shut all coal mines that produce less than 0.6 million tonnes

per annum by the end of 2020 — equivalent to around 15 million tonnes of production. Shanxi produced around 970 million tonnes of coal in 2019.

Figure 5.4: China’s metallurgical coal imports, year-on-year change

-4-3-2-10123456

Australia Russia Canada Mongolia UnitedStates

Rest ofworld

World

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nnes

Jan/Feb-20 Mar-20 Apr-20

Notes: China customs released combined January/February data for 2020. Source: Bloomberg (2020) China customs

India’s metallurgical coal imports to fall sharply before recovering India is the world’s second largest steel producer and metallurgical coal buyer, importing an estimated 53 million tonnes in 2019. India’s metallurgical coal imports fell slightly in the March quarter, and the decline accelerated in April. The Indian government imposed a lockdown in late March which was subsequently extended until the end of June, although only for key containment zones. The lockdown saw Indian steel mills cut output by 60-70 per cent at times and much of India’s steel sector was reportedly ‘hot idled’ whereby mills continued to produce but at minimum levels in order to avoid the costs of turning off furnaces and restarting operations. As India’s steel production fell so too did India’s metallurgical coal demand. Steel mills were unable to take more feedstock and were forced to on-sell coking coal cargoes. India’s metallurgical coal imports are forecast to fall by 8 million tonnes in 2020 to 45 million tonnes.


Figure 5.5: Metallurgical coal imports, annual

Notes: s Estimate f Forecast Source: IHS (2020); Department of Industry, Science, Energy and Resources (2020)

After 2020, India’s metallurgical coal imports are expected to begin to recover, increasing to 56 million tonnes in 2022 (Figure 5.5). India has ambitious plans to increase crude steel production capacity from 142 million tonnes in 2018–19 to 300 million tonnes per year by Indian fiscal year 2030–31. However, India has very limited domestic reserves of metallurgical coal, and will need to increase imports to support the rapid growth of its domestic steel sector. The pace at which India’s steel sector is able to expand remains a key risk to the outlook, with the economic impacts of COVID-19 adding to the sector’s ongoing financial and regulatory challenges.

Japan and South Korea’s imports to decline in 2020 and then stabilise Japan is the world’s third largest metallurgical coal importer, importing an estimated 47 million tonnes in 2019. Japan’s imports increased year-on-year in the four months to April, with Japan containing the spread of its first wave of COVID-19 infections. Following another lift in COVID-19

infections, however, the Japanese government announced a state of emergency in early April, which saw two of the country’s largest steel producers move to cut production by around 25 per cent. Japan’s metallurgical coal imports are forecast to decline in 2020 to 44 million tonnes and remain flat until 2022, in line with steel production.

South Korea is the world’s fourth largest metallurgical coal importer, bringing in an estimated 37 million tonnes in 2019. South Korea’s imports grew robustly in the four months to April, up 6 per cent year-on-year, but imports are forecast to edge down to 36 million tonnes in 2020, before stabilising until 2022, in line with steel production.

5.5 World exports US exports to remain responsive to prices over the next two years The US is the world’s second largest exporter of metallurgical coal after Australia, exporting around 50 million tonnes in 2019. The US is a swing producer in metallurgical coal markets — due to higher freight and production costs (Figure 5.3) — and exports fell sharply year-on-year in the first fourth months of 2020 due to the decline in metallurgical coal prices. US metallurgical coal exports are forecast to fall to 39 million tonnes in 2020, before rebounding in line with prices and lifting to 44 million tonnes in 2022 (Figure 5.6).

Russia’s exports affected by low metallurgical coal prices Russia exported an estimated 26 million tonnes of metallurgical coal in 2019. Exports appear to have been impacted by declining prices, falling in the March quarter, and are forecast to decline to 22 million tonnes in 2020. After 2020, Russia’s metallurgical coal exports are expected to gradually recover, reaching 27 million tonnes in 2022. Russia has been investing in both new additions to mining capacity and rail and port expansions in recent years.

Mongolia’s coal exports fell in early 2020 due to border closure Mongolia surpassed both Russia and Canada to become the world’s third largest metallurgical coal exporter in 2019, with exports of an estimated 31 million tonnes. In late January 2020, Mongolian authorities announced the

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Taiwan India EU27

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closure of its border with China to contain the spread of COVID-19. The closure disrupted the crossing of coal trucks and saw Mongolia’s coking coal exports fall sharply. Mongolia’s metallurgical coal exports are expected to recover as restrictions on the crossing of coal trucks into China continue to ease, but fall in 2020 as a whole to 26 million tonnes. Mongolia’s exports are expected to recover after 2020, reaching 32 million tonnes in 2022.

Canada’s exports affected by a combination of factors in 2020 Canada exported an estimated 30 million tonnes of metallurgical coal in 2019 (Figure 5.6). Canada’s exports declined year-on-year in the four months to April, as a result of severe weather events and rail blockades in January and February, and then the fall in metallurgical coal prices. Canada’s metallurgical coal exports are expected to decline to 27 million tonnes in 2020, before recovering to 31 million tonnes in 2022.

Figure 5.6: Metallurgical coal exports, annual

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Notes: s Estimate f Forecast Source: IHS (2020); Department of Industry, Science, Energy and Resources (2020)

Mozambique’s exports challenged by low prices Mozambique currently has two exporting metallurgical coal mines: Vale’s Moatize and Jindal Steel’s Songa mines. Once touted as the next major supplier of metallurgical coal, Mozambique has faced a number of challenges in growing its exports, estimated at 5 million tonnes in 2019. Mozambique’s metallurgical coal exports declined in the March quarter 2020, as COVID-19 lowered demand. Vale has also postponed the reconfiguration of the Moatize mine’s wash plant that was originally scheduled for the first half of 2020. The upgrade is needed to process an unanticipated section of lower grade material that was encountered at the mine.

Mozambique’s metallurgical coal exports are forecast to decline to 3 million tonnes in 2020, as low prices impact Mozambique’s relatively high cost producers. After 2020, Mozambique’s exports are forecast to begin to recover, reaching 7 million tonnes in 2022, driven by the ramp up of Vale’s Moatize mine, and facilitated by the Nacala logistics corridor rail line and Nacala port expansion.

5.6 Australia Metallurgical coal export earnings declined sharply in 2019–20 The value of Australia’s metallurgical coal exports declined from $44 billion in 2018–19 to an estimated $35 billion in 2019–20, driven by both lower prices and lower export volumes. Metallurgical coal export volumes fell 2.2 per cent year-on-year in the March quarter. A number of miners, including Yancoal, Coronado and BHP, reported lower production for the quarter, as a result of wet weather and/or bushfires. Australia’s metallurgical coal exports were relatively resilient to low prices in April (Figure 5.7), but Queensland ports data suggests that they weakened in May. An underground explosion at Anglo American's Grosvenor mine in Queensland at the start of the month saw the mine shutdown. Grosvenor produced 4.7 million tonnes of metallurgical coal in 2019.


Figure 5.7: Australia’s metallurgical coal exports, monthly

Source: ABS (2020)

Metallurgical coal export earnings to fall further in 2020–21 Metallurgical coal export earnings are forecast to decline further in 2020–21, falling to $25 billion (Figure 5.8), primarily due to lower prices. Export volumes are expected to edge down due to lower global demand for metallurgical coal, with some Australian miners announcing production cutbacks or temporary closures (discussed below) and the potential for further announcements to follow. However, exports should receive some support from the recovery of production from operational disruptions at a number of mines. The low Australian dollar and recent falls in oil prices (and resultant low diesel prices) should also assist Australian exporters. Export earnings are then expected to mount a partial recovery to $29 billion in 2021–22.

A key risk to the outlook is coal mines being placed on care and maintenance. However, there are a number of factors that reduce the risk of widespread mine closures in Australia, including take-or-pay contracts with rail and port operators, contracted export sales, and the costs

associated with moving to care and maintenance (see the thermal coal chapter for further discussion). About two-thirds of Australian metallurgical coal exports are HCC, while the remaining third is composed of pulverized coal for injection (PCI) and semi-soft coking coal. Most Australian HCC producers appear to be relatively well positioned even at current spot prices (Figure 5.9). However, producers of semi-soft coking coal and PCI appear to be more exposed to a prolonged period of low prices.

Figure 5.8: Australia’s metallurgical coal exports

Source: ABS (2020) International Trade, Australia 5454.0; Department of Industry, Science, Energy and Resources (2020)

To date, a number Australian mines have announced cuts to production. In May, Peabody announced the temporary closure of its 2.5 million tonne per annum Wambo underground thermal and semi-soft coking coal mine in New South Wales. Production will be halted at the mine for around 2 months from 19 June. Production will also be slowed at Peabody and Yancoal’s Middlemount mine in Queensland’s Bowen Basin due to the impacts of COVID-19. Middlemount produced around 2.7 million tonnes of metallurgical coal in 2019 (mainly PCI). In June, Anglo American announced that it would reduce production at its Dawson mine in the

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Bowen basin in response to low prices. Dawson produced around 6 million tonnes of hard and semi-soft coking coal last year. Stanmore Coal, which operates the Isaac Plains mine in Queensland (predominantly semi soft), is expecting no metallurgical coal sales in June (down from around 0.25 million tonnes), after term customers advised that they would be deferring the delivery of contracted coal shipments until later in the year. However, Stanmore’s production guidance for the full year is unchanged at 2.35 million tonnes.

Figure 5.9: Export margins of Australian metallurgical coal mines

Notes: Semi soft is semi-soft coking coal; PCI is pulverized coal for injection; HCC is hard coking coal. Price assumptions are HCC = US$120 a tonne; PCI = US$70 a tonne; semi soft = US$65 a tonne. Mines are categorized into HCC, PCI and semi soft based on which product they most produce of. Some mines produce a mixture of these products. Source: AME (2020); Department of Industry, Innovation and Science (2020)

Longer term, deferred investment decisions, as a result of the demand-side impacts of COVID-19, are likely to weigh on Australian metallurgical coal production. Coronado Coal has deferred an expansion of its Curragh mine in Queensland’s Bowen Basin, noting it would reduce capital

expenditure by around 40 per cent in response to COVID-19. Similarly, South32 may push back the timetable for development and project expansion for its Appin and Dendrobium underground coal mines in New South Wales because of capital constraints imposed by the company in response to COVID-19.

Coal exploration expenditure increases Australia’s coal exploration expenditure increased 75 per cent year-on-year to $63 million in the March quarter 2020, continuing to recover from the lows recorded over 2016 and 2017 (Figure 5.10).

Figure 5.10: Australian coal exploration expenditure and prices

Source: Source: ABS (2020); IHS (2020); Platts (2020)

The outlook for Australia’s metallurgical coal exports has deteriorated Australia’s forecast metallurgical coal export earnings have been revised down by $11 billion in 2020–21 and $6.7 billion in 2021–22, due to both lower prices and reduced export volumes. Forecast export volumes have been revised down by 14-16 million tonnes in 2020–21 and 2021–22. The ramp up in metallurgical coal exports forecast in the March 2020 Resources and Energy Quarterly is no longer expected during the outlook period, due to the demand-side impacts of COVID-19.

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0 50 100 150

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a to

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Million tonnes

HCC PCI Semi soft

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Exploration expenditure (rhs) Newcastle 6,000 kcal

Australian HCC


Table 5.1: World trade in metallurgical coal


Unit 2019s 2020f 2021f 2022f 2020f 2021f 2022f

World trade Mt 341 309 328 345 -9.3 6.0 5.3

Metallurgical coal imports

China Mt 75 67 70 76 -10.6 3.5 8.7

India Mt 53 45 51 56 -15.2 12.5 9.8

Japan Mt 47 44 43 43 -6.4 -1.2 -1.1

European Union 28 Mt 41 36 39 39 -14.0 9.7 -1.1

South Korea Mt 37 36 36 36 -1.8 -1.0 -1.0

Metallurgical coal exports

Australia Mt 184 179 184 189 -2.9 2.6 2.8

United States Mt 50 39 42 44 -22.5 8.5 4.8

Canada Mt 30 27 29 31 -8.9 7.3 7.0

Russia Mt 26 22 24 27 -15.1 9.8 12.5

Mongolia Mt 31 26 30 32 -17.0 15.3 6.7

Mozambique Mt 5 3 5 7 -39.3 65.8 40.0

Notes: f Forecast; s Estimate. Source: IEA (2019) Coal Information; IHS (2020); Department of Industry, Innovation and Science (2020)

49


Table 5.2: Metallurgical coal outlook



Contract pricese

– nominal US$/t 184 128 131 144 -30.3 1.9 10.1

– reald US$/t 188 128 128 138 -31.7 -0.2 7.6

Spot pricesg

– nominal US$/t 179 126 133 145 -29.2 4.8 9.2

– reald US$/t 182 126 130 139 -30.7 2.7 6.8


Production Mt 189 187 185 193 -0.9 -1.0 4.0

Export volume Mt 184 182 180 187 -0.8 -1.3 4.0

– nominal value A$m 43,637 34,552 25,297 29,200 -20.8 -26.8 15.4

– real valuei A$m 44,457 34,552 24,807 28,032 -22.3 -28.2 13.0

Notes: d In 2020 US dollars. e Contract price assessment for high-quality hard coking coal. i In 2019–20 Australian dollars. f Forecast. g Hard coking coal fob Australia east coast ports; s Estimate. Source: ABS (2020) International Trade in Goods and Services, Australia, 5368.0; Department of Industry, Innovation and Science (2020); Platts (2020)

50


6.1 Summary Thermal coal spot prices have fallen sharply as the impact of COVID-19

drives a contraction in seaborne trade for only the second time this century. The Newcastle benchmark is forecast to average US$56 a tonne in 2020, before slowly recovering to US$65 a tonne in 2022.

The bulk of production cuts are expected to come from Indonesia and the US. However, Australia’s exports are forecast to decline from an estimated 213 million tonnes in 2019–20 to 210 million tonnes in 2020–21, as Australian producers come under pressure from low prices.

Australia’s thermal coal exports are forecast to drop from an estimated $20 billion in 2019–20 to $16 billion in 2020–21, before a partial recovery to $17 billion in 2021–22 driven by higher prices and export volumes.

6.2 Prices Thermal coal prices remained resilient in early 2020 before falling sharply

Seaborne thermal coal spot prices weathered the impacts of COVID-19 over the first few months of 2020. The benchmark Australian thermal coal spot price — Newcastle 6,000 kcal/kg NAR (Net As Received) — was relatively stable in a US$60-70 a tonne range until early April (Figure 6.1).

On the demand side, prices received support from strong buying from China. While COVID-19 restrictions lowered Chinese power consumption, domestic coal production was curtailed by China’s efforts to control the spread of the virus and Chinese buyers turned to imports to make up the shortfall. Vietnam also lifted imports substantially over the first few months of 2020, and demand from India and Japan remained resilient.

On the supply side, South Africa’s lockdown saw exports from the world’s fourth largest exporter curtailed. COVID-19 also disrupted Colombian output, including at the 27 million tonne per annum Cerrejón coal mine — the largest in the nation — idled from late March until early May.

Against the backdrop of resilient spot prices, the 2020–21 Japanese Fiscal Year contract price (April to March) settled at US$68.75 a tonne, though this still represented a substantial drop from US$95 a tonne for 2019–20.

Figure 6.1: Thermal coal prices, weekly

Notes: Qinhuangdao (QHD) is the largest coal port in China and QHD prices are a key benchmark for coal prices in northeastern China. Source: IHS (2020)

By mid-April, however, spot prices had begun to decline due to weakening thermal coal import demand as a result of the impacts of COVID-19. The Newcastle 6,000 kcal spot price hovered around US$50 a tonne during May and the first half of June. A combination of developments drove the fall: in China, rising domestic production combined with subdued power demand; in India, a lockdown coupled with government directives that favoured domestic coal over imports; and in North East Asia, weak demand due to lower power consumption and an ongoing shift away from coal in electricity generation. Demand from smaller importers in South East Asia was also affected as the spread of COVID-19 widened. Competition from gas further reduced thermal coal demand, with oil-linked LNG contract prices in Asia near record low levels and LNG spot prices weighed down by an oversupplied market (see the gas chapter).

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Thermal coal prices to remain subdued due to weak demand

The Newcastle 6,000 kcal spot price is forecast to remain low for the remainder of 2020, averaging around US$56 a tonne for the year as a whole (Figure 6.2). Lower power demand, as a result of a sharp fall in economic activity, is expected to weigh on seaborne thermal coal demand. The rapid build-up in coal stocks in key importing countries will take some time to rundown, and should prevent any sharp rebound in prices in the short term. The move by the Indian government to encourage the use of domestic coal over imports only adds to demand-side pressures in the world’s second largest thermal coal importer. There also remains the risk of Chinese government intervention to restrict coal imports: the Chinese coal mining industry is pressuring the government to tighten import controls, with seaborne coal prices remaining attractive relative to domestic prices, and local supply continuing to outpace demand.

Figure 6.2: Thermal coal price outlook, annual

Notes: JFY is Japanese Fiscal Year (April to March). Source: IHS (2020); Department of Industry, Science, Energy and Resources (2020)

On the supply side, further cuts to production are likely to be required to balance the market in 2020. Around a third of production which supplies the seaborne thermal coal market (and for which data is available) is uneconomic at current prices.

Thermal coal prices are expected to rise in 2021, driven by an increase in seaborne thermal coal demand as the global economy recovers. However, longer-term trends will constrain the extent of the rise: Europe and South Korea are looking to reduce thermal coal usage, while the world’s two largest consumers (China and India) have signalled their intention to reduce thermal coal imports by increasing domestic production. Growing demand from South and Southeast Asia should help to offset declining thermal coal imports elsewhere. Competition from LNG is also expected to weigh on thermal coal demand, especially while LNG prices remain near record lows in spot and short-term contract markets (see the gas chapter).

The Japanese Fiscal Year contract price, which serves as a benchmark for the Asian market, is expected to settle at a premium relative to the spot price over the outlook period (Figure 6.2).

6.3 World trade World thermal coal trade is expected to contract in 2020 for only the second time this century (the first being 2015). World thermal coal imports are forecast to fall by about 100 million tonnes — a decline of close to 9 per cent.

The fall in seaborne thermal coal demand is expected to be led by India and China (Figure 6.3). Europe’s coal imports are expected to continue to decline as a part of its longer-term shift away from coal, while demand in Southeast and South Asia is also being affected by COVID-19’s impact on power demand and economic activity. The largest cuts to production are expected to come from Indonesia and the US, although all suppliers will be affected.

In 2021 and 2022, global thermal coal import demand is expected to recover, as the demand-side impacts of COVID-19 ease.

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Figure 6.3: Thermal coal imports

Notes: s Estimate f Forecast Source: IHS (2020); IEA (2019) Coal Market Report; Department of Industry, Science, Energy and Resources (2020)

6.4 World imports China’s imports to fall in 2020 despite a strong start to the year

As the world’s largest thermal coal consumer and importer, China exerts a profound influence on seaborne markets. China’s thermal coal imports lifted in the first four months of 2020 (Figure 6.4). The initial lift was due to a customs clearance backlog from December (when thermal coal imports reached near zero according to Chinese government customs data), which resulted from China’s efforts to meet its unofficial coal import cap for 2019. The implementation of measures from late January to control the spread of COVID-19 then restricted domestic production, forcing Chinese buyers to turn to the seaborne market. Chinese imports continued to increase year-on-year in April, with low seaborne prices making imports attractive relative to domestic coal.

China’s thermal coal imports are expected to decline over the remainder of 2020, and annual imports are forecast to fall from an estimated 241 million tonnes in 2019 to 230 million tonnes in 2020. China’s coal import policies will be critical in determining China’s thermal coal imports in 2020 and beyond, with ramifications for the seaborne market. China’s government has actively sought to manage coal import levels over the past few years, since its efforts to restructure its domestic coal industry led to concerns from the Chinese coal industry that imports were being favoured over domestic production. Although no official target has been set, China is reportedly seeking to cap total coal imports at 271-281 million tonnes in 2020. Imports increased rapidly in the first few months of 2020 and seaborne prices remain low, making it difficult to achieve this target without intervention. This has increased the likelihood of stricter import measures in the second half of the year.

Figure 6.4: China’s thermal coal imports, year-on-year change

Notes: Estimates based on Chinese customs data. China customs released combined January/February data for 2020. Source: Bloomberg (2020); Department of Industry, Science, Energy and Resources (2020)

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Thermal coal import policy has been a key tool for stabilising domestic prices within the ‘green zone’ — a price band of 500 to 570 Renminbi (RMB) (Figure 6.5). Prices in this range are understood to be broadly acceptable to China’s power generators and industrial consumers, while also providing sufficient margins for domestic coal miners. China’s government has tended to ease import restrictions when domestic prices are high, and tighten restrictions when domestic prices go below RMB500. In April, China’s domestic coal price dipped below this target range — a sign of an oversupplied market — but had recovered by June. Any further falls in domestic coal prices would further increase the likelihood of China using thermal coal import policy to restrict imports.

Figure 6.5: China’s domestic thermal coal price

Notes: The ‘green zone’ is a price band from 500-570RMB. Qinhuangdao (QHD) prices are a key benchmark for coal prices in northeastern China. Source: Bloomberg (2020)

In 2021 and 2022, China’s imports should edge down, with domestic production lifting more quickly than consumption. China has been restructuring its coal sector over the past few years and the replacement of smaller, less efficient mines with larger, more efficient mine capacity

should allow production to grow. Domestic production will also be supported by infrastructure improvements and expansions, including the 60 million tonne per annum Haoji railway commissioned in October 2019, which are increasingly connecting domestic supplies with demand centres.

Chinese coal demand is expected to lift in 2021 and 2022, as economic activity and power demand recovers. While the bulk of new installed capacity is likely to come from hydro and renewable generation, China has a substantial pipeline of coal-fired power stations. Between September 2014 and March 2016, China’s central government delegated permitting for coal-fired power stations to provincial authorities, which had strong incentives to approve new coal-fired power stations to meet economic targets for their provinces. Given the pipeline of coal generation projects in China, it is possible that the central government will raise the coal power cap in the country’s 14th Five Year Plan (2021-2025) to be released in 2020. China currently has over 1,000 gigawatts (GW) of operational coal-fired power generation capacity, and state planning bodies have recommended lifting the cap from 1,100 GW to somewhere between 1,200 GW and 1,400 GW. Increases in coal consumption in power generation are likely to be partly offset by falls in coal consumption in residential, commercial and small-scale industry sectors, as a result of China’s efforts to reduce air pollution.

India’s imports fall as lockdowns impact the power and industrial sectors

India is the world’s second largest thermal coal consumer and importer, importing an estimated 211 million tonnes of thermal coal in 2019. The Indian government ordered a lockdown in late March, which was subsequently extended until the end of June, although only for key containment zones. India’s imports grew slightly year-on-year in the March quarter (Figure 6.6), but the lockdown saw imports fall in April as buyers deferred shipments from South Africa, Indonesia and Australia scheduled for the coming months.

The fall in India’s imports was the result of a sharp contraction in demand coupled with resilient domestic output. As India went into a COVID-related lockdown in March, power demand plunged as did demand for thermal

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coal in electricity generation. The lockdown also affected industrial thermal coal demand, especially in the sponge iron and cement production sectors. India’s sponge iron sector uses an estimated 25-30 million tonnes of imported thermal coal each year, largely from South Africa.

India’s domestic coal output initially withstood the impacts of COVID-19. Production from state-owned Coal India — which accounts for about 80 per cent of India’s coal output — reached a monthly record in March, as the miner sought to reach its production target for Indian fiscal year (April to March) 2019–20. Coal stocks at mines, industrial facilities, ports and power plants climbed to record highs in April. With excess supply mounting, the Indian government urged state-owned generation companies to use domestic coal ahead of imports. India’s Power Ministry issued a directive for power plants to cut their use of imported coal.

India’s thermal coal imports are forecast to decline sharply by over 40 million tonnes to 167 million tonnes in 2020, due to the demand-side impacts of COVID-19. Record high inventories will take some time to run down and will weigh on India’s thermal coal imports in the short term, and India’s domestic coal production has been resilient to the disruptive effects of the virus. Domestic mining operations have been allowed to continue throughout the lockdown and coal producers have been directed to proceed in accordance with their annual production targets. Stated-owned Coal India has a production target of 710 million tonnes in Indian fiscal year (April to March) 2020–21.

India’s thermal coal imports are expected to recover gradually over the next two years to reach 185 million tonnes in 2022, as the country’s electricity demand picks up and industrial activity resumes. However, the bounce back is expected to be constrained by government targets and policy. In February 2020, India’s Minister for Coal and Mines announced India would aim to stop importing thermal coal from Indian fiscal year 2023–24 (instead relying on domestic production). While this has been a long-term goal for India and there are considerable barriers to its achievement, the announcement signals a renewed intent to reduce thermal coal imports.

Figure 6.6: India’s thermal coal imports, monthly

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The Indian government’s strategy to increase domestic production has several elements. The first is to boost production by state-owned companies, particularly Coal India. Coal India has a production target of 1 billion tonnes by Indian fiscal year 2023–24. The second strategy is to increase production by the private sector. The Indian government has introduced a number of reforms to encourage private investment, including opening up the country’s coal sector to foreign direct investment and changing the rules governing coal mine auctions. While India will likely fall short of its production targets, government policy is nevertheless expected to propel Indian coal production higher over the next few years.

Japan’s imports are being affected by competing influences

Japan is the world’s third largest thermal coal importer, importing an estimated 135 million tonnes of thermal coal in 2019. The country’s thermal coal imports were broadly stable year-on-year in the four months to April (Figure 6.7). Japan’s imports are forecast to decline by around 2 million tonnes to 133 million tonnes in 2020. Low LNG prices and subdued energy demand due to COVID-19 should weigh on thermal coal imports.


However, imports should also receive support from the shutdown of a number of nuclear power plants (which compete with thermal coal in electricity generation) that need to finish upgrades to comply with counterterrorism measures.

Figure 6.7: Japan, South Korea and Taiwan’s thermal coal imports

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Beyond 2020, there are competing trends at work. Japan has new coal-fired capacity under construction. However, energy demand in Japan is on a downward trend, and Japan is planning to shift its power generation mix towards nuclear and renewable energy, and away from gas and coal. The 2011 Fukushima disaster resulted in the closure of Japan’s nuclear fleet. At the time of writing, only nine of Japan’s 42 nuclear reactors had gained approval to restart. More reactors are likely to come back online by 2022, with 18 reactors having submitted applications to Japan’s Nuclear Regulation Authority to restart. The pace of nuclear restarts is the main uncertainty affecting the outlook for Japan’s thermal coal imports. Nuclear energy in Japan continues to face public opposition and legal challenges. There remain significant risks of delays and slippages in nuclear restarts.

