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Editor All material in this publication is licensed under a Creative Commons Attribution 4.0 International Licence, with the exception of: David Thurtell • the Commonwealth Coat of Arms; • content supplied by third parties; Chapter Authors • logos; and Resource and energy overview: David Thurtell • any material protected by trademark or otherwise noted in this publication. Macroeconomic overview and oil: Nathan Pitts Creative Commons Attribution 4.0 International Licence is a standard form licence Steel, iron ore and uranium: Mark Gibbons agreement that allows you to copy, distribute, transmit and adapt this publication provided you attribute the work. A summary of the licence terms is available from Metallurgical and thermal coal: Jeremy Coghlan https://creativecommons.org/licenses/by/4.0/. Gas: Monica Philalay Wherever a third party holds copyright in material contained in this publication, Gold, aluminium, alumina and bauxite: Thuong Nguyen the copyright remains with that party. Their permission may be required to use the material. Please contact them directly. Copper and nickel: Kate Martin Zinc and lithium: Caroline Lewis Attribution Content contained herein should be attributed as follows: Acknowledgements Department of Industry, Science, Energy and Resources, Commonwealth of The authors would like to acknowledge the contributions of: Australia Resources and Energy Quarterly December 2020. The Commonwealth of Allison Ball, Jeewantha Karunarathna, Russell Campbell and Lou Brooks Australia does not necessarily endorse the content of this publication. Cover image source: Shutterstock Requests and inquiries concerning reproduction and rights should be addressed to [email protected] ISSN 1839-5007 Vol. 10, no. 4 Disclaimer © Commonwealth of Australia 2020 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, Ownership of intellectual property rights Energy and Resources. Unless otherwise noted, copyright (and any other intellectual property rights, if any) This publication is not legal or professional advice. The Commonwealth of Australia in this publication is owned by 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.

2 Contents

Foreword 4 Trade summary charts and tables 148

About the edition 5 Appendix A: Definitions and classifications 155

Overview 6 Appendix B: Glossary 158

Macroeconomic Outlook 16 Appendix C: Contact details 164

Steel 26

Iron Ore 32

Metallurgical Coal 41

Thermal Coal 52

Gas 68

Oil 80

Uranium 90

Gold 96

Aluminium 105

Copper 115

Nickel 123

Zinc 130

Lithium 139

3 Japan and South Korea also announced targets to reach net zero Foreword emissions in either the mid or early second half of the century. These The outlook for Australia’s energy and resource commodity exports has targets sit outside our two year outlook period, and the impacts year to improved overall since our last report in September, despite further waves year will be driven by the timing and scope of the policies implemented to of COVID-19 in many of the world’s major economies. The markets for achieve them. most minerals have tightened in recent months, as manufacturing and China’s economy has maintained growth, albeit slower, through the travel activity — and hence resource and energy commodity demand — COVID-19 pandemic and the IMF is projecting growth of 8.2 per cent in recovers, alongside some cuts to supply. The global supply of some 2021. This outlook has been helped by stimulatory policy actions and high commodities has declined as the low prices of the June and September foreign demand for goods needed to cope with the pandemic. Beijing quarters forced plant closures, and as COVID-19 outbreaks impact on appears ready to postpone further stimulus measures, satisfied with its workers at various mining and refining operations around the world. current policies. The rollout of an effective COVID-19 vaccine presents the opportunity to Australian iron ore earnings appear set to record an all-time high in 2020– bring the pandemic under control in major economies in the first half of our 21: strong demand from China and a recovery in American, Japanese, two year outlook period. This will boost economic activity and commodity South Korean and European demand has added to the impact of ongoing demand, but also reduce outages to supply. The timing and pace of the supply problems in Brazil. After topping $102 billion in 2019–20, iron ore recovery is difficult to predict, and influenced by policy decisions that export earnings are forecast to be $123 billion in 2020–21. Gold has governments make to support economic recovery. The IMF forecasts a surrendered some of the sharp gains of 2020, but is still high in historical contraction in the world economy of 4.4 per cent in 2020, but a resumption terms; export earnings are on track to set a new record (of about $30 in growth of 5.2 per cent in 2021. However, news of at least three effective billion) in 2020–21. Base metals have recovered to pre-COVID-19 levels, vaccines postdates the IMF’s outlook, suggesting upside risks to these as the market looks to a successful vaccine rollout. Spot LNG prices are forecasts. now above pre-COVID-19 levels, as demand picks up ahead of the Rising commodity prices and Australia’s relative success at containing Northern Hemisphere winter and the impact of (mainly US) supply COVID-19 have helped strengthen the Australian dollar further in recent cutbacks and disruptions flow through. months, partly diminishing the impact on export earnings of rising prices. Annual resource and energy exports are forecast to remain over a quarter Coal markets are in a state of flux dealing with issues quite separate to of a trillion dollars in the outlook period — at $279 billion in 2020–21 and COVID-19. Shipments of (mainly Australian) coal faced delays at Chinese $264 billion in 2021–22. One downside risk is for substantial delays in the ports. Price differentials have changed dramatically; the bottom line for successful rollout of the COVID-19 vaccines to a large number of the Australian coal producers is lower profitability and the likelihood of world’s working population. Another downside risk is the extent of further production cuts the longer the Chinese restrictions remain in place. disruption to Australian trade with China. Besides the discovery of a number of promising COVID-19 vaccines, another material change since the September 2020 Resources and Energy Quarterly is the election of a new US Administration, effective on 20 January 2021. President-elect Biden has flagged an intention to make policy changes in relation to trade policy and emissions reductions. China,

Resources and Energy Quarterly December 2020 4

About this edition The Resources and Energy Quarterly (REQ) contains the Office of the The global environment in which Australia’s producers compete can Chief Economist’s forecasts for the value, volume and price of Australia’s change rapidly. Each edition of the Resources and Energy Quarterly major resources and energy commodity exports. attempts to factor in these changes, and makes appropriate alterations to A ‘medium term’ (five year) outlook is published in the March quarter the forecasts/projections by estimating the impact on Australian producers edition of the Resources and Energy Quarterly. Each June, September and the value of their exports. and December edition of the Resources and Energy Quarterly features a In this report, commodities are grouped into two broad categories, ‘short term’ (two year) outlook for Australia’s major resource and energy referred to as ‘resources’ and ‘energy’. ‘Energy’ commodities comprise commodity exports. metallurgical and thermal coal, oil, gas and uranium. ‘Resource’ Underpinning the forecasts/projections contained in the Resources and commodities in this report are all other mineral commodities. Energy Quarterly is the Office of the Chief Economist’s outlook for global Unless otherwise stated, all Australian and US dollar figures in this report resource and energy commodity prices, demand and supply. The are in nominal terms. Inflation and exchange rate assumptions are forecasts/projections for Australia’s resource and energy commodity provided in tables 2.1 and 2.2 in the macroeconomic outlook chapter. exporters are reconciled with this global context. Data in this edition of the Resources and Energy Quarterly is current as of 8 December 2020.

Resources and Energy Quarterly publication schedule

Publication Expected release date Outlook period final year

March 2021 29 March 2021 Australian data: 2025–26 World data: 2026 June 2021 28 June 2021 Australian data: 2022–23 World data: 2023 September 2021 30 September 2021 Australian data: 2022–23 World data: 2023 December 2021 20 December 2021 Australian data: 2022–23 World data: 2023

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

Resources and Energy Quarterly December 2020 5

1.1 Summary Figure 1.1: Australia’s resource and energy export values/volumes . Since last quarter, Australia’s outlook for resource and energy exports 125 300 has improved overall. . World economic activity has rebounded, with the demand for resource 100 240 and energy commodities picking up. Oil consumption and prices are down in 2020, but set to recover partially as lockdown measures ease. 75 180 21 = 21 = 100

. While volumes are set to rise, export earnings are expected to be – down on 2019–20, largely driven by lower LNG prices in 2020–21 and 50 120 A$ billion A$ lower iron-ore prices in 2021–22, after recently making 7-year highs. . Australian coal prices should recover over the outlook period. 25 60 Index, 2020 Index,

1.2 Export values 0 0 2009–10 2011–12 2013–14 2015–16 2017–18 2019–20 2021–22 Australia’s export values are estimated at about $279 billion in 2020–21 Volumes Values (rhs) In the December quarter 2020, the Office of the Chief Economist’s (OCE) Source: ABS (2020) International Trade in Goods and Services, 5368.0; Department of Industry, Science, Energy and Resources (2020) Resources and Energy Export Values Index declined 0.8 per cent from a year before; a 0.5 per cent fall in prices added to a 0.2 per cent volume Figure 1.2: Annual growth in Australia’s resources and energy export decline. Australian resource and energy exports are estimated at $276 values, contributions from prices and volumes billion in 2020, down $21 billion on calendar 2019. 45 In the outlook period, exports are forecast at $279 billion in 2020–21 and $264 billion in 2021–22 (Figure 1.1), down from a record $291 billion in 30 2019–20. Lower USD commodity prices and Australian dollar gains will likely more than offset the impact of export volumes gains which appear 15 set to rise marginally in 2020–21 notwithstanding COVID-19 (Figure 1.2).

Rising Australian dollar constraining earnings cent Per 0 In Australian dollar terms, the OCE’s Resources and Energy Commodity -15 Price Index rose by 3.3 per cent (preliminary estimate) in the December quarter to be flat on a year ago. In US dollar terms, the index rose by 4.7 per cent in the quarter, and was 6.0 per cent higher than a year ago. The -30 2009–10 2011–12 2013–14 2015–16 2017–18 2019–20 2021–22 index of prices for resource commodity exports (Australian dollar terms) Prices Volumes Values rose by an estimated 21.8 per cent in the year to the December quarter Source: ABS (2020) International Trade in Goods and Services, 5368.0; Department of 2020, while energy commodity prices fell by 29.2 per cent (Figure 1.3). Industry, Science, Energy and Resources (2020)

Resources and Energy Quarterly December 2020 7

Figure 1.3: Resource and energy export prices, AUD terms With air travel still heavily restricted and land-based travel in most nations 240 still below pre-COVID levels, oil demand is weak but recovering. It may 220 take the widespread rollout of COVID-19 vaccines before international 200 travel returns to pre-COVID-19 levels. Travel ‘bubbles’ between nations 180 with negligible infection rates could see some recovery in air travel in the 160 coming months, boosting a recovery in tourism and oil consumption. 140 There are reports Chinese authorities may be reluctant to take fresh, large 120 stimulatory measures, as the Chinese economy pushes further above pre- 100 80 pandemic levels and resumes growing at its pre-pandemic pace. China’s 60 property sector has cooled, in response to modest government measures. Index, 2020 = Index, September 100 40 There is potential for US policy changes that could affect both world Jun-08 Jun-10 Jun-12 Jun-14 Jun-16 Jun-18 Jun-20 Jun-22 growth and resource and energy commodity markets. President-elect Resources Energy Total resources and energy Biden is due to take office on 20 January 2021 and has signalled an intent 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 to make some large shifts to US policy, including in trade and in each commodity’s EUV by its share of total export values. re-joining the Paris Climate Accord. Source: ABS (2020) International Trade in Goods and Services, 5368.0; Department of Industry, Science, Energy and Resources (2020) The emphasis of some governments’ COVID-19 recovery stimulus spending is towards ‘green’ infrastructure, and also to ensuring domestic 1.3 Macroeconomic, policy, trade and other factors production of essential goods and services to reduce supply chain With global economic activity rebounding, the demand for resources and vulnerabilities. ‘Green’ infrastructure will be resource-commodity intensive, energy is steadily rising, running down inventories built up at the height of boosting resource commodity demand. COVID-19 lockdowns. The demand for energy remains the most affected, The most recent IMF forecasts — made prior to news of promising COVID- though a colder than normal Northern Hemisphere winter now seems to be 19 vaccines — put world GDP growing by slightly more than 5 per cent in offsetting that significantly. Households have built up their savings; while 2021. This would see the world economy recover a loss of slightly more they are consuming fewer services and socialising and travelling less, than 4 per cent in 2020. IMF forecasts world GDP growth to then moderate goods consumption has rebounded, helping to lift industrial output and towards more typical levels in 2022. Resource and energy commodity world trade. demand should thus recover over the outlook period. The extent of further Since the first wave of COVID-19, the mortality rate of COVID-19 has official and unofficial Chinese government restrictions on imports of some diminished, as treatments become more effective and as infections are Australian goods poses a downside risk to the forecasts. The current concentrated among younger people with stronger immune systems. In restrictive measures in place are being closely monitored for implications addition, some effective vaccines appear to have been discovered, the to our outlook. At this stage, there is a high degree of uncertainty around rollout of which promises to restore increasing normalcy to (daily working the extent to which they will persist throughout the outlook period, as well and living) economic activity in major economies in the first half of the as the timing and extent to which Australia’s exports can find alternative outlook period. markets.

Resources and Energy Quarterly December 2020 8 1.4 Prices Figure 1.4: Bulk commodity prices The iron ore price has remained strong since the September 2020 140 Resources and Energy Quarterly, currently at a 7-year high. A recovery in 120 demand in some of the advanced industrialised nations has added to strong Chinese demand, to keep prices high in a market still heavily 100 constrained by low Brazilian supply (Figure 1.4). Prices are expected to ease by 2022, as Brazilian supply recovers and China reduces stimulus. 80 After a minor recovery in the September quarter 2020, prices of Australian 60 metallurgical coal have been hit sharply by a decline in Chinese imports. 40 Metallurgical coal prices had been kept low by extremely weak ex-Chinese Index, Index, June 2012 = 100 demand due to COVID-19. A modest lift in prices is likely over the forecast 20 period, as high-cost mines are closed and ex-Chinese demand recovers. Winter heating demand from Asian coal-fired power utilities has combined 0 Jun-12 Jun-14 Jun-16 Jun-18 Jun-20 Jun-22 with output cuts to help lift thermal coal prices. Further modest gains are Iron ore Metallurgical coal Thermal coal likely in the outlook period, as demand recovers further (Figure 1.4). Notes: Prices are in US dollars, and are the international benchmark prices Oil prices are steadily regaining some of the sharp declines of the first four Source: Bloomberg (2020); Department of Industry, Science, Energy and Resources (2020) months of 2020. Production cuts have combined with a recovery in Figure 1.5: Base metal prices demand to remove some inventory from the market. In the December quarter 2020, demand is likely to be impacted by targeted COVID-19 180 containment measures introduced in parts of the EU. The price should rise 150 steadily during 2021 and 2022, but seems likely to be capped at US$60 a barrel, as shuttered US production re-enters the market. Australian LNG 120 export values are expected to dip sharply in 2020–21: 75 per cent of our LNG is sold under contracts linked to oil prices with a lag of several 90 months. Spot LNG prices have recovered strongly. 60 The gold price has lost some of its lustre, as news of several effective COVID-19 vaccines pushes investment flows away from safe havens. A 30 recovery in scrap supply will offset improved jewellery demand over the Index, June 2012 = 100 outlook period. Further out, the price is likely to fall, as equity markets 0 recover more broadly and real bond yields rise. Base metal prices have Jun-12 Jun-14 Jun-16 Jun-18 Jun-20 Jun-22 recovered their COVID-19 losses, largely on the back of the Chinese Aluminium Copper Nickel Zinc economic rebound (Figure 1.5). Base metal demand should rise as world Notes: Prices are in US dollars, and are the international benchmark prices industrial activity recovers further from COVID-19 restrictions. Source: Bloomberg (2020); Department of Industry, Science, Energy and Resources (2020)

Resources and Energy Quarterly December 2020 9

1.5 Export volumes 1.6 Contribution to growth and investment Sustained Australian export volumes, driven by resource exports Mining industry contracted, but by much less than the rest of the economy The OCE’s Resources and Energy Export Volumes Index (preliminary Australia’s real Gross Domestic Product (GDP) rose by 3.3 per cent in the estimate) rose by 7.1 per cent in the December quarter 2020 from the September quarter 2020, but was down 3.8 per cent through the year September quarter, but was 0.2 per cent lower than a year before (Figure since the September quarter 2019. 1.6). Within this total, resource commodity volumes rose by 3.5 per cent in Mining value-added fell by 1.7 per cent in the September quarter, to be the year to the December quarter, while energy commodity volumes fell by down 2.3 per cent over the previous twelve months. Coal and oil/gas 7.1 per cent. The sharp decline in the volume of energy exports was driven production fell significantly, while iron ore and ‘other’ mining grew modestly by the slowdown in Asian economic activity due to COVID-19. (Figure 1.7). In volume terms, resources exports are likely to show modest growth over In the coming year, it is likely that the iron ore sector will make a significant the outlook period. Economic growth and industrial production have contribution to GDP growth, as high prices and margins drive growing rebounded amongst our main trading partners, increasing their demand for volumes. The coal sector is likely to make only a modest contribution to our ferrous and non-ferrous metals. Energy export volumes are forecast to growth in the first half of the outlook period. Gas production is likely to recover pandemic losses during 2021 and then tend to level out. However, make a positive contribution to growth, on the back of stronger LNG this is not sufficient to offset lower energy prices to allow export earnings demand and a recovery in prices. to return to pre-COVID-19 levels. Australian coal producers are amongst the world’s most competitive producers, and would be quick to reopen Figure 1.7: Contribution to quarterly growth, by sector mines and expand output after seeing a reduction in 2021–22. 6 Figure 1.6: Resource and energy export volumes 5 120 4 3 100 2 80 1 0

60 points Percentage -1 40 -2 -3 20 Sep–12 Sep–14 Sep–16 Sep–18 Sep–20

Index, 2020 December Index, = 100 Coal mining Oil and gas extraction 0 Jun-12 Jun-14 Jun-16 Jun-18 Jun-20 Jun-22 Iron ore mining Mining total Resources Energy Source: ABS (2020) Australian National Accounts, 5206.0 Source: Department of Industry, Science, Energy and Resources (2020)

Resources and Energy Quarterly December 2020 10

Mining investment is picking up Figure 1.9: Mining industry capital expenditure by type, quarterly The ABS Private New Capital Expenditure and Expected Expenditure 25 5 survey for the September quarter 2020 shows that Australia’s mining industry invested $8.5 billion in the quarter. This is down by 7.5 per cent in 20 4 the quarter, but up 1.6 per cent from the September quarter 2019. In recent quarters, growth in investment by the metal ore mining sector has 15 3 been strong, albeit with a slight pullback in the September quarter (Figure A$ billion A$ 1.8). This likely reflects the surge in iron ore prices. billion A$ 10 2 Figure 1.8: Mining industry capital expenditure by commodity 5 1 18

15 0 0 2002 2005 2008 2011 2014 2017 2020

12 Buildings and structures Equipment, plant and machinery (rhs)

9 Notes: Chart data is in nominal terms Source: ABS (2020) Private New Capital Expenditure and Expected Expenditure, 5625.0

A$ billion A$ 6 The Resources and Energy Major Projects publication, released in 3 November 2020, suggests that investment in Australia’s minerals projects 0 has entered a new growth cycle. Record gold prices have driven large 2010 2012 2014 2016 2018 2020 investments in gold exploration, development and extraction, with a Oil and gas extraction Metal ore mining number of Australian gold mines returning to production. Some of these Coal mining Other mining mines had been closed for more than 20 years. Notes: Other mining includes non-metallic mineral mining and quarrying and exploration and other mining support services; chart data is in nominal terms An uptake in battery technology has also driven greater investment in Source: ABS (2020) Private New Capital Expenditure and Expected Expenditure, 5625.0 nickel, cobalt, rare earths and lithium, with Australia now hosting around 60 projects in the ‘battery commodity’ space. Expenditure fell in the September quarter for buildings and structures as Slightly offsetting this, tough global conditions and low energy prices have well as machinery and equipment (Figure 1.9), though the latter remains weighed on the development of coal and LNG projects, with some being well above its average level of recent years. Mining companies invested deferred as a result. Finance is likely to remain difficult for these projects. $35 billion in 2019–20, with forward expectations suggesting that investment in 2020–21 will be little changed (Figure 1.10). Strong prices Data on exploration spending (adjusted for inflation) suggests that mining for gold, iron ore and other minerals are leading to new investment plans, capital expenditure is recovering at a marginal pace following falls in early including the re-opening of mines. However, investment in new greenfield 2020 (Figure 1.11). Exploration spending edged up in the September projects remains well below the levels of the previous decade. quarter, with spending for all commodities rising to $922 million.

Resources and Energy Quarterly December 2020 11

Figure 1.10: Mining industry capital expenditure, fiscal year 1.7 Revisions to the outlook

100 Over the outlook period, export earnings are now forecast to be $279 billion in 2020–21 and $264 billion in 2021–22. The new forecasts are up 80 $22 billion and $12 billion, respectively, from those contained in the September quarter 2020 Resources and Energy Quarterly. 60 Stronger metal (mainly iron ore) exports have driven the upward revisions. The forecast rise in the Australian dollar and lower coal and LNG revenues $ billion $ 40 will be the main drivers of the drop in earnings in 2020–21 and 2021–22 compared with 2019–20. 20 Figure 1.12: Resource and energy exports, by forecast release 0 300 2010–11 2012–13 2014–15 2016–17 2018–19 2020–21 Actual Expected 275

Notes: Chart data is in nominal terms 250 Source: ABS (2020) Private New Capital Expenditure and Expected Expenditure, 5625.0 225 Figure 1.11: Mining capital expenditure vs exploration (real), quarterly 200

30 2.5 billion A$ 175 150 24 2.0 125 100 18 1.5 2006–07 2009–10 2012–13 2015–16 2018–19 2021–22 Actual Jun-20 forecast 12 1.0 Sep-20 forecast Dec-20 forecast

A$ bilion A$ A$ billion A$ Source: Department of Industry, Science, Energy and Resources (2020) 6 0.5

0 0.0 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Mining capex, chain volume measures Exploration (rhs)

Source: ABS (2020) Private Capital Expenditure Survey, Chain Volume measure, 5625.0

Resources and Energy Quarterly December 2020 12

Notes: f forecast. EUV is export unit value. Per cent change is from 2019–20. Source: ABS (2020) International Trade in Goods and Services, 5368.0; Department of Industry, Science, Energy and Resources (2020)

Resources and Energy Quarterly December 2020 13

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

Annual percent change Exports (A$m) 2018–19 2019–20 2020–21f 2021–22f 2019–20 2020 –21f 2021–22f Resources and energy 281,297 290,649 278,668 263,996 3.3 –4.1 –5.3 – realb 287,599 293,243 278,668 259,670 2.0 –5.0 –6.8 Energy 132,676 115,531 78,702 93,406 –12.9 –31.9 18.7 – realb 135,648 116,562 78,702 91,875 –14.1 –32.5 16.7 Resources 148,621 175,118 199,966 170,590 17.8 14.2 –14.7 – realb 151,951 176,681 199,966 167,795 16.3 13.2 –16.1

Notes: b In 2020–21 Australian dollars; f forecast. Source: ABS (2019) International Trade in Goods and Services, 5368.0; Department of Industry, Science, Energy and Resources (2020)

Resources and Energy Quarterly December 2020 14

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

Prices Export volumes Export values, A$b Unit 2019–2020 2020–21f 2021–22f Unit 2019–20 2020–21f 2021–22f 2019–20 2020–21f 2021–22f Iron ore US$/t 78 107 86 Mt 858 899 906 103 123 95 Metallurgical coal US$/t 145 121 142 Mt 177 169 184 34 22 27 LNG A$/GJ 11.4 7.8 8.9 Mt 79 75 80 48 31 37 Thermal coal US$/t 63 58 64 Mt 213 199 222 20 15 16 Gold US$/oz 1,562 1,830 1,608 t 350 364 393 24 30 27 Alumina US$/t 282 269 284 Mt 17,876 18,082 17,948 7.4 7.0 6.9 Copper US$/t 5,666 6,683 6,606 Kt 925 920 941 10.1 10.8 10.7 Oila US$/bbl 52 45 52 Kb/d 291 304 308 9.0 7.2 8.3 Aluminium US$/t 1,675 1,814 1,916 Kt 1,430 1,345 1,385 3.7 3.4 3.5 Zinc US$/t 2,206 2,390 2,203 Kt 1,530 1,416 1,590 3.6 3.2 3.2 Nickel US$/t 13,982 14,989 15,491 Kt 231 209 253 3.8 3.7 4.4 Lithium US$/t 548 416 466 Kt 1,503 1,589 1,868 1.1 1.0 1.3 Uranium US$/lb 27 31 37 t 7,195 6,486 5,800 0.7 0.5 0.5

Notes: a Export data covers both crude oil and condensate; 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)

Resources and Energy Quarterly December 2020 15

Summary ramped up quantitative easing programs. Despite these policies, prospects for the economic recovery are uncertain. Economic output over the outlook . The COVID-19 pandemic, and subsequent containment measures, period is likely to be driven by the evolution of the pandemic, with risks have significantly affected world industrial production and economic arising from the possibility of renewed outbreaks, further containment growth. The IMF assumes that the recovery will be unsteady and uneven measures, and an effective vaccine rollout. across economies. The rollout of an effective vaccine will be influential. . The economic downturn has been limited by significant stimulatory In the December quarter 2020, there were reports of promising preliminary policies. Governments have imparted fiscal stimulus to support results for numerous COVID-19 vaccines. However, the timing that these businesses and workers, while central banks around the world have vaccines will receive government authorisation remains uncertain, as does pushed down official interest rates and bought large amounts of debt. the pace that sufficient doses can be distributed around the world. Despite . The IMF expects that world economic activity contracts by 4.4 per cent considerable uncertainty regarding the precise time that an effective in 2020, before growing by 5.2 per cent in 2021 and 4.2 per cent in 2022. vaccine(s) becomes available, it appears increasingly likely that this will occur sometime in 2021. This presents considerable upside risks for Global economic outlook economic growth in 2021 and 2022. The IMF is forecasting a contraction in the world economy of 4.4 per cent Global trade is recovering from the earlier disruptions posed by falling in 2020, as COVID-19 containment measures negatively affect economic consumer confidence and supply disruptions. Global merchandise export activity. This forecast is less pessimistic than the 4.9 per cent decline in volumes in September rose by 1.5 per cent month-on-month, with these the IMF’s previous release in June 2020. This revision reflects June trade volumes only 1.8 per cent lower than pre-COVID-19 levels. quarter economic activity declining by less than expected in many Advanced economies’ exports rose by 2.1 per cent month-on-month to be advanced nations, and June quarter Chinese economic growth surpassing 3.1 per cent lower than December 2019 volumes. Emerging economies’ expectations. Nonetheless, the economic recovery from the COVID-19 exports rose by 0.3 per cent month-on-month, and are now 0.7 per cent pandemic remains highly uncertain, as COVID-19 cases remain elevated above December 2019 volumes. Historically, global trade volumes growth in a number of nations, and some Eurozone governments have recently is closely correlated to industrial production growth (Figure 2.1). It is likely introduced containment measures against renewed COVID-19 outbreaks. that the peak impact on trade and industrial production was in May 2020, with the fall in the year to May comparable in magnitude to the global Governments around the world have introduced fiscal packages to financial crisis. However, the COVID-19 induced downturn seems likely to address the widespread job losses and reduced working hours. Other be briefer in duration. measures have generally been aimed at supporting affected businesses and spending on health care. As COVID-19 cases have fallen in some Government-imposed containment measures have had a significant countries, governments have announced further stimulus measures impact on labour markets, particularly in the service sectors. Employment designed to facilitate the economic recovery. Some of these recovery and business activity have also faced pressures from supply chain packages include considerable green stimulus, which is likely to materially disruptions and lower consumer demand. affect resources and energy demand over the outlook period. To The global Services Purchasing Managers Index (PMI) declined to 52.2 in accompany these fiscal stimulus measures, central banks around the November, down from 52.9 in October. This was the fifth consecutive world have reduced official interest rates, and many central banks have monthly reading above 50, indicating month-on-month expansion. These

Resources and Energy Quarterly December 2020 17

growth readings follow the historic lows recorded in April and May, the Figure 2.2: Manufacturing PMI peak impact of COVID-19 containment measures on the global services 65 sector. 60

Figure 2.1: Industrial production and world merchandise trade 55 25 15 50 20 12

15 9 Index 45 10 6 40 5 3 35 0 0 30 -5 -3 May-18 Nov-18 May-19 Nov-19 May-20 Nov-20 -10 -6 China Australia Japan

Annual per per Annual cent change -15 -9 per Annual cent change -20 -12 US Eurozone World -25 -15 Source: Bloomberg (2020) Sep-02 Sep-05 Sep-08 Sep-11 Sep-14 Sep-17 Sep-20 Imports Industrial production (rhs) Figure 2.3: GDP growth

Source: CPB Netherlands Bureau for Economic Policy Analysis (2020) 15

Although the largest economic impacts of the COVID-19 pandemic have 10 been in the services sector, the global manufacturing sector has been 5 significantly impacted by supply chain disruptions and falling household 0 demand. The global manufacturing PMI was below 50 for most of the first half of 2020, falling to a historically low 39.6 in April. In November, the -5 index rose to 53.7, a 33-month high. This was the fifth consecutive month cent Per -10 above 50, although manufacturing performance across countries has -15 recently diverged. For the 30 nations where data was available, 19 -20 registered expansions and 11 contractions. Most of Australia’s major resources and energy export markets registered expansions (Figure 2.2). -25 Dec-16 Dec-18 Dec-20 Dec-22 The IMF expects global economic activity in 2021 to increase by China Korea US Japan 5.2 per cent. Advanced economies are forecast to grow by 4.8 per cent, EU India World and developing economies are expected to grow by 6.0 per cent (Figure 2.3). In 2022, global economic growth is likely to moderate to 4.2 per cent. Source: Bloomberg (2020); IMF (2020)

Resources and Energy Quarterly December 2020 18

Major trading partner economic outlook The Chinese manufacturing PMI increased marginally to 52.1 in China is Australia’s only major export market with projected growth in 2020 November, the ninth consecutive month the index has been in expansionary territory. Chinese industrial production in October increased In the September quarter of 2020, the Chinese economy grew by 2.7 by 6.9 per cent year-on-year, the seventh consecutive month of growth, per cent quarter-on-quarter. The Chinese economy has recovered rapidly driven by resilient export demand and the government-led infrastructure from the COVID-19 induced contraction of 10 per cent in the March drive. The demand side recovery has been much slower, with retail sales quarter, posting 12 per cent growth in the June quarter. This rebound was declining on a year-on-year basis for much of 2020 prior to the 0.5 per a result of containment measures being rapidly relaxed during April, and a cent increase recorded in August. Retail sales increased by 4.3 per cent in government-led infrastructure drive (Figure 2.4). October, as household discretionary spending recovered. The Chinese government has introduced significant fiscal stimulus. In Chinese exports have been resilient throughout 2020, propped up in the addition to an infrastructure drive, the Chinese government has granted first half of the year by strong export demand for medical goods. In later tax relief and increased unemployment benefits. Fiscal stimulus has also months, Chinese export demand has benefited from recovering global been accompanied by interest rate cuts by the People’s Bank of China consumer demand, with November customs data showing that Chinese (PBOC). The PBOC has also cut the bank reserve requirement ratio, exports grew by 21 per cent year-on-year. This growth was largely driven increased the money supply, and provided funds to increase the capacity by increasing demand for electronic goods and work-from-home of commercial banks to lend to small businesses. As a result, Chinese equipment. Chinese imports rose by 4.5 per cent in November, as Chinese bank lending hit a record high in the first half of 2020. household demand recovered. Chinese imports of resources and energy Figure 2.4: Chinese residential buildings construction and prices commodities were buoyant throughout 2020, as China capitalised on low prices to import key resources and energy products, notably oil and gas. 40 The IMF is forecasting the Chinese economy to grow by 1.9 per cent in 30 2020, making it one of the few economies where economic growth is anticipated. Chinese economic growth is expected to recover to 8.2 per 20 cent in 2021, before moderating to 5.8 per cent in 2022. The US economy faces a delayed recovery from COVID-19 10 The US economy grew by a record 7.4 per cent in the September quarter. This followed a 9.5 per cent decline in the June quarter, which was the

Annual per per Annual cent change 0 largest decline on record. Despite the record growth rate in the September quarter, economic activity remains 3.5 per cent below the December 2019 -10 quarter. Ongoing services sector impacts are likely to weigh on the Oct-12 Oct-14 Oct-16 Oct-18 Oct-20 economic recovery, as will high COVID-19 case numbers. Newly built commercial residential buildings prices Residential buildings under construction President-elect Biden has signalled an intention to make some large shifts in US policy priorities once he takes office. These include an intent to Source: Bloomberg (2020) re-join the Paris Climate Accord and to shift trade policy. If these shifts are

Resources and Energy Quarterly December 2020 19

made, they could materially affect global mineral demand, particularly in The US government has introduced around US$3 trillion worth of stimulus the medium to long term. to address the impacts of COVID-19. The largest package was signed in late March, and committed US$2 trillion for household payments, support US COVID-19 cases have recently hit fresh highs, with significant variation for local and state governments, and financial assistance for large in case numbers and in the level of restrictions across regions. Even in the businesses, including aircraft producers and airlines. Negotiations for states where COVID-19 containment measures have eased rapidly, further fiscal stimulus are ongoing as of 8 December 2020, as the number economic harm caused by behavioural responses to the virus is ongoing. of new COVID-19 cases has surged and containment measures are In October, industrial production grew by 1.1 per cent month-on-month, but reintroduced in many states. The size and timing of any further fiscal remains 5.6 per cent below the February level. Manufacturing output rose stimulus packages remains uncertain. by 1.0 per cent in August, but was 6.7 per cent lower than in February. The persistence of the COVID-19 pandemic in the US — and consequent The US unemployment rate declined to 6.7 per cent in November, after concerns for US economic growth — has seen the US dollar depreciate peaking in April at a record high 15 per cent. Unemployment remains sharply since June 2020. The lower US dollar has given support to significantly higher than before the COVID-19 pandemic, as does the commodity prices. number of people filing for unemployment benefits (Figure 2.5). Employment has fallen starkly in the services sector, particularly in the The IMF forecasts the US economy to grow by 3.1 per cent in 2021 and leisure and hospitality and retail trade sectors. Reduced service sector 2.9 per cent in 2022. employment is likely to push down US consumer demand for 2020 and EU government stimulus to drive economic recovery 2021, particularly for large consumer durables. Eurozone GDP in the September quarter increased by 13 per cent Figure 2.5: US initial jobless claims and unemployment rate quarter-on-quarter, following a 12 per cent decline in the June quarter 6 15 (Figure 2.6). Despite the strong September quarter reading, economic activity remains 4.3 per cent lower year-on-year, and is 8.7 per cent lower 5 13 in Spain, 5.8 per cent lower in Germany and 4.3 per cent lower in France. The ongoing economic recovery is likely to be constrained by rising 4 11 COVID-19 cases and the subsequent tightening of containment measures in the December quarter. 3 9

Per cent Per Since August 2020, Eurozone COVID-19 cases have risen rapidly and 2 7 have recently surpassed the peak case numbers from April. As a result, various EU member state governments have re-introduced containment 1 5 measures in the December quarter. Thus far, these measures remain relatively targeted, potentially lowering the impact on economic activity. 0 3 No. of claims (av. monthly, millions) Nov-04 Nov-08 Nov-12 Nov-16 Nov-20 Eurozone industrial production in September declined by 0.4 per cent on a Initial jobless claims Unemployment Rate (rhs) monthly basis, following the 0.6 per cent increase in August. Although

Source: Bloomberg (2020) industrial production has generally increased in recent months, these

Resources and Energy Quarterly December 2020 20

gains have not yet reversed the declines from earlier in 2020, with In July 2020, European Union members agreed to a fiscal stimulus industrial production in September still down by 6.8 per cent year-on-year. package totalling €750 billion, to address the economic impacts from the Germany, a key manufacturing country in Europe, registered an annual COVID-19 pandemic. This package consists of €390 billion worth of grants 8.7 per cent decline in industrial production in the year to September. and €360 billion of low-interest loans. Almost a third of this €750 billion is earmarked for climate initiatives consistent with Paris Agreement targets. Forward looking indicators suggest that manufacturing activity is recovering. The Eurozone manufacturing PMI declined to 53.8 in These fiscal policies have been accompanied by expansionary monetary November, and has been denoting month-on-month expansion since July. policy, with the European Central Bank keeping interest rates at negative Although the manufacturing sector expansion is likely to be somewhat levels throughout 2020. Furthermore, in March 2020, the central bank affected by the introduction of fresh COVID-19 containment measures, the introduced a pandemic emergency purchase programme that targets largest impacts are likely to be felt in the Eurozone services sector. securities, and ramped up their quantitative easing programme introduced in 2019. These programs were later increased in both size and duration. The services PMI was 41.7 in November, down from 46.9 in October. The The outcome of ongoing Brexit negotiations will have implications for EU hospitality and retail sectors have been affected by tightening containment and UK growth. measures and household behaviour responding to escalating COVID-19 case numbers. With fresh containment measures coming into effect The IMF forecasts that the Eurozone economy contracts by 7.6 per cent in throughout October and November, the Eurozone services sector will likely 2020. Economic growth is forecast to be 5.0 per cent in 2021, and 3.3 per contract in the December quarter. cent in 2022. However, these IMF forecasts were finalised before COVID-19 containment measures were re-introduced in October, so are Figure 2.6: Eurozone GDP and Composite PMI likely to be revised lower. 95 15 Japanese GDP is set to fall despite significant fiscal stimulus measures 80 10 Japanese GDP in the September quarter rose by a record 5.0 per cent quarter-on-quarter. This follows a fall of 8.2 per cent in the June quarter. 65 5 Economic recovery in September was largely driven by a 4.7 per cent increase in private consumption, with retail sales rebounding as 50 0 containment measures were relaxed and citizens spent government

