Australian Commodities December Quarter 07.4

australian commodities december quarter 07.4

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economic overview 585 drought in australia – its impact on broadacre and dairy farms incomes 595 commodity outlook crops wheat 599 coarse grains 603 oilseeds 607 cotton 610 sugar 613 livestock wool 617 sheep meat 619 beef and veal 621 dairy 623 energy oil and gas 627 thermal coal 632 metals steel and steel making raw materials 637 gold 643 aluminium and alumina 646 nickel 650 copper 652 zinc 655 articles climate change – impacts on Australian agriculture 657 don gunasekera, yeon kim, catherine tulloh and melanie ford india’s economic prospects – and implications for australia’s commodity exports 677 marina kim and jammie penm farm management deposits – use and interaction with exceptional circumstances assistance 691 caroline levantis and peter martin minerals and energy – major development projects – october 2007 listing 699 alan copeland and commodity analysts, energy and minerals branch statisical tables 715 abare management 752

australian commodities > vol. 14 no. 4 > december quarter 2007 583 abareconomics.com

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abare has moved to 7 london circuit canberra abare provides high quality economic policy analysis and forecasts to enhance the competitiveness of Australia’s agricultural, fi shing, forestry, energy and minerals industries. abare is proud to contribute to signifi cant items on the Australian and international policy agendas: > multilateral trade negotiations and more open agricultural markets > greenhouse gas emissions and climate change response policies > water policy reform > salinity management > international energy developments > minerals exploration and policies > issues in regional Australia > Australian farm performance > fi sheries bioeconomic model > forestry economic overviewcontents

> jammiecontact penm > +61 > +61 2 6272 2 6272 ???? 2030 > [email protected]> [email protected] economic overview increased downside risks to world economic outlook marina kim and jammie penm

» Although the global economy has sustained strong growth in recent quarters, volatility in ﬁ nancial markets has led to an increase in the downside risks to the world economic outlook. » In preparing this set of commodity forecasts, world economic growth is assumed to be 4.6 per cent in 2008, compared with an estimated 4.8 per cent in 2007 and 5.4 per cent in 2006. » Economic growth in Australia is assumed to strengthen to 4.25 per cent in 2007- 08 from 3.2 per cent in 2006-07. world economic outlook

fi nancial market volatility yet to affect economic growth Despite a signifi cant increase in fi nancial market volatility, global economic expansion has been strong. This has been supported mainly by robust economic performance in the emerging market economies. In particular, China’s economy expanded year on year by 11.5 per cent in the September quarter, following growth of 11.9 per cent in the June quarter. In India, economic growth continues at an annual world economic growth rate of around 9 per cent (For a more detailed discussion, see the article on India’s economic prospects). The pace of economic expansion in other emerging 5 market economies also remains strong. These economies include Singapore, the Philippines and Indo- 4 nesia, as well as the Russian Federation, the Ukraine and eastern Europe. 3 Strong growth in the emerging market economies has counterbalanced moderating growth in 2 some OECD countries. In the United States, weaker housing activity has adversely affected overall 1 economic growth, while economic growth in the euro area and Japan has slowed after strong expansion % in early 2007. 1988 1992 19962000 2004 2008

australian commodities > vol. 14 no. 4 > december quarter 2007 585 economic overview

increase in crude oil prices in local currency terms approximated by the price of West Texas Intermediate oil per barrel

average Jan-Oct change late Nov change country currency of 2006 2007 from 2006 2007 from 2006 % % OECD United States US$ 66.1 68.1 3.1 98.2 48.6 Japan ¥ 7 662.7 8 086.6 5.5 10 629.8 38.7 Western Europe € 52.4 50.2 –4.1 65.9 25.8 United Kingdom £ 35.8 34.1 –4.6 47.5 32.7 Australia A$ 87.9 82.3 –6.4 112.7 28.3 Asia China yuan 526.7 521.0 –1.1 728.0 38.2 India rupee 2 992.7 2 842.1 –5.0 3 867.3 29.2 Malaysia ringgit 243.6 236.3 –3.0 332.8 36.6 Indonesia rupiah 608 266.2 621 105.3 2.1 923 698.1 51.9

emerging infl ationary pressures in developing countries Despite the recent substantial increase in crude oil prices, headline infl ation remains largely contained in the major OECD economies. In contrast, infl ationary pressures are emerging in a number of developing countries, including China and India, mainly refl ecting strong growth in domestic demand and a marked rise in food prices. The increase in food prices has stemmed from the use of food crops, such as corn and oilseeds, for biofuel production in a number of major world economies and adverse seasonal conditions and supply disruptions in a number of producing countries. Mean- while, oil prices have rebounded to new highs, owing to stronger growth in demand in the face of lower production by the Organisation of Petroleum Exporting Countries (OPEC), a smaller than expected rise in non-OPEC output, and continuing geopolitical concerns in key oil producing regions. In response to increased infl ationary pressures, monetary authorities in a number of emerging market economies have tightened mone- regional economic growth tary policy and increased interest rates. In China, for example, interest rates were raised in mid-September for the fi fth time since the beginning of 2007. Simi- 2006 larly, the Reserve Bank of India increased its bench- 8 2007 mark interest rate in June 2007, the fi fth over the past 2008 18 months. 6 world economic growth to slow marginally in 2008 4 Despite the modest increase in infl ationary pressures in some emerging market economies and continued 2 fi nancial market volatility, global economic growth is expected to remain relatively strong in the short term. % In preparing this set of commodity forecasts, world OECD non-OECD Latin Russia, world economic growth is assumed to be 4.6 per cent in Asia America Ukraine, 2008, compared with an estimated 4.8 per cent in eastern Europe 2007 and 5.4 per cent in 2006.

586 australian commodities > vol. 14 no. 4 > december quarter 2007 economic overview there are signifi cant downside risks to the outlook While world economic growth is assumed to remain strong in the short term, there are considerable downside risks surrounding the short term outlook for the global economy. One signifi cant downside risk to the current world economic outlook is associated with recent weakening in global credit market conditions. There has been an increase in global credit market risks as a result of tightening in lending conditions stemming from the problems in the subprime mortgage market in the United States. global credit market volatility has increased Initially, rising delinquencies in US subprime mortgages led to a rise in interest rates on borrowings backed with such loans in the United States. More recently, rising uncertainty about the magnitude of losses and the exposure of fi nancial institutions in both the United States and other countries has signifi cantly added to market concerns. As a result, market interest rates have risen and share market valuations of companies with exposure to the subprime mortgage market have declined markedly in the United States, Japan and the euro area. The volatility has also spilled over to emerging markets, with borrowing costs rising, share market valuations falling, and capital fl ows to emerging markets being scaled back. In response to increased market disruptions, monetary authorities in a number of countries, including the US Federal Reserve and the European Central Bank, have provided signifi cant capital injections to money markets and/or lowered their benchmark interest rates. Despite the monetary interventions, signifi cant uncertainty remains as to the full extent of the effects on general economic activity, especially on consumer spending and business (in particular residential) investment in major world economies. US economic growth to moderate In the face of credit tightening and volatile fi nancial market conditions, the short term outlook for US world stock markets economic growth has been downgraded. Economic growth in the United States is now assumed to be stock market index around 2.0 per cent in 2008, a reduction of 0.6 52 week late percentage points from the assumption used in high a Nov. 2007 change ABARE’s previous outlook. Economic growth in the % United States is estimated to average around 1.9 per OECD cent in 2007. This compares with growth of 2.9 per United States 14 165 12 937 –8.7 cent in 2006. Japan 18 300 14 995 –18.1 Euro area 4 558 4 235 –7.1 Ongoing diffi culties in the mortgage market are Australia 6 852 6 405 –6.5 expected to extend the decline in residential (housing) east Asia investment in the United States, while higher energy China 6 396 5 415 –15.3 prices, sluggish job growth, and weaker house prices Korea, Rep. of 2 065 1 829 –11.4 could dampen growth in consumer spending. Chinese Taipei 9 860 8 537 –13.4 The correction in the US housing sector, which south east Asia has now been under way for two years, has been a Indonesia 2 733 2 598 –4.9 major drag on economic activity. The sharp decline Malaysia 1 414 1 362 –3.7 in residential investment is estimated to have taken Philippines 3 897 3 534 –9.3 Singapore 3 906 3 367 –13.8 around 1 percentage point off US economic growth Thailand 925 820 –11.3 in the past year. In the current economic outlook, US India 19 978 18 979 –5.0 housing activity is expected to remain weak well into a Highest point between late November 2006 and late 2008. November 2007 australian commodities > vol. 14 no. 4 > december quarter 2007 587 economic overview

economic growth Furthermore, there are signifi cant downside risks to OECD US domestic demand stemming from the slowdown United States in housing activity. There is considerable concern in 3.0 Japan the marketplace that a tightening credit market could western Europe signifi cantly affect confi dence in the household sector 2.5 and further curtail consumer demand. There remains 2.0 a distinct possibility that house prices could decline more sharply than currently expected, adding to diffi - 1.5 culties of refi nancing and further weakening household balance sheets. Should this occur, it would have 1.0 a further dampening impact on private consumption 0.5 as well as on residential investment. Against this background, the risk of a more % protracted economic slowdown in the United States 2006 2007 2008 has increased. While the Federal Reserve can be expected to respond quickly by easing monetary policy further in the face of increasing economic weakness, it now looks likely that a period of subpotential growth will occur in the United States. risks of spillover to western Europe In light of continuing fi nancial market uncertainty, there is also concern that economic growth in Japan and western Europe will be adversely affected. Western Europe has been affected directly by the problems in the US subprime mortgage market as a number of European banks are involved in lending to the US housing sector. Although the European Central Bank and the Bank of England have taken actions to ease monetary policy, increased uncertainty about the broader economic outlook for the region means domestic demand could be weaker than currently expected. One particular area of downside risk in western Europe relates to housing markets. Demand for housing has grown strongly in a number of regional economies, most notably the United Kingdom, Ireland and Spain, with rapid price rises and sharp increases in residential investment. Although there has been some cooling of regional housing markets, the recent subprime market developments in the United States could have a further dampening effect on regional housing activity, and hence on general economic growth, particularly if credit availability were to be further tightened. Economic growth in western Europe is assumed to average 2.1 per cent in 2008, compared with an estimated 2.5 per cent in 2007 and 2.8 per cent in 2006. the impact on Japan could be less signifi cant In the case of Japan, the direct fi nancial exposure to the US subprime mortgage sector is limited. However, recent economic indicators suggest a possible weakening of growth as a result of a decline in the export growth rate. This adds to the vulnerability of Japan’s economic activity to global fi nancial market instability, especially if consumer and business confi dence is adversely affected. Despite market concerns about the effects of fi nancial market instability, Japanese economic activity, measured by real gross domestic product, increased by an annual rate of 2.6 per cent in the September quarter 2007. However, this increase followed a decline of 1.6 per cent in the June quarter.

588 australian commodities > vol. 14 no. 4 > december quarter 2007 economic overview

Looking ahead, economic indicators and business surveys released recently suggest that business confi dence remains solid, despite lower export shipments to the United States. However, there is concern that growth in exports to China, Europe and southeast Asia, which helped to sustain export growth over the past six months, may slow in the short term as a result of weaker expected economic growth in the United States. Refl ecting the increased uncertainty about sustained world demand for Japanese exports and domestic consumer spending, economic growth in Japan is assumed to moderate in the short term. key macroeconomic assumptions Economic growth is assumed to be 1.8 per cent in 2008, compared with an estimated 2.0 per cent in 2007 and World 2005 2006 2007 f 2008 f 2.2 per cent in 2006. Economic growth OECD % 2.6 3.2 2.4 2.3 United States % 3.1 2.9 1.9 2.0 economic prospects for emerging Asian Japan % 1.9 2.2 2.0 1.8 economies Western Europe % 1.5 2.8 2.5 2.1 – Germany % 0.8 2.9 2.4 2.0 Economic growth in non-OECD Asia has remained – France % 1.7 2.0 1.9 2.0 strong, led by China and India, as growth in exports and – United Kingdom % 1.8 2.8 3.1 2.3 business investment has strengthened. While economic – Italy % 0.1 1.9 1.7 1.3 performance has been strong in many southeast Asian Korea, Rep. of % 4.2 5.0 4.8 4.6 New Zealand % 2.7 1.6 2.8 2.3 countries, including Singapore, the Philippines, Indonesia Developing countries % 7.1 7.7 7.6 7.2 and Malaysia, political uncertainties continue to under- – Non-OECD Asia % 8.2 8.8 8.8 8.1 mine confi dence and domestic demand in Thailand. South East Asia a % 5.4 5.8 5.8 5.5 Despite recent global fi nancial market instability, China b % 10.4 11.1 11.5 10.5 Chinese Taipei % 4.1 4.7 4.1 4.0 economic growth in the region remains fi rm and is not India % 9.0 9.7 9.0 8.5 expected to slow markedly in the short term. In the case – Latin America % 4.6 5.5 5.0 4.3 Russian Federation % 6.4 6.7 7.0 6.5 of China, economic growth is assumed to be 10.5 per Ukraine % 2.7 7.1 6.7 5.5 cent in 2008, following growth of 11.5 per cent in 2007. Eastern Europe % 5.6 6.3 5.8 5.2 Growth in the Indian economy is assumed to be 8.5 per World c % 4.8 5.4 4.8 4.6 cent in 2008, compared with an estimated 9.5 per cent Industrial production in 2007. OECD % 2.4 3.3 2.7 2.7 Inflation In southeast Asia, export growth is likely to be affected, United States % 3.4 3.2 2.7 2.3 to some extent, by the assumed weaker economic growth Interest rates in the United States. Although a rebound in economic US prime rate d % 7.3 8.0 8.0 7.5 growth in 2008 is assumed in Thailand, as consumer US exchange rates e and business confi dence recovers, economic growth in Yen/US$ 110 116 116 113 other regional economies is assumed to slow marginally Euro/US$ 0.80 0.79 0.73 0.71 in the short term. For southeast Asia as a whole, economic 2004 2005 2006 2007 Australia -05 -06 -07 -08 f growth is assumed to average 5.5 per cent in 2008, Economic growth % 2.8 3.0 3.2 4.25 compared with an estimated 5.8 per cent in 2007. Inflation % 2.4 3.2 2.9 2.8 Risks to the regional economic outlook are broadly Interest rates g % 8.9 9.1 9.8 10.5 balanced at this stage. On the upside, the assumed slow- Australian exchange rates down in China’s growth may not materialise as economic US$/A$ 0.75 0.75 0.78 0.88 performance in China has consistently outperformed Yen/A$ 80 85 93 101 TWI for A$ h 63 63 65 70 expectations. Growth in India could also be stronger than a Indonesia, Malaysia, the Philippines, Singapore and Thailand. b assumed, especially if strong corporate profi ts continue to Excludes Hong Kong. c Weighted using 2006 purchasing-power-parity boost investment spending. (PPP) valuation of country GDPs by the IMF. d Commercial bank prime lending rates in the United States. e Average of daily rates. g Prime On the downside, a possible decline in demand for lending rates to large businesses. h Base: May 1970 = 100. f ABARE Asian exports, in particular electronic goods, is of partic- assumptions. ular concern. Given the signifi cant trade links between the Sources: ABARE; ABS; IMF; OECD; RBA.

australian commodities > vol. 14 no. 4 > december quarter 2007 589 economic overview

economic growth in Asia region and major OECD countries, there remains a distinct possibility that weaker OECD economic growth could adversely affect regional economic 2006 10 growth through weaker export demand. 2007 2008 8 infl ationary pressures in China pose another downside risk 6 Infl ationary pressures in China have been on the rise in recent months, with the consumer price index 4 increasing year on year by 6.5 per cent in October 2007, following a rise of 6.2 per cent in September. 2 This compares with an average increase of 1.5 per cent in 2006. % Food prices, which account for around a third E>FI>KA >I>VPF> FKD>MLOB EFK> LOB> EFKBPB of China’s consumer price index, have risen year KALKBPF> EFIFMMFKBP BMLC >FMBF on year by 17.6 per cent in October 2007, contributing the most to the acceleration in infl ation. In response to signifi cantly higher world oil prices, China’s government raised gasoline and diesel prices by around 10 per cent in early November, which poses another upside risk to infl ation. In an attempt to prevent a substantial increase in infl ationary pressures, the People’s Bank of China has been progressively raising its benchmark lending rate. Given continued strong economic growth and emerging infl ationary pressures, further tightening of monetary policy is likely in the short term. Higher interest rates have the potential to adversely affect consumer spending and business investment expenditure.

economic prospects in Australia Economic growth in Australia is robust with, for example, the volume of retail trade rising year on year by 5.1 per cent in the September quarter 2007. As well, demand for labour remains strong with the unemployment rate at a relatively low 4.3 per cent in October 2007. economic indicators In the next few quarters, expanding global Australia demand for Australia’s resources exports will continue economic inflation prime lending to provide support for economic activity. Solid growth growth rate rate 10 in employment and wages is expected to underpin rising consumer spending. 8 Economic growth in Australia is assumed to be 4.25 per cent in 2007-08, compared with 3.2 per 6 cent in 2006-07. In contrast to the economy as a whole, the 4 economic performance of the Australian farm sector is likely to remain relatively subdued. The deterioration 2 in seasonal conditions over the critical September– October period, with little or no worthwhile rain and % continued above average temperatures, means the 2005 2006 2007 major winter grain crops in 2007-08 will be smaller -06 -07 -08 than previously forecast. Areas particularly affected

590 australian commodities > vol. 14 no. 4 > december quarter 2007 economic overview have been parts of South Australia, northern Victoria interest rates and New South Wales. The livestock sector has also monthly, ended October 2007 been affected by the deterioration in seasonal conditions, with farmers continuing to reduce stock numbers because of limited pasture growth and the high cost of 10 purchased feeds. Australia For 2007-08 as a whole, the volume of farm produc- 8 tion is forecast to increase by around 3.4 per cent, after declining by around 21 per cent in 2006-07. While 6 the volume of crop production is forecast to rise by 13 United States per cent in 2007-08, livestock production is forecast to fall by 4.3 per cent. 4 infl ation % Australia’s consumer price index rose by 0.7 per cent Dec Dec Dec Dec in the September quarter 2007, compared with an 2004 2005 2006 2007 increase of 1.2 per cent in the June quarter. Contrib- uting most to the increase in the September quarter were rises in the prices of fruit (9.6 per cent), vegetables (7.9 per cent), water and sewerage (5.5 per cent), property rates and charges (4.5 per cent) and electricity (4.3 per cent). Partially offsetting these increases were falls in the costs of child care (33.4 per cent), pharmaceuticals (4.5 per cent) and automotive fuel (3.7 per cent). Other price indexes released recently indicate that infl ationary pressures are likely to remain modest. For example, the producer price index for fi nal commodities rose year on year by 2.4 per cent in the September quarter 2007, following a rise of 2.3 per cent in the June quarter. The domestic component of this price index increased year on year by 3.7 per cent, compared with a largely exchange rate induced decline of 5.5 per cent in the import component. Australia’s infl ation rate is assumed to average around 2.8 per cent in 2007-08, compared with 2.9 per cent in 2006-07. exchange rates Over the past few months, the Australian dollar has exchange rate appreciated markedly both against the US dollar Australia and on a trade weighted basis. The Australian dollar appreciated from around US79c and TWI 63 in mid-August to a high of US93c and TWI 72 in early 0.8 November, before a partial reversal to around US87c and TWI 68 in late November. 0.7 In the fi rst fi ve months of 2007-08, the Australian dollar is estimated to have averaged around US87c 0.6 and TWI 69. This compares with an average of US78c and TWI 65 in 2006-07. A major factor that has contributed to the recent 0.5 appreciation of the Australian dollar is the weakness of the US dollar against other international curren- US$/A$ cies. Against the euro, for example, the US dollar 1991 1995 1999 2003 2007 was trading around 0.67 euro in late November, -92 -96 -2000 -04 -08

australian commodities > vol. 14 no. 4 > december quarter 2007 591 economic overview

major indicators of Australia’s commodity sector

Change from 2002 2003 2004 2005 2006 2007 previous year -03 -04 -05 -06 -07 -08 f 2006-07 2007-08 %% Commodity exports Exchange rate US$/A$ 0.58 0.71 0.75 0.75 0.78 0.88 4.0 12.8 Unit returns a Farm index 100.0 92.2 91.5 91.3 95.3 105.2 4.4 10.4 Mineral resources index 100.0 94.7 120.0 158.7 173.7 167.8 9.5 – 3.4 – energy minerals index 100.0 88.9 122.9 166.5 151.8 156.4 – 8.8 3.0 – metals and other minerals index 100.0 99.3 117.9 152.8 190.5 176.6 24.7 – 7.3 Total commodities index 100.0 93.9 110.9 137.0 148.5 146.8 8.4 – 1.1 Value of exports Farm A$m 27 865 26 550 27 911 27 947 27 664 26 792 – 1.0 – 3.2 – crops A$m 13 299 13 496 13 679 14 108 12 844 11 532 – 9.0 – 10.2 – livestock A$m 14 566 13 055 14 232 13 838 14 821 15 260 7.1 3.0 Forest and fisheries products A$m 3 935 3 692 3 660 3 687 3 848 3 883 4.4 0.9 Mineral resources A$m 57 777 54 282 69 498 92 438 107 887 109 805 16.7 1.8 – energy minerals A$m 24 161 20 737 29 696 39 328 39 428 42 207 0.3 7.0 – metals and other minerals A$m 33 616 33 544 39 803 53 110 68 459 67 598 28.9 – 1.3 Total commodities A$m 89 577 84 524 101 070 124 071 139 399 140 480 12.4 0.8 Farm sector Gross value of farm prodn b A$m 33 203 37 300 36 552 38 417 34 330 38 327 – 10.6 11.6 – crops A$m 16 045 20 789 18 725 20 598 16 145 19 496 – 21.6 20.8 – livestock A$m 17 158 16 511 17 827 17 819 18 185 18 831 2.1 3.6 Farm costs A$m 27 766 29 367 29 826 31 139 31 572 33 683 1.4 6.7 Net cash income c A$m 11 403 12 573 12 042 11 083 6 690 8 703 – 39.6 30.1 Net value of farm prodn d A$m 5 437 7 933 6 726 7 278 2 758 4 644 – 62.1 68.4 Farmers’ terms of trade index 101.0 94.7 91.0 92.6 96.5 99.3 4.2 2.9 Volume of farm production index 93.6 111.9 110.7 107.5 85.4 88.3 – 20.6 3.4 – crops index 83.4 123.0 116.8 111.3 67.8 76.6 – 39.1 13.0 – livestock index 104.2 99.6 103.1 102.2 104.1 99.6 1.9 – 4.3 Crop area and livestock numbers Crop area (grains and oilseeds) ’000 ha 20 777 23 201 23 808 22 299 19 415 21 349 – 12.9 10.0 Sheep million 99.3 101.3 102.5 92.7 86.8 85.0 – 6.4 – 2.1 Cattle million 26.7 27.5 28.3 28.8 27.8 27.6 – 3.5 – 0.7 Minerals and energy sector Volume of mine production index 115.2 113.3 118.6 118.0 120.9 132.2 2.5 9.3 – energy index 115.0 111.0 113.4 111.5 117.6 126.0 5.5 7.1 – metals and other minerals index 115.6 115.5 123.6 124.2 124.5 138.1 0.2 10.9 Gross value of mine prodn A$m 55 466 52 110 66 719 88 740 103 571 105 413 16.7 1.8 New capital expenditure e A$m 8 766 9 282 10 253 18 608 22 119 na 18.9 na Exploration expenditure A$m 1 728 1 731 2 073 2 503 3 940 na 57.4 na – energy A$m 1 080 1 036 1 192 1 484 2 533 na 70.6 na – metals and other minerals A$m 648 695 881 1 018 1 407 na 38.2 na Employment Agriculture, forestry and fishing ’000 375 373 364 353 355 na 0.7 na Mining ’000 86 92 93 115 120 na 4.9 na Australia ’000 9 321 9 431 9 536 9 857 10 123 na 2.7 na a Base: 2001-02 = 100. b For a definition of the gross value of farm production see table 21. c Gross value of farm production less increase in assets held by marketing authorities and less total cash costs. d Gross value of farm production less total farm costs. e Mining industry (ANZSIC subdivision B) only. s ABARE estimate. f ABARE forecast. na Not available. Note: ABARE revised the method for calculating farm price and production indexes in October 1999. The indexes for the different groups of commodities are calculated on a chained weight basis using Fishers' ideal index with a reference year of 1997-98 = 100. Sources: Australian Bureau of Statistics; ABARE.

592 australian commodities > vol. 14 no. 4 > december quarter 2007 economic overview compared with 0.74 euro in mid-August. As mentioned earlier, US interest rates have been progressively reduced in response to the credit market concerns stemming from that country’s subprime mortgage problems. A widening of interest rate differentials between the United States and other world economies has placed signifi cant downward pressure on the value of the US dollar. More importantly, the recent subprime mortgage problems in the United States have led to considerable fi nancial market concern about the prospects for US economic growth in the short term. Together with the fact that the US equity market has underperformed relative to those overseas, the attractiveness of the US economy as a destination for international capital fl ows appears to have declined. Given these developments, there is a strong possibility that the US dollar will remain weak in the short term. Consequently, the Australian exchange rate against the US dollar is likely to remain relatively high. Interest rate movements in Australia will also be important to movements in the Australian dollar. The main factor affecting Australian interest rates will be the outlook for economic growth and infl ation. Given strengthening economic growth in Australia, Australia’s prime lending rates are assumed to average 10.5 per cent in 2007-08. This compares with an average of 9.8 per cent in 2006-07. In preparing this set of commodity forecasts, the Australian dollar is assumed to average around US88c and TWI 70 in 2007-08. Although the value of the Australian dollar is assumed to remain high against the US dollar in the short term, considerable uncertainty remains. This is because movements in the Australian dollar can be infl uenced strongly by changes in sentiment in fi nancial markets, leading to signifi cant volatility in the Australian exchange rate. As a result, it will be important for primary producers major Australian commodity exports and exporters to manage the risks associated with fl uc- world prices are in $US for all commodities except wool and wine which are $A tuations in the Australian exchange rate. ¦ commodity export prices largely unchanged in S>IRB S>IRB SLIRJB TLOIA iron ore, MOF@B 2007-08 pellets The index of unit export returns for Australian commodi- metallurgical coal ties, in aggregate, is forecast to fall marginally in 2007- gold 08, following a rise of over 8 per cent in 2006-07. crude oil For farm commodities, the index of unit export returns thermal coal is forecast to rise by 11 per cent in 2007-08, after copper increasing by only 4 per cent in 2006-07. World indi- lng cator prices are forecast to average higher in 2007-08 for wheat, corn, rice, soybeans, cotton, wool and dairy nickel products. alumina However, unit export returns for Australia’s mineral aluminium and energy commodities are forecast to fall by around beef, veal 3 per cent in 2007-08, following a rise of 9.5 per cent in dairy 2007-08 2006-07. The fall in 2007-08 largely refl ects the effects wine 2006-07 of lower forecast prices for some minerals and metals zinc on world markets, and an assumed appreciation of the wool Australian dollar against the US dollar. lead While unit returns for energy exports are forecast to rise by 3 per cent in 2007-08, unit export returns for ?

australian commodities > vol. 14 no. 4 > december quarter 2007 593 economic overview

metals and other minerals are forecast to fall by more than 7 per cent, compared with an increase of nearly 25 per cent in 2006-07. earnings from commodity exports slightly higher Earnings from Australia’s commodity exports are forecast to be $140.5 billion in 2007-08, compared with an estimated $139.4 billion in 2006-07 (a rise of 1 per cent). The forecast increase reﬂ ects higher earnings from energy exports. Export earnings from both farm products and metal and other mineral commodities are forecast to be lower as a result of drought, and lower world prices for some minerals and metals respectively. For farm commodities, export earnings are forecast to be $26.8 billion in 2007-08, a fall of 3.1 per cent from $27.7 billion in 2006-07. Agricultural commodities for which export earnings are forecast to be lower in 2007-08 include wheat, cotton lint and seed, sugar, live sheep, and wool. However, export earnings for barley, canola, wine, lamb, live cattle and most dairy products are all forecast to be higher in 2007-08 than in 2006-07. For forest and ﬁ sheries products, export earnings are forecast to be around $3.9 billion in 2007-08, 2.6 per cent higher than earnings in 2006-07. The value of Australia’s minerals and energy exports is forecast to be around $110.2 billion in 2007-08, compared with $107.9 billion in 2006-07. For energy commodities, export earnings are forecast to increase by 7 per cent, from $39.4 billion in 2006-07 to $42.2 billion in 2007-08 as a result of higher earnings from crude oil, LNG, LPG, other petroleum products, thermal coal and uranium. For metals and other minerals, export earnings are forecast to fall by 1 per cent to $67.6 billion in 2007-08. While export earnings from gold, iron ore and lead are forecast to be higher, earnings from alumina, aluminium, copper, nickel, zinc, synthetic rutile and zircon are all forecast to fall in 2007-08.

594 australian commodities > vol. 14 no. 4 > december quarter 2007 droughteconomic in overviewaustralia

> milly lubulwa > +61 2 6272 2069 > [email protected] drought in australia its impact on broadacre and dairy farm incomes stephen hooper and dale ashton broadacre farms protracted period of poor seasonal conditions Australian broadacre farms have been affected by two years of adverse seasonal conditions. A poor start to 2006-07 reduced the area sown to winter crops in that year. As seasonal conditions deteriorated throughout the season there were widespread crop failures and many grain producers realised below average yields. Livestock producers turned off animals in response to reduced pasture availability and increased feed and fodder costs. Signifi cant depletions of soil moisture profi les and some of the lowest water storage levels on record resulted in summer crop production falling by more than 50 per cent. Favourable rainfalls in autumn 2007 across the majority of winter cropping areas encouraged many producers to increase their area sown to winter crops. However, with the exception of Queensland, pockets of northern New South Wales and southern Western Australia, seasonal conditions again deteriorated over the critical September– October period (map 1). With little rainfall and protracted above average temperatures, crop yield potential fell signifi cantly and some areas experienced a second year of crop failure. Some producers were able to cut their winter crops for hay, helping them to recoup some of their planting costs. Winter crop production in 2007-08 is now generally expected to be above 2006-07 levels, with the exception of New South Wales. Fewer broadacre farmers reported drought conditions in October–November 2007 than in the same months of 2006. Livestock have also been affected by the deterioration in seasonal conditions, with farmers continuing to reduce stock numbers. Increased yardings of cattle, sheep and lambs during spring 2007 led to lower saleyard prices, which will feed through into reduced cash receipts and incomes on properties with livestock. The rainfall outlook for summer crop production in 2007-08 is promising, with a moderate to strong shift in the odds toward above average rainfall over eastern New South Wales and south east Queensland. This has resulted in large plantings of grain sorghum. However, the lack of irrigation water is expected to severely constrain the area planted to cotton and rice in 2007-08.

australian commodities > vol. 14 no. 4 > december quarter 2007 595 drought in australia

ﬁ nancial performance of Australian broadacre farms 1 average per farm New South Wales Victoria 2005-06 2006-07 2005-06 2006-07

farm cash receipts $ 304 871 (8) 320 479 (10) 255 017 (10) 218 823 farm cash costs $ 240 896 (7) 308 335 (10) 199 644 (11) 177 315 (6) farm cash income $ 63 975 (20) 12 143 (110) 55 374 (14) 41 508 (16) percentage of farms with negative farm cash income % 22 (15) 49 (11) 20 (19) 30 (15) farm business proﬁ t $ –6 669 (143) –86 334 (14) –5 755 ( 111 ) –54 034 (13) rate of return – excl. capital app. % 0.7 (52) –1.3 (35) 0.7 (35) –1.1 (21)

South Australia Queensland

2005-06 2006-07 2005-06 2006-07

farm cash receipts $ 323 956 (6) 341 487 (12) 387 010 (17) 446 235 (22) farm cash costs $ 265 014 (6) 274 054 (11) 288 154 (14) 391 347 (21) farm cash income $ 58 942 (17) 67 433 (24) 98 856 (32) 54 888 (35) percentage of farms with negative farm cash income % 29 (18) 34 (18) 27 (13) 41 (13 farm business proﬁ t $ –13 644 (75) –38 431 (33) –6 128 (472) –15 732 (141) rate of return – excl. capital app. % 0.5 (64) –0.1 (531) 0.8 (90) 0.6 (93)

Western Australia Tasmania 2005-06 2006-07 2005-06 2006-07

farm cash receipts $ 472 042 (6) 463 809 (9) 266 833 (15) 245 967 (21) farm cash costs $ 401 227 (7) 391 986 (8) 195 977 (16) 224 159 (25) farm cash income $ 70 814 (19) 71 823 (32) 70 856 (26) 21 808 (86) percentage of farms with negative farm cash income % 29 (20) 39 (12) 21 (29) 50 (26) farm business proﬁ t $ –24 486 (56) –56 272 (43) 14 783 (128) –46 904 (42) rate of return – excl. capital app. % 0.7 (49) 0.2 (277) 1.3 (47) –1.0 (63)

Australia a 2005–06 2006–07

farm cash receipts $ 335 513 (5) 346 186 (6) farm cash costs $ 265 571 (4) 303 953 (6) farm cash income $ 69 943 (11) 42 234 (16) percentage of farms with negative farm cash income % 24 (7) 41 (6) farm business proﬁ t $ –8 002 (83) –54 267 (13) rate of return – excl. capital app. % 0.8 (29) –0.4 (56) a Includes Northern Territory farms even though separate results for the Northern Territory are not available due to insufﬁ cient sample.