South Korea’s imports to decline as energy transition accelerates

South Korea is the world’s fourth largest thermal coal importer, purchasing an estimated 99 million tonnes of thermal coal in 2019. South Korea’s thermal coal imports fell steeply year-on-year in the four months to April 2020 (Figure 6.7), down around 20 per cent, as COVID-19 affected power demand and the country scaled up its temporary closure of coal-fired power stations to curb air pollution. Over the past few years, the South Korean government has introduced regulations that require coal-fired power stations in South Korea to shut down or operate at reduced capacity during certain periods of the year, particularly over winter, or when air pollution reaches certain thresholds. South Korea’s government has also introduced new tax arrangements aimed at encouraging the use of gas over coal.

South Korea’s thermal coal imports are forecast to fall to 93 million tonnes in 2020. In 2021 and 2022, South Korea’s imports are forecast to remain broadly stable at around 93 million tonnes, with increasing power demand offset by the impact of policies to reduce coal use. South Korea’s long-term plan is to shift its energy mix towards renewables and gas, and away from nuclear and coal. Under South Korea’s energy plan, no new coal-fired power or nuclear capacity will be added, aside from that already under construction. Under South Korea’s draft 2020-2034 energy plan, the current target of 36 per cent for coal’s share of power generation in 2034 would be cut to 15 per cent.

Taiwan’s imports to decline under national energy plan

Taiwan’s thermal coal imports were broadly steady in 2019, at an estimated 58 million tonnes. While power demand in Taiwan was resilient to the impacts of COVID-19 in early 2020, thermal coal imports have declined year-on-year due to the government’s energy transition policies. Thermal coal imports are expected to decline in 2020, falling to 55 million tonnes. In 2021 and 2022, Taiwan’s thermal coal imports are expected to decline slightly further. Taiwan is aiming to shift its power generation mix towards gas and renewables, and away from nuclear and coal. Under


Taiwan’s current energy plan, coal’s share of power generation would fall from 46 per cent at present to 27 per cent in 2025.

While government policy is expected to reduce Taiwan’s thermal coal imports, Taiwan does face challenges in achieving a rapid energy transition. Taiwan will need to quickly bring on LNG regasification capacity in order to ramp up LNG imports, and project slippage remains a risk. Taiwan’s energy plan also envisages a 10-fold expansion in solar photovoltaic capacity, but Taiwan is densely populated, and access to land to support the ramp up remains a major challenge. To date, Taiwan’s expansion of offshore wind generation has gone relatively smoothly, with greater government control over offshore development rights.

Southeast and South Asia to be a key source of import growth

In 2019, Southeast and South Asia (excluding India) imported an estimated 153 million tonnes of thermal coal. The largest importers of thermal coal in Southeast Asia were Vietnam, Malaysia, the Philippines and Thailand. In South Asia, Pakistan was the largest thermal coal buyer, followed by Bangladesh. While countries in Southeast and South Asia are relatively small importers individually, collectively, the region is expected to play a substantial role in thermal coal markets going forward.

Vietnam’s thermal coal imports appear to have grown strongly in the first five months of 2020, with total coal imports reaching record high levels in April and May, as power demand climbed. The impacts of COVID-19 in early 2020 were more pronounced in a number of other nations in South and South East Asia. Power generators in the Philippines are reportedly expecting to cut coal imports this year, as measures aimed to contain the COVID-19 pandemic reduce power demand. In 2020, Southeast and South Asia’s imports are forecast to decline to 144 million tonnes.

After 2020, the thermal coal imports of Southeast and South Asia are expected to increase, reaching 178 million tonnes in 2022 (Figure 6.8).

Figure 6.8: South and South East Asia thermal coal imports

Source: IEA (2019) Coal Information; Department of Industry, Science, Energy and Resources (2020); IHS (2020)

Economic and population growth is driving the demand for electricity, and coal-fired power generation is expected to play a key role in meeting growing usage. While project cancellations appear to have been rising in recent years, the completion of coal-fired power stations currently under construction is expected to drive the region’s demand for thermal coal imports higher over the next few years.

Vietnam is expected to be a key driver of import demand growth. Under Vietnam’s Power Development Plan, coal-fired power will account for 49 per cent of the nation’s electricity generation capacity by 2025. However, there are downside risks to the outlook, with the National Steering Committee for Power Development reportedly recommending that the government scale back the target for coal-fired power to 37 per cent in 2025.

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6.5 World exports Indonesia’s exports to decline sharply from record highs

Indonesia is the world’s largest thermal coal exporter, selling an estimated 466 million tonnes in 2019 — a record high — from production of 610 million tonnes. Indonesian thermal coal exports have come under pressure as thermal coal prices weaken, with prices below the cost of production for some miners. The COVID-related lockdown in India — the main destination for Indonesia’s exports — has reduced demand for Indonesia’s lower calorific coals. Indonesia’s exports are expected to fall sharply from record highs, declining to 420 million tonnes in 2020.

Figure 6.9: Thermal coal exports

Notes: s Estimate f Forecast Source: IHS (2020); IEA (2019) Coal Information; ABS (2019); Department of Industry, Science, Energy and Resources (2020)

Indonesia’s exports are expected to increase slightly in 2021 and 2022 as prices recover, however, the extent of the rebound will be limited by a more general downward trend in Indonesia’s exports. The Indonesian government has previously flagged plans to limit annual production in order to safeguard coal reserves for future domestic use. The Indonesian government is targeting an output cap of 550 million tonnes for 2020.

Whether this target can be achieved remains to be seen, with output having exceeded the target for the past few years.

South Africa’s exports fall due to a COVID-related lockdown

South Africa exported an estimated 77 million tonnes of thermal coal in 2019, making it the world’s fourth largest exporter. South Africa began a lockdown in late March, which was subsequently extended until the end of April. The lockdown reduced exports from the country’s largest port — Richard’s Bay — although a number of major exporters received exemptions which allowed them to continue operations. The lockdown also affected production for domestic use, with mines which were not supplying South Africa’s power utility Eskom only allowed to operate at 50 per cent of capacity during the second half of April. South Africa’s coal mines were all allowed to restart operations from 1 May. South Africa’s exports are forecast to fall to 65 million tonnes in 2020.

By 2022, South Africa’s exports are expected to recover to 77 million tonnes (Figure 6.9). Developments in India — a major destination for South African exports — will be key to the recovery of the nation’s coal sector. South African exports to India are expected to rise, and miners will increasingly target other Asian markets — such as Pakistan — as European coal consumption declines. A modest decline in domestic consumption should also help free up thermal coal for export. In October 2019, the South African government approved the National Development Plan, which foresees coal-fired power generation capacity falling from 37 GW at present to 33 GW by 2030.

Russia’s exports have been affected by COVID-19

Russia was the world’s third largest thermal coal exporter in 2019, shipping an estimated 181 million tonnes. Russia’s exports fell sharply year-on-year in the March quarter 2020. SUEK, Russia’s largest coal exporter, reported lower exports due to depressed seaborne prices and logistics issues on the eastern rail network. Russia’s exports are forecast to fall to 173 million tonnes in 2020, before rebounding to 184 million tonnes in 2022 as seaborne thermal coal demand recovers.

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Export growth will be supported by ongoing government plans to invest in the coal industry and in associated rail and port infrastructure. Russia has been investing heavily in transportation infrastructure to the country’s eastern ports — targeting the Asian premium market, where Japan’s utilities are diversifying their supply sources, and South Korea’s new regulations are lifting demand for Russia’s low sulphur coal. The low Russian ruble has also helped Russian coal miners.

US exports to decline due to cost and infrastructure challenges

The US exported an estimated 34 million tonnes of thermal coal in 2019. The US is considered a price-sensitive swing supplier in the seaborne thermal coal market, with most US producers considered high cost. US exports fell by around 30 per cent year-on-year in the four months to April 2020, and a number of producers have idled mines which will affect exports later in 2020. Lower exports are partly related to the impacts of COVID-19 on the seaborne thermal coal market, but the US coal sector was already under pressure due to low natural gas prices, a strong US dollar, falling demand in Europe (the typical destination for US coal), and a lack of infrastructure on the US west coast (near Asian markets). These challenges are expected to result in US thermal coal exports falling to 20 million tonnes in 2020, before rebounding to 24 million tonnes in 2022.

Colombia’s thermal coal exports impacted by COVID-19

Colombia exported an estimated 75 million tonnes in 2019. Exports increased solidly year-on-year in January and February, but declined in March and April as COVID-19 disrupted output. With Glencore’s Prodeco mine still offline at the time of writing, Colombia’s exports are forecast to fall to 65 million tonnes in 2020, before recovering over the next two years.

The low level of investment in Colombia’s coal sector in recent years, and falling coal consumption in Europe — where Colombian miners have historically sold their coal — are expected to limit the prospects for growth in Colombia’s exports. Most of Colombia’s coal mines are on the Caribbean coast, and its miners face high shipping costs to growing demand centres in Asia.

6.6 Australia Export earnings impacted by bushfires, rainfall and COVID-19 in 2019–20 The value of Australia’s thermal coal exports declined from $26 billion in 2018–19 to an estimated $20 billion in 2019–20: the impact of price falls were only partly offset by an estimated 3 million tonne increase in export volumes. A number of miners reported lower output as a result of bad weather and/or bushfires in the March quarter 2020, including BHP, Yancoal and Whitehaven.

Australia’s thermal coal exports have been relatively resilient to the impacts of COVID-19 to date. Exports increased year-on-year in February and March and, while falling back in April by around 7 per cent, (Figures 6.10), look to have only weakened slightly in May based on New South Wales ports data.

Figure 6.10: Australia’s thermal coal exports, monthly

Source: ABS (2020)

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Thermal coal export earnings to decline driven by lower prices Thermal coal export earnings are forecast to decline by around $4 billion to $16 billion in 2020–21, due to lower prices and slightly lower export volumes (Figure 6.11). The benchmark Newcastle 6,000 kcal spot price has fallen to around US$50 a tonne, down from the US$60-70 a tonne range, and is expected to take some time to recover.

Australia’s thermal coal export volumes are forecast to edge down from an estimated 213 million tonnes in 2019–20 to 210 million tonnes in 2020–21. Forecast low prices over the next 12 months are expected to result in lower production at higher cost mines. However, the low Australian dollar and recent falls in oil prices (and resultant low diesel prices) should partly offset pressures from low seaborne prices.

Figure 6.11: Australia’s thermal coal exports

Source: ABS (2020); Department of Industry, Science, Energy and Resources (2020)

In late May, Peabody announced the temporary closure of its 2.5 million tonne per annum Wambo underground thermal and semi-soft coking coal mine in New South Wales. Production will be halted at the mine for around 2 months from 19 June. Earlier in the month, Terracom Resources

announced that it would target coal sales of 2 million tonnes in 2020–21 from its Blair Athol mine in Queensland (down from an expected 2.5-2.6 million tonnes in 2019–20), due to the impacts of COVID-19. Glencore’s Rolleston mine in Queensland, which produces around 16 million tonnes per annum, was reported to have stopped production for two weeks in early June, due to low prices. A number of mines which predominantly produce metallurgical coal have also announced cutbacks to output. Further such announcements are expected.

A significant proportion of Australian thermal coal production is loss-making at current spot prices. On a calorific-value-adjusted basis, an estimated one third of Australian thermal coal exports are cash negative at prices of US$50 a tonne for Newcastle 6,000 kcal coal (Figure 6.12). However, a number of factors should see Australian supply remain relatively resilient and minimise the risk of widespread mine closures: Some Australian thermal coal is exported on contracts which provide

Australian miners with some protection from lower spot prices, at least until these contracts expire. The 2020–21 Japanese fiscal year (April to March) contract price settled at US$68.75 a tonne, well above the forecast for average spot prices of US$54 a tonne for the same period (see Section 6.2 Prices).

Mines may run at loss for a time — given the costs associated with shutting down production — until prices recover. The costs associated with placing a mine on care and maintenance are relatively high in Australia, compared with nations like Indonesia.

Mines may have ‘take-or-pay’ clauses in contracts with rail and port facilities, under which they incur costs whether or not they produce. Mines may continue to produce even if their costs are above prices, because take-or-pay costs are greater than losses from producing.

Some of the mines that are uneconomic at current thermal coal prices do not rely on their thermal coal sales for the bulk of their revenue, because they mainly produce metallurgical coal (Figure 6.12). However, low metallurgical coal prices could threaten the viability of some of these mines (see the metallurgical coal chapter).

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Figure 6.12: Export margins of Australian thermal coal mines

Notes: The margin curve incorporates the following assumptions: a price of US$50 a tonne for Newcastle 6,000 kcal coal; an adjustment to mine costs based on this calorific content; an exchange rate of 1 AUD = US$0.65; ‘Thermal’ refers to mines that produce 100 per cent thermal coal; ‘Mostly thermal’ more than 70 per cent; ‘Thermal/met 30-70 per cent; ‘Mostly met’ 1-30 per cent. Source: AME Group (2020); Department of Industry, Science, Energy and Resources (2020)

Australian thermal coal export earnings are forecast to edge up by around $1 billion to $17 billion in 2021–22, driven by higher prices and a partial recovery in export volumes.

Revisions to the outlook for Australian thermal coal exports

Australia’s forecast thermal coal export earnings have been revised down by about $2 billion in both 2020–21 and 2021–22, due to both forecast low prices and lower export volumes. Forecast export volumes have been revised down by 9-11 million tonnes in 2020–21 and 2021–22. With global thermal coal demand expected to contract sharply in 2020 — and to take some time to recover — the ramp up in Australian thermal coal export volumes projected in the March 2020 Resources and Energy Quarterly is no longer expected during the outlook period. Higher-cost operations are under pressure, and other miners may defer both capital investment and the ramp up of production until market conditions become more favourable.

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Table 6.1: World trade in thermal coal


Unit 2019s 2020f 2021f 2022f 2020f 2021f 2022f

World trade Mt 1,143 1,046 1,075 1,097 -8.6 2.8 2.0

Thermal coal imports

Asia Mt 908 831 858 881 -8.5 3.2 2.7

China Mt 241 230 228 225 -4.9 -0.7 -1.2

India Mt 211 167 180 185 -20.6 7.5 2.8

Japan Mt 135 133 134 135 -1.6 0.9 0.7

South Korea Mt 99 93 93 93 -5.9 -0.2 0.0

Taiwan Mt 58 55 54 54 -5.2 -1.3 -1.3

Thermal coal exports

Indonesia Mt 466 420 422 423 -9.9 0.6 0.2

Australia Mt 212 207 214 217 -2.7 3.4 1.8

Russia Mt 181 173 179 184 -4.4 3.2 2.8

Colombia Mt 75 65 72 75 -13.8 11.4 4.2

South Africa Mt 77 65 70 77 -15.6 7.5 10.0

United States Mt 34 20 22 24 -41.7 12.4 9.1

Notes: f Forecast; s Estimate. Source: IEA (2019) Coal 2019, accessed through the IEA 20/20 Professional Browser; IHS (2020); Department of Industry, Science, Energy and Resources (2020)


Table 6.2: Thermal coal outlook

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 fob Newcastle 6000 kcal net as received; e In 2020 US dollars; f Forecast; h In 2019–20 Australian dollars. Source: ABS (2020) International Trade in Goods and Services, Australia, Cat. No. 5368.0; IHS (2020); NSW Coal Services (2020); Queensland Department of Natural Resources and Mines (2020); Company Reports; Department of Industry, Science, Energy and Resources (2020)



Contract pricesb

– nominal US$/t 95 69 66 71 -27.4 -3.7 6.6

– realc US$/t 97 69 65 68 -28.9 -5.7 4.2

Spot pricesd

– nominal US$/t 74 56 61 65 -24.5 9.4 6.5

– reale US$/t 76 56 60 62 -26.1 7.1 4.1


Production Mt 271 265 273 278 -2.2 2.7 2.1

Export volume Mt 210 213 210 216 1.3 -1.0 2.7

– nominal value A$m 25,958 19,806 15,971 17,214 -23.7 -19.4 7.8

– real valueh A$m 26,446 19,806 15,662 16,525 -25.1 -20.9 5.5

65


7.1 Summary Australian LNG export prices have fallen to record lows, due to the sharp

decline in both oil-linked contract prices and Asian LNG spot prices. Both spot and contract LNG prices are forecast to gradually recover from these lows over the next two years.

The rapid expansion of Australia’s LNG capacity is coming to an end. Australia’s LNG exports reached an estimated 79 million tonnes in 2019–20, and are forecast to edge up to 80 million tonnes by 2021–22.

Australia’s LNG exports earnings are forecast to decline from an estimated $47 billion in 2019–20 to $35 billion in 2020–21, weighed down by low contract and spot prices, before edging up to $36 billion by 2021–22.

7.2 Prices Plunging oil prices will weigh on LNG contract prices Almost three-quarters of the LNG traded in Asia is sold on long-term contracts, which link the price of LNG to the price of oil with a time lag of several months (commonly the Japanese customs-cleared crude, JCC). Oil prices began declining sharply in March 2020, due to the combined impact of falling consumption and inadequate production cuts (see the oil chapter).

Consequently, the indicative LNG contract price is expected to reach a near record low in the September quarter, before making a modest recovery over 2021 and 2022 (Figure 7.1). However, LNG contract prices could remain below the average in the period between 2015 and 2019, due to the ongoing impacts of COVID-19 on oil prices.

Some Asian LNG contracts include a varying pricing slope known as an ‘s-curve’, which lowers the sensitivity of LNG prices to oil price changes at very high and very low oil prices, and could act to cushion the impact of low oil prices on LNG contract prices.

There is substantial uncertainty surrounding the outlook for oil prices — and consequently LNG contract prices. This uncertainty is explored further through scenario analysis (Box 8.1 in the oil chapter).

Figure 7.1: LNG spot and contract prices, quarterly

Notes: The ANEA (Argus Northeast Asia) spot price is shown. LNG prices are DES (Delivered Ex Ship). DES prices include shipping and insurance. The long-term oil-linked contract price is indicative only, and is estimated at 14 per cent of the 3-month lagged Japan Customs-cleared crude oil price plus shipping. Source: Argus (2020); Bloomberg (2020); Department of Industry, Science, Energy and Resources (2020)

Asian LNG spot prices at record lows While falling LNG spot prices — due to an oversupplied global LNG market — have been anticipated for some time, Asian LNG spot prices have repeatedly dipped to unprecedented lows in the first half of 2020. The Asian LNG spot price fell to a record low of US$1.70 per mmBtu at the end of April, and remained below the US$2.50 per mmBtu mark in May and the first half of June.

COVID-19 containment measures have resulted in gas and LNG demand falling substantially across the power, industrial and transport sectors around the world. The demand destruction as a result of COVID-19 has exacerbated the supply glut in global LNG markets, and placed further downward pressure on LNG spot prices. The extent to which a demand response to low prices and the build-up of gas in storage can support spot prices is expected to become increasingly limited. There are constraints to how much coal-to-gas switching can occur. Further, many North East

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Asian customers purchase the bulk of their LNG on long-term contracts, with little room to move to the spot market. Lastly, storage capacity has filled up faster than usual, particularly in Europe, due to the recent mild winter. As a result, supply cuts are appearing increasingly likely.

Asian LNG spot prices are expected to gradually recover as the impacts of COVID-19 ease, to average US$5.60 per mmBtu by 2022 (Figure 7.1). Demand growth, supported by global economic recovery, combined with slowing supply growth is expected to help rebalance the market in 2021 and 2022. However, the outlook for global LNG markets is subject to considerable uncertainty, with the pace and shape of the global economic recovery a key risk (see the macroeconomic outlook chapter).

7.3 World trade In 2019, LNG trade totalled an estimated 353 million tonnes, an increase of 43 million tonnes, or 14 per cent, from 2018. Growth in global LNG supply capacity — primarily from the US, Russia and Australia — has rapidly outpaced demand growth in the last few years. This has resulted in a supply glut, which has been exacerbated in 2020 by the impacts of COVID-19 on LNG demand. With the exception of China, LNG imports from most major Asian buyers fell on a year-on-year basis in April and May (Figure 7.2). In the meantime, global LNG capacity has continued to grow, largely driven by the ongoing ramp up of new projects in the US.

Global LNG trade is expected to grow by 1 per cent in 2020 — a substantially slower rate than initially expected in the March 2020 Resources and Energy Quarterly, due to the impacts of COVID-19 on LNG demand. While global gas consumption is forecast to decline by 4 per cent in 2020, the first contraction in 11 years, LNG trade is still expected to grow, at the expense of both pipeline gas and domestic production. Growth in LNG trade is expected to be supported by the ongoing ramp up of new LNG projects and the associated growth in contracted supply, and low LNG spot prices. The expansion in global LNG supply capacity is expected to slow dramatically in 2021 and 2022, and the global LNG market is expected to become less oversupplied, as demand recovers and absorbs the available capacity (Figure 7.3).

Figure 7.2: Monthly LNG imports, year-on-year change

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Figure 7.3: Annual change in LNG demand and world supply capacity

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Source: Nexant (2020) World Gas Model, Department of Industry, Science, Energy and Resources (2020)


7.4 World imports China to remain a key driver of LNG demand growth The impacts of COVID-19 on LNG demand in China — the world’s second largest LNG importer — were largely concentrated in February and March 2020, with LNG imports declining by an estimated 7.1 per cent relative to the same period in 2019 (Figure 7.4). LNG imports rebounded sharply in April and May, as restrictions eased and economic activity picked up. In April, China imported its first US LNG cargo since March 2019. The recommencement of Chinese imports of US LNG will contribute to China’s commitment under the Phase One trade deal to buy US$52 billion of energy products from the US in 2020 and 2021. However, low oil and LNG spot prices will make meeting this target a challenge.

Despite the impacts of COVID-19 at the start of the year, China’s LNG imports are forecast to reach 68 million tonnes (up 12 per cent) in 2020. As China is ahead of the global recovery curve, it presents LNG exporters with the best prospects to absorb some excess supply in 2020. Smaller uncontracted Chinese buyers have reportedly raised spot LNG purchases to take advantage of low prices. However, the impact of slowing global economic growth on China’s export-oriented sectors, and the risk of further COVID-19 containment measures presents a downside risk to the outlook.

Beyond 2020, China’s gas demand is expected to be driven by the industrial sector and a policy-driven expansion of gas-fired power generation to reduce air pollution. China is expected to remain the key source of global LNG demand growth, with LNG imports forecast to reach 83 million tonnes by 2022 — making China the world’s largest importer of LNG by the end of the outlook period (Figure 7.5).

While LNG imports are expected to play a major role in meeting China’s growing demand for gas, LNG is expected to face competition from domestic gas and pipeline imports. The Power of Siberia pipeline opened in December 2019, and is expected to ramp up over the next five years. The outlook for China’s LNG demand is also sensitive to future energy and environmental policies, which are subject to considerable uncertainty as government priorities change due to the impacts of COVID-19.

Figure 7.4: China’s monthly LNG imports

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Figure 7.5: World LNG import forecasts

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Notes: Emerging Asia includes India. Source: Nexant (2020) World Gas Model, Department of Industry, Science, Energy and Resources (2020)


Japan’s LNG imports forecast to stagnate in 2020 The impact of COVID-19 on LNG imports by Japan — the world’s largest buyer of LNG in 2019 — was limited in the March quarter, with imports increasing by 15 per cent year-on-year. Several buyers reportedly sought deferrals of cargoes for April-June 2020 delivery in anticipation of weaker demand. A national state of emergency from 7 April to 25 May resulted in declining power demand, and Japan’s LNG imports consequently fell by 5.4 per cent in April and 25 per cent in May on a year-on-year basis.

Despite the recent sharp falls, Japan’s volume of LNG imports in 2020 is expected to decline only marginally by 3 per cent to 74 million tonnes (Figure 7.5), given countering trends. The impact of lower power demand on LNG imports due to the COVID-19 pandemic is expected to be largely offset by nuclear reactor shut downs, which results in greater gas-fired power generation. Four reactors are expected to be shut in 2020 to complete anti-terrorism upgrades. A fifth reactor is also expected to remain offline until the end of 2020, due to a court injunction.

Beyond 2020, Japan’s LNG imports are forecast to remain largely flat at around 74-75 million tonnes. The return of nuclear power generation and declining share of gas in Japan’s energy mix are expected to weigh on future LNG demand in Japan. However, there are significant risks of delays and slippages in nuclear restarts, which remains the key uncertainty affecting the outlook for Japan’s LNG imports.

LNG to play a larger role in Taiwan’s energy mix Taiwan’s LNG imports appear to have been relatively resilient amidst the COVID-19 pandemic. Taiwan appears to have contained the COVID-19 outbreak early, and also avoided the lockdowns seen in many countries. As a result, energy consumption has remained relatively robust, consistent with overall economic activity in Taiwan. LNG imports have decreased marginally by 2.0 per cent year-on-year in the first five months of the year.

Taiwan’s LNG imports are forecast to increase over the next two and a half years. Taiwan’s energy plan envisages the share of gas in the energy mix rising from 34 per cent to 50 per cent by 2025, to be supported by an

additional 6 mtpa of LNG import capacity. However, there is some uncertainty regarding this target, given the history of significant delays to major infrastructure projects, including LNG import terminals.

South Korea’s LNG imports forecast to recover after 2020 South Korea’s LNG imports declined by 22 per cent year-on-year in April and May (Figure 7.2), due to a decline in power demand as a result of COVID-19. Kogas — South Korea’s largest LNG buyer — reportedly requested delays to shipments for May to October, in anticipation of weaker demand. South Korea’s LNG imports are forecast to decline to 37 million tonnes in 2020, due to the impacts of COVID-19 and higher nuclear power generation, with an addition of a new nuclear reactor in October.

South Korea’s LNG imports are forecast to recover in 2021 and 2022 (Figure 7.5), supported by an assumed economic recovery and supportive government policies. These policies include lower consumption taxes on gas relative to coal, a fine dust policy — which reduces coal-fired power generation in winter, resulting in higher gas demand — and a long-term goal to boost the share of gas in its energy mix. South Korea’s draft ninth Basic Energy Plan was released on 7 May, which includes plans to shut 15.3 GW of coal-fired capacity by 2034, with 12.7 GW of this capacity to be switched to run on LNG.