Index issued stimulus checks. Exports also increased, as global automobile 35 -5 demand recovered, and a shift towards working from home in many economies boosted semi-conductor exports. However, capital expenditure 20 -10 fell by 3.4 per cent from the June quarter, suggesting business confidence

Quarterly Quarterly changepercentage remains subdued. The IMF expects Japan’s economy to contract by 5.3 5 -15 Sep-04 Sep-08 Sep-12 Sep-16 Sep-20 per cent in 2020. Eurozone Composite PMI Eurozone GDP (rhs) Source: Bloomberg (2020)

Resources and Energy Quarterly December 2020 21

Figure 2.7: Japanese industrial production and machinery orders cent lower year-on-year. The economic recovery has been driven by significant fiscal stimulus and a 16 per cent quarter-on-quarter increase in 40 60 exports. Trade has grown due to the ‘Zoom Boom’ that has increased 30 45 demand for remote working equipment, benefitting South Korean exports of semi-conductors and electronic goods. The IMF expects the South 20 30 Korean economy to contract by 1.9 per cent in 2020. 10 15 The South Korean manufacturing PMI increased to 52.9 in November, the 0 0 highest reading since February 2011. Industrial production in October was unchanged month-on-month, but was 2.7 per cent lower year-on-year. -10 -15 Manufacturing output declined by 1.3 per cent month-on-month, while -20 -30 services output increased by 1.2 per cent. Annual per per Annual cent change per Annual cent change -30 -45 In 2019, heightened trade tensions between South Korea and Japan disrupted regional supply chains, affecting both economies. These -40 -60 Sep-05 Sep-08 Sep-11 Sep-14 Sep-17 Sep-20 tensions appeared to be easing in late 2019 and early 2020. However, in June 2020, the South Korean government announced that it was Industrial Production Japanese machinery orders (rhs) re-opening its WTO complaint against Japan. A renewal of Source: Bloomberg (2020) South Korean-Japan trade tensions could pose risks to economic activity in both nations. In response to the downturn, the Japanese government has introduced further fiscal stimulus measures, building on the December 2019 package The IMF forecasts that the South Korean economy will grow by 2.9 per (which pre-dated the COVID-19 pandemic). Following the resignation of cent in 2021 and 3.1 per cent in 2022. Prime Minister Abe in August 2020, new Japanese Prime Minister Suga is Rising COVID cases and resulting containment measures affecting India looking to introduce a new fiscal package to stimulate economic activity. Indian GDP increased by 23 per cent in the September quarter, following The Japanese manufacturing PMI increased marginally to 49.0 in the record contraction of 30 per cent in the June quarter (Figure 2.8). This November, although it still suggests a month-on-month contraction. In economic recovery was driven by higher consumer spending and capital October, Japanese industrial production increased by 3.8 per cent investment. The IMF is forecasting the Indian economy will contract by 10 month-on-month, driven by vehicle production. Despite the strong growth, per cent in 2020. industrial production remained 3.2 per cent lower year-on-year. Indian economic activity fell by more than other emerging economies in The IMF expects the Japanese economy to grow by 2.3 per cent in 2021. the June quarter, largely due to stringent COVID-19 containment Growth is then expected to moderate to 1.7 per cent in 2022. measures and relatively limited fiscal and monetary policy relief. In April ‘Zoom Boom’ supporting South Korean exports and income 2020, the Indian government introduced containment measures including a three week lockdown, which was extended until 30 June for some areas. South Korean economic activity increased by 2.1 per cent Following 30 June, state governments have introduced their own quarter-on-quarter in the September quarter, although it remains 1.3 per

Resources and Energy Quarterly December 2020 22

containment measures, creating disparities across regions. In recent Implications of recent net-zero announcements for Australia uncertain months, some localised restrictions have persisted, although containment In September 2020, China’s Premier announced a net-zero target before measures have generally eased. The Indian government has been limited 2060. In October, Japan’s new Prime Minister and South Korea’s in its scope for fiscal stimulus due to high debt levels. President committed to net-zero emissions by 2050. These The scope for interest rate cuts is also constrained, due to a string of announcements — by Australia’s three largest energy export markets — previous interest rate cuts in 2019, which aimed to address illiquidity in the mark a significant shift in the climate ambitions of these countries. financial sector. With food prices already soaring, there are concerns that Substantial uncertainty remains over the policies and plans which will be additional interest rate cuts could stoke inflation. These inflationary used to achieve these targets, with more clarity likely to emerge in the concerns are in contrast to most other economies, where inflation remains coming year. China is finalising its 14th Five Year Plan (2021-2025), which relatively low despite widespread monetary stimulus. is expected to place climate change at the centre of policy making. The The Indian manufacturing PMI declined to 56.3 in November, but remained plan will align with China’s long-term strategy, due to be submitted ahead at values suggesting expansion for the third consecutive month. The of the COP26 climate change conference in November 2021. Japan’s series suggests strong increases in aggregate new orders, new export revised Strategic Energy Plan, expected to be released in mid-2021, will orders and output. likely encompass stronger efforts to reach a lower-emission energy mix by 2030. South Korea is scheduled to release a revised energy policy for The IMF expects Indian GDP to grow by 8.8 per cent in 2021 and 8.0 per 2020-2034 and a low-emissions development strategy by the end of 2020. cent in 2022. China, Japan and South Korea together accounted for 74 per cent of Figure 2.8: Indian GDP growth Australia’s thermal coal exports and 87 per cent of Australia’s LNG exports in 2019–20. However, the implications for Australian coal and gas remain 15 uncertain given the long time horizons and lack of clarity surrounding the 10 policy details. While pre-existing policies enacted by major trading partners have been factored into the current forecasts for thermal coal and gas, 5 most impacts will likely occur beyond the two-year outlook contained in 0 this edition of the Resources and Energy Quarterly.

-5 Investment in coal and gas projects has weakened in recent years, but challenging market conditions have also contributed to this trend. Gas is -10 expected to play an important role as a bridging fuel in the global energy

Annual per per Annual cent change -15 transition (see the gas chapter). However, thermal coal is likely to be more negatively affected, with recent policies accelerating the phase out of coal -20 in Japan and South Korea (see the thermal coal chapter). -25 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18 Sep-19 Sep-20

Source: Bloomberg (2020)

Resources and Energy Quarterly December 2020 23

Table 2.1: Key IMF GDP assumptions

2019 2020a 2021a 2022a Economic growthb

Advanced economies 1.7 -5.8 3.9 2.9

– Australia 1.8 -4.2 3.0 2.8

– Eurozone 1.7 -7.6 5.0 3.3

– France 1.5 -9.8 6.0 2.9

– Germany 0.6 -6.0 4.2 3.1

– Japan 0.7 -5.3 2.3 1.7

– New Zealand 2.2 -6.1 4.4 2.6

– South Korea 2.0 -1.9 2.9 3.1

– United Kingdom 1.4 -9.8 5.9 3.2

– United States 2.3 -4.3 3.1 2.9 Emerging economies 3.7 -3.3 6.0 5.1

– ASEAN-5d 4.8 -3.4 6.2 5.7

– Chinae 6.1 1.9 8.2 5.8

– India 4.2 -10.3 8.8 8.0

– Latin America 0.1 -8.1 3.6 2.7

– Middle East 1.3 -4.1 3.0 4.0

Worldc 2.9 -4.4 5.2 4.2 Notes: a Assumption; b Year-on-year change; c Calculated by the IMF using purchasing power parity (PPP) weights for nominal country gross domestic product; d Indonesia, Malaysia, the Philippines, Thailand and Vietnam. e Excludes Hong Kong. Sources: Bloomberg (2020); Department of Industry, Science, Energy and Resources (2020); IMF (2020)

Resources and Energy Quarterly December 2020 24

Table 2.2: Exchange rate and inflation assumptions

2019 2020a 2021a 2022a AUD/USD exchange rate 0.70 0.69 0.75 0.75

Inflation rateb United States 1.8 0.9 1.7 2.0

2018–19 2019–20 2020–21a 2021–22a Australiae 1.6 1.3 0.9 1.7 Notes: a Assumption; b Change from previous period; c Calculated by the IMF using purchasing power parity (PPP) weights for nominal country gross domestic product; e Average of daily rates. Sources: ABS (2020) Consumer Price Index, 6401.0; Bloomberg (2020); Department of Industry, Science, Energy and Resources; RBA (2020) Reserve Bank of Australia Bulletin.

Resources and Energy Quarterly December 2020 25

3.1 Summary Figure 3.1: Steel production, monthly change . World steel consumption is expected to have declined by 2.2 per cent in 30 2020, due to the COVID-19 pandemic and resulting economic downturn. 20 Stimulus in China has prevented a much worse overall result, though 10 steel demand remains low in many countries. 0 . World steel consumption is forecast to rebound as the global economy -10 recovers, growing by 3.8 per cent in 2021 and by 3.6 per cent in 2022. -20 -30 . Steel output is forecast to follow a similar trend, falling by 2.0 per cent in -40 2020 before rising by 3.0 per cent in 2021 and 3.6 per cent in 2022 as year per - on year cent change -50 steel smelters move back towards normal production levels. -60 Year 3.2 World consumption and production -70 Oct-2016 Oct-2017 Oct-2018 Oct-2019 Oct-2020 Steel production is likely to be robust in 2020 EU US India Japan China Global steel production has now completely reversed the falls of early Notes: Monthly average for integrated basic oxygen furnace (BOF) steel mills 2020, with aggregate monthly production now above the levels of late Source: Bloomberg (2020) China BOF Steel Profit Index 2019. However, this trend conceals a drastic shift in market structure, with historically high output in China acting as an offset for countries where Figure 3.2: Steel production by region steel output remains at recessionary levels. Many steel smelters remain 1,200 closed or on standby around the world. Steel demand has been supported by rising automotive sales and by an 1,000 easing in COVID-19 restrictions in some countries. It is expected that 800 conditions for steel demand will lift further over the next six months, supported by global economic recovery and rising consumer demand. 600

China’s monthly steel production in September is running at almost 40 per 400 cent above the level of September 2019. This has placed the country in a (million) Tonnes position of unprecedented dominance in steelmaking globally, with 200 numerous other countries continuing to face manufacturing and 0 steelmaking recessions. 2004 2007 2010 2013 2016 2019 2022 Despite growing domestic production, steel inventory in China has come European Union India China under pressure, with traders’ and mill’s finished inventory in decline at the Japan United States ROW end of 2020. This suggests production is being driven by direct Source: World Steel Association (2020); Bloomberg (2020) consumption, rather than efforts to ramp up in preparation for further

Resources and Energy Quarterly December 2020 28 stimulus measures. Construction activity remains strong in China, with Figure 3.3: Steel consumption growth by region warmer temperatures and more rapid approvals for infrastructure projects 50 supporting building efforts. In contrast, European steelmaking has been slow to recover. The steel ROW sector in Europe was already facing difficult conditions prior to the (471 Mt) COVID-19 pandemic, with issues including growing trade disputes, 25 ineffective EU anti-dumping policies, and lingering uncertainty around India Brexit. Over the longer term, European steelmaking has faced decline over decades as a result of persistent price competition from subsidised USA steelmakers in China. A perfect storm of long-term and short-term issues 2020 - 2022 0 Sth Korea China over the last year led to unprecedented workforce reductions and (929 Mt) EU Japan production cuts in late 2019 and early 2020. A number of smelters remain (per cent growth period) over cent growth (per shut down across Europe. -25 In Brazil, steelmaking continues to face tough conditions, and is expected -25 0 25 50 to fall by around 6 per cent in 2020 relative to 2019. However, this is a less 2017-2019 (per cent growth over period)

severe fall than had been expected by most analysts in the early part of Source: Department of Industry, Science, Energy and Resources (2020) 2020. Figure 3.4: Steel production growth by region Steelmaking in Japan remains in recession, with monthly output running at 50 20 per cent below its level of a year ago. Part of this cut may become permanent should some steel plants fail to reopen. India’s steel production has largely recovered to its pre-COVID level, with September output running at around 95 per cent output from September 25 ROW (520 Mt) 2019. However, the Indian Government’s ambitious targets to expand its India domestic steel output were delayed by the COVID–19 pandemic, which Other forced workers to stay offsite and disrupted transport infrastructure Europe including ports and rail. 0 EU) Sth. 2020 - 2022 Japan Korea Recovery has also proven uneven among the different forms of steel. A China recovery in global manufacturing is driving a shift towards hot-rolled coil, (1,099 Mt) which is expected to dominate growth in steel output in the December period) over cent growth (per -25 quarter. Demand for rebar steel is expected to grow more slowly, with -25 0 25 50 more limited price pressure over the coming months. 2017-2019 (per cent growth over period)

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

Resources and Energy Quarterly December 2020 29 China is likely to retain its dominance over global steel markets Growth elsewhere is expected to remain modest, with rebalancing slow Steel demand is likely to remain strong in China into 2021, supported by Steelmaking outside China is showing signs of recovery, led by growth in infrastructure development and housing construction, which has in turn other Asian countries. South Korean production has recovered to around been supported by relatively low interest rates. pre-COVID levels, with new facilities and upgrades expected to provide a further modest lift by the end of the outlook period. The Chinese government will release its fourteenth Five-Year Plan (covering 2021-2025) in March 2021. The plan has major implications for India’s steel production has shown solid growth in recent months, but it is China’s steel industry, and is expected to include a renewed focus on not yet clear how rapidly its long-held plans to expand domestic steel infrastructure rollouts and more rapid urbanisation, particularly in central production can proceed in light of COVID-19 disruptions and the unusually and western China. high iron ore price, which affects the viability of proposed steel plants. Elsewhere, growth appears to be picking up in Myanmar and Estonia, China’s government is examining more rapid consolidation of its domestic where production is expected to keep expanding, albeit from a relatively steel sector. The merger of small and mid-sized companies with larger low base. steel makers will see inefficient mills shut and larger companies gain greater power over pricing and market conditions. The result will likely be a However, production in Europe is not expected to fully recover, with some steel mills expected to close permanently. This will result in the more centrally planned industry, with internal coordination and more acceleration of a long-running shift in steel production towards emerging pricing heft. economies across southern and eastern Asia, with Vietnam in particular Figure 3.5: China’s steel consumption, production and net exports expected to increase its output as new steel projects are completed.

1,200 180 There may also be new forms of steelmaking emerging over coming years. 160 Carbon abatement goals have resulted in growing interest in ‘green steel’, 1,000 140 with estimates from the World Steel Association suggesting that the steel 120 sector currently accounts for around 8 per cent of global carbon emissions. 800 100 A shift towards scrap-based steel production — already underway in China 80 600 — is likely to gather speed over the next few years. Interest is also 60 growing in zero-carbon steel production, notably through Green Hydrogen 400 40

Tonnes (million) Tonnes 20 (million) Tonnes Ironmaking. This technique substitutes hydrogen for carbon in blast 200 0 furnaces, thereby avoiding the release of carbon dioxide emissions. A -20 number of pilot projects for this technology are now underway, with the 0 -40 biggest trial set to occur in Sweden. 2004 2007 2010 2013 2016 2019 2022 Should this or similar technology become commercial, there may be Steel production Steel consumption Implied net exports substantial shifts across the steel supply chain over the coming decades.

Source: Bloomberg (2020) World Steel Association; Department of Industry, Science, Energy Such a change would provide significant opportunities to any global and Resources (2020) steelmaker able to draw capital and develop new technology.

Resources and Energy Quarterly December 2020 30

Table 3.1: World steel consumption and production Million tonnes Annual percentage change

Crude steel consumption 2019 2020e 2021f 2022f 2020e 2021f 2022f China 875 892 918 942 2.0 2.8 2.7 European Union g 180 162 159 157 -10.3 -1.4 -1.4 United States 112 111 113 116 -1.3 2.2 2.2 India 106 99 106 113 -6.8 7.2 6.6 Japan 71 66 65 64 -7.6 -1.5 -1.5 Russia 56 53 53 52 -4.7 -1.2 -1.2 South Korea 45 43 42 42 -3.5 -1.7 -1.7 Brazil 25 23 24 25 -5.7 2.9 2.8 World steel consumption 1840 1799 1868 1935 -2.2 3.8 3.6 Crude steel production 2019 2020e 2021f 2022f 2020e 2021f 2022f China 993 1 054 1 067 1 101 6.2 1.2 3.2 European Union 148 123 124 125 -16.7 0.4 0.5 India 99 79 82 81 -19.9 3.0 -1.0 Japan 111 96 103 112 -13.4 7.2 8.3 United States 88 70 70 70 -19.8 0.1 0.1 Brazil 72 71 72 72 -1.1 0.9 1.1 Russia 71 67 72 73 -6.4 7.1 1.3 South Korea 32 31 31 31 -5.4 0.1 0.1 World steel production 1843 1806 1860 1927 -2.0 3.0 3.6

Notes: e Estimate; 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)

Resources and Energy Quarterly December 2020 31

4.1 Summary Figure 4.1: China's iron ore port stocks and spot price . The iron ore price has risen sharply in recent months, supported by 200 150 robust demand in China linked to government stimulus measures. The iron ore price is expected to remain well above US$100 a tonne until 160 120 mid-2021 before easing to just over US$75 by the end of 2022. . Australian export volumes are expected to grow from 858 million tonnes 120 90 in 2019–20 to 906 million tonnes by 2021–22 as mines open or expand 80 60 in Western Australia (see Australia section). US$ a tonne Million tonnes Million . Stronger prices are expected to push Australia’s iron ore export values 40 30 up to a peak of $123 billion in 2020–21. An easing in prices and stronger Australian dollar are subsequently expected to push earnings 0 0 back to a still strong $95 billion by 2021–22. 2016 2017 2018 2019 2020

Weekly port stocks Iron ore price 62% CFR (rhs) 4.2 Prices Notes: China import Iron ore fines 62% Fe spot (CFR Tianjin port) Iron ore prices remain strong due to supply disruptions Source: Bloomberg (2020) Antaike iron ore port stocks and Metal Bulletin Iron ore prices surged in mid-2020 as a result of growing Chinese demand and ongoing disruptions to Brazilian supply. Subsequently, prices have Figure 4.2: Iron ore price spread between grades held up at high levels, moving up again in recent weeks (Figure 4.1). 60 60 Slight growth in Brazilian supply has led to some reduction in the price premium for higher grades (Figure 4.2). The price premium has also been 30 45 curbed by a seasonal slowdown in construction across China, though Chinese construction remains strong overall, and seasonal effects are likely to be temporary. 0 30 Iron ore prices have proven highly sensitive to movements in demand over Price spread Price 2020. Prior to 2020, many large iron ore miners cut back investment, -30 15 closed mines, and attempted to retire debt. This left the industry without substantial spare capacity, magnifying the impact of supply disruptions Per cent difference to benchmark*to difference cent Per and recent growth in Chinese steel use. With China continuing to direct -60 0 substantial spending towards investment in infrastructure and property, 2015 2016 2017 2018 2019 2020 domestic steel stockpiles are now being run down. This is likely to keep Discount 58% fine ores Premium 66% fine ores Spread (rhs) pressure on prices over the short term, even though many steel mills in Notes: *Benchmark used is 62 per cent iron fines CFR other parts of the world are yet to return to full production. Source: Bloomberg (2020) China import prices

Resources and Energy Quarterly December 2020 34

Iron ore prices are likely to stay robust into 2021 Figure 4.3: Iron ore price by grade and China steel price index Prices are expected to remain strong for the next six months. China’s 150 5,000 demand is expected to remain high, though China’s steelmakers may seek to modestly reduce production should prices remain at a level which 120 4,000 renders many of them unprofitable (see Figures 4.3 and 4.4). Demand in 90 3,000 many other countries is expected to remain below its 2019 level: a range of steelmakers in Europe and South Asia remain on hiatus or shut down, 60 2,000 and are not expected to return to production until iron ore prices drop. US$ a tonne

30 1,000 Renminbi a tonne Prices have been held up by a combination of production constraints in Brazil, ongoing stimulus-driven demand in China, and the relatively low 0 0 price of metallurgical coal, which gives steelmakers added flexibility to pay Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 more for iron ore. These factors are likely to persist for at least another six CFR 58% CFR 62% months. On December 2, Vale released an update to its guidance, which CFR 66% FOB 62% reduced its expected output for 2020 from 310-330 million tonnes to 300- China steel price index (rhs) 305 million tonnes. This will add significantly to supply pressures over the Source: Bloomberg (2020); Department of Industry, Science, Energy and Resources (2020) coming year, with demand likely to be met through drawdown of inventories, a potential restart of currently closed mines in China, or a lift in Figure 4.4: Iron ore price vs China steel production growth high-cost production from India. Persistently strong prices will likely be 15 150 needed to bring sufficient supply to the market. Prices will also be supported by recovery in the global economy, and a 10 120 linked recovery in steel production outside of China. A substantial amount of steelmaking capacity remains shut down across much of the world, but 5 90 many of these plants have retained their workforce and are capable of a rapid power-up should it become profitable for them to do so. With global 0 60 US$ a tonne steelmaking now more China-centred than ever before, many governments may seek to ensure their domestic capacity is not -5 30

permanently lost, while governments seeking rapid expansion in their per - on year Year cent change domestic industries (such as India) may wish to ensure that such plans are -10 0 2015 2016 2017 2018 2019 2020 not delayed for too long by COVID–19. China steel production Iron ore price (rhs) Risks remain evenly split in both directions. China’s dominance in iron ore Notes: China import Iron ore fines 62% Fe spot (CFR Tianjin port) consumption gives it considerable capacity to set global prices, though the Source: Bloomberg (2020) China import prices; World Steel Association (2020) relative concentration of the iron ore supply chain may act as a counter- balance. Any easing in Chinese stimulus measures will also lead to

Resources and Energy Quarterly December 2020 35

fairly rapid downward shifts in prices from the current forecast level. previous guidance for output in 2020, and are expected to produce 324-333 million tonnes and 276-286 million tonnes (respectively). On balance, it is expected that prices will remain above US$100 a tonne until mid-2021, before easing gradually to around US$75 by the end of However, output from Vale remains under pressure, as previously noted. 2022 as Brazilian supply recovers and Chinese stimulus eases back (see In November, the company announced that 33 of its 104 Brazilian dam Figure 4.5). structures had failed stability assessments, with nearly all of the affected dams connected to iron ore facilities. The company remains subject to a Figure 4.5: Iron ore price outlook, quarterly range of legal actions, added regulatory processes and other requirements 150 in the wake of the Brumadinho Dam collapse in 2019. The COVID-19 pandemic also led to significant disruptions of port and rail facilities in the south of Brazil, adding further logistical difficulty. 100 The company did achieve significant milestones across its southern operations in the second half of 2020, with shipments rising from 64 million tonnes in the June quarter to 82 million tonnes in the September quarter.

$US/tonne 50 However, this has not been sufficient to enable the company to meet its initial production guidance for 2020. The longer term outlook for Vale is stronger, with the company making 0 significant progress on its US$1.5 billion Serra Sul 120 project, expected 2015 2016 2017 2018 2019 2020 2021 2022 to be completed by 2024. This upgrade will open access to additional Price - 62% fines mining areas, incorporate extra processing lines and provide a duplicate Notes: China import Iron ore fines 62% Fe spot (CFR Tianjin port) long-distance conveyor. Mine plant capacity is expected to expand by 20 Source: Bloomberg (2020) Department of Industry, Science, Energy and Resources (2020) million tonnes a year, allowing Vale to maintain its productive capacity as new production and licencing restrictions affect its output adversely. 4.3 World trade With Vale’s output set to recover over time, the three largest iron ore Brazilian iron ore supply is recovering producers remain in a dominant market position, with the relative lack of competition and high entry barriers somewhat moderating China’s power China has become steadily more dominant as a global iron ore to set prices in the market. In response, China has stepped up its effort to destination, with steel production in a range of other countries subject to source alternative supplies during 2020. recessionary conditions in the latter half of 2020. China now accounts for more than 70 per cent of global iron ore imports, though its power to set By far the largest prospective alternative mine is at Simandou in the prices has been somewhat checked by the relative market concentration Nzérékoré region of Guinea. In recent months, China has stepped up among iron ore producers. efforts to develop the project, which has potential to extract 70-150 million Most Chinese imports come from three large companies: BHP, Vale, and tonnes of iron ore a year (depending on whether both the northern and Rio Tinto. Of these three, BHP and Rio Tinto remain on track to meet their southern blocks can be brought into production). This would represent a

Resources and Energy Quarterly December 2020 36

large new source of seaborne iron ore, though the market impact would be domestic recycling. This will result in reduced Chinese dependence on the somewhat limited given the scale of the overall seaborne market (where seaborne iron ore market. supply is rising towards 2 billion tonnes a year). While demand continues to evolve, iron ore supply is expected to remain The Simandou deposit is subject to complex ownership arrangements. broadly unchanged in its structure, with Australia continuing to play a The southern blocks of Simandou are controlled by a joint venture dominant role (Figure 4.6). between Rio Tinto and Chinalcom, while much of the northern area is controlled by a separate Chinese joint venture, which has recently Figure 4.6: Outlook for global iron ore exports announced plans to push ahead with its project. 1,800

The project faces significant logistical issues. Rio Tinto has estimated that 1,600 project infrastructure costs are likely to exceed US$20 billion. The project 1,400 will require about 650 kilometres of new railway, which would cut through mountainous and inaccessible regions. The profitability for the mine would 1,200 be somewhat clouded by the fact that any significant price falls brought 1,000 about by the project would reduce profitability of other Rio Tinto facilities 800 around the world. Million tonnes Million 600 Overall, it is not expected that production at Simandou will occur within the next five years, and potentially longer. Little progress has been made over 400 the past 10 years, and a large quantity of complex infrastructure will need 200 to be built. 0 One new iron ore mine has recently received formal approval to proceed, 2015 2016 2017 2018 2019 2020 2021 2022 with Champion Iron’s Bloom Lake expansion in Canada now expected to Australia Brazil ROW be completed in December 2022. This would almost double output from Source: World Steel Association (2020); Department of Industry, Science, Energy and the site to 15 million tonnes annually from 2023. Resources (2020) In aggregate, demand for iron ore remains strongly China-centred, with Chinese steel blast furnaces continuing to operate at above-normal 4.4 Australia capacity. Much of this output is being used in building infrastructure, with Iron ore export earnings are set to reach a new record in 2020–21 the Chinese government progressing with plans for new bridges, rail, and Australian iron ore export values set a new record of $10.9 billion in subway lines. Steel production has also recovered somewhat in India and October. This is more than one third higher than the total for October South Korea, creating the possibility of a more diverse and broadly based 2019. The bulk of this growth is made up of Chinese imports from steel market in 2021. Australia, which have risen strongly in recent months. The refurbishment Chinese demand for iron is likely at its peak, with a decline expected over of a railcar dumper at BHP’s Port Hedland facilities is expected to help the the next 10 years as a growing share of its steel production is drawn from company meet this demand into 2021, with the conclusion of site

Resources and Energy Quarterly December 2020 37

maintenance at Rio Tinto facilities also expected to support exports over Figure 4.7: Australia’s iron ore export volumes and values the December quarter. 1000 160 A new mine is set to open in the Pilbara, where Strike Resources has announced the completion of a feasibility study into its Paulsens East 750 120 project. This mine is expected to produce an initial output of about 6 million tonnes over four years, with the study finding low technical risks and robust economics given the relatively high quality of output and the current 500 80

price environment. First production from the site is targeted for mid-2021. A$ billion Million tonnes Million Overall trends for investment in iron ore can be viewed in the 2020 250 40 Resources and Energy Major Projects publication.

Australia’s iron ore export volumes are forecast to grow 0 0 2009–10 2012–13 2015–16 2018–19 2021–22 Export volumes are expected to increase from 858 million tonnes in Volume Value (rhs) 2019–20 to be above 900 million tonnes by 2021–22 (see Figure 4.7).

Output is expected to grow from several expanding projects in the Pilbara Source: ABS (2020) International Trade, Australia, 5368.0; Department of Industry, Science, region. Prices are expected to remain strong over the outlook period, with Energy and Resources (2020) export earnings expected to peak at $123 billion in 2010–21 before easing Figure 4.8: Australia’s iron ore export destinations to $95 billion by 2021–22. However, exports will remain sensitive to 9000 conditions in China, which remains our dominant market (Figure 4.8). 8000 Iron ore exploration expenditure is growing as prices lift 7000

Iron ore exploration has picked up in recent quarters as prices have lifted. 6000 A total of $111 million was invested in exploration in the September 5000 quarter. This is around 8 per cent higher than in the September quarter 2019, and reflects favourable prices in the first half of 2020-21. 4000

$m (monthly) 3000 Revisions 2000 Forecast export earnings for 2020–21 have risen considerably, from $97 1000 billion in the September Resources and Energy Quarterly to just over $120 0 billion in this edition. This results from a stronger than expected Chinese Sep-96 Sep-00 Sep-04 Sep-08 Sep-12 Sep-16 Sep-20 demand and recent large cuts in Vale’s production guidance, which will Japan Korea Taiwan China Others likely lead to a supply shortfall and significantly higher prices over the year. Earnings have been revised up for 2021–22, though to a lesser degree. Source: ABS (2020) Department of Industry, Science, Energy and Resources (2020)

Resources and Energy Quarterly December 2020 38

Table 4.1: World trade in iron ore Million tonnes Annual percentage change

2019 2020e 2021f 2022f 2020f 2021f 2022f Total world trade 1,555 1,647 1,783 1,861 6.0 8.2 4.4

Iron ore imports

China 1,071 1,209 1,343 1,421 13.0 11.0 5.8

European Union 137 128 125 125 -7.0 -2.2 0.0

Japan 120 98 101 100 -18.3 3.2 -1.0

South Korea 74 69 74 75 -6.4 7.1 1.3

India 5 5 5 5 -6.5 -2.1 0.0 Iron ore exports Australia 836 876 896 923 4.9 2.3 3.0

Brazil 336 269 281 301 -20.1 4.5 7.1

Ukraine 44 50 62 64 12.9 24.0 3.2

India 40 52 62 65 28.2 21.3 3.6

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

Resources and Energy Quarterly December 2020 39

Table 4.2: Iron ore outlook Annual percentage change

World Unit 2019 2020e 2021f 2022f 2020f 2021f 2022f Prices bc

– nominal US$/t 81.5 93.1 100.0 76.3 14.2 7.4 -23.7

– real d US$/t 82.6 93.1 98.0 73.2 12.8 5.3 -25.3

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

Production

– Steel hs Mt 6.05 5.48 5.49 5.52 -9.5 0.3 0.6

– Iron ore Mt 924 919 929 930 -0.6 1.1 0.1

Exports

Steel Mt 1.21 0.88 0.90 0.95 -27.6 2.3 5.9

– nominal value A$m 1 287 1 010 833 861 -21.6 -17.5 3.4

– real value hi A$m 1 316 1 019 833 847 -22.6 -18.3 1.7

Iron ore Mt 818 858 899 906 4.9 4.7 0.7

– nominal value A$m 77,553 102,815 123,178 95,245 32.6 19.8 -22.7

– real value i A$m 79,291 103,732 123,178 93,685 30.8 18.7 -23.9

Notes: b fob Australian basis; c Spot price, 62 per cent iron content basis; d In 2020 US dollars; e Estimate; 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 2020–21 Australian dollars. Source: ABS (2020) International Trade in Goods and Services, Australia, 5368.0; Bloomberg (2020) Metal Bulletin; World Steel Association (2020); AME Group (2020); Company Reports; Department of Industry, Science, Energy and Resources (2020)

Resources and Energy Quarterly December 2020 40

5.1 Summary Figure 5.1: Metallurgical coal prices, monthly . Metallurgical coal prices have been volatile in the December quarter, 350 rebounding on hopeful signs in world industrial activity, then falling to four year lows on a slow-down in China’s imports. The Australian 300 premium hard coking coal (HCC) price is estimated to average US$125 250 a tonne in 2020, down from US$179 a tonne in 2019. . Australia’s exports are forecast to fall by around 8 million tonnes to 169 200 million tonnes in 2020–21, due to lower global demand. Exports should lift in 2021–22, as world steel production recovers further (see Australia 150 section). US$ a tonne 100 . Australia’s metallurgical coal exports values are forecast to fall sharply to $22 billion in 2020–21, from $34 billion in 2019–20. They are forecast 50 to recover partially to $27 billion in 2021–22, as prices and volumes lift. 0 5.2 Prices Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 Metallurgical coal prices volatile on China uncertainty Australian HCC Low Vol PCI Semi-soft It’s been a volatile December quarter for metallurgical coal prices. The benchmark price for Australian premium hard coking coal (HCC) rose Notes: HCC stands for hard coking coal. PCI stands for pulverized coal for injection. rapidly to US$140 a tonne early in the quarter, then plunged 30 per cent to Source: Platts (2020) US$98 a tonne at one point in November. While price falls in early 2020 are observed — where Chinese imports of Australian coal rebounds were driven by a steel industry slowed by the COVID-19 pandemic, the sharply in the first months of the year — then this could be expected to latest price declines come at a time of robust recovery in the industry (see help prices for Australian coal close the gap with other global prices. This the steel chapter). is the assumed scenario that underpins the forecasts in this chapter. From The price plunge is more likely to reflect significant uncertainty arising from 2021, metallurgical coal prices are expected to begin to recover in line with contemporaneous unofficial reports from traders in China that Australia’s global steel production. The premium Australian HCC price is forecast to coal exports could be subject to informal import restrictions (see thermal average US$134 a tonne in 2021 and US$145 a tonne in 2022, both well coal chapter). Chinese domestic prices have moved in the opposite below the 2019 average (Figure 5.2). direction, with one Chinese domestic hard coking coal benchmark up 13 The overriding risk to the outlook for prices is a scenario in which China’s per cent in the same period that Australian prices fell. The Australian informal import restrictions on Australian coal extends beyond the end of premium HCC spot price is estimated to average $108 a tonne in the the quarter and into 2021. In such a scenario, prices would stay low for December quarter (Figure 5.1), a little lower than the September quarter. longer, as Australian exporters take time to adjust. Australian exporters in The recovery of Australian metallurgical coal prices will largely depend on this scenario will need to find customers in other countries to buy up to 3–4 Chinese government policy and signals. If the patterns of previous years million tonnes a month of metallurgical coal, and as other exporting

Resources and Energy Quarterly December 2020 43

countries have to redirect 3–4 million tonnes a month to China to meet the 5.3 World trade needs of its growing steel industry. China’s steel industry would likely face In 2020, world trade in metallurgical coal is estimated to fall by 43 million a particular challenge in obtaining the higher-grade hard coking coals in tonnes (around 13 per cent) to 294 million tonnes. Production cutbacks sufficient quantities. Indications of coal trade realignment started in the motivated by low prices — as a percentage of 2019 levels — are expected December quarter, with additional Australian cargoes delivered to Indian to be most severe for the US, but other major exporters are also likely to ports and other Asian customers in response to uncertainty regarding be affected, including Australia. The US is the second largest metallugrical Chinese policy. To fill the gaps caused by restricting Australian coal, other coal supplier, but many US producers have relatively high costs, as shown exporters such as Canada’s Teck Resources are diverting sales to China in the global cost curve (Figure 5.5). where possible, as this earns Teck a significant premium compared with other markets in Asia. In 2021 and 2022, world trade in metallurgical coal is expected to grow strongly as industrial production recovers; rising by 34 million tonnes in On the other hand, there is an increased risk over the Australian summer 2021 and a further 21 million tonnes in 2022. This forecast contrasts with of extreme weather disrupting Queensland’s coal production, which could the forecast for thermal coal, which is not expected to regain 2019 world curtail supply just as the global steel industry is recording strong growth, trade levels during the outlook period (see thermal coal chapter). putting upward pressure on the Australian hard coking coal benchmark. 5.4 World imports Figure 5.2: Australian premium HCC spot price, quarterly China’s informal import restrictions are in effect 300 China is the world’s largest steel maker, and imported 75 million tonnes of metallurgical coal in 2019 — making it the world’s largest metallurgical 250 coal buyer. After strongly increasing imports into China early in the June quarter — to supply its recovering steel industry — the September quarter 200 saw a reversal of fortunes for seaborne imports, as a result of China’s informal import restrictions. During the September quarter, China’s imports 150 were 14 per cent lower than the same period a year earlier (Figure 5.3).