596 australian commodities > vol. 14 no. 4 > december quarter 2007 drought in australia farm incomes fall in 2006-07… With the exception of producers in Western Australia fig A financial performance of broadacre and South Australia, reduced winter crop plantings farms and poor grain yields are estimated to have resulted in 100 farm cash income a marked deterioration in farm fi nancial performance in 2006-07 (table 1, fi gure A). The impact on incomes 80 of reduced cropping receipts was exacerbated by a 60 reduction in livestock receipts, principally because of 40 weaker prices and reduced livestock fertility. Results from ABARE’s Australian agricultural and grazing 20 2006-07 industries survey show that, at the national level, $’000 broadacre farm incomes are estimated to have fallen –20 by almost 40 per cent to around $42 000 in 2006- 07. The proportion of farms reporting negative farm –40 farm business profit cash incomes increased in each state. –60 Average farm cash income in Western Australia 1978 1985 1992 1999 2006 and South Australia increased slightly in 2006-07, -79 -86 -93 -2000 -07 as higher grain and wool prices more than offset the impact of lower grain yields and livestock prices. Producers in most states responded to the fall in farm cash fl ows and rising fodder costs by reducing discretionary spending. That is, producers reduced livestock purchases and deferred nonessential repairs and maintenance. map 1 Australian rainfall deciles, 1 September to 30 November 2007 decile ranges highest on record

10 very much above average

8–9 above average Northern Territory 4–7 average

2–3 below average

1 very much below average Queensland Western Australia South Australia lowest on record

New South Wales

Victoria

source: Bureau of Meteorology Tasmania

australian commodities > vol. 14 no. 4 > december quarter 2007 597 economic overview

…but expected to recover slightly in 2007-08 Despite a second year of poor seasonal conditions, average farm cash income is expected to recover slightly in 2007-08 from the previous year. Winter grain production in 2007- 08 is estimated to be almost 40 per cent higher than in 2006-07, and grains prices are also higher. However, crop production remains signifi cantly below average, so cropping receipts in 2007-08 are also likely to remain well below average. In addition, there are reports that some farmers forward sold wheat early in the season, preventing them from capturing the benefi ts of higher prices. Farmers who had forward sold wheat and suffered crop failure will be further adversely affected by having had to buy out contracts. Producers in Queensland, parts of northern New South Wales and southern Western Australia are expected to experience the strongest recovery in incomes, as these regions have received benefi cial rainfall that maintained crop yields and stimulated good spring pasture growth. Throughout much of Australia’s southern and western agricultural zone, the poor spring conditions adversely affected pasture growth and livestock fertility, resulting in lower birth rates and increased death rates. Cattle and sheep yardings indicate that producers have responded to rising fodder costs and poor pasture availability by increasing their turnoff of livestock. However, livestock receipts are unlikely to increase markedly in 2007-08 as cattle and sheep prices are expected to be lower.

dairy farms

incomes remain subdued Dairy farmers’ incomes fell substantially in 2006-07 because of the drought and conse- quent lower milk production and higher fodder costs, and slightly lower farmgate milk prices (table 2). Results from ABARE’s Australian dairy industry survey show that dairy farmers responded to the drought in a variety of ways, such as increasing their use of purchased feeds to replace pasture and reducing herd sizes. As the drought worsened and pasture production proved to be considerably below average in 2006-07, some dairy farmers increased the amount of concentrated rations (including grain, supplements and hay) fed to their milking herd. At the same time, farm costs rose as feed grain prices increased substantially as the drought sharply curtailed winter and summer grain production. There was also widespread cuts to cow numbers as many dairy farmers reduced herd sizes to reduce feed costs. ﬁ nancial performance of Australian With drought conditions continuing in many dairy 2 dairy farms average per farm regions, incomes for dairy farmers are expected to Australia remain low in 2007-08. High feed costs, poor pasture conditions in many areas, low irrigation water alloca- 2005-06 2006-07 tions and high water prices, are expected to encourage total dairy cattle no. 322 310 (3) dairy farmers to further reduce cow numbers and milk dairy cows no. 196 191 (3) total milk production L 1 081 596 1 060 180 (3) production. Nevertheless, total cash receipts are total cash receipts $ 416 899 409 560 (3) expected to rise slightly in 2007-08 as higher farm- total cash costs $ 331 458 356 960 (4) gate milk prices are likely to offset the impact on farm farm cash income $ 85 440 52 600 (15) incomes of lower milk production.

598 australian commodities > vol. 14 no. 4 > december quarter 2007 contentscrops

> johncontact hogan > +61 > +61 2 6272 2 6272 ???? 2056 > [email protected] > [email protected] crops prices to remain high in 2007-08 wheat leanne lawrance » [email protected]

Despite an estimated 2 per cent increase in global wheat production in 2007-08, low opening wheat stocks mean that total supplies are an estimated 1 per cent lower than in the previous year. With demand remaining strong and end of season stocks forecast to fall by 8 per cent to a relatively low 109 million tonnes, prices have risen substantially since midyear. Reﬂ ecting the above developments, the world wheat indicator price (US hard red winter, fob Gulf ports) is forecast to average US$310 a tonne in 2007-08, nearly US$100 above the average in the previous year. Prices peaked in October, with the world wheat indicator price averaging US$353 a tonne in October 2007. This compares with an average of US$220 a tonne a year earlier. There was some moderation of prices in November as the global supply–demand picture became clearer. In the ﬁ rst three weeks of November the world wheat indicator price averaged US$325 a tonne, compared with US$217 a tonne in November 2006. Despite an assumed appreciation of the Australian dollar, the pool return for Austra- lian premium white wheat (APW 10) is forecast to increase by nearly 55 per cent in 2007-08 compared with the 2006-07 season. With drought reducing domestic production for a second wheat prices consecutive season, there has been a substantial rise monthly, ended November 2007 in domestic wheat prices. Prices of wheat used in livestock feeding averaged A$430 a tonnes in November 2007, compared with A$321 in January 2007. 300 400 production higher in 2007-08 world wheat World wheat production in 2007-08 is estimated to indicator price 200 US$/t 300 be 602 million tonnes, 12 million tonnes higher than Australia: in 2006-07. Harvesting of 2007-08 northern hemi- wheat for feed A$/t sphere wheat crops is complete, while in the southern 100 200 hemisphere, harvesting is approaching completion. When this season’s wheat harvest is combined with low beginning season stocks, total wheat supplies in US$/t A$/t 2007-08 are estimated to be 720 million tonnes, 7 JuneDec June million tonnes lower than in the previous year. 2006 2007 australian commodities > vol. 14 no. 4 > december quarter 2007 599 wheat

Wheat production in four out of the fi ve major wheat producing countries is estimated to have increased in 2007-08. Growing season conditions in China, India, the Russian Federation and the United States were favourable during the year. Despite an improvement in wheat production in the United States in 2007-08, the protein content of hard red winter wheat (the major wheat produced in the United States) was below last year’s high level and below the fi ve year average. The European Union, the world’s largest wheat producing region, is estimated to have produced around 4 million tonnes less wheat than in 2006-07. Conditions were variable across the European Union ,with hot and dry conditions in some countries, while in others, heavy rainfall reduced yields. The variable conditions in the European Union have resulted in yields being roughly 5 per cent below the fi ve year average. Aggregate production of the fi ve major exporters — Argentina, Australia, Canada, the European Union and the United States — in 2007-08 is forecast to be largely unchanged from the previous season, but 7 per cent below the fi ve year average. Increased production in Argentina, Australia and the United States is expected to be offset by lower production in Canada and the European Union. high prices curb feed demand Global wheat consumption is forecast to remain largely unchanged at 610 million tonnes in 2007-08. While human consumption of wheat is forecast to increase to around 444 million tonnes in 2007-08, the use of wheat for livestock feeding is forecast to decline by close to 5 million tonnes in 2007-08, because of higher prices. The largest user of wheat for livestock feeding purposes is the European Union, with an average of 55 per cent of total feed wheat use. Wheat prices in the European Union have increased considerably and this is likely to reduce the demand for wheat for livestock feeds as producers seek out alternative lower priced feed stocks. The UK feed wheat price averaged US$319 a tonne in November 2007 compared with US$186 a tonne in November 2006 and US$199 a tonne in January 2007. Wheat used for feed in the European Union is forecast to decline by around 8 per cent in 2007-08.

feed wheat use world trade lower in 2007-08 European Union World wheat trade is forecast to be 105 million tonnes in 2007-08, 6 million tonnes lower than in 60 the previous year. Increased domestic production in Brazil and India means that the import requirements 50 of these two countries will be lower in 2007-08. Brazil’s imports are forecast to decline by around 40 1.2 million tonnes, while in India, imports are fore- 30 cast to decline by close to 60 per cent to around 2.8 million tonnes. 20 Total shipments from the ﬁ ve major exporters are forecast to decline by 5 million tonnes in 2007- 10 08 compared with 2006-07 exports. Exports are Mt forecast to fall in most of these countries, with the 1998 2001 2004 2007 exception being the United States, where exports -99 -02 -05 -08 are forecast to increase by 28 per cent.

600 australian commodities > vol. 14 no. 4 > december quarter 2007 wheat world stocks low At the end of the 2007-08 season, world wheat stocks are forecast to be 109 million tonnes, the lowest since the late 1970s. The implied 9 million tonnes reduction in stocks is adding to uncertainty about global wheat supplies and is contributing to current high wheat prices. Stocks of high quality milling wheat held by the major exporters is forecast to be about 25 million tonnes in 2007-08, around 13 million tonnes less than a year earlier. The reduction in stocks refl ects a drawdown in holdings to meet export commitments and domestic consumption needs and (in some countries) below average crops. Australian production affected by drought again Harvest of the 2007-08 Australian wheat crop is well under way, with production estimated to be around 12.7 million tonnes. A hot and dry spring across large parts of the Australian grains belt has resulted in wheat yields being well below average. Average wheat yields are estimated at 1.04 tonnes a hectare in 2007-08, signifi cantly lower than the fi ve year average of 1.73 tonnes a hectare but higher than the low yield of 0.88 tonnes a hectare in 2006-07. Although Australian wheat production is forecast to be well below average, it is nearly 3 million tonnes above the previous year’s drought reduced crop. The 2007-08 season has been one of considerable varia- wheat outlook tion between regions. In Western Australia — the largest 2005 2006 2007 % wheat producing state — wheat production is estimated -06 -07 -08 f change to be 16 per cent above the previous year’s harvest. World However, the estimated harvest is still around 30 per Production Mt 620 590 602 2.0 – China Mt 98 105 107 1.9 cent below the fi ve year average. – EU27 Mt 134 125 121 – 3.2 New South Wales, Victoria and South Australia have – India Mt 69 69 75 8.7 been the states worst affected by the hot and dry condi- – Russian Fed. Mt 48 45 47 4.4 tions. In New South Wales, winter and spring rainfall was – United States Mt 57 49 56 14.3 below average and temperatures were above average, Consumption Mt 624 610 610 0.0 – human Mt 440 442 444 0.5 culminating in reduced yield prospects. Wheat produc- – feed Mt 108 96 91 – 5.2 tion in New South Wales in 2007-08 is estimated at 1.8 Closing stocks Mt 137 118 109 – 7.6 million tonnes, which is lower than the crop harvested Trade Mt 110 111 105 – 5.4 last year. Wheat crops in South Australia and Victoria Exports were subject to similar hot and dry conditions. Wheat – Argentina Mt 8 12 10 – 16.7 production in Victoria is estimated at 1.9 million tonnes – Australia Mt 15 11 7 – 36.4 – Canada Mt 16 19 15 – 21.1 compared with 650 000 tonnes in 2006-07. South – EU27 Mt 15 13 11 – 15.4 Australian wheat production is estimated at 2.3 million – United States Mt 27 25 32 28.0 tonnes, around 950 000 tonnes more than in 2006-07. Price US$/t 176 212 310 46.2 In both cases crops were higher than last year’s as a Australia result of increased plantings and slightly better yields. Area ’000 ha 12 543 11 138 12 257 10.0 September rainfall in Queensland was average to Production kt 25 367 9 819 12 695 29.3 above average across most of the grains belt, which Exports kt 15 168 11 196 6 958 – 37.9 – value A$m 3 296 2 765 2 309 – 16.5 helped improve yield prospects. Queensland wheat APW 10 net production is estimated at 910 000 tonnes, compared pool return A$/t 192 240 370 54.2 with 700 000 in 2006-07 See back tables for details. f ABARE forecast.

australian commodities > vol. 14 no. 4 > december quarter 2007 601 wheat

domestic feed demand falling Wheat used for livestock feed in Australia has risen in price by more than $100 a tonne since the beginning of 2007. High feedgrain prices are reducing the economic viability of feeding grain to livestock and can be expected to result in lower consumption of wheat in livestock feeds. Higher grain prices have reduced returns from livestock feeding and in the case of cattle contributed to a 22 per cent drop in the number of cattle on feed in Australia between the June and September 2007 quarters. The number of cattle on feed in September 2007 was 23 per cent lower than a year earlier. In the case of pigs, reduced proﬁ tability and competition from imported pig meat has led to an estimated 1 per cent drop in sow numbers Australian wheat production in 2007-08. With a smaller number of pigs in 2007-08, demand for feed wheat from this sector is expected to decline. average 8 2006-07 Australian exports declining 2007-08 Despite the improved harvest in 2007-08, Austra- 6 lian wheat exports in the October–September marketing year are forecast to decline by 2 million tonnes. Australian wheat stocks were drawn down 4 by 6 million tonnes in 2006-07, leaving Australia with low stocks to draw on for the 2007-08 2 marketing year. The value of these exports is forecast to be $2.3 billion. Reﬂ ecting the rise in world Mt wheat prices, the unit value of these exports is fore- New Victoria Western South cast to be $346 a tonne compared with $267 a South Wales Queensland Australia Australia tonne in the previous year.

602 australian commodities > vol. 14 no. 4 > december quarter 2007 coarse grains coarse grains amelia brown » [email protected]

Forecast record world production of coarse grains in 20 07- 08 will refl ect, in large measure, a signifi cant increase in world corn output — particularly in the United States. However, continued strong growth in demand and low world stocks will place upward pressure on prices. As a result, the world indicator price for coarse grains (US corn, fob Gulf) in 2007- 08 is forecast to average US$168 a tonne, a 7 per cent increase from 2006-07. Australian feed and malting barley prices are forecast to remain high in 2007-08. Although domestic barley production in 2007-08 is estimated to increase from the drought affected 2006-07 crop, it is still estimated to be around 36 per cent below the fi ve year average. Strong world prices resulting from a relatively tight supply–demand balance, combined with adverse seasonal conditions domestically, will provide support to barley prices. World barley prices are forecast to remain high in 2007-08 as a result of a reduction in world supply, increased world demand (particularly for world feedgrain prices feed use by livestock industries) and low world monthly, ended November 2007 stocks relative to consumption. EU feed barley record global production of coarse grains 300 World coarse grains production is forecast to rise by 8 per cent to a record 1.05 billion tonnes in Black sea feed barley 2007-08, with a signifi cant increase in production 200 forecast for both the United States and Canada. Production in both China and south America is fore- US corn cast to decrease marginally. Production in the Euro- 100 pean Union and the Black Sea region is estimated to decline despite an increase in the area planted, refl ecting poor seasonal conditions. US$/t A signifi cant increase in production in the United Jan July Jan July Jan July States will offset declines in the other major producing 2005 2006 2007 countries where there have been adverse seasonal conditions. With the harvest complete, the US corn crop is estimated to be the biggest on record, at around 335 million tonnes — 67 million tonnes greater than the 2006-07 crop. This rise refl ects the second highest average yields ever, combined with the largest area harvested since 1933. Canadian corn production in 2007-08 is estimated to rise 19 per cent to 10.6 million tonnes, refl ecting a signifi cant increase in the area sown in response to higher corn prices, combined with a mostly favourable season. Corn production in China is estimated at around 145 million tonnes in 2007-08, marginally less than the record produced in 2006-07. Despite a 4 per cent increase in the area sown, dry conditions in spring and summer in the north eastern provinces (one of the largest corn growing regions) adversely affected crop yields. Corn production in Argentina in 2007-08 is forecast at 23 million tonnes, unchanged from last year. In Brazil, 2007- 08 corn production is also forecast to be similar to 2006 - 07 at around 50 million tonnes.

australian commodities > vol. 14 no. 4 > december quarter 2007 603 coarse grains

EU corn production is forecast to fall by around 15 per cent to 47 million tonnes in 2007- 08. Although the area sown to corn in the European Union increased this year, extended drought and extreme heat in late June–July severely affected production. Refl ecting a 12 per cent increase in the area sown to corn in the Ukraine, 2007- 08 production is estimated at 7 million tonnes, around 9 per cent more than what was produced in 2006-07. Canadian barley production is estimated at 11.8 million tonnes in 2007-08, a 23 per cent increase from the previous season, refl ecting an increase in the area planted, combined with mostly favourable growing conditions. Ukraine barley production in 2007-08 is estimated to have fallen by 46 per cent to just over 6 million tonnes, refl ecting a decline in the area sown, combined with poor seasonal conditions. Barley production in the Russian Federation is estimated at 17 million tonnes in 2007-08, a 6 per cent decline from 2006-07. Poor seasonal conditions limited overall production, despite an estimated 18 per cent increase in the area sown. Hot and dry conditions in the European Union also adversely affected barley yields. EU barley production is estimated at around 58 million tonnes in 2007-08 — a 4 per cent increase from the similarly drought affected 2006-07 crop. continued strong demand putting pressure on stocks World consumption of coarse grains is forecast to reach a record of over 1.05 billion tonnes in 2007-08, refl ecting continued strong growth in global feed demand and increasing demand for corn for ethanol production. A tight supply–demand situation for wheat means that there is limited potential for increased substitution of wheat in livestock feeds. Feed use by livestock industries in developing Asian and Latin American countries continues to expand with population and income growth. However, a signifi cant proportion of the forecast increase in demand will occur in the United States, where there is expected to be continued growth in the consumption of corn in ethanol production. Increasing ethanol production is the major driver of coarse grains demand, and is being boosted by government mandates and subsidies and by high fuel prices. However, the US ethanol market appears to be going through a period of reduced fi nancial returns. Although corn prices have eased from earlier highs, declines in ethanol prices as a result of supply growth outpacing demand have reduced profi t margins for ethanol producers. A number of new world coarse grain ending stocks US ethanol plants have been put on hold because of the decline in profi tability. There are also a number rest of world of infrastructure issues impeding the growth of the United States ethanol market, particularly the diffi culty of trans- China 250 porting ethanol because of its porous nature. Refl ecting the above diffi culties, the US Depart- 150 ment of Agriculture has reduced its forecast of corn used for ethanol in 2007-08. Despite this downward revision, ethanol production is still a major source of 100 demand growth for corn. US ethanol production in 2007 is estimated to exceed 26 billion litres, a 37 per 50 cent increase from 2006. Recent strength in global oil prices is likely to provide support for the continued Mt expansion of ethanol production. 1991 1995 1999 2003 2007 Although feed use of corn in the United States -92 -96 -2000 -04 -08 is expected to decline as a result of higher prices,

604 australian commodities > vol. 14 no. 4 > december quarter 2007 coarse grains demand is still expected to be strong as beef feedlot placements rose by 12 per cent in October, pork production is at record rates and poultry production continues to expand. Export demand for US corn is expected to increase because of its current price competitiveness with other feedgrains. stocks to remain low World stocks of coarse grain are forecast to remain at around 135 million tonnes in 2007- 08, despite record production, refl ecting continued strong growth in demand. This level of stocks is similar to that in 2006-07 and is one of the lowest in more than twenty years. World barley stocks are forecast to decline by around 25 per cent in 2007-08, to one of the lowest levels in forty years, as adverse seasonal conditions constrained production in key producing countries and demand for feed barley remains strong. Continued growth in world beer consumption, in line with population growth and rising disposable incomes in developing regions means that demand for malting barley is forecast to increase in 2007-08. US stocks of corn are forecast to increase by only 15 million tonnes in 2007- 08, despite a forecast 67 million tonne increase in production. The relatively small rise in US stocks refl ects the signifi cant increase in corn used for ethanol production and strong global export demand. EU stocks of coarse grains are forecast to decline by around 35 per cent in 2007-08, refl ecting lower production and continued strong growth in demand. Stocks of corn in China are forecast to decline by around 14 per cent in 2007-08, despite consecutive years of near record production, refl ecting continued strong growth in domestic feed demand combined with increased demand for corn for ethanol production. However, high corn prices and concern about competition with food supplies has led to a moratorium on corn based ethanol production. The Chinese Government is urging companies to switch to other products such as cassava, sweet potato and cellulose, to make ethanol. coarse grains outlook trade in coarse grains to reach a record 2005 2006 2007 % -06 -07 -08 f change World trade in coarse grains in 2007-08 is forecast to World increase from last year’s record to around 117 million Production Mt 977 980 1 054 7.6 – barley Mt 137 137 135 – 1.5 tonnes. This mainly refl ects an increase in corn trade, – corn Mt 696 703 768 9.2 as increased availability of corn means that it remains Consumption Mt 989 1 006 1 053 4.7 competitively priced compared with wheat and barley. Trade Mt 107 115 117 1.7 US exports of corn are forecast to increase by around Closing stocks Mt 164 135 135 0.0 11 per cent to almost 60 million tonnes, refl ecting record US corn price US$/t 106 157 168 7.0 domestic production combined with strong global feed (fob Gulf, Sept–Aug) demand. Despite the recent increase in corn prices, corn Australia Area ’000 ha 6 573 5 619 6 474 15.2 is still a relatively lower cost feedgrain (in nutrient terms) – barley ’000 ha 4 447 3 990 4 350 9.0 than wheat and barley. In 2007-08, corn exports from – sorghum ’000 ha 767 457 795 74.0 Argentina and Brazil are also expected to remain high, Production kt 14 284 5 854 9 272 58.4 refl ecting increased production combined with continued – barley kt 9 563 3 722 5 545 49.0 strong world demand. – sorghum kt 1 970 952 2 003 110.4 Exports kt 5 684 3 255 3 025 – 7.1 EU imports of corn are forecast to increase by 34 per – value A$m 1 193 875 924 5.6 cent in 2007-08, refl ecting sharply lower production, Feed barley price A$/t 187 286 320 11.9 strong demand for feed and the tighter supply–demand Malting barley price A$/t 202 328 346 5.5 situation for other feedgrains, particularly barley. The See back tables for details. f ABARE forecast.

australian commodities > vol. 14 no. 4 > december quarter 2007 605 coarse grains

European Union is likely to source much of its increased imports from Brazil and Argentina to satisfy a demand preference for GM free grain. The biggest growth in corn import demand is expected to occur in Mexico, refl ecting changes to tariff rate quotas from January 2008 under provisions of the North American Free Trade Agreement (NAFTA). Corn is the only grain that is still subject to transitional trade restrictions under NAFTA that, until the start of 2008, have allowed Mexico to apply tariff rate quotas to US and Canadian corn imports. Because of these restrictions, over the past several years, Mexico has imported large volumes of US cracked corn (classifi ed as a milling product) that had unrestricted access to the Mexican market. Following the end of NAFTA’s transitional restrictions in January 2008, cracked corn imports are likely to be replaced almost entirely by wholegrain corn. Refl ecting these developments Mexican imports of US corn are forecast to increase by around 34 per cent to 9.5 million tonnes in 2007-08. A 2 per cent fall in global barley production, combined with export restrictions imposed by two major exporters, is forecast to result in a decline in world barley trade in 2007-08. The Ukraine Government reinstated export quotas in July 2007 in an effort to improve availability and reduce prices in the domestic market. The restrictions have been extended until March 2008. Similarly, the Russian Government’s concerns about the impact of rising grain prices on infl ation have prompted the introduction of a 30 per cent tax, to be applied to the customs value of barley exports. The tax took effect in mid-November and will cease at the end of April 2008.

Australian production and exports to rise Despite a promising start to the 2007-08 winter cropping season, subsequent drought conditions across the majority of the grains belt resulted in substantially reduced yields in most regions. Nevertheless, at around 5.5 million tonnes, forecast barley production will be well above last year’s severely drought affected crop. Australian barley exports on a marketing year basis are forecast to increase by 14 per cent to around 2.9 million tonnes in 2007-08, refl ecting the increase in production. The value of barley exports is forecast to increase by 15 per cent to around $886 million. The area planted to grain sorghum is forecast at 795 000 hectares in 2007-08, a signifi cant increase from 2006-07. There was an increase in the area of fallow land available for summer cropping in southern Queensland as a result of the reduction in planting of winter crops in these districts. This, combined with average to above average October– November rainfall and high domestic sorghum prices, means that the area planted in Queensland is forecast at 540 000 hectares, a 61 per cent increase from the previous season. Refl ecting the forecast increase in production, 2007-08 marketing year exports of grain sorghum are forecast to increase by around 83 000 tonnes, to 100 000 tonnes.

606 australian commodities > vol. 14 no. 4 > december quarter 2007 oilseeds oilseeds leanne lawrance » [email protected]

The world indicator price for oilseeds (soybean, cif, Rotterdam) is forecast to average US$445 a tonne in 2007-08, US$110 a tonne above the previous year’s price. Reduced global production of oilseeds and growing demand is placing upward pressure on prices. In recent months, prices have been particularly high, with the world oilseed indicator price averaging US$450 a tonne in October 2007, compared with an average US$273 a tonne in October 2006. In the ﬁ rst few weeks of November 2007 the indicator price averaged more than US$470 a tonne. With drought adversely affecting canola production in Australia for a second year in succession, and global prices expected to remain high, Australian canola prices are forecast to average $585 a tonne in 2007-08. This is $55 a tonne higher than in 2006- 07. In October and November 2007 the Australian canola price averaged $647 and $639 a tonne respectively. This compares with average prices of oilseed prices $489 and $557 a tonne in the same months a year earlier. world soybean indicator 400 left axis 600 production lower in 2007-08 Australian canola World produc tion of oilseeds is forecast to be around 350 right axis 500 392 million tonnes in 2007-08, a 3 per cent reduction on the previous year’s record. Soybeans are 300 400 the major oilseed produced around the world and production is forecast to decline by around 6 per 250 300 cent in 2007-08 from the previous year. Canola/ rapeseed and cottonseed are the second and 200 200 third largest global oilseed crops, in volume terms. 2006-07 2006-07 While production of canola/rapeseed is forecast to US$/t A$/t increase by 1.5 million tonnes, cottonseed produc- 1995 1998 2001 2004 2007 tion is forecast to decline by 1 per cent to 45 million -96 -99 -02 -05 -08 tonnes in 2007-08. The United States is the world’s largest soybean producer, accounting for an average 38 per cent of global soybean production over the past ﬁ ve years. Harvesting of the 2007-08 US soybean crop is approaching completion and production is estimated at 71 million tonnes, compared with 87 million tonnes in the previous year. The decline in US soybean production is largely the result of a 16 per cent decline in the area sown, as growers switched land to the production of corn in response to higher expected returns from corn. In Brazil and Argentina — the second and third largest soybean producers respectively — planting of the 2007-08 soybean crop is nearing completion. The area sown to soybeans in both countries is forecast to increase by 6 per cent in 2007-08, compared with the previous year. Assuming that yields decline closer to their historical averages, after records in the previous year, production is forecast to increase by around 5 per cent in Brazil, while remaining largely unchanged in Argentina. In the European Union (27 members) — the world’s largest canola/rapeseed producer — the area sown to canola is estimated to have increased by 19 per cent in 2007-08 as growers responded to expectations of higher returns than from other grains. Higher EU australian commodities > vol. 14 no. 4 > december quarter 2007 607 oilseeds

world soybean production canola/rapeseed prices reﬂ ect the growing demand major producers for vegetable oils for use in producing biodiesel. Canola/rapeseed production is estimated to have United States increased by 11 per cent in 2007-08 compared with 80 the previous season. Much of the decline in global cottonseed supply is 60 forecast to come from lower production in the United States. The area sown to cotton in the United States is Brazil 40 estimated to have declined by 17 per cent as growers switched land into the production of corn. Cotton- Argentina seed production in the United States is estimated to 20 have declined by 11 per cent as yields were above average. Mt 1995 1998 2001 2004 2007 record consumption in prospect -96 -99 -02 -05 -08 World consumption of oilseeds is forecast to increase to a record 405 million tonnes in 2007-08 as demand for oilseed products expands. Consumption of oilseed meal and vegetable oil is forecast to increase by 4 per cent and 5 per cent respectively in 2007-08, compared with the previous season. The growth in the production of biodiesel is contributing to increased demand for vegetable oil in 2007-08. Biodiesel is a transport fuel and heating oil that can be derived from products such as vegetable oil. In the European Union — the largest biodiesel producer — the use of vegetable oil for industrial purposes is forecast to increase to nearly 9 million tonnes in 2007-08, from 8 million in the previous year. Biodiesel production capacity in 2007 is estimated at 10.3 million tonnes. Supportive government policies in the European Union are encouraging increased production of biodiesel from vegetable oil. The use of vegetable oil in biodiesel production is also forecast to increase in Malaysia in 2007-08. In April 2007 the Malaysian Government passed legislation to mandate the use of biofuel. It is estimated that the government has approved licences for ninety biofuel plants. These projects are currently at different vegetable oil industrial use stages of development. Industrial use of vegetable oil in Malaysia in 2007-08 is forecast to increase by around 22 per cent from the previous year. The major European Union 27 feedstock used in Malaysian biodiesel production is 8 likely to be domestically produced palm oil. The main use of oilseed meal is for feeding live- 6 stock and the largest consumers are the European Union, China and the United States. Together, these 4 countries account for an average 60 per cent of total world oilseed meal consumption. Consumption Malaysia of high protein oilseed meal in these three countries 2 is forecast to reach a record 137 million tonnes in 2007-08, 5 million tonnes more than in the previous Mt year. Increasing livestock production and meat 1999 2001 2003 2005 2007 consumption is driving the increased demand for -2000 -02 -04 -06 -08 oilseed meal.