India’s LNG imports have dropped sharply after a strong start to the year Indian LNG buyers took advantage of low LNG spot prices at the start of 2020, absorbing much of the excess supply. In February and March, India’s LNG imports increased by 7.2 per cent relative to the same period in 2019 (Figure 7.2). India’s lockdown — which began on 24 March and was extended to 30 June for key containment zones — has since reduced gas demand, and resulted in several buyers and ports declaring ‘force majeure’ on LNG cargoes. India’s LNG imports declined by 25 per cent year-on-year in April and May. India is expected to return to opportunistically purchasing LNG at record low spot prices after the lockdown is lifted. However, this is subject to considerable uncertainty, and will largely depend on the speed and shape of India’s economic recovery and subsequent growth in energy demand.


From 2021, India is expected to be a major source of LNG demand growth (Figure 7.5). The Indian government is aiming to lift the share of gas in its energy mix from around 6 per cent currently to 15 per cent in 2030, although the target is considered to be ambitious. While India’s domestic gas production is expected to grow, it is unlikely to keep pace with demand, with the country’s gas sector facing a range of challenges. LNG imports are expected to help fill the gap. A key constraint to LNG import growth will be inadequate pipeline infrastructure, which is needed to move LNG from coastal ports to inland demand centres.

Europe’s LNG imports projected to decline from record highs Europe imported a record 87 million tonnes of LNG in 2019, 71 per cent higher than 2018 volumes. Europe — known as the ‘destination of last resort’ for LNG, due to its extensive storage capacity — absorbed a large share of the increase in global LNG production in 2019.

Strong import growth appears to have continued in early 2020, despite the impacts of COVID-19: Europe’s LNG imports increased by 37 per cent year-on-year in the first five months of the year, largely at the expense of pipeline imports and production from Norway and the Netherlands.

Despite the strong start to the year, Europe’s LNG imports in 2020 are forecast to be only slightly higher than 2019 levels. Gas storage capacity was close to full at the seasonal peak in October 2019, and will likely reach full capacity at an earlier stage in 2020: the level of gas in storage was already 35 per cent higher year-on-year in March. The high levels of gas in storage is expected to limit opportunities for Europe to further absorb excess global LNG supply. Opportunities for coal-to-gas switching are also beginning to be exhausted.

From 2021, LNG imports are expected to face increasing competition from imports of pipeline gas, offsetting the impacts of declining European gas production. Though the project has been subject to numerous delays, the Nord Stream II gas pipeline, with a capacity of 55 bcm per annum (40 mtpa), is expected to commence operations in early 2021.

7.5 World exports Global LNG exports in 2020 have been revised down The rapid expansion in global LNG supply capacity seen over the last few years is expected to continue in 2020, driven by the continued ramp up of new operations in the US, Australia and Russia. Five new large scale LNG projects — with a combined nameplate capacity of 42 million tonnes — commenced production in 2019.

However, exports will likely grow at a slower pace than originally expected, with global LNG trade in 2020 revised down by 4 per cent from the March 2020 Resources and Energy Quarterly to 356 million tonnes. With spot and oil prices below breakeven costs of many LNG producers, producers have been responding with production cuts, extended maintenance schedules, and slowed construction or ramp up of new projects.

Growth in global LNG capacity is set to slow dramatically in 2021 and 2022, as LNG projects finish ramping up (Figure 7.6). The outlook for investment in new LNG projects has weakened substantially. The impact of low oil prices could result in the deferral of final investment decisions (FIDs) which could result in a supply deficit by the mid to late-2020s.

Figure 7.6: LNG supply capacity and global demand

Notes: Nameplate capacity is the theoretical maximum annual production capacity Source: Department of Industry, Science, Energy and Resources (2020); Nexant (2020) World Gas Model

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Qatar’s LNG exports are expected to hold steady Qatar exported an estimated 75 million tonnes of LNG in 2019, making it the world’s second largest exporter after Australia. LNG exports were largely resilient in the first five months of 2020, growing by an average of 2.7 per cent year-on-year (Figure 7.7). Qatar’s LNG exports are forecast to remain largely steady over the outlook period, at about 75 million tonnes. Qatar Petroleum officials reaffirmed plans to construct another two LNG ‘mega trains’ — to raise LNG production capacity to 126 million tonnes by 2027 — but have postponed the start of production by 3-6 months to 2025.

The US is expected to be the key source of LNG export growth US exports surged by 47 per cent to 34 million tonnes in 2019, driven by the ramp up of three new LNG projects. US LNG exports grew by 96 per cent year-on-year in the first five months of 2020 (Figure 7.7). However, the pace of growth slowed substantially in May, and US LNG output cuts appear likely. In May, Henry Hub futures settled above both Asian and Europe benchmarks, meaning that the price of procuring feed-in gas for US LNG is above the price US exporters may achieve in Asia and Europe.

US LNG exports are expected to grow at a slower-than-expected pace in 2020, as a result of persistently weak global demand and low prices. US LNG export growth is expected to bounce back in 2021, in line with global demand, and reach 58 million tonnes by 2022. Weak market conditions have resulted in (and may continue to drive) FID deferrals, which could impact on the pace of US LNG exports in the longer term.

Mixed results from other major exporters Despite an outbreak of COVID-19 cases at several Russian LNG facilities, Russian exports have been relatively resilient. Russia’s LNG exports are forecast to rise from 29 million tonnes in 2019 to 33 million tonnes by 2022, driven by the ramp up of new projects (Figure 7.8). LNG exports have been declining from other major LNG exporters. Malaysia’s Petronas has reportedly curtailed some LNG production, and Egypt’s LNG shipments have been paused since March (Figure 7.7).

Figure 7.7: Monthly LNG exports, year-on-year change

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Figure 7.8: LNG export forecasts

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Source: Department of Industry, Science, Energy and Resources (2020); Nexant (2020) World Gas Model


7.6 Australia Australia’s LNG capacity expansion has come to an end The latest wave of LNG investment in Australia saw over US$200 billion invested in seven new LNG projects, commissioned between 2009 and 2012. The ramp up of these projects has seen Australia’s annual LNG nameplate capacity reach 88 million tonnes in 2019 (Figure 7.9), and LNG export volumes reach 77 million tonnes worth $49 billion. This has made Australia the world’s largest LNG exporter in 2019.

In April 2020, Arrow Energy (a Shell and PetroChina joint venture) took a positive FID on the Surat Gas Project in Queensland, with first gas sales expected in 2021. Gas from the project will be sold domestically and exported through the QCLNG plant at Gladstone.

The Arrow Energy FID stands in contrast to current trends. The outlook for the next wave of investment in Australian LNG projects is shrouded by considerable uncertainty, with low oil prices resulting in capital expenditure reductions and FID deferrals. At the time of writing, FIDs for four gas and LNG projects had been flagged for deferral (Table 7.1). These FID postponements could be a longer term issue for Australia’s LNG exports, as new gas field developments are necessary to backfill LNG projects.

Production at the North West Shelf project is likely to decline from about 2022 onwards, requiring backfill from the Browse Basin project fields of

Calliance, Torosa and Brecknock, or a combination of other fields. The FID for the Browse Basin project was initially delayed from late 2020 to late 2021, and has since been delayed to an unspecified date, due to low oil prices. The Darwin operation will require backfill from the Barossa project to continue production, although infill drilling at Bayu-Undan may extend its lifespan and narrow the time between its closure and the start-up of the Barossa project. The FID for the Barossa project has been delayed from the June quarter 2020 to an unspecified date.

Figure 7.9: Australia’s LNG exports and export capacity

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Table 7.1: Status of gas and LNG projects in Australia

Project Companies State Type Initial expected FID date Current FID status

Barossa backfill to Darwin LNG Santos, SK, ENI, INPEX, JERA, Tokyo Gas NT Sustaining Q2 2020 Delayed to unspecified

date Scarborough/Pluto Train 2 Woodside, Kansai Electric, Tokyo Gas, BHP WA Expansion 2020 Delayed to 2021

Crux backfill to Prelude FLNG Shell, Osaka Gas, SGH Energy WA Sustaining 2020 Delayed to unspecified

date Browse to North West Shelf

Woodside, BP, PetroChina, Shell, Japan Australia LNG WA Sustaining H1 2021 Delayed to unspecified

date Notes: FID is final investment decision. mtpa is million tonnes per annum. Backfill is the supply of natural gas from a new source that will support the ongoing operation of an existing LNG facility. Source: Company reports and announcements


Australia’s LNG export volumes forecast to flatten Despite the impacts of COVID-19 on global LNG demand, Australia’s LNG export volumes have been relatively resilient. Exports in the first four months of 2020 were 11 per cent higher compared to the same period in 2019. Shipping data shows that Australian LNG shipments have largely held steady on a year-on-year basis in May, growing marginally by 0.7 per cent per cent (Figure 7.10).

However, there may be growing downward pressure on Australian LNG export volumes. Several companies have reported that some buyers have exercised their rights to reduce contracted purchases in 2020. The ‘downward quantity tolerance’ in most contracts typically allows a buyer to reduce purchases by around 10 per cent. Combined with fewer export cargoes into spot markets, delayed shipments and changes to maintenance schedules, this could marginally reduce Australian LNG exports volumes in the second half of 2020. APLNG has reportedly extended its maintenance schedule, originally planned for 27 to 31 May, to end on 18 June. Despite challenging market conditions, at the time of writing, Australian LNG producers have not flagged major output cuts in 2020, with the exception of Prelude.

The Prelude FLNG project — which shipped its first cargo in June 2019 — was temporarily shut in February 2020, due to technical issues. At the time of writing, Prelude remains offline, with no official restart date announced.

Australia’s LNG exports volumes totalled an estimated 79 million tonnes in 2019–20, an increase of 4.3 million tonnes from 2018–19. The ramp up of Ichthys — with 2020 marking the first full year of the project producing at nameplate capacity — has supported growth in export volumes.

Australia’s LNG export volumes are forecast to edge up to 80 million tonnes in 2020–21, reflecting the assumed resumption of production at Prelude from the September 2020 quarter onwards. LNG exports are then forecast to decline marginally in 2021–22, due to a production halt at the Darwin LNG plant from 2022 as gas from the Bayu-Undan field is exhausted.

Figure 7.10: Australia’s monthly LNG shipments

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Figure 7.11: Australia’s LNG exports


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Australia’s LNG export earnings forecast to decline from record highs Australia exported an estimated $47 billion of LNG in 2019–20, 4.6 per cent lower than 2018–19 (Figure 7.11). Export earnings have been weighed down by low contract and Asian LNG spot prices, offsetting higher export volumes.

Australia’s LNG export earnings are forecast to fall back sharply by 26 per cent to $35 billion in 2020–21, due to weak contract and Asian LNG spot prices, as well as an expected rise in the Australian-US dollar exchange rate. The impact of the slide in oil prices is expected to be concentrated in the second half of 2020, due to the several month lag of the flow-on effects for oil-linked contract prices (at which most Australian LNG is sold). Export earnings are forecast to edge up to $36 billion in 2021–22, tracking a forecast rise in contract and spot prices.

The outlook for oil prices is a key risk Oil prices are a key sensitivity for Australian LNG export earnings, and there is substantial uncertainty underpinning the outlook for oil prices.

While this chapter provides point forecasts for Australia’s LNG export earnings, scenario analysis of oil prices (see Box 8.1 in the oil chapter) highlights that these forecasts are underpinned by considerable uncertainty. Based on scenario analysis using different oil price forecasts, LNG export earnings could fall anywhere between $29 and $37 billion in 2020–21, and $30 and $42 billion in 2021–22.

Australia’s LNG export earnings have been revised down

The forecast for Australian LNG export earnings has been revised down from the March 2020 Resources and Energy Quarterly: by $10 billion in 2020–21 and $12 billion in 2021–22.

The substantial downward revision reflects exchange rate revisions, lower oil price forecasts (see the oil chapter) and lower Asian LNG spot prices. LNG spot prices have fallen to unprecedented lows in the first half of 2020, due to weak demand as a result of the COVID-19 pandemic. The unexpected shut down of Prelude has also contributed to the downward revision in export earnings.


Table 7.2: World gas outlook Annual percentage change

Unit 2019 2020f 2021f 2022f 2020f 2021f 2022f

JCC oil pricea

– nominal US$/bbl 66.4 45.9 44.9 52.8 -30.9 -2.2 17.5

– realh US$/bbl 67.8 45.9 44.0 50.5 -32.3 -4.3 14.9

Asian LNG spot pricebg

– nominal US$/MMbtu 5.4 2.9 4.4 5.6 -46.8 51.6 27.8

– realh US$/MMbtu 5.6 2.9 4.3 5.4 -47.9 48.5 24.9

LNG trade Mtc 352.7 356.0 376.3 393.3 0.9 5.7 4.5

Gas production Bcm 4,052 3,931 4,097 4,224 -3.0 4.2 3.1

Gas consumption Bcm 4,056 3,897 4,109 4,234 -3.9 5.4 3.0 Notes: a JCC stands for Japan Customs-cleared Crude; b Historical data is the North Asia SLlnG weekly spot price; c 1 million tonnes of LNG is equivalent to approximately 1.36 billion cubic metres (bcm) of gas; f Forecast; g 1 MMBtu is equivalent to 1.055 GJ; h In 2020 US dollars. Source: ABS (2020) International Trade in Goods and Services, Australia, 5368.0; Department of Industry, Science, Energy and Resources (2020); Company reports; Nexant World Gas Model (2020)


Table 7.3: Australian gas outlook Annual percentage change

Unit 2018–19 2019–20s 2020–21f 2021–22f 2019–20f 2020–21f 2021–22f

Productiond Bcm 145.2 156.5 155.8 159.5 7.8 -0.4 2.3

– Eastern market Bcm 55.3 56.9 54.6 54.8 2.9 -4.0 0.3

– Western market Bcm 82.3 85.6 87.9 90.2 4.1 2.7 2.6

– Northern marketk Bcm 7.6 14.6 14.5 14.5 92.5 -0.7 0.0

LNG export volume Mtc 74.8 79.1 80.0 79.7 5.8 1.1 -0.4

– nominal value A$m 49,727 47,426 34,858 36,416 -4.6 -26.5 4.5

– real valuee A$m 50,662 47,426 34,183 34,959 -6.4 -27.9 2.3 LNG export unit valueg

– nominal value A$/GJ 12.6 11.4 8.3 8.7 -9.8 -27.3 4.9

– real valuee A$/GJ 12.8 11.4 8.1 8.3 -11.5 -28.7 2.6

– nominal value US$/MMBtu 9.5 8.0 5.9 6.5 -15.6 -26.7 10.7

– real valuee US$/MMBtu 9.7 8.0 5.8 6.3 -17.2 -28.1 8.3 Notes: c 1 million tonnes of LNG is equivalent to approximately 1.36 billion cubic metres (bcm) of gas; d Production includes both sales gas and gas used in the production process (i.e. plant use) and ethane. Historical gas production data was revised in the June quarter 2017 to align with Australian Petroleum Statistics published by the Department of Environment and Energy; e In 2019–20 Australian dollars; f Forecast; g 1 MMBtu is equivalent to 1.055 GJ; h In 2020 US dollars; k Gas production from Bayu-Undan Joint Production Development Area is not included in Australian production. Browse basin production associated with the Ichthys project is classified as Northern market. Source: ABS (2020) International Trade in Goods and Services, Australia, 5368.0; Department of Industry, Science, Energy and Resources (2020); Company reports; Nexant World Gas Model (2020)


8.1 Summary Oil prices are forecast to increase in the second half of 2020, but to

remain relatively low as the COVID-19 pandemic limits global consumption. Brent crude prices are forecast to average US$42 a barrel in 2020, down from US$64 a barrel in 2019.

Australian crude oil and feedstock exports are estimated to have risen to 292,000 barrels a day in 2019–20. Exports are expected to peak at 300,000 barrels a day in 2020–21 before falling marginally in 2021–22.

Australian oil export earnings are estimated to decline marginally to $9.0 billion in 2019–20, reflecting low prices late in the fiscal year. Ongoing low prices are expected to lead to export earnings falling to $6.8 billion in 2020–21, before a price rebound lifts earnings to $8.6 billion in 2021–22.

8.2 Prices Oil prices have fluctuated significantly so far in 2020 Global oil prices dropped dramatically in the first half of 2020, with the sharpest decline following the OPEC+ meeting on 6 March. In this meeting, OPEC+ members could not agree to production targets to address the impacts of COVID-19, nor to extending the production cuts already in place. Between 6 March and 31 March, prices fell by 53 per cent, on expectations that Russia, Saudi Arabia and the rest of OPEC+ would increase output in the face of dwindling consumption.

In April 2020, global production was estimated to exceed global consumption by around 25 million barrels a day (Figure 8.1). This is the equivalent of about 25 per cent of 2019 production, resulting in available storage capacity falling sharply in many parts of the world. These storage constraints saw the WTI contract (for May delivery) fall to –US$38 a barrel on the second last day of trading of the contract, down from US$18 a barrel on the previous day. Market players with long positions but no storage capacity were effectively paying buyers to take delivery of this oil. Prices reverted to US$12 a barrel on the first day of trading of the June contract.

Figure 8.1: Global consumption, production and stock change

Source: Department of Industry, Science, Energy and Resources (2020), International Energy Agency (2020)

Facing falling prices and strong export competition between OPEC+ member countries, members agreed on 12 April 2020 to reduce production in May and June 2020 by a record 9.7 million barrels a day. On 6 June 2020, these production cuts were extended until the end of July. Beyond July, OPEC+ production is scheduled to slowly increase until targets expire on 30 April 2022. Production in several non-OPEC+ producing countries (such as the US) has also fallen in response to low global oil prices.

In recent weeks, oil prices have partly recovered as chronic oversupply eases. Lower global production resulted in the Brent oil price rising by 71 per cent between 1 May 2020 and 16 June 2020, to around US$40 a barrel. Despite this gain, prices remain well below the 2015-2019 average, as global output exceeds usage. However, once the impacts of COVID-19 on global oil consumption ease, established OPEC+ production targets out to April 2022 are likely to drive global prices higher.

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Prices to recover gradually over the outlook period Oil prices are forecast to remain low for the rest of 2020. Low oil prices are expected to persist for longer than other energy commodities, as the recovery in global oil consumption is expected to be particularly slow. Although transportation demand is expected to pick up as quarantine measures ease, aviation demand is expected to remain weak until international travel recovers — with the International Air Transport Association estimating that air travel demand will not return to 2019 levels until 2023. The Brent benchmark is forecast to average US$43 a barrel in the September quarter 2020 and US$44 a barrel in the December quarter 2020 (Figure 8.2), up from an estimated US$31 a barrel in the June quarter 2020.

Prices in 2021 are forecast to recover to US$45 a barrel, with prices to increase over the year, reaching US$47 a barrel in the December quarter. Global consumption is expected to exceed production, as consumption recovers and production is curtailed by relatively low oil prices. Prices in 2022 are forecast to increase further to average US$53 a barrel.

Figure 8.2: Oil prices

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The outlook for the oil sector is highly uncertain, arising from both geopolitical factors and the high sensitivity of the oil market to the impacts of the COVID-19 pandemic. The Resources and Energy Quarterly publication normally provides point forecasts which attempt to summarise the balance of risks, based on the best information available at the time. However, to better address the sizable uncertainty facing oil markets, this edition also presents scenario analysis on a range of oil price forecasts and the impact on Australian LNG export earnings (see Box 8.1).

8.3 World consumption Consumption to fall significantly in 2020 Global oil consumption in 2020 is forecast to fall by 9.2 per cent to 91 million barrels a day. If realised, this would be the first decline since 2009, and the largest historical decline in volume terms. Consumption is forecast to fall in all major consuming countries, as transportation consumption and industrial production both decline as a result of COVID-19 restrictions. Although the largest impacts are expected in the first half of 2020, consumption for each month is expected to be below values from 2019.

Indicators suggest that road activity fell by around 50 per cent in some cities in April. COVID-19 related restrictions are expected to ease in the second half of 2020, leading to a recovery in commuting demand. Aviation consumption is forecast to remain low over the rest of 2020, as international travel is limited by stringent quarantine measures.

Industrial oil consumption is estimated to have declined sharply in the first half of 2020, but to be more resilient than travel-based oil consumption. After the production disruptions posed by COVID-19 related containment measures ease, demand for manufactured oil products is expected to be affected by low consumer confidence and lagged unemployment impacts.

Global consumption in 2020 is also expected to be constrained by poor refining margins, as end-use demand is affected by containment measures and low consumer confidence. Despite low crude oil prices, minimal consumer demand has pushed down refining margins and reduced refining throughput. This low refining throughput, along with some


countries increasing their strategic reserves, is pushing global crude stocks starkly higher. Geographically, a high proportion of the stock build-up is occurring in China and the US, two major oil consuming nations. High stocks in these countries will weigh on oil prices as the impacts of the COVID-19 pandemic ease. The rate of stock accumulation is expected to end in the September quarter of 2020 as consumption recovers.

There are likely to be some behavioural shifts once the COVID-19 pandemic recedes that will have material impacts on the oil market. This may occur through a shift towards working from home, evolving commuting patterns, and lingering impacts on long haul air travel. This raises the level of uncertainty for oil consumption late in the outlook period.

Consumption is forecast to recover to 97 million barrels a day in 2021 but grow more slowly in 2022 to 101 million barrels a day (Figure 8.3).

Figure 8.3: Oil consumption, OECD and non-OECD

Sources: Department of Industry, Science, Energy and Resources (2020), International Energy Agency (2020)

OECD consumption to drop Between 2012 and 2019, OECD oil consumption was relatively steady at around 48 million barrels a day, as energy efficiency improvements offset higher transport needs. This period of stability ended in 2020, as quarantine measures have curtailed commuting and aviation demand. The falls are expected to have been largest in the June quarter 2020, when containment measures severely cut usage in the EU and the US — the world’s two largest oil consumers. In 2021, consumption is forecast to recover to close to 2019 levels, with aviation demand still lagging during much of 2021. Consumption is forecast to recover to 48 million barrels a day in 2022.

China and India to lead decline in non-OECD consumption Non-OECD consumption is forecast to fall by 4.7 million barrels a day in 2020, compared to the 2019 increase of 1.1 million barrel a day.

In 2019, China accounted for over 80 per cent of global consumption growth, and Chinese consumption is a key driver of global oil prices. This was evident when oil prices fell by 16 per cent in January 2020 — when COVID-19 was largely confined to China. In the first quarter of 2020, Chinese oil consumption fell by 17 per cent on a quarterly basis (Figure 8.4). Chinese usage in 2020 is forecast to fall by 7 per cent to 13 million barrels a day.

Indian consumption in 2020 is forecast to fall by 8 per cent to 4.6 million barrels a day. Consumption is expected to have fallen significantly in the June quarter of 2020, reflecting strict quarantine measures. In late March 2020, India entered national lockdown for an initial three weeks, with this lockdown later extended to June 30 for certain areas of the country.

Non-OECD consumption in 2021 is forecast to increase by 5 per cent to 50 million barrels a day, largely driven by a recovery in demand in China and India. Consumption is forecast to increase further to 53 million barrels a day in 2022.

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Figure 8.4: IEA non-OECD consumption forecasts

Source: International Energy Agency (2020)

8.4 World production Global oil production is forecast to fall in 2020, as OPEC+ production declines to meet targets and output in other nations (such as the US) falls in response to lower global prices. Output is forecast to fall by 8.6 per cent to 92 million barrels a day. During 2020, OPEC+ output is expected to be lowest between May and July, before gradually increasing later in the year. Timely indicators for May production suggests that OPEC+ member compliance with new production targets is relatively high. Outside of OPEC+, output fell noticeably in April/May, as producers responded to low global prices (Figure 8.5). Non-OPEC+ production is expected to be lowest in the September quarter 2020, before increasing marginally as some low-cost producers respond to slightly higher prices.

Low oil prices are likely to influence investment decisions, leading to a downwards revision in production from the March 2020 Resources and Energy Quarterly. Although this is largely expected to occur in higher-cost producers such as Canada and the US, all producing nations are expected to be affected. This is evident in the Saudi Aramco announcement in March 2020, which flagged plans to reduce capital expenditure, despite Saudi Arabia being one of the lowest cost global producers.

Figure 8.5: Change in oil production by region

Notes: This assumes OPEC+ members fully comply with production cuts from June 2020. Sources: Department of Industry, Science, Energy and Resources (2020), International Energy Agency (2020)

Record OPEC+ cuts to limit global production OPEC+ production started to decline from May under the new OPEC+ agreement. The largest change came from Saudi Arabia, whose output reached a record high 12 million barrels a day in April. Kuwait and UAE production also reached record highs in April. As a result, Russian production only increased slightly. In May and June, Russian output targets are 8.5 million barrels a day, the same as Saudi Arabia’s targets.

On 11 May, Saudi Arabia announced that they were cutting production by an additional 1 million barrels a day in June, reducing their output target to 7.5 million barrels a day, 39 per cent lower than April production. Kuwait and the United Arab Emirates also agreed to reduce their production, by 80,000 barrels a day and 100,000 barrels a day, respectively.

In the June 6 agreement to extend these record production cuts for July, the OPEC+ members that exceeded their May and June production targets agreed to compensate with further cuts between July and

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September. Assuming full compliance with production targets over the outlook period, OPEC+ production in 2020 is forecast to fall by 17 per cent to 51 million barrels a day. Output is forecast to fall further to 49 million barrels a day in 2021. In 2022, production is forecast to increase by 17 per cent to 56 million barrels a day (this assumes that production beyond April 2022 is slightly above 2019 production targets).

Non-OPEC+ production to drop in response to low prices Production in non-OPEC+ nations is also expected to fall, as producers respond to low prices. US production is forecast to fall by 6 per cent to 16 million barrels a day (Figure 8.6). Canadian production is forecast to decline by 9 per cent to 5.1 million barrels a day in 2020, as relatively high production costs and dwindling storage capacity influence producer decisions. In 2021, non-OPEC+ production is forecast to increase by 4 per cent to reach 42 million barrels a day. Output in 2022 is forecast to rise further to 44 million barrels a day.

Figure 8.6: US production

Sources: Department of Industry, Science, Energy and Resources (2020), International Energy Agency (2020)

8.5 Australia Final investment decisions on gas projects to influence oil production In 2019–20, Australian crude and condensate production is estimated to increase by 21 per cent to 412,000 barrels a day (Figure 8.7), as crude production rises as a result of Woodside’s Greater Enfield project. Condensate and LPG production is expected to be affected by the temporary shutting of the Prelude FLNG project from February 2020 (see the gas chapter).