US$ a tonne After more than a decade of strong growth associated with the rise of the 100 steel industry, China’s metallurgical coal imports in 2020 are estimated to be on par with 2019, at around 75 million tonnes. Chinese metallurgical 50 coal imports are forecast to ease to 73 million tonnes in 2022, as China’s mines increase their own output. This assumes that China follows the 0 pattern of recent years, and relaxes import restrictions in early 2021. It Dec-12 Dec-14 Dec-16 Dec-18 Dec-20 Dec-22 also assumes that China does not apply country-specific restrictions on Source: Platts (2020); Department of Industry, Science, Energy and Resources (2020) Australian coal. If these assumptions turn out to be incorrect — for example, if China further tightens its import policy in early 2021 — then results are likely to be below forecasts.

Resources and Energy Quarterly December 2020 44

Figure 5.3: China’s metallurgical coal imports, year-on-year change Chinese metallurgical coal output is also expected to lift in the outlook 5 period, but may not keep pace with steel industry demand. Environmental, productivity and safety policies are making it more difficult for many small- 4 scale Chinese coal mines to secure approvals to operate, and output is 3 more reliant on smaller mines than is thermal coal output. 2 1 India’s metallurgical coal imports recovering 0 India is the world’s second largest steel producer and metallurgical coal buyer, importing 58 million tonnes in 2019. India’s metallurgical coal

Million tonnes Million -1 -2 imports jumped 23 per cent in the September quarter compared with a year earlier. This was driven by the emergence of India’s steel industry -3 from COVID-19 containment measures earlier in the year, although the -4 Australia Russia Canada Mongolia United World ongoing spread of the virus remains a risk to India’s industrial recovery. States India has plans to raise crude steel production capacity from 142 million Jan/Feb-20 Mar-20 Apr-20 May-20 tonnes to 300 million tonnes per year over the next decade. India has Jun-20 Jul-20 Aug-20 Sep-20 limited domestic reserves of metallurgical coal, and will need to lift imports Notes: China customs released combined January/February data for 2020. to support rapid growth of its steel sector. As Australian cargoes into China Source: Bloomberg (2020), China customs (2020) have declined in recent months, many have found alternative buyers in Figure 5.4: Metallurgical coal imports India. India’s metallurgical coal imports are estimated at 55 million tonnes 80 in 2020, down 3 million tonnes on 2019. They are expected to fully recover in 2021 and to increase to 65 million tonnes in 2022 (Figure 5.4). 70 60 Japan’s imports to fall, while South Korea’s to rise slightly after 2020 50 Japan is the world’s third largest metallurgical coal importer, importing 47 40 million tonnes in 2019. Japan’s imports plunged in the September quarter, 30 down 23 per cent year-on-year. With two major producers planning to retire some steel making capacity over the outlook period, Japan’s Million tonnes Million 20 metallurgical coal imports are forecast to fall to 40 million tonnes in 2020, 10 holding at around that level through to 2022. 0 China Japan South Taiwan India EU27 South Korea is the world’s fourth largest metallurgical coal importer, Korea buying 37 million tonnes in 2019. South Korea’s imports fell 10 per cent 2019 2020s 2021f 2022f year-on-year in the September quarter, and are forecast to be 34 million Notes: f Forecast tonnes in 2020. South Korea’s imports are expected to bouce back next Source: IHS (2020); Department of Industry, Science, Energy and Resources (2020) year, reaching 38 million tonnes in 2022.

Resources and Energy Quarterly December 2020 45

5.5 World exports in 2021, reaching 27 million tonnes in 2022 (Figure 5.6). In recent years, US exports volumes plunge and are likely to stay down Russia has invested in new mining capacity, and rail/port expansions. The US is the world’s second largest exporter of metallurgical coal after Mongolia’s exports depend on China border Australia, exporting 50 million tonnes in 2019. The US is a swing producer Mongolia surpassed both Russia and Canada to become the world’s third in seaborne metallurgical coal markets — due to higher production costs largest metallurgical coal exporter in 2019, exporting around 30 million (Figure 5.5) and higher freight costs to key consumer markets. US exports tonnes — mostly by road to China. The closure of the China–Mongolia fell 24 per cent in the September quarter year-on-year. Even without border from late January to April 2020 disrupted the crossing of coal sharing the deep price falls felt by Australian exporters in the December trucks. In late November and early December, coal truck crossings were quarter, many US mines are unprofitable at current prices. Since many US reported to be falling, as China implemented new border controls due to mines produce both thermal and metallurgical coal, the loss of revenues the re-emergence of COVID–19 in Mongolia. associated with diminishing thermal coal demand detracts from the viability Due to the interruptions in both the early and late months of 2020, of the metallurgical mining. US metallurgical coal exports are forecast to Mongolia’s metallurgical coal exports are estimated to fall by 20 per cent in fall to 37 million tonnes in 2020, before rebounding in line with expected 2020 to 24 million tonnes. Mongolia’s exports are forecast to recover once higher prices and lifting to 44 million tonnes in 2022 (Figure 5.6). these public health challenges are resolved, rising to 35 million tonnes in Russia’s exports fall for now 2022, supported by strong demand from China’s steel makers (Figure 5.6). Russia exported 25 million tonnes of metallurgical coal in 2019. Exports in Mongolia is a key supplier of metallurgical coal to China, and during the the September quarter were 6 per cent higher year-on-year. With output border closure in early 2020 — when Mongolian coal supply was cut backs due to current low prices, exports are forecast to be 22 million effectively cut off — China’s traders called in additional Australian cargoes tonnes in 2020. Russian metallurgical coal exports are expected to recover by sea to prevent shortages (Figure 5.3).

Figure 5.5: Metallurgical coal (including hard coking, PCI and semi-soft) global cost curve, FOB, 2020 160 140 120 100 80 60 US$ a tonne 40 20 0 0 50 100 150 200 250 300 350 Australia Russia US Canada Mozambique Mongolia RoW Million tonnes

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

Resources and Energy Quarterly December 2020 46

Figure 5.6: Metallurgical coal exports 5.6 Australia 200 Metallurgical coal export earnings to fall in 2020–21

150 Australia is the world’s largest exporter of metallurgical coal, with exports worth $34 billion in 2019–20. Metallurgical coal export volumes fell 7 per 100 cent year-on-year in the September quarter 2020, due to slower Japanese and South Korean demand and China’s import limits (Figure 5.7).

Million tonnes Million 50 Metallurgical coal export earnings are forecast to decline to $22 billion in 0 2020–21, due to a combination of lower prices and reduced mine Australia US Canada Mongolia Russia Mozambique production (Figure 5.8). Export volumes are expected to decline due to 2019 2020s 2021f 2022f lower global demand for metallurgical coal, with some Australian miners Notes: f Forecast. s Estimate. Source: IHS (2020); Department of Industry, Science, Energy and Resources (2020) announcing production cutbacks or temporary closures, and the potential for further announcements to follow given the disruption caused by Exports from Canada could partly fill China’s Australia gap Chinese import restrictions. Export earnings are then expected to mount a Canada exported 34 million tonnes of metallurgical coal in 2019 (Figure partial recovery to $27 billion in 2021–22. 5.6), of which less than 10 per cent was shipped to China. Canada’s total However, there are a number of factors that reduce the risk of widespread exports to all countries in the September quarter declined by 37 per cent mine closures in Australia; these include ‘take-or-pay’ contracts with rail year-on-year. In the December quarter, it is expected to fill some of the and port operators, contracted export sales, and the costs associated with gaps caused by China’s informal import restrictions on Australian coal. moving to care and maintenance (see the thermal coal chapter for Canada’s metallurgical coal exports are estimated at 32 million tonnes in discussion). About two-thirds of Australian metallurgical coal exports are 2020, but to bounce back to 35 million tonnes in 2022. HCC, while the remaining third is composed of pulverized coal for injection Mozambique’s exports collapse (PCI) and semi-soft coking coal. Most Australian HCC producers appear to Mozambique currently has two exporting metallurgical coal mines: Vale’s be relatively well-positioned at current spot prices (Figure 5.9). Semi-soft Moatize and Jindal Steel’s Songa mines. Once touted as the next major coking coal and PCI miners seem to be at higher risk of operating losses. supplier of metallurgical coal, Mozambique has faced a number of With prices for semi-soft and PCI (the lower grades of metallurgical coal) challenges in growing its exports, which were 5 million tonnes in 2019. equal to, or only marginally above, thermal coal prices, mines are facing Mozambique’s metallurgical coal exports plummeted 39 per cent year-on- challenging market conditions. Some mines — like Bluff PCI Mine in the year in the September quarter 2020. Bowen Basin — have gone into ‘care and maintanence’ citing their Mozambique’s metallurgical coal exports are forecast to decline to 3 intention to halt production ‘while the coal price remains below economic million tonnes in 2020, as low prices impact Mozambique’s relatively high levels and uncertainty remains regarding Chinese Government policy cost producers (Figure 5.6). After 2020, Mozambique’s exports are relating to Australian metallurgical coal imports’. On 19 November 2020, forecast to begin to recover, reaching 7 million tonnes in 2022. The rise that mine’s contracted operator, MACA, called in receivers to commence will be driven by the ramp up of Vale’s Moatize mine, and facilitated by the debt recovery against the owner. 912 kilometre Nacala logistics corridor rail line and Nacala port expansion.

Resources and Energy Quarterly December 2020 47

Figure 5.7: Australia’s metallurgical coal exports, monthly Several major Australian mining companies — such as Australia’s largest 20 producer, Glencore — reduced their coal output in the September quarter in response to low prices, but the effort was focussed on reducing thermal 16 coal production. Glencore reports that metallurgical coal was the only profitable part of its coal mining business in the 2019–20 financial year. 12 Nevertheless, Glencore announced in December that it intends to close its Newlands hard coking coal and premium thermal coal mine in the Bowen Basin in the next few years as the resource is exhausted. 8

Million tonnes Million BHP, responsible for around a quarter of metallurgical coal production, 4 reduced its production volume by 17 per cent in the September quarter compared to the June quarter. BHP’s stated medium term goal is to cut its 0 2020-21 metallurgical output to 40–44 million tonnes, and to focus its Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec production efforts on higher quality coals.

2018 2019 2020 Production also slowed at Peabody and Yancoal’s 2.7 million tonne Source: ABS (2020) Middlemount mine (which produces mostly PCI) in Queensland’s Bowen Basin. Anglo American’s Grosvenor mine in Queensland — which closed Figure 5.8: Australia’s metallurgical coal exports due to an accident that injured 5 workers in early May — will remain 200 60 suspended until at least the second half of 2021, removing up to 4 million tonnes from global metallurgical coal supply. Peabody also announced in 160 48 December that its Metropolitan mine in NSW will close for 8 weeks from 1 January 2021, citing weak prices and a lack orders. 120 36 As the result of announced production cuts, Australian export volumes are forecast to fall by 5 per cent to 169 million tonnes in 2020–21. A full

80 24 billion A$ recovery is anticipated by 2021–22, with exports in that year rising 9 per cent to 184 million tonnes. Million tonnes Million 40 12 A near term risk to mine production is a higher likelihood of disruptive heavy rainfall in coal producing regions of Queensland and NSW. This risk 0 0 is not factored in to the forecast, due to the uncertainty of such events. 2009–10 2012–13 2015–16 2018–19 2021–22 Stockpiling may be occurring as both a response to difficult market Volumes Values (rhs) conditions and as a precaution against the current La Niña episode. The Source: ABS (2020) International Trade, Australia 5454.0; Department of Industry, Science, Australian Bureau of Meteorology (BOM) advises that La Niña conditions Energy and Resources (2020) are expected to continue through the March quarter 2021.

Resources and Energy Quarterly December 2020 48

The last significant La Niña was in 2010–11, and resulted in around 85 per Figure 5.9: Export margins of Australian metallurgical coal mines cent of Queensland coal mines either restricting output or closing because 50 of stormwater impacts. When Cyclone Debbie hit Queensland in March 40 2017, the impact to coal production caused prices to double and then ease 30 back over nearly two months. The price effect offset lower export volumes. 20 Coal exploration expenditure may have peaked 10 Australia’s coal exploration expenditure decreased by 6 per cent year-on- 0

year to $73 million in the September quarter 2020, but remains higher than US$ a tonne -10 the lows recorded over 2016 and 2017. The increase compared to the -20 2016 lows were likely in response to high coal prices, especially -30 metallurgical coal, in the intervening years. High prices persisted for -40 several years then starting to decline from mid–2019. Current low prices 0 50 100 150 Million tonnes are expected to translate to lower coal exploration expenditure over the HCC PCI Semi soft coming year or two (Figure 5.10). 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 Investment activity largely on hold = US$65 a tonne. Mines are categorized into HCC, PCI and semi soft. If a mine produces a more than one type, they are categorised according to their dominant product for simplicity. Investment in future Australian metallurgical coal projects is uncertain, as highlighted in the 2020 edition of the Resources and Energy Major Source: AME (2020); Department of Industry, Innovation and Science (2020) Projects publication. Weak market conditions in 2020 resulted in capital Figure 5.10: Australian coal exploration expenditure and prices expenditure reductions, write-downs, and FID deferrals. There are 42 350 250 metallurgical coal projects in the pipeline (25 of these target both thermal and metallurgical coals) which, if progressed, would have a total 280 200 investment value of $23–31 billion. Thirty of these coal projects are at the feasibility stage, but progress has slowed. For the two projects at the stage 210 150 where investment has been committed, both are mine expansions. 140 100 A$ million A$

Revisions to the outlook for Australian metallurgical coal exports US$ a tonne Australia’s forecast metallurgical coal export earnings have been revised 70 50 down by $0.4 billion in 2020–21 and by $0.6 billion in 2021–22 since the September Resources and Energy Quarterly. The revisions have been 0 0 Sep-10 Sep-12 Sep-14 Sep-16 Sep-18 Sep-20 driven by a stronger forecast $A/$US exchange rate, reduced export Exploration expenditure (rhs) Newcastle 6,000 kcal volumes and lower prices. Forecast export volumes in 2020–21 have been Australian Hard Coking Coal revised down by 2 million tonnes, and volumes in 2021–22 down by 1 million tonnes. Source: ABS (2020), IHS (2020), Platts (2020)

Resources and Energy Quarterly December 2020 49

Table 5.1: World trade in metallurgical coal

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

World trade Mt 337 294 328 348 -12.1 10.8 7.2

Metallurgical coal imports

China Mt 75 75 67 73 0.7 -10.9 8.2

India Mt 58 55 60 65 -5.4 9.8 8.7

Japan Mt 47 40 40 40 -13.5 0.5 -0.8

European Union 28 Mt 41 35 39 38 -14.0 11.5 -2.6

South Korea Mt 37 34 38 38 -6.4 10.1 1.1

Metallurgical coal exports

Australia Mt 184 168 179 185 -9.1 6.7 3.5

United States Mt 50 37 42 44 -26.5 14.3 4.8

Canada Mt 34 32 34 35 -6.5 5.9 2.9

Russia Mt 25 22 24 27 -9.0 7.4 12.5

Mongolia Mt 30 24 30 35 -20.2 25.4 16.7

Mozambique Mt 5 3 5 7 -39.3 68.3 40.0

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

Resources and Energy Quarterly December 2020

50

Table 5.2: Metallurgical coal outlook

Annual percentage change

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

Contract pricese

– nominal US$/t 184 127 132 145 -31.2 3.9 10.1

– reald US$/t 186 127 129 139 -32.1 1.8 7.8

Spot pricesg

– nominal US$/t 179 125 134 145 -30.0 7.3 8.2

– reald US$/t 181 125 132 139 -30.9 5.2 6.0

Australia Unit 2018–19 2019–20 2020–21f 2021–22f 2019–20 2020–21f 2021–22f Production Mt 189 184 179 192 -2.8 -2.8 7.4 Export volume Mt 184 177 169 184 -3.4 -4.7 9.2 – nominal value A$m 43,637 34,246 22,572 27,263 -21.5 -34.1 20.8

– real valuei A$m 44,615 34,552 22,572 26,817 -22.6 -34.7 18.8

Notes: d In 2020 US dollars. e Contract price assessment for high-quality hard coking coal. i In 2020–21 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)

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6.1 Summary Figure 6.1: Thermal coal prices, weekly . Thermal coal spot prices stabilised in the December quarter 2020, on 120 the back of production cuts in major exporting countries and stronger demand, as Asian economies emerged from COVID-19 containment 100 measures. The Newcastle benchmark price is estimated to average 80 US$57 a tonne in 2020, before slowly rising to US$65 a tonne in 2022. . Reports of informal import restrictions in China on Australian coal are 60

weighing on producer sentiment. Australia’s exports are forecast to US$ a tonne 40 decrease from around 213 million tonnes in 2019–20 to 199 million tonnes in 2020–21, then to 222 million tonnes in 2021–22 (see Australia 20 section). 0 . Australia’s thermal coal exports are forecast to fall from $20 billion in Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 2019–20 to $15 billion in 2020–21, and $16 billion in 2021–22 driven by Newcastle 6,000 Newcastle 5,500 higher prices and volumes. Indonesia 4,700 QHD 5,500 kcal (domestic)

6.2 Prices Note: Qinhuangdao (QHD) is the largest coal port in China, and QHD prices are a key International thermal coal prices recover as COVID-19 impacts recede benchmark for coal prices in northeastern China. Source: IHS (2020) Thermal coal prices recovered from their August 2020 low point in the December quarter 2020. The benchmark Australian thermal coal spot (April to March) contract price of US$69 a tonne, though not all cargoes to price — Newcastle 6,000 kcal/kg — rebounding to average at an Japan trade at this price. The Japanese fiscal year contract price, which estimated $60 a tonne in the December quarter, 24 per cent higher than serves as a benchmark for the Asian market, as usual, is expected to the September quarter 2020 average (Figure 6.1). This recovery coincided settle at a premium relative to the spot price over the outlook period with cooler weather in the northern hemisphere and the emergence of (Figure 6.2). many countries from COVID-19 containment measures. But the main China’s domestic thermal coal prices rise strongly driver of improving prices was the curtailment of coal mine production around the world, with world exports in the September quarter down 13 China’s government intervention to limit imports is placing downward per cent year-on-year, as higher-cost mines sought to limit their operating pressure on Australian thermal coal prices, while supporting China’s losses amid low prices. thermal coal miners. Prices for China’s domestic product have soared to around double the price of the equivalent Australian coal (see comparison The Newcastle 6,000 kcal spot price is likely to have averaged around with QHD prices in Figure 6.1). US$57 a tonne in 2020 (Figure 6.2). Australian producers have received some support over this period from the 2020–21 Japanese Fiscal Year In 2021, thermal coal spot price gains will be driven by a rise in seaborne

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Figure 6.2: Thermal coal price outlook economic activity. The largest output cuts are likely to have come from 140 Indonesia, Colombia and the US, although all miners have been affected. In 2021 and 2022, global thermal coal import demand is expected to grow 120 weakly, as the world economy slowly rebounds from the impacts of 100 COVID-19. However, the shift away from coal in power generation in some countries, combined with the drive for self-sufficiency in others, is 80 expected to keep world trade in thermal coal below 2019 levels during the 60 outlook period. US$ a tonne 40 6.4 World imports 20 Import policy causes China’s coal price premium to soar

0 China’s total thermal coal imports in the September quarter 2020 were 38 2016 2018 2020 2022 per cent lower than the same period in 2019 due to China’s expanding Newcastle 6,000 kcal JFY contract price domestic coal production and import restrictions. This fall occurred despite China’s power generators increasing their year-on-year output by 5.3 per Note: JFY is Japanese Fiscal Year (April to March). cent in September and 4.6 per cent in October. Source: IHS (2020); Department of Industry, Science, Energy and Resources (2020) As the world’s largest thermal coal producer, consumer and importer, thermal coal demand, as the global economy recovers from the COVID-19 China exerts a profound influence on seaborne markets. Propelled by a pandemic. However, longer-term trends will constrain the extent of the rebounding economy — after its intense early 2020 measures to contain rise: growth in the seaborne trade over the outlook period is forecast to be COVID-19 infections — China’s total thermal coal imports surged in the modest, and may never regain the levels of 2019. first half of 2020. However, this was short-lived. Many traders appear to have quickly exhausted their permitted import volumes, and in the second 6.3 World trade half of the year have turned to higher-cost Chinese coal or to overland In 2020, world thermal coal trade is estimated to have declined for only the imports from Mongolia as substitutes. second time this century (the first in 2015). World thermal coal imports are China’s coal mining industry — the world’s largest — produced 3,500 forecast to have fallen by 70 million tonnes — or 6.4 per cent to 1,036 million tonnes of coal in 2019, equal to half of world output. Despite the million tonnes. The fall in seaborne thermal coal demand has been led by impacts of COVID-19 containment measures in the early months of the India and Europe (Figure 6.3). Europe’s coal imports are expected to year, China’s domestic coal mining industry has been growing noticeably. continue to fall, as a part of the region’s long-term shift away from coal in China’s mine output in the nine months to September rose by over 2 per energy generation. Demand in South and Southeast Asia is also being cent compared to the equivalent period in 2019. Consequently, and affected by the impact of the COVID-19 pandemic on power demand and despite firm demand driven by strong industrial activity, China’s total

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Figure 6.3: Thermal coal imports Figure 6.4: China’s black coal imports, monthly volumes

250 40

35 200 30

150 25

20 100

Million tonnes Million 15 Million tonnes Million 50 10 Informal import restrictions were introduced in late 2018 0 5 China Japan South Taiwan India Other EU27 0 Korea Asia Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2019 2020s 2021f 2022f 2017 2018 2019 2020

Note: s Estimate f Forecast Notes: Data is for all black coal, including thermal and metallurgical coal. Smoothed estimates based on China customs data. Source: IHS (2020); IEA (2019) Coal Market Report; Department of Industry, Science, Energy and Resources (2020) Source: Bloomberg (2020); Department of Industry, Science, Energy and Resources (2020) which is undergoing restructuring — and to pursue energy security goals. thermal coal imports in 2020 are estimated to fall by 14 million tonnes. Import data shows that all three major suppliers of thermal coal to China In the nine months to September, Australia’s thermal coal exports to China (Indonesia, Australia, Russia) sold lower volumes to China in the were similar in volumes in the equivalent period of 2019. However, September quarter than the same period in 2019. For the month of historically high export volumes at the start of the year have been offset by October, China’s total thermal coal imports were down 61 per cent year- sharply lower volumes in more recent months (Figure 6.4). During the on-year and imports from Australia were down 60 per cent year-on-year. September quarter, Australian thermal coal exports to China were 39 per Official data shows that Indonesia’s exports experienced a similar decline cent lower year-on-year. as Australia’s. Meanwhile, imports from Russia rose. With import restrictions expected to continue to curtail volumes until early Unofficial reports emerged on 2 November that China’s authorities had 2021, annual imports of thermal coal are forecast to be 210 million tonnes directed Chinese buyers to reduce or stop purchases of Australian coal. in 2020, down from 224 million tonnes in 2019. Shipping data suggested that around 7 million tonnes of Australian thermal China’s government has actively sought to manage coal import levels over and metallurgical coal cargoes were awaiting discharge at China’s ports in the past few years; in part to provide support for China’s coal industry — late November. On 26 November, China’s government said Australian

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cargoes were subject to increased testing for quality and environmental stabilise China’s domestic prices within a price band of 500 to 570 reasons. Renminbi (RMB), equivalent to US$76–87 a tonne at the current exchange rate, including by controlling coal imports. Prices in this range are On 14 December, further reports — this time in state media — indicated understood to be broadly acceptable to China’s power generators and that China’s authorities had verbally advised some power plants they could industrial consumers, while also providing sufficient margins for domestic import thermal coal without clearance restrictions, except for Australia. coal miners. NDRC has tended to ease import restrictions when the This development poses a downside risk to the forecasts and it is being domestic benchmark price exceeds RMB570 a tonne, and tighten closely monitored for implications to the outlook. At this stage, there is a restrictions when the price goes below RMB500. The price range is shown high degree of uncertainty around the extent to which this practice will as a green zone in Figure 6.5. persist throughout the outlook period, as well as the timing and extent to which Australia’s exports can find alternative markets. Since mid-September, the benchmark price has exceeded target levels, indicating pent-up demand. With meteorologists predicting the peak of the China’s National Development and Reform Commission (NDRC) aims to La Niña cycle in the December quarter 2020, China’s winter is forecast to be colder than average. Additional demand for heating could be placing Figure 6.5: China’s domestic vs Australian thermal coal export price additional upward pressure on China’s prices. 800 With world seaborne prices near their lowest point in years, the benchmark 700 price within China’s green zone provides an unusually large premium to 600 China’s coal producers. For comparison, the FOB price for Newcastle 5,500 has been around 250RMB for six months. The province of Inner 500 Mongolia moved in October to allow a number of major mines to operate 400 above capacity and allowed most other mines to operate at full capacity, to meet increased domestic demand. 300 RMB a tonne RMB China’s thermal coal demand is expected to lift in 2021 and 2022, as 200 economic growth rises. While the bulk of newly installed power generation 100 capacity will likely come from hydro and renewable generators, China has 0 a significant pipeline of coal-fired power plants coming on-stream. In 2021 Dec-18 Jun-19 Dec-19 Jun-20 Dec-20 and 2022, with domestic mine output in China lifting more quickly than Qinhuangdao 5,500 kcal Newcastle 5,500 kcal thermal coal consumption, China’s imports are expected to decline. Restructuring in China’s coal mining industry has supported rapid thermal Notes: The ‘green zone’ is a price band from 500-570RMB. Qinhuangdao (QHD) prices are a coal production growth since 2017. The competitiveness of domestic key benchmark for coal prices in northeastern China. The Newcastle benchmark series (traded in USD) is converted to RMB at 18 November 2020 exchange rate. Note that the mines will also be boosted by ongoing infrastructure improvements and Newcastle series excludes freight costs which typically add around US$10/t or 66 RMB. expansions. One such project already operational is the 1,800 kilometre Source: Bloomberg (2020) Haoji railway, completed in late 2019 and capable of hauling 200 million

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tonnes a year. Coal is sent to consumers in the south from key producing Figure 6.6: India’s thermal coal imports, monthly regions in the north such as Inner Mongolia, Shanxi and Shaanxi. To date, 20 it has only tended to haul around ten per cent of its capacity. 18 On 22 September 2020, at the UN General Assembly, China pledged to 16 achieve carbon neutrality by 2060, complementing their previous pledge of 14 peak emissions before 2030. China is currently developing its 14th Five 12 Year Plan for the period 2021–2025. When released, this will indicate 10 whether China intends to proceed with some or most of the currently 8 planned 100 Gigawatts of additional coal generation capacity, or to cap tonnes Million 6 output closer to 1,200 Gigawatts level currently. Any plan targeting extra 4 wind and solar capacity could lower the need for more coal generation. 2 India’s power and industrial sectors in recovery 0 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 India is the world’s second largest thermal coal consumer and importer, Indonesia South Africa United States Australia Russia Other importing 189 million tonnes of thermal coal in 2019. The Indian economy Source: IHS (2020) is recovering from the impacts of the COVID-19 pandemic, and industrial thermal coal consumption is rising after experiencing the world’s steepest 2020 suggests that this production surge is likely to last, as miners strive declines in the first half of 2020. In the September quarter, India’s power to meet ambitious monthly targets missed since the beginning of the fiscal generators returned to 2019 coal consumption levels, a strong recovery year (in April). India’s thermal coal imports are estimated to have declined from the June quarter, in which coal power was down 24 per cent year on sharply in 2020 — by 24 million tonnes to 165 million tonnes — due to the year. Demand from the sponge iron and cement sectors is also growing. In impact of the COVID-19 pandemic on India’s economy in the first half of a normal year, India’s sponge iron sector uses about 25–30 million tonnes the year. With India’s coal consumption and production both dwarfing of imported thermal coal each year, largely from South Africa. import requirements, small changes in either direction will likely exert a Coal imports in the September quarter were 4.8 per cent lower year-on- huge influence over the trajectory of India’s thermal coal imports. year, a significant improvement on the June quarter which had been the India’s thermal coal imports are expected to recover gradually over the slowest in years. Australia’s thermal coal exports to India are usually very next two years to reach 190 million tonnes in 2022, as the country small (Figure 6.6), but in the September quarter they jumped almost 100 recovers from the COVID-19 pandemic, industrial activity resumes and per cent year-on-year to 1.7 million tonnes, perhaps as sellers sought electricity demand picks up. However, the bounce back is expected to be alternative markets due to China’s lower import demand. constrained by government targets and policy. In February 2020, India’s India’s domestic coal production also recovered from the disruptive effects Minister for Coal and Mines reaffirmed plans for India to stop importing of COVID-19 during the September quarter 2020, producing about 6 per thermal coal from Indian fiscal year 2023–24 (instead relying on domestic cent more than in the same period in 2019. Preliminary data for October mine production for all its needs). While this has been a long-running goal

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for India, and there are considerable barriers to its achievement, the writing, only nine of Japan’s 42 nuclear reactors had gained approval to announcement signals a renewed policy drive for energy self-sufficiency. restart, and many of these are currently idle undergoing anti-terrorism upgrades or safety testing. Most of the nine reactors are expected to be The Indian government’s strategy to increase domestic production has back online by early to mid-2021. Another four reactors are currently several elements. The first is to boost production by state-owned seeking approval and could be online by 2022. companies, particularly Coal India — which has an annual production target of 1,000 million tonnes by Indian fiscal year 2023–24. The second In his first general policy address to the Diet on 26 October 2020, Prime strategy is to increase production by the private sector. The Indian Minister Yoshihide Suga announced that Japan would pursue a national government has introduced a number of reforms to encourage private target of net-zero emissions by 2050. Depending on how policies are sector investment, including opening up the country’s coal sector to foreign implemented and the evolution of technologies, this could have a material direct investment and changing the rules governing coal mine auctions. impact on Japan’s demand for thermal coal. While India’s mines may fall short of production targets, government policy In mid-2021, Japan’s 6th Basic Energy Plan is expected to be released, is nevertheless expected to propel Indian coal production higher over the setting out a roadmap to the 2050 goal. Accelerating the pace of nuclear next few years. reactor restarts may be a part of that plan. Nuclear energy continues to Japan’s imports to recover partially face public opposition in Japan, and the pace of nuclear restarts is the main uncertainty affecting the outlook for Japan’s thermal coal imports in Japan is the world’s third largest thermal coal importer, buying 138 million tonnes in 2019. Low LNG prices and subdued energy demand are Figure 6.7: Japan, South Korea and Taiwan’s thermal coal imports weighing on thermal coal imports, despite a colder than normal winter 14 ahead. In the September quarter 2020, Japan’s thermal coal imports were 13 per cent lower than the same period in 2019 (Figure 6.7). 12

Japan’s total imports for 2020 are expected to decline by about 5 million 10 tonnes to an estimated 133 million tonnes, 4.0 per cent lower than 2019. 8 Beyond 2020, there are competing trends at work: Japan has new high- efficiency coal-fired power generation capacity under construction and/or 6 consideration, but coal consumption will be cut by the retirement of up to tonnes Million 4 100 older power plants by 2030. As with its population, Japan’s energy demand is on a downward trend so coal imports are forecast to recover to 2 just 135 million tonnes in 2022 as COVID-19 impacts recede. 0 Nuclear power generation is expected to hit a three-year low during the Sep-18 Mar-19 Sep-19 Mar-20 Sep-20 2020-21 winter period. The 2011 Fukushima nuclear reactor disaster Japan South Korea Taiwan resulted in the closure of Japan’s nuclear power plants. At the time of Source: IHS (2020)

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the next few years. In October 2020, South Korea’s president declared in a policy speech in the national assembly that the country will be carbon neutral by 2050. This To date, regulatory and geographic hurdles have slowed the growth of announcement could lead to policies that augment the country’s existing Japanese renewable energy capacity relative to other OECD countries. plan to shift its energy mix away from coal and may also have implications However, the commissioning of Japan's sixth-largest onshore wind project for nuclear. Seven coal power units already under construction are likely to in October 2020 lifted the country to a record year for renewable energy be completed but South Korea’s draft 2020–2034 energy plan is expected installations, and the Prime Minister’s announcement signals strengthened to set out a roadmap to commence the phase out of coal. In recent years, commitment to the sector. coal has provided around 27 per cent of South Korea’s power. In November, Japanese engineering company Toshiba was the latest to The president outlined a multibillion-dollar plan to invest in green announce its exit from the coal generation business, joining engineering infrastructure, clean energy and electric vehicles. South Korea is expected giants General Electric and Siemens. to add 7.2 gigawatts of offshore wind capacity in the next decade, becoming the world's seventh largest offshore wind market on a South Korea to reduce coal burn over winter cumulative installation basis. South Korea is the world’s fourth largest thermal coal importer, purchasing In 2021 and 2022, South Korea’s thermal coal imports are forecast to 93 million tonnes of thermal coal in 2019. South Korea’s thermal coal gradually decline, with increasing power demand offset by the impact of imports continued to fall in the September quarter (Figure 6.7), down 12 policies to reduce coal use. per cent year-on-year, despite the recovery of economic activity related to South Korea’s success in containing COVID-19. Nuclear generation is Taiwan’s imports resilient in 2020 expected to contribute more power to the grid this winter, and the return of Taiwan’s thermal coal imports are expected to decline to an estimated 58 the government’s winter fine dust policy to improve air quality will result in million tonnes in 2020, from 61 million tonnes in 2019. Due to its early the temporary closure of some 16 coal-fired power stations during the success in containing COVID-19, power demand in Taiwan has been period December 2020 to March 2021. reasonably resilient. Thermal coal imports in the September quarter South Korea’s import and consumption of thermal coal has been declining declined by 3 per cent year-on-year. since 2018, as government policies have been implemented to manage air In 2021 and 2022, Taiwan’s thermal coal imports are expected to decline pollution problems, including new tax arrangements aimed at encouraging slightly further, as a result of the government’s energy transition policies. the use of gas over coal. The country plans to convert a quarter of its Taiwan is aiming to shift its power generation mix towards gas and coal–fired capacity to gas by 2031. renewables and away from nuclear power and coal. Under Taiwan’s South Korea’s thermal coal imports are expected to have fallen to an current energy plan, coal’s share of power generation would fall from 46 estimated 85 million tonnes in 2020, as a result of these ongoing trends per cent at present to 27 per cent in 2025. and the reduced power demand caused by COVID-19 containment Taiwan's government is aiming to reduce the share of coal in its energy measures earlier in the year. mix, in part by rapidly ramping up LNG imports. Taiwan faces challenges

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in achieving a rapid transition to gas, and will face challenges to bring on 6.5 World exports LNG regasification capacity at the intended pace (see gas chapter). Indonesia’s exports decline sharply Southeast and South Asia imports to grow, led by Vietnam Indonesia is the world’s largest thermal coal exporter, exporting 449 million In 2019, the nations in Southeast and South Asia (excluding India) tonnes in 2019 — a record high — from production of 610 million tonnes. collectively imported 151 million tonnes of thermal coal, and are expected 2020 has been a difficult year for Indonesia’s coal exporters, with prices to play a substantial role in thermal coal markets in the 2020s. The largest below the cost of production for some miners. The drop in India’s imports importers of thermal coal in these regions are Vietnam, Malaysia and the — the main destination for Indonesia’s exports — throughout 2020 has Philippines. Economic and population growth is driving the demand for reduced demand for Indonesia’s lower calorific coals. electricity, and coal-fired power generation is expected to play a key role in With the more recent drop in China’s imports, Indonesia’s exports in 2020 meeting growing power use. are estimated to be just 390 million tonnes, 13 per cent lower than 2019. Vietnam’s thermal coal imports are estimated to have grown by almost 20 In the September quarter 2020, Indonesia’s exports fell by 22 per cent per cent in 2020 to an estimated 55 million tonnes, as power demand compared with the same period a year earlier. This was a partial recovery climbed thanks to Vietnam’s early success in containing the spread of from the heavy export reductions in the June quarter, which were the COVID-19. The composition of electrical power supply also tilted towards coal, as hydroelectric power generation was crippled by a prolonged dry Figure 6.8: South and South East Asia thermal coal imports season. Recent flooding has also caused disruption to generation and 180 transmission infrastructure. 160 Power generators in the Philippines are estimated to have cut coal imports 140 in 2020, as measures aimed to contain the COVID-19 pandemic reduced 120 power demand. In 2020, Southeast and South Asia’s imports are expected 100 to have declined slightly to an estimated 150 million tonnes, as Vietnam’s 80 forecast import growth offsets declines in all other importers in the region.

Million tonnes Million 60 Over the outlook period, thermal coal imports by Southeast and South 40 Asia are expected to increase, reaching 189 million tonnes in 2022 20 (Figure 6.8). Vietnam is expected to be a key driver of import demand 0 growth, with around 5.5 Gigawatts of additional coal-fired power 2010 2013 2016 2019 2022 generation capacity likely to come online in the outlook period in that Vietnam Philippines Malaysia Thailand Bangladesh Pakistan Other country alone. An early 2020 resolution of Vietnam’s government sought to prioritise renewables and gas over thermal coal, but uncertainly over the Source: IEA (2020) Coal Information; Department of Industry, Science, Energy and Resources (2020); IHS (2020) level and duration of policy support may undermine the required investment.