608 australian commodities > vol. 14 no. 4 > december quarter 2007 oilseeds

China is the world’s largest importer of oilseeds and in 2007-08 is forecast to import close to 35 million tonnes of oilseeds, compared with imports of 30 million tonnes in 2006-07. Imported oilseeds are crushed domestically, with both the meal and oils used to meet growing Chinese demand for these products. While the volume of oilseed imports is forecast to increase, the volume of oilseed meal and vegetable oil imports is also forecast to rise. Chinese vegetable oil imports are forecast to increase by 8 per cent in 2007-08, while oilseed meal imports are forecast to rise by 1.2 million tonnes. Australian canola production hit by drought Australian canola production is forecast to be around 931 000 tonnes in 2007-08, 82 per cent higher than the drought reduced 2006-07 crop, but 36 per cent below the fi ve year average. In parts of New South Wales, particularly the central and southern regions, crops have suffered greatly. In some cases, with total crop failure in prospect, producers cut crops for hay or grazed them out. Canola yields in New South Wales are estimated to be 0.17 tonnes a hectare in 2007-08, similar to the drought reduced yields in 2006-07. With an estimated 33 per cent increase in the area sown to canola in New South Wales, production is estimated to be 10 000 tonnes higher in 2007-08 than in the previous year. In Victoria and South Australia, canola crops in 2007-08 are estimated to increase by 183 000 tonnes and 115 000 tonnes respectively. Increased production in these two states largely refl ects an expanded area sown to canola and an improvement in yields. In Western Australia, the area sown to canola in 2007-08 declined by 3 per cent as a result of the late and patchy start to the season. However, timely rainfall during the season, especially in southern areas, means that Western Australian canola production is estimated to have increased by 30 per cent in 2007-08, to around 475 000 tonnes. summer oilseeds production also lower Production of Australian summer oilseeds (primarily cottonseed and sunfl ower seed) is forecast to decline by 44 per oilseeds outlook cent in 2007- 08. This decline is driven largely by a forecast 2005 2006 2007 % 62 per cent reduction in cottonseed production. A lack of -06 -07 -08 f change irrigation water means that the estimated area planted to World cotton in 2007-08 has been cut to 56 000 hectares, from Production Mt 391 406 392 – 3.4 144 000 hectares in 2006-07. Consumption Mt 383 395 405 2.5 – oilseed meal Mt 215 223 232 4.0 Average to above average rainfall in October and – vegetable oil Mt 112 118 124 5.1 November in southern Queensland and northern New Closing stocks Mt 64 72 58 – 19.4 South Wales is expected to result in a near doubling in the Soybeans indicator area sown to sunfl owers in 2007-08. Assuming average price US$/t 261 335 445 32.8 yields, sunfl ower production is forecast to be 38 000 tonnes Australia in 2007-08, compared with 18 000 in the previous year. Total production kt 2 517 1 026 1 229 19.8 – winter kt 1 475 540 959 77.6 Australian canola exports to increase – summer kt 1 042 486 270 – 44.4 Canola Australian canola exports are forecast to increase to Production kt 1 436 513 931 81.5 481 000 tonnes in 2007-08, as a result of increased Exports kt 884 238 481 102.1 production. The value of Australia’s canola exports is fore- – value $m 331 108 239 121.3 Price (Nov–Oct) A$/t 386 530 585 10.4 cast to more than double to around A$239 million refl ecting (delivered Melbourne) the greater volume shipped and higher prices. See back tables for details. f ABARE forecast.

australian commodities > vol. 14 no. 4 > december quarter 2007 609 cotton

cotton

frank drum » [email protected]

World consumption of raw cotton is forecast to exceed production in 2007-08. Refl ecting this, the world cotton price indicator (Cotlook ‘A’ index) is forecast to increase by 18 per cent in 2007-08 to US69c/lb. prices rose strongly in October After averaging US61.3c/lb in the fi rst nine months of 2007, the world cotton price rose signifi cantly to average US68.9c/lb in October 2007, the highest monthly average in more than three years. Prices were supported by speculation that unseasonably heavy rainfall in parts of India and China could result in lower yields, and hence production, in those countries in 2007-08. In addition, high international grain prices led to increased market expectations of a further reduction in cotton plantings in the United States in 2008-09, placing world polyester and cotton prices further upward pressure on world prices. monthly, ended October 2007 Chinese demand for imported cotton is expected cotlook A index to increase in the short term, as mills use their 140 remaining 2007 import quotas. Net imports of raw 120 cotton in China are forecast to increase by 46 per cent in 2007-08 to 3.5 million tonnes as domestic 100 consumption increases and production declines 80 slightly. In addition, the depreciation of the US dollar polyester against key Asian currencies is expected to stimulate 60 increased import demand for US cotton elsewhere in 40 Asia. A forecast 15 per cent decline in world cotton stocks is expected to contribute to upward pressure 20 2006-07 on world cotton prices. USc/lb By the end of 2007, cotton prices are expected to drift lower as harvest in the northern hemisphere 1994 1997 2000 2003 2006 progresses and supply concerns are reduced, particularly in India and China. After the northern hemisphere harvest, prices are expected to increase again as 2008 import quota is allocated in China and the size of the 2008-09 world cotton crop remains unclear. world production to fall in 2007-08 In 2007-08, world cotton production is forecast to fall by 2 per cent to 26.0 million tonnes, largely as a result of forecast lower production in the United States and Africa — predominantly in Mali and Burkina Faso. Cotton yields in India are forecast to increase in 2007-08, underpinned by average seasonal conditions and the continued adoption of genetically modifi ed cotton. Despite excessive rainfall affecting yields in some isolated areas, cotton yields in India are forecast to reach 550 kilograms per hectare in 2007-08, 6 per cent above the previous season, but remain well below the world average of 770 kilograms per hectare. In 2007-08, Indian cotton production is forecast to increase by 11 per cent to 5.2 million tonnes. Following excessive rainfall in some eastern producing areas of China during the harvest period, yields are forecast to fall by 3 per cent to average 1.2 tonnes per hectare.

610 australian commodities > vol. 14 no. 4 > december quarter 2007 cotton

Refl ecting this, cotton production in China is forecast to fall slightly in 2007-08 to 7.6 million tonnes. Pest infestations in Pakistan in 2007-08 have affected both the quality and volume of cotton produced. According to local reports, production forecasts have been revised down by around 170 000 tonnes, with the worst affected areas located in the Punjab and Sind districts. Despite this, an increase in the area planted to cotton in Pakistan in 2007-08 is forecast to result in cotton production increasing by 5 per cent to 2.3 million tonnes. US production boosted by low abandonment rates Despite the area planted to cotton in the United States falling by 29 per cent in 2007- 08, historically low abandonment rates, particularly in Texas, Oklahoma and Kansas, have boosted production estimates. Refl ecting the lowest abandonment rate in sixty years, cotton production in the United States in 2007-08 is forecast to reach 4.1 million tonnes, although this is still 13 per cent below the previous year. Initial forecasts for 2008-09, indicate that the area planted to cotton in the United States may fall by as much as 12 per cent, as producers in the delta states (Arkansas, Louisiana, Mississippi, Missouri US cotton abandonment rate and Tennessee) and south west states (Kansas, Okla- homa and Texas) divert land away from cotton to soybeans and wheat. If recent averages for yield and abandonment are applied, US cotton production may fall by 12–16 per cent. A decline in production of 15 this magnitude would result in the smallest US cotton crop in ten years, placing signifi cant upward pressure 10 on world cotton prices. world consumption to rise in 2007-08 5 In 2007-08, world consumption of cotton is forecast to increase by 3 per cent to 27.5 million tonnes, as clothing and textile production continues to expand % throughout Asia. However, high cotton prices are expected to temper this growth as textile mills increase 1941 19521963 1974 1985 1996 2007 their use of cheaper man made fi bres such as polyester, polypropylene and viscose rayon. According to recent mill surveys there is a sustained shift in fi bre use away from cotton toward synthetic cotton outlook fi bres. In China, increased production of raw mate- 2005 2006 2007 % rials used in the production of polyester staple has -06 -07 -08 f change World lowered the cost of polyester. Refl ecting this greater Production Mt 25.6 26.5 26.0 – 1.9 availability at lower prices, consumption of poly- Consumption Mt 25.3 26.8 27.5 2.6 ester in China increased by 11 per cent in 2006 to Closing stocks Mt 10.4 10.1 8.6 – 14.9 Stocks to 6.1 million tonnes — 53 per cent of global polyester consumption ratio % 41.2 37.8 31.4 – 16.9 consumption. Cotlook ’A’ index USc/lb 56.0 58.1 68.5 17.9 Cotton consumption in China is forecast to Australia increase by 7 per cent in 2007-08 to 11.5 million Area harvested ’000 ha 336 144 56 – 61.1 Lint production kt 597 274 103 – 62.4 tonnes, down from an 11 per cent rise in 2006-07. Exports kt 650 487 217 – 55.4 This slowing in the rate of growth refl ects the greater – value A$m 1 137 823 365 – 55.7 use of synthetic fi bres in mills and reduced government See back tables for details. f ABARE forecast.

australian commodities > vol. 14 no. 4 > december quarter 2007 611 cotton

cotton use in selected countries support for clothing and textile production. Throughout 2007, the Chinese Government has implemented a number of policies aimed at controlling future growth Vietnam 1000 Indonesia in the clothing and textiles sector, including: tightening Bangladesh the deposit requirements on domestic lenders and 800 reducing export tax rebates on textiles. Elsewhere in Asia, differing labour costs are 600 resulting in an ongoing redistribution of global textile and clothing production. According to the Werner 400 International 2007 report on primary textiles labour cost comparison, labour costs in coastal areas of 200 China are around US$1.00 an hour, compared with US$0.22 in Bangladesh, US$0.29 in Viet Nam and kt US$0.36 in Indonesia respectively. Refl ecting this 1992 1995 1998 2001 2004 2007 slow shift in production, raw cotton use in the latter -93 -96 -99 -02 -05 -08 countries is forecast to increase by 4 per cent in 2007- 08 to 1.2 million tonnes. Australian cotton production in 2007-08 declines further Continued dry conditions in most water catchments throughout spring and low water storages have severely reduced water available for irrigated cotton in 2007-08. All irrigated crops in the Namoi Valley, for example, are expected to be grown with ground- water supplies, as a result of low storage levels in the Keepit and Split Rock dams. In addition, much of the remaining water available for irrigation is being used by producers to fi nish high value winter crops and plant summer grain crops such as sorghum. Refl ecting the diffi cult water supply situation, the area planted to cotton in Australia is forecast to fall by 61 per cent in 2007-08 to 56 000 hectares. The reduction in the area planted and likely lower yields than in the previous season are forecast to result in Australian production of cotton lint falling by 62 per cent in 2007-08 to around 103 000 tonnes. water storage and availability

capacity Nov 2006 Nov 2007 GL % of capacity % of capacity southern Queensland Beardmore 82 20 8 Fairbairn 1 301 11 15 Glenlyon 254 27 17 Leslie 106 12 9

northern New South Wales Copeton 1 362 22 13 Keepit 426 10 15 Pindari 312 60 31

southern New South Wales and Victoria Blowering 1 631 29 31 Burrendong 1 188 19 14 Burrinjuck 1 026 30 38 Dartmouth 3 906 41 17 Hume 3 038 10 28 Menidee Lakes 1 731 11 1 Wyangala 1 220 14 15

612 australian commodities > vol. 14 no. 4 > december quarter 2007 sugar sugar anton wood » [email protected] prices to fall in 2007-08 In 2007-08, the traded price of raw sugar (Intercontinental Commodities Exchange no.11 spot, fob Caribbean) is forecast to fall by 6 per cent to average US11 cents a pound as a result of increased production in India, China and Thailand. With export supply expected to exceed import demand, stocks are forecast to rise by 10.1 million tonnes, placing downward pressure on prices. Although the average traded price of raw sugar was unchanged from October to November 2007, the depreciation of the US dollar against some of the major sugar producers’ currencies has meant that producers’ returns have been lower than would otherwise have been the case. For example, in Brazil — the world’s largest exporter of sugar — the average traded price of raw sugar fell by 3 per cent from October to November 2007, when expressed in local currency terms. Indian exports to increase In 2007-08 the Indian sugar industry is likely to come under increasing fi nancial pressure because the ‘state advised prices’ to be paid to growers for sugar cane are likely to continue to exceed millers’ returns from sales of sugar. Privately owned mills in Uttar Pradesh — which provide about 25 per cent of India’s milling capacity — had nearly A$400 million worth of cane payments in arrears from the 2006-07 season at the end of August 2007. At the start of November, these mills were waiting for a government response that would help them pay their growers before starting to crush the 2007-08 cane crop. In 2007-08, sugar production in India is forecast to be 33.2 million tonnes, 8 per cent higher than in 2006-07. The large debts already owed by mills, and the delays in starting the harvest are creating uncertainty about whether or not Indian sugar production in 2007-08 will be as high as the cane crop would suggest. If sugar production is lower than forecast, millers would be expected to put less sugar into storage and reduce their storage costs, rather than reduce sugar sales and reduce their revenue. sugar Indian sugar consumption is forecast to increase by 6 per cent to 22.2 million tonnes in 2007-08 as a result world indicator price of lower prices for consumers. In the past, domestic 16 10 sugar consumption has increased signifi cantly when 14 8 world prices have been relatively low and stocks have 12 6 been high. With Indian sugar production forecast to exceed consumption by nearly 11 million tonnes, and 10 4 stocks of sugar already at 12 million tonnes, suitable 8 2 sugar storage facilities are expected to be in short 6 Mt supply in 2007-08. Millers are therefore likely to 4 –2 increase exports by as much as possible to avoid the risk of signifi cant stock losses from improper storage. 2 change in stocks –4 2006-07 However, low world prices and high production costs USc/lb –6 are expected to limit the amount of sugar that will be 1995 1998 2001 2004 2007 exported from India. In addition, quality issues have -96 -99 -02 -05 -08

australian commodities > vol. 14 no. 4 > december quarter 2007 613 sugar

world sugar indicator price index been raised by Chinese buyers as some of the sugar various currencies,weekly, ended 23 November 2007 being exported from India has been stored for a number of years under conditions that are less than ideal. 0.9 Taking into account the above factors, Indian sugar US dollars exports are forecast to increase by 3 million tonnes to 4.5 million tonnes in 2007-08. Sugar that is not 0.8 exported or consumed will have to be stored, meaning that stocks are forecast to rise by 50 per cent to around 19.4 million tonnes in 2007-08. 0.7 Brazilian exports to fall Indian rupees Brazilian Brazilian sugar production is forecast to fall by 2 per 0.6 reals cent to 31.9 million tonnes in 2007-08 because of SepDec April June Sep an increase in the amount of cane used to produce 2006 2007 ethanol instead of sugar. With lower sugar prices and increased demand for ethanol, returns from ethanol production are expected to be higher than those from sugar. In Brazil, sales of fl ex fuel vehicles — that can run on ethanol, petrol, or any combination of the two fuels — have been rising steadily since they became available in March 2003. Ethanol has a lower energy content than petrol. As a result, motorists purchase ethanol when ethanol prices are less than 70 per cent of petrol prices. In September and October 2007, ethanol prices averaged 46 per cent of petrol prices in Sao Paulo state, Brazil’s largest producer and consumer of ethanol. As the price of crude oil (the main factor determining the price of petrol) is forecast to average higher in 2007-08, sales of fl ex fuel vehicles are expected to increase and ethanol consumption and prices to rise. Sugar exports from Brazil are forecast to fall by 2 per cent in 2007-08 to 20.3 million tonnes as a result of lower forecast sugar prices and increased global competition from Indian sugar exporters. Many of Brazil’s traditional customers, such as the Russian Federa- tion and the large refi neries in the Middle East, are signifi cantly closer to India than to Brazil. With freight rates at record levels, Indian sugar can therefore be landed at lower cost in these markets than Brazilian sugar. vehicle sales in Brazil In 2007-08 Brazilian sugar consumption is fore- monthly, ended September 2007 cast to increase by 2 per cent to 11.5 million tonnes. Growth in the food processing sector is expected to flex fuel and pure alcohol powered account for much of the increase in Brazilian sugar 150 demand. Thai production and exports to grow strongly 100 In Thailand, production of sugar is forecast to increase by 9 per cent in 2007-08 to 7.6 million tonnes as favourable seasonal conditions are 50 expected to lead to yield improvements. The forecast increase in production can be attributed mostly petrol vehicles to the end of drought conditions in 2006-07, and ‘000 an increase in plantings that resulted in Thai sugar June DecJune Dec June production growing by 36 per cent to 6.9 million 2005 2006 2007 tonnes in that year. With production increasing and

614 australian commodities > vol. 14 no. 4 > december quarter 2007 sugar consumption forecast to be unchanged at 2.6 million net raw sugar exports tonnes in 2007-08, exports are forecast to increase by 11 per cent to 4.9 million tonnes. 20 2006-07 Russian production to fall and imports to rise 2007-08 Production of sugar in the Russian Federation is fore- 15 cast to fall by 2 per cent in 2007-08 to 3.5 million tonnes. Production is expected to fall despite an 10 increase in plantings because adverse seasonal conditions in central and southern Russia have 5 reduced beet yields. Consumption of sugar in the Russian Federation is Mt forecast to increase by 1 per cent in 2007-08 to 6.6 million tonnes as stronger forecast economic growth –5 ﬂ ows into higher consumer disposable incomes. Brazil Thailand Russia Although demand for sugar is expected to strengthen, India Australia China the introduction of a seasonal import duty for six months from the start of December 2007 is expected to limit Russian consumers’ access to cheaper imported sugar. With lower production and a small increase in consumption forecast, Russian sugar imports are forecast to rise by 5 per cent to 3.3 million tonnes in 2007-08. China’s imports of sugar expected to fall signiﬁ cantly Sugar production in China is forecast to rise by 7 per cent in 2007-08 to a record of nearly 14 million tonnes as a result of increased plantings and favourable seasonal conditions. Despite lower forecast prices, returns from cane and beet are expected to remain favourable relative to other crops. Consumption of sugar in China is forecast to increase by 9 per cent in 2007-08 to 14 million tonnes. Chinese food processors are expected to substitute sugar for high fructose corn syrup as a result of lower forecast sugar prices and an expected increase in corn prices, the latter driven in part by increased demand for biofuels. In contrast to previous years, sugar production in China is forecast to roughly equal consumption, and as a result, sugar imports are forecast to fall by 56 per cent to 650 000 tonnes in 2007-08.

Australia sugar outlook The Australian sugar cane harvest is forecast to fall 2005 2006 2007 % by 3 per cent to 35 million tonnes of cane in 2007- -06 -07 -08 f change 08 as cyclone Larry in 2006 delayed the end of the World previous harvest, reducing the length of the 2007- Production Mt 152.1 162.6 169.0 3.9 – Brazil Mt 32.0 32.4 31.9 – 1.5 08 growing season. Adverse seasonal conditions Consumption Mt 150.3 155.3 158.9 2.3 have also had an impact in 2007-08 — excessive Closing stocks Mt 57.5 67.4 79.1 17.4 rainfall in northern Queensland and drought in Change in stocks Mt 0.4 9.9 10.1 southern Queensland have led to lower cane yields. Price USc/lb 15.8 11.7 11.0 – 6.0 In addition, some frost affected cane has been cut Australia Area ’000 ha 406 400 400 0.0 for cattle feed in New South Wales and southern Production kt 5 108 4 722 4 658 – 1.4 Queensland. Exports kt 4 067 3 656 3 600 – 1.5 A number of factors have delayed the harvest and – value A$m 1 597 1 413 957 – 32.3 the crushing of cane in 2007-08. For example, the See back tables for details. f ABARE forecast.

australian commodities > vol. 14 no. 4 > december quarter 2007 615 sugar

Plane Creek and Pioneer mills are expected to ﬁ nish crushing at least a month later than usual because of wet weather delays and mill machinery breakdowns. In the Bundaberg region, problems with the Millaquin mill have also contributed to delays. Average sugar content, expressed as ‘commercial cane sugar’ (CCS) values are estimated to increase by 0.2 percentage points to average 13.5 per cent in 2007-08 as harvest delays have meant that more of the crop was harvested in the second half of the season than the ﬁ rst. Average CCS values are higher later in the season because CCS values typically rise early in the harvest and then plateau toward the end of the season. Increased sugar recovery relative to the previous season is expected to partly offset the reduction in cane production, and as a result, sugar production is forecast to fall by a smaller percentage than cane production in 2007-08. Australian production of sugar in 2007-08 is forecast to be 1 per cent lower than in 2006-07, at 4.7 million tonnes. The value of exports is forecast to fall by 32 per cent to $957 million in 2007-08. The assumed appreciation of the Australian dollar against the US dollar, lower forecast world prices, and reduced production are expected to cut earnings for Australian producers.

616 australian commodities > vol. 14 no. 4 > december quarter 2007 livestockmeat

> john hogan > +61 2 6272 2056 > [email protected] livestock restocking in Australia reliant on improved seasonal conditions wool caroline gunning-trant » [email protected]

The eastern market indicator price for wool is forecast to Australian eastern market indicator in user average 950 cents a kilogram in 2007-08, 10 per cent currencies weekly, ended 30 November 2007 higher than in 2006-07. The reduced availability of wool resulting from a smaller ﬂ ock, combined with continued Chinese RMB strong demand by Chinese and European buyers, 1000 60 continues to put upward pressure on greasy wool prices. 800 Australian 50 production to be lower in 2007-08 cents Shorn wool production is estimated to fall by 7 per cent to 395 000 tonnes in 2007-08. This is a result of the 600 40 decline in sheep numbers following the selloff of stock euro cents in 2006-07 and the ﬁ rst quarter of 2007-08 because of 400 30 the drought. Between July and October 2007 there had c/kg RMB/kg already been a 7 per cent decline in the number of bales clean equivalent clean equivalent tested by the Australian Wool Testing Authority and a 13 per cent fall in national wool offerings compared with 2005 2006 2007 the same period a year earlier. While the spring rains in early October and November will assist many producers wool outlook with their pastures going into summer, they will have little 2005 2006 2007 % impact on wool shorn in the 2008 autumn period. -06 -07 -08 f change In-store stocks at the beginning of 2007-08 were Sheep numbers million 93 87 85 – 2.3 Sheep shorn million 104 101 92 – 8.9 down 28 per cent compared with 2006 -07. Lower stocks, Wool production (greasy) combined with the forecast fall in production, mean that – shorn kt 461 426 395 – 7.3 the overall supply of wool will be well down in 2007-08. – other kt 49 51 42 – 17.6 – total kt 510 477 437 – 8.4 Expectations of lower supply are likely to have been an Wool exports (balance of payments basis) important contributor to the upward movement in prices – volume (gr. equiv.) kt 543 566 476 – 15.9 in recent months. Between July and November 2007, the – value A$m 2 544 3 065 2 812 – 8.3 Market indicator (clean) eastern market indicator averaged almost 30 per cent – eastern Ac/kg 713 864 950 10.0 higher than in the corresponding period last year. It is fore- – western Ac/kg 692 856 953 11.3 cast to average 950 cents a kilogram clean in 2007-08, Auction price (gr.) Ac/kg 464 544 604 11.0 a 10 per cent increase from 2006-07. See back tables for details. f ABARE forecast.

australian commodities > vol. 14 no. 4 > december quarter 2007 617 wool

Lack of plentiful and good quality pasture has contributed to an increase in the proportion of fi ne wool in the clip this season. This is in addition to the underlying upward trend in production of superfi ne wool (19.5 microns or less) over the past fi fteen years. The production of superfi ne wool accounted for almost 39 per cent of the clip between July and October 2007, an increase of 4 percentage points year on year. This compares with 12 per cent of the wool clip in 1995-96 and 18 per cent in 2000-01. The proportion of superfi ne wool shorn and marketed is forecast to remain relatively high for the rest of 2007-08 given the generally poor feed conditions that prevailed in most of New South Wales, Victoria and South Australia during winter and early spring. As a result, producers stand to gain from the high prices being paid for fi ne wools, particularly by Italian fi rms purchasing fi bre for high-end wool garments such as suits. Australian wool exports in 2007-08 are forecast to decline by 16 per cent to 476 000 tonnes, as a result of lower total production. However, export earnings are forecast to fall by only 8 per cent, to $2.8 billion, given higher forecast prices and continued strong demand by Chinese and Italian buyers. demand still strong despite dollar’s appreciation The signifi cant increase in prices this season refl ects not only the impact of lower wool supply but also strong demand for raw wool. The assumed 13 per cent appreciation of the Australian dollar against the US dollar in 2007-08 has had no apparent effect on market clearances. As the Chinese yuan is closely aligned with the US dollar, it has also declined against the Australian dollar, with the effect that Australian wool prices expressed in yuan have risen by more than their rise in Australian dollar terms. Despite the 12 per cent rise in prices paid (in yuan) by Chinese buyers since September, Chinese purchases of Austra- lian wool have remained at a relatively constant proportion (roughly 60 per cent) of total greasy wool exports. Prices paid by European wool buyers have not risen as much as for Chinese buyers since the Australian dollar has appreciated by a smaller amount (4 per cent) against the euro. As a result, the stronger Australian dollar has had little effect on prices expressed in euros, with the eastern market indicator having fl uctuated around 570 euros a kilogram clean for the past twelve months. European purchases have been largely maintained, with the proportion of total greasy wool exports (in value terms) going to Italy between July and September 2007 being only 2 per cent lower year on year. US economic slowdown a demand risk Export demand for wool is not only sensitive to movements in the exchange rate but also to economic growth in fi nal end user markets and to prices of alternative fi bres. As a major exporter of yarns and textiles, the economic performance of China’s trading partners, particularly the United States, affects how Chinese wool and textile processors plan future activity. The United States is a major importer of yarn, woven fabrics and clothing from China. Refl ecting the impact of the recent volatility in fi nancial markets and downside risks to economic growth from the housing market, economic growth in the United States is assumed to be modest in 2008. A slowing in economic growth can often be accompanied by reduced private demand for semidurable goods, such as apparel. US imports of textiles and clothing from China (in value terms) increased by 30 per cent between January and September 2007, compared with the corresponding period in 2006. However, any expectation by Chinese buyers that slower US economic growth could affect 2008-09 orders for yarn and apparel could potentially be refl ected in a weakening of demand for Australian wool in 2008.

618 australian commodities > vol. 14 no. 4 > december quarter 2007 sheep meat sheep meat sally ﬂ etcher » sﬂ [email protected]

The Australian saleyard price of lambs is forecast to average 332 cents a kilogram in 2007-08, 2 per cent higher than in 2006-07. The higher prices are expected to be underpinned by forecast lower production and strong demand in export markets, particularly the United States. While saleyard prices for lambs fell by 30 per cent between July and October this year as a result of higher lamb turnoff, increased demand during November from meat processors and fi nishers of store lamb resulted in some strengthening in lamb prices. Over the remainder of 2007-08, saleyard prices are forecast to increase in response to lower availability of lambs and fi rm demand. The Australian weighted saleyard price for sheep is forecast to average 21 per cent higher in 2007-08, at 165 cents a kilogram, largely refl ecting lower turnoff from a smaller sheep fl ock. Australian saleyard prices Assuming a reasonable autumn break and increased monthly, ended October 2007 restocker demand next year, mutton prices can be expected to improve relative to this spring in the lamb second quarter of 2008. 300 sheep meat production to fall in 2007-08 Lamb yardings were relatively high during the fi rst four 200 months of 2007-08, partly refl ecting the continuation mutton of drought conditions. Despite poor seasonal conditions, the quality of lambs being put through the sale- 100 yards has been good, with most lambs this year falling into the trade and heavy weight categories (over 18 kilograms) and grading fat score three and above. Ac/kg dressed Lamb slaughterings are forecast to be lower over Dec JuneDec June the remainder of 2007-08, refecting the reduced 2006 2007 breeding fl ock in the wake of the 2006-07 drought. sheep meat outlook Overall, total lamb slaughterings for 2007-08 are forecast to be 19.4 million, nearly 800 000 less than in 2005 2006 2007 % 2006-07. Consequently, lamb production is forecast -06 -07 -08 f change Slaughterings to fall by 3 per cent in 2007-08, to around 400 000 Sheep ’000 11 830 13 271 10 800 – 18.6 tonnes. Lamb ’000 18 666 20 158 19 400 – 3.8 Sheep slaughter is forecast to fall by 19 per cent in Production Mutton kt 244 271 222 – 18.1 2007-08, to 10.8 million. This decline largely refl ects Lamb kt 382 413 400 – 3.1 the lower availability of sheep, with the size of the Exports (shipped weight) Australian sheep fl ock having fallen to an estimated Mutton kt 145 162 135 – 16.7 87 million by June 2007. Relatively high prices for both Lamb kt 143 150 148 – 1.3 – to United States kt 39 41 43 4.9 wool and prime lambs also mean that there is a strong Total sheep meat incentive for producers to retain additional breeding – value $m 1 199 1 206 1 170 – 3.0 ewes and wethers where seasonal conditions permit. Live sheep ’000 4 248 4 138 3 650 – 11.8 Saleyard prices Refl ecting the forecast lower slaughterings, mutton Mutton Ac/kg 175 136 165 21.3 production is forecast to fall by 18 per cent in 2007- Lamb Ac/kg 347 326 332 1.8 08 to 222 000 tonnes. See back tables for details. f ABARE forecast.

australian commodities > vol. 14 no. 4 > december quarter 2007 619 sheep meat

saleyard throughput of lambs The Australian sheep fl ock is forecast to fall again Australia this year, mainly refl ecting a smaller natural increase as a result of the lower number of breeding ewes. 1000 2006 Although this will be the third year of contraction in 2007 sheep numbers, the rate of decline is slowing. By June 800 2008, the sheep fl ock is forecast to number around 85 million. 600 strong lamb export demand 400 Demand for Australian lamb in major export markets, including the United States, China and the United 200 Kingdom, is expected to remain strong in 2007-08. Lamb exports to the United States are forecast to expand ‘000 by 5 per cent in 2007-08 to 43 000 tonnes, despite July Aug Sept Oct the appreciation of the Australian dollar against the US dollar. However, exports to other, more price sensitive, markets are forecast to decline slightly as prices of Australian lamb increase in importing country currencies. In total, Australian lamb exports, at 148 000 tonnes, are forecast to be only 1 per cent lower than in 2006-07, with some lamb being diverted from domestic consumption to export. Mutton exports are forecast to fall by 17 per cent in 2007-08 to 135 000 tonnes, largely because of higher sheep prices and lower production. live sheep exports to fall The reduction in the availability of suitable sheep because of the smaller sheep fl ock is expected to constrain live sheep exports in 2007-08. Higher prices for sheep suitable for export, together with the effects of a higher Australian dollar on importer prices, will also contribute to lower shipments. In addition, increased supplies of sheep and goats from north African countries are expected to provide greater competition for Australian sheep in the Middle East. Sheep and goats can be imported from Somalia, Ethiopia and Kenya at a lower price than Australian sheep. One of the main advantages that Australian animals have had over those from competing countries is their disease-free status. Many countries, including Saudi Arabia, placed bans on sheep from the Greater Horn of Africa region following outbreaks of Rift Valley fever. However, following a World Organisation for Animal Health (OIE) workshop in June 2007, representatives from African and Middle Eastern countries agreed on a harmonised system of regional certifi cation of the health and safety of exported ruminants and ruminant products. This certifi cation system is expected to increase importers’ confi dence in animals from north African countries. Refl ecting these developments, Australia’s exports of live sheep are forecast to fall by 12 per cent in 2007-08, to 3.65 million.