Figure 8.7: Composition of Australian oil production

Source: Australian Bureau of Statistics (2020), Department of Industry, Science, Energy and Resources (2020)

Production is forecast to fall slightly in 2020–21 and 2021–22, as production continues to decline at existing fields. Beyond the outlook period, the deferral of final investment decisions (FIDs) for several gas projects may affect future condensate and LPG production, with the production of both commodities typically associated with gas production (see the gas chapter). In 2018–19, condensate accounted for 57 per cent of total Australian crude oil, condensate and LPG production. LPG accounted for a further 16 per cent.

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Australian exports to be affected by low prices In recent months, Australian exports have fallen in both value and volume terms, as global consumption and prices declined. In the March quarter 2020, export volumes fell by 15 per cent on a quarterly basis. Export values fell by even more, down 24 per cent.

Australian export values in 2020–21 are forecast to fall by 24 per cent to $6.8 billion, then recover to $8.6 billion in 2021–22, as global prices rise and demand for Australian grades increases.

Figure 8.8: Australian oil and feedstock exports

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Australian consumption Australian refinery throughput is expected to decline in 2019–20, as low household demand weighs on the profitability of the Australian refineries. As a result, all four of Australia’s remaining refineries have recently announced plans to adjust future production. Caltex announced it would temporarily shutter its Brisbane refinery until margins improve. The other three refineries have announced plans to adjust production volumes. BP and Viva have also announced plans to delay maintenance. Australian refinery throughput is expected to recover late in 2020, and reach usual monthly volumes by the March quarter of 2021. Over the rest of the outlook period, refinery throughput is forecast to remain at around these levels, fluctuating in line with plant maintenance.

Australian oil consumption is estimated to have fallen in 2019–20, as COVID-19 restrictions weighed heavily on activity in the first half of 2020. Consumption is forecast to recover in 2020–21, supported by an expected easing of these restrictions in the second half of 2020. Australian oil uage is expected to recover faster than the global average. However, aviation demand is expected to remain low, as travel is expected to be confined to the Oceania region. In Australia, aviation consumption accounts for a relatively high share of oil usage — about 15 per cent in 2019.

Exploration Australia’s petroleum exploration expenditure was $294 million in the March quarter, on a seasonally adjusted basis, a quarterly decrease of $84 million or 22 per cent. This national decline was largely driven by falls in Queensland (down $32 million) and Western Australia (down $15 million).

8.6 Revisions to forecasts Australian export earnings have been revised down by $3.2 billion in 2020–21 and by $2.4 billion in 2021–22. This largely reflects the impacts of COVID-19 on oil prices, but a downward revision to export volumes has also reduced forecast export earnings. Additionally, global production and consumption have both been revised down.


Box 8.1: Oil price and LNG export earnings scenario analysis

Oil prices have fluctuated sharply in 2020, affected by COVID-19 and tensions between OPEC+ members. Between 2 January and 25 May 2020, Brent prices have ranged between US$17 a barrel and US$69 a barrel, and WTI prices have ranged between -US$38 a barrel and US$63 a barrel. Although oil prices have been less volatile since May 2020, there is still a high degree of uncertainty for the short-term oil outlook.

This uncertainty presents significant risks to the outlook for the Australian commodity sector: although Australia is not a major oil producer or exporter, almost three quarters of Australian LNG exports are sold under oil-linked long-term contracts. These contracts link the price of LNG sold to the price of oil (commonly the Japan customs-cleared crude, JCC) with a time lag of several months. The remaining LNG is sold at spot prices or on short-term contracts.

This scenario analysis illustrates the impacts of oil price variability on LNG export earnings. For the purposes of this analysis, all other factors which influence Australian LNG export earnings (LNG spot prices, exchange rates, export volumes) are held constant.

To illustrate the potential impacts of oil price movements on Australian LNG export earnings, a baseline and three scenarios are examined for oil prices (Figure 8.1). The scenarios use different assumptions for the impacts of COVID-19 on oil markets, OPEC+ production, and oil stocks.

Baseline

The baseline uses the oil prices forecasts in the oil chapter. Under the baseline, Australia’s LNG exports earnings are forecast to decline from an estimated $49 billion in 2019–20 to $34 billion in 2020–21, before partly recovering to $40 billion by 2021–22 (see the gas chapter).

Scenario 1: prices recover quickly

Scenario 1 is the most optimistic of the three. It assumes that early in the second half of 2020, quarantine measures ease and transport demand increases rapidly. With the exception of aviation consumption, all

components of oil consumption return to usual volumes relatively quickly. Furthermore, a vaccine is assumed to be developed in the June quarter of 2021, and aviation travel demand increases rapidly.

On the production side, OPEC+ output cuts and market-driven reductions from other producers are effective in stabilising oil prices. OPEC+ members are assumed to fully comply with these output targets, and do not compete for market share as prices rise. As a result, global oil stocks begin falling in the second half of 2020. Beyond 2021, oil consumption and production are expected to be fairly similar to the baseline case, with OPEC+ sticking to agreed production cuts out to April 2022. However, higher prices than in the baseline case in result in a smaller, market-driven fall in non-OPEC+ output. Demand is similar to the baseline case, except that aviation demand gains sooner and faster.

Oil prices are assumed to rise to US$49 a barrel in the December quarter 2020. Prices are forecast to average US$53 a barrel in 2021, and US$61 a barrel in 2022.

Under Scenario 1, relative to the baseline scenario, Australia’s LNG export earnings are estimated to be $1.6 billion higher in 2020–21 and $6.2 billion higher in 2021–22.

Scenario 2: prices recover more slowly

Scenario 2 is slightly more pessimistic than the baseline scenario: it assumes that the greatest impacts of COVID-19 on the oil market were in the second quarter of 2020, but that the recovery is slower and more uneven across countries. Aviation demand recovers at the same point in 2021, but low consumer confidence leads to a protracted slowdown. In this scenario, not all OPEC+ members fully comply with production targets, and the decline in non-OPEC+ production is more moderate. This may occur due to ongoing competition for market share between major oil exporters or governments trying to maintain oil sector employment. As a result of elevated production, oil storage capacity falls further in the September 2020 quarter. Stocks are assumed to remain elevated throughout 2021, limiting price growth.


Under Scenario 2, Australia’s LNG export earnings are estimated to be $3.3 billion lower in 2020–21 and $0.6 billion lower in 2021–22, relative to the baseline scenario.

Scenario 3: prices fall further

Scenario 3 is the most pessimistic scenario, where oil consumption falls by the most and the production response to low prices is muted. Consumption is assumed to fall by more than in the baseline case, as some countries struggle to bring the COVID-19 pandemic under control. More severe economic impacts lead to higher falls in the components of oil consumption tied to industrial production, and these impacts persist for longer. Major exporters may choose to continue fighting for market share, or OPEC+ tensions may resurface as member countries exceed production targets. In this case, production responses aren’t sufficiently timely and global spare storage capacity dwindles. As a result, prices fall further, down to US$26 a barrel in the September quarter 2020 and US$25 a barrel in the December quarter 2020.

These high stocks curtail price growth in 2021, and prices remain relatively low. Furthermore, some components of oil consumption remain low well into 2021, as aviation demand is curtailed and economic impacts of COVID-19 persist. As a result, prices are forecast to be lower than the baseline case over the rest of the outlook period to December 2022.

Under Scenario 3, Australia’s LNG export earnings are forecast to decline from an estimated $47 billion in 2019–20 to $29 billion in 2020–21 ($6.7 billion lower than in the baseline scenario), before edging up to $29 billion in 2021–22 ($5.3 billion lower than in the baseline scenario).

Australian LNG export earnings

While the gas chapter provides point forecasts for Australia’s LNG export earnings, this analysis highlights that these forecasts are underpinned by considerable uncertainty. Based on this scenario analysis, LNG export earnings could fall anywhere between $29 and $37 billion in 2020–21, and $30 and $42 billion in 2021–22, depending on oil prices.

Figure 8.9: Oil price scenarios

Source: Bloomberg (2020), Department of Industry, Science, Energy and Resources (2020)

Figure 8.10: Australian LNG export earnings

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Table 8.1: Oil Outlook

World Unit 2019 2020f 2021f 2022f Annual percentage change

2020f 2021f 2022f

Productiona mb/d 100.5 91.8 92.1 98.6 -8.6 0.3 7.0

Consumptiona mb/d 99.9 90.6 97.1 100.9 -9.2 7.1 4.0

WTI crude oil price

– nominal US$/bbl 56.7 39.2 40.1 47.8 -31.0 2.3 19.2

– realb US$/bbl 57.9 39.2 39.2 45.7 -32.4 0.2 16.5

Brent crude oil price

– nominal US$/bbl 63.9 42.1 44.9 52.8 -34.1 6.6 17.5

– realb US$/bbl 65.2 42.1 44.0 50.5 -35.5 4.4 14.9


Crude and condensate

Productiona kb/d 340 412 398 392 21.2 -3.4 -1.6

Export volumea kb/d 254 292 300 299 14.9 2.9 -0.3

– Nominal value A$m 9,071 8,955 6,798 8,595 -1.3 -24.1 26.4

– Real valueg A$m 9,242 8,955 6,666 8,251 -3.1 -25.6 23.8

Importsa kb/d 375 354 342 345 -5.6 -3.3 0.9

LPG productionac kb/d 66 97 100 101 46.3 3.7 0.8

Refined products

– Refinery productiona kb/d 502 464 474 489 -7.5 2.0 3.1

– Export volumead kb/d 17 15 12 9 -13.2 -19.8 -25.3

– Import volumea kb/d 645 658 655 685 2.0 -0.4 4.6

– Consumptionae kb/d 1,045 1,022 1,045 1,079 -2.2 2.2 3.2

Notes: a The number of days in a year is assumed to be 365, and a barrel of oil equals 158.987 litres; b In 2020 calendar year US dollars; c Primary products sold as LPG; d Excludes LPG; e Domestic sales of marketable products, including imports; f Forecast; g In 2019–20 financial year Australian dollars; s estimate. Sources: ABS (2020) International Trade in Goods and Services, Australia, Cat. No. 5368.0; International Energy Agency (2020); EnergyQuest (2020); US Energy Information Administration (2020); Department of Industry, Science, Energy and Resources (2020).

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9.1 Summary A pause in production at Canada’s Cigar Lake mine has led to a surprise

lift in the uranium price in May. Spot prices are currently around US$33 per pound, and are expected to lift past US$50 a pound by late 2022.

Production in Australia is set to decline from 2021, due to the closure of the Ranger mine. However, new prospects, including Boss Resources’ Honeymoon mine, could lift production beyond the outlook period.

Price growth is expected to push the value of Australia’s uranium exports up from an estimated $650 million in 2019–20 to $747 million by 2021–22.

9.2 Prices Uranium prices are largely stable, but change is in prospect Uranium prices have risen significantly since the start of the COVID-19 pandemic (Figure 9.1). This is largely a result of a recent series of production cuts in Canada, Namibia and Kazakhstan. The largest of these cuts was announced by Cameco on 13 April, when the company confirmed that its Cigar Lake mine — one of the world’s largest uranium mines — would close indefinitely. The Canadian mine, which accounts for 10 per cent of global uranium output, had been placed on temporary suspension. But the COVID-19 pandemic (and a subsequent fall in global electricity generation) appeared to represent a tipping point for the company.

More than 85 per cent of uranium is traded through contracts, and the relatively small size of the spot market has left it highly responsive to the recent supply cut announcements. However, short-term price risks have now moved firmly to the downside. Uranium inventories remain significant, and recent price growth is more related to supply constraints than growth in demand. These supply constraints could be revisited at any time should prices increase further.

In the longer term, price risks remain on the upside, with generation rising in recent years (Figure 9.2), while many potential supply projects remain on hiatus after years of low prices.

Figure 9.1: Uranium price outlook

Source: Cameco Corporation (2020) Uranium Spot Price; Ux Consulting (2020) Uranium Market Outlook

Figure 9.2: World nuclear power generation

Source: International Energy Agency (2019); World Nuclear Association (2019); Department of Industry, Science, Energy and Resources (2020)

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9.3 World consumption Nuclear power growth faces a significant potential upside Production cuts will likely result in a growing uranium supply deficit over the next two years, with a gradual drawdown in global inventories expected. However, the pace of drawdown will be mitigated by lower global energy use in the wake of the COVID-19 pandemic. Over the longer term, consumption is expected to rise as nuclear reactor production returns to normal and new reactors are constructed in Asia and Eastern Europe.

In Canada, Ontario Power Generation’s Darlington plant unit 2 completed its refurbishment and rebuild cycle, reaching criticality in early April. The reactor is expected to return to operation by mid-2020, with the successful refurbishment extending its operating life by 30 years.

Nuclear generation in France is expected to reduce considerably in 2020 as industrial production is shut down across the country. Électricité de France — the country’s largest electricity supplier — has reduced its projection for annual nuclear output in 2020 from 375-390 terawatt hours (TWh), to around 300 TWh this year, and 330-360 TWh in 2021 and 2022. Load-following reactors will reduce output over the year, while maintenance outages at Flamanville units 1 and 2 will be extended by five months. Neither unit is now expected to re-open until the end of October 2020.

In Japan, many reactors remain closed as a result of the 2011 Fukushima accident, with progress towards their reopening remaining slow. In addition, the Japanese government has announced that four reactors are expected to temporarily close in 2020 in order to undergo anti-terrorism retrofits, with a fifth reactor likely to face the same requirements following a recent court injunction.

In Ukraine, Energoatom — an important energy supplier — has announced plans to place three of its fifteen nuclear plant units into temporary hiatus. The decision follows an estimated 9 per cent fall in nuclear power demand across the country, which has closed substantial

parts of its industrial base as a COVID-19 safety measure. In the US, unit 2 of the Indian Point nuclear power plant closed permanently on 30 April 2020. The reactor, which has run for 45 years, has faced issues with falling demand and low prices, as well as rising competition from gas and renewables.

The COVID-19 pandemic is not expected to affect the prospects for reactors under construction. Reactors close to completion include Belarus’ first nuclear reactor, which successfully completed hot-tests in May. The Czech Republic is moving ahead with plans to expand its reactor fleet, with the government entering talks with the European Commission to lay out a roadmap for construction of a new power plant. ČEZ — one of the country’s largest utilities — has also applied to construct two more reactors in the country’s Vysočina region. Both are expected to have a capacity of up to 1,200 megawatts.

In Uzbekistan, the Minister of Energy has released an update to its electricity generation strategy. The strategy aims to reduce reliance on gas fired generation, while increasing the country’s share of nuclear generation to 15 per cent. Nuclear generation is considered more secure due to the capacity to store fuel on-site rather than rely on constant imports through pipelines, which face risks of disruption.

Russia has also released a new energy strategy, which includes a focus on low-carbon development and an associated expansion in nuclear output from 203 TWh in 2017 to 260 TWh by 2050.

The South African government has announced work on a roadmap to develop 2.5 gigawatts of additional nuclear capacity. The government will consider a range of options including small modular reactors as well as more traditional builds.

The United Arab Emirates has announced that the first unit at its Barakah nuclear plant will reach criticality in June, with all units at the site remaining on schedule to enter operation by the end of 2020.

Other uses of nuclear energy are set to increase in the short-term. Around half of all healthcare products — including clothing, gloves, syringes, and

other equipment — are routinely sterilised using nuclear generated X-rays or gamma rays. Rising demand for personal protective equipment as a result of COVID-19 is creating a considerable new demand for this service. In addition, companies such as Bruce Power — a Canadian energy provider — are adjusting supply chains to provide additional medical isotopes and other essential items to frontline medical workers during the COVID-19 pandemic.

On balance, it is expected that global uranium demand will trend down over the coming year, with a slow subsequent recovery and then a more rapid rise as new projects are completed across Asia, Africa, and Eastern Europe (see Figures 9.3 and 9.4).

9.4 World production Large suppliers have reduced output in the wake of COVID-19 Low prices have resulted in a series of cut-backs in uranium production since 2017. The latest of these was announced by Cameco, which advised in April that output would be suspended at its large Cigar Lake mine in Canada. The McLean Lake Uranium Mill, which handles output from the mine, is also suspending production, effectively bringing uranium supply from Canada to a halt. Output from both facilities was initially expected to stop for around four weeks, but subsequent announcements have extended the shut-down to an ‘indeterminate period’. The decision may be revisited should global conditions improve.

In Kazakhstan, the Kazatomprom company, which supplies more than one-fifth of all global uranium, has announced that its 2020 production will be 4,000 tonnes lower than previously expected. The cut has been linked to new requirements and safety measures imposed during the COVID-19 pandemic.

In Namibia, CNNC Rössing Uranium will suspend production at its Rössing uranium mine following an announcement by the Namibian government of new lockdowns in the Erongo region, where the mine is located. The mine is expected to reopen once the COVID-19 lockdown measures are removed.

Figure 9.3: World uranium consumption and inventory build (U3O8)

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Figure 9.4: New nuclear capacity: medium-term expansion

Source: International Energy Agency (2020); World Nuclear Association (2020); Department of Industry, Science, Energy and Resources (2020)

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All these output cuts are expected to push mined global uranium output down to 62,800 tonnes of triuranium octoxide (U3O8) in 2022 (Figure 9.5).

While mined output remains in decline, the last few months have seen some significant technological breakthroughs in the uranium refining step. Framatome, a French company, has recently entered agreements to supply nuclear fuel for the SMR-160 reactor, which is one of the leading small modular reactor builds. Uranium-molybdenum fuel alloys developed by Framatone in conjunction with the University of Munich present virtually no nuclear proliferation risks.

The TRISCO manufacturing facility in Virginia is also developing a new form of reactor fuel. BMX technologies, which owns the facility, is adding new furnaces, and has developed a new fuel type which includes layers of carbon and silicon. These compositional changes will result in fuel with very low proliferation risks and significantly improved heat resistance. Improvements to nuclear fuel could support new growth, and may draw additional capital to the sector over the coming years, with potential to drive broader growth in nuclear power beyond the outlook period.

Figure 9.5: World uranium production and secondary supply (U3O8)

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2010 2012 2014 2016 2018 2020 2022

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Source: International Energy Agency (2020); World Nuclear Association (2020); Ux Consulting (2020)

9.5 Australia Production and exports are set to decline from 2021

The Ranger uranium mine in the Northern Territory is now well into its final year of operation, with closure scheduled for January 2021. This will leave Australia with two operating mines: Olympic Dam, and Four Mile, both in South Australia. These two mines still hold significant untapped resources, while at least six proposed mines still have potential to develop. The closure of Ranger will reduce export volumes from 2021, though price gains are expected to support export earnings (Figure 9.6).

Figure 9.6: Australia's uranium exports


Low prices have sharply reduced uranium exploration Only $1.1 million was invested in uranium exploration in the March quarter. With prices rising, some recovery is possible over coming quarters.

Export earnings forecasts have risen, due to a recent jump in prices

The recent lift in uranium prices has improved Australia’s export earnings prospects. The March 2020 Resource and Energy Quarterly estimates (for earnings of $597 million in 2020-21 and $623 million in 2021-22) have been revised up to $750 million and $752 million, respectively.

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Table 9.1 Uranium outlook


World Unit 2019 2020f 2021f 2022f 2020s 2021f 2022f

Production kt 63.1 56.6 54.8 62.8 -10.3 -3.1 14.5

Africab kt 10.4 10.4 10.4 9.7 0.4 0.0 -7.0

Canada kt 8.2 1.8 0.0 8.2 -77.8 N/A N/A

Kazakhstan kt 26.8 26.8 27.6 27.9 0.1 3.2 1.1

Russia kt 3.5 3.6 3.8 4.0 3.9 3.7 4.8

Consumption kt 83.6 84.1 84.7 83.9 0.6 0.7 -0.9

China kt 12.9 13.5 14.7 15.1 4.8 8.9 2.6

European Union 27 kt 22.5 22.4 23.1 20.3 -0.2 3.2 -12.4

Japan kt 1.9 1.9 2.4 2.4 0.0 26.0 0.0

Russia kt 7.7 7.4 7.6 7.6 -3.2 2.6 -0.6

United States kt 21.8 21.7 18.8 21.0 -0.7 -13.3 12.1

Spot price US$/lb 25.7 33.0 42.5 49.7 28.4 28.7 17.1

realc US$/lb 26.2 33.0 41.6 47.6 25.8 26.0 14.4

Australia Unit 2018–19 2019–20s 2020–21ff 2021–22ff 2019–20s 2020–21ff 2021–22ff

Mine production t 7,618 7,329 6,500 5,800 -3.8 -11.3 -10.8

Export volume t 7,571 7,270 6,500 5,800 -4.0 -10.6 -10.8

– nominal value A$m 734 650 745 747 -15.1 19.5 0.3

– real valued A$m 748 650 730 717 -16.7 17.2 -1.8

Average price A$/kg 96.9 85.7 114.6 128.8 -11.6 33.7 12.4

– reald A$/kg 98.8 85.7 112.4 123.7 -13.2 31.1 10.1

Notes: b Includes Niger, Namibia, South Africa, Malawi and Zambia; c In 2020 US dollars; d in 2019–20 Australian dollars; f forecast; s estimate. Source: Department of Industry, Science, Energy and Resources (2020); Cameco Corporation (2020); Ux Consulting (2020) Uranium Market Outlook


10.1 Summary Due to the COVID-19 pandemic and its impacts, the gold price is

forecast to reach an 8-year high, averaging about US$1,630 an ounce in 2020. An expected global economic rebound is projected to see the price slide to around US$1,510 an ounce in 2022.

Australia’s gold mine production is forecast to reach a peak of 381 tonnes in 2021–22, as high prices encourage an expansion in production.

The value of Australia’s gold exports is forecast to reach a record $32 billion in 2020–21, driven by higher prices and export volumes, before declining to $30 billion in 2021–22, as gold prices ease back.

10.2 Prices Gold prices rose strongly in the first half of 2020 The London Bullion Market Association (LBMA) gold price has risen by 14 per cent so far in 2020, to US$1,727 an ounce on 17 June 2020 — well above the average of US$1,479 an ounce in the second half of 2019. The US dollar gold price reached a seven and a half year high of US$1,748 an ounce on 20 May 2020, benefitting from its status as a safe haven asset during the COVID-19 pandemic.

Emergency interest rate cuts and massive quantitative easing measures taken by the US Federal Reserve in recent months have driven the real US Treasury bond yields lower. Lower real bond yields have encouraged institutional investment into gold, boosting gold prices (Figure 10.1).

The COVID-19 pandemic has also pushed the Australian dollar lower, with the currency falling by 1.9 per cent in 2020, to US$0.688 on 17 June. Propelled by a lower Australian dollar and a higher US dollar gold price, the Australian dollar gold price has risen 15 per cent so far in 2020, to A$2,493 an ounce on 17 June 2020. Gold prices are expected to continue to benefit from a surge to safe haven assets over the remainder of 2020, as the COVID-19 pandemic plays out.

Figure 10.1: US dollar gold price and real US 10-Year Treasury yield

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The LBMA gold price is estimated to average US$1,630 an ounce in 2020, an increase of 17 per cent on 2019 (Figure 10.2). Gold prices expected to fall in 2021 and 2022 As the global economy recovers, gold prices are forecast to fall by around 3.7 per cent between 2021 and 2022, to average US$1,510 an ounce in 2022 (Figure 10.2). The global economic recovery is expected to undermine some of gold’s appeal to institutional investors: funds are expected to move out of safe haven assets like gold and into riskier assets. The pace of central bank gold buying is expected to decrease at an annual rate of 4.0 per cent over the outlook period, amidst a modestly diminished appetite for gold for reserves.

The lower US dollar gold price, in combination with the higher Australian dollar, is expected to push the Australian dollar gold price lower over the outlook period, to average A$2,099 an ounce in 2022.


Figure 10.2: US and Australian dollar gold prices

Source: LBMA (2020) Gold price PM; Department of Industry, Science, Energy and Resources (2020)

10.3 Consumption World gold consumption increased in the March quarter 2020 World gold demand increased by 1.2 per cent year-on-year in the March quarter 2020, to 1,084 tonnes, driven by inflows into gold-backed exchange traded funds (ETFs), which added 298 tonnes (or net inflows of US$23 billion) — the largest quarterly value ever — driven by large inflows into ETFs in Asia and Europe. The global COVID-19 pandemic, which raised the level of volatility in financial markets, has driven demand for gold backed ETFs.

Over this period, official sector gold buying — that is, from central banks and other government financial institutions — fell by 7.6 per cent year-on-year to 145 tonnes. The need for more liquid assets during the COVID-19 pandemic appears to have been the main catalyst for central banks’ diminished appetite for gold. According to the World Gold Council, six central banks increased their gold reserves by at least a tonne in the March quarter 2020, compared to ten central banks a year before.

The COVID-19 pandemic and higher gold prices impacted global gold jewellery demand in the March quarter 2020. Jewellery demand dropped by 39 per cent year-on-year, to 326 tonnes, led by a 65 per cent (or nearly 120 tonnes) fall in demand from China — the world’s largest gold jewellery consuming country. Reduced incomes, due to physical distancing lockdowns, deterred Chinese consumers from spending on non-necessities such as jewellery. In India — the world’s second largest gold jewellery consuming country — jewellery demand fell by 41 per cent year-on-year in the March quarter 2020, due to higher domestic gold prices and the COVID-19 lockdown. In the US and Europe, jewellery demand fell by 3.7 and 15 per cent year-on-year to 23 and 11 tonnes, respectively, triggered by COVID-19 lockdowns.

Gold demand is forecast to fall by 18 per cent to 3,588 tonnes in 2020, as the COVID-19 pandemic reduces incomes and deters gold jewellery consumption in many parts of the world (Figure 10.3). Gold is expected to continue to attract institutional investors.

Russia’s central bank — the world’s largest gold buyer for the last 14 consecutive years — suspended gold buying for its reserves on 1 April 2020, citing low oil prices and budgetary requirements to deal with the COVID-19 pandemic. The absence of Russia from the world gold markets will likely prove to be a significant negative factor in 2020. Offsetting the fall in gold demand from Russia, the central bank of Kazakhstan — the world’s fourth largest gold buyer — is planning to increase its 2020 gold purchases, after buying 57 tonnes in 2019.

Gold consumption expected to rise in 2021 and 2022 World gold consumption is forecast to grow at an average annual rate of 4.2 per cent in 2021 and 2022, to 3,892 tonnes in 2022 (Figure 10.3). The growth is expected to be largely driven by jewellery consumption, rising by 13 per cent a year in 2021 and 2022 to 2,008 tonnes. Innovation in gold jewellery production — which has resulted in a wider product offering — is providing consumers with greater choices and driving higher demand for gold.