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result both of heavy rains in South Kalimantan and miners’ strategic After years of strong production growth, Russia’s coal industry had a decisions to lower output due to low prices. challenging year in 2020, with low prices weighing on coal production, despite falls in the value of the Russian Ruble. Indonesia’s exports are expected to rise slightly in 2021 and 2022, as prices recover. However, output will not return to 2019 levels during the Future export growth will be supported by ongoing government plans to outlook period, as forecast low prices discourage production. Moreover, invest in the coal industry and associated rail/port infrastructure. Russia the Indonesian government has previously flagged plans to limit annual has been investing heavily in transportation infrastructure to the country’s output, in order to preserve coal reserves for future domestic use. The eastern ports — targeting the Asian market, as Japan’s utilities are looking government targeted an output cap of 550 million tonnes in 2020. to diversify their sources of supply, and South Korea’s new regulations are lifting demand for Russia’s low sulphur thermal coal. Russia’s production and exports in reverse Russia was the third largest thermal coal exporter in 2019, shipping 181 In 2020, Russian export volumes are estimated at 170 million tonnes, a million tonnes. Russia’s exports in the September quarter 2020 were decline of 5.8 per cent. Exports are forecast rebound to 184 million tonnes strong, with volumes on par with 2019. in 2022 as seaborne demand rises. Colombia’s exports fall due to prolonged strike Colombia exported 69 million tonnes of thermal coal in 2019. COVID-19 Figure 6.9: Thermal coal exports containment measures in March and April 2020 disrupted production to 500 some extent, but the decline deepened when miners at the massive Cerrejón coal mine went on strike on 31 August. The strike, over a pay 400 dispute with the company, was resolved in the December quarter and a gradual return to work is planned from 8 December, with a focus on safety 300 and occupational health. With just one of Colombia’s big 4 coal exporters fully operational during the September quarter — due to stoppages at 200 Prodeco and Colombian Natural Resources — exports were down 47 per

Million tonnes Million cent year-on-year. Columbia’s exports are estimated at 55 million tonnes 100 in 2020, down 21 per cent, but rise to 75 million tonnes in 2022.

0 South Africa’s exports return to growth Indonesia Australia Russia Colombia South US South Africa produced 250 million tonnes of thermal coal in 2019, and Africa exported 79 million tonnes — making it the world’s 4th largest exporter. 2019 2020s 2021f 2022f South Africa’s exports returned to growth in the September quarter 2020, Notes: s Estimate. f Forecast. lifting 11 per cent year-on-year. This followed two quarters of contraction, Source: IHS (2020); IEA (2019) Coal Information; ABS (2019); Department of Industry, Science, Energy and Resources (2020) associated with COVID-19 containment measures and weak demand.

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The return of Indian demand — a major destination for South African 6.6 Australia exports — put the wind in the sails of the nation’s coal sector in the A volatile time for thermal coal exports September quarter. Across 2020, South Africa’s thermal coal exports are estimated to have declined by 6.2 per cent to 75 million tonnes. In the September quarter 2020, Australia’s thermal coal exports suffered their largest quarterly fall since records going back to 1988. Exports were By 2022, South Africa’s exports are expected to return to 79 million tonnes down 15 per cent year-on-year, reflecting weak prices and concerns over (Figure 6.9). South African exports to India are expected to rise, and delays unloading cargoes in China (Figure 6.10). China imported half as miners will increasingly target other Asian markets — such as Pakistan — much Australian thermal coal in the September quarter 2020 as in the as European thermal coal use falls. A modest decline in domestic use of same period last year. In the months of September and October, thermal coal should also support export volumes. This was outlined in the Australia’s exports to China were the lowest in almost a decade. South African government’s October 2019 plan to reduce coal-fired power generation capacity from 37 Gigawatts now to 33 Gigawatts by 2030. In the December quarter, high winds associated with the La Niña weather system damaged a coal loader at the Port of Newcastle on 16 November. US exports to decline due to cost and infrastructure challenges The two-loader port handles 33 per cent of Australia’s thermal coal exports The US exported 34 million tonnes of thermal coal in 2019. The US is and the damaged loader will be offline for repairs, potentially restricting considered a price-sensitive swing supplier in the seaborne thermal coal export volumes in the December quarter and part of the March quarter market, with most US producers operating at higher costs. 2021. US exports continued their decline in the September quarter 2020, falling In December, the nation’s largest coal miner, Glencore, announced plans 36 per cent year-on-year, as a number of producers idled mines. The US to close four Australian mines by 2023 as these mines’ currently- coal sector was already under pressure, due to low natural gas prices, developed resource are exhausted. In the Hunter Valley, it will close falling demand domestically and in Europe, and a lack of infrastructure on Liddell, Integra and Glendell. In the Bowen Basin, the metallurgical and the US west coast (near Asian markets). thermal coal mine Newlands will close. These mines represent 11.5 million tonnes a year, or around 4 per cent of Australia’s thermal coal production. In November 2020, Peabody Energy Corporation — the world’s largest Offsetting this decline in production is the ramp up of Glencore’s million coal producer and an operator of mines in both the US and Australia — tonne a year United-Wambo joint venture with Peabody. announced that it may need to declare bankruptcy unless creditors agree a plan to restructure its debts. The company’s announcement is partly In August, Glencore had announced immediate plans to reduce its overall related to falling revenues for its thermal coal products. These challenges Australian output by about 12 per cent relative to its 2019 output. The cuts are expected to result in US thermal coal exports falling by 35 per cent to will focus on lower quality coals that face the largest oversupply, and 22 million tonnes in 2020. follow temporary operational stops at some Glencore mines. Glencore and Yancoal announced that, in support of efforts to curtail output and cut operating costs, they would be laying off 84 contractors at their joint Hunter Valley Operations mine in December. This decision does not affect

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Figure 6.10: Australia’s thermal coal exports, monthly US$68.75 a tonne, well above both the prevailing spot price at the 25 time and the forecast for average spot prices of US$52 a tonne for the same period (see Section 6.2 Prices). . Mines may run at loss for a time — given the costs associated with 20 shutting down production — until prices recover. The costs associated with placing a mine on care and maintenance are 15 relatively high in Australia, compared with costs in nations such as Indonesia, South Africa and Colombia. 10 . Mines may have ‘take-or-pay’ clauses in contracts with rail and port Million tonnes Million facilities, under which they incur costs whether or not they produce. 5 Mines may continue to produce even if their costs are above prices, if take-or-pay costs are greater than those losses from producing. 0 Some of the mines that are uneconomic at current thermal coal prices do Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec not rely on their thermal coal sales for the bulk of their revenue, since they 2018 2019 2020 mainly produce metallurgical coal (Figure 6.11). However, low Source: ABS (2020) metallurgical coal prices could threaten the viability of some of these mines (see metallurgical coal chapter). permanent employees, who number around 1,200. Australia’s thermal coal export volumes are forecast to edge down from In August 2020, Peabody announced that it would halve the workforce at 213 million tonnes in 2019–20 to 199 million tonnes in 2020–21. Low its 2.5 million tonne per annum Wambo underground thermal and semi- prices are expected to result in weaker production at higher-cost mines soft coking coal mine in New South Wales. This decision followed a two- during the first half of 2020–21 (Figure 6.12). month temporary closure since June. Thermal coal export earnings are forecast to decline by $5.8 billion to A significant proportion of Australian thermal coal production was loss- $15 billion in 2020–21, due to lower prices and slightly lower export making in the December quarter. On a calorific-value-adjusted basis, an volumes (Figure 6.11). From around US$60 a tonne in the December estimated one-quarter to one-third of Australian thermal coal exports are quarter 2020, the benchmark Newcastle 6,000 kcal spot price is expected cash negative at prices of US$50 a tonne for Newcastle 6,000 kcal NAR to rise slowly, reaching around US$65 a tonne at the end of the outlook coal. However, prices are showing signs of recovery and a number of period. factors should minimise the risk of widespread mine closures if prices do not persist at current lows beyond 2020: Australian thermal coal export earnings are forecast to rise by around . Some Australian thermal coal is exported on contracts that provide $1.9 billion to $16 billion in 2021–22, driven by a surge in export volumes Australian miners with an annual fixed price. The 2020–21 Japanese and a slow but steady lift in prices. fiscal year (April to March) benchmark contract price settled at

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Figure 6.11: Export margins of Australian thermal coal mines expansions designed to extend the life of existing mines and/or improve 45 the productivity of existing operations. An expanding list of lenders and investors have announced plans to cease 30 financing thermal coal projects. Some pension and equity funds are also divesting from, or limiting their exposure to, thermal coal, narrowing the 15 range of investment financing options available to coal projects.

0 For details of coal exploration expenditure, see section 5.6 in the metallurgical coal chapter. US$ a tonne -15 Revisions to the outlook for Australian thermal coal exports -30 Since the September 2020 Resources and Energy Quarterly, Australia’s forecast thermal coal export volumes have been revised down by 9 million -45 tonnes in 2020–21, due to the estimated impact of China’s informal coal 0 50 100 150 200 250 300 import restrictions in the December quarter. Value in that year is largely Million tonnes Thermal Mostly thermal Thermal/met Mostly met unchanged as higher prices offset the drop in volumes. Earnings in Notes: The margin curve incorporates the following assumptions: a price of US$50 a tonne 2021–22 are $0.4 billion lower as a result of a stronger Australian dollar. for Newcastle 6,000 kcal NAR coal; an adjustment to mine costs based on this calorific content; an exchange rate of 1 AUD = US$0.65; ‘Thermal’ refers to mines that produce 100 Figure 6.12: Australia’s thermal coal exports per cent thermal coal; ‘Mostly thermal’ more than 70 per cent; ‘Thermal/met 30-70 per cent; ‘Mostly met’ 1-30 per cent. 250 30 Source: AME Group (2020); Department of Industry, Science, Energy and Resources (2020) 200 24 Investment activity largely on hold Beyond the outlook period, investment in future Australian thermal coal 150 18 projects is highly uncertain, as highlighted in the 2020 edition of the Resources and Energy Major Projects publication. Weak market 100 12 A$ billion A$ conditions in 2020 have resulted in capital expenditure reductions, write- tonnes Million downs, and FID deferrals. There are 53 thermal coal projects in the 50 6 pipeline which, if progressed, would have a total investment value of $64–74 billion. 34 of these projects are at the feasibility stage, but many 0 0 2011–12 2013–14 2015–16 2017–18 2019–20 2021–22 have not progressed for years. Among just 6 projects with committed Volumes Values (rhs) investment, 2 are new ‘greenfields’ projects and 4 are mine expansions. For example, Mandalong Southern Extension and United-Wambo are Source: ABS (2020); Department of Industry, Science, Energy and Resources (2020)

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Table 6.1: World trade in thermal coal

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

World trade Mt 1,106 1,036 1,077 1,098 -6.4 4.0 2.0

Thermal coal imports

Asia Mt 847 811 856 878 -4.2 5.5 2.6

China Mt 224 210 216 212 -6.0 2.9 -2.2

India Mt 189 165 185 190 -12.6 11.9 3.1

Japan Mt 138 133 134 135 -4.0 0.8 0.7

South Korea Mt 93 85 84 83 -9.0 -1.2 -1.2

Taiwan Mt 61 58 57 57 -4.6 -1.2 -1.2

Thermal coal exports

Indonesia Mt 449 390 422 423 -13.1 8.1 0.2

Australia Mt 212 193 217 226 -9.0 12.3 4.3

Russia Mt 181 170 179 184 -5.8 5.3 2.8

Colombia Mt 69 55 68 75 -20.8 23.6 10.3

South Africa Mt 79 75 76 79 -6.2 2.0 3.9

United States Mt 34 22 22 24 -34.6 -1.6 9.1

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

Resources and Energy Quarterly December 2020 66

Table 6.2: Thermal coal outlook

Annual percentage change

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

Contract pricesb

– nominal US$/t 95 69 68 69 -27.4 -1.7 1.8

– realc US$/t 95 69 66 66 -28.2 -3.8 -0.3

Spot pricesd

– nominal US$/t 74 57 63 64 -25.1 9.8 1.8

– reale US$/t 75 57 61 61 -26.1 7.6 -0.3

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

Production Mt 272 268 259 276 -1.5 -3.0 6.5

Export volume Mt 210 213 199 222 1.4 -6.6 11.8

– nominal value A$m 25,958 20,376 14,573 16,472 -21.5 -28.5 13.0

– real valueh A$m 26,540 20,557 14,573 16,202 -22.5 -29.1 11.2

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 2020–21 Australian dollars; s estimate 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)

Resources and Energy Quarterly December 2020

67

7.1 Summary Figure 7.1: Global gas and LNG prices, monthly . Average Asian LNG spot prices and oil-linked contract prices are 12 expected to recover over the next two years, as the impacts of 10 COVID-19 ease and growing demand catches up to global LNG supply capacity. 8 . Australian export volumes reached 79 million tonnes in 2019–20, but 6 are forecast to decline to 75 million tonnes in 2020–21, reflecting the impacts of COVID-19 as well as technical issues at the Prelude and 4 US$ per mmBtu Gorgon LNG plants. Exports are forecast to recover to 80 million tonnes 2 in 2021–22 (see Australia section). 0 . Australia’s LNG exports earnings are forecast to decline sharply, from Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 $48 billion in 2019–20 to $31 billion in 2020–21, due to weak prices and Asian LNG spot price Henry Hub export volumes, before a partial recovery to $37 billion in 2021–22. UK National Balancing Point Japan average import price Notes: ANEA is the Argus Northeast Asia spot price. LNG prices are DES (Delivered Ex 7.2 Prices Ship), which include shipping and insurance. The Asian LNG spot price has rallied strongly Source: Argus (2020); Bloomberg (2020) The Asian LNG spot price recovered strongly in the December quarter Figure 7.2: LNG spot and contract prices, quarterly 2020, more than tripling from the record lows seen in mid-2020 to reach a 15 78 two-year (Figure 7.1). The spot price has averaged an estimated US$6.60 per mmBtu (A$8.70 per GJ) in the December quarter 2020, 12 65 88 per cent higher than in the September quarter, and 16 per cent higher 9 52 year-on-year. Expectations for a colder-than-usual winter in the Northern Hemisphere has driven robust demand growth for gas and LNG. The 6 39 global LNG market has also been tighter amidst supply disruptions from 3 26 US$ a barrel major exporters, including Australia, Qatar and the US, propelling prices US$ per mmBtu higher. 0 13 Dec-16 Dec-18 Dec-20 Dec-22 The Asian LNG spot price is forecast to increase from an estimated -3 0 average of US$4.00 per mmBtu (A$5.50 per GJ) in 2020 to US$5.70 per Oil-linked premium to ANEA ANEA LNG spot price Indicative oil-linked contract price Brent crude oil (rhs) mmBtu (A$7.20 per GJ) in 2021 and US$6.40 per mmBtu (A$8.00 per GJ) in 2022 (Figure 7.2). Global demand for LNG is expected to strengthen, as Notes: ANEA is the Argus Northeast Asia spot price. LNG prices are DES (Delivered Ex Ship), which include shipping and insurance. The long-term oil-linked contract price is the impacts of the COVID-19 pandemic ease, and demand from China and indicative, and is estimated at 14 per cent of the 3-month lagged JCC oil price plus shipping. emerging Asian economies grows further. However, the global LNG The oil-linked premium to ANEA represents the differential between these two prices. market is also expected to remain well supplied — likely constraining any Source: Argus (2020); Bloomberg (2020); Department of Industry, Science, Energy and Resources (2020) price rally — as US LNG exports ramp up further over the next two years.

Resources and Energy Quarterly December 2020 70 Over the next few months, the key risk to the outlook for Asian LNG spot Figure 7.3: LNG demand and world supply capacity prices is whether the expected colder-than-average Northern Hemisphere 500 winter materialises. In the longer term, the main uncertainties relate to the pace of the global economy recovery and COVID-19 developments (see 400 the macroeconomic outlook chapter). 300 Weak oil prices expected to continue to weigh on LNG contract prices Almost 70 per cent of the LNG traded in Asia is sold via long-term 200

contracts, which link the price of LNG to the price of oil (commonly the tonnes Million Japanese customs-cleared crude, JCC) typically lagged by around three to 100 six months, depending on contractual arrangements. Oil prices have been broadly stable since recovering from multi-year lows in the first half of 0 2020. Due to the several month lag, the mid-year recovery in oil prices is 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Japan South Korea expected to be reflected in contract prices in the December quarter 2020. China Emerging Asia Europe Rest of world While oil prices are expected to recover, global oil consumption is Global supply capacity expected to continue to be constrained by the impacts of the COVID-19 Source: Nexant (2020) World Gas Model; Department of Industry, Science, Energy and pandemic (see the oil chapter). Consequently, while LNG contract prices Resources (2020) are expected to gradually recover over 2021 and 2022, they are expected to remain relatively weak in historical terms. Figure 7.4: World LNG import forecasts 90 7.3 World trade 80 In 2020, global LNG trade appears to have grown by 1.1 per cent to an 70 estimated 349 million tonnes — a sharp deceleration compared to recent 60 years of growth (Figure 7.3). The impacts of the COVID-19 pandemic on 50 LNG demand have occurred amidst an existing global LNG supply glut. 40 However, a recovery in the global LNG sector is underway, driven by 30 Million tonnes Million structural factors (as the impacts of the COVID-19 pandemic ease and 20 growth in emerging Asia resumes) and seasonal factors (with LNG imports 10 showing strong growth as the Northern Hemisphere winter arrives). 0 Japan South China Emerging Europe Rest of Global LNG trade is expected to continue to recover in 2021 and 2022, Korea Asia (ex world growing by around 4 per cent a year. The global LNG market is expected China) to tighten, as demand recovers and absorbs the available supply capacity. 2019 2020 2021 2022

However, given the large scale expansion of global LNG capacity in recent Notes: Emerging Asia includes India. 2020 is an estimate. 2021 and 2022 are forecasts. years, demand is expected to continue to fall short of total supply capacity. Source: Nexant (2020) World Gas Model; Department of Industry, Science, Energy and Resources (2020)

Resources and Energy Quarterly December 2020 71 7.4 World imports Figure 7.5: Monthly LNG imports, year-on-year change Japan’s LNG imports expected to decline as nuclear power returns 2.0 Japan — the world’s largest LNG buyer — imported an estimated 74 1.5 million tonnes of LNG in 2020, 4.8 per cent lower than in 2019 (Figure 1.0 7.5). The impact of COVID-19-related demand weakness has been 0.5 partially offset by several other factors: temporary coal-to-gas switching in 0.0 the December quarter 2020, due to low LNG prices; stronger demand in -0.5 the lead up to a colder-than-usual winter; and nuclear outages. tonnes Million -1.0 Nuclear generation is expected to hit a three-year low during the 2020–21 -1.5 winter period. At the time of writing, only nine of Japan’s 42 nuclear -2.0 reactors have gained approval to restart since Fukushima in 2011, and Japan China South India Taiwan Europe most of these are currently idled to undergo anti-terrorism upgrades, Korea maintenance or safety testing. Most of the nine nuclear reactors are Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 expected to be back online by early to mid-2021. Another four reactors are Sep-20 Oct-20 Nov-20 currently seeking approval for restart, and could be online by 2022. Source: Bloomberg (2020)

Japan’s LNG imports are forecast to decline marginally in 2021 and 2022, Figure 7.6: China’s gas supply by source with the impacts of an expected economic recovery expected to be offset by the return of nuclear power generation from both the recent temporary 350 35 shut downs, as well as the longer term return of nuclear power following 300 30 Fukushima. However, there are significant risks of delays and slippages in 250 25 nuclear restarts, which remains the key uncertainty affecting the outlook 200 20 for Japan’s LNG imports. Beyond the two year outlook period, there is 150 15

uncertainty over the extent to which LNG will be affected by Japan’s recent cent Per pledge to achieve net-zero emissions by 2050. 100 10 Billion cubic metres China to remain a key driver of LNG demand growth 50 5 China’s LNG imports are expected to grow by 8.8 per cent, to reach an 0 0 estimated 65 million tonnes in 2020 — making it the world’s second largest 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 LNG importer. China’s gas consumption has been resilient in 2020, driven LNG imports Pipeline imports by robust demand from the industrial and residential sectors, and ongoing Domestic production LNG's share of China's gas supply (rhs) Notes: 2020 is an estimate. coal-to-gas switching. LNG has accounted for a slightly larger share of Source: Bloomberg (2020) National Bureau of Statistics of China, Bloomberg (2020) General China’s gas demand in 2020, supported by cheap LNG (Figure 7.6). Administration of Customs

Resources and Energy Quarterly December 2020 72 Australia has accounted for the largest share of China’s LNG imports in impacts of the COVID-19 pandemic on power demand, as well as the 2020, at about 45 per cent. Imports from Australia grew by 5.0 per cent restart of nuclear power plants — closed in 2019 for extended year-on-year in the ten months to October. China’s imports of US LNG maintenance. South Korea’s LNG imports are expected to decline by 3.4 restarted in April 2020, supported by the US-China Phase One trade deal, per cent to an estimated 38 million tonnes in 2020. and grew by 1.7 million tonnes between April and October. This follows a South Korea’s LNG imports are forecast to stage a modest recovery in year of virtually no LNG imports from the US, due to Chinese tariffs, 2021 and 2022, rising by around 2.1 per cent a year (Figure 7.5). While imposed amidst escalating trade tensions. These tariffs are now being growing nuclear capacity is expected to weigh heavily on gas demand, this waived, in a bid to raise imports from the US as part of the US-China deal. is expected to be offset by government policies favouring gas usage over China is expected to be a key driver of near term global LNG demand coal. According to a draft proposal, seasonal restrictions on coal-fired growth, growing by around 11 per cent annually over the next two years, power generation are expected from December 2020 to March 2021, in and overtaking Japan as the world’s largest importer by 2022. Despite order to control fine dust. This is expected to buoy winter gas demand. In China’s recent net-zero by 2060 pledge, gas is expected to play an the longer term, gas is expected to benefit from a move away from coal, important role in the country’s energy transition. including plans to convert a quarter of coal-fired capacity to gas by 2031. It is uncertain how South Korea’s recent ‘net-zero’ pledge will affect the role Ongoing growth in gas use is expected to be supported by a policy-driven of gas in the nation’s energy mix in the coming decades. expansion of gas use in the industrial and residential sectors, as well as by gas market reforms. The creation of PipeChina — a national midstream Taiwan’s LNG demand has held steady company that operates pipelines, terminals and storage facilities — is Taiwan’s LNG demand has been relatively resilient to the impacts of expected to improve third party access and support growth in LNG COVID-19 in 2020, supported by growing gas-fired power generation. The imports. country is aiming to increase the share of gas-fired power generation in its While China’s LNG demand is set grow in the coming years, it is expected electricity mix, from around 35 per cent currently to 50 per cent by 2025. to face intensifying competition from domestic sources and pipeline Taiwan’s LNG imports are forecast to grow by around 2.4 per cent a year imports. While China has faced challenges in tapping into its extensive gas to reach 18 million tonnes by 2022. reserves — due to challenging geology — supportive government policies India is expected to be a major source of LNG demand growth are expected to drive up domestic gas output in the longer term. Pipeline India’s LNG imports have been volatile in 2020, with lockdowns weighing imports are also expected to grow — the Power of Siberia pipeline opened on demand earlier in the year before opportunistic buying of cheap LNG in December 2019, and is expected to ramp up over the next five years. buoyed imports (Figure 7.5). India is an extremely price sensitive buyer of The pipeline has nameplate capacity of 38 billion cubic metres of gas per LNG, and the recent rally in LNG spot prices is expected to weigh on year — equivalent to around 28 million tonnes of LNG. demand in the last few months of 2020. India’s LNG imports are expected South Korea’s LNG demand to be supported by government policies to be broadly flat at an estimated 23 million tonnes in 2020. South Korea’s LNG imports are expected to have picked up in the last few India is expected to be a major source of LNG demand growth over the months of 2020, supported by temporary nuclear outages — caused by outlook period, with LNG imports forecast to grow by around 15 per cent typhoons — and strong buying ahead of winter. This marks a rebound annually over the next two years. However, the extent and pace of this from a year of otherwise weak LNG imports, weighed down by both the

Resources and Energy Quarterly December 2020 73 growth is subject to considerable uncertainty. While the Indian government Europe’s LNG imports have slowed is aiming to lift the share of gas in its energy mix from about 6 per cent In recent years, Europe has played an important role in absorbing large now to 15 per cent in 2030, this is considered ambitious. Its achievement volumes of LNG and balancing the global LNG market, due to its extensive depends on a range of factors, including domestic gas market reforms, the storage capacity and liquid gas hubs. In recent months, the region has not pace of infrastructure development, and growth in domestic gas output. been required to absorb as many LNG cargoes, due to stronger Asian Emerging Asia to shape future developments in global LNG markets demand and weaker US exports. Europe’s LNG imports have declined sharply, falling by 36 per cent year-on-year in the four months to Other south and southeast Asian economies are also expected to be November. major sources of demand growth, driven by declining domestic production, the expansion of gas-fired power generation and new LNG infrastructure Europe’s LNG imports are forecast to decline over the next two years, as developments. While these countries are relatively small importers of LNG the global LNG market tightens (Figure 7.5). The ramp up of two new gas individually, collectively they are expected to account for a growing share pipelines are also expected to place downward pressure on LNG imports. of global LNG demand, and help absorb excess LNG supply in the coming The Trans Adriatic Pipeline began commercial operations in November, years (Figure 7.7). The region (including India) is forecast to import 71 and has an annual nameplate capacity of 10 billion cubic metres (equal to million tonnes of LNG by 2022, 42 per cent higher than 2019 volumes about 7.4 million tonnes of LNG). However, Nord Stream 2, which was expected to begin production by 2021, could now face delays amidst The impacts of the COVID-19 pandemic have not significantly impacted geopolitical pressures. Nord Stream 2 is a 55 billion cubic metre pipeline the growth trajectory of the region. According to shipping data, Pakistan’s (40 million tonnes) which will transport gas from Russia to Germany. LNG imports grew by 22 per cent year-on-year, in the four months to November, Bangladesh’s by 166 per cent, and Thailand’s by 41 per cent. 7.5 World exports Figure 7.7: LNG imports from emerging Asian countries Weak economic conditions have resulted in project FIDs deferrals 80 At the end of 2019, global LNG capacity was estimated at close to 400 70 million tonnes per annum (mtpa), with another 125 mtpa of capacity under 60 construction or sanctioned for development. These new projects will 50 contribute to significant growth in global LNG capacity over the next few years, albeit at a slower pace than in recent years. 40 30 There is over 900 mtpa of proposed LNG capacity in the pre-FID stage, Million tonnes Million 20 though much of this is not likely to proceed. There were pre-COVID-19 10 pandemic expectations that about 50 mtpa of new LNG capacity would be 0 approved in 2020. However, weak spot LNG and oil prices have since 2015 2016 2017 2018 2019 2020 2021 2022 resulted in the deferral of most of these FIDs. At the time of writing, only India Pakistan Bangladesh one liquefaction project has been approved in 2020 — Sempra Energy’s 2.5 mtpa Costa Azul project in Mexico. FID deferrals could impact on the Thailand Malaysia Other emerging Asia Source: Nexant (2020) World Gas Model

Resources and Energy Quarterly December 2020 74 timing of the next wave of LNG capacity additions, which could result in a Figure 7.8: Monthly LNG shipments, year-on-year change tighter global LNG market towards the end of this decade. 3.0 2.5 US to be a key driver of export growth 2.0 The US is leading the global recovery in LNG exports: following sharp falls 1.5 from June to September 2020, US LNG exports have rebounded (Figure 1.0 7.8). Earlier in the year, weak global gas prices relative to the Henry Hub 0.5 price reduced the competitiveness of US LNG exports to Asia and Europe, 0.0 Million tonnes Million leading to cargo cancellations. Hurricanes in September 2020 also -0.5 resulted in outages at several US facilities. Stronger global gas and LNG -1.0 prices have since driven a rebound in US exports to Asia and Europe, -1.5 ahead of the Northern Hemisphere winter. In October/November, US LNG Qatar Australia US Russia Malaysia Norway Egypt shipments were 34 per cent higher year-on-year, returning to pre-COVID- Jan-20 Feb-20 Mar-20 Apr-20 19 pandemic levels. May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Overall, US LNG exports are expected to grow by 26 per cent in 2020 to Source: Bloomberg (2020) reach an estimated 49 million tonnes, with strong growth at the start and end of the year offsetting the mid-year declines. Figure 7.9: World LNG export forecasts

US LNG exports are forecast to reach 64 million tonnes by 2022 as new 90 LNG projects continue to ramp up (Figure 7.9). There is 15 mtpa of US 80 LNG capacity expected to commence operations by the end of 2021, and 70 another 30 mtpa of LNG capacity expected to commence operations 60 between 2023 and 2025. 50 Qatar’s exports have been resilient 40 Qatar’s LNG exports have been largely resilient in 2020 (Figure 7.8).

Million tonnes Million 30 Shipping data indicates that Qatar could reclaim the title of the world’s 20 largest LNG exporter from Australia in 2020. However, given the marginal 10 difference between the two country’s exports and uncertainty surrounding the precise level of Qatar’s LNG exports, this is far from certain. 0 Australia Qatar United Russia South Africa Rest of Qatar’s LNG exports are forecast to be broadly steady over the outlook States East Asia world period, at around 76 million tonnes (Figure 7.9). Beyond the outlook 2019 2020 2021 2022 period, Qatar has reaffirmed its intention to increase its LNG capacity Notes: 2020 is an estimate. 2021 and 2022 are forecasts. beyond the 126 mtpa target by 2027. Source: Department of Industry, Science, Energy and Resources (2020)

Resources and Energy Quarterly December 2020 75 7.6 Australia Figure 7.10: Australia’s monthly LNG shipments 8 Australia’s export earnings fell sharply in the September quarter 7 In the September quarter 2020, Australia’s LNG export earnings declined by 51 per cent year-on-year and 39 per cent quarter-on-quarter to $6.3 6 billion. Export values were weighed down by weak spot and oil-linked 5 contract prices, as well as by weaker export volumes. 4 Almost three-quarters of Australian LNG is sold via long-term contracts 3 that link the price of LNG to the price of oil with a lag of around three to six 2 Million tonnes Million months, depending on contractual arrangements. The lag between oil 1 price movements and its impact on LNG prices means that the sharp 0 decline in oil prices which occurred between March and May has been Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec mostly reflected in September quarter 2020 export earnings, and to a 2018 2019 2020

lesser extent, will also be reflected in December quarter export earnings. Source: Bloomberg (2020)

Australia’s LNG exports volumes are showing signs of recovery Gorgon’s production has also been disrupted, with the shutdown of Train 2 LNG export volumes declined by 8.7 per cent year-on-year and 3.1 per initially extended to October, and then to 23 November, after cracks were cent quarter-on-quarter in the September quarter 2020. Cargoes were discovered in its heat exchangers. After a period of uncertainty, a delayed or deferred, due to the impacts of the COVID-19 pandemic on shutdown of the whole plant was avoided, with phased shutdowns instead. demand, several plants underwent maintenance, and the Prelude and Preparations are underway to take Train 1 offline for inspections, and Gorgon operations faced technical issues. Shipping data for more recent Train 3 will be taken offline after Train 1 comes back online. There is a risk months are showing signs of recovery, supported by strong Asian demand of extended shutdowns if further cracks are discovered in these trains. ahead of the Northern Hemisphere winter. October/November exports LNG export volumes forecast to return to above pre-COVID-19 levels were up 5.0 per cent year-on-year (Figure 7.10). Australia’s LNG exports are forecast to decline from 79 million tonnes in However, outages at Prelude and Gorgon are expected to weigh on export 2019–20 to 75 million tonnes in 2020–21, reflecting the impacts of volumes in the December quarter. The Prelude FLNG project has been the COVID-19 pandemic on demand, as well as technical issues at the temporarily shut since February 2020, due to technical issues. At the time Prelude and Gorgon LNG plants (Figure 7.11). A gas processing unit was of writing, Shell has indicated that Prelude will not ship any LNG before shut at Wheatstone in early December after an anomaly was detected 2021. While the forecasts contained in the December 2020 Resources and during routine inspections. At the time of writing, it remains unclear Energy Quarterly assume that Prelude will resume shipping LNG in the whether LNG production has been affected, presenting a downside risk to March quarter 2021, Shell has not yet announced an official restart date, the forecast. LNG exports are forecast to rebound to around 80 million and further delays remain a risk to the outlook. The Prelude FLNG project tonnes in 2021–22. The rebound reflects a recovery in demand (as shipped its first cargo in June 2019, but had not yet produced at its full economies return to growth), an assumed resolution of technical issues annual nameplate capacity of 3.6 million tonnes. and Prelude ramping up towards its nameplate capacity.

Resources and Energy Quarterly December 2020 76 In 2022, an expected production halt at Darwin LNG is expected to weigh Figure 7.11: Australia’s LNG exports on export volumes, as gas from the Bayu-Undan field is exhausted. 90 60 However, Santos is progressing plans for an infill drilling program which, if approved, could extend the life of the field and narrow the time between its 75 50 depletion and start-up of the Barossa backfill project. In early December, for the second time this year, Santos deferred the FID for the Barossa 60 40 project to 2021, citing a preference to first finalise offtake agreements. 45 30 Production capacity at North West Shelf (NWS) is expected to open up A$ billion A$

from the early 2020s as gas from existing fields are depleted. NWS will tonnes Million 30 20 require backfill from smaller projects with shorter lead times, such as Waitsia and Pluto, as well as larger scale resources for the longer term. 15 10 Given complex commercial arrangements associated with the NWS, there 0 0 is potential for backfill project delays. Browse and Scarborough are two 2011–12 2013–14 2015–16 2017–18 2019–20 2021–22 possible backfill options for the longer term, but both have faced FIDs Volume Value (rhs) deferrals in 2020 due to weak market conditions. Source: ABS (2020); Department of Industry, Science, Energy and Resources (2020) Australia’s LNG export earnings forecast to decline from record highs Australia’s LNG export earnings are forecast to fall sharply in 2020–21, to Figure 7.12: Changes to Australia's LNG export earnings, $31 billion from $48 billion in 2019–20 (Figure 7.11). The decline in export contributions from volumes and prices earnings is expected to be primarily driven by weak contract prices and, to 50 a lesser extent, lower export volumes (Figure 7.12). Export earnings are 40 forecast to partially recover to $37 billion in 2021–22, tracking an expected 30 rise in contract and spot prices, as well as increased export volumes. The 20 forecast for Australian LNG export earnings is broadly unchanged from the 10 September 2020 Resources and Energy Quarterly. 0

Uncertainty surrounds the next wave of investment cent Per -10 The outlook for the next wave of investment in Australian LNG projects is -20 shrouded by considerable uncertainty, with weak market conditions -30 resulting in FID deferrals (see the Resources and Energy Major Projects -40 2020 publication). Most of the LNG projects in the investment pipeline are -50 backfill projects required to support the ongoing operation of existing LNG 2011–12 2013–14 2015–16 2017–18 2019–20 2021–22 facilities. The proposed Scarborough to Pluto LNG expansion (where a 5 Volumes Prices Values mtpa train would be added to Pluto) is the only substantial expansion to Source: ABS (2020); Department of Industry, Science, Energy and Resources (2020) Australia’s LNG capacity currently in the investment pipeline.