620 australian commodities > vol. 14 no. 4 > december quarter 2007 beef andcontents veal beef and veal frank drum » [email protected]

The> contact Australian > +61 2 weighted6272 ???? >average [email protected] saleyard price of beef cattle is forecast to increase slightly in 2007-08 to 294 cents a kilogram. This primarily refl ects forecast lower Austra- lian beef production and increased demand from restockers, assuming seasonal conditions improve in the fi rst half of 2008. Australian exports to Japan and the Republic of Korea in 2007-08 are forecast to fall for two main reasons. First, the appreciation of the Australian dollar relative to the Japanese yen and Korean won has resulted in reduced export demand for Australian beef. Second, rising feed costs have resulted in a decline in the number of cattle on feed, reducing the supply of grainfed beef suitable for export to the Japanese and Korean markets. Australian production to fall in 2007-08 Australian cattle slaughter is forecast to fall by 3 per cent in 2007-08 to 8.8 million. Below average pasture availability and high grain prices in winter and spring resulted in increased cattle turnoff as producers reduced herd numbers to manage their way through the drought. Assuming seasonal conditions improve over the remainder of 2007-08, cattle slaughter is forecast to fall as producers begin to rebuild herds. Australian beef production is forecast to fall by 4 per cent in 2007-08 to 2.1 million tonnes, largely because of the forecast decline in cattle slaughter. The high slaughter rates are forecast to lead to a fall in the size of the Australian cattle herd to 27.6 million by June 2008, slightly lower than a year earlier. Australian beef exports to decline in 2007-08 Australian beef exports in total are forecast to fall by 5 per cent in 2007-08 to 925 000 tonnes (shipped weight), largely because of lower Australian beef production. The total value of beef exports is forecast to fall by 4 per cent to $4.4 billion, as a result of lower volumes shipped and the effects of a higher Australian dollar on prices received. shipments to Japan to fall beef and veal outlook Australian beef exports to Japan are forecast to fall in 2005 2006 2007 % 2007-08 primarily owing to a reduction in the turnoff -06 -07 -08 f change of grainfed stock because of high feedgrain and cattle Cattle nos million 28.8 27.8 27.6 – 0.7 prices. Refl ecting the reduced number of cattle on feed – beef million 26.1 25.1 25.0 – 0.4 Slaughterings ’000 8 401 9 081 8 800 – 3.1 in Australia, Australian exports of grainfed beef to Japan Production kt 2 077 2 226 2 138 – 4.0 declined by 16 per cent year on year during the fi rst four Exports (shipped weight) months of 2007-08, to 56 000 tonnes. – to United States kt 295 303 290 – 4.3 With feedgrain prices forecast to remain high – to Japan kt 388 403 380 – 5.7 kt 121 157 130 – 17.2 throughout the remainder of 2007-08, Australian supplies – to Korea, Rep. of – total kt 892 974 925 – 5.0 of grainfed beef are likely to remain constrained. In addi- – value A$m 4 272 4 634 4 430 – 4.4 tion, the high value of the Australian dollar against the Live cattle ’000 549 638 720 12.9 Japanese yen is forecast to contribute to reduced export Price – saleyard Ac/kg 322 292 294 0.7 demand for Australian beef generally as it becomes – US import USc/kg 276 282 288 2.1 less price competitive with US product. As a result, total – Japan import USc/kg 430 477 510 6.9 Australian beef exports to Japan are forecast to fall by 6 See back tables for details. f ABARE forecast.

australian commodities > vol. 14 no. 3 > september quarter 2007 621 beef and veal

Australian grainfed exports to Japan per cent in 2007-08 to 380 000 tonnes. Australian export prices of grainfed and grassfed beef are fore- 2006 cast to increase by 18 per cent and 7 per cent respec- 2007 tively in 2007-08 to average 614 and 510 cents a 15 kilogram. Japanese import protocols remain unchanged 10 There has been minimal progress this year in negotiations between Japan and the United States on Japanese import restrictions on US beef. As a result, 5 the import restrictions applied by Japan continue to constrain imports of beef from the United States. By way of example, Japanese imports of US beef in kt the fi rst nine months of 2007 were 24 000 tonnes, Jul Aug Sep Oct compared with 198 000 tonnes in the corresponding period in 2003 — prior to the discovery of BSE (bovine spongiform encephalopathy or ‘mad cow’ disease) in the United States in December 2003. Refl ecting the delays in negotiating expanded access for US beef, the process of altering the current protocols is not expected to be completed until at least the second quarter of 2008. lower exports to Korea Australian exports to Korea are forecast to fall by 17 per cent in 2007-08 to 130 000 tonnes. Lower domestic production and reduced cattle numbers on feed are expected to be the main factors limiting exports to Korea in 2007-08. In addition, there may be increased competition from US beef next year. Changes to Korea’s import protocols allowing imports of US bone-in beef are not expected until the fi rst half of 2008. In October,

Australian feedlot numbers to fall in 2007-08 The number of Australian cattle on feed declined Australian feedgrain prices by 22 per cent in the September quarter 2007, as high feed grain prices reduced the viability of grainfed beef production. Declining global grain stocks and uncertainties about world supplies, in 400 addition to drought affected domestic production, barley contributed to a substantial rise in grain prices. For example, the cash price of wheat (delivered 300 Sydney) used for livestock feeding averaged $458 sorghum feed wheat a tonne in October 2007, 53 per cent above the 200 average price in June 2007. The reduction in cattle numbers on feed led to a fall in grainfed beef supplies, and resulted in a 100 rise in average Australian export prices of grainfed beef. With feedgrain prices forecast to remain high in the short term, numbers of cattle on feed are fore- A$/t cast to fall again in the December quarter, resulting July Jan July Jan July in a further reduction in grainfed beef supplies. 2005 2006 2007

622 australian commodities > vol. 14 no. 4 > december quarter 2007 dairy

Korea suspended quarantine inspections of US imports following the discovery of verte- bral column in a shipment of US beef. The suspension is expected to remain in place until a new health protocol for bone-in beef can be negotiated between the two countries. exports to the United States In 2007- 08, high domestic prices for manufacturing beef in the United States are expected to lead to increased US import demand for beef. However, Australian beef exports to the United States remained unchanged in the fi rst four months of 2007-08 compared with the corresponding period last year, as dry seasonal conditions resulted in increased cow slaughter. However, with female cattle slaughter forecast to fall in the remainder of 2007- 08, Australia’s supply of manufacturing grade beef is likely to decline. Australian exports to the United States are therefore forecast to fall in 2007-08 by 4 per cent to 290 000 tonnes, with export prices forecast to increase by 2 per cent to 288 cents a kilogram. live cattle exports Australian live cattle exports increased by 12 per Queensland live cattle exports cent, year on year, in the fi rst nine months of 2007 to around 535 000, underpinned by an increase in 2006 the supply of cattle suitable for the trade. With high 2007 grain prices reducing the profi tability of grainfed 20 beef production, increased numbers of second quality cattle have been diverted to the live export 15 market, particularly in Queensland. In the fi rst nine months of 2007, live cattle exports from Queensland 10 increased to 79 000, compared with 28 000 over the corresponding period a year earlier. With numbers of cattle suitable for live export fore- 5 cast to increase following the end of the wet season in February 2008, live cattle exports are forecast to ‘000 increase by 13 per cent in 2007-08 to 720 000. Jan Feb Mar Apr May Jun Jul Aug Sep dairy peter berry » [email protected]

Australian farmgate milk prices are forecast to average 33 per cent higher at around 44 cents a litre in 2007-08. High domestic milk prices reﬂ ect record world prices for manufactured dairy products and incentives by Australian milk processors to maintain milk production in an environment of high supplementary feed costs. However, for many Australian dairy farmers, the ability to take advantage of higher prices remains limited. Continuing poor seasonal conditions across some of Australia’s major water catchments — particularly in the southern Murray Darling Basin — will result in lower milk production in 2007-08 from farms reliant on irrigation. growth in world dairy supplies continues to lag demand World demand for dairy products has grown strongly in recent years, driven by rising incomes, largely in the developing economies of Asia but also in the developed econ-

australian commodities > vol. 14 no. 4 > december quarter 2007 623 dairy

omies of the European Union and the United States. Growth in world dairy supplies, however, has lagged behind growth in demand as a result of supply developments in the major producing and exporting countries that will limit growth in world dairy trade over the next few years. The key infl uences on world trade are market reforms in the European Union, leading to a reduction in surpluses and increased demand within the European Union, together with drought in Australia that will mean lower exports. In 2007-08, milk production in the European Union — the world’s largest exporter of dairy products — is forecast to grow by less than 2 per cent under Common Agricultural Policy (CAP) production quotas. Some regions within the union are expected to produce less than their milk quota (most notably the United Kingdom) as lower payments under CAP reform have reduced the profi tability of some smaller dairy producers. Milk production in most other EU member states is expected to be stable or rising, although an outbreak of bluetongue disease and high feed costs may have some impact on yields. Overall, the moderate increase in total EU milk output is expected to be fully accounted for by strong growth in domestic consumption of dairy products. With growth in domestic consumption exceeding growth in dairy product output — and with the unprecedented exhaustion of EU intervention stocks — reduced availabilities will result in lower dairy product exports from the European Union in 2007-08. The EU share of world dairy trade is projected to continue to decline over the next few years with production quotas restricting EU milk output. Growing domestic consumption of dairy products is expected to account for an increasing proportion of total milk production in the European Union. Changing patterns of dairy product demand (and associated price signals) within the European Union have resulted in a change in the mix of EU dairy product outputs. For example, EU cheese production has grown signifi cantly in recent years and has accounted for an increasing proportion of milk production. This trend has reduced the amount of milk available for use in other dairy products, such as milk powders. As a result, EU milk powder exports have fallen over the past year, and are expected to fall again in 2007-08. In New Zealand, milk production is expected to increase by 3 per cent in 2007-08 in response to strong world demand and sharply higher prices. However, the New Zealand dairy industry’s ability to increase production and exports quickly is expected to be constrained by lead times in building dairy cow numbers, together with competing land uses and increasing compliance with effl uent disposal regulations. In Argentina, signifi cant new investment in dairy farming and milk processing facilities in recent years has resulted in strong increases in milk and dairy product output. This has created considerable potential to expand dairy exports, particularly in an environment of strong world demand. In addition, reduced dairy exports from the European Union and Australia provide opportunities for Argentine exporters to expand into new markets. Despite this, fl oods in April and May 2007 and severe frosts in June and July have reduced dairy production and the potential for increased exports in 2007 and 2008. Dairy product exports from Argentina are also expected to be affected by government policies aimed at constraining exports in order to maintain low cost supplies to domestic consumers. world dairy prices up sharply World prices of dairy products are forecast to average sharply higher in 2007-08, as ongoing growth in world demand continues to outstrip growth in supplies from the major dairy exporters.

624 australian commodities > vol. 14 no. 4 > december quarter 2007 dairy

Prices for milk powders rose strongly throughout world dairy prices 2007, in response to strong world demand outstrip- ping limited growth in world production and exports. skim milk In 2007-08, prices for skim milk powder and whole powder 4000 milk powder are forecast to average around 66 per cent higher at US$5275 a tonne and US$5100 a whole milk powder tonne respectively. 3000 cheese Growth in world import demand for milk powders remains strong, particularly for infant formulas and 2000 food processing in Asia and the Middle East. Demand is also strong in the European Union, with butter food processing and protein supplements in animal 1000 feeds accounting for most of the growth in consump- 2007-08 tion. However, despite strong demand, reduced US$/t supplies of milk powders are expected in the Euro- 2001 2003 2005 2007 pean Union as a result of more milk going to cheese -02 -04 -06 -08 production. This, together with the exhaustion of EU intervention stocks, has sharply reduced the amount of milk powder available for export and contributed to higher global prices. Cheese prices are forecast to average 80 per cent higher, at around US$5400 a tonne in 2007-08 as world demand grows more rapidly than supply. Cheese production in the European Union is expected to rise during the year, refl ecting growing domestic demand and higher world prices. However, increasing domestic cheese consumption in the European Union will limit growth in EU cheese exports in 2007-08. In addition, reduced milk production in Australia is expected to be refl ected in lower cheese production, resulting in reduced Australian exports for the year. Butter prices are also forecast to rise strongly in 2007-08, more than doubling to average US$4350 a tonne. World demand for butter has grown strongly in 2007, particularly in Egypt and the Russian Federation. In contrast, butter production in the European Union is expected to remain relatively fl at, while the effective exhaustion of EU dairy outlook intervention stocks and reduced Australian exports means 2005 2006 2007 % that world butter trade is likely to be down this year. -06 -07 -08 f change Cow numbers ’000 1 881 1 800 1 780 – 1.1 Australian dairy production to fall in 2007-08 Milk yields L/cow 5 395 5 324 5 056 – 5.0 Australian milk production is forecast to fall by 6 per cent Production Total milk ML 10 089 9 583 9 000 – 6.1 to 9 billion litres in 2007-08. Lower milk production stems – market sales ML 2 066 2 161 2 197 1.7 from poor seasonal conditions that have cut water alloca- – manufacturing ML 8 023 7 422 6 803 – 8.3 tions to irrigation dependent regions and placed greater Butter kt 146 133 124 – 6.8 reliance on high cost purchased feeds. In response, Cheese kt 373 364 323 – 11.3 WMP kt 158 135 129 – 4.4 dairy farmers in affected regions have tended to reduce SMP kt 205 191 169 – 11.5 herd numbers and cut production in order to contain Milk price Ac/L 33.1 33.2 44.0 32.5 costs. Coastal dairy farms are expected to fare better, Value of exports A$m 2 574 2 443 3 257 33.3 with (assumed) average rainfall assisting the growth of World prices Butter US$/t 1 998 2 023 4 350 115.0 adequate pasture in most areas. Cheese US$/t 2 792 3 004 5 400 79.8 In the fi rst half of 2007-08, the dairying regions most SMP US$/t 2 175 3 188 5 275 65.5 affected by poor seasonal conditions included northern WMP US$/t 2 192 3 046 5 100 67.4 v Victoria and New South Wales along the Murray River See back tables for details. f ABARE forecast.

australian commodities > vol. 14 no. 4 > december quarter 2007 625 dairy

(where irrigation allocations were cut substantially). Other regions also suffered the effects of reduced rainfall, including the main dairying regions of Western Australia and South Australia, while seasonal conditions in coastal New South Wales and in Tasmania have generally been more favourable. For the remainder of the year, Australian milk production will be strongly linked to rainfall patterns and the cost and availability of feed. If Bureau of Meteorology probabilities of improved rainfall over the summer months come to fruition, fodder availability may improve in some regions — particularly along the coast. Although the situation in irrigation dependent regions of the inland is currently expected to remain diffi cult because of low water storages, some improvement in seasonal conditions relative to last year is likely to increase the availability of nonirrigated fodder supplies. With grain prices forecast to remain high over the remainder of the year, an improvement in fodder supplies from on-farm and off- farm sources will be important in helping to moderate the decline in milk production. farmgate milk prices to average higher in 2007-08 In 2007-08, Australian farmgate milk prices are forecast to rise by almost 33 per cent to average around 44 cents a litre. These forecast higher prices refl ect high world prices for dairy products and the need for dairy processors to maintain milk supplies for their processing facilities. Higher milk prices encourage dairy farmers to maintain production in the face of high purchased feed and water costs that might otherwise result in herd reductions. Despite the likelihood of some moderation in grain prices from their springtime highs, feed prices are expected to remain a major hurdle for dairy farm profi tability over the remainder of 2007-08. Australian dairy export earnings to rise in value of Australian dairy product exports 2007-08 The value of Australian dairy exports is projected to rise by more than 33 per cent to around $3.26 billion 1000 cheese in 2007-08, as a result of sharply higher world dairy prices outweighing the effect on earnings of a decline 800 in export volumes and an assumed higher Australian dollar relative to the US dollar. 600 skim milk powder The value of skim milk powder exports in 2007-08 whole milk is forecast to be up by almost 40 per cent to $705 powder 400 million and whole milk powder exports up by 54 per cent to $423 million. Similarly, the value of Australia’s 200 butter butter exports is forecast to rise by 61 per cent to $288 million and cheese by 26 per cent to $1.04 billion. 2007-08 casein A$m Casein export earnings are expected to remain rela- 2001 2003 2005 2007 tively fl at at $111 million as a result of decreased -02 -04 -06 -08 volumes.

626 australian commodities > vol. 14 no. 4 > december quarter 2007 contentsenergy

> contactalan copeland > +61 2> 6272+61 2 ???? 6272 > 2270 [email protected] > [email protected] energy energy prices to increase oil and gas alan copeland » [email protected]

In late November, crude oil prices in West Texas Intermediate terms exceeded US$98 a barrel, and were approaching record (in real terms) prices, set in early 1980. In the second half of 2007, oil prices are estimated to average more than US$81 a barrel, an increase of 35 per cent from the fi rst half of the year. The increase in prices in the second half of the year refl ects strong demand, limited spare production capacity and ongoing geopolitical tensions in the Middle East. In addition, the depreciation of the US dollar against major currencies has resulted in increased purchasing power for non-US oil importers, which has partially dampened the effect of increased oil prices. For 2007 as a whole, oil prices are estimated to average around US$71 a barrel, an increase of 9 per cent from 2006. oil prices to increase in 2008 In 2008, oil prices are forecast to average around US$77 a barrel, an increase of 8 per cent from 2007. Oil prices at the beginning of 2008 are assumed to be around 60 per cent higher than a year earlier, partly refl ecting a 20 per cent increase in oil prices in the last quarter of 2007. West Texas Intermediate oil prices During the course of 2008, crude oil prices are quarterly, ended December 2007 expected to remain high, supported by increased demand in developing economies in Asia and Latin America, limited growth in non-OPEC production and 80 low OPEC spare production capacity, the majority of which is sour crude from Saudi Arabia. The high sensitivity of oil prices to geopolitical tensions and to indica- 60 tions of possible future supply shortages is also important. In addition, total industry stocks (in terms of days 40 of consumption) in OECD countries are expected to fall in 2008 as consumption increases and the volume 20 of stocks (in barrels) remains around fi ve year averages. It is also assumed in this outlook that geopolitical 2007 tensions, particularly in the Middle East, will continue US$/bbl to place upward pressure on prices. 19771987 1997 2007

australian commodities > vol. 14 no. 4 > december quarter 2007 627 oil and gas

The limited supply response to high oil prices that is currently being observed is underpinned by a number of factors. Importantly, recent volatility in oil prices and the uncertainty attached to the sustainability of current price levels over the medium to longer term are increasing the risks associated with investment in oil projects and in alternative fuels and technologies such as oil sands and coal to liquids. These risks are also being reinforced by the uncertainty about the direction of future climate change policies. Higher risk raises the rate of return required to induce investment in particular projects. In addition, increases in construction and input costs are providing a further disincentive to investment. While the continuation of high prices has encouraged some investment in new crude oil production capacity, many of those projects have been delayed because of shortages of equipment and labour driven by capacity constraints worldwide. According to the International Energy Agency, slippage on oil projects completed in the past year has averaged around six months. While world oil prices are forecast to average higher in 2008, there is considerable uncertainty about this outlook. Over the past few years, a signifi cant reduction in world spare production capacity has increased the sensitivity of oil prices to unexpected supply disruptions. Supply disruptions may arise from weather related events such as hurricanes or from the sabotage of production facilities, as has occurred in Nigeria over the past few years, as well as from the geopolitical situation. In the second half of 2007, OPEC’s effective spare capacity fell from 2.9 million barrels a day in July to 2.5 million barrels a day in October. This excludes spare capacity in Indonesia, Iraq, Nigeria and Venezuela, where it is not considered feasible to increase production. This volume of spare capacity is still above the lows recorded in 2004 but is well below spare capacity in the early part of the 2000s. During the course of 2008, spare capacity is not expected to increase signifi cantly, refl ecting a combination of limited additions to OPEC capacity and increased production. On the demand side, uncertainty can stem from a range of sources. For example, in early 2007, during the northern hemisphere winter, above average temperatures resulted in lower oil consumption associated with lower demand for heating oil. There is also the potential for the recent instability in US fi nancial markets to have an effect on economic activity. A reduced rate of growth in the US economy, for example, could have a fl ow-on effect on economic WTI vs OPEC spare production capacity activity in economies in western Europe and Japan, monthly, ended October 2007 resulting in lower than forecast oil consumption and downward pressure on oil prices. WTI price In the fi rst nine months of 2007, world oil produc- 8 80 tion is estimated to have averaged around 85.1 average spare million barrels a day, an increase of 1 per cent year capacity (excl. Iraq) 6 60 on year. For 2007 as a whole, oil production is estimated to average 85.4 million barrels a day, a year on year increase of less than 1 per cent. The moderate 4 40 rate of growth refl ects OPEC members’ adherence to production quotas in the fi rst half of 2007. In 2008, 2 20 world oil supply is forecast to increase by 3 per cent to 87.8 million barrels a day, refl ecting increased mbd US$/bbl OPEC production quotas and the commencement June June June June June June of operations at new oil fi elds in some non-OPEC 20022003 2004 2005 2006 2007 countries.

628 australian commodities > vol. 14 no. 4 > december quarter 2007 oil and gas

OPEC At its general meeting on 11 September 2007, OPEC agreed to increase crude oil production by 0.5 million barrels a day to 27.2 million barrels a day. Despite the increase in OPEC oil production, oil prices increased by almost 20 per cent in the two months after the decision. At its extraordinary meeting on 5 December, OPEC members agreed to maintain oil production quotas at existing levels. OPEC stated that the market was well supplied and stocks were at comfortable levels. OPEC’s crude oil output during the September quarter averaged 30.6 million barrels a day, compared with 30.2 million barrels a day in the fi rst and second quarter of 2007. OPEC production in the December quarter is expected to continue to increase, refl ecting higher output from most members following the September quota increases. Increased production from Saudi Arabia, Qatar, Nigeria and Libya will be partially offset by a production loss of 600 000 barrels a day in the United Arab Emirates because of maintenance undertaken in a number of oil fi elds during November. In Angola, which along with Iraq is not constrained by production quotas, higher oil production will be supported by the startup of production from new fi elds in the last quarter of 2007. This will also allow for increased production in 2008. In 2007, Iraqi oil production is estimated to have averaged 2.1 million barrels a day, an increase of 5 per cent from 2006. Higher production has been assisted by increased availability of export capacity through the northern pipeline from Kirkuk to Ceyhan in Turkey. Since June, crude oil production from Iraq’s northern region has been steadily increasing, averaging 2.3 million barrels a day in October. This was the highest level since April 2004. The increased supply from Iraq refl ects improved security conditions along the northern pipeline. For 2007 as a whole, OPEC crude oil production is estimated to average 30.7 million barrels a day, an increase of 3 per cent from 2006. The increased output refl ects the contribution of Angola, which became an OPEC member oil and gas outlook at the start of 2007. If Angola’s production were excluded, OPEC crude oil production would be 600 000 barrels a 2006 2007 f 2008 f % World change day lower. OPEC production of natural gas liquids is esti- Production mbd 85.1 85.4 87.8 2.8 mated to increase by 4 per cent to around 5 million barrels Consumption mbd 84.1 85.7 87.8 2.5 a day, bringing OPEC’s total oil production to 35.6 million Trade weighted crude oil barrels a day in 2007. price US$/bbl 60.21 67.66 73.38 8.5 West Texas Intermediate crude In 2008, OPEC crude oil production is forecast to increase oil price US$/bbl 66.02 71.42 77.13 8.0 by around 3 per cent to 31.7 million barrels. The increase in 2005 2006 2007 output refl ects higher quotas for OPEC members associated Australia -06 -07 -08 f Crude oil and condensate with the outcomes of the September meeting. Total OPEC Production ML 24 315 28 555 29 541 3.5 supply in 2008, including natural gas liquids, is forecast to Exports ML 13 026 15 963 16 574 3.8 increase by around 4 per cent to 36.8 million barrels a day. – value A$m 6 638 8 318 9 549 14.8 Imports ML 24 416 25 341 28 106 10.9 Natural gas non-OPEC oil supply Production Gm3 42.2 43.6 45.4 4.1 In the fi rst three quarters of 2007, non-OPEC oil produc- LNG exports Mt 12.50 15.20 15.50 2.0 tion increased by 1 per cent to 50 million barrels a day. In – value A$m 4 416 5 222 5 836 11.8 LPG 2008, oil production is forecast to increase by 2 per cent Production ML 4 722 4 550 4 565 0.3 to 51 million barrels a day, refl ecting increased output from Exports ML 2 800 2 824 3 068 8.6 the Russian Federation, the Caspian republics, Brazil, north – value A$m 1 002 1 038 1 228 18.3 America and Australia. See back tables for details. f ABARE forecast. australian commodities > vol. 14 no. 4 > december quarter 2007 629 oil and gas

In 2007 and 2008, total OECD oil production is forecast to decline, with higher production from north America offsetting lower production from Europe. In north America, increased production from the United States and Canada will be partially offset by lower output from Mexico. In 2008, increased production from the United States will be supported by production from the Atlantis (commenced production late 2007), Gengis Khan (late 2007) and Neptune (early 2008) oil fi elds located in the Gulf of Mexico. The three fi elds will have a production capacity of more than 300 000 barrels a day. Production at the Thunderhorse oil fi eld, also located in the Gulf of Mexico, is scheduled to commence in late 2008. In 2007, production in Europe is estimated to have averaged around 5 million barrels a day, a decrease of 4 per cent from 2006. A signifi cant proportion of the lower European output stemmed from shutdowns for maintenance and delays to new projects in Norway. In addition, a number of fi elds were shut down for a short period in November because of a severe storm in the North Sea. In the United Kingdom, estimated production in 2007 was similar to that in 2006. Lower production from mature fi elds will be offset by production from the Buzzard fi eld, where production commenced in early 2007. However, production in the United Kingdom in 2008 is forecast to fall, refl ecting declining production from existing fi elds and no substantial new additions to production. oil consumption to rise in 2007 and 2008 Refl ecting strong economic growth during the year, world oil consumption is estimated to have increased by 1 per cent to 85.7 million barrels a day in 2007. The strongest growth in oil consumption has been in non-OECD countries and regions, including China, Latin America and the Middle East. OECD oil consumption is estimated to average 49.4 million barrels a day in 2007, an increase of 0.1 million barrels a day year on year. In 2008, world oil consumption is forecast to increase by 3 per cent to 87.8 million barrels a day. Growth in oil consumption is forecast for all major consuming regions, including the OECD. Moderate oil consumption growth in 2007 in the OECD refl ects lower demand for heating oil and lower utilisation of oil fi red electricity generation capacity in the fi rst quarter of the year because of unseasonably warm temperatures in north America and Europe. In the second half of the year, however, increases in OECD oil consumption were supported by above average temperatures in Japan during August and September, which increased demand for electricity for cooling. The increase in Japanese electricity demand occurred at a time when a number of nuclear power facilities were out of operation, resulting in an increase in oil fi red electricity generation and higher oil demand. In 2008, OECD oil consumption is forecast to increase by 1 per cent to around 49.9 million barrels a day, under the assumption of winter temperatures close to long term averages. Japan’s oil consumption in 2008 is forecast to increase, associated with the anticipated continued outage of the Kashiwazaki-Kariwa nuclear power station that has been shut down since July 2007 following damage sustained during an earthquake. Japan has a signifi cant amount of spare oil fi red electricity generation capacity that is expected to contribute to meeting the loss of nuclear generation capacity. China’s oil consumption in 2007 is estimated to have increased by 6 per cent to 7.6 million barrels a day. Refl ecting continued economic growth and the expansion of China’s transport sector, oil consumption in 2008 is forecast to increase by a further 5 per cent to 8 million barrels a day. At this rate, China will remain the major contributor to the growth in world oil consumption and the second largest consumer of oil in the world.