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Figure 10.3: World gold consumption by sector

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Source: World Gold Council (2020) Gold Demand Trends; Department of Industry, Science, Energy and Resources (2020)

Demand from China is expected to rise at double-digit rates in 2021, following a steep fall in 2020. In India, softer demand growth is expected, as the COVID-19 pandemic reshapes the gold retail business: physical stores are likely to expand at a slower pace than online trading. In the US and Europe, jewellery demand is unlikely to recover to pre-COVID-19 levels, as the COVID-19 pandemic slows economic growth. Higher unemployment and income losses are expected to hinder any rises in demand for discretionary goods such as jewellery.

Retail investment is expected to help global gold consumption, with demand for gold bars and coins forecast to rise at an average annual rate of 9.0 per cent between 2021 and 2022, to 868 tonnes by 2022. This is supported by a forecast pull-back in gold prices (see Section 10.2 prices).

The official sector is expected to remain a net buyer over the outlook period, but at a slower pace. Central banks’ gold buying is forecast to fall at an average annual rate of 2.0 per cent in 2021 and 2022, to 422 tonnes in 2022. Many central banks are expected to shift their focus from reserves

diversification amid the COVID-19 pandemic. The Central Bank of Russia is unlikely to return to buying gold while oil prices stay low.

Gold backed ETFs are expected to remain strong, with an average inflow of about 270 tonnes a year in 2021 and 2022. With record low interest rates in much of the world, the opportunity cost of holding gold is low.

10.4 Production World gold supply decreased in the March quarter 2020 World gold supply fell by 3.8 per cent year-on-year in the March quarter 2020, to 1,066 tonnes, due to a 2.6 per cent decline in gold mine production. A decline in net producer hedging in the March quarter — to minus 10 tonnes — contributed to the fall in gold supply.

Around 36 tonnes (or 1.1 per cent) of world gold mine production has been affected by the COVID-19 related lockdowns. Production losses have been recorded in many gold producing countries, including Mexico (nearly 11 tonnes), Canada (over 10 tonnes), South Africa (5.4 tonnes), Peru (5.0 tonnes) and Argentina (2.4 tonnes) (Figure 10.4).

Production in China — the world’s largest gold producing country — was largely unaffected by the COVID-19 pandemic, with only one mine reporting a 60-day shutdown, resulting in an estimated production loss of 0.4 tonnes of gold.

Production in Australia — the world’s second largest gold producing country — was unaffected by COVID-19 measures. However, output from several large Australian gold mines was reduced, due to planned maintenance (see Section 10.5 Australia’s exports and production).

The movement restrictions during the COVID-19 pandemic have discouraged gold recycling activities. Jewellery store closures and lockdowns reduced the physical exchange of gold for cash. Over the year to March, gold scrap supply decreased by 4.4 per cent year-on-year to 280 tonnes.

Figure 10.4: Impacts of COVID-19 lockdown on gold production

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Mexico CanadaSouth Africa Peru Argentina China Russia

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Source: S&P Global Market Intelligence (2020)

For 2020, world gold supply is estimated to fall by 1.3 per cent to 4,751 tonnes (Figure 10.5), reflecting the impacts of the COVID-19 pandemic on Russian and Brazilian gold mine output, as these nations have recently encountered a surge in COVID-19 cases.

In China, gold mines have returned to normal operations following suspensions in January and February 2020. In Australia, Newcrest’s Cadia and Telfer gold mines, that were on planned maintenance of concentrators and planned reduction of mining in the March quarter, are expected to resume normal operations in the June quarter.

Following the easing of COVID-19-related restrictions, Newmont — the world’s largest gold mining company — has ramped up production at its operations: the Penasquito gold mine in Mexico, the Cerro Negro gold mine in Argentina, the Eleonore gold mine in Canada and the Yanacocha gold mine in Peru.

Gold recycling supply is not expected to return to the pre-COVID-19 levels over the remainder of 2020: physical distancing restrictions and some reluctance of sellers to visit retail outlets are likely to impact on supply.

World gold supply expected to rise in 2021 and 2022 Propelled by higher mine production, world gold supply is forecast to rise at an average annual rate of 3.5 per cent between 2021 and 2022, reaching 5,087 tonnes by the end of the outlook period (Figure 10.5).

Figure 10.5: World gold supply

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Mine production Scrap

Source: World Gold Council (2020) Gold Demand Trends; Department of Industry, Science, Energy and Resources (2020)

World mine production is forecast to increase by 8.0 per cent (to 3,706 tonnes) in 2021 and by 2.0 per cent (to 3,781 tonnes) in 2022. A solid pipeline of projects in Australia, Russia and Canada should contribute to higher world mine output, with miners focusing on expansions and extending the life of existing mines.

Gold scrap supply is forecast to rise by 2.0 per cent in 2021, to 1,345 tonnes, due to an expected rise in gold selling activity. In 2021, unemployment is likely to remain high, causing hardship in many households, and some people may be forced to sell their gold jewellery for income to use on daily living expenses.

In 2022, lower gold prices and improving economic situations of many households are likely to discourage future sale of gold jewellery, thus gold scrap supply is forecast to fall by 5.0 per cent in 2022, to 1,278 tonnes.


10.5 Australia’s exports and production Export values increased in the March quarter 2020 Australia’s refined and unrefined gold exports were $5.8 billion in the March quarter 2020, up 7.0 per cent on the March quarter 2019. Exports were driven by a lower exchange rate (down 3.7 per cent quarter-on-quarter) and the higher US dollar gold price (see Section 10.2 prices).

Analysing monthly moves, Australian gold exports fell to a 36-month low in February 2020, to just above $1 billion, as gold exports to China (including Hong Kong) declined by 98 per cent at the peak of that nation’s COVID-19 outbreak. However, with a massive rise in gold exports to the United Kingdom (up 682 per cent year-on-year) in March 2020, Australian gold exports set a monthly record $3.3 billion (Figure 10.6).

Australia’s gold exports are estimated to have increased by 46 per cent to $27 billion in 2019–20, driven by higher gold prices (see Section 10.2 Prices) and increased export volumes (Figure 10.7). Export volumes are estimated to have risen by 11 per cent in 2019–20, reaching 362 tonnes.

Figure 10.6: Australia’s gold exports, monthly

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Source: ABS (2020) International Trade, 5368.0

Rising export volumes are estimated to have been driven by rising mine production, up 4.3 per cent to 335 tonnes. Positive outlook for Australian gold exports in 2020–21 Australia’s gold export earnings are forecast to rise by 15 per cent in 2020–21, to a peak of nearly $32 billion (Figure 10.7). Contributing factors include strong gold prices, higher production (up 11 per cent) and export volumes (up 15 per cent). Export values are forecast to decline after 2020–21, falling to around $30 billion in 2021–22 (Figure 10.7). The decline is expected to be driven by lower US and Australian dollar gold prices (see Section 10.2 prices).

Figure 10.7: Australia’s gold exports by financial year

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Source: ABS (2020) International Trade, 5368.0; Department of Industry, Science, Energy and Resources (2020)

Australian gold mine production increased in the March quarter 2020 Australia’s gold production rose by 2.0 per cent year-on-year to reach 80 tonnes in the March quarter 2020. Output was driven by improved production from several large gold mines in Victoria and South Australia. Production at Kirkland Lake Gold’s Fosterville gold mine in Victoria


increased by 24 per cent year-on-year in the March quarter 2020, to nearly 5.0 tonnes, driven by increased mill throughput and higher ore grades. Production at Oz Minerals’ Prominent Hill gold mine in South Australia rose by 49 per cent year-on-year in the March quarter 2020, to 1.5 tonnes, propelled by higher throughput.

However, production at Newcrest’s Cadia mine in New South Wales (NSW) and Telfer mine in Western Australia (WA) decreased by 11 and 20 per cent year-on-year in the March quarter 2020, to 6.1 and 3.0 tonnes, respectively, due to planned maintenance and decreased mill throughput. Over this period, production at AngloGold Ashanti and Independence Group’s joint-venture Tropicana gold mine in Western Australia fell by 7.1 per cent year-on-year, to 3.2 tonnes, due to lower grades. Production at Newmont’s Boddington gold mine in WA and Tanami gold mine in the Northern Territory decreased by 8.4 and 11 per cent in the March quarter 2020, to 4.4 and 3.6 tonnes, respectively, due to lower ore grades.

During the peak of the COVID-19 outbreak in Australia, some state jurisdictions — Western Australia and Queensland — banned interstate fly-in fly-out (FIFO) mining workers. The FIFO movement restrictions had different impacts on different gold companies or mines — depending on the base of their workforce. Evolution Mining has only one gold mine in Queensland (Cracow) and a FIFO workforce, of which 97 per cent are based within the state. In contrast, the FIFO movement restrictions may have had an impact on Newcrest’s workforce mobility, affecting the Cadia gold mine in NSW and the Telfer gold mine in Western Australia.

Despite some concerns about the impacts of the COVID-19 pandemic on gold operations, Australian gold production is estimated to have grown by 4.3 per cent in 2019–20 to 335 tonnes (Figure 10.8), encouraged by higher Australian dollar gold prices.

Higher production in the short term Australian gold mine production is forecast to rise at an average annual rate of 6.9 per cent between 2020–21 and 2021–22. Production of 381 tonnes by 2021–22 (Figure 10.8) will be propelled by both production from new mines and existing mine expansions.

Newmont has confirmed that 90 per cent of its planned 2020 gold production, including Boddington and Tanami mines in Australia, remains in operation.

Kirkland Lake has withdrawn its three-year production guidance to assess the impacts of COVID-19 on its Fosterville’s operation. The company has also suspended its exploration activities at the Cosmo mine in the Northern Territory.

Regis Resources’ 6 tonnes per year McPhillamys gold mine in NSW is expected to begin production in 2021, and Capricorn Metals’ Karlawinda gold mine project (annual production of 4 tonnes) is expected to be commissioned in 2021. St Barbara’s Gwalia extension project in WA is expected to begin operation in early July 2020, adding about 3 tonnes of new output per year to the operation. Ausmex Mining and Activex are working to commission the 0.9 tonne a year Mt Freda gold mine in Queensland by the end of 2020 — the mine previously ceased operating in 1991.

Figure 10.8: Australia’s gold production


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Low oil prices are expected to assist Australian gold producers, in the form of reduced energy costs. With improved margins and cash flows, gold producers are likely to invest in growth projects and/or extend the life of existing mines. Newcrest has announced that it will use additional funds from its recent share placement to develop the Havieron gold project in WA, and to extend the life of the Telfer mine.

Exploration expenditure continued to rise In the March quarter 2020, Australia’s gold exploration expenditure was $273 million, down 10 per cent from the December quarter 2019. However, the Australian gold industry spent more on exploration programs in the March quarter 2020 than the March quarter 2019. Exploration expenditure was up by nearly 39 per cent (or $50 million) year-on-year, driven by a seven and a half year high US dollar gold prices and record high Australian dollar gold prices. Gold exploration expenditure accounts

Figure 10.9: Australian gold exploration expenditure

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Source: ABS (2020) Mineral and Petroleum Exploration, Australia, 8412.0

for 45 per cent of Australia’s total minerals exploration expenditure. Western Australia remained the focus of gold exploration activity in Australia, accounting for 67 per cent (or $183 million) of total gold exploration expenditure (Figure 10.9).

Revisions to the outlook The outlook for the US dollar gold prices in 2020 has been revised up by 11 per cent (or US$157 an ounce) from the March 2020 Resources and Energy Quarterly, reflecting a stronger than expected rise in gold prices (up 13 per cent) in the first half of 2020.

As a result, the forecast for Australian gold exports in 2020–21 has been revised up by $5.2 billion to nearly $32 billion. Export earnings in 2021–22 have been revised up to around $30 billion, up $3.2 billion from the forecast in the March 2020 Resources and Energy Quarterly.


Table 10.1: Gold outlook Annual percentage change


Total demand tonnes 4,368 3,588 3,789 3,892 -17.9 5.6 2.7

Fabrication consumptionb tonnes 2,445 1,889 2,231 2,333 -22.7 18.1 4.6

Mine production tonnes 3,480 3,432 3,706 3,781 -1.4 8.0 2.0

Pricec

Nominal US$/oz 1,392 1,631 1,550 1,512 17.2 -5.0 -2.5

Reald US$/oz 1,421 1,631 1,518 1,447 14.8 -7.0 -4.7


Mine production tonnes 321 335 372 381 4.3 11.2 2.5

Export volume tonnes 326 362 418 427 11.2 15.5 2.1

Nominal value A$m 18,722 27,436 31,574 29,567 46.5 15.1 -6.4

Real valuee A$m 19,074 27,436 30,962 28,384 43.8 12.9 -8.3

Price

Nominal A$/oz 1,768 2,332 2,352 2,154 31.9 0.8 -8.4

Reale A$/oz 1,801 2,332 2,306 2,068 29.5 -1.1 -10.3

Notes: b includes jewellery consumption and industrial applications; c London Bullion Market Association PM price; d In 2020 calendar year US dollars; e In 2019–20 financial year Australian dollars; s Estimate; f Forecast. Source: ABS (2020) International Trade, 5368.0; London Bullion Market Association (2020) gold price PM; World Gold Council (2020); Department of Industry, Science, Energy and Resources (2020).


11.1 Summary The global aluminium industry is facing challenging conditions caused

by the impacts of COVID-19, with slowing demand, increasing supply, and rising inventory levels. Aluminium prices are forecast to fall by 8.3 per cent in 2020, to average US$1,643 a tonne, before recovering to US$1,726 a tonne by 2022.

Annual Australian output is expected to be broadly steady over the outlook period, at 1.6 million tonnes of aluminium and 20 million tonnes of alumina.

The total value of Australian exports of aluminium, alumina and bauxite is forecast to fall by 20 per cent in 2019–20, to nearly $13 billion, and 2.8 per cent in 2020–21, to $12 billion, due to low aluminium and alumina prices and declining bauxite export volumes.

11.2 Prices Aluminium and alumina prices declined sharply in the first half of 2020 The London Metal Exchange (LME) spot price for primary aluminium has fallen by 11 per cent in 2020, to US$1,578 a tonne on 17 June 2020 — compared to an average of US$1,757 a tonne in the second half of 2019. Prices have been affected by the COVID-19 pandemic and growing supply from China — Chinese primary aluminium producers have taken advantage of lower input costs (lower alumina and fuel prices) to ramp up their production. This increased production has resulted in a rise in aluminium inventories on the LME and Shanghai Futures Exchange (SHFE) (Figure 11.1). LME stocks have risen since February 2020, due to increasing supply and slowing demand, while SHFE stocks rose in the first three months of 2020, but have fallen since April 2020.

The aluminium LME spot price is forecast to decrease by 8.3 per cent in 2020, to an average US$1,643 a tonne (Figure 11.2), as additional aluminium capacity from new and existing aluminium smelters in China adds to downward pressure on aluminium prices.

Figure 11.1: Exchange aluminium stocks

Source: World Bureau of Metals Statistics (2020)

The free on board (FOB) Australian alumina price has decreased by 6.6 per cent in 2020, to US$257 a tonne on 17 June 2020 — compared to an average of US$291 a tonne in the second half of 2019 — due to a surplus of alumina output (around 870,000 tonnes) from 2019.

The FOB Australian alumina price is estimated to fall by 19 per cent in 2020, to US$272 a tonne (Figure 11.2), as more alumina refineries are expected to return to full capacity following the easing of COVID-19 related restrictions.

Aluminium and alumina prices expected to rise in 2021 and 2022 The LME aluminium spot price is forecast to increase by 4.0 per cent, to average US$1,709 a tonne in 2021, and to rise by a further 1.0 per cent in 2022, to average US$1,726 a tonne (Figure 11.2). The forecast rise in the primary aluminium price is sensitive to the assumption that the world economy recovers from the COVID-19 pandemic over the outlook period, and that governments and central banks implement further economic stimulus measures over the outlook period (see Chapter 2 macroeconomic outlook).

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Recovering Chinese aluminium consumption is expected to be a driver of the recovery in aluminium prices, however, they are not expected to return to 2018 and 2019 levels, as aluminium demand was slowing before the spread of the COVID-19 pandemic.

The FOB Australian alumina price is forecast to rise at an average annual rate of 2.9 per cent between 2021 and 2022, to US$289 a tonne by 2022 (Figure 11.2). A forecast increase of world aluminium production at an average annual rate of 2.8 percent in 2021 and 2022 is expected to provide support to alumina prices.

Figure 11.2: World aluminium and alumina prices

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Source: LME (2020) spot prices; Metals Bulletin (2020) Alumina monthly price; Department of Industry, Science, Energy and Resources (2020).

11.3 Consumption Global aluminium, alumina and bauxite consumption rose in the first three months of 2020 Global primary aluminium consumption increased by 5.5 per cent year-on-year in the first three months of 2020, to nearly 16 million tonnes,

driven by growing aluminium consumption from China — the world’s largest aluminium consuming country. COVID-19 restrictions reduced aluminium recycling activity, and the fall in aluminium collection activity led to a spike in the use of primary aluminium as a substitute for scrap aluminium. As a result, primary aluminium consumption in China rose by 5.8 per cent year-on-year in the first three months of 2020, to nearly 9 million tonnes.

Offsetting the rise in primary aluminium consumption in China, is the fall in aluminium use in the automotive industry due to COVID-19 lockdown measures. Global automotive makers have cut production at plants across Europe, North America and Asia. Volkswagen — the world’s largest car producing company — closed all of its plants for a few weeks in April and May 2020. General Motors — the largest US automaker — also closed its plants over this period. Car sales fell sharply across the world, as the loss of jobs and income reduced consumer spending on discretionary items. Car sales in China fell by 42 per cent year-on-year in the first three months of 2020, to around 3.7 million units, and in Europe, they dropped by 23 per cent, to 3.5 million units.

World primary aluminium consumption is forecast to increase by 2.7 per cent in 2020, to 64 million tonnes (Figure 11.3), propelled by a 2.1 per cent rise in aluminium consumption in China. Car sales are expected to recover, and could be supported by changing consumer preferences, with people preferring to travel by car rather than by bus or other forms of public transport. On the production side, European automakers such as BMW and Volkswagen restarted their production in May 2020, as COVID-19 lockdowns and precautions were eased.

The COVID-19 pandemic has provided global primary aluminium producers with a new source of demand, due to the rising consumption of disposable face masks. It is estimated that around 116 million units of face masks are produced every day, which in turn, consume around 1,305 tonnes of aluminium for making metal nose clips. It is estimated that this will add an additional 39,000 tonnes of primary aluminium demand to world consumption in 2020.

The COVID-19 pandemic is expected to impact the world aircraft manufacturing industry for several years. With border lockdowns, the demand for commercial airline travel has dropped in 2020 and it may take years to return to pre-COVID-19 levels. This decline is expected to impact aircraft production — as grounded airline fleets reduce the demand for new planes — and aluminium demand as a whole.

World alumina usage increased by 0.5 per cent year-on-year in the first three months of 2020, to nearly 29 million tonnes. The rise came as Chinese aluminium smelters ramped up production after COVID-19 lockdowns (see Section 11.4 production). Over this period, China’s alumina consumption rose by 1.3 per cent year-on-year, to nearly 17 million tonnes. However, demand for alumina from Western Europe and South America fell by 3.7 and 2.5 per cent, to 1.5 million and 548,000 tonnes, respectively, due to lower aluminium production.

World alumina demand is estimated to increase by 1.2 per cent in 2020, to nearly 119 million tonnes (Figure 11.4). An expected rise in global primary aluminium production in 2020 is likely to provide some support for alumina demand. China is expected to contribute to the growth, as Chinese aluminium smelters ramp up their production to maximise the benefit of low alumina and fuel prices. Outside of China, aluminium production in Russia, India and the Middle East is expected to return to at least half of pre-COVID-19 levels.

World bauxite usage increased by 0.1 per cent year-on-year in the first three months of 2020, to 76 million tonnes, driven by a slight increase in bauxite consumption in China. Over this period, China consumed nearly 32 million tonnes of bauxite, up 1.6 per cent year-on-year, as the domestic bauxite supply chains were disrupted at the height of the COVID-19 pandemic in January and February 2020 (see Section 11.4 production).

World bauxite consumption is estimated to increase by 4.0 per cent in 2020, to 311 million tonnes, driven by increased alumina production from China — the world’s largest alumina producing country.

Aluminium, alumina and bauxite demand set to increase in 2021 and 2022 World primary aluminium demand is forecast to increase at an average annual rate of 2.4 per cent between 2021 and 2022, to 68 million tonnes by 2022 (Figure 11.3). The growth is expected to be driven by increased demand for aluminium in the transport, construction and consumer sectors. Advanced and developing economies are expected to continue with economic stimulus policies such as infrastructure spending. In 2021 and 2022, global industrial production growth, strongly correlated with aluminium demand, is expected to recover from a sharp fall in 2020. The global economic recovery is expected to support demand for cars, houses and electrical equipment, and thus aluminium consumption.

A significant driver of aluminium demand is expected to come from cars, particularly energy efficient vehicles and electric vehicles, which contain a higher proportion of aluminium components. Automakers across the world are working to replace internal combustion engines with electrical engines,

Figure 11.3: World aluminium consumption and industrial production

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and are seeking to reduce vehicles’ weight by increasing the use of aluminium, which is 10 to 40 per cent lighter than steel.

Despite slowing economic growth, the Chinese government’s infrastructure projects and ambitious initiatives for promoting electric vehicle production are expected to bolster demand for aluminium. These initiatives are likely to at least partly offset the impacts of the COVID-19 pandemic on the country’s economy. China’s primary aluminium consumption is expected to continue to grow strongly over the next two years, reaching 38 million tonnes in 2022.

World alumina consumption is forecast to rise at an average annual rate of 1.9 per cent in 2021 and 2022, to 123 million tonnes in 2022 (Figure 11.4). Alumina demand is driven by primary aluminium production, which is forecast to increase by 2.8 per cent a year between 2021 and 2022.

World bauxite consumption is forecast to grow at an average annual rate of 4.0 per cent between 2021 and 2022, to 337 million tonnes by 2022. This is expected to be driven by new alumina capacity in China and India.

Figure 11.4: World aluminium production and alumina consumption

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11.4 Production Alumina output fell, but aluminium/bauxite output has grown so far in 2020 Global primary aluminium production has been largely unaffected by the COVID-19 lockdowns. Production increased by 2.0 per cent year-on-year in the March quarter 2020, to 16 million tonnes, propelled by higher output in China — the world’s largest aluminium producer. China produced 9.1 million tonnes of primary aluminium over this period, up by 2.1 per cent year-on-year, as Chinese primary aluminium producers ramped up their production.

Over this period, primary aluminium production in the Middle East rose by 9.6 per cent year-on-year to 1.5 million tonnes, driven by production ramp-up at the 1 million tonnes per year SALCO aluminium smelter in Iran. Production in Europe fell by 0.5 per cent year-on-year in the March quarter 2020, to 1.9 million tonnes, due to COVID-19 related lockdowns.

Rio Tinto has closed one of the aluminium production lines at its 340,000 tonnes a year Tiwai aluminium smelter in New Zealand, to comply with government restrictions to contain the spread of COVID-19. Production at Norsk Hydro’s 470,000 tonnes per year Albras aluminium smelter in Brazil has been cut by 25 per cent, as an electrical fire incident in early March 2020 forced the shutdown of one of the plant’s four production lines.

Primary aluminium production in China is expected to continue rising over the rest of 2020. New and existing Chinese aluminium smelters are likely to take advantage of low input costs (alumina and fuel prices) and a post-COVID-19 industrial recovery to ramp up production. Chinalco’s 500,000 tonnes per year Yunnan Aluminium smelter started production in May 2020. Chalco’s Guangxi 2 million tonnes per year alumina refinery is expected to start production in the September quarter 2020. China’s aluminium output in 2020 is forecast at 37 million tonnes (up 4.3 per cent).

Russia is expected to produce around 4 million tonnes of primary aluminium in 2020. Indian primary aluminium production is expected to remain steady at 3.7 million tonnes in 2020, on an assumption of consistent performance from their aluminium smelters. As a result, world


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primary aluminium production is forecast to increase by 3.2 per cent in 2020 to 66 million tonnes (Figure 11.4).

World alumina supply decreased by 0.8 per cent year-on-year in the March quarter 2020, to 30 million tonnes, due to 7.0 per cent (1.2 million tonnes) decline in Chinese alumina output, in response to collapsing alumina prices and cheap imported alumina from overseas. Production in Australia — the world’s second largest alumina producer — has remained largely unchanged in the March quarter 2020 (with average monthly production of 1.7 million tonnes), as all Australian refineries have remained in operation during the COVID-19 lockdowns. Over this period, Russian alumina production is estimated to have increased by 5.8 per cent year-on-year, to 948,000 tonnes.

World alumina supply is forecast to increase by 0.1 per cent in 2020, to over 121 million tonnes, driven by higher production in China and Australia. China’s alumina production is forecast to increase by 2.0 per cent in 2020, to 69 million tonnes, as the disruption in China’s bauxite supply is expected to ease in the second-half of 2020. Australia’s production is expected to increase slightly (up 0.2 per cent to over 20 million tonnes), as strong production performance from Rio Tinto’s Gladstone operation is likely to continue.

World bauxite supply increased by 3.6 per cent year-on-year in the March quarter 2020, to 90 million tonnes, as global bauxite miners increased their production to accommodate the rise in bauxite imports from China — the domestic bauxite supply chains were disrupted at the height of the COVID-19 pandemic in China in January and February 2020.

China’s bauxite imports increased by 10 per cent year-on-year in the first three months of 2020, to 28 million tonnes. Over this period, production in Guinea rose by 1.9 per cent year-on-year, to around 27 million tonnes.

For 2020, world bauxite supply is forecast to rise by 3.5 per cent, to 357 million tonnes, driven by higher production in Guinea (up 27 per cent to 80 million tonnes) — the world’s second largest producer (Figure 11.5).

Aluminium, alumina and bauxite output set to rise over the outlook period World primary aluminium production is forecast to increase at an average annual rate of 2.8 per cent between 2021 and 2022, to reach about 69 million tonnes by 2022 (Figure 11.3). The gains will be driven by additional capacity in China, Iran and Vietnam. In China, more greenfield aluminium smelters are anticipated, located in regions (such as Yunnan province) where power is cheap and abundant. The 396,000 tonnes per year Baiyinhua aluminium smelter is expected to start production in late 2020 or early 2021. Guizhou Zhengzhongyuan Mining’s 500,000 tonnes per year Weng’an aluminium project is expected to be commissioned in 2022.