Resources and Energy Quarterly December 2020 77

Table 7.1: World gas outlook

Annual percentage change Unit 2019 2020s 2021f 2022f 2020s 2021f 2022f JCC oil pricea – nominal US$/bbl 66.4 45.4 48.9 55.3 -31.7 7.8 13.0 – realh US$/bbl 67.3 45.4 47.9 53.1 -32.6 5.6 10.7

Asian LNG spot pricebg – nominal US$/MMbtu 5.4 4.0 5.7 6.4 -26.9 42.2 12.6 – realh US$/MMbtu 5.5 4.0 5.5 6.1 -27.9 39.5 10.3 LNG trade Mtc 345 349 363 375 1.1 3.9 3.5 Gas production Bcm 4,047 3,919 4,024 4,142 -3.2 2.7 2.9 Gas consumption Bcm 4,048 3,895 4,037 4,144 -3.8 3.6 2.7 Notes: a JCC stands for Japan Customs-cleared Crude; b Historical data is the Argus North East Asia 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; s estimate 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)

Resources and Energy Quarterly December 2020 78

Table 7.2: Australian gas outlook

Annual percentage change Unit 2018–19 2019–20 2020–21f 2021–22f 2019–20 2020–21f 2021–22f Productiond Bcm 145.2 157.6 150.1 160.0 8.5 -4.7 6.6 – Eastern market Bcm 55.3 57.5 52.5 54.2 3.9 -8.6 3.2 – Western market Bcm 82.3 85.7 82.6 90.9 4.2 -3.6 10.1 – Northern marketk Bcm 7.6 14.4 15.0 14.9 89.8 4.3 -1.0 LNG export volume Mtc 74.8 79.2 75.5 80.0 5.9 -4.8 5.9 – nominal value A$m 49,727 47,525 30,977 37,489 -4.4 -34.8 21.0 – real valuee A$m 50,841 47,949 30,977 36,874 -5.7 -35.4 19.0

LNG export unit valueg – nominal value A$/GJ 12.6 11.4 7.8 8.9 -9.8 -31.6 14.2 – real valuee A$/GJ 12.9 11.5 7.8 8.7 -11.0 -32.2 12.4 – nominal value US$/MMBtu 9.5 8.1 6.0 7.1 -15.3 -25.6 18.1 – real valuee US$/MMBtu 9.7 8.1 6.0 7.0 -16.5 -26.2 16.2 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; e In 2020–21 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)

Resources and Energy Quarterly December 2020 79

8.1 Summary Figure 8.1: Brent oil prices in 2020 80 . Although oil price volatility has eased in recent months, further price recovery has been limited by lingering COVID-19 containment measures. A gradual recovery in consumption is expected to lift Brent 60 crude prices from US$44 a barrel in the December 2020 quarter to US$57 a barrel by the December 2022 quarter. 40 . Australian crude oil and condensate exports in 2020–21 are expected

to increase by 4.6 per cent to 304,000 barrels a day, and remain around US$ a barrel these levels in 2021–22 (see Australia section). 20 . Low prices are expected to lead to Australian export earnings falling by 20 per cent to $7.2 billion in 2020–21. An uptick in prices is expected to 0 lift earnings to $8.3 billion in 2021–22. Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

8.2 Prices Source: Bloomberg (2020) Brent prices remaining around US$40 a barrel Prices to increase slowly over the outlook period Oil prices have been relatively stable in recent months, following the wild Oil prices are expected to increase over the outlook period as COVID-19 swings earlier in 2020. Prices fell below US$20 a barrel in early April, as containment measures ease and consumption recovers. Established global production exceeded global consumption by around 25 million OPEC+ targets, and current low exploration expenditure in Canada and barrels a day — equivalent to around 25 per cent of average production in the US are expected to limit any production response, further supporting 2019. Later in April, prices began to recover, propped up by the 12 April prices. Prices are expected to increase from an estimated US$44 a barrel OPEC+ announcement that member countries would reduce production in in the December quarter of 2020 to reach US$51 a barrel in the December May and June 2020 by a record 9.7 million barrels a day. quarter of 2021. In 2022, prices are forecast to increase further, reaching Between June 2020 and September 2020, prices hovered around US$40 US$57 a barrel by the December quarter (Figure 8.2). a barrel, as consumption growth was constrained by COVID-19 The timing and rate of likely price increases remains highly uncertain. containment measures. More recently, prices have been affected by rising Consumption may vary significantly depending on unforeseen changes in Northern Hemisphere COVID-19 cases and promising COVID-19 vaccine COVID-19 containment measures, as governments and households trial announcements. Prices fell by 13 per cent between 20 October and react to subsequent waves of the pandemic, and household confidence 30 October, as some EU governments announced fresh containment recovering as COVID-19 cases fall. The possibility of an effective measures to address rising COVID-19 cases (see the macroeconomic COVID-19 vaccine(s) at some time in the outlook period is also expected chapter). Over November 2020, prices increased by 24 per cent to reach to influence global oil consumption and prices. Despite recent promising US$47 a barrel, in response to promising COVID-19 vaccine trial COVID-19 vaccine trial results, it is unlikely that the rollout of these announcements (Figure 8.1). vaccines will significantly support oil consumption before the second half of 2021, reflecting the time required to distribute doses around the world.

Resources and Energy Quarterly December 2020 82

Substantial uncertainty also exists on the supply-side, primarily from 8.3 World Consumption OPEC+ members. OPEC+ is scheduled to increase production by Low aviation travel to constrain consumption 0.5 million barrels a day in January 2021. However, output beyond January 2021 remains uncertain, as production targets can be adjusted in Global crude oil and natural gas liquids consumption in 2020 is expected monthly ministerial meetings. Output is also uncertain for the OPEC+ to have fallen by an estimated 9.1 per cent to 91 million barrels a day. If members currently exempt from production targets, including Libya, Iran realised, this would be the first decline since 2009, and the largest and Venezuela. With production in these countries affected by either historical decline in volume terms. Consumption is forecast to fall in all blockades or international sanctions, unexpected political changes are major consuming countries, as travel demand and industrial production likely to affect global prices. both fall because of COVID-19 containment measures. Although the largest impacts are expected in the first half of 2020, consumption for each Figure 8.2: Oil prices month of 2020 is expected to be below 2019 levels. 80 Indicators suggest that road activity fell by around 50 per cent in some major cities in April. The recovery in global road activity later in 2020 has 60 been limited, as COVID-19 has spread to other developing nations and for some countries, containment measures have lingered. In recent months, Northern Hemisphere road activity has been affected by persistently high 40 COVID-19 cases in the US and a resurgence in COVID-19 cases in the

US$ a barrel EU. Targeted EU containment measures introduced in the December 20 quarter are likely to further constrain global oil consumption. As the US and EU are two of the world’s three largest oil consumers, future transport demand growth is likely to depend on COVID-19 cases declining in the 0 Northern Hemisphere. Dec-2016 Dec-2018 Dec-2020 Dec-2022 West-Texas Intermediate Brent Although transportation demand is expected to rise as containment measures ease, aviation demand is expected to remain weak over the Source: Bloomberg (2020); Department of Industry, Science, Energy and Resources (2020) outlook period. About two thirds of global passenger traffic is international Substantial uncertainty also exists on the supply-side, primarily from travel — which is unlikely to recover fully until a vaccine is rolled out. The OPEC+ members. OPEC+ is scheduled to increase production by International Air Transport Association expects that global passenger 0.5 million barrels a day in January 2021. However, output beyond traffic will not return to 2019 levels until 2024. Domestic air travel is January 2021 remains uncertain, as production targets can be adjusted in expected to rise gradually over the outlook period, as countries ease monthly ministerial meetings. Output is also uncertain for the OPEC+ restrictions on internal travel. However, domestic air travel is expected to members currently exempt from production targets, including Libya, Iran remain below 2019 levels over the outlook period. and Venezuela. With production in these countries affected by either Oil consumption for the manufacturing of plastic and other petrochemicals blockades or international sanctions, unexpected political changes are declined sharply in the first half of 2020, but was more resilient than likely to affect global prices. travel-based oil consumption. Similar to other manufactured products,

Resources and Energy Quarterly December 2020 83 demand for manufactured oil products has been affected by low household In 2021, demand is forecast to recover to 97 million barrels a day; still 3.3 consumption and supply chain disruptions. per cent below 2019 levels, as aviation demand remains limited. Demand is forecast to rise further to 100 million barrels a day in 2022 (Figure 8.3). Global consumption in 2020 has also been constrained by poor refining margins, as end-use demand is affected by containment measures and OECD consumption is expected to drop low consumer confidence. In addition to low refining throughput, some The COVID-19 pandemic and the associated containment measures have countries have increased their strategic reserves, pushing global crude significantly disrupted OECD consumption. Between 2012 and 2019, stocks starkly higher. Geographically, a high proportion of the stock OECD oil consumption was steady at around 48 million barrels a day, as build-up is occurring in China and the US, two major oil consuming ongoing energy efficiency improvements offset higher transport needs. nations. High stocks in these countries will weigh on oil prices once the This period of stability is expected to end in 2020, as containment impacts of the COVID-19 pandemic ease. Stock accumulation is expected measures affect travel and aviation demand in OECD economies. OECD to have ended in the June quarter of 2020, although the price limiting consumption is expected to have been most affected during the June impacts are expected to persist throughout the outlook period. quarter of 2020. However, the recovery in later quarters has been Figure 8.3: OECD and non-OECD oil consumption constrained by surging number of COVID-19 cases in the Northern Hemisphere, which are primarily occurring in OECD economies. These 120 impacts are expected to limit OECD consumption in the December quarter 100 of 2020 and the March quarter of 2021. OECD consumption in 2020 is forecast to fall by 12 per cent to 43 million barrels a day, before increasing 80 to 46 million barrels a day in 2021 and 2022.

60 US consumption is expected to fall by 11 per cent to 18 million barrels a day in 2020, as persistently high COVID-19 cases weigh on road activity 40 and travel demand. Although containment measures eased over the June

Million a barrels Million day quarter, the subsequent recovery in consumption has been muted as 20 households reduce non-essential travel due to persistently high COVID-19 cases. Consequently, further growth in US oil consumption is likely to 0 2006 2008 2010 2012 2014 2016 2018 2020 2022 depend on falling COVID-19 cases, complicated by variability across OECD Non-OECD states. In 2021, US demand is forecast to rise to 19 million barrels a day.

Source: Department of Industry, Science, Energy and Resources (2020); International EU consumption is expected to decline by 13 per cent to an estimated 12 Energy Agency (2020) million barrels a day in 2020. To address rising COVID-19 cases, some EU There are likely to be some behavioural shifts once the COVID-19 member states introduced containment measures in the December pandemic recedes that will have material impacts on the oil market. This quarter. As a result, the recovery in EU consumption is expected to be may occur through a shift towards working from home, evolving uneven and unsteady across member states. Consumption is forecast to commuting patterns, and lingering impacts on long haul air travel. This recover in 2021, reaching 13 million barrels a day, and remaining around raises the level of uncertainty for oil consumption late in the outlook period. these levels in 2022.

Resources and Energy Quarterly December 2020 84

Consumption in other OECD nations is also expected to fall significantly in Figure 8.4: Chinese crude oil imports 2020; Australia, Japan and South Korea all introduced containment 14 measures in the first half 2020. Although measures in these nations eased in the June quarter 2020, localised outbreaks in these nations have led to 12 the subsequent imposition of targeted, temporary containment measures. 10 Non-OECD consumption to plummet, driven by China and India 8 Non-OECD consumption is estimated to fall by 3.6 million barrels a day to 49 million barrels a day in 2020, compared to the 2019 increase of 6 1.1 million barrels a day. 4 Million a barrels Million day Chinese consumption in 2020 is expected to increase marginally to 14 million barrels a day. This forecast increase is in contrast to most other 2 economies, where consumption is forecast to fall considerably. 0 Consumption has recovered strongly since the March quarter, which fell by May 18 Nov 18 May 19 Nov 19 May 20 Nov 20 16 per cent on a quarterly basis. Future Chinese imports may be affected Source: Bloomberg (2020) by record levels of oil in storage in China, accumulated from imports made when prices reached multi decade lows during the June quarter of 2020 8.4 World Production (Figure 8.4). Lower Chinese imports would negatively affect global oil prices, since China accounted for over 80 per cent of oil consumption Global oil production is expected to fall in 2020, as OPEC+ production growth in 2019. Chinese demand is forecast to rise by 6.1 per cent in 2021 declines to meet targets and output in other nations (such as the US) falls and 2.8 per cent in 2022. in response to lower global prices (Figure 8.5). Output is estimated to fall by 7.0 per cent in 2020 to 93 million barrels a day. In 2021, oil production Indian consumption in 2020 is expected to fall by 9.1 per cent to 4.7 million is forecast to increase marginally to 94 million barrels a day, before barrels a day. Indian consumption has been affected by the national recovering to 98 million barrels a day in 2022. lockdown for much of the June quarter, and by varying containment measures across states since. Consumption has also been negatively Although oil production is forecast to increase, low oil prices throughout affected by the effects of the extremely wet monsoon season. 2020 are expected to reduce exploration expenditure and affect oil Consumption somewhat recovered in the September quarter, as production over the outlook period. Investment decisions are the most containment measures eased. Indian consumption is forecast to increase sensitive in higher-cost producing nations such as Canada and the US, over the rest of the outlook period, reaching 5.3 million barrels a day in though all producing nations are expected to be affected. This is evident in 2021 and 5.6 million barrels a day in 2022. the Saudi Aramco March 2020 announcement, which flagged plans to reduce capital expenditure, despite Saudi Arabia being one of the lowest Non-OECD consumption in 2021 is forecast to increase by 5.3 per cent to cost producers. 51 million barrels a day, largely driven by higher demand in China and India. Consumption is forecast to reach 53 million barrels a day in 2022.

Resources and Energy Quarterly December 2020 85

Figure 8.5: Change in oil production by major producers Production could rise considerably for the nations exempt from the current 5 OPEC+ agreement, although the timing and rate of these gains is highly uncertain. For much of 2020, Libyan output was affected by blockades on oilfields and export facilities, initially imposed in January 2020 but 0 remaining in place until September 2020. After this blockade passed, Libyan output rose noticeably, from 0.1 million barrels a day in September -5 2020 to 1.2 million barrels a day in November 2020. This increased production has occurred in a market that is already facing low prices and -10 considerable levels of oil in storage. However, the outlook for future Libyan production remains uncertain, and will depend on the UN mediated truce -15 remaining in effect. Libyan production is forecast to average 1.3 million barrels a day in 2021 and 1.5 million barrels a day in 2022.

-20 Production in Iran and Venezuela could also increase significantly if Quarterly Quarterly change, million barrels a day Mar-20 Jun-20 Sep-20 Dec-20 international sanctions ease. The sanctions affecting both countries may Saudi Arabia Russia Other OPEC+ US be influenced by the incoming US administration. However, both sets of sanctions are expected to remain in place over the outlook period, and Note: This assumes OPEC+ members fully comply with output targets. production over the next two years is forecast to remain at 2020 levels. Source: Department of Industry, Science, Energy and Resources (2020); International Energy Agency (2020) OPEC+ production in 2020 is expected to average 46 million barrels a day, OPEC+ output targets have succeeded in lowering world production down 16 per cent from 2019. This year-on-year decline is expected to be limited by elevated production between January and April. Output is Over 2020, OPEC+ output targets were lowest between May and July, expected to fall further to 45 million barrels a day in 2021, as output before output cuts were reduced from August 2020. The member countries targets are assumed to be in place for the whole of 2021. In 2022, that exceeded their production targets during May/June agreed to production is forecast to recover to 51 million barrels a day. compensate with further output cuts between July and September. During this period, compliance for these countries was high, as was compliance in Non-OPEC+ production to drop in response to low prices other OPEC+ members. The forecasts contained in this publication In 2020, production is also expected to decline significantly in non-OPEC+ assumes that OPEC+ members fully comply with production targets. nations, as producers respond to low global prices. Non-OPEC+ output Under the current agreement, OPEC+ production targets are scheduled to was estimated to be at its lowest point in the year in the June quarter, increase in January 2021. Over the rest of the outlook period, output is before rising marginally as some producers responded to higher prices. expected to rise steadily. However, the timing of these increases is US production is estimated to fall by 5.3 per cent to 16 million barrels a uncertain, and will be determined in monthly OPEC+ meetings. day in 2020. The majority of this decline is expected to have occurred in Compliance with the OPEC+ agreement across member nations is a key the June quarter 2020, with production averaging 14 million barrels a day. risk to excess global output, and may result in renewed OPEC+ tensions. In the first half of 2020, US producers reduced capital expenditure and

Resources and Energy Quarterly December 2020 86

their oil rig count. In combination with declining production from existing Figure 8.6: Composition of Australian oil production wells, this is expected to keep US production low in 2021. US oil production may also be affected by the ongoing legal challenge on the 600 Dakota Access Pipeline. Although the pipeline is allowed to continue 500 operating while legal proceedings are ongoing, this presents a downside risk to US supply, as some fields become less economically viable. In 400 2021, US production is forecast to increase to 17 million barrels a day, 300 before increasing to 18 million barrels a day in 2022. 200 Canadian production is estimated to decline by 4.4 per cent to 5.3 million barrels a day in 2020, as relatively high production costs and dwindling 100 storage capacity influence producer decisions. Canadian production is a barrels Thousand day 0 forecast to increase to 5.6 million barrels a day in 2021, and 5.7 million 2009–10 2011–12 2013–14 2015–16 2017–18 2019–20 2021–22 barrels a day in 2022. Crude oil Condensate LPG

In 2021, non-OPEC+ output is forecast to rise by 3.6 per cent to 48 million Source: Department of Industry, Science, Energy and Resources (2020) barrels a day. Non-OPEC+ output is forecast to rise further in 2022, to 49 million barrels a day. Australian exports to be affected by low prices

8.5 Australia In 2019–20, Australian crude oil and condensate export values in 2019–20 were $9.1 billion. This was 0.1 per cent lower than what was recorded in Final investment decisions on gas projects to influence oil production 2018–19, despite export volumes increasing by 14 per cent. In 2020–21, In 2019–20, Australian crude and condensate production increased by 18 export values are forecast to decline by 20 per cent to $7.2 billion, with per cent to 372,000 barrels a day, as crude output rose as a result of prices expected to remain low over the full fiscal year. Weak prices are Woodside’s Greater Enfield project. Late in the fiscal year, condensate expected to more than offset growing export volumes, which are expected and LPG production was affected by the temporary shutting of the Prelude to increase by 4.6 per cent in 2020–21. Export values in 2021–22 are FLNG project from February 2020. At the time of writing, Prelude remains forecast to increase by 15 per cent to $8.3 billion, driven by higher prices. offline, with no official restart date announced. Kwinana refinery closure to reduce Australian throughput Production is forecast to rise marginally in 2020–21, as output recovers at Australian refinery throughput fell significantly in early 2020 (Figure 8.7), existing fields. Output is expected to remain at around these levels in as low transport demand reduced Australian refinery profitability. As a 2021–22. Beyond the outlook period, the deferral of final investment result, all of Australia’s refineries announced plans to lower production decisions for several gas projects may affect future condensate and LPG until margins recovered. Furthermore, in October 2020, BP announced production, with the production of both commodities typically associated plans to close their Kwinana refinery and convert it to an import terminal. with gas production (see the gas chapter). In 2019–20, condensate and BP attributed this decision to persistent low refining margins and fierce LPG accounted for 47 per cent and 22 per cent of total Australian oil competition with international fuel refineries. These competitive pressures production, respectively (Figure 8.6). may also affect the future operations of the remaining three Australian

Resources and Energy Quarterly December 2020 87

refineries, with Ampol and Viva recently announcing that they are Exploration assessing the long-term viability of their Australian refineries. In the September quarter 2020, Australian petroleum exploration Australian refinery output is expected to fall gradually between the expenditure was a seasonally adjusted $220 million, a quarterly increase December quarter 2020 and the June quarter 2021. The winding down of of $8.4 million or 4.0 per cent. However, this is 39 per cent lower production at BP’s Kwinana refinery is expected to more than offset a year-on-year, as a 60 per cent decline in offshore exploration more than recovery in production at the remaining three refineries after being affected offset a 2.0 per cent increase in onshore exploration. A tighter domestic by the downturn in demand caused by COVID-19 containment measures. gas market could support ongoing growth in onshore petroleum Over the rest of the outlook period, refinery throughput is forecast to exploration, with the Australian Energy Market Operator forecasting a remain around June 2021 levels, fluctuating in line with plant maintenance. possible shortfall of natural gas in Australian southern states by 2024.

Australian refined product consumption fell in 2019–20, as COVID-19 Figure 8.8: Australian petroleum exploration containment measures weighed heavily on activity in the first half of 2020. Consumption is forecast to recover in 2020–21, as containment measures 1,200 across states ease. However, aviation demand is expected to remain low, as air travel remains depressed. In Australia, aviation consumption 1,000 accounts for a relatively high share of product usage — about 15 per cent. 800 Figure 8.7: Australian refinery output 2019–20 600 9 A$ million A$ 400

6 200

0 Sep-10 Sep-12 Sep-14 Sep-16 Sep-18 Sep-20

Billion Litres 3 Offshore expenditure Onshore expenditure

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

0 8.6 Revisions to the outlook LPG Automotive Aviation Diesel oil Fuel oil Other gasoline turbine fuel products The forecast for Australian export earnings has been revised up by $0.1 billion for 2020–21, reflecting upwards oil price revisions. Export Jan-Sep 2019 Jan-Sep 2020 earnings in 2021–22 have been revised downwards by $0.1 billion, largely Source: Department of Industry, Sciences, Energy and Resources (2020) reflecting upwards exchange rate revisions.

Resources and Energy Quarterly December 2020 88

Table 8.1: Oil Outlook

Annual percentage change s f f s f f World Unit 2019 2020 2021 2022 2020 2021 2022 Productiona mb/d 100.1 93.0 94.1 98.2 -7.0 1.1 4.3 Consumptiona mb/d 100.1 91.0 96.8 99.8 -9.1 6.4 3.1 WTI crude oil price

– nominal US$/bbl 56.7 40.6 46.0 51.4 -28.5 13.4 11.8 – realb US$/bbl 57.5 40.6 45.1 49.4 -29.4 11.2 9.5

Brent crude oil price

– nominal US$/bbl 63.9 42.2 48.9 55.3 -33.9 15.7 13.0

– realb US$/bbl 64.7 42.2 47.9 53.1 -34.7 13.5 10.7

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

Crude and condensate

Productionac kb/d 315 372 371 385 17.9 -0.1 3.6

Export volumea kb/d 254 291 304 308 14.5 4.6 1.2

– Nominal value A$m 9,071 9,009 7,220 8,273 -0.7 -19.9 14.6

– Real valueh A$m 9,275 9,089 7,220 8,138 -2.0 -20.6 12.7

Importsa kb/d 375 317 306 345 -15.4 -3.4 12.6

LPG productionacd kb/d 69 104 116 121 52.2 10.8 4.4

Refined products

– Refinery productiona kb/d 502 447 352 324 -10.9 -21.4 -7.8

– Export volumeae kb/d 17 17 14 9 -2.2 -18.7 -34.6

– Import volumea kb/d 645 640 785 844 -0.7 22.6 7.4 – Consumptionag kb/d 1,045 984 1,016 1,068 -5.9 3.3 5.1

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 Historical production data was revised in the September quarter 2020 to align with Australian Petroleum Statistics. d Primary products sold as LPG; e Excludes LPG; g Domestic sales of marketable products, including imports; f Forecast; h In 2020–21 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).

Resources and Energy Quarterly December 2020 89

9.1 Summary Figure 9.1: Uranium price outlook . Uranium prices are expected to rise steadily in 2021 and 2022. The 100 closure of Australia’s Ranger mine in early 2021 will lead to some supply 90 pressures during the year, though large producers retain the capacity to 80 ramp up rapidly should prices grow significantly. 70 60 . Australian production is set to decline from 2021, as the number of 50 active uranium mines falls from three to two (see Australia section). 40

. US$ a pound Export values are expected to ease from $688 million in 2019–20 to 30 $547 million by 2021–22 as mine output declines. 20 9.2 Prices 10 0 Prices are expected to rise slowly over the outlook period 2008 2010 2012 2014 2016 2018 2020 2022 Uranium prices have been volatile in recent quarters, reflecting some Spot price Contract price

competing pressures (Figure 9.1). Supply cuts by major producers drove Source: Cameco Corporation (2020) Uranium Spot Price; Ux Consulting (2020) Uranium early price gains, however their impact was offset in large part by slowing Market Outlook global electricity demand following the outbreak of the COVID-19 pandemic. Global electricity use remains constrained, albeit with some Figure 9.2: World nuclear power generation recovery evident in recent months, especially in China. 40

In response to mixed price movements, uranium suppliers have shifted 30 stances several times in 2020. Suppliers initially responded to slowing demand with substantial cuts in mine output. However, this was 20 subsequently reversed in Canada, where the large Cigar Lake mine was restarted in the September quarter 2020 after a brief hiatus. Overall output 10 remains down in Namibia and Kazakhstan, and a further fall in output is expected in 2021 following the final closure of the Ranger mine in 0 Australia. -10

Prices are expected to increase slowly from early 2021, as global Electrical capacity (gigaawatts) electricity use edges up. However, any rapid price growth will likely be -20 stymied given the scale of world uranium inventories and the significant 1958 1968 1978 1988 1998 2008 2018 spare capacity of major producers. Production will likely be ramped up by Nuclear generation added Nuclear generation removed the major producers should price rises significantly exceed current Source: International Energy Agency (2019); World Nuclear Association (2019); Department of Industry, Science, Energy and Resources (2020) expectations.

Resources and Energy Quarterly December 2020 91 9.3 World consumption Figure 9.3: World uranium consumption and inventory build (U3O8)

A recent wave of reactor completions and a slow increase in global energy 120 demand are expected to lift global uranium consumption from 84,100 tonnes in 2020 to 85,700 tonnes in 2021. Uranium use is then expected to 100 edge back in 2022 as the rate of reactor completions slows, though a 80 significant longer-term pipeline of future constructions remains in prospect across Asia, Africa, and Eastern Europe (see Figures 9.3 and 9.4). 60

More countries are showing interest in nuclear reactors 40

Reactor construction schedules were largely maintained during 2020, tonnes Thousand 20 despite the impacts of the COVID-19 pandemic. The December quarter 2020 saw several new reactors reaching their final stages of construction 0 in China, Russia and Belarus. Countries including Egypt, Turkey, the 2010 2012 2014 2016 2018 2020 2022 United Arab Emirates, Bangladesh and Belarus have continued to China European Union Japan Russia progress towards their first reactor constructions, while Uzbekistan, Kenya, United States Others Inventories Total production Ghana and the Philippines have announced that they are considering installing nuclear power for the first time. Source: International Energy Agency (2019); World Nuclear Association (2020); Ux Consulting (2020) China’s Fuqing nuclear plant was connected to the grid on 27 November, having achieved a sustained chain reaction on 21 October. This unit is the Figure 9.4: New nuclear capacity: medium-term expansion first of the new Hualong One reactor builds to be constructed, and is 60 expected to start generating in December. A second unit is expected to commence commercial operation at the same site in late 2021. China’s Tianwan unit 6 also concluded cold functional testing in October, with the 40 reactor scheduled to enter commercial operation in 2021. In October, China’s National Nuclear Corporation completed cold functional tests at its demonstration gas-cooled reactor in Shandong 20 province. A second reactor is now undergoing the same tests, with a electric Gigawatts further 18 units proposed for construction. China’s State Power Investment Corporation has also launched its new CAP-1400 reactor. The reactor 0 represents an upgrade from the previous AP1000 pressurised water build, China Other Eastern North Western Africa & South and is designed for rapid mass production and export. Asia Europe America Europe Middle America East Under construction Planned The Ostrovets nuclear plant in Belarus started up its first reactor in Source: International Energy Agency (2020); World Nuclear Association (2020); Department October. The Russian-made reactor is the first of two to commence of Industry, Science, Energy and Resources (2020)

Resources and Energy Quarterly December 2020 92 operation, with the second reactor expected to commence in late 2021. 9.4 World production The two reactors will be the first in Belarus, and are intended to provide Large suppliers have reduced output in the wake of COVID-19 the country with greater energy independence, reducing its reliance on imported gas. World uranium production has long been checked by large stocks of surplus supply and inventories. However, the impact of COVID-19 does Unit 2 of the Leningrad II plan in Western Russia was grid-connected in not appear to have resulted in significant disruption to uranium supply. A November. A final trial and inspection of the facility is now underway, with recent survey conducted by UxC suggests that most utilities and uranium the reactor expected to start generating power in the first half of 2021. suppliers are operating relatively unhindered, with initial mine production In October, Japan's Nuclear Regulatory Authority approved Tokyo Electric issues passing rapidly. Most production plans are expected to proceed Power Company’s safety programme. This brings the restart for units 6 without interruption into 2021. and 7 of the Kashiwazaki-Kariwa nuclear power plant a step closer. Development of new uranium mines has been slow in recent years, due to However, progress in reconnecting reactors in Japan remains slow, with persistently low prices. However, recent price growth has led to some only nine approved and one operational. There are reasonable prospects small increases in exploration and development. In September 2020, the for full approval of the Kashiwazaki-Kariwa reactors and Onagawa 2 and Ceará state government in Brazil announced the signing of a Tokai 2 by 2022, but this would still leave 41 of Japan’s 55 reactors Memorandum of Understanding with the Santa Quitéria Consortium. The closed, with most of the gap filled by coal and gas power. memorandum provides a basis for the development of a large mineral In the US, unit 3 of the Vogtle nuclear power plant has now concluded cold deposit in the country’s north, which includes the construction a combined functional testing. Only one step — hot functional testing — now remains uranium and phosphate extraction facility to refine the output. The deposit to be completed prior to fuel loading. is expected to produce around 79,000 tonnes of Triuranium octoxide (U3O8), in addition to phosphate and other minerals. Development continues to step up on small modular reactors. These reactors could offer a significant potential growth path for nuclear power In November, the UK Atomic Energy Authority’s Mega Amp Spherical after 2025. The US Department of Energy has announced a cost-sharing Tokamak (MAST) Upgrade achieved first plasma. The MAST upgrade is a agreement to acceleration of the first NuScale small modular reactor. forerunner for the one of the world’s first prototype nuclear fusion plants. Improvements to this reactor have seen expected power output increase The MAST upgrade will also provide data and support for Iter — the by 25 per cent, reducing average generation costs for the reactor world’s largest fusion experiment — which seeks to develop industrial- significantly. scale fusion power. Fusion power on this scale would enable the construction of large scale nuclear plants that do not require uranium. The Canadian government has announced an investment of US$15 million However, development of fusion technology has thus far been slow. to accelerate Terrestrial Energy’s Integral Molten Salt reactor plant. This plant will be able to mass produce pre-built reactors for easy shipment, Overall, uranium supply is expected to edge down from 84,600 tonnes in and forms part of the country’s strategy to achieve net zero carbon 2020 to 84,200 tonnes in 2021. A fall to 80,600 tonnes is expected in emissions by 2050. 2022, as utility sales and supplies from stockpiles are reduced. This would keep global output somewhat below its recent average for the next two years (see Figure 9.5). Further out, supply is expected to grow again, as

Resources and Energy Quarterly December 2020 93 the impact of the COVID-19 pandemic recedes and reactor constructions completion by 2026. Mining works at the site have been halted, with recent start to accelerate in the early 2020s. output limited to shipments from stockpiles and tailings. The closure of this mine will leave two Australia with two operating uranium mines, resulting in Figure 9.5: World uranium production and secondary supply (U3O8) falling production and exports after 2020 (see Figure 9.6). 120 Export volumes are expected to ease from 7,195 tonnes in 2019–20 to 100 5,800 tonnes by 2021–22. Export values are expected to fall from $688 80 million in 2019–20 to $547 million in 2020–21 and 2021–22, with slow price growth only partly offsetting falling volumes. 60 Figure 9.6: Australia's uranium exports 40 12 1200 Thousand tonnes Thousand 20

0 9 900 2010 2012 2014 2016 2018 2020 2022 Kazakhstan Canada Australia Africa Russia Others 6 600 Secondary supply Total consumption

Source: International Energy Agency (2020); World Nuclear Association (2020); Ux million A$

Consulting (2020) tonnes Thousand 3 300

9.5 Australia 0 0 Production and exports are set to decline from 2021 2009–10 2012–13 2015–16 2018–19 2021–22

Growth in Australian output is likely to be stymied in the short term, Volume Value (rhs) following the shelving of plans to expand the Olympic Dam copper, gold Source: Department of Industry, Science, Energy and Resources (2020) and uranium mine. Studies conducted by BHP concluded that copper resources, which were the primary target for the expansion, were ‘more Exploration remains low due to ongoing weak prices structurally complex”’ and ‘less continuous’ than previously thought. The Only $1.8 million was invested in uranium exploration in the September company will instead focus on improving its site infrastructure, to remove quarter. This is above the historical low of $1.1 million in the June quarter, bottlenecks and increase its ability to extract from existing deposits. but well below the peaks recorded in 2010. Mining at the ERA’s Ranger site has now effectively concluded, with the Revisions to the outlook company obliged by its lease to halt all mining at the site by January 8 2021. On October 6, the company released an update to its closure plan, The export earnings forecast for 2020–21 was revised down by $74 million and announced that 13 million tonnes of material had been shifted to fill in in the December Resources and Energy Quarterly, with the 2021–22 the mine pit in readiness for revegetation of the site. The planting of forecast revised down in similar proportion. This reflects a weaker price seedlings commenced in 2019, and full revegetation is scheduled for outlook over the next two years.

Resources and Energy Quarterly December 2020 94 Table 9.1 Uranium outlook

Annual percentage change

World Unit 2019 2020e 2021f 2022f 2020e 2021f 2022f Production kt 62.6 55.0 60.4 60.4 -12.9 9.9 -0.1 Africab kt 10.0 10.1 9.4 9.2 -2.1 -6.9 -2.4 Canada kt 8.2 4.8 8.2 8.2 -41.7 71.4 0.0 Kazakhstan kt 26.8 22.7 26.2 26.3 -15.3 15.5 0.6 Russia kt 3.4 3.4 3.6 3.6 -1.4 4.7 0.0 Consumption kt 83.8 84.1 85.7 84.9 0.6 1.9 -0.9 China kt 13.0 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 19.8 22.0 -0.7 -8.6 11.5 Spot price US$/lb 25.6 30.0 34.0 39.8 16.9 13.5 17.1 realc US$/lb 26.0 30.0 33.3 38.3 15.4 11.3 14.7

Australia Unit 2018–19 2019–20 2020–21ff 2021–22ff 2019–20 2020–21ff 2021–22ff Mine production t 7,618 7,349 6,486 5,800 -3.5 -11.7 -10.6 Export volume t 7,571 7,195 6,486 5,800 -5.0 -9.9 -10.6 – nominal value A$m 734 688 544 547 -0.7 -20.9 0.5 – real valued A$m 751 694 544 538 -2.0 -21.6 -1.2 Average price A$/kg 97.0 95.6 83.9 94.3 4.4 -12.3 12.4 – reald A$/kg 99.1 96.5 83.9 92.7 3.1 -13.0 10.5

Notes: b Includes Niger, Namibia, South Africa, Malawi and Zambia; c In 2020 US dollars; d in 2020–21 Australian dollars; e estimate; f forecast. Source: Department of Industry, Science, Energy and Resources (2020); Cameco Corporation (2020); Ux Consulting (2020) Uranium Market Outlook

Resources and Energy Quarterly December 2020 95

10.1 Summary ounce, with the Australian gold price estimated to rise by 29 per cent in . The COVID-19 pandemic and its fallout are likely to have seen the gold 2020, averaging A$2,581 an ounce (Figure 10.2). price peak at an annual record high in 2020, averaging about US$1,780 Gold prices are expected to fall in 2021 and 2022 an ounce. An effective COVID-19 vaccine rollout and consequent global The development and rollout of highly effective COVID-19 vaccines and economic rebound is projected to see the gold price slide to around the global economic recovery, is expected to undermine some of gold’s US$1,560 an ounce in 2022. appeal to institutional and retail investors: funds are expected to move out . Australia’s gold mine production is forecast to reach a record 384 tonnes of safe haven assets like gold and into riskier assets such as equities and in 2021–22, as record prices encourage an expansion in production (see real estate. The pace of central bank gold buying is expected to decrease Australia section). at an annual rate of 5.8 per cent over the outlook period, amidst a . The value of Australia’s gold exports is forecast to reach a record $30 modestly diminished official sector appetite for gold for reserves. billion in 2020–21 — driven by higher prices and export volumes — before declining to $27 billion in 2021–22, as gold prices ease back. As the global economy recovers, the gold price is forecast to fall in 2021 and 2022; the price is expected to average US$1,695 an ounce in 2021 10.2 Prices and US$1,560 an ounce in 2022 (Figure 10.2). The lower US dollar gold price, in combination with forecasts of a strengthening Australian dollar, is Gold prices rose strongly in 2020 expected to push the Australian dollar gold price lower over the outlook The London Bullion Market Association (LBMA) US dollar gold price is period, averaging A$2,076 an ounce in 2022. estimated to average US$1,875 an ounce in the December quarter 2020, a 26 per cent year-on-year gain. Gold has benefited from its status as a Figure 10.1: US dollar gold price and real US 10-Year Treasury yield safe haven asset during the COVID-19 pandemic. The close correlation 2,200 -1.2 between lower real bond yields and the US dollar gold price has persisted; 2,000 -0.7 low (and negative) real yields have caused a rush of investor money into 1,800 -0.2 gold, more than offsetting the impact of weaker demand from jewellery 1,600 0.3 consumers and central banks. The prospect of a successful COVID-19 1,400 0.8 vaccine rollout in 2021 has lifted real bond yields and reduced institutional 1,200 1.3

and retail investors’ appeal for gold as a safe haven (Figure 10.1). cent Per 1,000 1.8 2020 has seen record highs for the US dollar gold price — reaching 800 2.3 US$ a troy ounce US$2,064 an ounce on 6 August 2020 — and the Australian dollar gold 600 2.8 price — A$2,861 an ounce on 7 August 2020. The US dollar gold price is 400 3.3 expected to finish the year on a positive note, as new COVID-19 200 3.8 containment measures are introduced across Europe — and low interest Dec–04 Dec–08 Dec–12 Dec–16 Dec–20 rate policies persist. Reflecting these issues, the US gold price is US$ gold price estimated to increase by 28 per cent in 2020, averaging US$1,776 an Real US 10 Year Treasury bond yield (inverted, rhs)

Source: Bloomberg (2020)

Resources and Energy Quarterly December 2020 98 Figure 10.2: US and Australian dollar gold prices Central banks and other institutions (the official sector) sold gold for the 1,800 3,000 first time in a decade, but in small quantities. In the September quarter, net official sector selling was 12 tonnes, mainly due to large sales from central 1,500 2,500 banks of Turkey (22 tonnes) and Uzbekistan (35 tonnes).