630 australian commodities > vol. 14 no. 4 > december quarter 2007 oil and gas

Oil demand in the Middle East and Latin America is also forecast to grow strongly in 2008 as a result of strong economic growth associated with revenues from high oil and metal commodity prices, respectively. In the Middle East, oil consumption is estimated to have averaged 6.6 million barrels a day in 2007 and is forecast to increase by 5 per cent in 2008 to 6.9 million barrels a day. Oil consumption in Latin America is estimated to have increased by 3 per cent in 2007 to 7.5 million barrels a day and is forecast to increase by a further 3 per cent in 2008 to 7.7 million barrels a day. Australian production and exports to increase Australian crude oil production in 2007-08 is forecast Australian crude oil and condensate to increase by 4 per cent to 29.5 gigalitres. Increased exports production will come from the Stybarrow and Puffi n value north east oil fi elds, which commenced operations in volume the second half of calendar 2007, and the Puffi n south 8000 20 000 west fi eld, which is scheduled to commence production in early 2008. 6000 15 000 Refl ecting the growing share of production from north Western Australia, exports are forecast to 4000 10 000 increase in line with higher oil production. With close proximity to Asian refi ning markets, it is assumed that oil production within the Bonaparte and Carnarvon 2000 5000

Basins, including the Stybarrow and Puffi n oil fi elds, 2006-07 will be exported. A$/t ML Australian exports of crude oil are forecast to 1998 2001 2004 2007 increase by 4 per cent in 2007-08 to 16.6 gigalitres. -99 -02 -05 -08 The value of crude oil exports is forecast to increase by 15 per cent to $9.5 billion. Higher oil prices in Australian LNG exports Australian dollar terms will be an important driver of increased export value in 2007-08. Australian LNG exports to grow 5000 15 In 2007-08, Australian LNG exports are forecast to 4000 12 increase by 2 per cent to 15.5 million tonnes. Austra- value lia’s two LNG operations, the North West Shelf and 3000 9 the Darwin LNG plant, are expected to operate at close to capacity. Substantial further growth in Austra- 2000 6 lian LNG exports is not forecast until the fi fth train at volume the North West Shelf commences operations in late 1000 3 2008. 2006-07 Refl ecting higher LNG prices, linked to oil prices, A$/t ML the value of Australia’s LNG exports is forecast to 1998 2001 2004 2007 increase by 12 per cent to $5.8 billion. -99 -02 -05 -08

australian commodities > vol. 14 no. 4 > december quarter 2007 631 thermal coal

thermal coal

alan copeland and rohan kendall » [email protected]

In November, Newcastle thermal coal spot prices rose to record levels above US$90 a tonne, refl ecting the tighter coal demand–supply balance evident during 2007. Factors contributing to the high prices include strong growth in thermal coal import demand from Asia, export infrastructure constraints in Australia, heavy rain in Indonesia that impeded production and a reduction in exports from China. A key factor driving prices higher has been lower availability of thermal coal out of Newcastle under the Hunter Valley coal chain capacity balancing system. The capacity balancing system is designed to provide Hunter Valley coal producers with a proportionate share of the available capacity of the coal export infrastructure chain. This is designed to reduce shipping queues and, consequently, the costs that coal producers have to pay ships for waiting in such queues (demurrage costs). With allocations under the capacity balancing system being reduced throughout the thermal coal prices second half of the year, coal producers have not monthly, ended November 2007 been able to set aside any of their allocation for spot sales. Instead, all of their allocations have been used Richards Bay spot Newcastle spot to meet existing contracts. 60 Over the remainder of 2007-08, infrastructure constraints at Australian ports are unlikely to ease signifi cantly and Chinese exports are expected to 40 remain lower than in recent years. With strong import demand expected to continue in Asia, a signifi cant Japan contract reduction in Newcastle thermal coal spot prices in 20 the near future is unlikely. world trade to continue growing US$/t World thermal coal trade is estimated to increase Dec Dec Dec by 4 per cent in 2007 to 660 million tonnes and is 2004 2005 2006 2007 forecast to rise by a further 5 per cent to 692 million tonnes in 2008. Asia is estimated to remain the fastest growing import region, with growth rates of 9 per cent in 2007 and 7 per cent in 2008. The main factor driving this growth is increased coal fi red electricity generation in developing countries. China a net importer? An important factor in the current global thermal coal market has been developments in China’s domestic coal market, the world’s largest. China’s domestic coal prices have increased recently, refl ecting increased consumption for coal fi red electricity generation and the introduction of three new production taxes in the province of Shanxi. As a result of these developments, China appears likely to be a net importer of thermal coal in 2008. Higher domestic thermal coal prices have provided Chinese coal producers with an incentive to sell coal on the domestic market at the expense of the export market. This resulted in China’s thermal coal exports declining by 11 per cent in 2006 and by 19 per cent year on year in the fi rst nine months of 2007. For the year as a whole, China’s exports of thermal coal are estimated to fall by 19 per cent to 48 million tonnes. In 2008,

632 australian commodities > vol. 14 no. 4 > december quarter 2007 thermal coal exports are forecast to decline by a further 13 per cent to 42 million tonnes, refl ecting continued high domestic prices supported by strong growth in economic output and electricity consumption. While high domestic prices in China have resulted in reduced exports, they also mean that imported coal has become more competitive. In 2007, thermal coal imports are estimated to increase by 34 per cent to 45 million tonnes and in 2008, by a further 13 per cent to 51 million tonnes. small rise in Japanese imports Japan’s coal fi red power stations are operating at close to full capacity and there are no increases to coal fi red electricity generation capacity planned for 2007 or 2008. As a result, there is little scope for thermal coal import growth, which is estimated to expand by only 1 per cent in both 2007 and 2008, to total 120 million tonnes and 121 million tonnes respectively. In other Asian economies, including the Republic of Korea, Chinese Taipei and Malaysia, electricity generation is forecast to increase in line with strong economic growth. In these economies, a signifi cant proportion of the increased electricity demand is expected to be met through expansions to coal fi red generation capacity, refl ecting supply reliability and cost competitiveness. Since these countries do not have signifi cant coal reserves, the increased demand for coal will be met through imports. thermal coal outlook In Korea in 2007 and 2008, a total of ten 500 megawatt coal fi red power stations are expected 2006 2007 f 2008 f % World change to commence operation. As a result, thermal coal imports are estimated to increase by 7 per cent in Total trade Mt 635.2 659.7 692.0 4.9 2007 to 64 million tonnes and by a further 8 per Imports cent in 2008 to a forecast 69 million tonnes. Asia Mt 332.5 361.4 385.1 6.6 – China Mt 33.6 45.0 51.0 13.3 Within the ASEAN region, Malaysia’s thermal – Chinese Taipei Mt 57.5 61.0 63.0 3.3 coal imports are estimated to increase strongly, by – India Mt 24.0 27.0 31.0 14.8 15 per cent and 12 per cent in 2007 and 2008 – Japan Mt 117.8 119.5 121.0 1.3 – Korea Mt 59.6 64.0 69.0 7.8 respectively. The increase in imports is supported – Malaysia Mt 11.3 13.0 14.5 11.5 by government policies aimed at increasing coal – Other Asia Mt 28.7 31.9 35.6 11.6 fi red electricity generation capacity to diversify fuel Europe Mt 207.7 204.1 210.0 2.9 – EU 25 Mt 180.9 169.0 174.0 3.0 sources and to ensure reliability of supply. – Other Europe Mt 26.8 35.1 36.0 2.6 Despite being the world’s third largest coal Other Mt 95.0 94.2 96.9 2.9 producer, India imported 12 per cent more thermal Exports coal in the fi rst half of 2007 than in the corresponding Australia Mt 111.6 113.0 119.0 5.3 China Mt 58.9 48.0 42.0 – 12.5 period of the previous year. This follows growth in Colombia Mt 59.7 65.0 70.0 7.7 imports of 11 per cent in 2006. Indonesia Mt 170.0 186.0 201.0 8.1 India’s domestic transport infrastructure is a major Russia Mt 77.0 77.0 79.0 2.6 South Africa Mt 67.7 65.0 69.0 6.2 constraint on the effi cient movement of coal from the United States Mt 19.9 22.0 24.0 9.1 principal domestic producing regions to the main Other Mt 70.4 83.7 88.0 5.1 consuming centres. Rail transport is costly and often 2005 2006 2007 -06 -07 -08 f unreliable as passenger services have scheduling Australia priority. In addition, domestic coal often has a high Production Mt 174.2 181.1 183.6 1.4 ash content so it is blended with imported coal to Exports Mt 110.8 111.7 114.6 2.6 increase overall quality. Refl ecting these factors, – value A$m 7 206 6 762 7 330 8.4 Indian thermal coal imports are estimated to increase See back tables for details. s ABARE estimate. f ABARE forecast.

australian commodities > vol. 14 no. 4 > december quarter 2007 633 thermal coal

by 13 per cent to 27 million tonnes in 2007 and by a forecast 15 per cent to 31 million tonnes in 2008. EU imports to fall in 2007 In 2007, EU imports of thermal coal are estimated to decline by around 12 million tonnes, following an increase of almost 17 million tonnes in 2006. This decline is a result of a number of factors, including above average winter temperatures at the beginning of 2007, which reduced electricity demand for heating purposes, and a decrease in the cost of fuel substitutes, such as gas, which increased demand for alternative fuels at the expense of coal. major exporting countries In 2007 and 2008, growing demand for imported coal is expected to be met by increased shipments from Colombia, Indonesia and Australia. Thermal coal exports from South Africa are estimated to remain below 70 million tonnes in 2007 and 2008 because of capacity constraints at the Richards Bay Coal Terminal. In 2007, thermal coal exports from Colombia are estimated to increase by 9 per cent to 65 million tonnes. Exports could have been higher were it not for the unavailability of equipment at some mines that curtailed production in mid-2007. Diffi culties and delays in sourcing mining equipment has become a feature of the global mining industry. For example, according to Rio Tinto, lead times for delivery of tyres and large haul trucks have increased from three months to two years. Colombia’s thermal coal exports in 2008 are forecast to increase by 8 per cent to 70 million tonnes, supported by expansions at large mines such as Cerrejon and Drummond. US thermal coal exports in 2007 are estimated to have risen by 11 per cent to 22 million tonnes, encouraged mainly by high prices in Europe. US thermal coal generally has a high sulfur content that makes it less desirable for European power stations than low sulfur coal sourced from Colombia and South Africa. However, low supply growth into the Atlantic market in 2008, particularly from South Africa and the Russian Federation, is likely to force European power stations to use more US coal. Consequently, US thermal coal exports are forecast to rise by 9 per cent in 2008 to 24 million tonnes. Indonesia’s thermal coal exports in the fi rst half of 2007 are estimated to have been similar to the fi rst half of 2006. The lack of export growth refl ected disruptions to production associated with above average rainfall in May and June at a number of mines. With a return to favourable mining conditions in the second half of 2007, growth in Indonesian exports is expected to have been strong. For 2007 as a whole, Indonesia’s thermal coal exports are estimated to increase by 9 per cent to 186 million tonnes. In 2008, Indonesia’s thermal coal exports are forecast to increase by 8 per cent to 201 million tonnes. The slower rate of export growth refl ects an increasing proportion of production being consumed domestically, particularly for electricity generation. Indone- sia’s state owned power utility, Perusahaan Listrik Negara, is aiming to increase coal fi red electricity generation capacity by 10 000 megawatts by 2009, in addition to converting a number oil fi red power plants to coal. Australia’s exports to grow The industry’s ability to respond to growing global demand for Australian thermal coal is being hampered by infrastructure capacity constraints. However, some recent additions to

634 australian commodities > vol. 14 no. 4 > december quarter 2007 thermal coal infrastructure capacity, together with more expan- thermal coal exports sions planned for the next twelve months, will help Australia alleviate the current problems. value In early 2007, annual coal handling capacity at the Port of Newcastle was increased by around 7 100 13 million tonnes to 102 million tonnes. Further additions to capacity at the port of Newcastle are 6 75 already being planned, including a 33 million tonne a year third coal loading terminal that is scheduled 5 50 for completion in early 2010 and will be operated by the Newcastle Coal Infrastructure Group. Addi- volume tional expansions to the existing Kooragang Island 4 25 terminal are also planned. 2006-07 In Queensland, expansions at the Abbot A$b Mt Point terminal were completed in October 2007, 2001 2003 2005 2007 increasing capacity by 6 million tonnes to 21 million -02 -04 -06 -08 tonnes a year. Expansions at the Port of Gladstone and Dalrymple Bay terminals are expected to be completed in early 2008, adding to thermal coal export capacity. Australian coal allocation systems In 2007-08, Australia’s thermal coal production Coal allocation systems have been implemented in is forecast to increase by 1.4 per cent to 184 million parts of New South Wales and Queensland because tonnes. Several mines have commenced operations demand for coal from the Hunter Valley (New South in the past nine months, the most recent being the Wales) and Goonyella (Queensland) supply chains North Wambo longwall in New South Wales that is forecast to be greater than supply capacity. will produce 3 million tonnes of thermal coal a year Port Waratah Coal Services, which operates the when full production rates are achieved. In addition, two terminals at Newcastle, have proposed a new coal shipment allocation system for 2008 — the vessel the Ashton longwall, and the Wilpinjong, Boggabri, queue management (VQM) system. The VQM system Tarawonga opencut mines in New South Wales would replace the existing capacity balancing system and the Kogan Creek opencut mine in Queensland (CBS). Unlike the CBS, the VQM system takes into all commenced production during 2007 and are account rail capacity as well as port capacity when expected to continue to increase production toward allocating coal export capacity. This whole of coal their respective capacities. Coal production capacity chain approach to allocating export capacity means will also be boosted by the expected startup of that forecasts for 2008 coal exports from Newcastle should be more accurate than under the CBS. Using Anglo Coal Australia’s Dawson mine expansion the VQM system, it is forecast that in 2008, coal during 2007-08. export capacity through Newcastle will be 95 million Associated with higher production and infrastruc- tonnes. ture capacity, Australia’s thermal coal exports in The Dalrymple Bay Coal Terminal in Queensland 2007-08 are forecast to increase by around 3 per has also applied for an extension of its queue manage- cent to 115 million tonnes. ment system (QMS) to no later than the end of 2010, Reﬂ ecting increased export volumes and higher by which time system capacity expansion is expected to have occurred. The QMS operates similarly to the prices, the value of thermal coal exports in 2007-08 VQM in Newcastle and should prevent excessive ship- is forecast to increase by 8 per cent to $7.3 billion. ping queues by better matching the terminal capacity with that of the coal supply chain. Without coal allocation systems in place it could be expected that there would be signiﬁ cant vessel queues at Newcastle and Dalrymple Bay during the course of 2008.

australian commodities > vol. 14 no. 4 > december quarter 2007 635 december release abareconomics.com

australian commodity statistics available at abare website > excel tables > free PDF download available direct from abare > hard copy $50 contentsmetals

> alancontact copeland > +61 >2 6272+61 2 ???? 6272 > 2270 [email protected] > [email protected] metals appreciation of Australian dollar to affect export earnings steel and steel making raw materials rohan kendall » [email protected]

Global production of crude steel is estimated to be 1.34 billion tonnes in 2007 — nearly 8 per cent higher than in 2006-07 — and is forecast to grow by 6 per cent in 2008 to 1.41 billion tonnes. China remains the main driver of growth in world steel production and is expected to account for around 70 per cent of the increase in world steel output in both 2007 and 2008. Strong growth in steel production is also expected in India, Brazil and the Russian Federation. The positive outlook for global steel production will support increased demand for steel inputs, principally iron ore and metallurgical coal. steel making raw material prices to rise in 2008-09 metallurgical coal Following a decline in 2007-08, a substantial rise in metallurgical coal contract prices is expected for the 2008-09 Japanese ﬁ nancial year (JFY, April–March) because of strong global demand for coal and supply difﬁ culties resulting from congestion in Australian coal supply raw material prices chains. World metallurgical coal demand is strong, driven mainly by expanding steel industries in China and 120 India. However, growth in world demand for metal- hard coking coal lurgical coal has not been met by a corresponding 100 (2006-07US$/t) increase in Australian coal export infrastructure, 80 resulting in long shipping queues at Australian coal ports. High demand for metallurgical coal combined 60 with supply constraints indicates that contract prices semisoft are likely to rise during the upcoming negotiations. 40 coking coal (2006-07US$/t) 20 iron ore fines iron ore (2006-07USc/dltu) Iron ore prices are expected to rise substantially in 0 the upcoming round of contract negotiations for JFY 1998 2001 2004 2007 2008-09. This would be the sixth consecutive year of -99 -02 -05 -08 australian commodities > vol. 14 no. 4 > december quarter 2007 637 steel

iron ore prices price increases for iron ore ﬁ nes and lump. Factors that monthly, ended November 2007 are expected to contribute to a rise in iron ore prices include strong growth in global iron ore demand, led Indian exports to China in particular by production growth in China’s steel 150 63% Fe dry cif industry, rising iron ore production costs, the introduction of an iron ore export duty by the Indian Govern- ment and a signiﬁ cant depreciation of the US dollar 100 over the past year. China’s iron ore import prices indicate that the current divergence between spot and contract prices is likely 50 to underpin price rises at the 2008-09 negotiations. China domestic During 2007, the spot price of Indian iron ore Mt Newman 66% Fe wet, incl. 13% vat 2007 fines cif imported by China has risen from around US$80 US$/t a tonne (cif) to US$180 a tonne (cif). The difference Dec Dec Dec between the landed cost of Australian iron ore sold on 2005 2006 2007 a contract basis to China and Indian iron ore sold on a spot basis in China is now greater than US$100 a tonne.

shipping freight rates Higher freight rates in 2007 have imposed signifi cant cost increases on steel producers. From January to August 2007, spot freight rates between Australia and China rose by 48 per cent, or US$8 a tonne, while spot freight rates from Brazil to China rose by 83 per cent, or US$27 a tonne. Japanese and European steel mills tend to have long term shipping contracts that partly insulate them from rising shipping costs. In iron ore pricing contrast, very few Chinese steel mills have long term The bulk of the world’s seaborne iron ore exports is shipping contracts, leaving them exposed to move- sold under contract, with changes in iron ore prices ments in spot freight rates. revised on an annual basis following negotiations between the major iron ore producers (Vale, Rio Tinto steel prices to remain high in 2008 and BHP Billiton) and steel mills in Japan, western Europe and China. The negotiations typically start In 2008, world steel prices are expected to remain around November each year and continue for several high, refl ecting higher steel making costs and growing months. Once an agreement is reached (historically for steel demand. Steel making costs are expected to iron ore fi nes delivered to Japan) the price increases rise as a result of high freight costs and higher prices for other types of iron ore and other market segments for iron ore and metallurgical coal, the two key steel are usually settled with reference to this benchmark making ingredients. price. The rapid growth of China’s steel industry over the steel consumption past decade (and particularly the rapid growth in China’s steel production since 2000) has changed World crude steel consumption is estimated to be 1.30 the dynamics of global steel and iron ore markets, billion tonnes in 2007, around 7 per cent higher than in especially in the setting of iron ore prices. During the 2006, and is forecast to rise by 6 per cent in 2008 to 2007-08 negotiations, Chinese steel mills were the 1.38 billion tonnes. China continues to be the most impor- fi rst to settle the iron ore price, which then became the tant driver of global steel consumption, with consumption benchmark. This was the fi rst time that Chinese steel estimated to be around 448 million tonnes in 2007 and mills had been the fi rst to settle. Given that China is now the world’s largest iron ore importer, Chinese mills about 493 million tonnes in 2008. This means that China may continue to be the benchmark price setters. would account for 60 per cent of growth in global steel consumption in 2007 and 56 per cent in 2008.

638 australian commodities > vol. 14 no. 4 > december quarter 2007 steel

The construction sector accounts for more than half of China’s steel consumption. Demand for steel from the construction sector is expected to continue to grow strongly as the economy expands and the building of new factories and industrial buildings continues apace. China’s ongoing urbanisation will also contribute to substantial growth in infrastructure and housing construction. Japan’s steel consumption is estimated to have remained stable in 2007 and is forecast to grow by only 2 per cent in 2008 to around 88 million tonnes. This low growth refl ects an expected slowing in domestic construction activity fl owing from changes to Japanese laws that tighten building approval procedures. Steel consumption in the United States is forecast to rise slightly from an estimated 115 million tonnes in 2007 to 116 million tonnes in 2008. The low rate of growth (less than 1 per cent in both 2007 and 2008) is attributable mainly to weak steel demand from construction and manufacturing industries. Steel demand from the US construction industry has weakened because of a downturn in residential construction associated with the problems in the subprime mortgage market. Housing permits and starts, which are leading indicators of residential construction activity, have continued to fall, indicating that the decline in residential construction activity will continue into 2008. Steel demand from the US manufacturing sector has also been weak, as competition from imported manufactured goods has resulted in reduced steel orders from domestic manufacturers. However, if the US dollar continues to decline, then US manufactured goods are likely to become more competitive with imports, providing potential support for domestic steel production. In India, favourable government policies and economic conditions have contributed to an estimated 11 per cent increase in steel consumption in 2007 to 53 million tonnes. Steel consumption is forecast to rise by a further 10 per cent in 2008 to 58 million tonnes. One of the world steel outlook aims of the government’s national steel policy is to increase steel consumption per person to 165 kilograms by 2020 2005 2006 2007 s 2008 f (from 42 kilograms in 2006). Large investments are required Mt Mt Mt Mt crude steel consumption to improve India’s road, rail, port, airport, power generation European Union 27 182 194 199 203 and pipeline infrastructure, which underpins growth in steel United States 113 114 115 116 intensive construction. Brazil 19 19 20 21 Russian Federation 36 39 43 46 steel production and raw material demand China 350 396 448 493 Japan 83 86 86 88 In the fi rst ten months of 2007, world crude steel produc- Korea, Rep. of 49 49 51 53 tion rose by 8 per cent year on year to 1.1 billion tonnes. Chinese Taipei 24 24 25 26 Declining steel production in north America was more than India 41 47 53 58 offset by increases in all other regions. For 2007 as a whole, world total 1 126 1 217 1 303 1 383 world crude steel production is estimated to grow by 8 per crude steel production cent to 1.34 billion tonnes and is forecast to rise by a further European Union 27 196 206 211 213 6 per cent in 2008 to 1.41 billion tonnes. Rising costs of iron United States 95 98 97 98 ore and metallurgical coal are the main downside risk to Brazil 32 31 33 35 steel production in 2008. Russian Federation 66 71 73 76 China 356 423 490 544 Japan 112 118 119 119 China Korea, Rep. of 48 48 51 51 Steel production in China increased by 18 per cent year on Chinese Taipei 19 21 21 21 year in the fi rst ten months of 2007 to 409 million tonnes. For India 38 43 49 54 2007 as a whole, China is estimated to produce 490 million world total 1 140 1 244 1 339 1 414 tonnes of crude steel, up 16 per cent from the previous year. s ABARE estimate. f ABARE forecast.

australian commodities > vol. 14 no. 4 > december quarter 2007 639 metallurgical coal

With the startup of new steel making capacity, China’s steel production is forecast to grow by a further 11 per cent in 2008 to more than 544 million tonnes.

India Steel production in India is estimated to be 49 million tonnes in 2007, around 14 per cent more than in 2006. Production is forecast to grow by a further 10 per cent in 2008 to 54 million tonnes. Underpinning growth in India’s steel production has been substantial investment in new steel making capacity to meet demand from infrastructure investments and the growing industrial sector.

Russian Federation Steel production in the Russian Federation is estimated to be 73 million tonnes in 2007 (3 per cent up on 2006) and is forecast to rise by 4 per cent to 76 million tonnes in 2008. Russian steel mills have beneﬁ ted from securing raw materials at relatively low costs from captive mines and selling steel products at high prices in markets such as western Europe. This has generated substantial cash ﬂ ows for Russian steel producers, enabling them to invest in new or upgraded steel making facilities.

United States In response to declining steel prices associated with competition from imported steel, US steel producers have had to cut production in 2007, resulting in an estimated fall in production of around 1 per cent to 97 million tonnes. However, the depreciation of the US dollar will increase the competitiveness of domestically produced steel relative to imports. As a result, US steel production is forecast to grow by around 1 per cent in 2008 to 98 million tonnes. metallurgical coal consumption

strong growth in to continue in 2008 outlook for world metallurgical coal Global metallurgical coal consumption is estimated to be 764 trade million tonnes in 2007, an increase of 10 per cent from 2006, and is forecast to increase by 7 per cent in 2008 to 815 million 2005 2006 2007 s 2008 f tonnes. The majority of this increase is expected to occur in Mt Mt Mt Mt China, where consumption is estimated to grow by 13 per cent metallurgical coal imports European Union 27 51.8 53.0 52.9 54.0 in 2007 and 11 per cent in 2008, reﬂ ecting growth in blast Japan 56.6 60.1 63.5 64.1 furnace output. Strong growth in steel production and a lack of China 7.2 8.7 8.2 16.5 domestic reserves is also underpinning growth in India’s imports Korea, Rep. of 20.6 20.1 21.7 21.7 and consumption of metallurgical coal. Chinese Taipei 5.2 6.0 6.1 6.4 India 16.9 18.6 26.1 30.7 Indian metallurgical coal imports rising Brazil 13.7 13.4 15.2 16.1 Currently, just under half of India’s metallurgical coal require- world total 211.4 219.4 227.6 231.1 ments are met through imports. However, with an expectation metallurgical coal exports of strong growth in steel production and the low quality of Australia 124.9 124.4 136.3 139.0 Canada 26.7 24.6 25.2 25.9 domestic reserves of metallurgical coal, India’s metallurgical United States 26.0 24.9 26.5 28.3 coal imports are forecast to rise rapidly. Speciﬁ cally, India’s Russian Federation 10.0 10.4 10.1 9.0 imports of metallurgical coal are forecast to increase by 18 world total 211.4 219.4 227.6 232.6 per cent to 31 million tonnes in 2008, following an estimated s ABARE estimate. f ABARE forecast. increase of 40 per cent to 26 million tonnes in 2007.

640 australian commodities > vol. 14 no. 4 > december quarter 2007 iron ore metallurgical coal production growth in Australian production and exports Australia’s metallurgical coal production increased Australian metallurgical coal exports by nearly 7 per cent in 2006-07 to 142 million tonnes and is forecast to rise by a further 3 per cent to 147 million tonnes in 2007-08. The increases in value Australian production of metallurgical coal refl ect 15 120 increased production from new operations. In 2006-07, Australia’s exports of metallurgical coal rose by around 10 per cent to 132 million tonnes. 10 80 However, the value of exports declined by 12 per cent to $15 billion as lower US dollar contract prices and a stronger Australian dollar more than offset the 5 40 effect on earnings of higher volumes shipped. volume In 2007-08, Australia’s exports of metallurgical 2006-07 coal are forecast to increase by 4 per cent to 137 $b Mt million tonnes, refl ecting higher mine output and 1995 1998 2001 2004 2007 increased export capacity in Queensland. The value -96 -99 -02 -05 -08 of Australia’s metallurgical coal exports in 2007-08 is forecast to decline by 4 per cent to $14.4 billion as higher export volumes are more than offset by lower 2007-08 contract prices and a stronger Australian dollar. Capacity constraints in coal supply chains are the main threat to Australia achieving these export volumes. Throughout 2007, coal infrastructure in Queensland and New South Wales has not been suffi cient to meet throughput forecasts, leading to long shipping queues at ports. However, capacity upgrades that are due for completion in late 2007 and early 2008 are expected to boost capacity and relieve some congestion. iron ore supply Global iron ore production is estimated to be 1.61 outlook for world iron ore trade billion tonnes in 2007, up 8 per cent from 2006, and is forecast to rise by a further 8 per cent to 1.75 2005 2006 2007 s 2008 f billion tonnes in 2008. Australia, Brazil and China Mt Mt Mt Mt iron ore imports are expected to account for the majority of this European Union 27 160 170 173 176 increase as new iron ore projects and expansions Japan 132 134 139 140 come on line. China 275 326 378 438 Korea, Rep. of 43 44 44 46 Australia and Brazil to increase dominance in iron Chinese Taipei 15 15 16 16 ore supply world total 744 771 837 909 Refl ecting large increases in production capacity, iron ore exports Australian iron ore exports are estimated to be Australia 239 247 269 305 around 269 million tonnes in 2007, up 9 per cent Brazil 223 247 283 319 India 81 86 91 88 from 2006, and are forecast to increase by 13 per Canada 28 28 30 30 cent to around 305 million tonnes in 2008. Rising South Africa 27 27 31 34 prices and export volumes are leading to substantial Sweden 18 18 20 22 increases in iron ore export earnings. In 2006-07, world total 744 771 837 909 earnings from Australian iron ore exports rose by 21 s ABARE estimate. f ABARE forecast.

australian commodities > vol. 14 no. 4 > december quarter 2007 641 iron ore

Australian iron ore exports per cent to $15.5 billion and are forecast to rise by 16 per cent to $18.0 billion in 2007-08. volume Iron ore production in Australia increased by 24 million tonnes to 288 million tonnes in 2006-07 and is 15 225 forecast to rise by a further 24 million tonnes to around 312 million tonnes in 2007-08. These increases are value underpinned by substantial investment in iron ore explo- 10 150 ration and development of new capacity over the past ﬁ ve years that was driven by rising iron ore prices. Two new major sources of iron ore production in 5 75 Australia in 2008 will be stage 1 of Rio Tinto’s Hope Downs iron ore project (22 million tonnes a year) and

2006-07 Fortescue Metals’ Chichester Range project (45 million $b Mt tonnes a year), which is on schedule to begin shipping 1995 1998 2001 2004 2007 ore in May 2008. -96 -99 -02 -05 -08 In Brazil, iron ore exports are estimated to have risen by 15 per cent in 2007 to around 283 million tonnes and are forecast to increase by 13 per cent in 2008 to 319 million tonnes. Increases in Brazil’s exports are being driven by large investment in new capacity by Vale in response to strong demand from China. Vale recently announced an investment budget of US$3.3 billion for iron ore developments in 2008, including expansions to mine capacity and transport infrastructure. Much of the investment budget will be spent on expanding capacity at the Carajas mine to 130 million tonnes a year from its current capacity of 100 million tonnes. Overall, Brazil’s iron ore production is estimated to have risen by 11 per cent in 2007 to 357 million tonnes and is forecast to increase by 13 per cent in 2008 to 402 million tonnes. These increases in exports from Australia and Brazil are forecast to raise their combined share of global iron ore exports from 64 per cent in 2006 to 69 per cent in 2008.

strong growth in Chinese iron ore production and imports Production of iron ore in China is forecast to increase by 15 per cent in 2007 to 318 million tonnes and by a further 12 per cent to 356 million tonnes in 2008. Despite this, China will still require large quantities of imported ore to meet demand from its growing steel industry. China’s iron ore imports are estimated to rise by 16 per cent in 2007 to 378 million tonnes and by a further 17 per cent in 2008 to 442 million Australian iron and steel outlook tonnes. The majority of these imports will be sourced 2005 2006 2007 % from Australia and Brazil. -06 -07 -08 f change Production Iron and steel s Mt 7.87 8.01 8.33 4.0 iron ore exports from India to fall in 2008 Iron ore Mt 263.8 287.7 311.5 8.3 In March, the Indian Government imposed an export Metallurgical coal Mt 133.0 141.9 146.7 3.4 tax of 300 rupees (US$7.30) a tonne on iron ore with Exports Iron and steel Mt 2.43 2.65 2.86 7.9 an iron content of 63 per cent or more and a tax of – value A$m 1 674 1 743 1 822 4.5 50 rupees (US$1.20) a tonne on iron ore with an iron Iron ore Mt 239.4 257.4 289.8 12.6 – value A$m 12 854 15 519 18 030 16.2 content of less than 63 per cent. India’s iron ore exports Metallurgical coal Mt 120 132 137 3.8 to China appear to have been affected by the imposi- – value A$m 17 003 15 035 14 382 – 4.3 tion of this tax, declining from a monthly high of 9.8 See back tables for details. f ABARE forecast. million tonnes in March 2007 to 4.7 million tonnes

642 australian commodities > vol. 14 no. 4 > december quarter 2007 gold in September. For 2007 as a whole, India’s iron ore Indian iron ore exports to China exports are estimated to total 91 million tonnes, an monthly, ended September 2007 increase of over 5 per cent on the previous year, KAF>KFOLK LOBQ>U mainly because of strong growth before the export FJMLPBA tax was imposed. 8 In 2008, India’s iron ore exports are forecast to decline by 4 per cent to 88 million tonnes. The 6 reduced supply of iron ore from India, the world’s third largest exporter, is expected to contribute to 4 upward pressure on global iron ore prices.