Outside of China, Iran is implementing a plan to increase its annual aluminium production to 1.5 million tonnes by 2025, with the first phase (300,000 tonnes) of the 1 million tonnes per year SALCO aluminium smelter ramping up production over the outlook period. In Vietnam, the delayed Tran Hong Quan aluminium project (nameplate capacity of 436,000 tonnes per year) is expected to start production in early 2021.

A risk to global primary aluminium supply is the rising power costs that have the potential to impact the viability of the aluminium industry around the world. Rio Tinto is conducting strategic reviews of their Tiwai Point aluminium smelter in New Zealand and ISAL aluminium smelter in Iceland. The reviews will determine the viability of those operations, including any possible production curtailment or business closure.

World alumina supply is forecast to rise at an average annual rate of 1.8 per cent between 2021 and 2022, to 126 million tonnes by 2022. This growth is expected to be driven by China, India and Cameroon. In China, greenfield alumina refineries are expected to be constructed in order to comply with the Chinese government’s stricter environmental regulations. Aluminium Corporation of China’s 1 million tonne per year Chalco Hebei Huanghua greenfield alumina refinery started production in 2020, and is expected to ramp up production to 4 million tonnes per year over the outlook period. In India, production at Vedanta’s Lanjigarh refinery is expected to rise from 300,000 tonnes per year in 2020 to 1.8 million

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tonnes per year by 2022, through operating efficiencies. In Cameroon, the 3 million tonnes per year joint-venture CAL alumina refinery project is expected to come online in 2022. Alumina production in Australia is expected to remain steady at around 20 million tonnes per year.

Figure 11.5: World bauxite production

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World bauxite output is forecast to grow at an average annual rate of 2.4 per cent over the outlook period, reaching 374 million tonnes by 2022 (Figure 11.5). The gains are expected to be driven by newly added capacity in Guinea, where production is rapidly rising. Guinea’s bauxite output is forecast to grow at an average 9.0 per cent a year in 2021 and 2022. The Compagnie des Bauxites de Guinée mine in Guinea, which expanded from 13 to 18 million tonnes per annum in 2019, is due to expand to 28 million tonnes by 2022. Emirates Global Aluminium is planning to ramp up output at its bauxite mine in Guinea, targeting 12 million tonnes per year towards the end of the outlook period.

11.4 Australia’s exports and production March quarter 2020 mixed for aluminium, alumina and bauxite output Australia’s primary aluminium production increased by 1.8 per cent year- on-year in the March quarter 2020, to 391,000 tonnes. The increase is attributed to a 3.2 per cent year-on-year rise in Boyne Island aluminium smelter in Queensland and a 4.4 per cent year-on-year rise in Bell Bay aluminium smelter in Tasmania.

Australia’s alumina output was unchanged in the March quarter 2020, at nearly 5 million tonnes, with no production losses related to the COVID-19 lockdown.

Australia’s bauxite production fell by 4.6 per cent year-on-year in the March quarter 2020, to 24 million tonnes. The fall was due to the temporary shutdown of Metro Mining’s Bauxite Hills operation in Queensland for maintenance. In contrast, production at Rio Tinto’s Weipa bauxite operations (including Amrun bauxite project) in Queensland increased by 10 per cent, to 8.7 million tonnes, driven by the successful production ramp-up at Amrun in 2019.

Lower aluminium and alumina prices cut export earnings in 2019–20 Australia’s aluminium, alumina and bauxite exports declined by 16 per cent year-on-year in the March quarter 2020, to $3.0 billion. The decline was due to softening prices for aluminium and alumina (see Section 11.2 Prices), and lower aluminium export volumes, partially offset by higher export volumes of alumina and bauxite.

Falling aluminium and alumina prices are expected to have had a negative impact on Australian aluminium and alumina exports in the June quarter 2020. Export values are estimated to have declined by 19 per cent year-on-year, to about $3.0 billion. As a result, Australia’s aluminium, alumina and bauxite exports are estimated to have declined by 20 per cent to nearly $13 billion in 2019–20.

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Exports to fall over the outlook period Despite a forecast of improvement in aluminium and alumina prices in 2021 and 2022, Australia’s aluminium, alumina and bauxite export earnings are forecast to fall by 2.8 per cent in 2020–21 and 0.7 per cent in 2021–22, to $12 billion. The fall is expected to be driven by a decline in bauxite export volumes. Over this period, bauxite export volumes are forecast to decrease at an average annual rate of 7.2 per cent, to 34 million tonnes by 2021–22.

Australian bauxite exports could be affected by the rise of Guinea as a major producer and exporter of bauxite. Guinea has overtaken Australia as China’s largest supplier of bauxite, accounting for 44 per cent of China’s total bauxite imports in March 2020. Over the last few years, Chinese and European companies have invested heavily in Guinea to build up the country’s bauxite production capacity.

Figure 11.6: Australia’s aluminium exports and production

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Steady aluminium, alumina and bauxite production over the outlook Australia’s aluminium production is forecast to remain at around 1.6 million tonnes a year out to 2021–22 (Figure 11.6). Australia’s alumina production is expected to remain at around 20 million tonnes per annum over the outlook period (Figure 11.7). Australia’s bauxite production is forecast to remain at 105 million tonnes per year out to 2021–22 (Figure 11.8).

In June 2020, Alcoa Australia has applied to the Western Australia Environmental Protection Authority (WA EPA) to increase alumina production at its Pinjarra refinery from 5 to 5.25 million tonnes a year. The company has also applied to the WA EPA to increase bauxite production at its Huntly mine (annual production of 26 million tonnes).

Figure 11.7: Australia’s alumina exports and production

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Figure 11.8: Australia’s bauxite exports and production

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Revisions to the outlook The forecast for Australia’s aluminium, alumina and bauxite exports earnings have been revised down by $718 million, to $12 billion in 2020–21, and by $757 million to $12 billion in 2021–22, from the March 2020 Resources and Energy Quarterly.

The downward revision has been driven by a weaker price outlook. The forecast for the LME aluminium spot price has been revised down by 3.3 per cent (or US$56 a tonne of aluminium) in 2020, and the FOB Australian alumina prices has been revised down by 16 per cent (or US$50 a tonne), from the March 2020 Resources and Energy Quarterly. The revision reflects a sharper than expected fall in aluminium and alumina prices in the first half of 2020.

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Table 11.1: Aluminium, alumina and bauxite outlook


World Unit 2019 2020f 2021f 2022f 2020s 2021f 2022f Primary aluminium Production kt 63,635 65,696 68,125 69,366 3.2 3.7 1.8 Consumption kt 62,765 64,437 66,156 67,580 2.7 2.7 2.2 Prices aluminiumc - nominal US$/t 1,792 1,643 1,709 1,726 -8.3 4.0 1.0 - reald US$/t 1,829 1,643 1,674 1,652 -10.2 1.9 -1.3 Prices alumina spot - nominal US$/t 335 272 280 289 -18.6 2.9 3.0 - reald US$/t 342 272 275 276 -20.2 0.7 0.6 Australia Unit 2018–19 2019–20s 2020–21f 2021–22f 2019–20s 2020–21f 2021–22f Production Primary aluminium kt 1,573 1,575 1,573 1,574 0.1 -0.1 0.0 Alumina kt 20,103 20,220 20,201 20,174 0.6 -0.1 -0.1 Bauxite Mt 99.4 106.1 105.8 105.8 6.7 -0.2 0.0 Consumption Primary aluminium kt 156 188 237 237 20.9 25.8 0.0 Exports Primary aluminium kt 1,452 1,384 1,384 1,385 -4.6 0.0 0.0 - nominal value A$m 4,166 3,641 3,437 3,337 -12.6 -5.6 -2.9 - real valuee A$m 4,244 3,641 3,370 3,204 -14.2 -7.4 -4.9 Alumina kt 17,619 17,799 17,861 17,897 1.0 0.4 0.2 - nominal value A$m 10,245 7,470 7,404 7,478 -27.1 -0.9 1.0 - real valuee A$m 10,437 7,470 7,260 7,178 -28.4 -2.8 -1.1 Bauxite kt 33,546 39,616 36,307 34,099 18.1 -8.4 -6.1 - nominal value A$m 1,401 1,582 1,498 1,434 12.9 -5.3 -4.3 - real valuee A$m 1,427 1,582 1,469 1,377 10.9 -7.1 -6.3 Total value - nominal value A$m 15,811 12,693 12,339 12,249 -19.7 -2.8 -0.7 - real valuee A$m 16,108 12,693 12,100 11,759 -21.2 -4.7 -2.8

Notes: c LME cash prices for primary aluminium; d In 2020 calendar year US dollars; e In 2019–20 financial year Australian dollars; f Forecast; s Estimate. Source: ABS (2020) International Trade in Goods and Services, 5368.0; AME Group (2020); LME (2020); Department of Industry, Science, Energy and Resources (2020); International Aluminium Institute (2020); World Bureau of Metal Statistics (2020).

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12.1 Summary Copper prices are forecast to fall to US$5,560 a tonne in 2020, as the

COVID-19-related economic slowdown weighs on consumption. Copper prices are then expected to lift over the outlook period, rising an average 6.0 per cent a year to a forecast US$6,240 a tonne in 2022.

Australia’s copper exports are forecast to rise from an estimated 925,000 tonnes in 2019–20 to around 966,000 tonnes in 2021–22 (in metal content terms), as output from existing mines expands and new mines start.

As copper prices and export volumes rise, Australia’s export earnings are forecast to steadily lift, from an estimated $9.6 billion in 2019–20 to $9.9 billion by 2021–22.

12.1 Prices Copper prices stabilise at reduced levels After a dramatic fall in the copper price in the first four months of the year — to a low of US$4,620 a tonne at the end of March — prices have recently strengthened. Copper prices have been impacted by both the COVID-19 induced slowdown in economic activity and pessimistic expectations about the world economy going forward. Towards the end of the June quarter, prices improved slightly, supported by expectations of production constraints and improved economic conditions. In the June quarter, the LME copper spot price averaged an estimated US$5,250 a tonne, 14 per cent lower year-on-year (Figure 12.1). After building in the March quarter, stock levels fell in the June quarter, as China’s imports returned to previous levels.

Copper prices to reflect market surplus Copper prices are expected to strengthen over the remainder of the year, though without reaching 2019 levels. In 2020, the LME copper spot price is forecast to average US$5,560 a tonne, 7.5 per cent lower than the 2019 average of $6,000 a tonne. The forecast for world copper consumption in 2020 has been revised down, and a market surplus is expected in both 2020 and 2021.

Figure 12.1: Recent copper prices and stock movements

Source: LME (2020) official cash price; Bloomberg (2020) inventories LME, COMEX, SHFE

Figure 12.2: Copper stocks and prices

Source: LME (2020) official cash price; Bloomberg (2020) Department of Industry, Science, Energy and Resources (2020)

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Although it is difficult to know how the COVID-19 pandemic and the anticipated economic recovery will unfold, current indicators suggest the largest impact on world economic activity will have been in the June quarter 2020. Full year consumption is expected to fall, although government stimulatory measures may provide some support to usage in the second half of 2020.

Towards the end of the outlook period, copper prices are forecast to rise steadily, in line with gradual improvements in economic activity and falling copper inventories. The copper price is forecast to rise 6.0 per cent a year to average US$6,240 a tonne in 2022 (Figure 12.2).

12.2 World consumption Copper consumption down in major markets Forecast world copper consumption has been revised down, as the impacts of COVID-19 alter the economic landscape. In 2020, negative world GDP growth and extremely weak industrial production are expected to weigh on copper use: copper consumption is forecast to fall 2.5 per cent to 23 million tonnes (Figure 12.3).

China is expected to drive the decline in world copper consumption, given it consumes around half of the world’s copper, followed by Europe and the US. Although China’s industrial production figures have improved, China’s copper consumption is forecast to fall 2-3 per cent in 2020. Copper used in China’s auto manufacturing sector dropped significantly in the March quarter with extended industrial shutdowns, the effect of which has been replicated in Europe and the US. In China, stimulus measures may support consumption, as well as government programs to stockpile copper concentrates (to both support product markets and alleviate supply chain shortages).

Expanding markets and consumption growth expected to return In 2021 and 2022, a gradual lift in economic activity is expected to support copper usage. World consumption is forecast to reach 25 million tonnes in 2022, up an average 2.9 per cent a year (Figure 12.4). This forecast is dependent on economic growth in China as well as the rest of the world.

Figure 12.3: Industrial production and copper consumption

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Figure 12.4: Refined copper consumption


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Stronger economic growth is expected to support higher copper consumption for traditional uses like infrastructure and construction, which may be the target of government stimulus spending. There is also a growing role for copper in low-carbon technologies, including renewable electricity generation, electric vehicles and grid infrastructure, which is expected to support copper usage over the medium-long term.

12.3 World production Copper production slows with shut-downs and lower demand Low prices, lower consumption and industrial shutdowns are expected to lead to a fall in copper production in 2020. World mine production is forecast to contract 2.4 per cent to 20 million tonnes in 2020 (Figure 12.5).

The immediate impacts of COVID-19 shutdowns on major producers are still becoming apparent. In the March quarter, mine closures led to lower production in Peru, China and Africa. In many instances concentrate stocks have been used to maintain refinery processing.

In Chile, the world’s largest copper producer, total copper output increased in the March quarter, as large facilities continued to produce amid national shutdowns. Production from the state-owned Codelco and BHP’s Escondida mine increased in the March quarter, as production was maintained with a reduced workforce. Large output reductions have been experienced at other facilities, including First Quantum’s Cobre Panama mine — which temporarily suspended operations in April — and the El Abra copper mine — where processing activity was reduced by 40 per cent due to COVID-19. The Las Bambas copper mine in Peru has also reduced operations.

Mine production to expand as prices recover Mine production is expected to recover amid improved prices and normalised operating conditions. World mine production is forecast to reach 22 million tonnes in 2022, growing 4.9 per cent a year (Figure 12.6). Low copper prices have impacted the copper development pipeline with a number of new projects put on hold or expansions delayed.

Figure 12.5: Outlook for copper mine production


Figure 12.6: Outlook for refined copper production


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Refined production interrupted but expected to recover Refined copper production has been weighed down by plant closures, as well as constraints on refinery inputs, including supplies of concentrate and sulphuric acid. In the March quarter 2020, lower production in China and Russia were major contributors to the quarter-on-quarter decline in world refined production. Rio Tinto’s Kennecott mine and smelter facilities in the US also decreased production, following an earthquake in March.

Refined production is forecast to decline by 1.7 per cent to 23 million tonnes in 2020, primarily due to constrained production in China (Figure 12.6). As prices improve and new refinery capacity comes online, production is forecast to increase an average 2.9 per cent a year to reach 25 million tonnes in 2022. Secondary copper production has been constrained by shutdowns in China and Malaysia, followed by lower consumption requirements. Going forward market uncertainty — including uneconomic prices for some mines and lacklustre demand — are expected to influence copper production levels.

12.4 Australia Short-term export decreases overcome with higher prices and production In 2019–20, a decline in copper prices weighed on export earnings, which are estimated to have fallen by 2.2 per cent to $9.6 billion. Over the outlook period, a gradual recovery in copper prices and expanding domestic production are expected to lift export earnings by 2.0 per cent a year to reach $9.9 billion in 2021–22 (Figure 12.7).

Copper production subdued although not related to COVID-19 After significant growth in 2018–19, Australia’s mined copper production is estimated to have fallen by 4.6 per cent to 888,000 tonnes in 2019–20. Production was reduced by the closure of two Western Australian mines (Metals X’s Nifty mine and EMR’s Golden Grove) and FMR Investments’ Eloise mine in late 2019. Production from South Australia recently declined with the closure of Hillgrove’s Kanmantoo operation and the changing of ore bodies at Oz Minerals’ Prominent Hill mine (Figure 12.8).

Figure 12.7: Australia’s copper export volumes and values


Figure 12.8: Australia’s copper production by state


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Australia’s copper operations have managed COVID-19 related movement restrictions with minimal impact on output to date. Companies have addressed this by changing rostering arrangements, reverting to state-based employment or relocating contractors previously interstate.

There has been one closure related to COVID-19: Heron Resources’ recently reopened Woodlawn facility suspended operations after a 1,700 tonne shipment of copper concentrate in the March quarter.

At other sites, maintenance and development activities have been delayed or postponed due to COVID-19, including at BHP’s Olympic Dam site and KGL’s Jervois site. More broadly, ongoing low copper prices could pose a risk to the viability of some operations, although a large proportion of copper is co-produced with gold and may benefit from high gold prices.

Copper production growth over the short term Over the outlook period, Australia’s production is expected to grow steadily to reach a forecast 940,000 tonnes in 2021–22. The continued ramp-up of Oz Minerals’ Carrapateena mine in South Australia — which started operations in late 2019 and has an annual capacity of 65,000 tonnes — is expected to reach full production by the end of 2020, ahead of schedule.

Other new projects that could potentially come online over the outlook period include Golden Cross Resources’ Copper Hill project in NSW and Havilah Resources’ Kalkaroo project in South Australia, which has found rare earth elements in exploration drilling. These projects are at the feasibility stage, and have not received a final investment decision.

Interest in gold continues to help spur copper exploration In the March quarter, copper exploration expenditure was $97 million, 46 per cent higher year-on-year (Figure 12.9). High gold prices and medium-term expectations about copper consumption may be contributing to this growth.

Figure 12.9: Australia’s copper exploration expenditure, quarterly


Revisions to the outlook The forecast for Australia’s copper export earnings has been revised down since the March 2020 Resources and Energy Quarterly, primarily as a result of COVID-19 related falls in current and forecast copper prices. Most significantly, forecast export earnings have been revised down by $450 million in 2020–21.

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Table 12.1: Copper outlook Annual percentage change


Production

– mine kt 20,689 20,186 21,134 22,211 -2.4 4.7 5.1

– refined kt 23,690 23,286 24,101 24,655 -1.7 3.5 2.3

Consumption kt 23,573 22,988 23,823 24,513 -2.5 3.6 2.9

Closing stocks kt 1,394 1,390 1,317 1,139 -0.3 -5.2 -13.5

– weeks of consumption 3.1 3.1 2.9 2.4 0.8 -8.5 -16.0

Prices LME

– nominal US$/t 6,005 5,555 5,968 6,235 -7.5 7.4 4.5

USc/lb 272 252 271 283 -7.5 7.4 4.5

– realb US$/t 6,132 5,555 5,845 5,967 -9.4 5.2 2.1

USc/lb 278 252 265 271 -9.4 5.2 2.1


Mine output kt 931 888 883 940 -4.6 -0.6 6.4

Refined output kt 407 410 400 400 0.7 -2.6 0.1

Exports

– ores and consc kt 1,895 1,896 1,868 2,085 0.1 -1.5 11.6

– refined kt 396 381 374 375 -3.7 -2.0 0.2

– total metallic content kt 929 925 909 966 -0.4 -1.7 6.2

Export value

– nominal A$m 9,770 9,555 9 228 9 920 -2.2 -3.4 7.5

– reald A$m 9,953 9,555 9,049 9,523 -4.0 -5.3 5.2 Notes: b In 2020 calendar year US dollars; c Quantities refer to gross weight of all ores and concentrates; d In 2019–20 financial year Australian dollars; f Forecast; s Estimate. Source: ABS (2020) International Trade, 5465.0; LME (2020) spot price; World Bureau of Metal Statistics (2020); Department of Industry, Science, Energy and Resources (2020)

124 Resources and Energy Quarterly June 2020

13.1 Summary The nickel price is expected to decline to average US$12,600 a tonne in

2020, as a result of weaker consumption. Subsequently, the market is forecast to tighten, pushing the price up to a forecast US$15,100 a tonne in 2022.

New projects and expansions are expected to lift Australia’s export volumes from an estimated 282,000 tonnes in 2019–20 to around 374,000 tonnes in 2021–22.

Australia’s nickel export earnings are forecast to strengthen on the back of growing export volumes and recovering prices, reaching $6.8 billion in 2021–22, up from an estimated $4.3 billion in 2019–20.

13.2 Prices

Market disruptions have supported rising nickel prices Nickel prices swung sharply in the second half of 2019, ranging between US$10,400 and US$18,600 a tonne, and averaging US$13,900 a tonne. The volatility reflected uncertainty regarding the impact of Indonesia’s planned nickel ore export ban.

Prices then fell in early 2020, stabilising slightly during April and May. Recent price growth was supported by supply concerns amidst COVID-19 lockdowns, which affected production in several countries. The LME nickel spot price is estimated to be US$11,900 a tonne in the June quarter of 2020, 3.1 per cent lower year-on-year and down 6.6 per cent from the March quarter (Figure 13.1).

Several nickel miners were forced to cease activity during the quarter, due to COVID-19 containment measures. Of note, Brazilian miner Vale cut its output guidance for 2020 from 200,000 tonnes to about 180,000 tonnes, and mining activity in the Philippines was substantially halted in April.

Going forward, the COVID-19 pandemic is expected to push the nickel market into surplus in 2020. In 2020, the nickel price is forecast to average US$12,600 a tonne, down 9.5 per cent on the 2019 average price of US$13,900 a tonne (Figure 13.2).

Figure 13.1: Recent nickel prices and LME stock level trends

Source: Bloomberg (2020), London Metal Exchange (2020)

Figure 13.2: Nickel price and stock levels

Notes: Total stocks include warehouse and privately held stocks. Source: Bloomberg (2020) London Metal Exchange (2020); S&P Platts Global (2020), Department of Industry, Science, Energy and Resources (2020)

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Nickel is one of the best placed commodities to rebound post COVID-19 April’s upward trend in nickel prices was likely a false indicator of an early recovery, as previous fears of a supply shortage were alleviated by an expected widening market surplus for nickel. However, given its exposure to China’s stainless steel and electric vehicle (EV) production, there is wide consensus that nickel is one of the best placed base metals to rebound as the world, and particularly China, starts to recover economically from the COVID-19 pandemic.

13.3 World consumption

Final nickel demand forecast set to fall in 2020 Global primary finished nickel consumption is forecast to contract by 15 per cent in 2020, as COVID-19 impacts the world and the Chinese construction and automotive sectors. The resulting shutdowns from the pandemic have severely reduced activity in the industrial and construction sectors, resulting in weaker demand for base metals, including nickel.

China’s nickel ore imports fell in April China’s nickel ore imports plunged by 66 per cent year-on-year in April, as imports from Indonesia and the Philippines fell. China’s nickel ore imports have declined 35 per cent year-on-year in the first four months of 2020.

Falling nickel ore port stocks in China signal a tightening nickel ore market as China accounts for just over half of the world’s nickel demand. Global nickel demand is expected to be impacted more negatively by COVID-19 than nickel supply (Figure 13.3).

Evidence of Chinese economic recovery has lifted stainless steel expectations Chinese domestic stainless steel production, which accounted for 58 per cent of world output last year, fell by 13 per cent year-on-year in March 2020. However, Chinese net exports of stainless steel for March almost doubled over January and February 2020. Defying market expectations, Chinese domestic inventories have fallen, the stainless steel price has

strengthened, and a recovery in April production has led to improved conditions for Chinese stainless steel markets; consequently improving expectations for nickel consumption.

Nickel prices may benefit as electric car sales rise in Europe Although batteries currently account for about 5 per cent of total nickel consumption, they are vital for the nickel sulphate premium over nickel metal. Consequently, changes in EV sales and policy shifts can significantly affect the nickel market.

The COVID-19 pandemic has significantly affected global automotive sales; in Europe (excluding the UK) vehicle sales fell by 80 per cent during April. However EV sales were firmer, falling by only 30 per cent.

EV sales in China have fallen by almost a third over the year to April 2020 and China’s COVID-19 related lockdowns have delayed battery production across a number of facilities. If China’s EV producers, reinforced by European markets, return to targeted production levels in the next few months, this could potentially offer further support to nickel prices during 2020.

Figure 13.3: Refined nickel consumption by major country

Source: International Nickel Study Group (2020), Department of Industry, Science, Energy and Resources (2020)

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13.4 World production

The refined nickel market is facing the first surplus since 2015 Nickel mine supply remains subject to a range of disruptions, including reduced production in Brazil and the Philippines, as well as the Indonesian export ban (Figure 13.4). Despite this, the world refined nickel market is expected to record a net surplus for 2020, as the pandemic is expected to have a greater negative impact on consumption than on production. The market is expected to move from a 61,000 tonne deficit in 2019 to a 43,000 tonne surplus in 2020 (Figure 13.5).

Indonesia’s ore ban drives contraction in China’s nickel pig iron production The Indonesian nickel ore ban — and a sharp fall in exports from the Philippines — is having significant effects on Chinese nickel pig iron output, which declined for the second consecutive quarter in March 2020.

Philippines first quarter nickel ore output was down significantly In early April, the Philippines’ biggest nickel miners suspended operations, as a result of measures to contain COVID-19. These suspensions resulted in nickel ore output in the March quarter declining by 27 per cent from a year earlier to 28,000 tonnes. With more than half of its 29 operating nickel mines reporting zero production, port data suggests exports from the Philippines fell drastically in April, with January to April exports of nickel ore falling by 40 per cent year-on-year. The Philippines has become a main feedstock source for China’s nickel pig iron industry since the introduction of Indonesia’s export ban.

Brazil has lowered nickel production guidance for 2020 Vale, the world’s largest producer of nickel, has lowered its nickel production guidance for 2020, with the company citing heavy rain, unplanned outages, regulatory delays and ongoing logistics disruptions caused by COVID-19 lockdowns. Vale revised its 2020 production guidance for nickel down from 200,000-210,000 tonnes to 180,000-195,000 tonnes for the year. Vale nickel production totalled 208,000 tonnes in 2019.

Figure 13.4: Refined nickel output by major producing country


Figure 13.5: World nickel production and consumption


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13.5 Australia

Export earnings are set to grow despite lower prices In 2019–20, nickel export earnings are estimated to be $4.3 billion, 21 per cent higher year-on-year (Figure 13.6). Over the outlook period, this growth is expected to continue, with export earnings forecast to reach $6.8 billion in 2021–22.

This growth is expected to be primarily driven by stronger export volumes, as investment in new capacity comes online. Export volumes are estimated to total 282,000 tonnes in 2019–20, up 25 per cent year-on-year, and are forecast to rise to 374,000 tonnes in 2021–22.

Immediate COVID-19 impacts largely accommodated by mines In addition to lower prices and market uncertainty, mining operations have broadly accommodated COVID-19 related movement restrictions and production has been relatively unchanged. Panoramic Resources’ Savannah mine in Western Australia closed in April due to COVID-19 restrictions, and at the time of writing has not been reopened. In addition, ongoing nickel price weakness is a risk to a number of the projects in the development pipeline.