1,200 2,000 Offsetting the fall in gold jewellery demand and official sector gold selling was a 5.4 per cent rise year-on-year in inflows into gold-backed exchange 900 1,500 traded funds (ETFs) in the September quarter 2020. ETF holdings rose

A$ A$ an ounce 273 tonnes, worth around US$17 billion. The global COVID-19 pandemic, 600 1,000 US$ US$ an ounce low interest rate environment and record gold prices in August 2020 have 300 500 driven demand for gold backed ETFs. As 2020 comes to an end, the short term outlook for global gold 0 0 2012 2014 2016 2018 2020 2022 consumption has weakened: COVID-19 containment measures are expected to have adverse impacts on gold jewellery demand in Europe US dollar gold price Australian dollar gold price (rhs) and the US. Central bank gold buying activity is expected to be soft, as

Source: LBMA (2020) Gold price PM; Department of Industry, Science, Energy and these institutions address liquidity requirements — as part of measures to Resources (2020) cope with the COVID-19 pandemic. Offsetting these falls is an expected rise in gold jewellery demand from China and India, driven by the onset of 10.3 Consumption the festive and wedding season. Gold is expected to continue to attract World gold consumption decreased in the September quarter 2020 institutional investors. As a result, world gold consumption is estimated to World gold consumption decreased by nearly 19 per cent year-on-year in fall by 12 per cent in 2020, to 3,841 tonnes (Figure 10.3). the September quarter 2020 — the lowest in 11 years — to 892 tonnes, Gold consumption expected to rise in 2021 and 2022 led by a reduction in both jewellery consumption and central banks’ purchases. World gold consumption is forecast to grow by 3.1 per cent in 2021 and by 4.1 per cent in 2022, reaching 4,122 tonnes in 2022 (Figure 10.3). Growth The COVID-19 pandemic and high gold prices have adversely impacted is expected to be mainly driven by jewellery demand, up 30 and 10 per physical gold consumption. Demand for jewellery dropped by 29 per cent cent in 2021 and 2022, to 1,597 and 1,757 tonnes, respectively. year-on-year in the September quarter, to 333 tonnes. Jewellery consumption in China and India — the world’s two largest jewellery Demand from China and India is expected to rise at double-digit rates in consuming nations — fell by 25 and 48 per cent year-on-year to 119 and 2021, following a steep fall in 2020. However, Chinese and Indian 53 tonnes, respectively, as consumers reacted to higher gold prices and consumers are highly sensitive to prices, so the rise in jewellery demand is the COVID-19 containment measures. In the US and Europe, jewellery expected to be more modest. In the US and Europe, jewellery demand is demand fell by 3 and 17 per cent year-on-year in the September quarter, also likely to recover, but at a slower pace than China and India, as US to 28 and 10 tonnes, respectively. and European consumers’ interest in gold jewellery is expected to remain limited.

Resources and Energy Quarterly December 2020 99 Figure 10.3: World gold consumption by sector 10.4 Production 5,000 World gold supply decreased in the September quarter 2020 World gold supply fell by 3.3 per cent year-on-year in the September 4,000 quarter 2020, to 1,224 tonnes, mainly due to decreased gold mine production. 3,000 World gold mine production fell by 3.4 per cent year-on-year in the

Tonnes September quarter 2020 to 884 tonnes, driven by reduced output in some 2,000 major gold producing nations. Production in China — the world’s largest gold producer — decreased by 3.0 per cent year-on-year in the September 1,000 quarter, as stricter environmental regulations (implemented since 2017) reduced Chinese gold output. Over this period, Russia’s gold mine 0 production fell by 13 per cent year-on-year, due to lower ore grades. 2012 2014 2016 2018 2020 2022 Production in the US and Australia rose by 12 and 4.8 per cent year-on- Total Fabricated Investment Official sector year in the September quarter 2020, respectively. Notes: Total fabricated includes jewellery consumption and industrial applications Source: World Gold Council (2020) Gold Demand Trends; Department of Industry, Science, Figure 10.4: World gold supply Energy and Resources (2020) 5,400

Over the first half of outlook period at least, many central banks are 4,500 expected to continue to shift their focus from reserves diversification to supporting the economic recovery from the COVID-19 pandemic. The 3,600 official sector is thus expected to slow its (net) buying pace compared to recent years. Central banks’ gold buying is forecast to fall at an average 2,700

annual rate of 5.8 per cent in 2021 and 2022, to 270 tonnes (net) in 2022. Tonnes With record low interest rates in much of the world, the opportunity cost of 1,800 holding gold is low. Fund flows into gold backed ETFs are thus expected to continue to grow, but at a slower pace, with an average inflow of about 900 811 tonnes a year in 2021 and 2022. 0 Retail investment is expected to help global gold consumption, with 2012 2014 2016 2018 2020 2022 demand for gold bars and coins forecast to rise at an average annual rate Mine production Scrap of 15 per cent in 2021 and 2022, reaching 1,006 tonnes by 2022. This is Source: World Gold Council (2020) Gold Demand Trends; Department of Industry, Science, driven by a forecast pull-back in gold prices (see Section 10.2 prices). Energy and Resources (2020)

Resources and Energy Quarterly December 2020 100 The relaxation of COVID-19 containment measures in many parts of the 7.5 tonnes a year Burtica gold mine — first large scale underground gold world has encouraged the re-opening of jewellery stores and thus boosted project — has commenced commercial operation in December 2020. gold recycling activity. Some sales are likely to have been distressed, as Gold scrap supply is forecast to rise by 3.0 per cent in 2021, to 1,339 households try to raise funds to get through the pandemic. In the tonnes, as high gold prices — both in US dollar and local currency terms September quarter 2020, gold scrap supply rose by 6.2 per cent year-on- — encourage gold selling in major jewellery consuming markets such as year to 376 tonnes. China and India. In 2022, lower gold prices and an improvement in the For 2020, world gold supply is estimated to fall by 2.6 per cent to 4,684 economic situation of many households are likely to discourage the sale of tonnes (Figure 10.4), as gold mine production in some gold producing gold jewellery: gold scrap supply is forecast to fall by 3.0 per cent in 2022, countries such as China and Papua New Guinea (PNG) is expected to to 1,299 tonnes. remain subdued in the last quarter of 2020. Barrick Gold’s 15 tonnes a year Porgera gold mine in PNG — on care and maintenance since April 10.5 Australia’s exports and production 2020 — is not expected to restart before the end of the year, despite the Export values decreased in the September quarter 2020 PNG government and Barrick Gold reaching an in principle agreement on Australia’s gold exports decreased by 4.9 per cent year-on-year in the the ownership and operation of the mine on 15 October 2020. September quarter 2020, to around $7.0 billion, due to a 100 per cent Gold mine production in Australia is expected to rise in the December year-on-year fall in exports to China (including Hong Kong) and a 27 per quarter, as some large gold mines — such as Evolution Mining’s Cowal cent fall in exports to the UK. Offsetting the drop in China and the UK’ gold mine in NSW and Northern Star’s Kalgoorlie Operations in WA — to markets, exports to the US rose by 6,862 per cent year-on-year to $1.8 return to full production following planned maintenance in the September billion, fuelled by fund flows into ETFs and strong safe haven demand for quarter. Gold mines in the US, Russia and Canada are also expected to bullion. maximise production, possibly seeking out some low grade deposits Australian gold mine production increased in the September quarter 2020 previously deemed uneconomic. Australia’s gold mine production rose by 4.8 per cent year-on-year in the Gold recycling activity is expected to have picked up in the last quarter of September quarter 2020, to 81 tonnes, driven by higher output in several 2020, as retail consumers sell gold pieces to cash in on high gold prices. large gold mines. Production at Kirkland Lake Gold’s Fosterville mine in World gold supply expected to rise in 2021 and 2022 Victoria increased by 2.0 per cent year-on-year to 5.0 tonnes, driven by increased mill throughput. Over the same period, production at Newmont World gold supply is forecast to rise by 7.3 and 1.1 per cent in 2021 and Mining’s Boddington mine in WA rose by 4.8 per cent year-on-year, to over 2022, to 5,026 and 5,082 tonnes, respectively (Figure 10.4). Supply 5.4 tonnes, propelled by higher grades. growth is expected to be driven by stronger mine and scrap output. Production at Evolution Mining’s Cowal gold mine in NSW fell by nearly World mine production is forecast to increase by 8.0 per cent (to 3,682 32 per cent year-on-year in the September quarter 2020, to 1.6 tonnes, tonnes) in 2021 and by 2.0 per cent (to 3,756 tonnes) in 2022. A solid due to planned maintenance in August 2020. Northern Star’s Kalgoorlie pipeline of projects in Australia, Russia and Canada should contribute to Operations production declined by 19 per cent year-on-year, to 2.0 tonnes, higher world mine output, with miners focusing on expansions and due to planned maintenance, lower grades and reduced throughput. extending the life of existing mines. In Colombia, Zijin Continental Gold’s

Resources and Energy Quarterly December 2020 101 Figure 10.5: Australia’s gold production Figure 10.6: Australia’s gold exports

400 420 36

350 30 300 280 24

Tonnes 200 210 18 A$ billion A$ Tonnes 140 12 100

70 6 0 2011–12 2013–14 2015–16 2017–18 2019–20 2021–22 0 0 2011–12 2013–14 2015–16 2017–18 2019–20 2021–22 Source: ABS (2020) International Trade, 5368.0; Department of Industry, Science, Energy and Resources (2020) Volume Nominal value (rhs)

Higher production in the short term 10.5). The decline will come as the lower US dollar gold price and a rising Australian gold mine production is forecast to rise by 12 and 4.5 per cent Australian dollar (see Section 10.2 prices) more than offsets the impact of in 2020–21 and 2021–22, to 368 and 384 tonnes, respectively (Figure Source: Department of Industry, Science, Energy and Resources (2020) higher export volumes. 10.6). Output will be propelled by production from new mines and higher output from existing gold mines. Gold exploration expenditure rose strongly in the September quarter 2020

Production at Evolution Mining’s Mt Rawdon gold mine in Queensland is Australia’s gold exploration expenditure rose by 27 per cent year-on-year expected to return to normal capacity, after a rock fall incident in in the September quarter 2020 to $356 million — record quarterly September 2020. Capricorn Metals’ Karlawinda gold mine project (annual exploration expenditure — incentivised by high US and Australian dollar production of 3.0 tonnes) is expected to be commissioned in the June gold prices. quarter 2021. Ramelius’ 1.9 tonnes a year Penny gold mine is expected to Western Australia remained the centre of gold exploration activity in commence in the June quarter 2021. Australia, accounting for 73 per cent (or $60 million) of total gold Australia’s gold exports to reach a record of $30 billion in 2020–21 exploration expenditure (Figure 10.7). Australia’s gold export earnings are forecast to increase by 23 per cent in 2020–21, to reach a record of $30 billion (Figure 10.5), driven by higher gold prices and higher export volumes. Australia’s gold export earnings are forecast to fall by 11 per cent in 2021–22 to nearly $27 billion (Figure

Resources and Energy Quarterly December 2020 102 Figure 10.7: Australian gold exploration expenditure Revisions to the outlook 270 The forecasts for the US dollar gold price in 2021 and 2022 have been 240 revised down by 2.6 and 6.3 per cent, to US$1,695 and US$1,560 an 210 ounce, respectively, from the forecast in the September 2020 Resources 180 and Energy Quarterly. The downward revision reflects the increased 150 likelihood of effective COVID-19 vaccines in the first half of 2021 and an associated economic recovery in 2021. 120

A A $ million 90 As a result of the price revisions, the forecast for Australian gold exports in 60 2020–21 has been revised down by 3.3 per cent (or $1.0 billion), to $30 30 billion. Export earnings in 2021–22 have been revised down to $27 billion, 0 down $1.4 billion from the forecast in the September 2020 Resources and Sep-10 Sep-12 Sep-14 Sep-16 Sep-18 Sep-20 Energy Quarterly. WA Rest of Australia

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

Resources and Energy Quarterly December 2020 103 Table 10.1: Gold outlook

Annual percentage change

World Unit 2019 2020S 2021f 2022f 2020S 2021f 2022f Total demand tonnes 4,387 3,841 3,962 4,122 -12.4 3.1 4.1 Fabrication consumptionb tonnes 2,449 1,521 1,912 2,078 -37.9 25.7 8.7 Mine production tonnes 3,530 3,409 3,682 3,756 -3.4 8.0 2.0 Pricec Nominal US$/oz 1,392 1,776 1,695 1,560 27.6 -4.6 -8.0 Reald US$/oz 1,410 1,776 1,662 1,498 26.0 -6.4 -9.9 Australia Unit 2018–19 2019–20 2020–21f 2021–22f 2019–20 2020–21f 2021–22f Mine production tonnes 322 328 368 384 1.7 12.2 4.5 Export volumes tonnes 326 350 364 393 7.4 4.0 7.9 Export value - Nominal A$m 18,867 24,394 30,035 26,864 29.3 23.1 -10.6 Export value - Reale A$m 19,290 24,612 30,035 26,424 27.6 22.0 -12.0 Price Nominal A$/oz 1,769 2,338 2,510 2,129 32.2 7.3 -15.2 Reale A$/oz 1,809 2,359 2,510 2,094 30.4 6.4 -16.6

Notes: b includes jewellery consumption and industrial applications; c London Bullion Market Association; d In 2020 calendar year US dollars; e In 2020–21 financial year Australian dollars; f Forecast; s Estimate. 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).

Resources and Energy Quarterly December 2020 104

11.1 Summary Figure 11.1: Exchange aluminium stocks . Growing demand is expected to drive aluminium prices higher in 2021 5 and 2022, to an average of US$1,880 and US$1,960 a tonne, respectively. Alumina prices are also forecast to rise over the outlook 4 period, to an average of US$289 a tonne in 2022. 3 . Annual Australian output is expected to be broadly steady over the outlook period, remaining at around 1.6 million tonnes of aluminium and 2 20 million tonnes of alumina (see Australia section). Million tonnes Million . The total value of Australian exports of aluminium, alumina and bauxite 1 is forecast to fall by 7.1 per cent in 2020–21 to $12 billion as bauxite 0 volumes decline, then hold steady in 2021–22. Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 11.2 Prices LME aluminium stocks Shanghai aluminium stocks Off-Warrant stocks Aluminium and alumina prices rose in the December quarter 2020 Source: London Metal Exchange (2020); World Bureau of Metals Statistics (2020) The London Metal Exchange (LME) spot price for primary aluminium traded higher in the December quarter, averaging US$1,896 a tonne. The Figure 11.2: World aluminium and alumina prices speedy recovery of the China’s economy from the COVID-19 pandemic 2,500 500 has driven primary aluminium demand and prices to above pre-COVID-19 levels. This increased consumption has contributed to a fall in LME 2,000 400 aluminium inventories (Figure 11.1). SHFE stocks have fallen since April 2020, as China’s demand has recovered. Other factors contributing to 1,500 300 higher prices include large scale strategic primary aluminium stockpiling by

China’s primary aluminium producers and traders. LME off-warrant stocks US$ a tonne 1,000 200 have risen since data was first released in February 2020 (Figure 11.1). China’s winter production curtailment policy — first implemented in the 500 100 2017–18 winter to reduce air pollution in major northern cities — is US$ a tonne (FOB Australia) expected to be relaxed in the 2020–21 winter season, in order to boost 0 0 2012 2014 2016 2018 2020 2022 economic activity. The relaxation is likely to raise aluminium output and Average aluminium LME price Average alumina price (rhs) create headwinds for aluminium prices. As a result, the aluminium price is estimated to average US$1,681 a tonne in 2020, down 6.2 per cent from Source: LME (2020) spot prices; Metals Bulletin (2020) Alumina monthly price; Department of 2019 (Figure 11.2). Industry, Science, Energy and Resources (2020).

Resources and Energy Quarterly December 2020

107 The free on board (FOB) Australian alumina price was also higher in the Primary aluminium consumption in other major primary aluminium December quarter 2020, averaging US$276 a tonne. The rise was driven consumers fell in the September quarter 2020. These falls included the US by increased primary aluminium production in China. (down by 7.1 per cent year-on-year), Germany (down by 39 per cent year- on-year), India (down by 40 per cent year-on-year) and Japan (down by 14 China’s aluminium producers are expected to continue to ramp up per cent) (Figure 11.4). production in the short term. This increased production is likely to support alumina demand and prices. As a result, the FOB Australian alumina price The impact of the COVID-19 pandemic on the global automotive industry is estimated to average US$267 a tonne in 2020, a decline of 20 per cent has led to adverse impacts on global aluminium usage. Car sales fell — and 2.0 percentage points less than the September 2020 Resources across the world (except China), as the loss of jobs and income reduced and Energy Quarterly forecast. consumer spending on discretionary items. Global car sales decreased by 3.4 per cent year-on-year in the September quarter 2020, to 18 million Aluminium and alumina prices expected to rise in 2021 and 2022 units. Car sales in Europe fell by 2.3 per cent year-on-year to 4.1 million The LME aluminium spot price is forecast to increase by 12 per cent to units, and in the North America by 9.9 per cent to 4.6 million units. average US$1,878 a tonne in 2021, and to rise by a further 4.1 per cent in 2022 to average US$1,955 a tonne in 2022 (Figure 11.2). Recovering World primary aluminium consumption is estimated to rise by 1.5 per cent world aluminium demand — as the impacts of the COVID-19 pandemic to 64 million tonnes in 2020 (Figure 11.3), driven by a 6.2 per cent rise in recede — is expected to be a major driver of the rise in aluminium prices. aluminium consumption in China. Car sales are expected to recover, Higher Chinese demand is expected to be a significant driver of rising supported by changing consumer preferences as a result of the COVID-19 world demand. pandemic: people appear to be preferring to travel by car rather than by bus or other forms of public transport, though an increase in remote The FOB Australian alumina price is forecast to rise by 3.4 and 4.6 per working has also reduced some car usage. cent in 2021 and 2022, to average US$276 and US$289 a tonne, respectively. (Figure 11.2). The price gain is expected to be driven by a World alumina consumption increased by 1.1 per cent year-on-year in the rise in world aluminium production — forecast to increase at an average September quarter 2020, to 30 million tonnes. The rise came as China’s annual rate of 2.4 per cent in 2021 and 2022. aluminium smelters ramped up production to meet increased aluminium demand (see Section 11.4). Over this period, China’s alumina 11.3 Consumption consumption rose by 2.0 per cent year-on-year to nearly 17 million tonnes. Aluminium, alumina and bauxite usage rose in the September quarter Demand for alumina from Europe and America fell by 1.9 and 0.7 per cent, to 3.5 and 2.3 million tonnes, respectively, due to lower aluminium World primary aluminium consumption rose by 2.2 per cent year-on-year production. World alumina consumption is estimated to have risen by 1.4 to 16 million tonnes in the September quarter 2020, driven by a 15 per per cent in 2020 to 120 million tonnes (Figure 11.5). Higher global primary cent year-on-year rise in consumption in China — the world’s largest aluminium production has driven alumina demand. aluminium consuming country. Car sales in China rose by 14 per cent year-on-year in the September quarter 2020 to 6.9 million units, as China’s China is expected to contribute significantly to growth in alumina usage commuters shifted to car use to minimise the risk of COVID-19 infection. over the outlook period, as China’s aluminium smelters ramp up their

Resources and Energy Quarterly December 2020

108 Figure 11.3: World aluminium consumption and industrial production production to maximise the benefits of low alumina and energy prices. 80 140 Outside of China, alumina consumption is expected to rise in Canada, Brazil, Bahrain and Vietnam. 120 60 World bauxite consumption increased by 3.7 per cent year-on-year in the 100 September quarter 2020 to 77 million tonnes, driven by an increase in 80 bauxite consumption in China. China consumed nearly 32 million tonnes of 40 60 Index bauxite in the September quarter, up 1.6 per cent year-on-year. World

Million tonnes Million bauxite consumption is expected to increase by 2.5 per cent to 308 million 40 20 tonnes in 2020, driven by increased alumina production in China — the 20 world’s largest alumina producing country.

0 0 Aluminium, alumina and bauxite demand set to increase in 2021 and 2022 2012 2014 2016 2018 2020 2022 In 2021 and 2022, global industrial production growth — traditionally Aluminium consumption Industrial production (rhs) strongly correlated with aluminium demand — is expected to recover from Source: International Aluminium Institute (2020); Netherland CPB (2020); Oxford Economics a sharp fall in 2020. The global economic recovery is expected to support (2020); World Bureau of Metal Statistics (2020); Department of Industry, Science, Energy and Resources (2020) the demand for cars, houses and electrical equipment, and thus aluminium. Figure 11.4: Top 5 primary aluminium consuming countries In China, primary aluminium consumption from ultra-voltage transmission 12,000 lines projects — aluminium is used in steel core aluminium wires and 10,000 cables — is expected to rise over the outlook period. Improving the capacity of the grid sector is a key priority in the latest 5-year plan 8,000 released in October 2020. kt

6,000 World primary aluminium demand is forecast to grow by 5.7 per cent in 2021 and by 3.9 per cent in 2022, reaching 70 million tonnes by 2022 4,000 (Figure 11.3). The growth is expected to be driven by increased demand from the transport, construction and consumer durables sectors. Advanced 2,000 and developing economies are expected to continue with economic 0 stimulus measures, such as increased infrastructure spending. Sep-10 Sep-12 Sep-14 Sep-16 Sep-18 Sep-20 World alumina consumption is forecast to grow by 2.8 per cent in 2021 China US Germany India Japan and by 1.8 per cent in 2022, reaching 126 million tonnes in 2022 (Figure

Source: International Aluminium Institute (2020); World Bureau of Metal Statistics (2020) 11.3). Alumina demand is driven by primary aluminium production, which

Resources and Energy Quarterly December 2020

109 Figure 11.5: World aluminium production and alumina consumption smelter in Iran. Over the same period, Indian output fell by 2.1 per cent 70 140 year-on-year to 896,000 tonnes, due to COVID-19 containment measures. 60 120 Primary aluminium production in China is expected to continue rising over 50 100 the short term. New and existing aluminium smelters in China are likely to take advantage of low input costs (alumina and fuel prices) and a 40 80 post-COVID-19 industrial recovery to ramp up production. Some large 30 60 aluminium smelters have moved their production out of the eastern 20 40

Million tonnes Million province of Shandong — where aluminium production is powered by coal- Million tonnes Million 10 20 fired power plants — to the western province of Yunnan — where aluminium production is powered by hydropower supplies. In October 0 0 2012 2014 2016 2018 2020 2022 2020, Aluminium Corporation of China transferred a 135,000 tonne annual aluminium smelting capacity from Shandong Huayu aluminium smelter to Aluminium production Alumina consumption (rhs) Source: International Aluminium Institute (2020); AME (2020); World Bureau of Metal Yunnan Aluminium for clean and cheap hydropower. As a result, world Statistics (2020); Department of Industry, Science, Energy and Resources (2020) primary aluminium production is estimated to increase by 1.9 per cent in 2020 to 65 million tonnes (Figure 11.5). is forecast to increase at an average annual rate of 2.4 per cent between 2021 and 2022. World alumina supply increased by 0.9 per cent year-on-year in the September quarter 2020, to 32 million tonnes, driven by a 5.4 per cent World bauxite usage is forecast to grow by 3.8 per cent year-on-year in (268,000 tonnes) rise in Australian alumina output (see Section 11.4) and 2021 and by 5.3 per cent in 2022, reaching 336 million tonnes by 2022. a 5.7 per cent (995,000 tonnes) rise in China’s alumina output. Production This is expected to be driven by new alumina capacity in China and India. at Norsk Hydro’s Alunorte refinery in Brazil — the largest alumina refinery 11.4 Production outside China — declined by about 880,000 tonnes in the September quarter 2020, due to extended maintenance at the Paragominas bauxite Aluminium, alumina and bauxite output rose in the September quarter mine supplying the refinery. World aluminium production increased by 0.8 per cent year-on-year in the World alumina supply is estimated to have increased by 1.8 per cent to September quarter of 2020 to 16 million tonnes, due to higher output in over 126 million tonnes in 2020, driven by higher production in Brazil. China. Production in China — the world’s largest aluminium producer — Norsk Hydro’s 6.4 million tonne per year Alunorte refinery has ramped up rose by 8.1 per cent year-on-year over the same period, to 9.6 million production since early October 2020, following the completion of tonnes. China’s primary aluminium producers raised output in response to maintenance work at its Paragominas bauxite mine on 8 October 2020. government stimulus measures on infrastructure and construction. World bauxite output rose by 7.9 per cent year-on-year in the September Primary aluminium output in the Middle East rose by 1.5 per cent year-on- quarter 2020 to nearly 90 million tonnes, propelled by a 3.8 per cent (1.0 year in the September quarter 2020 to 1.4 million tonnes, driven by the million tonnes) rise in bauxite production in Australia — the world’s largest ramp up of production at the 1.0 million tonnes per year SALCO aluminium bauxite producer — and a 68 per cent (7.5 million tonnes) rise in bauxite

Resources and Energy Quarterly December 2020

110 production in Guinea. World bauxite supply is estimated to have risen by Huanghua alumina refinery started production in 2020, and is expected to 2.1 per cent in 2020, to 363 million tonnes (Figure 11.6). 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 Aluminium, alumina and bauxite output set to rise over the outlook period 300,000 tonnes per year in 2020 to 1.8 million tonnes per year by 2022. In World primary aluminium production is forecast to grow by 2.9 per cent in Cameroon, the 3 million tonnes per year joint-venture CAL alumina 2021 and by 1.8 per cent to 68 million tonnes in 2022 (Figure 11.5). The refinery project is expected to come online in 2022. Alumina production in gains is expected to be driven by additional capacity in China, Iran, Australia is expected to be steady at about 20 million tonnes per year. Norway and Vietnam. World bauxite output is forecast to grow by 6.4 per cent in 2021 and by 2.8 In China, it is expected that around 2.4 million tonnes of new primary per cent to 397 million tonnes in 2022 (Figure 11.6). The gains are aluminium capacity is expected to be added in 2021. More greenfield expected to be driven by newly added capacity in Guinea, where aluminium smelters are anticipated, located in regions where power is production is rising rapidly. Guinea’s bauxite output is forecast to grow at cheap and abundant (such as Yunnan province). Henan Shenhuo’s an average of 9.0 per cent a year in 2021 and 2022. The Compagnie des 900,000 tonne per year Yunnan aluminium project is expected to start Bauxites de Guinée mine in Guinea, which expanded from 13 to 18 million commercial production in the March quarter 2021. The 396,000 tonne per tonnes per annum in 2019, is due to expand to 28 million tonnes by 2022. year Baiyinhua aluminium smelter is expected to start production in late Emirates Global Aluminium is planning to ramp up output at its bauxite 2020 or early 2021. Guizhou Zhengzhongyuan Mining’s 500,000 tonne per mine in Guinea, targeting 12 million tonnes per year towards the end of the year Weng’an aluminium project is expected to be commissioned in 2022. outlook period. 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 Figure 11.6: World bauxite production (300,000 tonnes) of the 1 million tonne per year SALCO aluminium smelter 400 ramping up production over the outlook period. In Norway, production at Hydro’s Husnes aluminium smelter is forecast to increase by 105 per cent in 2021, to 195,000 tonnes, driven by the restart of its B line in November 300 2020. In Vietnam, the delayed Tran Hong Quan aluminium project (nameplate capacity of 436,000 tonnes per year) is expected to start 200

production in early 2021. tonnes Million World alumina supply is forecast to grow by 0.3 per cent in 2021, and by 100 1.8 per cent to 129 million tonnes in 2022. This growth is expected to be driven by China, India and Cameroon. In China, new alumina refineries are expected to be constructed, in order 0 2012 2014 2016 2018 2020 2022 to comply with the government’s stricter environmental regulations. Aluminium Corporation of China’s 1 million tonne per year Chalco Hebei Source: Department of Industry, Science, Energy and Resources (2020)

Resources and Energy Quarterly December 2020

111 11.5 Australia’s exports and production Over the last few years, companies from China and Europe have invested Weak aluminium, alumina and bauxite exports in the September quarter heavily in Guinea to build up the country’s bauxite production capacity. Guinea has overtaken Australia as China’s largest supplier of bauxite Australia’s aluminium, alumina and bauxite exports declined by 17 per since 2017 (Figure 11.7), accounting for 42 per cent of China’s total cent year-on-year in the September quarter 2020, to $2.8 billion. The bauxite imports in the September quarter 2020. decline was due to softening prices for aluminium and alumina (see Section 11.2), and lower aluminium export volumes (down 11 per cent Figure 11.7: China’s bauxite imports from major producers year-on-year), partially offset by higher export volumes of alumina (up 4.1 20 per cent year-on-year) and bauxite (up 0.4 per cent year-on-year). Australia’s aluminium output increased by 0.9 per cent year-on-year to 16 401,000 tonnes in the September quarter 2020, propelled by a 2.4 per cent rise in Rio Tinto’s Boyne Island aluminium smelter in Queensland. 12 Australia’s alumina output increased by 5.4 per cent year-on-year in the 8 September quarter 2020 to 5.2 million tonnes. The increase is attributed to tonnes Million a 14 per cent year-on-year rise in Rio Tinto’s Queensland Alumina Refinery in Queensland, and an 8.0 year-on-year rise in Rio Tinto’s 4 Yarwun alumina refinery in Queensland. 0 Australia’s bauxite output rose by 3.8 per cent year-on-year to nearly 28 Sep-10 Sep-12 Sep-14 Sep-16 Sep-18 Sep-20 million tonnes in the September quarter 2020. The rise was driven by a 6.0 Australia Guinea Indonesia Malaysia per cent year-on-year rise in Rio Tinto’s Gove operations in the Northern Source: Bloomberg (2020) Territory, and a 3.5 per cent year-on-year rise in Rio Tinto’s Weipa operations in Queensland. Steady aluminium and alumina production over the outlook period

Exports to fall over the outlook period Australia’s aluminium production is forecast to remain at around 1.6 million tonnes a year out to 2021–22 (Figure 11.8). Australia’s alumina production Despite a forecast of improvement in aluminium and alumina prices in is expected to remain at around 20 million tonnes per annum over the 2021 and 2022, Australia’s aluminium, alumina and bauxite export outlook period (Figure 11.9). earnings are forecast to fall by 7.1 per cent in 2020–21, to nearly $12 billion, and then hold steady in 2021–22. Australia’s bauxite output is forecast to fall by 4.0 per cent in 2020–21 to 103 million tonnes, as production at Metro Mining’s 6 million tonnes a year The fall in export earnings is expected to be driven by a decline in bauxite Bauxite Hills mine in Queensland is suspended from September 2020 to export volumes, which are forecast to fall at an average annual rate of 8.3 April 2021, due to the wet season shutdown. In 2021–22, bauxite output is per cent, to 35 million tonnes by 2021–22. forecast to rise by 2.8 per cent, to 106 million tonnes (Figure 11.10).

Resources and Energy Quarterly December 2020

112 Figure 11.8: Australia’s aluminium exports and production Figure 11.10: Australia’s bauxite exports and production 2.0 5 120 1,800

1.6 4 100 1,500

1.2 3 80 1,200 60 900 0.8 2 A$ billion A$ A$ million A$

Million tonnes Million 40 600

0.4 1 tonnes Million 20 300 0.0 0 2011–12 2013–14 2015–16 2017–18 2019–20 2021–22 0 0 2011–12 2013–14 2015–16 2017–18 2019–20 2021–22 Aluminium production Export volumes Export nominal values (rhs) Bauxite production Export volumes

Export nominal values (rhs) Source: Source: ABS (2020) International Trade in Goods and Services, 5368.0; Department of Industry, Science, Energy and Resources (2020) Source: ABS (2020) International Trade in Goods and Services, 5368.0; Department of Industry, Science, Energy and Resources (2020) Figure 11.9: Australia’s alumina exports and production 24 12 Revisions to the outlook for Australian exports The forecast for Australia’s aluminium, alumina and bauxite exports 20 10 earnings has been revised up from the September 2020 Resources and 16 8 Energy Quarterly — by $256 million in 2020–21, and by $205 million to $12 billion in 2021–22. The revision reflects larger than expected rise in 12 6 aluminium and alumina prices in the second half of 2020.

8 4 billion A$

Million tonnes Million 4 2 0 0 2011–12 2013–14 2015–16 2017–18 2019–20 2021–22

Alumina production Export volumes Export nominal values (rhs) Source: ABS (2020) International Trade in Goods and Services, 5368.0; Department of Industry, Science, Energy and Resources (2020)

Resources and Energy Quarterly December 2020

113 Table 11.1: Aluminium, alumina and bauxite outlook

Annual percentage change World Unit 2019 2020s 2021f 2022f 2020s 2021f 2022f Primary aluminium Production kt 63,635 64,853 66,725 67,938 1.9 2.9 1.8 Consumption kt 63,224 64,153 67,839 70,484 1.5 5.7 3.9 Prices aluminiumc - nominal US$/t 1,792 1,681 1,878 1,955 -6.2 11.8 4.1 - reald US$/t 1,814 1,681 1,841 1,877 -7.4 9.6 1.9 Prices alumina spot - nominal US$/t 335 267 276 289 -20.1 3.4 4.6 - reald US$/t 339 267 271 278 -21.1 1.4 2.5 Australia Unit 2018–19 2019–20 2020–21f 2021–22f 2019–20 2020–21f 2021–22f Production Primary aluminium kt 1,573 1,572 1,576 1,574 0.0 0.2 -0.2 Alumina kt 20,103 20,451 20,529 20,361 1.7 0.4 -0.8 Bauxite Mt 99.5 107.2 103.0 105.8 7.8 -4.0 2.8 Consumption Primary aluminium kt 156 188 237 237 20.9 25.8 0.0 Exports Primary aluminium kt 1,452 1,430 1,345 1,385 -1.5 -6.0 3.0 - nominal value A$m 4,166 3,691 3,352 3,514 -11.4 -9.2 4.8 - real valuee A$m 4,259 3,724 3,352 3,456 -12.6 -10.0 3.1 Alumina kt 17,619 17,876 18,082 17,948 1.5 1.2 -0.7 - nominal value A$m 10,245 7,431 6,959 6,926 -27.5 -6.4 -0.5 - real valuee A$m 10,474 7,498 6,959 6,812 -28.4 -7.2 -2.1 Bauxite kt 33,546 41,026 37,992 34,524 22.3 -7.4 -9.1 - nominal value A$m 1,401 1,648 1,554 1,452 17.7 -5.7 -6.5 - real valuee A$m 1,432 1,663 1,554 1,428 16.1 -6.5 -8.1 Total value - nominal value A$m 15,811 12,770 11,865 11,892 -19.2 -7.1 0.2 - real valuee A$m 16,165 12,884 11,865 11,697 -20.3 -7.9 -1.4 Notes: c LME cash prices for primary aluminium; d In 2020 calendar year US dollars; e In 2020–21 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).

Resources and Energy Quarterly December 2020

114

12.1 Summary Figure 12.1: Recent copper prices and stock movements

. The copper price is estimated to average US$6,060 a tonne in 2020, 1,000 10,000 after propelling higher since March 2020. Growing consumption amidst a modest recovery in the world economy is expected to lift prices to a forecast US$6,570 a tonne by 2022, up an average 4 per cent a year. 750 7,500 . Australia’s copper exports are forecast to rise from 925,000 tonnes in 2019–20 to 941,000 tonnes in 2021–22 (in metal content terms), as 500 5,000 output from existing mines expands and new mines start-up (see

Australia section). US$ a tonne . After reaching $10 billion in 2019–20, Australia’s export earnings are 250 2,500 Thousand tonnes Thousand forecast to rise 3 per cent a year to reach $11 billion in 2021–22.

12.2 Prices 0 0 Dec-18 Jun-19 Dec-19 Jun-20 Dec-20 Strong consumption from China pushes prices Stocks at major exchanges Spot price (rhs) The copper price edged higher in the second half of 2020, following a Source: LME (2020) official cash price; Bloomberg (2020) inventories LME, COMEX, SHFE strong recovery from the sharp COVID-19 related price fall in March 2020 (Figure 12.1). Prices spiked to seven-year highs in early December, Figure 12.2: Forecast copper price and stock levels exceeding US$7,000 a tonne. The combined effects of China’s energised 4 10,000 consumption, successful vaccine potential, a strong Chinese renminbi and weak US dollar contributed to market momentum. 3 7,500 The average December quarter 2020 LME copper spot price is estimated at US$6,750 a tonne, up by 4 per cent quarter-on-quarter and 14 per cent year-on-year. After falling since mid-year, copper stocks rose in late 2 5,000 September and have remained broadly stable since. US$ a tonne 1 2,500

Copper prices to modestly increase over outlook Weeks of consumption Despite sharp copper price movements over the year, the 2020 copper price is estimated at US$6,070 a tonne, little changed from the 2019 0 0 average. In 2020, consumption fell short of production, causing a market 2012 2014 2016 2018 2020 2022 surplus that is expected to be maintained into 2021. Beyond that, rising Stock levels LME spot price (rhs) consumption is forecast to lift prices to an average of US$6,570 a tonne in 2022, up an average 4 per cent a year (Figure 12.2). Negative economic Source: LME (2020) official cash price; Bloomberg (2020); Department of Industry, Science, Energy and Resources (2020) impacts from possible new waves of COVID-19 pose a risk to the outlook.