2 gold Mt chris rumley » [email protected] Dec Dec Dec After averaging US$666 for the fi rst three quar- 2005 2006 2007 ters of 2007, gold prices rose strongly in the fourth quarter. From the beginning of October to early November 2007, the world gold price increased by nearly US$100 an ounce to around US$840 an ounce. These price rises were supported by investor expectations that the cut in US interest rates in late September would result in a depreciation of the US dollar. In addition, higher crude oil prices and the potential for these to fl ow into higher infl ation are likely to have encouraged greater investment in gold as a hedge against possible infl ationary pressures. As a result, for 2007 as a whole, gold prices are estimated to average US$700 an ounce. prices to rise in 2008 The world gold price in 2008 is forecast to average US$780 an ounce, more than 11 per cent higher than in 2007, largely because of ongoing strength in investment demand. The possibility of further downward pressure on interest rates in the United States, the potential for a number of central banks to reduce their holdings of US dollars, and concerns about continued instability in US debt and capital markets are all expected to encourage demand for gold as a hedge against a possible decline in the US dollar. gold and oil prices Growth in world gold mine production, continued daily, ended 30 November 2007 high volumes of offi cial sector gold sales and lower rates of dehedging are expected to place some down- 900 oil 90 ward pressure on the gold price in 2008. However, this is expected to be more than offset by signifi cant 800 80 upward price pressures stemming from growth in global fabrication demand and ongoing strength in 700 70 investment demand. 600 60 global mine production to increase in 2008 World gold mine production is estimated to be 2506 500 gold 50 tonnes in 2007, up 1 per cent from 2006, as increased production in China and Indonesia has offset lower US$/oz US$/bbl production in South Africa and Peru. For 2007 as a JanJuly Jan July whole, China’s gold production is estimated to have 2006 2007 australian commodities > vol. 14 no. 4 > december quarter 2007 643 gold

gold price and US dollar/euro increased by 5 per cent to 260 tonnes. In South Africa, daily, ended 30 November 2007 the declines in gold production observed during the past decade, primarily as a result of increased extraction costs, have continued in 2007. In Peru, 1.4 800 lower production for the fi rst three quarters of 2007 gold price at Newmont’s Yanacocha mine and at Barrick Gold’s 1.3 600 Lagunas Norte operation will result in a reduction in Peruvian gold output in 2007. 1.2 400 In 2008, global gold production is forecast to increase by 3 per cent to 2590 tonnes, largely from US$/euro higher output in China, the United States and Australia. 1.1 200 In 2008, gold production in China is forecast to increase by 4 per cent to 270 tonnes. The continued US$/euro US$/oz uptake of more effi cient mining technology and better JulyJan JulyJan July exploration techniques by domestic gold producers 2005 2006 2007 is expected to support this increase. In the United States, a forecast increase in production in 2008 is underpinned by an assumption that output at Newmont’s Nevada operations grows as the recently commissioned Leeville and Phoenix mines achieve full production in the next twelve months, offsetting the suspension of mining at the Midas mine. offi cial sector sales to remain largely unchanged in 2008 For 2007 as a whole, offi cial sector sales are estimated to have increased by 19 per cent to 420 tonnes, mainly refl ecting an increase in gold sales by signatories to the second Central Bank Gold Agreement. In the third year of the agreement (27 September 2006 to 26 September 2007), signatories sold an estimated 476 tonnes of the annual limit of 500 tonnes. In 2008, offi cial sector sales are expected to remain largely unchanged, again not reaching the annual quota of 500 tonnes. While the central banks of a number of countries that are signatories to the second Central Bank Gold Agreement are expected to continue to sell gold, the 500 tonne limit is not likely to be reached unless a central bank with signifi cant gold holdings, such as in Germany or Italy, commences gold sales. Currently, the central banks of Germany and Italy have not indi- gold price volatility cated whether they intend to exercise the option to sell daily, ended 30 November 2007 a portion of their gold holdings over the remainder of the agreement. world fabrication demand to remain strong in 30 2008 Despite high gold prices in the fi rst three quarters of 2007, world gold fabrication demand increased 20 substantially. This was largely attributable to strong demand for gold jewellery in India, the Middle East 10 and China, where customers who had reduced purchases in 2006 in response to high gold price volatility re-entered the market. For 2007 as a whole, US$ world gold fabrication demand is estimated to have Jan JulyJan July increased by around 11 per cent to 3246 tonnes. 2006 2007 This anticipated pickup in consumption mainly refl ects

644 australian commodities > vol. 14 no. 4 > december quarter 2007 gold continued growth in household disposable incomes in China, India and the Middle East and low price volatility, particularly in the ﬁ rst three quarters of 2007. In 2008, gold fabrication consumption is forecast to increase by more than 3 per cent to 3358 tonnes, sustained by solid economic growth and corresponding increases in household incomes in India, the Middle East and China. However, important to the growth in consumption will be the outlook for gold price volatility in 2008. If gold price volatility returns to the highs observed in 2006, there may be a dampening effect on gold fabrication consumption. dehedging to continue but at reduced rates In the ﬁ rst three quarters of 2007, gold producers reduced their outstanding hedge positions by around 320 tonnes, effectively reducing the supply of gold on the world market. The majority of this dehedging was conducted by large gold producers such as Barrick Gold, Newmont, AngloGold Ashanti and Lihir Gold, particularly in the June quarter. For 2007 as a whole, dehedging is estimated to have reached around 410 tonnes. In 2008, dehedging is forecast to decline to around 200 tonnes, largely because the ability of major mining companies to further cut their outstanding hedge positions will be constrained by the reduced size of their remaining hedge books. While lower rates of dehedging are expected to place some downward pressure on the gold price in 2008, this is expected to be more than offset by growth in fabrication and investment demand. gold production in Australia to increase marginally in 2007-08 Australian gold production is forecast to increase by less than 1 per cent to 252 tonnes in 2007-08. This slight increase in production is expected to be supported by a buildup in output at mines that have recently commenced production, or will commence production over the remainder of 2007-08. Partially offsetting this increase has been the recent mothballing of a number of gold operations and decreasing production at mines that are scheduled to cease mining over the next several years as their ore bodies are depleted. Crescent Gold’s Laverton mine (90 000 ounces a year), View Resources’ Bronzewing mine (50 000 – 70 000 ounces a year) and Tanami Gold’s Coyote mine (initial production of 50 000 ounces a year) gold outlook are expected to build to full production over the remainder 2006 2007 f 2008 f % of 2007-08. Other projects that will add to Australia’s World change gold production over the remainder of 2007-08 include: Fabrication Straits Resources’ Hillgrove project (21 000 ounces a consumption t 2 918 3 246 3 358 3.5 year) in New South Wales; Frog’s Leg underground project Mine production t 2 477 2 506 2 590 3.4 (around 100 000 ounces a year) – a joint venture between Scrap sales t 1105 950 850 – 10.5 Net stock sales t – 664 – 210 – 82 – 61.0 La Mancha Resources and Dioro Exploration – in Western – official sector t 352 420 380 – 9.5 Australia; and, also in Western Australia, Avoca Resources’ – private sector t (647) (220) (262) Higginsville project (160 000 – 190 000 ounces a year), – producer hedging t (369) (410) (200) Price US$/oz 605 700 780 11.5 where mined ore is currently being stockpiled before gold 2005 2006 2007 production commences in mid-2008. -06 -07 -08 f The value of Australian gold exports in 2007-08 is fore- Australia cast to increase by 11 per cent to $11.4 billion. This is under- Mine production t 250 251 252 0.4 Exports t 315 400 410 2.5 pinned by the assumption that higher export volumes and – value A$m 7 089 10 320 11 445 10.9 sustained high US dollar denominated gold prices more Price A$/oz 707 814 874 7.3 than offset the assumed strength of the Australian dollar. See back tables for details. f ABARE forecast.

australian commodities > vol. 14 no. 4 > december quarter 2007 645 aluminium

aluminium

antony clarke » [email protected]

prices to peak in 2007 Driven mainly by strong demand, world aluminium prices averaged US$2675 a tonne (US121c/lb) in the fi rst ten months of 2007, 4 per cent higher than in 2006. This is despite a short term downward move to an average US$2390 a tonne in September, as aluminium stocks increased, particularly on the LME, where stocks increased by around 100 000 tonnes. Prices then increased and are expected to remain around current levels of US$2530 a tonne for the rest of the year. For 2007 as a whole, aluminium prices are estimated to average US$2660 a tonne (US121c/lb), 4 per cent higher than in 2006. By the end of 2007, stocks of aluminium are estimated to be around 4.6 weeks of consumption, 14 per cent higher than a year earlier. …before declining in 2008 In 2008, global aluminium prices are forecast to average around US$2365 a tonne, 11 per cent lower than in 2007. Production is forecast to exceed world consumption for a second year in succession. As a result, stocks are forecast to rise further, to the equivalent of 5.4 weeks of consumption by the end of 2008. divergent consumption trends in major markets World aluminium consumption in 2007 is estimated to be 37.2 million tonnes, a rise of almost 10 per cent from 2006, as strong demand growth in China and other developing countries more than offsets weak demand in the United States and Japan. In 2008, world aluminium consumption is forecast to increase by more than 6 per cent to 39.6 million tonnes, with China expected to continue to be the main driver of growth. Aluminium demand is also benefi ting from high copper prices, which are encouraging substitution to aluminium in a number of end uses, such as radia- tors, air conditioning and electrical transformers. Chinese aluminium consumption increased by 45 per cent world aluminium stocks and price year on year in the fi rst eight months of 2007, driven by strong LME growth in building construction, the expansion of electrical other exchange power grids, and growing output of consumer household prod- producer ucts and motor vehicles. In the fi rst nine months of 2007, invest- 2500 3000 ment in fi xed assets, such as factories and housing, increased price by around 26 per cent, year on year, and light motor vehicle production increased by 20 per cent. Over the same period, 2000 2000 both electricity production and the production of major white goods increased by 14 per cent. For 2007 as a whole, China’s consumption of aluminium is estimated to grow by 39 per cent 1500 1000 to 12 million tonnes. In 2008, Chinese consumption of aluminium is forecast to 2007 increase by 13 per cent to almost 13.6 million tonnes, as a US$/t kt result of continued strong economic and industrial production 1996 19992002 2005 2008 growth.

646 australian commodities > vol. 14 no. 4 > december quarter 2007 aluminium

In contrast to China, US consumption of primary US housing starts and permits aluminium declined by 12 per cent in the fi rst eight monthly, ended September 2007 months of 2007 year on year. This refl ected weakness in the housing and transport sectors. Both 2200 total housing starts and housing permits dropped permits by around 25 per cent in the fi rst three quarters of 2000 2007, year on year, and motor vehicle production 1800 fell by almost 5 per cent. For 2007 as a whole, US starts aluminium consumption is estimated to be 5.8 million 1600 tonnes, 5 per cent below that in 2006. In 2008, US consumption of primary aluminium 1400 is forecast to recover by 1 per cent to 5.9 million 1200 tonnes, as activity in aluminium intensive sectors, such as machinery and equipment, construction and no. packaging improves. 2001 2003 2005 2007 Aluminium consumption in Japan has also been weak in 2007, declining by 2.5 per cent in the fi rst seven months, year on year. A revision to the Building Standard Law in Japan in June resulted in a sharp drop in housing starts and this weakness is expected to continue in the short term. For 2007 as a whole, aluminium consumption in Japan is estimated to be 2.2 million tonnes, a fall of more than 3 per cent from 2006, before rising by 4 per cent in 2008 to 2.3 million tonnes, as the rate of industrial production growth increases. strong world production growth World aluminium production in 2007 is estimated to be 37.7 million tonnes, 11 per cent higher than in 2006, mainly as a result of the commissioning of new capacity in China, as well as smaller increases in Argentina, Brazil, Iceland, India, Iran, the Russian Federation and the United Arab Emirates. Cumulatively, these smaller additions to capacity will increase production in 2007 by more than 700 000 tonnes. In addition, the renegotia- aluminium outlook tion of power contracts in the United States has allowed 2006 2007 f 2008 f % a number of previously idled smelters to be reactivated, World aluminium change boosting production by 170 000 tonnes in 2007. Production kt 33 967 37 730 40 440 7.2 In contrast, a number of smelters across Europe — in Consumption kt 33 970 37 218 39 599 6.4 Closing stocks kt 2 764 3 277 4 118 25.7 France, Germany and Norway — have closed, taking – weeks consumption 4.2 4.6 5.4 17.4 around 200 000 tonnes out of production in these coun- Price US$/t 2 570 2 660 2 365 – 11.1 tries in 2007. USc/lb 116.6 120.7 107.3 – 11.1 World alumina These regional trends in aluminium production largely Spot price US$/t 433 330 296 – 10.3 refl ect movements in electricity costs, which account for 2005 2006 2007 around 30 per cent of the total cost of producing aluminium Australia -06 -07 -08 f metal, and the associated incentive for aluminium producers Production Bauxite Mt 60.9 62.7 62.1 – 1.0 to locate in countries with relatively low energy costs. Alumina kt 17 826 18 506 19 980 8.0 In 2008, world aluminium production is forecast to rise Aluminium kt 1 912 1 957 1 983 1.3 by more than 7 per cent to 40.4 million tonnes, largely as Exports Alumina kt 14 499 15 054 16 263 8.0 a result of continued strong production growth in China. – value A$m 5 262 6 224 5 556 – 10.7 Substantial additions to aluminium capacity in 2008 in other Aluminium kt 1 617 1 638 1 709 4.3 countries include the 285 000 tonnes a year expansion at – value A$m 4 788 5 648 4 867 – 13.8 Venalum’s smelter in Venezuela; an extra 250 000 tonnes See back tables for details. f ABARE forecast.

australian commodities > vol. 14 no. 4 > december quarter 2007 647 aluminium

aluminium production a year in the Russian Federation from the new Khakas monthly, ended September 2007 smelter and an expansion to the Sayanagorsk smelter; the ongoing commissioning of the 130 000 tonnes a 6 world excluding China year Nordural smelter in Iceland; the 130 000 tonnes a year expansion to the Iralco smelter in Iran; the 122 5 500 tonnes a year expansion to the Aluar smelter in 4 Argentina; and the 115 000 tonnes a year expansion to the Nalco smelter in India. 3 China …driven mostly by China 2 China is the major driver behind the strong growth 1 in world aluminium production. In both 2006 and in the fi rst nine months of 2007, year on year, China Mt accounted for 79 per cent of the increase in total 2001 2003 2005 2007 world production. China now accounts for just over a third of world aluminium production. After increasing by 20 per cent in 2006, Chinese production in 2007 is estimated to grow by 34 per cent to 12.5 million tonnes, as more than 3 million tonnes of new capacity is expected to be commissioned this year. For 2007 as a whole, China is estimated to contribute 84 per cent of the total increase in world aluminium production. In 2008, China’s production of aluminium is forecast to increase by a further 12 per cent to 14 million tonnes. The largest additions to capacity include the 300 000 tonnes a year expansion at the Shandong Weiqiao smelter and the new Huomei Hongjun smelter, with capacity of 200 000 tonnes a year. China is forecast to account for 55 per cent of the total increase in world aluminium production in 2008. Australia’s aluminium export earnings to fall In Australia, production of aluminium increased by almost 3 per cent in 2006-07 to 1.96 million tonnes, as a result of effi ciency improvements. Increases in production occurred at the Kurri Kurri smelter in New South Wales (up 11 per cent), the Portland and Point Henry smelters in Victoria (up 4 per cent), the Bell Bay smelter in Tasmania (up 3 per cent) and the Boyne Island smelter in Queensland (up 2 per cent). Production in 2007-08 is forecast to rise by around 1 per cent to 1.98 million tonnes, refl ecting ongoing effi ciency improvements. In 2006-07, Australian aluminium export earnings increased by 18 per cent to $5.7 billion, refl ecting higher export unit values and slightly higher export volumes. In 2007-08, export earnings are forecast to fall by 14 per cent to $4.9 billion, largely as a result of forecast lower aluminium prices and an assumed higher exchange rate.

648 australian commodities > vol. 14 no. 4 > december quarter 2007 alumina alumina antony clarke » [email protected] spot prices to decline in 2007 and 2008 In 2007, spot prices for alumina are estimated to average around 24 per cent lower than in 2006 at US$330 a tonne. Despite the strong increase in aluminium production, and thus alumina consumption, alumina production increases in Australia, Brazil, China, Greece and the Russian Federation are expected to exceed consumption growth. Total world alumina production is forecast to increase by almost 10 per cent to 81 million tonnes in 2007. Alumina production would be higher if not for disruptions at Rusal’s Guinea refi nery related to transport issues and at Jamalco’s refi nery in Jamaica as a result of port damage from Hurricane Dean. In 2008, spot alumina prices are forecast to decline by a Australian alumina exports further 10 per cent to average US$296 a tonne, as higher world alumina production again more than outweighs increased consumption. World alumina production in 2008 is forecast to increase by 7 per cent to 86.8 million tonnes. Major additions 6000 15 to alumina capacity are expected to occur in Brazil (3.9 million value tonnes a year), India (2.7 million tonnes a year), Australia (1.8 million tonnes a year) and the Russian Federation (1.4 million 4000 10 tonnes a year). However, a major risk to the outlook for alumina prices relates volume to the supply of Indonesian bauxite to China’s rapidly growing 2000 5 alumina refi ning industry. China’s alumina production increased by more than 50 per cent in the fi rst nine months of 2007, year 2007 on year. Over the same period, China’s bauxite imports rose A$ Mt by 170 per cent, with around 70 per cent of imports coming 1995 1998 2001 2004 2007 from Indonesia. There have been indications that Indonesia -96 -99 -02 -05 -08 may restrict illegal bauxite mining and subsequently exports. This could have signifi cant repercussions for China’s alumina production and spot alumina prices, with Chinese refi neries being among the largest purchasers of alumina on the spot market. In particular, if the availability of bauxite from Indonesia were impeded, alumina production in China would be adversely affected and alumina prices could be expected to be higher than forecast. Australia’s alumina export earnings to fall despite higher production Australian production of alumina increased by 4 per cent to 18.5 million tonnes in 2006- 07. This was largely from a 30 per cent increase in production at Rio Tinto’s Yarwun refi nery in Gladstone, Queensland, which has now reached full capacity. In 2007-08, alumina production in Australia is forecast to increase by 8 per cent to almost 20 million tonnes, as Alcan’s 1.8 million tonnes a year Gove refi nery expansion in the Northern Territory builds up production. Australia’s alumina export earnings increased by 18 per cent to $6.2 billion in 2006- 07, refl ecting both higher export unit values and greater export volumes. In 2007-08, earnings from alumina exports are forecast to fall by 11 per cent to $5.6 billion, as rising export volumes are more than offset by forecast lower alumina prices and an assumed higher exchange rate. australian commodities > vol. 14 no. 4 > december quarter 2007 649 nickel

nickel

rebecca mccallum » [email protected]

Nickel prices are forecast to average around US$30 000 a tonne in the December quarter following highly volatile prices earlier in the year. After rising to a record US$54 200 a tonne in May and then falling below US$25 100 a tonne in August, prices are expected to end the year above US$29 000 a tonne. prices to decline in 2008 but to remain high World nickel prices in 2007 are estimated to average around US$37 400 a tonne, 54 per cent higher than in 2006. The increase in the average price refl ects high prices in the fi rst half of the year (above US$40 000 a tonne) when world stocks were low and consumption was world nickel stocks to real price increasing rapidly. Consumption has since declined, monthly, January 1995 to August 2007 while production has remained steady, resulting in rising stocks and declining prices. 50 000 March 2007 Prices are forecast to average around US$27 500 a tonne in 2008. The world supply–demand balance 40 000 is expected to remain tight early in the year, providing support for prices above US$30 000 a tonne. 30 000 However, from the June quarter, nickel production is August 2007 forecast to increase and to exceed consumption as a 20 000 number of new mines are commissioned. As a result, nickel prices are forecast to fall to around US$25 000 10 000 a tonne in the September quarter. 2007 US$/t nickel stocks building 2468101214After falling to record lows of less than 4000 tonnes weeks of world consumption in February 2007, London Metal Exchange stocks increased to more than 40 000 tonnes in November, the highest they have been since early 2000. For world nickel price 2007 as a whole, growth in production is expected to daily, ended 22 November 2007 have outpaced demand growth. Refl ecting this, world nickel stocks at the end of 2007 are estimated to be price (US$/t) 50 000 around 3.4 weeks of world consumption, 8 per cent higher than at the end of 2006. 40 000 price consumption continuing to rise 30 000 World nickel consumption in 2007 is estimated to be around 1.42 million tonnes, an increase of 2 per cent 20 000 from 2006. Nickel purchases fl uctuated throughout 2007, partly in response to volatile prices. After prices stocks (tonnes) 10 000 rose early in the year, many users delayed purchasing nickel in favour of drawing down stocks and reducing 0 consumption in anticipation of nickel prices falling later Jan July Jan July in the year. With prices stabilising in the December 2006 2007 quarter, purchasing has increased.

650 australian commodities > vol. 14 no. 4 > december quarter 2007 nickel

Stainless steel production uses around 65 per cent of the primary nickel produced each year. As a result, developments in the stainless steel market have a substantial effect on world nickel consumption and prices. World stainless steel production increased in the fi rst fi ve months of 2007. However, producers responded to record high nickel prices in May by reducing production or switching to production of ferritic grade stainless steels that contain little or no nickel instead of the austenitic grades that have traditionally had a larger market share. Stainless steel producers in Europe, north America and Asia undertook large scale cutbacks in production in the September quarter (when demand is typically lower), with production in the European Union, Japan and the United States falling by almost 20 per cent in July. During this period, some demand for stainless steel was met from stocks. Production of stainless steel and hence nickel purchases are both expected to increase in the December quarter 2007 and in 2008 as producers lift output and warehouses rebuild stocks of nickel to meet demand. Nickel consumption is forecast to increase by around 6 per cent in 2008 to 1.50 million tonnes. world production continuing to increase In 2007, world nickel mine production is estimated to increase by around 6 per cent to 1.57 million tonnes. A large proportion of the increase is expected to be in the form of low grade ores and concentrates produced in the Philippines, Indonesia and New Caledonia. Production in these three countries is estimated to increase by approximately 20 per cent in 2007. The low grade ores and concentrates produced in these countries are used in the production of nickel pig iron in China. Nickel pig iron is a ferronickel pig iron that contains less than 5 per cent nickel, compared with conventional ferronickel that contains 25–40 per cent nickel. In August 2007, China’s National Development and Reform Commission announced plans to phase out small scale production of nickel pig iron (production in furnaces less than 300 cubic metres). As part of the plan, all new steel capacity (which includes nickel pig iron) must be approved by the government and furnaces must be larger than 1000 cubic metres. Despite the shutdown of smaller producers, the production of higher grade nickel pig iron in large furnaces is likely to remain economic until nickel prices fall below US$25 000 a tonne, which is not expected to be until late 2008. As a result, some production of nickel pig iron is expected to continue, providing ongoing demand for nickel outlook low grade ores. 2006 2007 f 2008 f % World nickel mine production is forecast to increase by 6 World change Production kt 1 352 1 424 1 523 7.0 per cent to around 1.66 million tonnes in 2008 as more than Consumption kt 1 396 1 417 1 503 6.1 ten new mines worldwide are expected to begin produc- Closing stocks kt 87 94 114 21.3 tion in 2008. The two largest mines are Ravensthorpe in – weeks consumption 3.2 3.4 4.0 17.6 Western Australia (capacity of 50 000 tonnes a year) and Price US$/t 24 252 37 421 27 500 – 26.5 USc/lb 1 100 1 697 1 247 – 26.5 Onca Puma in Brazil (57 000 tonnes a year). 2005 2006 2007 World refi ned nickel production in 2007 is estimated Australia -06 -07 -08 f to be around 1.42 million tonnes, 5 per cent more than in Production 2006. The large increase in nickel pig iron production in Mine kt 186 192 191 – 0.5 Refined kt 115 118 114 – 3.4 the fi rst half of the year is expected to account for a large Intermediate kt 74 57 55 – 3.5 proportion of this increase. Increased refi nery production in Exports s kt 198 215 214 – 0.5 Canada and Finland is also expected to contribute to the – value A$m 3 457 8 381 5 802 – 30.8 increase in output. See back tables for details. f ABARE forecast.

australian commodities > vol. 14 no. 4 > december quarter 2007 651 copper

World production of refi ned nickel is forecast to increase by a further 7 per cent in 2008 to around 1.52 million tonnes, supported by increased refi ning capacity in Australia and greater ferronickel capacity in China. The expected higher world output of refi ned nickel will be in response to continued growth in demand for nickel and greater availability of ores and concentrates. Australian production and exports In 2007-08, Australian nickel mine production is forecast to remain largely unchanged at around 191 000 tonnes. New production from Ravensthorpe in Western Australia and Avebury in Tasmania is expected to offset lower production at Murrin Murrin in Western Australia as a result of a planned maintenance shutdown in the December quarter. Refi ned nickel production in 2007- 08 is forecast to fall by 3 per cent to around 114 000 tonnes. There was lower production at both the Kalgoorlie smelter and the Yabulu refi nery in the September quarter as a result of planned maintenance activities. This is expected to more than offset increased production at Yabulu after the expansion project is completed in the fi rst half of 2008. Earnings from Australian nickel exports are forecast to fall by 31 per cent in 2007-08 to $5.8 billion. Export volumes are forecast to remain approximately unchanged at around 214 000 tonnes. However, lower world nickel prices and an assumed appreciation of the Australian dollar are forecast to reduce earnings from exports.

copper

kate penney » [email protected]

In the fi rst eleven months of 2007, copper prices averaged nearly US$7200 a tonne (326c/lb), 6 per cent higher than in the corresponding period in 2006. Strong demand in China coupled with a number of supply disruptions provided continued support for prices over this period. However, in late October, the tight deman–supply balance began to moderate, resulting in a steady increase in stocks and declining copper prices. world copper price high prices to persist in 2007 and 2008 monthly, ended November 2007 For 2007 as a whole, world copper prices are estimated to increase by 5 per cent to average around US$7100 a tonne (321c/lb). World production of 6000 refi ned copper is estimated to be 18.0 million tonnes, 4 per cent more than in 2006, and world copper consumption to also be around 18.0 million tonnes, 4000 up 6 per cent. With global consumption forecast to marginally exceed production, global copper stocks are forecast to decline to 1.9 weeks of consumption. 2000 World copper prices are forecast to average around US$6950 a tonne in 2008. World refi ned 2007 production in 2008 is forecast to exceed consump- US$/t tion and, as a result, stocks are forecast to increase 1990 1994 1998 2002 2006 to 2.3 weeks of consumption. However, if the vari-

652 australian commodities > vol. 14 no. 4 > december quarter 2007 copper ability in concentrate supplies adversely affects refi ned production, prices may rise further, presenting an upside risk to this assessment. China continues to drive strong growth in global consumption In the fi rst nine months of 2007, world copper consumption increased by 5 per cent year on year as higher consumption in China more than offset lower consumption in Europe and north America. In the fi rst nine months of 2007, China’s consumption of copper increased by 38 per cent year on year, refl ecting continued strong economic and industrial production growth. Underpinned by rapid growth in domestic economic activity, Chinese production of copper intensive goods rose strongly in the fi rst nine months of 2007. Looking forward, copper demand in China is expected to continue to grow, refl ecting strong growth in construction activity and additions to power generation capacity. The power industry accounts for around half of China’s copper consumption and is expected to continue to support strong copper demand. Around 105 gigawatts of new generating capacity was connected to the electricity grid in 2006, an increase of 20 per cent. Addi- tions to generating capacity are expected to slow in 2007 and 2008 as the gap between peak load demand and generating capacity narrows. Around 90 gigawatts of capacity is expected to be added to the grid in 2007 (a 14 per cent increase) and 85 gigawatts in 2008 (a 12 per cent increase). Copper use in the power sector is expected to be around 2 million tonnes in 2007 and 2.1 million tonnes in 2008. weak construction activity to continue to affect US consumption US copper consumption declined by 6 per cent year on year in the fi rst nine months of 2007 largely because of continued weakness in the residential housing market. The fallout in the US subprime mortgage sector and associated tighter credit conditions have had a negative infl uence on the demand for new housing. In the fi rst nine months of 2007, construction spending and new residential home sales declined by 3 per cent and 23 per cent respectively. The weakness in US construction activity is expected to persist in 2008. Against this background, US copper consumption is forecast to decline by 1 per cent to 2 million tonnes. copper outlook world mine production increasing 2006 2007 f 2008 f % In 2007, world copper mine production is estimated to be World change 15.6 million tonnes, an increase of 3 per cent from 2006, Production – mine kt 15 097 15 567 16 955 8.9 as a result of the commissioning of a number of new – refined kt 17 328 17 972 19 111 6.3 projects. Additional output is expected from Freeport’s Consumption kt 17 044 18 029 18 932 5.0 Cerro Verde expansion in Peru (an increase of approxi- Closing stocks kt 703 646 825 27.7 mately 145 000 tonnes a year), which was commis- – weeks consumption 2.1 1.9 2.3 21.1 Price US$/t 6 741 7 086 6 950 – 1.9 sioned in early 2007, and the restart of BHP Billiton’s Pinto USc/lb 305.8 321.4 315.2 – 1.9 Valley operations in the United States (70 000 tonnes a 2005 2006 2007 year) that were mothballed in 1998. -06 -07 -08 f World copper mine production in 2008 is forecast to Australia Mine output kt 936 859 878 2.2 increase by 9 per cent to 17 million tonnes as new projects Refined output kt 461 435 448 3.0 in Chile, the United States, Zambia and the Democratic Exports Republic of Congo are commissioned. In Chile, Codelco – ores and conc. kt 1 635 1 493 1 545 3.5 – refined kt 314 290 328 13.1 plans to commission its Gaby project (150 000 tonnes a – total value A$m 5 653 6 520 6 206 – 4.8 year) and expand output at Andina (by 80 000 tonnes a See back tables for details. s ABARE estimate. f ABARE forecast.

australian commodities > vol. 14 no. 4 > december quarter 2007 653 copper

year). Anglo American and Xstrata plan to increase production at the Collahuasi mine by 105 000 tonnes a year following a debottlenecking program. In addition, Xstrata plans to increase production at its Lomas Bayas mine (by 10 000 tonnes a year) in late 2008. Elsewhere, additional capacity is expected to come from Freeport’s Safford mine (109 000 tonnes a year) in the United States; Equinox Minerals’ Lumwana mine (169 000 tonnes a year) in Zambia; and CAMEC’s Luita mine (100 000 tonnes a year) in the Demo- cratic Republic of Congo. In addition, Katanga Mining’s Kamoto mine (150 000 tonnes a year) in the Democratic Republic of Congo is expected to approach full capacity after being commissioned in late 2007. refi ned production to expand World refi ned copper production is estimated to be 18 million tonnes in 2007, an increase of 4 per cent from 2006, and is forecast to rise by 6 per cent in 2008 to 19.1 million tonnes, in line with capacity expansions in Chile and China. China’s production of refi ned copper is expected to expand strongly in 2007 and 2008 in line with the anticipated commissioning of more than 900 000 tonnes of new capacity. High copper prices have encouraged increased investment in the copper smelting industry in China, with around 640 000 tonnes of new copper smelting capacity to be completed in 2007, and an additional 400 000 tonnes to be added in 2008. However, the rapid development of new copper smelting capacity has increased China’s reliance on imports of raw materials. According to the National Development and Reform Commission, China’s copper concentrate self suffi ciency ratio declined from 46 per cent in 2001 to 42 per cent in 2006. In Chile, additional refi ned copper output is expected from BHP Billiton’s Spence SX–EW (solvent extraction electrowinning) project (200 000 tonnes a year) that was commissioned at the end of 2006 and Codelco’s Gaby SX–EW project which is expected to be commissioned in 2008. Elsewhere, additional refi ned production will come from Freeport’s Safford SX–EW project in the United States and CAMEC’s Luita SX–EW project in the Democratic Republic of Congo, which are both expected to be commissioned in 2008. Australian export earnings to decline in 2007- 08 In 2007-08, Australia’s copper mine production is forecast to increase by 2 per cent to 878 000 tonnes as a number of new small scale projects are commissioned. Copper- co’s Lady Annie mine in Queensland (25 000 tonnes a year), Matrix Metals Leichhardt operation in Queensland (10 000 tonnes a year) and Jabiru Metals Jaguar mine in Western Australia (9600 tonnes a year) were all commissioned in mid to late 2007. Compass Resource’s Brown’s Oxide mine in the Northern Territory (10 000 tonnes a year) is expected to be commissioned in the fi rst quarter of 2008. Australian refi ned copper production is forecast to increase by 3 per cent to 448 000 tonnes as a result of expected higher output from the Townsville Copper Refi nery (an expansion of 20 000 tonnes) and the commencement of SX–EW production from the Leichhardt, Lady Annie and Brown’s Oxide operations. In 2007-08, Australia’s total export earnings from refi ned copper and copper ores and concentrates are forecast to decline by 5 per cent to $6.2 billion. A forecast 13 per cent rise in the volume of refi ned copper exports and 4 per cent rise in the volume of copper concentrate exports is expected to be more than offset by the effect on earnings of forecast lower export prices and an assumed appreciation of the Australian dollar.