Expectations of market growth support expansions and restarts Although nickel prices are expected to remain depressed over the short term, growing markets for nickel used in batteries is supporting expectations and higher production in Australia.

Australia’s mine production is projected to lift from an estimated 156,000 tonnes in 2019–20 to 258,000 tonnes in 2021–22, growing an average 28 per cent a year. This growth is expected to be supported by a number of new projects and restarts.

In Western Australia, production at BHP’s Nickel West project is expected to expand over 2020 following downtime at the Mt Keith mine and with new production from the Yakabindie mine, which commenced operations in the March quarter.

Figure 13.6: Australia’s nickel export volumes and values

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The restart of First Quantum’s Ravensthorpe mine in Western Australia is expected to be completed in April, with the first shipment in May. Before it went into care and maintenance in 2017, the Ravensthorpe mine produced around 20,000 tonnes of nickel a year.

Growing demand for nickel sulphide in batteries, and subsequent nickel prices, will influence the trajectory of a number of projects currently under development. Poseidon Nickel’s Black Swan project is production ready and could restart quickly if supportive nickel prices were maintained.

Additional capacity could also come from Mincor’s nickel projects, primarily the Greenfield Cassini mine, and Durkin North and Long mine restarts. The Definitive Feasibility Study released in March 2020 suggested production could start by the end of 2021 if a positive financial investment decision is received this year. It is intended that nickel ore will be processed at BHP’s Kambalda facility and sold to BHP for further processing into nickel sulphide.


Significant potential exists in refinery capacity In the March quarter 2020, refinery production lifted following major maintenance activities at BHP’s Kwinana refinery and Kalgoorlie smelter. Over the outlook period, Australia’s refinery production is forecast to increase from an estimated 104,000 tonnes in 2019–20 to 131,000 tonnes in 2021–22, growing at an average of 13 per cent a year.

Restarted production from First Quantum’s Ravensthorpe facility, as well as capacity expansions at BHP’s Kwinana refinery, are expected to contribute to this growth. Long term prospects for nickel consumption in electric vehicle batteries remain strong, despite current COVID-19 demand losses. A number of Australian projects are poised to take advantage of growing markets.

Exploration expenditure In the March quarter 2020 nickel and cobalt exploration fell to $38 million, 22 per cent lower year-on-year (Figure 13.7). Lower nickel and cobalt prices may have dampened exploration activity.

Figure 13.7: Australia’s nickel and cobalt exploration expenditure, quarterly

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Revisions to the outlook The forecasts for Australia’s nickel export earnings have been revised down since the March 2020 Resources and Energy Quarterly, most notably by $310 million in 2020–21. This is primarily due to downward revisions in the forecast nickel price.


Table 13.1: Nickel outlook



Production

– mine kt 2,551 2,227 2,478 2,674 -12.7 11.3 7.9

– refined kt 2,370 2,110 2,348 2,534 -11.0 11.3 7.9

Consumption kt 2,432 2,067 2,385 2,593 -15.0 15.4 8.7

Closing stocks kt 720 763 726 667 5.9 -4.9 -8.1

– weeks of consumption 15.4 19.2 15.8 13.4 24.6 -17.6 -15.5

Prices LME

– nominal US$/t 13,904 12,578 14,278 15,123 -9.5 13.5 5.9

USc/lb 631 571 648 686 -9.5 13.5 5.9

– realb US$/t 14,196 12,578 13,984 14,473 -11.4 11.2 3.5

USc/lb 644 571 634 657 -11.4 11.2 3.5


Production

– minec kt 159 156 215 258 -1.6 37.8 19.8

– refined kt 114 104 124 131 -8.5 18.9 6.1

– intermediate 13 14 28 32 14.4 94.8 14.3

Export volumed kt 225 282 333 374 25.2 18.2 12.3

– nominal value A$m 3,535 4,287 5,885 6,822 21.3 37.3 15.9

– real valuee A$m 3,601 4,287 5,771 6,549 19.0 34.6 13.5 Notes: b In 2020 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 2019–20 financial year Australian dollars; f Forecast, s Estimate. Source: ABS (2020) International Trade in Goods and Services, Australia, Cat. No. 5368.0; Company reports; Department of Industry, Science, Resources and Energy (2020); International Nickel Study Group (2020); LME (2020); World Bureau of Metal Statistics (2020)


14.1 Summary Zinc prices are expected to remain soft for the rest of 2020, with the

COVID-19 pandemic weighing on an already weakening market. Prices are expected to grow modestly over the rest of the outlook period, with supply growth tempering any significant price gains. Prices are forecast to rise 3.1 per cent to US$2,055 a tonne over 2020 to 2022.

Australia’s zinc production is forecast to increase from an estimated 1.3 million tonnes (in metallic content terms) in 2019–20 to 1.6 million tonnes in 2021–22.

Australia’s zinc export earnings are forecast to decline from $3.5 billion in 2019–20 to around $3.2 billion in both 2020–21 and 2021–22 based on an appreciating Australian dollar, despite increasing production and rising prices.

14.2 Prices Price declines reflect macroeconomic uncertainty The COVID-19 pandemic has exacerbated rising weakness in the zinc market, leading to falling prices in recent months. However, production disruptions have helped to moderate recent price movements. After falling to a low of US$1,685 a tonne in the March quarter, the London Metal Exchange (LME) zinc price has since rebounded to around US$2,000 a tonne.

Reflecting softer market fundamentals, zinc inventories began to build with the onset of COVID-19, but the shutdown of mines in South Africa and South America acted to delay the rise in stockpiles. The same production shutdowns pushed treatment and refining charges down to around US$155–170 a tonne in June, after a peak of US$305 earlier in the year.

Inventories are starting to build from decade lows as most mines return to work post COVID-19 lockdowns. LME zinc stocks fell to a 20-year low of 49,775 tonnes in January 2020, but rebuilt quickly to over 100,000 tonnes in June 2020. Shanghai Futures Exchange (SHFE) inventories rose to around 100,000 tonnes during the four months to mid-June.

The Chinese provinces of Yunnan and Gansu announced possible non-ferrous strategic stockpile requirements for smelters in response to the COVID-19 pandemic, making overall stock estimation more opaque.

The LME zinc spot price is estimated to average US$1,995 a tonne during 2020, down from the March 2020 Resource and Energy Quarterly estimate of US$2,045 (Figure 14.1). The impact of the COVID-19 pandemic continues to weigh on prices but may ease later in the year. China’s response to the COVID-19 pandemic and the response of miners as lockdowns ease will help determine the price outlook over the forecast period.

Beyond 2020, rising inventories — as expanding mine production outpaces a recovery in demand — are expected to limit price gains. The price of zinc is expected to average US$2,095 a tonne in 2021, falling modestly to US$2,055 a tonne in 2022, once COVID-19 stimulus packages begin to taper off.

Figure 14.1: Zinc prices and stocks

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14.3 World consumption The COVID-19 pandemic is assumed to affect the global economy less into the second half of 2020. Globally, the OECD is assuming a contraction in GDP in 2020. (See the macroeconomic outlook chapter). This has led to scaling back of zinc forecasts, with countries choosing a variety of stimulus measures in addition to traditional infrastructure investment. The OECD has forecast a contraction in China’s GDP in 2020 before rebounding in 2021. While economic conditions have lowered China’s zinc consumption in the short term, smelters are returning with treatment charges lowering to attract more concentrate after many miners halted production earlier in the year. Short term shortages in China saw Australian zinc concentrate exports increase by 22 per cent during April.

Movements in world industrial production (IP) generally tend to reflect zinc consumption. World IP growth fell sharply in the 2008–09 Global Financial Crisis, but zinc consumption remained relatively robust. However, large falls in zinc consumption in 2017 were probably driven by resistance to strong price rises induced by the lack of new supply in the previous years. Elsewhere, the relationship was more synchronised (Figure 14.2).

Figure 14.2: World zinc consumption vs industrial production

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Source: International lron and Steel Institute (2020); CPB Netherlands Bureau for Economic Policy Analysis (2020); Department of Industry, Science, Energy and Resources (2020)

More directly, zinc’s primary use is galvanising steel, either through hot dipping or cold plating. As such, zinc consumption traditionally tracks well with steel production, and this relationship is expected to continue (Figure 14.3).

Figure 14.3: Annual percentage change: steel production vs world zinc consumption

Source: International lron and Steel Institute (2020); Department of Industry, Science, Energy and Resources (2020)

Global automotive sales fell 25 per cent year-on-year during the March quarter and 44 per cent in April year-on-year. The Asia-Pacific region recorded a decrease in automotive sales of 33 per cent year-on-year for the March quarter but only 16 per cent for April year-on-year. Weak sales and worries about the spread of COVID-19 saw automotive production halted at numerous auto assembly lines around the world.

The immediate effects of this are decreased zinc consumption and depressed prices. However, the medium term implications for zinc are more complex. Factories are heading back to work gradually, with various countries implementing stimulus packages, including in the renewable energy space (see the macroeconomic outlook chapter and lithium chapter, Section 15.3, Europe). European sales of electric vehicles were

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up for the March quarter in Germany, the UK and France. With iron ore prices relatively high, stimulus measures in construction have been slower with central banks instead concentrating on interest rates, quantitative easing and employment measures (see steel and iron ore chapter). China’s changes in electric vehicle subsidies may bring consumption forward for lithium but also for zinc as part of specialist galvanised steel. Additionally, Germany recently announced incentives to support electric vehicle sales (see the lithium chapter, Section 15.3). Whilst this may not fully offset the COVID-19 consumption dip, it may provide some important relief.

China and South Korea are expected to continue to dominate global zinc consumption, though rising construction spending in India is expected to gradually boost its market share. The OECD has forecast GDP growth for India in 2021 (see macroeconomic outlook chapter).

Global zinc consumption is forecast to rise modestly over the outlook period, from 13.5 million tonnes in 2020 to 14.0 million tonnes in 2022, having fallen from 13.7 million tonnes in 2019 (Table 14.1).

Zinc batteries for renewable energy Zinc is forecast to play an increasing role in renewable energy storage over time, with new demand sources providing further opportunities for Australian mines. During the March quarter, Redflow, an Australian zinc bromine battery manufacturer received repeat orders for their batteries from a New Zealand telecommunications company. US-based Zinc Five has also received venture capital funding to develop the world’s first nickel-zinc rechargeable battery.

14.4 World production Mine production is set to rise over the outlook period Global mine output is expected to increase from 13.2 million tonnes in 2020 to 14.2 million tonnes in 2022 (Figure 14.4). The rise in output is largely the result of earlier price incentivised drilling (Figure 14.5). High prices in early 2018 — peaking at US$3,605 a tonne in February 2018 — resulted in increased funding to drill out resources. However, resource

drilling takes time, especially when there are no initial resource figures — only zinc mineralisation intersected in wide spaced drill holes. Consequently, initial resources may lag high commodity prices which justified the drilling by a couple of years.

Figure 14.4: World zinc production, metallic content

Source: International Lead Zinc Study Group (2020); AME Mineral Economics (2020); Department of Industry, Science, Energy and Resources (2020)

However, the recent zinc price decline and COVID-19 may deter higher cost operations already in shutdown from re-entering the market and delay developments. Penoles has opted not to reopen the Francisco I. Madero mine in Mexico, citing low zinc prices. Most major zinc producing nations are now either out of lockdown or considering easing lockdown.

Regionally, 11 per cent of production may be lost in 2020, with 17 per cent lost in Africa and 14 per cent lost in Central and South America. Production losses in Namibia included the placing on care and maintenance of the Skorpian open pit operation. The mine has an associated solvent extraction–electrowinning refinery for its zinc carbonate ore. The operation faced technical difficulties prior to COVID-19 and may face extended downtime while these issues are resolved. South Africa’s Gamsberg and Black Mountain mines were also affected by the COVID-19 related lockdown, which is now easing.

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Figure 14.5: Initial zinc resources versus zinc price

Notes: Initial zinc resource is the first resource figure that is calculated from drill results. Source: S&P Global Market Intelligence (2020); London Metal Exchange (2020); Department of Industry, Science, Energy and Resources (2020)

Production in Central and South America was strongly affected by closures in Bolivia, with operations at Colquiri, San Vincente and San Cristobal suspended. Mines in Mexico were affected by closure covering operations run by Grupo Mexico, Newmont and Gold Resource Corporation, although smelters appear to be operating at reduced capacity. Peru’s miners are returning to work with the Antamina operation having recently resumed production. Canadian operating capacity is estimated to have been reduced by 12 per cent over 2020 due to COVID-19, with operations affected in Quebec including the Matagami operation.

As mined supply of concentrate once again increases, limits in smelter capacity will limit uptake. With high grade projects in the development pipeline, this may cause lower grades mines currently closed to reconsider restarting. COVID-19 has resulted in the delay of numerous resources projects globally, including zinc projects. However, the high grade nature

of upcoming zinc projects means that delays are less likely to be lengthy due to the higher revenue likely from the higher grades. While high grade production was due to be developed at Dairi in Indonesia and at Kipushi in the Democratic Republic of Congo, the COVID-19 pandemic has now delayed proceedings. Kipushi was scheduled to come online around 2022. Gamsberg was ramping up in 2020 towards 200,000 tonnes per annum, but will likely have its timetable affected by the COVID-19 pandemic. Brazil’s Aripuna project (80,000 tonnes per annum) may also be delayed in its 2021 start up.

Kazakhstan appears to not have been affected by COVID-19 zinc mine closures. Kazakh material is supplied via an overland route to Western China, as opposed to the dominant Australia to Shanghai trade route. This may impact other producers as they try to re-enter the market. Kazakhstan’s new Glencore owned mine, Zhairem, has had its start up deferred, with production now scheduled for 2021.

Refinery production may struggle to keep pace with mine output Refinery production is expected to largely follow the trajectory of mined production. Global zinc refinery capacity is estimated to have decreased by around 8 per cent during COVID-19, with Namibia the most affected as a result of the Skorpian operations being stalled. Operations appear least affected in India, with capacity falling by around 5 per cent. Smelters in Mexico are likely to have been considerably affected by mine closures.

Post COVID-19, smelters in China were back up to over 80 per cent utilisation but in May lower treatment charges have resulted in refined zinc output declining 1.1 per cent. The smelters may also face short term constraints due to acid inventories.

Increasing supplies of concentrate will likely result in increasing treatment and refining charges if there is insufficient capacity. This is likely to form part of the evaluation for higher cost operations as they contemplate returning to work. Increases in India’s smelting capacity at several smelters may provide some offset to capacity pressures elsewhere.

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14.5 Australia Export earnings declining modestly Australia’s zinc export earnings are forecast to decline from $3.5 billion in 2019–20 to around $3.2 billion in both 2020–21 and 2021–22 based on an appreciating Australian dollar, despite rising production and prices.

Australian mine production is expected to increase Zinc production for the March quarter was down 5.6 per cent in Australia quarter-on-quarter, partly due to the COVID-19 outbreak. The Century mine in Queensland (QLD) had difficulties ramping up during the March quarter, with wet season events causing recoveries to drop from 49 to 46 per cent.

Production at Mt Isa rebounded from the December quarter low of 75,300 tonnes of zinc in concentrate, rising to 85,200 tonnes in the March quarter 2020. This was more in-line with the previous 12 months. Mount Garnet in QLD was also placed on care and maintenance due to COVID-19. Production for the quarter was 1,384 tonnes. High costs may threaten the mine’s long term viability.

COVID-19 also impacted on the commissioning at the Woodlawn mine in New South Wales (NSW). The operation is likely to resume production, due to helpful by-products credits. Production increased at Hera and Peak in NSW: the ore at these mines is gold based with zinc a by-product. Hence, with high gold price, zinc production increased. Around 30 per cent of lost production in NSW was partly offset by increased by-product output. Production at McArthur River in the Northern Territory was approximately steady at 68,500 tonnes of zinc in concentrate. No significant production was recorded in South Australia or Victoria (Figure 14.6).

Foreign exchange rates may challenge miners, with export earnings in 2020–21 and 2021–22 forecast to decline relative to 2019–20, despite increasing production. Australia’s zinc mined production is projected to increase from 1.3 million tonnes (in metallic content) in 2019–20 to 1.6 million tonnes in 2021–22 based principally on expansion at Century, which is experiencing difficulties in its planned ramp up of production but has maintained guidance for the upcoming June quarter (Figure 14.7).

Figure 14.6: Australia’s zinc mine production by state

Source: Company reports; Department of Industry, Science, Energy and Resources (2020)

Figure 14.7: Australia’s zinc exports, metallic content


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Thou

sand

tonn

esVolumes Values (rhs)


Australia refines about 3.4 per cent of the world’s zinc. Refined production of zinc is forecast to increase by 50,000 tonnes a year over the outlook period. There are two zinc refiners in Australia: Nyrstar, which refines zinc at its Hobart refinery, and South Korean-owned Sun Metals, which operates a smelter near Townsville. The expansion of the Sun Metals refinery is due for completion in 2021.

Exploration expenditure declined Exploration expenditure for silver, lead and zinc has declined 50 per cent year-on-year for the March quarter, following a 21 per cent decline in zinc prices over the same period. Exploration was impacted disproportionately due to the COVID-19 outbreak as well as the discretionary nature of the expenditure (Figure 14.8).

Revisions to the forecast Compared with the March 2020 Resources and Energy Quarterly, estimates for export revenue were revised up 1.6 per cent for 2020–21 and down 0.6 per cent for 2021–22. This resulted from improvements in the forecast price for zinc with forecast production increases slightly tempered.

Figure 14.8: Quarterly exploration expenditure on silver, lead and zinc versus zinc prices

Source: ABS (2020) Mineral and Petroleum Exploration, Australia, 8412.0; Company reports; Department of Industry, Science, Energy and Resources (2020)

0

10

20

30

40

0

1,000

2,000

3,000

4,000


A$ m

illion

US$

a to

nne

Silver, lead, and zinc exploration expenditure (rhs)

LME Zinc Price


Table 14.1: Zinc outlook



Production

– mine kt 13,141 13,179 14,050 14,167 0.3 6.6 0.8

– refined kt 13,515 13,654 13,968 14,123 1.0 2.3 1.1

Consumption kt 13,684 13,530 13,844 14,000 -1.1 2.3 1.1

Closing stocks kt 834 957 1,081 1,204 14.8 12.9 11.4

– weeks of consumption 3.2 3.7 4.1 4.5 16.1 10.3 10.2

Price

– nominal US$/t 2,550 1,995 2,095 2,055 -21.8 5.0 -1.8

USc/lb 116 90 95 93 -21.8 5.0 -1.8

– real a US$/t 2,604 1,995 2,050 1,967 -23.4 2.8 -4.1

USc/lb 118 90 93 89 -23.4 2.8 -4.1


Mine output kt 1,294 1,332 1,523 1,556 3.0 14.3 2.2

Refined output kt 480 439 465 498 -8.5 6.0 7.2

Export volume

– ore and concentrate b kt 2,091 2,444 2,733 2,804 16.9 11.8 2.6

– refined kt 420 364 336 369 -13.4 -7.9 10.1

– total metallic content kt 1,322 1,456 1,532 1,598 10.1 5.3 4.2

Export value

– nominal A$m 3,952 3,471 3,179 3,264 -12.2 -8.4 2.7

– real c A$m 4,026 3,471 3,117 3,133 -13.8 -10.2 0.5 Notes: a in 2020 US dollars; b Quantities refer to gross weight of all ores and concentrates; c In 2019–20 Australian dollars; f Forecast, s Estimate. Source: ABS (2020) International Trade in Goods and Services, Australia, Cat. No. 5368.0; Company reports; Department of Industry, Science, Energy and Resources (2020); International Lead Zinc Study Group (2020); LME (2020); World Bureau of Metal Statistics (2020)


15.1 Summary The spodumene price (delivered to China) fell by 17 per cent to

US$425 a tonne in the first five months of 2020. Prices are forecast to remain flat at US$425 a tonne in 2021 and 2022 until increasing electric vehicle uptake makes shortages possible after 2022.

Australian lithium production is expected to fall from 208,000 tonnes (lithium carbonate equivalent) in 2019–20 to 146,000 tonnes in 2021–22, after a sharp pullback in 2020–21 (to 131,000 tonnes) due to continued weakness in spodumene prices.

After falling from $1.0 billion in 2019–20 to $0.6 billion in 2020–21, Australian lithium export earnings are forecast to partly recover to $0.7 billion by 2021–22.

15.2 Prices Lithium prices have declined across the board Lithium carbonate prices (delivered to China) declined by 14 per cent to US$6,800 a tonne from the start of the year to mid-June, and by 46 per cent year-on-year. This compared with price declines in Europe of 18 per cent for the same period and 35 per cent year-on-year to US$7,350 a tonne (delivered).

Lithium hydroxide prices (delivered to China) fell by 32 per cent to US$7,508 a tonne from the start of the year to mid-June, and declined by 41 per cent year-on-year. This compared with a price decline of 7.5 per cent into Europe for the same period and a 31 per cent year-on-year decline to US$9,250 a tonne (delivered).

Spodumene prices (delivered to China) declined by 17 per cent to US$425 a tonne from the start of the year to mid-June, and 33 per cent year-on-year (Figure 15.1).

Prices are expected to remain flat until after 2022 when the market is expected to tighten as electric vehicle manufacturers continue their expansions. These expansions are expected to increase lithium demand, buoyed by battery prices falling towards US$100 a kilowatt hour.

Figure 15.1: Prices of spodumene concentrate and lithium hydroxide

Source: Roskill (2020); Brokers (2020); Department of Industry, Science, Energy and Resources (2020)

Figure 15.2: Lithium production and demand

Source: Roskill (2020); BloombergNEF (2020); Department of Industry, Science, Energy and Resources (2020)

0

250

500

750

1,000

0

5,000

10,000

15,000

20,000

2018 2019 2020 2021 2022

US$

a to

nne

US$

a to

nne

Lithium hydroxide Spodumene concentrate (rhs)

0

200

400

600

2018 2019 2020 2021 2022

Thou

sand

tonn

esProduction kt LCE Demand kt LCE


15.3 World consumption Strong consumption growth is likely over the outlook period Despite the COVID-19 induced slump in automotive sales globally, China’s imports of lithium carbonate were up 544 per cent year-on-year for April and up 284 per cent for the four months, January to April 2020, on a year-on-year basis as falling prices encouraged large orders. The increased volumes were based on a cost reduction to China of 41 per cent for the year-on-year comparison. China’s imports of lithium hydroxide were also up 262 per cent, month-on-month for April as trade reopened after the COVID-19 outbreak. This, coupled with offtake agreements undertaken during COVID-19, suggest that the appetite for lithium is quite strong. In South Korea lithium carbonate imports increased 28 per cent month-on-month in April as trade resumed post the COVID-19 outbreak.

Global lithium demand is forecast to rise from 258,000 tonnes (lithium carbonate equivalent) in 2020 to around 414,000 tonnes by 2022 as car plants in Germany and China commence production and ramp up, after being slowed down by COVID-19 (Figure 15.2). Electric vehicles sales are forecast to drop by 18 per cent in 2020 due to the effects of COVID-19. Global electrical vehicle sales slumped by 44 per cent for the March quarter, but were offset by stronger European sales based on emissions restrictions due to come into force on 1 January 2021.

China electric vehicle subsidies change again China has extended its electric vehicle subsidies again, with scaled reductions from 10 per cent to 30 per cent over the next three years for vehicles with a maximum price of US$42,400. This has led to a change in battery chemistry away from cobalt and back to lithium iron phosphate batteries, supporting recent increases in the lithium trade. The scaling back of subsidies may again bring consumption forward as it did in early 2019, especially after record sales of the Tesla Model 3 in China during May 2020. This accelerating of sales may counteract the effects of COVID-19, which has pushed electric vehicle sales out by an estimated 12 months (Figure 15.3). Additionally, Germany recently announced incentives to support electric vehicle sales.

New energy vehicle sales in China were down 30 per cent in April to 64,000 vehicles. However, first time buyers in particular are entering the market and purchasing in order to avoid perceived COVID-19 risks associated with public transit but it is not clear yet whether their purchases favour electric cars, although these are much easier to register in China.

Tesla’s Shanghai factory is producing around 10,000 cars per month. The recent change in China’s subsidies for electric vehicles resulted in Tesla dropping prices on the Model 3 in order to retain subsidies. Additionally, changes in battery technology could see cobalt free batteries in the Model 3 in 2021 with costs lower than US$100 a kilowatt hour, proving an upside risk to demand. This cost threshold was thought to be reached by 2027 as little as 18 months ago; demonstrating the strongly disruptive innovation characteristics of the lithium market. Tesla also filed a patent for a single crystal nickel-cobalt-aluminium cathode that may extended battery life three-fold and thereby potentially accelerate lithium demand.

Electric vehicles are becoming increasingly economical Sales of electric vehicles rose in Europe and the United Kingdom over the March quarter despite the effects of COVID-19. Volkswagen dropped prices on the e-Golf to US$27,000 in the lead up to the release of the ID.3, giving indications that the price crossover point for electric vehicles versus the internal combustion engine is close in Europe. US$10,000 discounts on the e-Bolt by General Motors during the COVID-19 pandemic have also brought the crossover point for internal combustion engine versus electric vehicle much closer in the US. In India the crossover point has already been reached for two wheelers, which are the preferred commuting and delivery option. This presents opportunities for Australia, with ASX listed Neometals pursuing these on a number of fronts in India (Figure 15.4).

Europe proposes COVID-19 renewables stimulus package Europe is proposing a COVID-19 stimulus package focussed on renewable energy. If the package is approved, it may increase the demand for lithium in Europe. ASX listed Vulcan Energy is pursuing opportunities for ‘zero carbon lithium production’ from geothermal power in Germany.


Figure 15.3: Long-term electric vehicle sales projection

0

10

20

30

0

10

20

30

2018 2020 2022 2024 2026 2028 2030

Per c

ent

Milli

ons

Electric vehicle sales Share of all vehicle sales (rhs)Source: International Energy Agency (2019); BloombergNEF (2020); Department of Industry, Science, Energy and Resources (2020)

Figure 15.4: World quarterly electric vehicle sales

0

200

400

600

800

Mar-12 Mar-14 Mar-16 Mar-18 Mar-20

Thou

sand

s

Electric vehicle sales

Source: BloombergNEF (2020); Department of Industry, Science, Energy and Resources (2020)

15.4 World production Production may fall but offtake agreements are increasing Global production reached 486,000 tonnes of lithium carbonate equivalent in 2019, but is forecast to fall to 466,000 tonnes in 2022. After adjusting demand for the lead time in battery manufacturing (12 months) and mine production for refinery losses; stockpiles at mines, ports and warehouses fall to an equivalent of around six months of supply (Table 15.1).