Resources and Energy Quarterly December 2020 117 12.3 World consumption Figure 12.3: Industrial production and copper consumption 15 2020 consumption flat with diverging growth between China and the world In 2020, copper consumption is estimated to increase to 25 million tonnes, 10 higher than the previous two years. After a significant fall in the first half of the 2020, consumption has recovered across most markets in recent 5 quarters. Consumption is forecast to reach 26 million tonnes in 2022, in line with a recovery in industrial production (Figure 12.3). 0

2020 consumption growth attributable to China’s recovery -5

China consumes more than half of the world’s copper, and is expected to per - on year cent change -10 have been the only market posting consumption growth in 2020 Year (Figure 12.4). China’s consumption has recovered from the COVID-19 -15 falls, and is estimated to exceed 13 million tonnes in 2020, up 4 per cent 2002 2006 2010 2014 2018 2022 year-on-year. The Chinese manufacturing PMI index has shown steady World consumption Industrial Production gains in manufacturing activity in the last seven months, with the Source: World Bureau of Metal Statistics (2020); Department of Industry, Science, Energy manufacturing of whitegoods up 36 per cent year-on-year in October. and Resources (2020) Copper consumption has also been boosted by infrastructure-related Figure 12.4: Refined copper consumption by major market stimulus spending. 30 COVID-19 second wave stifles consumption growth outside of China Consumption in major markets outside of China has fallen in the year to 25 August, including Japan (down 17 per cent), Europe (down 11 per cent) 20 and the US (down 5 per cent). Consumption is expected to recover, as economic activity and copper-intensive stimulus spending picks up. 15 However, subsequent COVID-19 measures (particularly in the US and

Europe) risk stifling business activity and weighing on economic recovery tonnes Million 10 more broadly. Much will depend on a successful vaccine rollout. 5 Traditional copper uses and expanding markets drive growth over outlook Recovering economic activity is expected to lift copper consumption over 0 2012 2014 2016 2018 2020 2022 the outlook period. Consumption growth is expected to be broad based. Consumption growth will come from traditional areas, such as electricity China Rest of world Germany US transmission and construction, but also receive a boost from rising wind Source: World Bureau of Metal Statistics (2020); Department of Industry, Science, Energy and Resources (2020) power generation and emerging low-carbon emissions technologies such as batteries and EV charging infrastructure.

Resources and Energy Quarterly December 2020 118 Copper’s role remains strong in China’s latest Five Year Plan Figure 12.5: Outlook for copper mine and refined production

Twenty years ago, China accounted for 10 per cent of world copper 30 consumption. This share has increased significantly as consecutive Five Year Plans have established paths for economic development. China’s 14th Five Year Plan (for 2021-2025) outlines investment areas which are expected to support future copper consumption, although the plan is under 20 development with specific policies still to be announced These include new infrastructure investment, such as high speed rail and telecommunications wiring, which are expected to support higher usage in 10 Thousand tonnes Thousand the medium term. The increased take up of low-emissions technologies, including the electrification of transport and increased use of renewable energy, is expected to see copper use expand into growth markets for EV 0 batteries and charging infrastructure. Consumption growth is expected to 2012 2014 2016 2018 2020 2022 be met through increases in domestic refinery capacity and imports. Mined copper production Refined copper production Source: World Bureau of Metal Statistics (2020); Department of Industry, Science, Energy 12.4 World production and Resources (2020)

Production levels return following COVID-19 outages Figure 12.6: Copper production by major country, 2019 and forecast Copper production facilities in Chile, Peru and Panama have all change in 2020 experienced shutdowns or reduced operations in 2020, owing to the 7 COVID-19 pandemic. As most major operations have returned to normal 6 operating levels, annual world mine production is estimated to decline by 1.4 per cent to 20 million tonnes in 2020 (Figure 12.5). 5

In Chile, the world’s largest copper producer, operations at Codelco have 4 recovered from March quarter losses, with year-to-September 2020 production up 4 per cent year-on-year. Codelco recently announced a 12 3 Million tonnes Million month mine life extension to the Chuquicamata’s open pit mine, which was 2 due to close in December 2020. September quarter 2020 production at BHP’s Escondida and Pampa Norte mines fell 3 per cent and 33 per cent 1 year-on-year, respectively. 0 In Peru, September quarter 2020 production was down 9 per cent year-on- Chile Peru China DRC US China Chile Japan Russia DRC year, with lower production across a range of mines including Antamina Mined Refined and Las Bambas major. Reduced operating levels may be extended by Source: World Bureau of Metal Statistics (2020); Department of Industry, Science, Energy recent labour strikes at the Candelaria mine (Figure 12.6). and Resources (2020); S&P Global (2020)

Resources and Energy Quarterly December 2020 119 Mine production constrained by project delays and rising capital costs 12.5 Australia Mine production is expected to expand over the outlook period, but at a Copper export earnings to reach $11 billion with continued growth slower pace than previously expected. In 2022, world mine production is After reaching $10 billion in 2019–20, positive price growth is expected to forecast to reach 23 million tonnes, averaging growth of 6 per cent a year support higher export earnings over the outlook period. Export earnings over the next two years. COVID-19 related interruptions and low copper are forecast to rise an average 3 per cent a year to $11 billion in 2021–22 prices have impacted the project development pipeline, with a number of (Figure 12.7). projects being delayed which may weigh on this growth. This includes the transition to underground mining at Freeport’s Grasberg mine in Indonesia, Copper production stabilises after 2019 closures which was expected to be online in 2023, but has been delayed without a After mine closures resulted in lower production in 2019–20, Australia’s new start date. copper production is expected to recover by 2020–21, reaching a forecast 2020 refined production stable after September quarter recovery 912,000 tonnes. These losses have been partially offset by the start-up of Oz Minerals’ Carrapateena mine in South Australia, where the ramp-up In the September quarter 2020, world refined production continued to was complete in November 2020, six months ahead of schedule (Figure recover from declines seen in the March and June quarters. Earlier in the 12.8). Round Oak Minerals’ Mt Colin mine in Queensland has also year, low copper prices and restricted scrap supply weighed on output. contributed to recent production growth. In 2021, production in the first half These constraints have since been overcome, and refined copper output is of the year may be impacted by the equipment replacement at BHP’s forecast to be 24 million tonnes in 2020, marginally lower than 2019. Olympic Dam mine. China accounts for more than 40 per cent of world refined production, and Figure 12.7: Australia’s copper export volumes and earnings has seen a significant recovery in production in the second half of 2020. Despite this, China’s refined production is forecast to fall almost 2 per cent 1,200 12 in 2020, to 10 million tonnes. Recent capacity investments will partly offset these losses, including the 200,000 tonne Ruichang Xikuang copper refinery, which is expected online before the end of the year. 800 8 Refined production from Chile increased by 6 per cent in the year to September. In the Democratic Republic of the Congo (DRC), a six-month waiver to the copper concentrate export ban was announced in October, 400 4 billions A$ prompted by shortages in domestic smelting capacity. The DRC has considerable copper resources, and accounts for around 4 per cent of

world refined production. The export ban is designed to promote Metal content, thousand tonnes 0 0 investment in refinery capacity. 2013–14 2015–16 2017–18 2019–20 2021–22 Beyond 2020, new capacity and resumed operating rates are expected to Volumes Values (rhs) support healthy production growth. World refined output is forecast to rise Source: ABS (2020) International Trade in Goods and Services, 5368.0; Department of by an average 4 per cent a year, to reach 25 million tonnes in 2022. Industry, Science, Energy and Resources (2020)

Resources and Energy Quarterly December 2020 120 New and expanded projects bring production potential Figure 12.8: Australia’s copper production by state Over the outlook period, Australia’s production is expected to grow 300 marginally, to reach a forecast 912,000 tonnes in 2021–22. Development projects on the horizon include Golden Cross Resources’ Copper Hill mine 250 in NSW and KGL Resources’ Jervois mine in the NT. 200 Expansions underway include Oz Mineral’s Prominent Hill mine, with the recently approved extension project set to increase annual mining rates to 150 4-5 million tonnes by 2022. A restart at Metals X’s Nifty mine is also being considered, after the mine closed in late 2019. BHP have decided not to 100 proceed with the Olympic Dam Brownfield Expansion Project for now, instead investment in increasing production with existing capacity. BHP 50 are also actively undertaking exploration at the Oak Dam project. The Metal content tonnes)(thousand progress of copper development projects are discussed in the latest Resources and Energy Major Projects 2020 report. 0 Sep-15 Sep-16 Sep-17 Sep-18 Sep-19 Sep-20 Refinery production SA NSW Qld WA

After recording 411,000 tonnes of refined copper production in 2019–20, Source: Department of Industry, Science, Energy and Resources (2020) refinery production is forecast to increase by 4 per cent to 446,000 tonnes in 2021–22. Beyond the outlook period, the recent $15 million grant to Figure 12.9: Australia’s copper exploration expenditure, quarterly Glencore’s Mt Isa smelter has extended the production period from 2022 150 to 2025.

Exploration activity supported by potential for by-production of gold 120 In the September quarter 2020, copper exploration expenditure was $76 million, 35 per cent lower year-on-year (Figure 12.9). Uncertainty 90 around copper prices and market growth may have contributed to this reduction. million A$ 60

Revisions to the outlook 30 Since the September 2020 Resources and Energy Quarterly, the forecast for Australia’s copper export earnings has been revised down by 0 $200 million in 2020–21 and $280 million in 2021–22, due to slight price 2015 2016 2017 2018 2019 2020 revisions and a forecast of a stronger Australian dollar.

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

Resources and Energy Quarterly December 2020 121 Table 12.1: Copper outlook Annual percentage change

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

Production – mine kt 20,757 20,464 21,733 22,862 -1.4 6.2 5.2 – refined kt 23,973 23,541 24,483 25,462 -1.8 4.0 4.0 Consumption kt 23,537 24,853 24,792 25,688 5.6 -0.2 3.6 Closing stocks kt 1 394 1 390 1 317 1 139 -0.3 -5.2 -13.5 – weeks of consumption 3.1 2.9 2.8 2.3 -5.6 -5.0 -16.6 Prices LME – nominal US$/t 6,005 6,063 6,615 6,574 1.0 9.1 -0.6 USc/lb 272 275 300 298 1.0 9.1 -0.6 – realb US$/t 6,082 6,063 6,485 6,313 -0.3 7.0 -2.7 USc/lb 276 275 294 286 -0.3 7.0 -2.7 Australia Unit 2018–19 2019–20 2020–21f 2021–22f 2019–20 2020–21f 2021–22f Mine output kt 931 912 893 912 -2.1 -2.1 2.1 Refined output kt 407 411 424 446 0.8 3.3 5.2 Exports – ores and consc kt 1,895 1,900 1,730 1,794 0.3 -9.0 3.7 – refined kt 396 392 428 429 -1.0 9.3 0.1 – total metallic content kt 929 925 920 941 -0.4 -0.5 2.3 Export value – nominal A$m 9,770 10,147 10,796 10,724 3.9 6.4 -0.7 – reald A$m 9,989 10,237 10,796 10,548 2.5 5.5 -2.3

Notes: b In 2020 calendar year US dollars; c Quantities refer to gross weight of all ores and concentrates; d In 2020–21 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)

Resources and Energy Quarterly December 2020 122

13.1 Summary Figure 13.1: Recent nickel prices and LME stock level trends . The 2020 nickel price is estimated to be US$13,600 a tonne, down 400 20,000 2 per cent on 2019. Prices are forecast to recover to US$15,600 a tonne in 2022, fuelled by returning consumption growth. 300 15,000 . New projects and potential restarts are expected to lift Australia’s export volumes from 231,000 tonnes in 2019–20 to a forecast 253,000 tonnes in 2021–22, up an average 6 per cent a year (see Australia section). 200 10,000 . Australia’s nickel export earnings are expected to rise with higher export

volumes and recovering prices, reaching a forecast $4.4 billion in US$ a tonne

2021– 22, up from $3.8 billion in 2019–20. Stocks tonnes)(thouosand 100 5,000 13.2 Prices 0 0 Nickel prices recover COVID-19 related losses Dec–18 Jun–19 Dec–19 Jun–20 Dec–20 Nickel prices have continued to recover from the March lows, reaching LME stocks Price (rhs) US$16,200 in late November, the highest price in over two years. Rising stainless steel production in China and Indonesia, as well as expectations Source: Bloomberg (2020); London Metal Exchange (2020) of stimulus spending, and a weaker US dollar have supported a rebound in prices, even as stock levels have remained stable (Figure 13.1). Figure 13.2: Nickel price and stock levels 30 21,000 Continued consumption momentum is expected to support nickel prices for the remainder of 2020. The December quarter 2020 LME spot price average is estimated at US$15,300 a tonne, up 8 per cent quarter-on- quarter but down 1 per cent year-on-year. The full year 2020 price is 20 14,000 estimated at US$13,600 a tonne, down 2 per cent on the 2019 price of US$13,900 a tonne (Figure 13.2). This price fall reflects the market surplus that arose in 2020, as significant consumption losses and reductions in 10 7,000 US$ a tonne stainless steel output occurred. Weeks of consumption While nickel prices are currently weighed down by the market surplus, expectations of future market growth and potential market tightness could 0 0 2012 2014 2016 2018 2020 2022 push higher prices over the outlook period. In 2022, the nickel price is Total stocks LME nickel price (rhs) forecast to average US$15,600 a tonne, up 13 per cent in 2021 and Notes: Total stocks include warehouse and estimated privately held stocks. 2 per cent in 2020. Source: Bloomberg (2020); London Metal Exchange (2020); S&P Platts Global (2020); Department of Industry, Science, Energy and Resources (2020)

Resources and Energy Quarterly December 2020 124 13.3 World consumption Figure 13.3: Quarterly refined nickel consumption by major country

COVID-19 and market disruptions weigh on nickel use in 2020 250 Nickel consumption is estimated to contract by 5 per cent to 2.3 million tonnes in 2020, after significant COVID-19 related consumption 200 losses in the first half of 2020 (Figure 13.3). Going forward, growth is expected to be driven by strong economic activity and growing markets for 150 nickel used in batteries. In 2022 world consumption is forecast to be 2.6 million tonnes, up an average 7 per cent a year (Figure 13.5). 100

Strong stainless steel production marks a recovery in China’s consumption tonnes Thousand 50 China accounts for just over half of world nickel consumption and a strong recovery in consumption has overcome COVID-19 related shutdowns in 0 the March quarter and import shortages from Indonesia. In the year to Sep–17 Mar–18 Sep–18 Mar–19 Sep–19 Mar–20 Sep–20 September consumption was 990,000 tonnes, consistent with 2019 levels. China Rest of world European Union Japan Indonesia United States This recovery has been evident for several months, with October stainless steel production up 12 per cent year-on-year. Recent price increases for Source: International Nickel Study Group (2020); Department of Industry, Science, Energy stainless steel inputs may weigh on December quarter production. Overall, and Resources (2020) China’s full year consumption is forecast to be 1.3 million tonnes in 2020, stable on 2019 levels. Figure 13.4: Forecast nickel consumption by use 1,600 Other consumption markets slower to recover Consumption in other major markets fell more sharply over the year to September 2020, with consumption in Europe and the US down 1,200 18 per cent and Japan down 7 per cent. World consumption excluding China is forecast to fall by 7 per cent to 990,000 tonnes in 2020. 800 Economic recovery and battery demand boosts future consumption Nickel consumption is forecast to increase over the outlook period, as a Thousand tonnes Thousand 400 gradual economic recovery and ongoing stimulus spending support consumption growth, which is expected to be led by China. Expanding use of nickel in batteries is also expected to support consumption, though the 0 timing of this growth will be dependent on battery chemistry, battery costs 2016 2017 2018 2019 2020 2021 2022 and government policies supportive towards EVs (Figure 13.4). Class I Stainless steel Other Batteries refined nickel is used in high-grade batteries to improve energy density, Source: International Nickel Study Group (2020); Department of Industry, Science, Energy however use of nickel free batteries is growing (see lithium chapter). and Resources (2020); BloombergNEF (20200

Resources and Energy Quarterly December 2020 125 13.4 World production Figure 13.5: Forecast for world refined nickel market Mine production falls in 2020 with production interruptions 3,000 Mine production has broadly recovered following COVID-19 related mine 2,500 closures in the first half of 2020. Despite this, mine production is estimated to fall by 6 per cent to 2.4 million tonnes in 2020. Structural changes in 2,000 world exports — due to Indonesia’s export ban — have been broadly accommodated by increased production from the Philippines. However, 1,500 recent COVID-19 outbreaks and the typhoon season may weigh on productive capacity and exports from the Philippines. 1,000 Thousand tonnes Thousand Going forward, mine production is expected to grow, as new refinery 500 capacity in Indonesia creates a market for domestic mined output. Mine production is forecast to grow an average 7 per cent a year over the 0 outlook period, to reach 2.7 million tonnes in 2022. 2014 2015 2016 2017 2018 2019 2020 2021 2022 Rest of world China Indonesia Japan Refined production stable in 2020 before strong growth in 2021 and 2022 Russia World Consumption Additions to refinery capacity are expected to marginally outweigh 2020 refinery outages, resulting in refined production increasing by 1 per cent in Source: International Nickel Study Group (2020); Department of Industry, Science, Energy and Resources (2020) 2020 to reach 2.4 million tonnes. This follows three years of 9 per cent annual growth. Continued investment momentum in refinery capacity in F6igure 13. : Refined nickel output by major producing country China and Indonesia is expected to drive refined production, growing 200 4 per cent a year to 2.6 million tonnes in 2022 (Figure 13.5).

Refined production boosted by Indonesia 150 Despite COVID-19 related shutdowns and nickel consumption losses, refined production expanded in 2020, due to policy-induced production rises in Indonesia. World refined production was 1.8 million tonnes over 100 the year to September 2020, up by 2 per cent year-on-year (Figure 13.6).

This growth was primarily from Indonesia, where refined production tonnes Thousand 50 increased 50 per cent in the year to September, reaching 400,000 tonnes.

China accounts for a third of world refined production, but has seen 0 production fall 11 per cent through the year to September 2020, due to Sep–17 Mar–18 Sep–18 Mar–19 Sep–19 Mar–20 Sep–20 constrained access to concentrate imports. Rest of world production has China Rest of world Indonesia Japan Russia also decreased with lower output from New Caledonia, including from Source: International Nickel Study Group (2020); Department of Industry, Science, Energy Glencore’s Koniambo nickel plant. and Resources (2020)

Resources and Energy Quarterly December 2020 126 Growth on the horizon for Indonesia’s refinery capacity 13.5 Australia In January 2020, the Indonesian government introduced a ban on nickel Volumes growth support higher export earnings ores and concentrate exports, in order to promote the development of After reaching $3.8 billion in 2019–20, nickel export earnings are forecast Indonesia’s nickel downstream capacity: including refinery, nickel pig iron to remain stable in in 2020–21 before reaching $4.4 billion in 2021–22 and stainless steel capacity. Initial impacts of the ban have seen domestic (Figure 13.8). Continued growth in export volumes and modest price concentrate sales fall considerably (Figure 13.7). However, refinery increases are expected to support this growth. production is expanding with a number of projects underway, including projects at the Weda Bay nickel smelting park. Three smelting plants at Total nickel export volumes are forecast to rise from 231,000 tonnes in Weda Bay started production this year, and annual production capacity is 2019–20 to 253,000 tonnes in 2021–22, up an average 6 per cent a year. expected to double in 2021, up from 110,000 tonnes. Although some Production from new projects, as well as expansions and restarts, are projects have been delayed due to COVID-19 labour restrictions and low expected to support this growth. nickel prices, capacity additions are expected over the outlook period. Stable production results in the September quarter Much of Indonesia’s new refining capacity will be high-pressure acid Australia’s nickel mine production was broadly stable in the September leaching, which is energy intensive and has significant environmental quarter 2020, with falls in some mines offset by the continued ramp-up of consequences. With low (carbon-intensive) electricity costs and access to production at First Quantum’s Ravensthorpe mine and BHP’s Yakabindie raw materials, Indonesia is positioning itself as a battery metals processor mine. Lower production at Western Area’s Forrestania operations were a with potential for downstream expansion (see lithium chapter). result of lower ore grades and changes in a mine schedule.

Figure 13.7: Indonesia’s nickel production and world prices Figure 13.8: Australia’s nickel export volumes and values 150 20,000 400 6.0

120 16,000 300 4.5

90 12,000 200 3.0

60 8,000 billion A$ US$ a tonne Thousand tonnes Thousand Thousand tonnes Thousand 100 1.5 30 4,000

0 0 0 0.0 2013 2015 2017 2019 2011–12 2013–14 2015–16 2017–18 2019–20 2021–22 Mine production Refined production Nickel price (rhs) Export volumes Export values (rhs) Source: ABS (2020) International Trade in Goods and Services, 5368.0; Department of Source: International Nickel Study Group (2020); Bloomberg (2020); London Metal Exchange (2020) Industry, Science, Energy and Resources (2020)

Resources and Energy Quarterly December 2020 127 Nickel demand to support production growth Figure 13.9: Australia’s nickel and cobalt exploration expenditure Australia’s nickel production is expected to increase over the outlook 90 period, driven by strong prospects for long-term consumption growth. Mine production is forecast to lift from 161,000 tonnes in 2019–20 to 75 213,000 tonnes in 2021–22, up an average 15 per cent a year. A restart of 60 production at Mincor’s Kambalda operations is expected to drive this growth, with new output coming online in 2021–22. Production at BHP’s 45 Nickel West operations accounts for the largest share of Australia’s A$ million A$ production, and is expected to continue expanding, as production from the 30 Mount Keith mine transitions to process ore from Yakabindie mine. 15 Over the outlook period, a number of restarts are under consideration. 0 Panoramic Resources’ Savannah mine closed in April 2020 and is 2010 2012 2014 2016 2018 2020 expected to be ready for restart in the first half of 2021 following the recent release of an updated mine plan. Poseidon Nickel’s Black Swan mine has Source: here xxABS (2020) Mineral and Petroleum Exploration, Australia, 8412.0 been closed since 2009 and has been prepared for restart, pending market conditions. These projects and other development projects Revisions to the outlook highlights Australia’s strong potential to supply responsibly sourced, high The forecast for Australia’s nickel export earnings has been revised down quality nickel suitable for processing as battery inputs (see the recently since the September 2020 Resources and Energy Quarterly, most notably released Resources and Energy Major Projects 2020 report). by $1.4 billion in 2021–22. This follows downward revisions to Australia’s production and export profile. Refinery production to expand over the outlook period

Australia’s refinery production is forecast to increase from 108,000 tonnes in 2019–20 to 139,000 tonnes in 2021–22, growing at an average rate of 14 per cent a year. Higher production is expected from BHP’s facilities, following major maintenance shutdowns at the Kwinana refinery and the Kalgoorlie smelter. However, the significant 100,000 tonne capacity expansion at BHP’s nickel sulphate plant has been delayed, and is not expected to come online until the end of 2022.

Exploration expenditure In the September quarter 2020, nickel and cobalt exploration increased to $49 million, however 24 per cent lower than the same period in 2019 (Figure 13.8). Due to high quality resources and investment attractiveness Australia’s is the world’s top destination for nickel exploration.

Resources and Energy Quarterly December 2020 128 Table 13.1: Nickel outlook

Annual percentage change

World Unit 2019 2020s 2021f 2022f 2020s 2021f 2022f Production – mine kt 2,529 2,391 2,622 2,735 -5.5 9.7 4.3 – refined kt 2,372 2,391 2,492 2,599 0.8 4.2 4.3 Consumption kt 2,401 2,281 2,448 2,600 -5.0 7.3 6.2 Closing stocks kt 660 770 814 813 16.7 5.7 -0.1 – weeks of consumption 14.3 17.6 17.3 16.3 22.8 -1.5 -5.9 Prices LME – nominal US$/t 13,904 13,612 15,318 15,607 -2.1 12.5 1.9 USc/lb 631 617 695 708 -2.1 12.5 1.9 – realb US$/t 14,083 13,612 15,018 14,987 -3.3 10.3 -0.2 USc/lb 639 617 681 680 -3.3 10.3 -0.2 Australia Unit 2018–19 2019–20 2020–21f 2021–22f 2019–20s 2020–21f 2021–22f Production – minec kt 159 161 178 213 1.2 10.6 19.8 – refined kt 114 108 130 139 -5.3 20.3 7.1 – intermediate 13 15 27 33 23.9 72.5 24.9 Export volumed kt 225 231 209 253 2.5 -9.4 21.2 – nominal value A$m 3,535 3,786 3,664 4,403 7.1 -3.2 20.2 – real valuee A$m 3,614 3,820 3,664 4,331 5.7 -4.1 18.2

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 2020–21 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)

Resources and Energy Quarterly December 2020 129

14.1 Summary At the time of writing, zinc stocks stand at close to 280,000 tonnes for both . Zinc prices are firm heading into 2021, with demand strong due to the LME and Shanghai Futures Exchange (SHFE). The impact of stimulus COVID-19 government stimulus packages focused on infrastructure packages and continuing uncertainty with the COVID-19 pandemic will spending. Prices are expected to increase from an estimated average of likely influence prices positively in the short to medium term, albeit with an US$2,245 a tonne in 2020 to US$2,285 a tonne in 2021, before rising easing impact next year as surplus from the concentrate market becomes supply pushes the price lower to an average US$2,170 a tonne in 2022. available. Short term constraints have increased, after a supply disruption in South Africa unrelated to the COVID-19 pandemic. . Australia’s zinc mine production is forecast to rise from 1.3 million tonnes (metallic content) in 2019–20 to 1.6 million tonnes by 2021–22 (see The LME zinc spot price is estimated to average US$2,245 a tonne over Australia section) 2020, up from the September 2020 Resource and Energy Quarterly . Australia’s zinc export earnings are forecast to decline from $3.6 billion estimate of US$2,080 (Figure 14.1). The strength of China’s recovery from in 2019–20 to around $3.2 billion in both 2020–21 and 2021–22, as the the COVID-19 pandemic as well as additional stimulus packages in other Australian dollar appreciates and tops out. countries is underpinning a solid short to medium term outlook for zinc (see macroeconomic outlook chapter). 14.2 Prices In 2021, the zinc price is forecast to average US$2,285 a tonne, falling to Price increases reflect anticipation of stimulus packages US$2,170 a tonne in 2022, as stimulus measures begin to taper and high Zinc prices averaged US$2,472 a tonne during the September quarter, grade production comes online around 2021–22 from a number of performing more strongly than expected. During the September 2020 deposits in Indonesia, and the Democratic Republic of Congo. quarter, production recovered from the COVID-19 pandemic. Concentrate imports to China in the September 2020 quarter were up 14 percent, Figure 14.1: Zinc prices and stocks, annual year-on-year, placing upward pressure on prices. However China’s 10 5,000 imports were down 11 per cent in September year-on-year, as China substituted imports with production of its own zinc concentrates. 8 4,000

Treatment and refining charges are still under pressure despite increasing 6 3,000 supply, with charges understood to be around US$100 a tonne. The increasing supply of zinc concentrate, anticipated to be in surplus next 4 2,000 year, may yield a rise in these charges. However, this will depend on US$ a tonne 2 1,000

concentrate moving from the mines to the smelters in an orderly manner, Weeks of consumption despite potential supply disruptions from the COVID-19 pandemic. China’s 0 0 zinc smelters have called for a more co-ordinated approach, similar to the 2012 2014 2016 2018 2020 2022 copper smelters. However, the Chinese provinces of Yunnan and Gansu have recently called for non-ferrous strategic stockpile requirements for Stocks Price (rhs) smelters in response to the COVID-19 pandemic in late April. Source: London Metal Exchange (2020); Department of Industry, Science, Energy and Resources (2020)

Resources and Energy Quarterly December 2020

132 14.3 World consumption Figure 14.2: World zinc consumption vs industrial production Infrastructure and green stimulus packages spur consumption 15 Zinc consumption has been reasonably correlated with the world IP cycle over the past decade (Figure 14.2). Zinc’s primary role is in galvanising 10 steel, either through hot dipping or cold plating. Consumption is thus expected to continue to move with steel production, construction, and 5 vehicle sales (Figure 14.3). Global zinc concentrate consumption was down sharply in the first half of 2020 as the COVID-19 pandemic hit, but 0 September quarter 2020 data showed some improvement. -5 Infrastructure stimulus packages are assumed to still spur zinc Annual Annual changepercentage consumption in 2021. Stimulus packages in China designed to buoy -10 construction are also supporting zinc demand via galvanised steel inputs 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 to construction as well as in automotive production. World zinc consumption World industrial production Global automotive sales fell by 2 per cent year-on-year during the Source: International lron and Steel Institute (2020); CPB Netherlands Bureau for Economic September quarter, but rose 20 per cent month-on-month in September. Policy Analysis (2020); Department of Industry, Science, Energy and Resources (2020) Europe followed a similar pattern but September sales rose by 43 per cent month-on-month, propelled by buyers seeking to beat tightening emissions Figure 14.3: Steel production vs world zinc consumption requirements, which come into force on 1 January 2021. Europe is likely to 10 see zinc consumption rise in the short term. However, China and South Korea are still expected to continue to dominate global zinc usage. 5 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, 0 after having fallen from 13.7 million tonnes in 2019 (Table 14.1).

Zinc batteries continue to improve -5 Zinc is forecast to play an increasing role in energy storage over time, with new demand sources providing further opportunities for Australian mines. Annual changepercentage Redflow, an Australian zinc bromine battery maker, is due to test its Gen3 -10 2012 2014 2016 2018 2020 2022 battery with customers towards the end of 2020. These batteries have Steel production World zinc consumption applications in stationary power storage, such as attached to homes. Additionally, Thomas Maschmeyer’s zinc bromine battery technology is Source: International lron and Steel Institute (2020); Department of Industry, Science, Energy and Resources (2020) being utilised at Sydney University.

Resources and Energy Quarterly December 2020

133 14.4 World production South African production was steady during the quarter, after a low of Mine production is set to rise over the outlook period 4,000 tonnes in April. However, Vedanta’s Gamsberg mine halted production, after a geotechnical failure. The operation produced Strength in the zinc price continues to draw miners back into production, 92,000 tonnes last year and was ramping up towards with COVID-19 containment measures continuing to ease. Global mine 250,000 tonnes per annum. Vedanta’s Skorpian open pit operation in output in 2020 is estimated at 13.0 million tonnes, rising to 14.3 million Namibia remains on care and maintenance. tonnes in 2022 (Figure 14.4). The rise over the outlook period is the result of investments in mine commissioning and expansion. High grade Figure 14.4: World zinc mine production, metallic content production is scheduled to come online from the Dairi project in Indonesia 16 8 in 2021–22. The resource grade of 11.5 per zinc makes this project one of the higher grade undeveloped resources. High grade production on a 12 4 similar timeframe is also due from the refurbishment of Kipushi in the Democratic Republic of Congo. Resource grades average just below 11 per cent but higher grade zinc rich sections average over 35 per cent 8 0 zinc. Million tonnes Million Over the past nine months, significant shifts have taken place in the 4 -4 production of zinc. The global production of zinc for the nine months to Annual Annual changepercentage September 2020 decreased by 7.0 per cent over the corresponding period in 2019, with Australia up 3.3 per cent, China down 3.1 per cent and Peru 0 -8 2012 2014 2016 2018 2020 2022 down 13 percent. Mine production Mine production change (rhs) However, production in the September quarter 2020 compared with the Source: International Lead Zinc Study Group (2020); AME Mineral Economics (2020); corresponding period in 2019 shows China substituting domestic Department of Industry, Science, Energy and Resources (2020) production of concentrate with product it previously may have sourced Nexa Resources increased zinc production from its operations, primarily in from Australia and Peru. The global production of zinc for the September Peru and Brazil, by 31 per cent quarter-on-quarter to the end of quarter 2020 compared to the previous corresponding period in 2019 was September. However, production was still down 16 per cent compared to unchanged, but with Australia down 1.9 per cent and Peru down 18 the September quarter 2019. The COVID-19 pandemic continues to pose percent, but China up 4.6 per cent. risks, with increasing cases close to mines that could lead to restrictions. Glencore’s output for the nine months to September rose by 4.0 per cent, Countrywide, production from Peru has rebounded strongly, although mine largely as a result of higher throughput from Mt Isa in Queensland and output is not yet matched by concentrate exports. Operations resumed at higher grades from its Antamina operation in Peru (held by Glencore, BHP Sumitomo’s San Cristobal mine in Bolivia following their second cessation and Teck Resources). Trevali’s Santandar mine in Peru is back at full in late August due to the COVID-19 pandemic. production levels, with output up 17 per cent from the June quarter 2020, Initial estimates showed a possible 11 per cent reduction of global mine albeit down compared to the June quarter 2019. production likely to be lost in 2020, due to the COVID-19 pandemic and

Resources and Energy Quarterly December 2020

134 other supply disruptions. However, increased production from miners Figure 14.5: World zinc refinery production, metallic content responding to higher prices are now likely to offset these production 16 4 losses, and result in production being relatively stable in 2020 compared with 2019. 12 2 Refineries continue to operate during COVID-19 Refinery production is expected to follow mine production over the outlook 8 0 period. Primary and secondary zinc production rose by 0.4 per cent in the Million tonnes Million nine months to September 2020, with China output rising by 2.1 percent, 4 -2 but others falling by 0.9 per cent over the corresponding period in 2019. Annual Annual changepercentage However, there are short term constraints with supply from Peru that may 0 -4 reach the market as 2021 begins. This may be further exacerbated if there 2012 2014 2016 2018 2020 2022 are any additional containment measures as a result of the COVID-19 Refinery production Refinery production change (rhs) pandemic. However, the substitution of China’s own product into its smelters may offset some of the supply chain risk. Source: International Lead Zinc Study Group (2020); Department of Industry, Science, Energy and Resources (2020) Smelters in China are operating well. Zinc imports from Australia rose by 33 per cent in the 9 months to September 2020 (compared to the 14.5 Australia corresponding period in 2019) but fell 39 per cent month-on-month Export earnings declining modestly between September and August 2020. Australia’s zinc export earnings are forecast to decline from $3.6 billion in 2019–20 to around $3.2 billion in both 2020–21 and 2021–22, as the In 2021, rising zinc concentrate supply is likely to result in higher treatment Australian dollar appreciates and tops out. and refining charges, as smelters approach full capacity. However, refiners will need to consider the risk of further disruptions to supply as a result of Australian mine production is expected to increase the ongoing COVID-19 pandemic. Changes to refinery production are less Australia’s September quarter 2020 zinc production was up 2.1 per cent responsive to price changes than mining production, due to the higher quarter-on-quarter (Figure 14.6). Production at Century in Queensland costs of restarting smelters. during the September quarter was stable at 34,000 tonnes of zinc. Refined production estimates for 2020 and forecasts for the outlook period Elsewhere in Queensland, production at Mt Isa rose by 2.0 per cent to are largely unchanged compared with the September quarter 2020 over 91,000 tonnes, whilst Dugald River production rose by 5.5 per cent to Resources and Energy Quarterly forecasts. Refined production for 2020 over 46,000 tonnes. Mount Garnet in Queensland restarted processing ore (including recycling) is estimated at 13.6 million tonnes, with 2021 forecast in May, after closing during late March due to health concerns surrounding at 13.9 million tonnes and 2022 forecast at 14.1 million tonnes the COVID-19 pandemic. Overall, Queensland production rose by 10 per (Figure 14.5). cent in the September quarter 2020 compared to the same period in 2019.

Resources and Energy Quarterly December 2020

135 Production from Mc Arthur River in the Northern Territory decreased to just Figure 14.7: Australia’s zinc exports, metallic content below 66,000 tonnes in the September quarter 2020, down by 4.1 per cent 2,000 8 compared to the year prior. In New South Wales (NSW), production increased nearly 14 per cent at Hera, whilst gold and silver production 1,500 6 from the same mine decreased, largely as a result of going through some lower grade stopes as a part of the mine plan. However at Peak in NSW, output decreased by 22 per cent, due to development needs at the mine. 1,000 4

Australian export volumes for zinc concentrate declined by 33 per cent in billion A$ the September quarter 2020, more than reversing the gains of the June tonnes Thousand 500 2 quarter. This compares with a 26 per cent decrease by value over the same period, based on stronger zinc prices over the quarter. 0 0 In the September quarter 2020, refined exports fell by 13 per cent from the 2011–12 2013–14 2015–16 2017–18 2019–20 2021–22 June quarter, as a result of lower Chinese imports. However, export values Volumes Values (rhs) fell by 7.4 per cent over the same period, due to higher zinc prices. Source: ABS (2020) International Trade in Goods and Services, 5368.0; Department of Industry, Science, Energy and Resources (2020) Figure 14.6: Australia’s zinc mine output by state, metallic content 2,000 Australia’s zinc mine production is forecast to increase from 1.3 million tonnes (in metallic content) in 2019–20 to 1.6 million tonnes in 2021–22, driven by the possible expansion at the McArthur River 1,500 operations. The rising Australian dollar may reduce revenue, with export earnings in 2020–21 and 2021–22 forecast to decline relative to 2019–20, 1,000 despite increasing production (Figure 14.7).