654 australian commodities > vol. 14 no. 4 > december quarter 2007 zinc zinc rebecca mccallum » [email protected]

After starting 2007 at around US$4260 a tonne, zinc prices had dropped to less than US$2500 a tonne in the third week of November, the lowest they had been since March 2006. Apart from a brief rally in May, supported by purchases from China, prices have fallen steadily in 2007. For 2007 as a whole, zinc prices are estimated to average around US$3240 a tonne, 1 per cent lower than in 2006. Except in August, zinc production was consistently lower than consumption in the fi rst nine months of the year. As a result, world stocks of zinc are estimated to fall by 6 per cent in 2007 to around 460 000 tonnes. weaker prices in 2007 to continue into 2008 World zinc prices are forecast to weaken in 2008, falling by 45 per cent year on year to average around US$1780 a tonne. The forecast drop in prices refl ects expectations that new supply will come on line and stocks will recover as production exceeds consumption. Stocks are forecast to rise from the equivalent of 2.1 weeks of consumption at the end of 2007 to around 3.1 world zinc weeks by the end of 2008. There is some upside risk to the price assessment, however, in that new industry standards in China have the potential to reduce production of stocks refi ned zinc, and result in a smaller rise in end of year 3000 12 stocks. price consumption 2000 8 In the fi rst eight months of 2007, zinc consumption increased by 3 per cent year on year, supported by some substitution of galvanised steel (which is zinc coated) for 1000 4 stainless steel (which contains nickel), when nickel prices were at record highs. At the same time, demand for galva- 2007 weeks consumption nised steel and zinc based alloys remains strong. As a US$/t result, for 2007 as a whole, world consumption of zinc 1992 1996 2000 2004 2008 is estimated to be 11.3 million tonnes, up 2 per cent from zinc outlook 2006. 2006 2007 f 2008 f % World zinc consumption is forecast to increase by a World change further 3 per cent in 2008 to 11.6 million tonnes, supported Production kt 10 691 11 225 11 831 5.4 by continued economic growth in China and other Consumption kt 11 034 11 252 11 590 3.0 developing economies. Growth in vehicle production in Closing stocks kt 486 459 701 52.7 – weeks consumption 2.3 2.1 3.1 47.6 China and India is expected to remain strong, resulting Price US$/t 3 276 3 237 1 775 – 45.2 in increased demand for galvanised steel sheet used in USc/lb 148.6 146.8 80.5 – 45.2 the bodies of cars and trucks. In the United States, rising 2005 2006 2007 demand for galvanised steel in nonhousing construction is -06 -07 -08 f expected to offset lower demand from residential construc- Australia Mine output kt 1 380 1 382 1 530 10.7 tion associated with the downturn in the housing market. Refined output kt 446 496 480 – 3.2 Exports production increasing steadily – ores and conc. kt 1 821 1 948 2 096 7.6 – refined kt 388 374 420 12.3 World zinc mine production was 7.9 million tonnes in the – total value A$m 2 540 4 306 3 066 – 28.8 fi rst eight months of 2007. Encouraged by high prices See back tables for details. f ABARE forecast. australian commodities > vol. 14 no. 4 > december quarter 2007 655 zinc

since 2006, production is increasing in Peru and the United States where new mines have commenced operations and previously closed mines have restarted. Production has also risen in China; however, output remains variable from month to month. For 2007 as a whole, world zinc mine production is estimated to be 11.2 million tonnes, 7 per cent higher than in 2006. In 2008, production is forecast to increase by another 3 per cent to 11.6 million tonnes. A number of new mines are expected to commence production during the year, including Sotkamo in Finland (capacity of 60 000 tonnes a year) and Penasquito in Mexico (capacity of 135 000 tonnes a year). Refi ned zinc production is estimated to be 11.2 million tonnes in 2007, an increase of 5 per cent from 2006. Changes to mine production of zinc can have a direct effect on refi ned production. Reduced mine production in China in July and August reduced the availability of ores and concentrates for smelting and refi ning and resulted in lower refi ned production in the same months. In 2008, refi ned production is forecast to increase by a further 5 per cent to 11.8 million tonnes. A risk to refi ned zinc production forecasts for 2008 is China’s efforts to prevent over- investment in power, resource and pollution inten- China’s refined zinc production and sive industries. China’s National Development and consumption Reform Commission has set out a number of entrance standards aimed at improving the performance of share of world consumption its domestic lead and zinc industries and has asked share of world production provincial governments to phase out lead and zinc 30 consumption 3 production facilities that do not meet the benchmarks. China is currently the world’s largest producer of both mine (27 per cent of world production in 2006) 20 2 and refi ned zinc (30 per cent). As a result, any regulations that signifi cantly reduce the production of refi ned 10 1 zinc in China will reduce world production and, combined with likely increased consumption, have the potential to result in higher world prices. % Mt Australian production and exports rising 19971999 2001 2003 2005 2007 Australian zinc mine production is forecast to increase by 11 per cent to 1.5 million tonnes in 2007-08. A fi re at the Mount Isa lead–zinc concentrator in late September 2007 is estimated to have reduced concentrates production in the December quarter. However, full year output from Hellyer and Lennard Shelf, combined with expansions at the Broken Hill, Endeavor and McArthur River mines, are expected to more than offset lower production from Mount Isa. In 2007-08, Australian refi ned zinc production is forecast to fall by around 3 per cent to 480 000 tonnes as lower concentrates production from the Mount Isa lead–zinc concentrator is estimated to result in lower metal production at the Townsville refi nery in the December quarter. Exports of both ores and concentrates and refi ned zinc are forecast to increase in 2007-08. Increased production combined with stable domestic demand is expected to result in ores and concentrates exports rising by 8 per cent to 2.1 million tonnes. Refi ned exports are also forecast to increase despite lower production as a greater proportion of production is expected to be exported. Total Australian export earnings from refi ned zinc and zinc ores and concentrates are forecast to fall by 30 per cent in 2007-08 as lower prices and an assumed appreciation of the Australian dollar offset increased export volumes. 656 australian commodities > vol. 14 no. 4 > december quarter 2007 climate change

> don> alan gunasekera copeland > > +61 +61 2 26272 6272 2040 2270 > > [email protected] [email protected]

climate change impacts on Australian agriculture

don gunasekera, yeon kim, catherine tulloh and melanie ford

» Agriculture plays an important role in the global and Australian economies. However, potential changes in climate may reduce productivity and output in agricultural industries in major producing countries, including Australia, in the medium to long term. » ABARE analysis indicates that future climate changes and associated declines in agricultural productivity and global economic activity may affect global production of key commodities: for example, global wheat, beef, dairy and sugar production could decline by 2–6 per cent by 2030 and by 5–11 per cent by 2050, relative to what would otherwise have been the case (the ‘reference case’). » Furthermore, Australian production of these commodities could decline by an estimated 9–10 per cent by 2030 and 13–19 per cent by 2050, relative to the reference case. » These changes would also have signiﬁ cant implications for international agricultural trade. For example, Australian agricultural exports of key commodities are projected to decline by 11–63 per cent by 2030 and by 15–79 per cent by 2050, relative to the reference case. » Australia is projected to be one of the most adversely affected regions from future changes in climate in terms of reductions in agricultural production and exports. » There is a continuing need for the agriculture sector to maintain strong productivity growth in order to cope with the potential pressures emerging from climate change. In this context, adaptation measures, including improved agricultural technologies, will be particularly important in reducing the potential impacts. » There is also an urgent need for policies that encourage rather than impede adjustment in vulnerable sectors in agriculture, including already marginal farming enterprises. » In order to respond to climate change in an efﬁ cient manner and maintain and enhance the productivity and international competitiveness of Australian industries, further research and development is required in both climate change adaptation and mitigation technologies and measures.

australian commodities > vol. 14 no. 4 > december quarter 2007 657 climate change

introduction There is broad agreement among the international scientiﬁ c community that the global climate has been changing and will continue to change (IPCC 2007a). According to the current scientiﬁ c literature, human induced increases in the atmospheric concentration of greenhouse gases will continue to drive changes in climate across the globe, including Australia, for the foreseeable future (IPCC 2007a; PMSEIC 2007). The projected changes in climate are likely to be associated with a range of biophysical, environmental, social and economic impacts across a range of sectors and throughout the world (Stern 2006; Garnaut 2007). Agriculture is an important sector domestically and globally that is likely to be affected directly and indirectly by climate change. Although agriculture contributes only about 2 per cent of gross domestic product (GDP) in Australia (ABARE 2007), around two-thirds of agricultural products are exported (DAFF 2007) and exports of agricultural products account for about 18 cent of total Australian merchandise exports (ABARE 2007). In 2005, Australia was the world’s largest exporter of wool and the second largest exporter of beef and veal, mutton and lamb, wheat and sugar (ABARE 2007). Manufacturing of food, beverages and tobacco contributes a further 2 per cent to Australia’s GDP (ABARE 2007). In this article, the potential medium to long term economic and agricultural trade impacts of potential changes in climate on Australian and global agriculture sectors are investigated.

projected changes in climate In this section, a brief overview of the potential future changes in climate, as reported in recent domestic and international scientiﬁ c literature, is presented. The contribution of anthropogenic (human induced) greenhouse gas emissions to rising atmospheric concentrations of these gases is expected to lead to a range of regionally differentiated changes in key climate variables, including temperature, rainfall patterns and extreme weather events. temperature Given a range of potential greenhouse gas emissions pathways, global mean surface air temperatures are projected to increase by between 1.1 and 6.4 degrees Celsius by the end of the century, relative to 1980–99 (IPCC 2007b). The projected increase in temperatures over land masses is expected to be greater than the global average because of lower evaporative cooling and a smaller thermal inertia compared with the oceans. Temperature increases comparable to the global average are considered likely in parts of south east Asia, southern South America, Australia and New Zealand. Increases in temperatures above the global average are likely throughout Africa, central, northern and eastern Asia, the Tibetan plateau, most of south and central America and in north America and Europe (IPCC 2007b). In northern parts of north America and in northern Europe warming is projected to be greatest in winter. However, in southern North America and mediterranean Europe the greatest warming is expected to occur in summer (IPCC 2007b). precipitation As reported by the Intergovernmental Panel on Climate Change (IPCC 2007b), projected changes in precipitation are less certain than changes in temperatures, and rainfall patterns are projected to vary widely between different regions. Annual average rainfall is expected to increase in the Asian monsoon region, eastern Africa, northern

658 australian commodities > vol. 14 no. 4 > december quarter 2007 climate change

Europe, Canada, north eastern United States and western areas on the South Island of New Zealand (IPCC 2007b). However, rainfall is projected to decrease in northern Saharan Africa, mediterranean Africa and Europe, south western United States and central America. Changes in seasonal rainfall patterns are also expected, with winters becoming wetter in central Europe, northern, eastern, southern and south east Asia and the Tibetan Plateau. Summers are projected to be drier in central Europe, central Asia and southern Canada and wetter in northern, eastern, southern and south east Asia and south eastern South America (IPCC 2007b). extreme events The IPCC (2007b) has also found that changing temperature and rainfall patterns are likely to result in more severe extreme events, such as droughts, fl oods and tropical cyclones. Land affected by extreme drought is expected to increase signifi cantly by the end of the century (IPCC 2007b). Southern Australia and mediterranean and central Europe are all expected to experience increased risk of drought over the next century. Heat waves in eastern Asia are expected to increase in frequency, intensity and length. Extreme daily high temperatures are projected to become more frequent in Australia and New Zealand. Conversely, the number of frost days is expected to fall and thereby increase the growing seasons especially in parts of North America, Europe and central and northern Asia. Overall, tropical storms and cyclones are expected to become less frequent. However, the average intensity of tropical cyclones is projected to increase. Precipitation events are in general projected to become more intense, with longer dry periods between events. These extreme precipitation events, as well as snow and glacier melt and rising sea levels, are expected to lead to an increase in fl oods (IPCC 2007b). climate projections for Australia temperature Given a range of potential future global green- projected increases in average house gas emissions pathways, as reported in 1 temperatures in Australia the IPCC’s Special Report on Emission Scenarios compared with 1990 (IPCC 2000), the average temperature in Australia 2030 2050 2070 is projected to increase by 1–5 degrees Celsius °C °C °C at 2070 compared with 1990 (CSIRO and BoM Australia 1.0 0.8 – 2.8 1.0 – 5.0 2007, table 1). The increase in temperature is coastal 0.7 – 0.9 expected to vary between regions in Australia. inland 1.0 – 1.2 Warming is expected to be greatest in inland areas Source: CSIRO and BoM (2007). and least in coastal and mountainous regions. By 2030, average annual temperatures are projected to be about 1 degree Celsius higher, but inland areas may experience increases of up to 1.8 degrees. Warming is expected to be most severe in the north west of Australia and mildest in the south and east. There is also expected to be seasonal differences in warming patterns, with mean warming in winter months projected to be less than in other seasons. rainfall Best estimate projections from the CSIRO and BoM (2007) indicate potentially little change in precipitation for northern Australia and decreases of around 10 per cent

australian commodities > vol. 14 no. 4 > december quarter 2007 659 climate change

projected future changes in precipitation in Australia 2 compared with 1990 2030 2050 2070 annual % % % northern areas (and central and eastern for 2050 and 2070) –10 to +5 –20 to +10 –30 to +20 southern areas –10 to 0 –20 to 0 –30 to +5 winter and spring south east –10 to 0 –20 to 0 –35 to 0 south west –15 to 0 –30 to 0 –40 to 0 eastern areas –15 to +5 –20 to +10 –40 to +15 summer and autumn –15 to +10 –20 to +15 –40 to +30 Source: CSIRO and BoM (2007).

in southern areas by 2070, relative to 1990. Changes in precipitation levels are also expected to vary widely across regions and seasons in Australia. Although northern Australia is projected to experience little change in rainfall levels over the next sixty years, south western areas in Australia are projected to experience decreased rainfall of up to 40 per cent by 2070 in winter and spring. The decreases in rainfall are projected to be greatest in winter and spring across Australia (table 2). extreme events CSIRO and the Bureau of Meteorology project that there will be up to 20 per cent more drought months over most of Australia by 2030. By 2070, up to 40 per cent more drought months are projected in eastern Australia and up to 80 per cent more in south western Australia. Extreme daily precipitation events are expected to become more frequent in the north but less frequent in the south. Throughout Australia, precipitation events are projected to become heavier and be followed by longer dry spells. This is expected to lead to an increased occurrence of ﬂ oods and erosion of soils (CSIRO and BoM 2007). Hotter and drier conditions are also expected to increase ﬁ re risk, particularly in south eastern Australia. Similar to global projections, the Australian region is likely to experience an increase in the proportion of intense tropical cyclones, but a possible decrease in the total number of cyclones (CSIRO and BoM 2007).

climate change impacts on agriculture Given the projected changes in key global and regional climate variables, one of the key sectors vulnerable to climate change is agriculture, both in Australia and globally. Changes in water availability, water quality, temperatures and pests and diseases are all likely to have an impact on agricultural productivity. It is important to recognise that potential impacts of climate change are unlikely to be uniformly distributed around the world. Increasing temperatures may extend the growing season for crops in some areas but increase the demand for water by crops and decrease yields in other areas (Ecofys BV 2006). In colder regions higher temperatures are likely to reduce cold related livestock deaths while warmer regions could experience increased heat stress in livestock (Ecofys BV 2006). Projected impacts of climate change on different agricultural industries globally are presented in table 3.

660 australian commodities > vol. 14 no. 4 > december quarter 2007 climate change 3 projected climate change impacts on global agriculture temperature change/ projected region and sector/industry CO2 concentration/ year impact source % change world agricultural production global average temperature –0.8 to –0.3, ERS 2001 increase of 2.8–5.2°C by 2100, relative to 1990 relative to 1990 aggregate crop production global average temperature –1.3 to –0.5, ERS 2001 increase of 2.8–5.2°C by 2100, relative to 1990 relative to 1990 south east Asia aggregate crop production global average temperature –4.8 to –2.6, ERS 2001 increase of 2.8–5.2°C by 2100, relative to 1990 relative to 1990 China wheat yields 1°C –5.4 to –1.5 You et al. 2005 India wheat yields 0.5–1.5°C –2 to –5 IPCC 2007a Bolivia cattle production 4°C up to –20 IPCC 2007a Africa net income from livestock 2100 –54, relative Seo & Mendel- to current levels sohn 2007 Japan aggregate crop production global average temperature +6.2 to +10.4, ERS 2001 increase of 2.8–5.2°C by 2100, relative to 1990 relative to 1990 southern Europe legume yields 2050 –30 to +5, IPCC 2007a relative to baseline northern Europe 2080 +10 to +30, IPCC 2007a wheat yields relative to baseline Canada Lemmen & cow/calf/dairy production 5°C –10 Warren 2004 United States total agricultural production global average temperature –0.9 to +1.7, ERS 2001 increase of 2.8–5.2°C by 2100, relative to 1990 relative to 1990 aggregate crop production global average temperature –0.7 to +3.8, ERS 2001 increase of 2.8–5.2°C by 2100, relative to 1990 relative to 1990 crop agriculture global average temperature average annual Jorgenson increase of 2.4°C by 2100, change 2000–2100 et al. 2004 relative to 2000 –25.8 to +20.4 (central estimates) wheat yields 0.8°C +2.4 USDA 2007 dairy milk production doubling of CO2 –2.2 to –2.1 USDA 2007 livestock production doubling of CO2 –1.3 to –0.5 Crosson 1997

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In Australia, projected higher temperatures and lower rainfall are expected to reduce agricultural production, relative to what would otherwise be the case (‘reference case’). Increases in carbon dioxide concentration could have positive carbon fertilisation effects by increasing the rate of photosynthesis in some plants (Steffen and Canadell 2005). However, higher concentrations of carbon dioxide could also reduce crop quality, by lowering the content of protein and trace elements (EEA 2004). The positive impacts of carbon fertilisation are likely to be restricted by high temperatures and low rainfall, which are both expected to occur in Australia (Amthor 2001). Cline (2007) projects that future potential climate changes could lower agricultural productivity in Australia by 27 per cent (without carbon fertilisation) and by 16 per cent (with carbon fertilisation) by 2080. World agricultural production could potentially fall by 16 per cent (without carbon fertilisation) and by 3 per cent (with carbon fertilisation) by 2080 (Cline 2007). Extreme events such as ﬂ ooding and droughts are projected to increase in frequency and severity as the global climate changes. Such events are likely to reduce agricultural productivity and production by decreasing crop yields and increasing stock losses (Ecofys BV 2006). Changes in temperatures are also projected to alter the incidence and occurrence of pests and diseases. For example, Queensland fruit ﬂ y is expected to spread southwards in response to future higher temperatures, reducing yields and increasing costs to the Australian agriculture sector. However, the range of the light brown apple moth, for example, is expected to contract following changes in projected climatic conditions (Preston and Jones 2006). The projected impacts of climate change on different agricultural industries in Australia are presented in table 4.

projected climate change impacts on Australian agriculture 4 for given changes in temperature relative to 1990 change in temp. sector / industry impact source < 1°C annual milk production per cow fall by 250–310 litres Preston and Jones 2006 or 6 per cent total factor productivity of wheat in –4.2 per cent, relative Heyhoe et al. 2007 NSW with lower rainfall to reference case total factor productivity of wheat in –7.3 per cent, relative Heyhoe et al. 2007 WA with lower rainfall to reference case total factor productivity of sheep –1.8 per cent, relative Heyhoe et al. 2007 meat in NSW with lower rainfall to reference case total factor productivity of sheep –6.1 per cent, relative Heyhoe et al. 2007 meat in WA with lower rainfall to reference case 1–2°C pasture productivity with 20 per –15 per cent Crimp et al. 2002 cent lower precipitation liveweight gain in cattle with –12 per cent Crimp et al. 2002 20 per cent lower precipitation 3–4°C tick related losses in net cattle increase by Preston and Jones 2006 production weight 128 per cent

662 australian commodities > vol. 14 no. 4 > december quarter 2007 climate change potential economic impacts of climate change on Australian and global agriculture Given the potential for future changes in key climate variables, it is important to understand the potential impacts on different industries. In this article, the potential medium to long term economic impacts of future changes in climate on Australian and global agriculture are illustrated within the context of two important factors — productivity impacts and trade impacts. The economic impacts of climate change on a certain country’s agricultural production depend not only on how production potential is affected within the country by changes in climate variables, but also on how potential changes in both agricultural and nonagricultural productivity affect import demands and export supplies of farm products in other regions of the world. productivity impacts Potential changes in key climate variables, such as increased average temperatures, changed rainfall patterns and increased climate variability, are projected to directly affect agricultural productivity (AGO 2007). There may also be indirect impacts on agricultural productivity through changes in the incidence of pests and diseases and increased rates of soil erosion and degradation. The effect of changes in climate on agricultural productivity is likely to vary between different countries (Cline 2007) and across different crop and livestock industries. For instance, crop production is likely to be affected directly by changes in average rainfall and temperatures, and by possible changes in distribution of rainfall during the year. The productivity of certain livestock industries will be inﬂ uenced by changes in the quantity and quality of available pasture, as well as by the direct effects of temperature changes (Adams, Hurd and Reilly 1999). The impact of potential changes in climate on agricultural productivity is uncertain, with estimates ranging from a small loss to a potential gain (Stern 2006). At increases in local average temperatures above 3 degrees Celsius, the potential for global food production is projected to decline (IPCC 2007a). According to Cline (2007) the projected reduction in agricultural productivity as a result of potential changes in climate within this century could lead to a decline in agricultural output in many regions in the medium to long term, with developing countries projected to experience much larger declines than developed countries. trade impacts Agricultural trade impacts of future changes in climate are likely to arise from the interaction of two forces — ﬁ rst, from a potential reduction in agricultural output in key producing countries brought about by changes in key climate variables and, second, from a slowdown in global economic activity brought about by climate change related effects that may be associated with a decline in demand for agricultural products in some regions. In this context it is important to recognise that the likely change in demand for agricultural commodities, such as grains, in response to changes in income is likely to be relatively low across many regions given their importance in meeting dietary requirements. On the other hand, the likely change in demand for dairy and livestock products in response to changes in income is likely to be relatively high, particularly in key developing countries.

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box 1 analytical framework

GTEM ABARE’s global trade and environment model (GTEM) is a dynamic, multiregion, multi- sector, general equilibrium model of the world economy. The model provides a useful framework for analysing economywide and sectoral impacts, including those resulting from, for example, a slowdown in global economic activity and productivity changes in different sectors in an economy brought about by climate change. The GTEM framework takes into account the interactions between different sectors and other agents in an economy and captures the interactions between economies through trade. It can be used to estimate the impacts of the changes in policies or events on key economic variables. Full documentation of the model is available on ABARE’s website (abareconomics.com).

Ausregion ABARE’s Ausregion model is a dynamic computable general equilibrium model of the Australian economy, with representation of all states and territories. Ausregion has a compre- hensive coverage of sectors that are important to Australia. The model provides a useful framework for analysing economywide and sectoral impacts, including those resulting from, for example, productivity changes in different agricultural industries at state/territory level. Details of the model are also available on ABARE’s website.

interface The two models have unique characteristics that, when used together, provide a robust and rigorous framework for analysing policy issues that have international, national, sectoral and state level impacts. The interface between the models is illustrated below:

model interface

international and international GTEM Ausregion information sectoral information

» GTEM is used to assess the country/region economic and trade implications of a slowdown in global economic activity and change in agricultural productivity in key countries/regions over the medium to long term driven by potential changes in climate. » Ausregion is used to assess the state/territory implications of changes in agricultural productivity in Australia driven by future potential changes in climate over the medium to long term, while taking into account the international trade implications of a slowdown in global economic activity and a decline in agricultural productivity in key countries/ regions. » Successive iterations of the Ausregion and GTEM model simulations are undertaken to validate and ensure consistency of the state/territory economic and trade implications in Australia of a global slowdown in economic activity and agricultural productivity changes driven by potential changes in climate over the medium to long term.

664 australian commodities > vol. 14 no. 4 > december quarter 2007 climate change analysing the economic impacts of climate change on agriculture declines in global agricultural productivity and a slowdown in global economic activity An illustrative scenario is analysed here to investigate potential medium to long term economic and trade impacts of potential changes in climate on global and Australian agriculture. The scenario assumes that no signiﬁ cant global climate change response measures emerge to substantially mitigate the potential medium to long term impacts of climate change. Furthermore, the scenario assumes no planned adaptation in agriculture in terms of strategic responses in anticipation of expected changes in climate. The results of this scenario are compared against a reference case in which it is assumed that there are no climate change impacts on future economic growth. It is important to recognise that there remain uncertainties in both the potential changes in climate and impacts on industry at the regional and sectoral level. The results presented in this article are illustrative and are designed to provide insights into the potential direction and order of magnitude of likely medium to long term impacts only, rather than precise forecasts. Under the scenario, based on Cline (2007), it is assumed that agricultural productivity in the major producing regions of the world, including Australia, will decline over the medium to long term because of projected changes in climate. Furthermore, it is also assumed that there will be adverse impacts on productivity in many nonagricultural sectors, driven by the impacts of changes in climate. Based on Stern (2006), it is assumed that there will be an overall slowdown in global economic activity driven by climate change in the medium to long term across key regions. The purpose of the scenario is to illustrate how a slowdown in global economic activity, including overall declines in agricultural productivity, in response to potential changes in climate, may affect global farm production and trade in the medium to long term. The results from this global scenario analysis are then used to illustrate the impact of potential changes in climate on key agricultural industries in major regions in Australia. This analysis takes into account two important factors: ﬁ rst, the potential international trade implications of a slowdown in global economic activity associated with a decline in global agricultural and nonagricultural productivity driven by potential changes in climate; and second, potential differential impacts across varying farming regions in Australia driven by future potential climate change, following Cline (2007). A brief description of the analytical framework and interface between the models used is provided in box 1. assumptions Potential changes in key climate variables may reduce global agricultural productivity in the medium to long term. In this analysis, estimates of the potential impacts of climate change on regional agricultural productivity from a recent study by Cline (2007) are used. Using a range of climate models with other modelling techniques and statistical tools relating agricultural productivity to climate variables, and applying a consistent meth- odology to more than 100 countries, regions and subregions within the larger countries, Cline (2007) estimated the potential changes in agricultural productivity for a wide range of countries and regions to 2080. Cline projected that global agricultural output at 2080 could be 3–16 per cent less (depending on the impacts of carbon fertilisation), compared with what would otherwise be the case, as a result of climate change. The

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greatest reduction in agricultural productivity is likely to occur in the developing countries. For modelling purposes, these projected impacts have been adjusted to 2050. The assumed changes in agricultural productivity in response to future climate change that are used in the modelling in this article are based on Cline (2007) and are provided in tables 5 and 6. It is evident from table 5 that the potential decline in agricultural productivity in response to climate change will vary between different regions. Hence, the implications for global agricultural production and trade can be infl uenced by the differential productivity declines in different regions. In general, agricultural production systems in countries located in the lower latitudes, primarily developing countries, are expected to be most adversely affected. Mid to high latitude countries are expected to experience limited losses or even benefi t from changes in agricultural production brought about by climate change (Rosenzweig and Tubiello 2007). Given the paucity of information, it is assumed in the current analysis that climate change is likely to result in productivity changes across different agricultural activities to a similar degree in a particular region. However, it is important to recognise that the impacts of climate change on agricultural productivity are likely to differ across different activities. According to Stern (2006), potential changes in climate can affect long term global economic activity projected changes in agricultural through at least three processes: through market 5 productivity from climate change impacts (for example, through impacts on the energy without carbon fertilisation at 2050 sector and coastal regions); through nonmarket relative to the reference case impacts (impacts on the environment); and through the risk of catastrophic impacts (such as cyclones). These %impacts highlighted by Stern are also likely to adversely Australia –17 affect the productivity of many nonagricultural sectors. China –4 Taking into account these potential impacts, Stern Japan –4 New Zealand +1 provided a range of equivalent measures of medium ASEAN –12 to long term global economic impacts of potential India –25 changes in climate. These impacts range widely and Canada –1 increase up to around 35 per cent in terms of losses United States –4 under extreme climate change scenarios. In assessing Rest of Europe –4 Argentina –7 the economic impacts of climate change, Stern Brazil –10 (2006) used a low discount rate. That low rate has Least developed countries –18 been commented on by Tol and Yohe (2006), Nord- European Union –4 haus (2007), Weitzman (2007), Dasgupta (2007) Rest of the world –13 and Mendelsohn (2007). The size of the discount Source: Based on Cline (2007). rate used has important implications for the magnitude of the impact of climate change in the distant future projected change in agricultural and the most appropriate policy response. A very low 6 productivity in Australia from discount rate magnifi es large damages as a result of climate change without carbon climate change in the far-distant future into a large fertilisation at 2050 relative to the reference case current value (Nordhaus 2007). Given this background, and based on Stern (2006), in the modelling %analysis in this article it has been assumed that in devel- Australia –17 – south east –7 oped and developing countries economic activity will – south west –9 decline by 5 per cent and 10 per cent respectively by – north –27 2050, relative to what would otherwise be the case, Source: Based on Cline (2007). as a result of potential changes in climate.