The gap between production and consumption may be smaller than it appears: after mined production is refined, supply decreased to 337,600 tonnes of lithium carbonate equivalent in 2019. Given the potential for supply chain disruption demonstrated by COVID-19, this makes for potentially tighter market conditions. This is consistent with recent strong lithium carbonate purchasing by China, and with offtake agreements for spodumene signed between Pilbara Minerals / Yibin Tianji and Altura / Hunan Yongshan Lithium Co. Ltd.

COVID-19 has so far not disrupted production in Chile, but operations were temporarily curtailed in Argentina and China. Profit margin declines in Chile have been tempered by both falls in royalties for brine producers — as a result of lower prices — and falls in fuel and re-agent costs. Australian production was down in the March quarter, due to continued low prices. Despite lower mine production, electric vehicle manufacturers continued to push forward with production plans. This may tighten the demand supply gap sooner rather than later.

World production is forecast to fall to 373,000 tonnes in 2020, down from 486,000 tonnes in 2019. Production is forecast at 460,000 tonnes in 2021, and 466,000 tonnes (lithium carbonate equivalent) by 2022. Continued lithium price weakness — exacerbated by the COVID-19 pandemic — is extending timelines for producers in a potentially unsustainable manner, particularly for high cost spodumene producers. This could lead to supply becoming highly concentrated (with almost 50 per cent in the hands of three entities), and make the market vulnerable to supply deficits in late 2022.


Due to the COVID-19 pandemic, a pullback in capital expenditure is expected in the short to medium term. The US$330 million expansion plans of Chilean lithium carbonate producer, Sociedad Quimica y Minera de Chile (SQM) may be scaled back or delayed if current weak market conditions persist. Livent, with operations in Argentina, has also cut capital expenditure for 2020 by 50 per cent to US$115 million. Delays are also likely in Argentina for other projects and expansions.

Delays are mooted in Western Australia for the Kemerton lithium hydroxide plant being developed by Albemarle, on top of delays for its La Negra III & IV expansions in Chile. Consequently, Australia’s lithium hydroxide output forecast (Figure 15.5) has been lowered from the March 2020 Resources and Energy Quarterly number; and is now dependent on the outcome of ownership changes at the Kwinana lithium refinery and the attendant expertise that may be required for the ramp up of production at that operation.

Figure 15.5: World lithium hydroxide production

0

4

8

12

16

20

24

28

0

100

200

300

400

500

600

700

2020 2021 2022 2023 2024 2025

Per c

ent o

f wor

ld

Thou

sand

tonn

es

World production Australian production (rhs)

Source: BloombergNEF (2020); Department of Industry, Science, Energy and Resources (2020)

15.5 Australia Exports forecast to dip before recovering Exports of spodumene are estimated to earn $1.0 billion in 2019–20. Continued low prices may see revenue fall to $0.6 billion in 2020–21. Possible production from lithium hydroxide refineries is forecast to raise export earnings to $0.7 billion by 2021–22.

Production is forecast to dip before recovering Production for the March quarter reported to the ASX at the end of April and from other data providers showed a decrease by 18 per cent, although shipments only decreased by 14 per cent as miners continue to deplete stockpiles. Production is forecast to increase over the outlook period with a price induced slowdown in the short term, followed by a recovery expected towards the end of 2022, as lithium hydroxide production rises (Figure 15.6). Battery manufacturers such as Contemporary Amperex Technology Co. Limited (CATL), through their chemical suppliers, continue to try to secure long term supply in spodumene. This is reflected in their recent offtake with Pilbara Minerals via a related party, Yibin Tianji. Both Pilbara Minerals / Yibin Tianji and Altura / Hunan Yongshan Lithium Co. Ltd recently secured offtake agreements. These agreements both reference the spodumene price against other refined lithium products and costs in perhaps a more synergistic partnership.

The production outlook has grown more volatile, with most Australian producers no longer quoting prices received and costs of production. Instead there is continued quoting of recovery rates for spodumene, with Pilbara Minerals achieving recoveries in their target range of 72 to 78 per cent. Other Australian producers, excluding Greenbushes, have achieved only 55 to 60 per cent recovery, with higher recoveries becoming harder to achieve as producers shift to campaign style operations and stockpile processing due to low spodumene prices. Recent offtake agreements may provide some relief in this area.

Whilst spodumene production in Australia has continued to scale back during the March quarter, lithium hydroxide production was placed on hold.


Tianqi announced the cessation of commissioning of the Kwinana lithium hydroxide plant in late March. Additionally, Tianqi announced a potential partial sale of Greenbushes and the Kwinana plant, aimed at offsetting the debt taken on to buy a large stake in SQM but the sale process has reportedly been suspended. Albemarle were understood to have pre-emptive rights in any offer. SQM’s stated aim of increasing production and dominating the market is well documented, with over 20 per cent of SQM held by Tianqi. It is reported that another Chinese entity may take up parent company Chengdu Tianqi’s controlling stake in Tianqi, with perhaps a minority stake for CATL. This potential industry change comes on the back of World Bank modelling that suggests a ten-fold increase in lithium production is needed by 2050 in order to meet the targets of the Paris Agreement.

Smaller Australian producers are likely to continue to examine their strategic alliances with respect to the stability of longer term offtake. India’s successful price crossover from internal combustion engines to electric vehicles in the two wheel market represents another potential market for Australian spodumene exports as well as a potential assets for acquirers or joint venture partners from India.

Australian producers were forecast to ramp up hydroxide production at Kwinana, Kemerton and Mt Holland. However, commissioning risks have proven significant, given Kwinana’s recent changes. Value adding offshore may prove more attractive, as Pilbara Minerals is pursuing with POSCO.

As noted in the March 2020 Resources and Energy Quarterly, a key risk to the forecast is that margins for lithium hydroxide are insufficient to attract capital. Adding to this is now a lack of commissioning success at Kwinana.

Revisions to the forecast Continued low lithium prices have seen export revenue forecasts for 2020–21 decrease by 12 per cent to $0.6 billion. Exports in 2021–22 have been revised down by 47 per cent from $1.3 billion to $0.7 billion (Figure 15.7), reflecting the relatively weak price environment and further potential commissioning difficulties for lithium hydroxide refineries.

Figure 15.6: Australian spodumene concentrate production

0

100

200

300

2014 2015 2016 2017 2018 2019 2020 2021 2022

Thou

sand

tonn

es L

CE

Notes: Lithium hydroxide is not included. Source: Company reports; Roskill (2020); Department of Industry, Science, Energy and Resources (2020)

Figure 15.7: Australian spodumene concentrate exports

Notes: Income figures include lithium hydroxide and spodumene volumes contain hydroxide. Source: Company reports; Roskill (2020); Department of Industry, Science, Energy and Resources (2020)

0

500

1,000

1,500

2,000

0

500

1,000

1,500

2,000

2013–14 2015–16 2017–18 2019–20 2021–22

A$ m

illion

Thou

sand

tonn

esSpodumene volumes Spodumene values (rhs)


Table 15.1: Lithium Outlook


World Unit 2019 2020f 2021f 2022f f 2020 f2021 f2022

aLithium production kt 486 373 460 466 -23.3 23.5 1.4

bDemand kt 258 196 330 414 -24.1 68.7 25.4

cStocks kt 100 100 149 185 0.0 48.3 24.3 – weeks of consumption 20.2 26.6 23.4 23.2 31.7 -12.1 -0.9

Spodumene price

– nominal US$/t 600 438 425 425 -27.1 -2.9 0.0

d– real US$/t 613 438 416 407 -28.6 -4.9 -2.3

Lithium hydroxide price

– nominal US$/t 11,400 7,327 7,837 8,500 -35.7 7.0 8.5

d – real US$/t 11,640 7,327 7,676 8,135 -37.1 4.8 6.0


aMine production kt 246 208 131 146 -15.6 -36.8 11.2

Export volume e kt 1,404 1,367 948 983 -2.6 -30.6 3.7

– nominal value A$m 1,599 1,049 577 668 -34.4 -45.0 15.8

– real value g A$m 1,629 1,049 566 642 -35.6 -46.0 13.3 Notes: a Lithium Carbonate Equivalent: This is a measure of the quantity of refined product; b Demand is ahead of consumption by approximately 12 months due to the lead time required in battery manufacturing; c Stockpile estimates possibly inaccurate due to changing specifications. Calculated from residual after losses from refining and allowing for lead time in battery manufacturing; d In 2020 US dollars; e Spodumene concentrates: 2018–19 products include direct ship ore, 4 per cent Li2O concentrate and 6 per cent concentrate, thereafter mostly 6 per cent Li2O concentrate, stockpiles run down in 2019–20; f Forecast; g In 2019–20 Australian dollars; s Estimate. Source: ABS (2020) International Trade in Goods and Services, Australia, Cat. No. 5368.0; Company reports; Department of Industry, Science, Energy and Resources (2020); Roskill (2020); Government of Western Australia Department of Mines, Industry Regulation and Safety (2020)


148

Trade summary charts and tables

Figure 16.1: Industry shares of GDP

29 8 7

58

210 6 8

61

0

20

40

60

80

Agriculture,forestry and

fishing

Mining Manufacturing Building andconstruction

Services

Per c

ent

2008–09 2018–19

GDP: $1462 b

GDP: $1887 b

Source: ABS (2020) Australian National Accounts, National Income, Expenditure & Production, 5204.0 Figure 16.2: Principal markets for Australia’s resources and energy exports, 2019–20 dollars

19

28

1410 9 8 10

1

40

18

9 8 6 5 41

0

10

20

30

40

50

China Japan Other SouthKorea

OtherAsia

India EU28 UnitedStates

Per c

ent

2008–09 2018–19

Exports: $286 b

Exports: $205 b

Source: ABS (2020) International Trade in Goods and Services, 5368.0

Figure 16.3: Principal markets for Australia’s resources exports, 2019–20 dollars

32

18

813

711 8

3

53

1711

6 5 51 2

0

20

40

60

China Other OtherAsia

Japan SouthKorea

EU28 India Thailand

Per c

ent

2008–09 2018–19

Exports: $107 b

Exports: $151 b

Source: ABS (2020) International Trade in Goods and Services, 5368.0 Figure 16.4: Principal markets for Australia’s energy exports, 2019–20 dollars

44

610 13

9 118

3125

12 10 9 93

0

20

40

60

Japan China OtherAsia

SouthKorea

India Other EU28Pe

r cen

t

2008–09 2018-19

Exports: $98 b

Exports: $135 b



Figure 16.5: Principal markets for Australia's total exports, 2019–20 dollars

2317

8 7 5 5 4

3136

16

7 4 4 3 3

27

0

20

40

60


India UnitedStates

HongKong

NewZealand

Other

Per c

ent

2008-09 2018-19

Exports: $290 b

Exports: $380 b


Figure 16.6: Australia's total imports by country of origin, 2019–20 dollars

b Source: ABS (2020) International Trade in Goods and Services, 5368.0

Figure 16.7: Proportion of goods and services exports by sector

13

48

1424

12

53

1222

12

55

1222

10

58

1121

0

20

40

60

80

Rural Mineralresources

Othermerchandise

Services

Per c

ent

2015–16 2016–17 2017–18 2018–19

Source: ABS (2020) Balance of Payments and International Investment Position, 5302.0

Figure 16.8: Proportion of merchandise exports by sector

Source: ABS (2020) Balance of Payments and International Investment Position, 5302.0

1712

8 6 5 5

47

25

117 5 5 4

43

0

20

40

60

China UnitedStates

Japan SouthKorea

Thailand Germany Other

Per c

ent

2008–09 2018–19

Imports: $275 b

Imports: $312 b

18

63

1916

68

1615

70

1513

73

14

0

20

40

60

80

Rural Mineral resources Other merchandise

Per c

ent

2015–16 2016–17 2017–18 2018–19


Table 16.1: Principal markets for Australia’s thermal coal exports, 2019–20 dollars

Unit 2014–15 2015–16 2016–17 2017–18 2018–19 Japan $m 7,727 7,345 8,692 10,187 11,849 China $m 2,979 1,860 3,702 4,906 4,309 South Korea $m 2,905 2,707 2,706 3,077 3,884 Taiwan $m 1,924 1,692 2,385 2,662 3,222 Malaysia $m 635 527 680 774 922 Vietnam $m 4 106 154 132 677 Total $m 17,490 15,837 19,952 23,389 26,446


Table 16.2: Principal markets for Australia’s metallurgical coal exports, 2019–20 dollars Unit 2014–15 2015–16 2016–17 2017–18 2018–19

India $m 5,553 5,020 8,985 10,009 11,642

China $m 5,285 4,218 8,217 8,842 10,241

Japan $m 5,108 4,746 7,449 7,667 7,930

South Korea $m 2,636 2,272 3,960 3,871 4,167

Taiwan $m 1,262 1,058 1,956 2,040 2,690

Netherlands $m 906 982 1,991 1,855 1,825

Total $m 23,742 21,246 37,298 39,137 44,457



Table 16.3: Principal markets for Australia’s crude oil and refinery feedstocks exports, 2019–20 dollars

Unit 2014–15 2015–16 2016–17 2017–18 2018–19

Singapore $m 1,979 676 1,069 1,216 1,982

Malaysia $m 4 155 451 606 1,671

Thailand $m 1,373 745 595 1,194 1,141

China $m 29 757 746 653 1,027

South Korea $m 1 482 475 716 707

Indonesia $m 36 380 969 1,355 661

Total $m 9,583 5,926 5,879 7,206 9,242


Table 16.4: Principal markets for Australia’s LNG exports, 2019–20 dollars Unit 2014–15 2015–16 2016–17 2017–18 2018–19

Japan $m 15,581 11,307 11,940 15,028 21,609

China $m 1,423 3,156 6,021 9,901 17,810

South Korea

Taiwan

Singapore

Malaysia

$m

$m

$m

$m

1,035

44

154

121

1,802

172

427

201

2,697

268

1,510

221

3,819

774

1,176

376

5,407

2,387

1,260

889

Total $m 18,388 17,795 23,547 32,006 50,662

Notes: Department of Industry, Science, Energy and Resources estimates based on International Trade Centre data, except for 2016–17 where ABS trade data is available. Source: ABS (2020) International Trade in Goods and Services, 5368.0; International Trade Centre (2020) International Trade Statistics 2001–2019


Table 16.5: Principal markets for Australia’s iron ore exports, 2019–20 dollars Unit 2014–15 2015–16 2016–17 2017–18 2018–19

China

Japan

South Korea

Taiwan

India

$m

$m

$m

$m

$m

45,826

7,288

4,405

1,412

118

41,629

5,027

3,278

1,097

7

54,400

5,686

4,125

1,511

6

51,902

5,521

3,735

1,279

310

64,660

5,865

4,754

1,801

242

Indonesia $m 30 58 46 46 44

Total $m 59,339 51,316 66,096 63,576 79,010


Table 16.6: Principal markets for Australia’s aluminium exports, 2019–20 dollars Unit 2014–15 2015–16 2016–17 2017–18 2018–19

Japan

South Korea

Thailand

$m

$m

$m

1,586

836

312

748

1,197

288

984

782

324

1,422

874

387

1,344

782

399

Taiwan $m 532 320 218 339 299

Indonesia $m 149 101 160 189 122

China $m 54 100 53 35 17

Total $m 4,161 3,480 3,343 4,156 4,244



154


Table 16.7: Principal markets for Australia’s copper exports, 2019–20 dollars Unit 2014–15 2015–16 2016–17 2017–18 2018–19

China

Japan

Malaysia

South Korea

$m

$m

$m

$m

3,968

2,166

573

398

3,851

1,533

663

526

2,848

1,432

908

471

3,901

1,579

901

301

3,674

1,868

1,264

696

Philippines $m 273 236 419 173 623

India $m 874 551 721 867 453

Total $m 9,217 8,707 7,989 8,751 9,953


Table 16.8: Principal markets for Australia’s gold exports, 2019–20 dollars Unit 2014–15 2015–16 2016–17 2017–18 2018–19

China $m 7,569 7,028 2,448 3,043 5,167

Hong Kong $m 206 2,710 10,145 8,328 4,450

United Kingdom $m 634 4,228 4,130 3,385 4,398

Singapore $m 3,389 1,284 319 1,198 1,619

Thailand $m 976 273 562 1,183 1,355

Switzerland $m 16 93 238 809 1,111

Total $m 14,201 16,841 19,014 19,560 19,074


155

Appendices

Appendix A Definitions and classifications A.1 Exchange rates In this report, the AUD/USD exchange rate (Australian dollar relative to the US dollars) is based on the median of economic forecasters at the time that the report is prepared. The source is the Bloomberg survey of economic forecasters.

World commodity prices are typically denominated in US dollars, and exchange rate movements can have a significant effect on the actual outcomes of commodity prices and export earnings. A change in the value of the US dollar against other floating international currencies can influence movements in world resources and energy prices. A change in the Australian dollar against the US dollar will impact on export earnings for domestic commodity exporters and producers. There is substantial uncertainty surrounding any exchange rate forecast, with changes to exchange rates influenced by changes in financial market sentiment, sometimes resulting in strong volatility.

A.2 Conversion to real dollars Nominal values and prices are converted to real dollars using Australian and US consumer price indexes (CPI). The Australian and US CPI forecasts are based on the median of economic forecasters at the time that the report was prepared. The source is the Bloomberg survey of economic forecasters.

A.3 Time periods The terms ‘estimate’, ‘forecast’ and ‘projection’ refer to different time periods in this report. Estimate refers to a time period that has passed, but for which full historical data is not yet available, while ‘forecast’ and ‘projection’ refer to different periods in the future. It is important to distinguish between different future time horizons, as factors affecting production, consumption and prices in the short-term differ from factors affecting these components in the medium to long-term. Forecasts also become increasingly imprecise over longer time horizons, due to increased risk and uncertainty. For these reasons, the Department of Industry, Science, Energy and Resources’ Office of the Chief Economist (DISER OCE) uses different terminology to distinguish between short-term forecasts and medium to long-term projections, as outlined in Table A2.

Table A1: OCE terminology for different time periods/horizons

Period Years Terminology

Historical Time period has passed but complete for data for the period is not yet available

Estimate

Short-term 1 to 2 years Forecast

Medium-term 3 to 5 years Projection

Long-term Beyond 5 years n/a



A.4 Commodity classifications The DISER OCE defines exports for each commodity by a selected set of 8-digit Australian Harmonised Export Commodity Classification (AHECC) codes. Where possible, the choice of AHECC codes is based on alignment with international trade data, to ensure that direct comparisons can be made. For example, groupings for various commodities are aligned with classifications used by the International Energy Agency, World Steel Association, International Nickel Study Group, International Lead and Zinc Study Group, International Copper Study Group and World Bureau of Metal Statistics.

In this report, benchmark prices and Australian production and exports are forecast for 21 commodities, as shown in Table A3. In estimating a total for Australia’s resources and energy exports, the remaining commodities, defined as ‘other resources’ and ‘other energy’, are forecast as a group.

Table A2: Resources and energy commodities groupings and definitions

Resources (non-energy) Energy

Definition Resource commodities are non-energy minerals and semi-manufactured products produced from non-energy minerals

Energy commodities are minerals and petroleum products that are typically used for power generation

Australian Harmonised Export Commodity Classification (AHECC) chapters

25 (part); 26 (part); 28 (part); 31 (part); 73 (part); 74; 75; 76; 78; 79; 80; 81 27 (part)

Commodities for which data is published, forecasts are made and analysed in detail in this report

Aluminium; alumina; bauxite; copper; gold; iron ore; crude steel; nickel; zinc, lithium

Crude oil and petroleum products; LNG; metallurgical coal; thermal coal; uranium

Notes: The AHECC chapter is the first two digits of the trade code. Groupings are made at the 8-digit level. Source: Department of Industry, Science, Energy and Resources (2020)


Appendix B Glossary

Term Description

A$ Australian dollar

ABS Australian Bureau of Statistics

AHECC Australian Harmonized Export Commodity Classification

AISC All-In Sustaining Cost — an extension of existing cash cost metrics and incorporates costs related to sustaining production.

Base metals A common metal that is not considered precious (includes aluminium, copper, lead, nickel, tin, zinc)

Bbl Barrel

Bcm Billion cubic metres

Benchmark A standard specification used to price commodities.

BF and BOF Blast furnace and basic oxygen furnace — used in an integrated steelmaking process that uses iron ore and coal.

Bulks Non-liquid and non-gaseous commodities shipped in mass and loose (iron ore, coal, bauxite)

CAGR Compound annual growth rate

Capex Capital expenditure

CFR Cost and freight — Seller clears exports, and pays freight.

CIF Cost, Insurance, and Freight

Coal Seam Gas (CSG) Natural gas found in coal seams. Also known as Coal Bed Methane (CBM)

Coke Made by heating coal at high temperatures without oxygen, and used to reduce iron ore to molten iron saturated with carbon, called hot metal


159

Conventional gas Natural gas that can be produced from reservoirs using traditional techniques. Contrasts with unconventional gas.

COVID-19 2019 Novel Coronavirus

CPB

CPI

Crude steel

CPB Netherlands Bureau for Economic Policy Analysis

Consumer Price Index — measures quarterly changes in the price of a basket of goods and services which account for a high proportion of expenditure by the CPI population group (i.e. metropolitan households).

Steel in the first solid state after melting, suitable for further processing or for sale.

DES Delivered Ex Ship — price of LNG including shipping and insurance.

DISER Department of Industry, Science, Energy and Resources

DMO Domestic Market Obligation — a policy to reserve energy commodities for domestic usage

DRC Democratic Republic of the Congo

ECB

Economic growth

EIA

European Central Bank

An increase in the capacity of an economy to produce goods and services, compared from one period of time to another. It is measured in nominal or real gross domestic product (GDP).

The United States Energy Information Administration

EAF Electric arc furnace — a furnace that melts steel scrap using the heat generated by a high power electric arc.

ETF Exchange Traded Fund — an exchange traded fund that allows investors to invest in gold on the exchange.

EUV Export unit value — export value/volumes exported

EV Electric vehicle

f Forecast — a two year outlook

FEED Front end engineering design

FID Final investment decision


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FOB Free on board — seller clears export, buyer pays freight.

GAD Gross air dried basis — For measuring coal quality.

GAR Gross as received basis — For measuring coal quality.

GBP Great Britain Pounds

GDP Gross Domestic Product — measures the value of economic activity within a country/group.

GFC Global Financial Crisis — the period of extreme stress in global financial markets and banking systems between mid-2007 and early 2009.

GJ Gigajoule

GST

HCC

IEA

Goods and Services Tax — a value-added tax levied on most goods and services sold for domestic consumption.

Hard coking coal — The best grade of metallurgical coal used in the steel production process. Australian hard coking coal is regarded as the industry benchmark.

International Energy Agency

IMF International Monetary Fund — an international organisation that promotes international financial stability and monetary cooperation.

IMO International Maritime Organisation

IP Industrial Production — measures the output of the industrial sector that comprises mining, manufacturing, utilities and construction.

IPO Initial public offering — a process of offering shares of a private corporation to the public in a new stock issuance.

ISM US Institute for Supply Management

ISM

JCC

Institute of Supply Management

Japan Customs-cleared Crude (or Japan Crude Cocktail) — average price of crude oil imported by Japan and a common price index in long-term LNG contracts.

JFY Japanese fiscal year

kcal/kg Kilocalories per kilogram


161

kt Thousand tonnes

ktpa Kilotonnes per annum

LBMA London Bullion Market Association

LCE Lithium Content Equivalent

Li OH Lithium Hydroxide

LME London Metal Exchange

LNG Liquefied natural gas

LNY Lunar New Year

LPG Liquefied petroleum gas

LVPCI Low volatile pulverised coal injection — a type of low volatile coal used in the PCI process

m Million

MMbtu Million British thermal units

Mt Million tonnes

mtpa Million tonnes per annum

MW Megawatts

Nameplate capacity The theoretical maximum annual production capacity

NAR Net as received basis — For measuring coal quality

NDRC China’s National Development and Reform Commission

NEV New energy vehicle — term used for plug-in electric vehicles eligible for public subsidies (battery electric vehicles and plug-in hybrid vehicles)


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OCE Office of the Chief Economist

OECD Organisation for Economic Co-operation and Development

OPEC Organisation of Petroleum Exporting Countries, a formal alliance of 14 countries to collaborate to manage the world oil market

OPEC+ Informal term for agreements between OPEC and ten other oil-producing countries (which are not members of OPEC)

Oz Ounce

PCE Personal Consumption Expenditure — a measure of the changes in price of consumer services and goods.

PCI Pulverised coal injection — PCI coal is used for its heat value and injected directly into blast furnaces as a supplementary fuel, which reduces the amount of coke required.

PCI Pulverised coal injection — a process used in blast furnace operations

PM The afternoon price of gold set at 3.00pm each business day at the London Bullion Market Association

PMI Purchasing Managers Index — an indicator of economic health for manufacturing and service sectors.

PPP Purchasing Power Parity — a way of measuring economic variables in different countries that equalise the purchasing power of different currencies

RoW Rest of world

s Estimate — Incomplete data or subject to revision

Shale gas Natural gas found in shales

SDR Special drawing right

SHFE Shanghai Futures Exchange

SSCC Semi-soft coking coal — A type of metallurgical coal used in the steel production process alongside hard coking coal, but results in a lower coke quality and more impurities.

Tariff A tax on imports or exports that is used by governments to generate revenue or to protect domestic industries from competition.

Tight gas Natural gas found in low quality reservoirs


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TWI Trade Weighted Index — a measure of the foreign exchange value of the US dollar against a basket of major foreign currencies.

U3O8 Triuranium octoxide — a compound of uranium.

UAE United Arab Emirates

UK United Kingdom

Unconventional gas Natural gas that is more difficult to extract, including coal seam gas, shale gas and tight gas. Contrasts with conventional gas.

US United States

US$ United States dollar

WEO The International Energy Agency’s World Energy Outlook

WTI West Texas Intermediate crude oil price

z Projection — a five year outlook


Appendix C Contact details

Chapter/s Author Email

Overview David Thurtell [email protected]

Macroeconomic outlook, oil Nathan Pitts [email protected]

Steel, iron ore, uranium Mark Gibbons [email protected]

Metallurgical coal, thermal coal Nikolai Drahos [email protected]

Gas Monica Philalay [email protected]

Gold, aluminium, alumina and bauxite Thuong Nguyen [email protected]

Copper, nickel Kate Martin [email protected]

Nickel Matt Boyce [email protected]

Zinc, lithium

Caroline Lewis [email protected]


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