Refined production Thousand tonnes Thousand 500 Production of refined zinc is forecast to increase by 50,000 tonnes a year over the outlook period. There are two zinc refiners in Australia: Nyrstar, 0 which refines zinc at its Hobart refinery, and South Korean-owned 2011–12 2013–14 2015–16 2017–18 2019–20 2021–22 Sun Metals, which operates a smelter near Townsville. The expansion of the Sun Metals refinery is due for completion in 2021 (see the recently QLD NT NSW WA TAS SA VIC released Resources and Energy Major Projects 2020 Report). Source: Company reports; Department of Industry, Science, Energy and Resources (2020)

Resources and Energy Quarterly December 2020

136 Exploration expenditure increased Exploration expenditure for silver, lead and zinc has increased 56 per cent quarter-on-quarter for the September quarter, as the zinc price appreciated by 19 per cent over the same period (Figure 14.8). The increase in exploration follows increased prices as a result of stimulus measures in response to due to the COVID-19 pandemic.

Figure 14.8: Exploration expenditure on silver, lead and zinc versus zinc prices

4,000 40

3,000 30

2,000 20 A$ million A$ US$ a tonne 1,000 10

0 0 Sep-10 Sep-12 Sep-14 Sep-16 Sep-18 Sep-20

Silver, lead, and zinc exploration expenditure (rhs) LME zinc price

Source: ABS (2020) Mineral and Petroleum Exploration, Australia, 8412.0; Company reports; Department of Industry, Science, Energy and Resources (2020) Revisions to the forecast Compared with the September 2020 Resources and Energy Quarterly, forecasts for export revenue were revised down by 0.3 per cent for 2020–21 and down 0.4 per cent for 2021–22 to around $3.2 billion for both periods. The main driving factor was changes to the forecast price for zinc along with an appreciating Australian dollar.

Resources and Energy Quarterly December 2020

137 Table 14.1: Zinc outlook Annual percentage change

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

Production – mine kt 12,894 13,009 13,510 14,326 0.9 3.8 6.0 – refined a kt 13,481 13,627 13,917 14,090 1.1 2.1 1.2 Consumption kt 13,699 13,530 13,820 13,993 -1.2 2.1 1.3 Closing stocks kt 842 939 1,035 1,132 11.5 10.3 9.3 – weeks of consumption 3.2 3.6 3.9 4.2 12.9 8.0 8.0 Price – nominal US$/t 2,550 2,244 2,286 2,171 -12.0 1.9 -5.1 USc/lb 116 102 104 98 -12.0 1.9 -5.1 – real b US$/t 2,583 2,244 2,241 2,084 -13.1 -0.1 -7.0 USc/lb 117 102 102 95 -13.1 -0.1 -7.0

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

Mine output kt 1,285 1,340 1,449 1,578 4.3 8.1 8.9 Refined output kt 480 439 465 498 -8.5 6.0 7.2 Export volume – ore and concentrate c kt 2,091 2,556 2,299 2,650 22.2 -10.1 15.3 – refined kt 420 390 351 365 -7.3 -10.0 4.2 – total metallic content kt 1,322 1,530 1,416 1,590 15.7 -7.4 12.3 Export value – nominal A$m 3,952 3,592 3,158 3,211 -9.1 -12.1 1.7

– real d A$m 4,040 3,624 3,158 3,159 -10.3 -12.9 0.0 Notes: a includes secondary refined zinc; b in 2020 US dollars; c Quantities refer to gross weight of all ores and concentrates; d In 2020–21 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)

Resources and Energy Quarterly December 2020 138

15.1 Summary Figure 15.1: Prices of spodumene concentrate and lithium hydroxide . The spot spodumene price (delivered to China) increased by 0.2 per cent 20,000 1,000 to US$392 a tonne between September and November 2020. Prices are forecast to rise to US$510 a tonne by 2022, based on rising electric 15,000 750 vehicle uptake and ‘green’ government stimulus packages in response to the COVID-19 pandemic. . Australian lithium production is expected to rise from 233,000 tonnes 10,000 500 US$ a tonne (lithium carbonate equivalent) in 2019–20 to 277,000 tonnes in 2021–22, US$ a tonne based on production tied to offtake agreements (see Australia section). 5,000 250 . After falling from $1.1 billion in 2019–20 to $1.0 billion in 2020–21, Australian lithium export earnings are forecast to increase to $1.3 billion by 2021–22. 0 0 2018 2019 2020 2021 2022 15.2 Prices Lithium hydroxide Spodumene concentrate (rhs) Lithium prices stabilised in the three months to November 2020 Notes: Lithium hydroxide price is for lower priced technical grade The lithium carbonate price (delivered to China) was US$6,400 a tonne at Source: Roskill (2020); Brokers (2020); Department of Industry, Science, Energy and the end of November — up 1.6 per cent over three months, but down Resources (2020) 27 per cent year-on-year. This compares with price falls — off a higher Figure 15.2: World lithium production and demand base — in Europe of 7.7 per cent for the same period and 41 per cent year-on-year (delivered to Europe). Although European prices ended at 600 around US$6,000 a tonne; lower than China. Lithium hydroxide prices (delivered to China) declined by 0.5 per cent to US$6,992 a tonne between September and November, and fell by 400 14 per cent year-on-year. This compared with a price decline of 3.9 per cent into Europe for the same period and 30 per cent year-on-year (to US$8,050 a tonne, delivered). Lithium carbonate prices improved 200 before lithium hydroxide, suggesting lithium iron phosphate (LFP) batteries tonnes Thousand have preference in production due to cost and flammability advantages.

Spodumene prices (delivered to China) increased by 0.5 per cent to 0 US$392 a tonne from September to November, but declined 25 per cent 2018 2019 2020 2021 2022 year-on-year. Spodumene prices are expected to increase in 2021 and Production kt LCE Demand kt LCE 2022, with ‘green’ government stimulus packages and electric vehicle Source: Roskill (2020); BloombergNEF (2020); Department of Industry, Science, Energy and manufacturers continuing to expand production (Figure 15.1). Resources (2020)

Resources and Energy Quarterly December 2020 140 15.3 World demand South Korea is a very important market for lithium hydroxide, due to its Demand increasing for lithium carbonate as LFP batteries increase in use refineries and its battery makers. Imports of lithium carbonate for conversion into lithium hydroxide or for use in LFP batteries were back to World demand for lithium is estimated to have increased to previous levels with no net change for the September 2020 quarter 305,000 tonnes lithium carbonate equivalent (LCE) in 2020, up from compared to the September 2019 quarter. The return to ‘normal’ trading is 298,000 tonnes in 2019 (Table 15.1). Demand is forecast at despite a 36 per cent reduction in the nine months to September, reflecting 417,000 tonnes in 2021, increasing 20 per cent to 502,000 tonnes by 2022 disruption due to the COVID-19 pandemic. Japan showed more strength in (Figure 15.2). The increase in 2021 demand is based on ‘green’ stimulus the lithium hydroxide market — reflecting its concentration on the higher packages to raise economic growth following the COVID-19 pandemic. It end markets for batteries — with imports up 94 per cent month-on-month is worth noting that demand is usually ahead of consumption by in September 2020, after imports were down 13 per cent for the nine approximately 12 months, due to the lead times required in battery months to September 2020, compared to the previous corresponding manufacturing. This lead time may get shorter in the future, as production period. is streamlined. Lithium hydroxide: battery grade purity and volume – expertise required The largest market for lithium carbonate is China. Lithium carbonate Lithium hydroxide battery grade purity product is increasingly being imports were up 54 per cent month-on-month and 73 per cent year-on- supplied from China instead of Chile. Value-adding countries — such as year in the nine months to September 2020. Higher imports led to a firming Chile — are not gaining the same momentum as China, due to product in the market for lithium carbonate — decreasing the need for lithium purity and availability issues. Expertise in China includes Albemarle’s hydroxide — as LFP batteries became the preferred option for lower Chinese operations. However, outside of China, expertise in the driving range models in China. This was due to their low cost and lower production of lithium hydroxide has yet to fully mature. This includes flammability. At this stage, LFP batteries can only be made in China, with Albemarle’s Chilean operations, as well as its proposed Australian patents due to start expiring in 2022. This has implications for demand for operation at Kemerton. Australia could reach 4 percent of world production Australia’s spodumene, which is primarily geared towards the lithium in lithium hydroxide in 2022, if the ramp up of operations proceeds hydroxide market — with South America geared primarily towards the steadily. lithium carbonate market. Strong market appetites for electric vehicles Despite changing market dynamics, lithium hydroxide exports from China Price points for electric vehicles are becoming more competitive relative to were up 35 per cent month-on-month and up 14 per cent in the year to the internal combustion engine (ICE). China’s adoption of LFP batteries for September. Exports were driven by strong demand for longer range short commutes is playing into this dynamic. Additionally, flexible battery electric vehicles. The changing demand pattern is eroding the premium choice is being offered by Nio (based in China). This allows for low driving that lithium hydroxide traditionally holds over lithium carbonate — of range batteries to be swapped out by the owner to higher performance around US$1500 a tonne — due to the cost of converting carbonate to units — potentially offering a better value proposition to customers who hydroxide. The price difference between lithium carbonate and lithium are unsure of which electric vehicle to purchase. Nio has established hydroxide in Europe is currently around US$2000 a tonne, but is now only battery swapping stations in China, and the process is understood to take around US$700 a tonne in China. ‘minutes’ compared with longer charging times. Additionally, they have

Resources and Energy Quarterly December 2020 141 also given customers the option of lower priced electric vehicles, with Figure 15.3: World electric vehicle sales batteries as a subscription service instead of the upfront cost. Chinese 1,000 electric vehicle manufacturers have also been experiencing significant share price appreciation as China’s economy grows in 2020 (see 800 macroeconomic outlook chapter). Volkswagen released 8,000 ID4 electric 4WDs for sale in the US during 600 the September quarter, priced at US$32,500 after federal tax credits. The vehicles sold out in eight hours. The ID4 is the electric equivalent of the 400 Thousands Tiguan 4WD. This comes on the back of California banning the sale of ICE’s by 2035. Meanwhile the UK has brought forward its ban on ICE 200 sales from 2040 to 2030. Hybrid vehicles with no emissions will still be allowed until 2035. In Australia, the ACT introduced zero interest loans of 0 $15,000 for private and not-for-profit electric vehicles as well as two years Sep-15 Sep-16 Sep-17 Sep-18 Sep-19 Sep-20 of free registration. China Asia Pacific (ex China) Europe Americas Other

Start up ‘Australian Clean Energy’ is offering electric vans and utility Source: BloombergNEF (2020) trucks. Units are planned to be in available in late 2021 with online reservation available now. The price point of $26,000 before on road costs Figure 15.4: Long-term electric vehicle sales projection makes them a potentially attractive entry point for Australian motorists. 30 30 However, there are still a number of safety and regulatory hurdles to overcome before models are released.

Electric vehicle sales for September quarter 2020 20 20 World electric vehicle sales for the September quarter increased Millions

68 per cent quarter-on-quarter, with China increasing 35 per cent cent Per (Figure 15.3). Sales in Europe increased by 117 per cent quarter-on- 10 10 quarter. The European increase is largely driven by impending tighter emissions standards at the start of 2021. Sales were also strong elsewhere in Asia increasing beyond pre-COVID-19 levels, whilst sales in 0 0 the US returned to pre-COVID-19 levels. 2018 2020 2022 2024 2026 2028 2030 The overall strength of electric vehicle sales in 2020 (estimated at 2.3 Electric vehicle sales Share of all vehicle sales (rhs)

million, up 17 per cent on the September quarter estimate) supports the Source: Department of Industry, Science, Energy and Resources (2020); International expectation of increasing electric vehicle uptake over the long term — and Energy Agency (2020); BloombergNEF (2020) therefore increasing lithium demand (Figure 15.4).

Resources and Energy Quarterly December 2020 142 Technological developments 15.4 World production Two key developments in battery technology are currently playing out: low Security of supply being sought as world production lifts technology with incremental improvements (i.e. lithium iron phosphate World production in 2020 has been stronger than anticipated, driven by batteries with cell to pack technology to increase the driving range) versus increasing electric vehicle demand. In 2020, output is estimated at new battery technology (i.e. Tesla’s new 4680 battery, using nickel 431,000 tonnes LCE, down from 486,000 tonnes in 2019. Production is powders for longer driving range, backed up by continuous manufacturing forecast at 503,000 tonnes in 2021, and at 585,000 tonnes by 2022. instead of stepwise batch production) (see the nickel chapter). Production has been less affected than anticipated by the COVID-19 Tesla’s new battery technology was revealed on ‘Battery Day’ in October. pandemic, as major producing countries have been able to maintain While market responses were initially muted, battery partners Panasonic healthy work sites. Disruptions were experienced at some smaller and LG now appear to be getting on board, with a potential scaling up of the operations in Argentina in the early stages of the pandemic — due to new manufacturing processes. The benefits of the new battery technology safety concerns — but most operations have resumed. Most disruption include potentially lower costs, and significantly increased driving range. has taken place in the active development or expansion stage of the Claims for both parameters are currently at greater than 50 per cent projects, due to logistical constraints imposed by the COVID-19 pandemic. improvement on each front. If it can perform on both fronts, it may be a ‘Green’ stimulus packages and tightening emissions standards in Europe, significant rebuttal to the LFP argument for quick and cheap development coupled with supply chain disruption due to the COVID-19 pandemic, is at the expense of driving range. It is worth noting that Mercedes Benz have changing the nature of a previously oversupplied market. Consequently entry level electric vehicles that use LFP batteries, whilst those above entry the gap between supply and demand is narrowing. Stockpiles still exist but level use the nickel-based lithium batteries. they are difficult to determine at this time and offtake agreements continue In Indonesia, Contemporary Amperex Technology Limited (CATL), LG and to be signed, suggesting an eagerness to gain secure access to Tesla are also considering setting up lithium battery supply chain projects. production. Additional offtake agreements in the September 2020 quarter This might then connect with nickel and cobalt developments, via high include production from Australian spodumene producer Galaxy pressure acid leach projects in Indonesia (due to start in 2021) — creating Resources, after multiple agreements were signed in the June 2020 opportunities and challenges for Australia. Indonesia may capture the full quarter with a number of Australian producers. value chain in electric car manufacture, from some mining inputs (nickel Outlook positive if battery grade lithium products produced and cobalt) to batteries and then electric vehicles. India is also pursuing the full value chain for electric vehicles. Therefore, both India and The outlook for the demand for battery grade lithium carbonate and lithium Indonesia represent potential markets for Australia’s lithium products. hydroxide remains positive. Production is increasing on both fronts, but challenges in obtaining reliable quality and quantities of battery grade European majors, Solvay and Veolia, have entered into partnership that lithium hydroxide are driving some countries to reprocess lithium examines the life cycle for electric car batteries. From 2025, recycling may carbonate into battery grade lithium hydroxide. The market for battery be a key supply component. It is worth noting that LFP batteries also have grade chemicals is strongly affected by battery technology trends. LFP simpler recycling pathways for lithium — in contrast to batteries containing batteries and nickel manganese cobalt (NMC) batteries often use lithium nickel and cobalt, with these more valuable metals recovered at the carbonate for their production. High end, high purity nickel-based lithium expense of the cheaper lithium. batteries tend to use lithium hydroxide. This represents an opportunity for

Resources and Energy Quarterly December 2020 143 Australia — as it begins to ramp up its lithium hydroxide refineries — as The entry of CODELCO highlights the importance of lithium production, well as an opportunity for its nickel (see the nickel chapter). despite the environmental challenges in the Atacama region. These challenges are being addressed on a number of fronts, with water In Australia, the value-adding of spodumene into lithium hydroxide might efficiency measures and potential new processing techniques. SQM is to come at an opportune time — with respect to possible world supply cut water use by 50 per cent by 2030. The Chilean government is also in changes — if sufficient quality production can be established (Figure 15.5). dispute with Albemarle over royalties, which have declined as a result of Figure 15.5: World lithium hydroxide production falls in the price of lithium products. Production of lithium elsewhere in 700 35 Chile is currently limited by the state to production by SQM and Albemarle. 600 30 In Argentina, development is more market based with less direct control limiting the number of companies. Development by ASX listed Galaxy 500 25 Resources of the Sal da Vida deposit in Argentina continues with FEED 400 20 and pilot plant work, targeting production in late 2022. Production by ASX 300 15 listed Orocobre, at their Argentinian Olaroz lithium facility, was down 6 per cent due to planned shutdown but operations in country are still being 200 10

Percentage of of Percentage world hampered by the COVID-19 pandemic. A stage 2 expansion is underway.

Thousand tonnes Thousand 100 5 Water efficient direct lithium extraction (DLE) by US based Lilac Solutions 0 0 is being further trialled by ASX listed Lake Resources in Argentina, in 2020 2021 2022 2023 2024 2025 order to advance its Kachi project. Samples produced thus far are of World production Australian share of production (rhs) battery grade quality lithium carbonate. Gangfeng lithium has increased its Source: BNEF (2020); Department of Industry, Science, Energy and Resources (2020) stake in the Sonora project in Mexico to 50 per cent, with production Project development scheduled to commence in 2023. Gangfeng has agreements to supply As market conditions improve, expansion plans of Chilean lithium lithium to Tesla. ASX listed Vulcan Resources obtained additional EU carbonate producer, Sociedad Quimica y Minera de Chile (SQM) are funding after its successful capital raising in Australia. It is now advancing moving forward. SQM plans to spend US$1.3 billion expanding lithium the prefeasibility studies on its zero carbon lithium project in Germany. carbonate production to 180,000 tonnes per annum and lithium hydroxide Despite challenging conditions in the spodumene market, the mothballed production to 30,000 tonnes per annum by 2023. Albemarle-led Whabouchi project in Quebec is being refinanced by creditors in expansions at La Negra III and IV in Chile could also occur in 2021–22. conjunction with Pallinghurst Group. Elsewhere in North America, ASX This could place pressure on Australian miners, as they seek to respond to listed Piedmont Lithium concluded a spodumene supply agreement with changing market conditions. Production from Livent and Orocobre in Tesla for product from their North Carolina deposit. They are currently Argentina is likely declined in 2020, due COVID-19 pandemic disruptions. completing bench-scale test work on conversion of the spodumene into In Chile, state-owned Corporacion Nacional del Cobre de Chile lithium hydroxide. A feasibility study was also completed on the Goulamina (CODELCO) has started going down the lithium development path, deposit in Mali, with planned production of over 400,000 tonnes per annum although CODELCO has yet to be granted a quota for lithium extraction. of spodumene, further adding to potential supply in the medium term.

Resources and Energy Quarterly December 2020 144 15.5 Australia production at Mt Cattlin expand significantly if full entitlements are purchased. Exports forecast to recover Exports of lithium were around $1.1 billion in 2019–20. Subdued Quotation of costs has been sparse, with some producers at over spodumene prices may see revenue fall to $1.0 billion in 2020–21, despite US$400 a tonne of spodumene. Pilbara Minerals achieved a production possible production from lithium hydroxide refineries. However, increased cost of US$355 a tonne (CIF China), similar to its June 2020 quarter. The production — due to new offtake agreements and firming prices — is company is still targeting US$320-350 a tonnes when fully operational. forecast to raise lithium export earnings to $1.3 billion by 2021–22. Capacity utilisation by Pilbara Minerals was 70-75 per cent in the September quarter. Production has started to increase Weak prices have continued to weigh on producers, with Altura Mining Figure 15.6: Australian spodumene concentrate - quarterly going into receivership. A number of other producers are lining up to take production and exports over its operations. Australia’s short to medium term production profile will 80 largely depend on whether the acquisition of Altura’s Pilgangoora operation is used as a substitute for a more capital-intensive expansion. If 60 it is used as a substitute, the net result will be a reduction in the short to medium term production of spodumene in Australia. The transaction may crystallise in the March quarter 2021. 40 Tonnes In the September quarter 2020, spodumene output continued to rise, up 20 an estimated 11 per cent quarter-on-quarter. An estimated 64,000 tonnes LCE was produced, with strong performance by a number of miners. Shipments rose by 0.7 per cent quarter-on-quarter, after the 0 previous record quarter to 57,000 tonnes LCE — when inventory was Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 drawn down significantly (Figure 15.6). Inventory levels of concentrate are Produced - t LCE Shipped - t LCE difficult to forecast at this time, given potential operational changes — as a Source: Company reports; Roskill (2020); Department of Industry, Science, Energy and result of corporate activity regarding the potential sale of Altura. Resources (2020) Pilbara Minerals exceeded its September quarter guidance of Australian production forecast to rise over the outlook period 40,000 tonnes, producing 62,000 tonnes of spodumene from its Australian production is now expected to rise over the outlook period. Pilgangoora mine in WA. Sales were 44,000 tonnes of spodumene. Output is forecast at 277,000 tonnes LCE in 2021–22, driven by Meanwhile, production from the Mt Marion mine in WA grew from anticipated price appreciation (due to rising electric vehicle demand). 116,000 tonnes to 133,000 tonnes. Elsewhere in WA, production at Mt Spodumene exports are forecast to increase from 1.5 million tonnes in Cattlin and Pilgangoora (Altura) was steady. However, a new offtake 2019–20 to 1.9 million tonnes in 2021–22 (Figure 15.7). agreement between Galaxy and Chengxin — for 60,000 tonnes per annum of spodumene concentrate over the next three years — could see

Resources and Energy Quarterly December 2020 145 Lithium hydroxide production is still mooted in 2021–22 for both Kwinana Figure 15.8: Australian spodumene concentrate exports and Kemerton. A financial investment decision is also possible on 2,000 2,000 Mt Holland (owned by SQM and Wesfarmers) with its associated lithium hydroxide plant, also at Kwinana. However, a cautious approach is likely, 1,500 1,500 given the difficulties in ramping up.

Revisions to the forecast 1,000 1,000 No changes in forecast export revenue from lithium have been recorded A$ million A$ for the December quarter 2020. Upside risk, due to ‘green’ stimulus Thousand tonnes Thousand 500 500 packages is noted, but is tempered by the changing nature of demand from lithium hydroxide to lithium carbonate — as a result of rising demand for LFP batteries (Figure 15.8). 0 0 2013–14 2015–16 2017–18 2019–20 2021–22 World production in 2020 has been stronger than anticipated, with an Volumes Values (rhs) estimated 431,000 tonnes LCE in 2020, compared with the previous forecasts of 373,000 tonnes. Notes: Income figures include lithium hydroxide and spodumene volumes contain hydroxide. Source: Company reports; Roskill (2020); Department of Industry, Science, Energy and Figure 15.7: Australian spodumene concentrate production Resources (2020) 400

300

200

100 Thousand tonnes LCE Thousand

0 2014 2015 2016 2017 2018 2019 2020 2021 2022

Notes: Lithium hydroxide is not included. Source: Company reports; Roskill (2020); Department of Industry, Science, Energy and Resources (2020)

Resources and Energy Quarterly December 2020 146 Table 15.1: Lithium Outlook

Annual percentage change

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

Lithium production a kt 486 431 503 585 -11.2 16.7 16.1

Demand b kt 298 305 417 502 2.3 36.6 20.5

Stocks c kt 100 120 143 170 19.7 19.2 18.7

– weeks of consumption 17.5 20.5 17.9 17.6 17.0 -12.7 -1.5

Spodumene price

– nominal US$/t 655 437 440 510 -33.4 0.8 15.9

– real d US$/t 663 437 431 490 -34.2 -1.2 13.5

Lithium hydroxide price

– nominal US$/t 13,184 7,200 8,080 8,800 -45.4 12.2 8.9

– real d US$/t 13,353 7,200 7,922 8,450 -46.1 10.0 6.7

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

Mine production a kt 246 233 233 277 -5.3 -0.2 19.0 Spodumene export kt 1,343 1,503 1,589 1,868 12.0 5.7 17.6 volume e – nominal value A$m 1,563 1,091 962 1,265 -30.2 -11.8 31.6

– real value g A$m 1,598 1,100 962 1,244 -31.2 -12.6 29.4 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 increasing product purity 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 2020–21 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)

Resources and Energy Quarterly December 2020 147 Trade summary charts and tables

148

Figure 16.1: Industry shares of GDP Figure 16.3: Principal markets for Australia’s resources exports, 2020–21 dollars 80 60 55 GDP: $1492 b 60 60 60 Exports: $102 b GDP: $1882 b 40 37 40 Exports: $176 b Per cent Per

20 cent Per 20 17 14 7 10 8 7 11 6 7 9 9 11 2 2 7 6 8 6 8 0 1 3 1 Agriculture, Mining Manufacturing Building and Services 0 forestry and construction China Other Other Japan South EU India Thailand fishing 2009–10 2019–20 Asia Korea 2009–10 2019–20 Source: ABS (2020) Australian National Accounts, National Income, Expenditure & Production, 5204.0 Source: ABS (2020) International Trade in Goods and Services, 5368.0 Figure 16.2: Principal markets for Australia’s resources and energy exports, 2020–21 dollars Figure 16.4: Principal markets for Australia’s energy exports, 2020–21 dollars 50 44 Exports: $173 b 60 40 Exports: $293 b Exports: $71 b 30 27 40 37 Exports: $117 b 22 30 27

Per cent Per 20 16 1413 9 10 9 11 7 cent Per 20 10 7 7 12 12 13 12 3 10 11 10 11 1 2 7 5 0 3 China Japan Other Other South EU India United 0 Asia Korea States Japan China Other Other South India EU Asia Korea 2009–10 2019–20

2009–10 2019–20 Source: ABS (2020) International Trade in Goods and Services, 5368.0 Source: ABS (2020) International Trade in Goods and Services, 5368.0

Resources and Energy Quarterly December 2020 149

Figure 16.5: Principal markets for Australia's total exports, Figure 16.7: Proportion of goods and services exports by sector 2020–21 dollars 80 60 59 55 Exports: $247 b 60 53 48 39 40 Exports: $385 b 30 40 25 23 cent Per 24 22 22 20

Per cent Per 18 20 20 13 14 14 12 12 10 12 12 11 8 7 8 5 5 4 4 3 4 3 0 0 Rural Mineral Other Services China Japan South India United Hong New Other resources merchandise Korea States Kong Zealand 2016–17 2017–18 2018–19 2019–20 2009–10 2019–20

Source: ABS (2020) Balance of Payments and International Investment Position, 5302.0 Source: ABS (2020) International Trade in Goods and Services, 5368.0

Figure 16.6: Australia's total imports by country of origin, Figure 16.8: Proportion of merchandise exports by sector 2020–21 dollars 80 74 60 68 70 63 Imports: $251 b 46 41 60 40 Imports: $301 b 27 40 Per cent Per

Per cent Per 18 20 12 18 19 11 9 20 16 15 16 15 14 6 6 12 5 5 5 5 3 0 0 China United Japan South Thailand Germany Other Rural Mineral resources Other merchandise States Korea 2016–17 2017–18 2018–19 2019–20 2009–10 2019–20

Source: ABS (2020) Balance of Payments and International Investment Position, 5302.0 Source: ABS (2020) International Trade in Goods and Services, 5368.0

Resources and Energy Quarterly December 2020 150

Table 16.1: Principal markets for Australia’s thermal coal exports, 2020–21 dollars Unit 2015–16 2016–17 2017–18 2018–19 2019–20 Japan $m 7,649 7,247 8,558 11,891 8,422 China $m 2,948 1,835 3,645 4,325 3,965 South Korea $m 2,875 2,671 2,665 3,898 2,868 Taiwan $m 1,904 1,669 2,348 3,233 2,407 Vietnam $m 4 105 152 679 1,050 Malaysia $m 629 520 669 925 539 Total $m 15,893 20,022 23,472 26,540 20,557

Source: ABS (2020) International Trade in Goods and Services, 5368.0

Table 16.2: Principal markets for Australia’s metallurgical coal exports, 2020–21 dollars Unit 2015–16 2016–17 2017–18 2018–19 2019–20

China $m 5,143 4,105 7,954 10,111 9,864

India $m 5,404 4,886 8,698 11,494 7,556

Japan $m 4,971 4,620 7,211 7,829 6,138

South Korea $m 2,565 2,211 3,834 4,114 3,061

Taiwan $m 1,228 1,029 1,893 2,655 2,013

Netherlands $m 897 969 1,960 1,832 1,253

Total $m 21,322 37,430 39,276 44,615 34,552

Source: ABS (2020) International Trade in Goods and Services, 5368.0

Resources and Energy Quarterly December 2020 151

Table 16.3: Principal markets for Australia’s crude oil and refinery feedstocks exports, 2020–21 dollars Unit 2015–16 2016–17 2017–18 2018–19 2019–20

Singapore $m 1,959 667 1,052 1,990 1,370

China $m 29 747 735 1,031 1,042

Malaysia $m 4 153 444 1,677 1,022

Indonesia $m 36 375 954 663 767

Thailand $m 1,359 735 585 1,145 623

South Korea $m 1 476 467 710 348

Total $m 9,326 5,767 5,691 9,275 9,093

Note: Some country details have been confidentialised by the Australian Bureau of Statistics. Source: ABS (2020) International Trade in Goods and Services, 5368.0

Table 16.4: Principal markets for Australia’s LNG exports, 2020–21 dollars Unit 2015–16 2016–17 2017–18 2018–19 2019–20

Japan $m 11,347 11,983 15,081 21,686 20,111

China $m 3,167 6,042 9,936 17,874 16,427

South Korea $m 1,809 2,707 3,832 5,426 5,209

Taiwan $m 172 269 777 2,396 2,617

Malaysia $m 202 221 378 892 1,469

Singapore $m 428 1,515 1,180 1,264 1,049

Total $m 17,858 23,631 32,120 50,841 47,949

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

Resources and Energy Quarterly December 2020 152

Table 16.5: Principal markets for Australia’s iron ore exports, 2020–21 dollars

Unit 2015–16 2016–17 2017–18 2018–19 2019–20

China $m 45,362 41,075 53,560 64,889 85,436

Japan $m 7,214 4,960 5,598 5,886 7,100

South Korea $m 4,360 3,234 4,061 4,771 6,280

Taiwan $m 1,398 1,082 1,488 1,808 1,891

Indonesia $m 30 57 45 45 28

India $m 117 7 5 243 21

Total $m 51,498 66,330 63,802 79,291 103,566

Source: ABS (2020) International Trade in Goods and Services, 5368.0

Table 16.6: Principal markets for Australia’s aluminium exports, 2020–21 dollars

Unit 2015–16 2016–17 2017–18 2018–19 2019–20

South Korea $m 828 1,181 770 785 1,148

Japan $m 1,570 738 969 1,349 1,025

Taiwan $m 527 316 214 300 362

Thailand $m 308 285 319 401 292

United States $m 20 135 192 860 249

Indonesia $m 148 100 157 123 96

Total $m 3,492 3,355 4,171 4,259 3,723

Source: ABS (2020) International Trade in Goods and Services, 5368.0

Resources and Energy Quarterly December 2020 153

Table 16.7: Principal markets for Australia’s copper exports, 2020–21 dollars Unit 2015–16 2016–17 2017–18 2018–19 2019–20

China $m 3,928 3,799 2,804 3,687 3,806

Japan $m 2,144 1,513 1,409 1,874 2,089

Malaysia $m 567 654 893 1,269 831

South Korea $m 393 519 464 698 641

India $m 865 543 710 454 451

Philippines $m 270 233 413 625 364

Total $m 8,738 8,018 8,783 9,989 10,109

Source: ABS (2020) International Trade in Goods and Services, 5368.0

Table 16.8: Principal markets for Australia’s gold exports, 2020–21 dollars Unit 2015–16 2016–17 2017–18 2018–19 2019–20

United Kingdom $m 628 4,172 4,066 4,414 12,820

Hong Kong $m 204 2,674 9,989 4,468 3,370

United States $m 159 156 77 130 3,107

Switzerland $m 16 91 234 1,187 1,916

Singapore $m 3,355 1,267 314 1,625 1,436

China $m 7,492 6,935 2,410 5,185 831

Total $m 17,869 20,104 20,050 19,290 24,612

Source: ABS (2020) International Trade in Goods and Services, 5368.0

Resources and Energy Quarterly December 2020 154 Appendices

155 Appendix A A.3 Time periods Definitions and classifications 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 A.1 Exchange rates ‘projection’ refer to different periods in the future. It is important to In this report, the AUD/USD exchange rate (Australian dollar relative to distinguish between different future time horizons, as factors affecting the US dollars) is based on the median of economic forecasters at the time production, consumption and prices in the short-term differ from factors that the report is prepared. The source is the Bloomberg survey of affecting these components in the medium to long-term. Forecasts also economic forecasters. become increasingly imprecise over longer time horizons, due to World commodity prices are typically denominated in US dollars, and increased risk and uncertainty. For these reasons, the Department of exchange rate movements can have a significant effect on the actual Industry, Science, Energy and Resources’ Office of the Chief Economist outcomes of commodity prices and export earnings. A change in the value (DISER OCE) uses different terminology to distinguish between short-term of the US dollar against other floating international currencies can forecasts and medium to long-term projections, as outlined in Table A2. influence movements in world resources and energy prices. A change in the Australian dollar against the US dollar will impact on export earnings Table A1: OCE terminology for different time periods/horizons for domestic commodity exporters and producers. There is substantial Period Years Terminology uncertainty surrounding any exchange rate forecast, with changes to exchange rates influenced by changes in financial market sentiment, Time period has passed but Historical complete for data for the period is Estimate sometimes resulting in strong volatility. not yet available A.2 Conversion to real dollars Short-term 1 to 2 years Forecast Nominal values and prices are converted to real dollars using Australian and US consumer price indexes (CPI). The Australian and US CPI Medium-term 3 to 5 years Projection forecasts are based on the median of economic forecasters at the time Long-term Beyond 5 years n/a that the report was prepared. The source is the Bloomberg survey of economic forecasters. Source: Department of Industry, Science, Energy and Resources (2020)

Resources and Energy Quarterly December 2020 156 A.4 Commodity classifications In this report, benchmark prices and Australian production and exports are The DISER OCE defines exports for each commodity by a selected set of forecast for 21 commodities, as shown in Table A2. In estimating a total for 8-digit Australian Harmonised Export Commodity Classification (AHECC) Australia’s resources and energy exports, the remaining commodities, codes. Where possible, the choice of AHECC codes is based on alignment defined as ‘other resources’ and ‘other energy’, are forecast as a group. 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.

Table A2: Resources and energy commodities groupings and definitions

Resources (non-energy) Energy

Resource commodities are non-energy minerals and Energy commodities are minerals and petroleum Definition semi-manufactured products produced from non- products that are typically used for power generation energy minerals

Australian Harmonised Export Commodity 25 (part); 26 (part); 28 (part); 31 (part); 73 (part); 74; 27 (part) Classification (AHECC) chapters 75; 76; 78; 79; 80; 81

Commodities for which data is published, forecasts are Aluminium; alumina; bauxite; copper; gold; iron ore; Crude oil and petroleum products; LNG; metallurgical made and analysed in detail in this report crude steel; nickel; zinc, lithium 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)

Resources and Energy Quarterly December 2020 157 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

Resources and Energy Quarterly December 2020 158 Conventional gas Natural gas that can be produced from reservoirs using traditional techniques. Contrasts with unconventional gas.

COVID-19 2019 Novel Coronavirus

CPB 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 CPI expenditure by the CPI population group (i.e. metropolitan households).

Crude steel 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 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 Economic growth nominal or real gross domestic product (GDP).

EIA 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

Resources and Energy Quarterly December 2020 159 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 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 HCC industry benchmark.

IEA 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 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 JCC LNG contracts.

JFY Japanese fiscal year

kcal/kg Kilocalories per kilogram

Resources and Energy Quarterly December 2020 160 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)

Resources and Energy Quarterly December 2020 161 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.

Pulverised coal injection — PCI coal is used for its heat value and injected directly into blast furnaces as a supplementary fuel, which reduces the PCI 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.

Purchasing Power Parity — a way of measuring economic variables in different countries that equalise the purchasing power of different PPP 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

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 SSCC 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

Resources and Energy Quarterly December 2020 162 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

Resources and Energy Quarterly December 2020 163 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 Jeremy Coghlan [email protected]

Gas Monica Philalay [email protected]

Gold, aluminium, alumina and bauxite Thuong Nguyen [email protected]

Copper, nickel Kate Martin [email protected]

Zinc, lithium Caroline Lewis [email protected]

Resources and Energy Quarterly December 2020 164