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Based on the estimates of adverse impacts of fig A changes in global agricultural potential future changes in climate on a range of production relative to the reference case countries and regions provided in Cline (2007) and wheat Stern (2006), potential agricultural and nonagri- Australia cultural sector productivity declines to 2050 are simulated using ABARE’s GTEM model to assess China the resulting changes in agricultural production and 2030 India 2050 trade in key regions of the global economy. If the Canada impacts of climate change on productivity are larger than those modelled in this article, the impacts on United States agricultural production and trade would be magni- Argentina ﬁ e d . Brazil EU 25 simulation results World change in global agricultural production –1 5 –10 –5% 5 Potential changes in key climate variables are beef projected to result in a loss of agricultural produc- Australia tivity, declines in crop yields, pasture growth and New Zealand livestock production returns and a rise in agricultural 2030 production costs, leading to a loss in competitive- 2050 United States ness and, hence overall output. Furthermore, a slow- Argentina down in global economic activity driven by climate Brazil change related effects is likely to result in a decline in the demand for agricultural products in some EU 25 regions. As indicated earlier, the likely magnitude World of the decline in demand for agricultural commodi- –1 5 –10 –5 % 5 ties can vary depending on the degree of demand responsiveness to changes in income and prices in dairy different countries/regions with respect to different Australia farm products. New The impact of a slowdown in global economic 2030 Zealand activity and a reduction in agricultural productivity of 2050 United States farm output is shown in ﬁ gure A, based on analysis EU 25 using ABARE’s GTEM model. The modelling results are reported here only for key countries and major World internationally traded farm products. The detailed –1 5 –10 –5 % 5 Australian results (based on the GTEM–Ausregion sugar modelling interface) are discussed separately Australia toward the end of this section. The modelling results show that as a result of potential future changes in ASEAN climate, global wheat production is estimated to India decline by 2.5 per cent at 2030 and 5.1 per cent 2030 Brazil 2050 at 2050; beef by 6.1 and 11 per cent; dairy by 6.5 EU 25 and 11 per cent; and sugar by 5.0 and 8.0 per cent respectively, relative to the reference case. World –1 5 –10 –5 % 5

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Wheat production is projected to be most affected in developing countries, such as Argentina and Brazil and also in Australia. Similarly, Argentina, Brazil and Australia are expected to be most adversely affected for beef production. Sugar production in India and ASEAN countries (particularly Thailand) is projected to be most adversely affected. However, given the relative comparative advantage of Brazilian sugar production, sugar output in Brazil is expected to expand, relative to the reference case. In the developed countries, US wheat, beef and dairy production is likely to be fairly signifi cantly affected by future climate change and an associated slowdown in global economic activity, as illustrated in fi gure A. Furthermore, production of wheat, beef, dairy and sugar in the European Union is also likely to decline in 2050 relative to the reference case. Given the assumed increases in New Zealand’s agricultural productivity, as reported in Cline (2007), output of New Zealand dairy and beef is fig B changes in global agricultural expected to expand, relative to the reference case. exports relative to the reference case In box 2, other projections of climate change wheat impacts on agricultural production are presented for 2030 Australia comparison purposes. 2050 Canada changes in global agricultural exports United States The slowdown in economic activity combined with Argentina regionally differentiated declines in productivity resulting from potential changes in climate will also World have important implications for international trade –3 0 –2 0 –10% 10 20 patterns in agricultural commodities (fi gure B). beef Global wheat exports are projected to fall by Australia about 1.8 per cent at 2030 and 5.1 per cent at 2050, New Zealand relative to the reference case. Wheat exports are 2030 projected to decline in developed countries such as 2050 United States the United States. Argentina Beef export volumes are expected to increase slightly by 2030, but as the major beef exporters then Brazil suffer from greater productivity losses, world beef World exports are expected to fall by 2.8 per cent at 2050, –3 0 –2 0 –10% 10 20 relative to the reference case. Beef exports from Argen- dairy tina and Brazil are expected to be most adversely Australia affected. 2030 Dairy export volumes are projected to fall by around New Zealand 3.2 per cent at 2030, relative to the reference case, 2050 EU 25 because of reduced productivity and economic activity brought about by climate change. However, at 2050 World world dairy exports are projected to increase by 2.9 –3 0 –2 0 –10% 10 20 per cent relative to the reference case. This is likely to sugar occur as changes in relative comparative advantage –79 –63 Australia and resource reallocations take effect and production ASEAN and exports are concentrated in more productive dairy producing countries such as New Zealand. 2030 Brazil 2050 World sugar exports are projected to increase by World 6.9 per cent at 2030 and 9.7 per cent at 2050, relative –3 0 –2 0 –10% 10 20 to the reference case. This refl ects redistribution effects

668 australian commodities > vol. 14 no. 4 > december quarter 2007 climate change from different productivity losses across regions, fig C Australian agricultural production with shifts in relative comparative advantage and relative to the reference case resource reallocations to more effi cient countries. In Australia particular, Brazil is projected to increase its already 2030 wheat substantial share in sugar exports. Exports of sugar 2050 from ASEAN countries (particularly Thailand) are sheep meat projected to be adversely affected. beef changes in Australian agricultural production dairy The impacts on Australia of assumed global develop- sugar ments (slowdown in global economic activity and –3 0 –20 –10 % a decline in agricultural productivity) and domestic New South Wales developments (a decline in agricultural productivity in wheat key growing regions) are assessed here using ABARE’s sheep meat GTEM–Ausregion modelling interface (box 1). Overall, the modelling results indicate that, with beef assumed changes in climate, Australian production dairy of key agricultural products is estimated to decline –3 0 –20 –10 % — wheat by 9.2 per cent at 2030 and 13 per cent Victoria at 2050; beef by 9.6 and 19 per cent; sheep meat wheat by 8.5 and 14 per cent; dairy by 9.5 and 18 per sheep meat cent; and sugar by 10 and 14 per cent respectively, relative to the reference case (fi gure C). Australia is beef projected to be one of the most adversely affected dairy regions from declines in agricultural production driven –3 0 –20 –10 % by climate changes. Queensland As shown in fi gure C, the output effects on key beef agricultural industries in each relevant state or territory are broadly in line with the likely productivity sugar impacts indicated in table 6. –3 0 –20 –10 % The modelling results indicate that wheat produc- South Australia tion across the states is estimated to decline by wheat 8.3–9.6 per cent at 2030 and 12–13 per cent at sheep meat 2050, relative to the reference case, in New South dairy Wales, Victoria, South Australia and Western Australia (fi gure C). As a result of potential changes –3 0 –20 –10 % Western Australia in climate, output in the sheep meat industry in New South Wales, Victoria, South Australia and Western wheat Australia is estimated to decline by 6.4–8.1 per cent sheep meat at 2030 and 12–13 per cent at 2050, relative to the beef reference case. Output in the beef industry in New South Wales, –3 0 –20 –10 % Tasmania Victoria, Queensland, Western Australia and dairy Northern Territory is estimated to decline by between 0.7–20 per cent at 2030 and 3.0–34 per cent at –3 0 –20 –10 % 2050, relative to the reference case, as a result of Northern Territory potential changes in climate (fi gure C). Dairy industry beef output is also estimated to fall at 2030 and 2050 –3 0 –20 –10 %

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respectively by between 4.6–8.3 per cent and 6.1–12 per cent in New South Wales, Victoria, South Australia and Tasmania, relative to the reference case. Sugar industry output in Queensland is estimated to decline by 12 per cent at 2030 and 17 per cent and 2050, relative to the reference case. Australia is projected to be one of the most adversely affected regions. changes in Australian agricultural exports The changes in international trade in farm commodities resulting from the slowdown in global economic activity combined with a decline in agricultural productivity have important implications for Australian farm exports, as highlighted earlier. As shown in ﬁ gure D, the modelling results indicate that, with potential changes in climate, Australia’s exports of key agricultural products are likely to decline: wheat by an estimated 11 per cent at 2030 and 15 per cent at 2050; beef by 29 and 33 per cent, sheep meat by 15 and 21 per cent; dairy by 19 and 27 per cent; and sugar by 63 and 79 per cent respectively, relative to the reference case. fig D changes in Australian agricultural Australia is projected to be one of the most adversely exports relative to the reference case affected regions wheat impact on gross state product in Australia The potential impacts of the reduction in productivity sheep meat and agricultural production and exports driven by 2030 potential changes in climate on gross state products 2050 (GSP) and Australian gross domestic product (GDP) beef are shown in ﬁ gure E. Future changes in climate are projected to reduce Australia’s economic output by dairy about 2.8 per cent at 2030 and 5 per cent at 2050 relative to what would otherwise occur. If GDP is sugar assumed to grow by an average 2.4 per cent a year to 2050 in the reference case (without climate change –80 –60 –40 –20 % impacts), a 5 per cent reduction in GDP by 2050

fig E changes in Australia’s gross domestic product and gross state product relative to the reference case

Australia 2030 2050 New South Wales Victoria Queensland South Australia Western Australia Tasmania Northern Territory

–8 –6 –4 –2 %

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box 2 other projections of climate change impacts on agricultural production Schimmelpfennig et al. (1996), Rosenzweig and Tubiello (2007) and Darwin et al. (1995) have also examined the climate change impact on world potential impact of climate change on agricultural production 7 agricultural production systems. Their analysis indicates that agricultural productivity comparative static declines are likely in the medium to long term as a result of climate change but that these declines will vary between world production regions. Schimmelpfennig et al. (1996) found that global without with production of all crops and livestock is projected to fall when carbon fertilisation carbon fertilisation carbon fertilisation effects are not considered (table 7). % % Darwin et al. (1995) found that world production of wheat is rice –4.69 –0.35 projected to increase but production of nongrain crops will fall wheat –4.37 –0.54 as a result of future climate changes. Livestock production is other grains –3.03 1.85 also expected to increase. Rosenzweig and Tubiello (2007) other crops –2.02 –0.33 project changes in average crop yields as a result of future livestock –2.31 0.07 climate changes of between a 1 per cent increase and a 5 processed agriculture –3.33 –0.15 per cent decrease depending on the climate scenario used. Source: Schimmelpfennig et al. (1996).

(from climate change) would convert to a reduction in average annual growth of 0.1 percentage points, to 2.3 per cent a year. For comparison, it is estimated that the 2002- 03 and 2006-07 droughts reduced Australia’s economic growth by about 1.0 and 0.75 percentage points respectively from what would otherwise have been achieved in the short term (Penm 2003; Penm and Glyde 2007). It is important to recognise that the impacts of drought tend to be short term. Whereas, climate change impacts will occur over the long term with the potential for cumulative effects and stepwise changes. The projected decline in gross state product in Queensland, the Northern Territory, South Australia and Western Australia are estimated to be greater than in the other states. This reﬂ ects not only the extent of climate change impacts on particular regions but also the relative size and structure of agriculture in different regions. adaptation and mitigation: reducing the impacts of climate change adaptation It is important to recognise that adaptation to the impacts of climate change, including through better farm management practices, diversiﬁ cation of crop varieties, shifting cropping seasons, changing livestock breeds and improved farming technologies, can potentially reduce the magnitude of the losses in farm output from climate change (Heyhoe et al. 2007). Historically, Australia’s agriculture sector has adjusted and adapted continuously to external drivers, such as changes in the natural resource base, including climate variability. Such adaptation has been achieved predominantly through productivity improvements induced by technological changes, changes to farm management practices and more market oriented domestic policy reforms. Following Heyhoe et al. (2007), the potential impact of on-farm technological adaptation measures in the wheat industry in New South Wales and Western Australia is assessed in an illustrative case study. The illustrative analysis is based on a relatively conservative assumption that a range of on-farm planned adaptation measures would reduce the decline in agricultural productivity as a result of climate change by 0.08–0.09

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fig F change in wheat production at 2030 per cent a year (Heyhoe et al. 2007). For compar- relative to the reference case ison, average productivity growth in broadacre agriculture in Australia over the past several decades has without adaptation with adaptation averaged around 2 per cent a year. No mitigation New South measures are assumed in this analysis. Wales The results of the illustrative analysis with assumed adaptation measures are shown in fi gure F. As Western Australia expected, the adverse impacts of climate change on wheat production in New South Wales and Western –8 –6 –4 –2 % Australia are reduced considerably as a result of the implementation of planned adaptation measures. For example, the impact of climate change on wheat production in New South Wales and Western Australia changes from falls of 8.4 per cent and 8.9 per cent respectively, relative to the reference case, at 2030 to losses of 5.0 per cent and 4.8 per cent respectively relative to the reference case when adaptation measures are put in place. mitigation Reducing global greenhouse gas emissions can moderate potential changes in climate and associated economic impacts. In Australia, emissions from agriculture account for about 17 per cent of total emissions (NGGI 2007). Given this contribution, reducing emissions in agriculture will be important for achieving long term domestic emission targets. The introduction of lower emission production processes and changes in management practices in agriculture are vital for achieving reductions in emissions and allowing continued growth in industry output. Some mitigation options in agriculture, such as converting to minimum tillage, increasing the feed effi ciency of livestock and changing fertiliser applications, can provide both cost savings and emission reductions. However, there may be a number of information or upfront cost barriers that need to be overcome to achieve widespread uptake. Including agriculture in an emissions trading scheme will also reduce the total cost of abatement in the Australian economy and will also reduce the burden on other sectors of meeting an emissions target. The effi cient level of mitigation in the agriculture sector will be infl uenced by the relative costs and benefi ts of both mitigation and adaptation. Much research is needed to better understand the opportunities and costs of mitigation in Austra- lian agriculture (Gunasekera et al. 2007).

concluding comments The illustrative scenario examined in this article demonstrates how future changes in climate may affect the Australian and global economies through impacts on productivity in agricultural and nonagricultural sectors. Impacts are projected to be felt both directly through reduced agricultural production and indirectly through a slowdown in overall economic activity. The economic impacts of climate change are projected to be considerable and unevenly distributed around the world, with developing countries suffering the most. Australia is also projected to be one of the most adversely affected developed regions given the importance of agriculture in its economy. Based on the illustrative analysis discussed in this article, global production of several major agricultural commodities are projected to fall relative to what would otherwise be the case owing to future changes in climate. Production and exports of key Austra-

672 australian commodities > vol. 14 no. 4 > december quarter 2007 climate change lian agricultural commodities are also projected to decline because of future changes in climate. Several policy implications that can be drawn from the illustrative scenario analysis are worth highlighting. First, measures to mitigate greenhouse gas emissions domestically and globally will be a key to lessening the projected adverse impacts of climate change, including those affecting the agriculture sector. A portfolio of measures including market based policy instruments and adoption of cleaner and more energy effi cient technologies will be needed across many parts of the world to reduce greenhouse gas emissions and, at the same time, achieve continuing economic growth and development. In Australia, the inclusion of agriculture in an emissions trading scheme will provide incentives to mitigate emissions from agriculture and opportunities for carbon sequestration, particularly in forestry. Mitigation measures, including those relating to emissions from enteric fermentation in livestock and from livestock waste, minimum tillage to reduce fossil fuel use and soil carbon emissions and better fertiliser management, will be required in agriculture to make a signifi - cant contribution to the reduction of greenhouse gas emissions. Reducing emissions from agriculture in Australia could be particularly important in meeting a long term domestic emissions target given that agriculture currently accounts for about 17 per cent of Austra- lia’s greenhouse gas emissions (NGGI 2007). Second, another important way to respond to climate change is to adapt to the changes. Adaptation measures provide opportunities to manage risks and adjust economic activity to reduce vulnerability and improve business certainty in key sectors such as agriculture (COAG 2007). Planned adaptation generally involves enhancing adaptive capacity by developing new technologies and processes. For example, the development of cropping systems that are more effi cient in water use and have high tolerance and resilience to pests and diseases and to salinity could be important. Increased research and development in such technologies is necessary for the agriculture sector to cost effectively adapt to changing climatic conditions in the medium to long term. Third, there is a continuing need for the agriculture sector to improve productivity to cope with the potential pressures emerging from climate change and any associated policy responses. In this context, there is a need for appropriate policies designed to encourage rather than impede structural adjustment in vulnerable areas in the agriculture sector, including already marginal farming enterprises. Finally, to maintain and enhance the productivity and international competitiveness of the agriculture sector, further research and development is required in both adaptation and mitigation technologies, with a key role to be played by both private and public sectors. references ABARE 2007, ‘Statistical tables’, in Australian Commodities, vol. 14, no. 3, September quarter, pp. 541–77. Adams, R.M., Hurd, B.H. and Reilly, J. 1999, Agriculture and Climate Change: A Review of the Impacts on US Agricultural Resources, Pew Center on Global Climate Change, Arlington, United States. AGO (Australian Greenhouse Offi ce) 2007, Australia’s Agriculture – Impacts of Climate Change, Australian Government Department of the Environment and Heritage, Canberra (www.greenhouse.gov.au/impacts/agriculture.html).

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Amthor, J.S. 2001, ‘Effects of atmospheric CO2 concentration on wheat yield: review of results from experiments using various approaches to control CO2 concentration’, Field Crops Research, vol. 73, pp. 1–34. Cline, W. 2007, Global Warming and Agriculture: Impact Estimates by Country, Center for Global Development and Peterson Institute for International Economics, Washington DC (www.cgdev.org/content/publications/detail/14090#Chpt). COAG (Council of Australian Governments) 2007, National Climate Change Adapta- tion Framework, Canberra (www.coag.gov.au/meetings/130407/docs/national_ climate_change_adaption_framework.pdf). Crimp, S.J., Flood, N.R., Carter, J.O., Conroy, J.P. and McKeon G.M. 2002, Evaluation of the Potential Impacts of Climate Change on Native Pasture Production – Implica- tions for livestock Carrying Capacity, A Report to the Australian Greenhouse Offi ce, Canberra. Crosson, P. 1997, Impacts of Climate Change on Agriculture, Climate Issues Brief no. 4, Resources for the Future, Washington DC, June (www.rff.org/Documents/RFF-CCIB- 04.pdf). CSIRO and BoM (Bureau of Meteorology) 2007, Climate Change in Australia: Technical Report 2007, CSIRO, Melbourne. DAFF (Australian Government Department of Agriculture, Fisheries and Forestry) 2007, Trade Facts, Canberra (www.daff.gov.au/market-access-trade/trade_facts?SQ_ DESIGN_NAME=text_only). Darwin, R.F., Tsigas, M., Lewandrowski, J. and Raneses, A. 1995, World Agriculture and Climate Change: Economic Adaptations, Agricultural Economic Report no.703, Economic Research Service, US Department of Agriculture, Washington DC. Dasgupta, P. 2007, ‘Commentary: the Stern Review’s economics of climate change’, National Institute Economic Review, vol. 199, pp. 4–7. Ecofys BV 2006, Agriculture and Forestry Sectoral Report, for the European Climate Change Programme Working Group II Impacts and Adaptation, Brussels, (http:// ec.europa.eu/environment/climat/pdf/eccp/impactsadaptation/agriforestry.pdf). EEA (European Environment Agency) 2004, Agriculture, Copenhagen, (http://epaedia. eea.europa.eu/page.php?pid=346#galleryhere). ERS (Economic Research Service) 2001, Briefi ng Rooms: Global Climate Change Ques- tions and Answers, US Department of Agriculture, Washington DC (www.ers.usda. gov/Briefi ng/GlobalClimate/Qa.htm). Garnaut, R. 2007, Will climate change bring an end to the platinum age? Paper presented at the inaugural S.T. Lee Lecture on Asia and the Pacifi c, Australian National Univer- sity, 29 November (www.garnautreview.org.au/CA25734E0016A131/WebObj/ GarnautPublicLectureANU29November2007/$File/Garnaut%20Public%20Lecture %20ANU%2029%20November%202007.pdf). Gunasekera, D., Ford, M. and Tulloh, C. 2007, ‘Climate change: issues and challenges for Australian agriculture and forestry’, Australian Commodities, vol. 14, no. 3, September quarter, pp. 493–515. Heyhoe, E., Kim, Y., Kokic, P., Levantis, C., Ahammad, H., Schneider, K., Crimp, S., Flood, N. and Carter, J. 2007, ‘Adapting to climate change’, Australian Commodities, vol. 14, no. 1, March quarter, pp. 167–78.

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IPCC (Intergovernmental Panel on Climate Change) 2000, Emissions Scenarios, Special Report of the Intergovernmental Panel on Climate Change, Nakicenovic, N. and Swart, R. (eds), Cambridge University Press, England. —— 2007a, Climate Change 2007: Impacts, Adaptation and Vulnerability, Contribution of Working Group II to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change, Cambridge University Press, England. —— 2007b, Climate Change 2007: The Physical Science Basis, Contribution of Working Group I to the Forth Assessment Report of the Intergovernmental Panel on Climate Change, Cambridge University Press, England. Jorgenson, D.W., Goettle, R.J., Hurd, B.H. and Smith, J.B. 2004, US market consequences of global climate change, Prepared for the Pew Center on Global Climate Change, Arlington, April. Lemmen, D.S. and Warren, F.J. (eds) 2004, Climate Change Impacts and Adaptation: A Canadian Perspective, Natural Resources Canada, Ottawa, (http://adaptation. nrcan.gc.ca/perspective/pdf/report_e.pdf). Mendelsohn, R.O. 2007, ‘A critique of the Stern Report’, Regulation, vol. 29, no. 4, pp. 40–7. NGGI (National Greenhouse Gas Inventory) 2007, National Greenhouse Gas Inven- tory 2005, Canberra, March (www.greenhouse.gov.au/inventory/2005/pubs/ inventory2005.pdf). Nordhaus, W.D. 2007, ‘A review of the Stern Review on the economics of climate change’, Journal of Economic Literature, vol. 45, no. 3, pp. 686–702. Penm, J. 2003, ‘Economic overview’, Australian Commodities, vol. 10, no. 3, September quarter, pp. 329–39. —— and Glyde, P. 2007, ‘Economic overview’, Australian Commodities, vol. 14, no. 1, March quarter, pp. 5–26. PMSEIC (Prime Minister’s Science, Engineering and Innovation Council Independent Working Group) 2007, Climate Change in Australia, Report prepared for the Prime Minister’s Science, Engineering and Innovation Council, Canberra, June (www.dest. gov.au/NR/rdonlyres/CE5D024E-8F58-499F-9EEB-D2D638E7A345/17397/ ClimateChangeinAustraliareport.pdf). Preston, B.L. and Jones, R.N. 2006, Climate Change Impacts on Australia and the Benefi ts of Early Action to Reduce Global Greenhouse Gas Emissions, A consultancy report for the Australian Business Roundtable on Climate Change, CSIRO, Canberra, February (www.csiro.au/fi les/fi les/p6fy.pdf). Rosenzweig, C. and Tubiello, F.N. 2007, ‘Adaptation and mitigation strategies in agriculture: an analysis of potential synergies’, Mitigation and Adaptation Strategies for Global Change, vol. 12, pp. 855–73. Schimmelpfennig, D.E., Lewandrowski, J., Reilly, J.M., Tsigas, M. and Parry, I. 1996, Agri- cultural Adaptation to Climate Change: Issues of Long run Sustainability, Agriculture Economic Report no. 740, Natural Resources and Environment Division, Economic Research Service, US Department of Agriculture, Washington DC. Seo, S.N. and Mendelsohn, R. 2007, The Impact of Climate Change on Livestock Manage- ment in Africa: A Structural Ricardian Analysis, World Bank Policy Research Working Paper 4279, Washington DC, July, (www-wds.worldbank.org/external/default/ WDSContentServer/IW3P/IB/2007/07/06/000016406_20070706160359/ Rendered/PDF/wps4279.pdf).

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Steffen, W. and Canadell, P. 2005, Carbon Dioxide Fertilisation and Climate Change Policy, Australian Greenhouse Ofﬁ ce, Australian Government Department of the Envi- ronment and Heritage, Canberra. Stern, N. 2006, The Economics of Climate Change: The Stern Review, HM Treasury, Cambridge University Press, London (www.hm-treasury.gov.uk/Independent_ Reviews/stern_review_economics_climate_change/sternreview_index.cfm). Tol, R.S.J. and Yohe, G.W. 2006, ‘A review of the Stern Review’, World Economics, vol. 7, no. 4, pp. 233–50. USDA (US Department of Agriculture) 2007, The Effects of Climate Change on Agriculture, Land Resources, Water Resources, and Biodiversity, Public Review Draft of Synthesis and Assessment Product 4.3, Washington DC, September. (www.climatescience.gov/ Library/sap/sap4-3/public-review-draft/sap4-3prd-all.pdf). Weitzman, M.L. 2007, ‘A review of the Stern Review on the economics of climate change’, Journal of Economic Literature, vol. 45, no. 3, pp. 703–24. You, L., Rosegrant, M.W., Chang, F. and Wood, S. 2005, Impact of Global Warming on Chinese Wheat Productivity, EPT Discussion Paper 143, Washington DC, October (http://ifpri.org/divs/eptd/dp/papers/eptdp143.pdf).

676 australian commodities > vol. 14 no. 4 > december quarter 2007 india’s economic prospects

jammie> alan penm copeland > +61 >2 +616272 2 62722030 2270> [email protected] > [email protected]

india’s economic prospects and implications for australia’s commodity exports

marina kim and jammie penm

» India’s strong economic growth in recent years — averaging more than 8 per cent a year since the early 2000s — places it among the world’s fastest growing economies. The main drivers of this growth have been economic reforms and opening up to the global economy. » Key economic reforms have covered trade, investment, industrial policy and foreign exchange. However, further reforms, especially in the areas of infrastructure provision, business operating environment and public ﬁ nances, are still required for India to sustain high economic growth into the future. » Continued strong economic growth in India will have important implications for Australia’s commodity exports. There is great potential for Australia to increase exports of commodities such as wheat, wool, livestock products, fruit and vegetables, coal and LNG to India. This potential would be enhanced if India’s government continues to reform its economic policies, including those relating to protected domestic and trade sectors.

Economic reforms initiated in the early 1990s have put India’s economy on a higher growth path. Opening up the economy to foreign trade and investment has led to a substantial increase in output, rise in capital inﬂ ows, expansion of exports and a competitive corporate sector. Together with strong economic growth in China, India’s economic performance has become a major driver of growth in the global economy. The importance of India as a destination for Australia’s commodity exports has increased. While income growth and industrialisation are expected to remain strong in India, the opportunities for Australia to expand its commodity exports signiﬁ cantly to this market depend, to a large extent, on India’s ability to address a number of key challenges relating to international trade, investment, industrial policy and foreign exchange.

India’s economic performance India has emerged as one of the world’s fastest growing economies in recent years. Since the early 2000s, economic growth, measured by gross domestic product (GDP), has increased to an annual average of more than 8 per cent, compared with average growth of around 6 per cent in the 1990s (ﬁ gure A; ADB 2007). This strengthening in economic performance mainly reﬂ ects a period of economic reforms after decades of isolationist

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fig A annual economic growth India economic policies, and an increased openness of the april–march years economy to global markets (see box 1). In 2006, India accounted for around 7 per cent of total world output on a purchasing power parity basis. This compares 8 with a share of around 4 per cent in 1990.

6 main contributors to growth – services and industrial sectors 4 Economic growth in India has been driven mainly by the services sector, particularly the development of software, information technology and other business 2 services. Since the early 2000s, the services sector has grown, on average, by close to 10 per cent a % year, compared with an average of around 7 per 1991 1994 1997 2000 2003 2006 cent a year in the 1990s. In 2006-07, India’s services -92 -95 -98 -01 -04 -07

box 1 progress of economic reforms in India In the early 1990s, signifi cant reforms were undertaken in the Indian economy, driven largely by fi scal and balance of payments diffi culties. Major reform areas included industrial policy, international trade, foreign investment, foreign exchange, taxation and the fi nancial sector. In the area of industrial policy, the system under which government approval was required for any investment in all but a few selected industries was changed to one where approval was required for only a small number of industries, such as alcohol, tobacco and defence related industries. All industries have now been opened to private sector participation, except for defence and industries with a national interest, such as railways, mining, petroleum refi ning and atomic energy. Major reforms to international trade and foreign exchange policies restrictions on foreign included fl oating the exchange rate, tariff reductions and the abolition of 1 direct investment, by sector import controls and licensing (prior to the reforms, India maintained quanti- tative import restrictions and licensing of capital goods, intermediate goods permitted equity held and consumer products). Although applied tariffs fell from an average of by a foreign company around 35 per cent in 1997-98 to around 16 per cent in 2006-07, India’s %tariffs remain relatively high by international standards. There is also a agriculture 0 signifi cant difference between the average tariffs for nonagricultural prod- coal mining – own use 100 ucts (12 per cent) and agricultural products (almost 41 per cent) (WTO coal mining – other 0 2002, 2007). The Indian Government has expressed its intention to lower manufacturing 100 tariffs to the ASEAN average (currently around 9 per cent) by 2010. newspaper publication 26 The rules governing foreign direct investment have been eased, with electricity generation 100 the creation of an automatic clearance system for foreign direct invest- airports a 100 ment and increases in caps on foreign ownership across a range of distribution of petroleum products 100 industries. Although foreign ownership of up to 100 per cent is permitted pipelines 100 in many sectors (table 1), the overall regulatory environment — including roads, highways, ports 100 civil aviation b 49 regulatory restrictions, price distortions, defi ciencies in legal practice, telecommunication services 74 problems in getting access to fi nance and infrastructure bottlenecks — is banking 74 the main reason why levels of investment in many industries have been insurance 26 relatively low compared with other countries. retail distribution 0 In the area of taxation, key reforms entailed signifi cant reduction of retail distribution (single brand) 51 marginal tax rates for individuals and companies, simplifi cation of indirect a FDI of more than 74 per cent in existing airports taxes such as excises, and broadening of the tax base through the intro- requires government approval. b Provided there duction of a service tax. Reforms in the fi nancial sector resulted in improve- is no direct or indirect participation by foreign airlines. ments in the balance sheets of commercial banks, lower entry barriers and Source: OECD (2007). the introduction of new supervisory bodies.

678 australian commodities > vol. 14 no. 4 > december quarter 2007 india’s economic prospects sector accounted for around 55 per cent of gross fig B sector shares in India’s economy domestic product — compared with 44 per cent in % of GDP at current factor cost 1990-91 (fi gure B; ADB 2007; IMF 2007). 2006-07 Following relatively weak growth in the 1990s, the US$4232 billion industrial sector has joined services as a major driver services agriculture of India’s economic growth, underpinned by solid 55% 17% performance in manufacturing. Growth in the indus- 1990-91 trial sector has averaged around 9.4 per cent a year US$1145 billion services agriculture since the early 2000s, with manufacturing achieving 44% 29% growth in excess of 12 per cent in 2006-07. In contrast, growth in agriculture has been rela- industry 28% tively subdued, averaging only around 3 per cent a year between 1990-91 and 2006-07. Agricultural production in India has varied signifi cantly from year industry 27% to year, mainly refl ecting varying seasonal conditions (fi gure C; ADB 2007). The share of agriculture fig C growth in sector outputs India in India’s GDP declined from 29 per cent in 1990- 91 to 17 per cent in 2006-07. agriculture industry services GDP 10 increased openness promotes international trade 8 Recent strong economic performance in India has been accompanied by a higher degree of open- 6 ness of its economy. The combined share of imports and exports in gross domestic product has more than 4 doubled since the early 1990s, reaching around 35 per cent in 2006-07. 2 Exports have been growing at an average % rate of 28 per cent a year since the early 2000s — compared with an average of 8 per cent in the 1990-91 2003 2004 2005 2006 to 2002-03 -04 -05 -06 -07 1990s (fi gure D; RBI 2007a). India’s export markets have become more diverse (fi gure E; GoI 2007). fig D exports of goods and services Over the past decade, Asia has increased its posi- India tion as the main destination for Indian exports, accounting for nearly half of its total merchandise exports. The European Union currently is the destina- 100 tion for about 21 per cent of Indian exports, down from 26 per cent a decade ago. The share of the 75 United States has fallen from around 21 per cent to goods 16 per cent over the same period. 50 In contrast, exports to the Middle East, Africa and Latin America have increased. Diversity of trading services partners has helped India to sustain a rapid pace 25 of export growth even as demand in some key individual markets has weakened in recent years. US$b Despite a signifi cant strengthening in export 1990 2003 2004 2005 2006 performance, India’s share of global merchandise -91 -04 -05 -06 -07

australian commodities > vol. 14 no. 4 > december quarter 2007 679 india’s economic prospects

fig E India’s export markets exports remains relatively small (at around 0.9 per cent in 2007 US dollars in 2005). Although India has a larger share of global services exports (2.3 per cent in 2005), the country’s 2006-07 US$129.3b share in total global exports of goods and services is other 3% only around 1.2 per cent. This is markedly lower than EU-27 the 6.6 per cent for China in 2005 (WTO 2006). 1996-97 Asia 21% Refl ecting stronger economic growth, import growth US$44.0b 50% Africa other 6% 7% in India has also increased markedly in recent years, averaging around 36 per cent a year in the three years EU-27 Asia northern ended 2006-07. India’s main imports are gold, petro- 42% 26% Latin America 16% leum and some capital goods, such as electronics Africa 4% America 3% and nonelectrical machinery. However, strong import northern America 21% growth has resulted in an increase in India’s trade Latin America 1% imbalance, with a defi cit of US$64.9 billion, or around 7 per cent of GDP, in 2006-07. Despite the increase in the trade imbalance, the current account defi cit remains relatively low, refl ecting signifi - cant income transfers from overseas. In 2006-07, the current account defi cit was US$9.6 billion, equivalent to around 1.1 per cent of India’s gross domestic product. foreign investment has increased but remains low Foreign investment in India has been increasing, driven mainly by rising portfolio investments and external commercial borrowings. Although foreign direct investment (FDI) has risen in recent years, it remains low compared with that in other emerging market economies (fi gure F; UNCTAD 2006). In 2005, for example, India received FDI infl ows of around 1 per cent of GDP, compared with around 4 per cent of GDP for China. In absolute terms, FDI in China was around 11 times higher than India in 2005. There is potential for a signifi cant increase in FDI infl ows to India if the Indian Government continues to reform and deregulate the economy. It will be essential for India to attract a substantially higher level of foreign investment in order to sustain high economic growth. Continued foreign direct and portfolio investment infl ows have led to a sustained rise in India’s foreign exchange reserves, from around US$6 billion in 1990-91 to around

fig F foreign direct investment in selected countries, 2005

foreign direct investment shares in each country’s: gross fixed capital formation gross domestic product US$4.0 billion Malaysia US$2.0 billion Viet Nam US$14.6 billion Russian Federation US$15.1 billion Brazil US$72.4 billion China US$3.7 billion Thailand US$1.1 billion Philippines US$6.6 billion India US$7.2 billion Korea, Rep. of

%24 6 8101214

680 australian commodities > vol. 14 no. 4 > december quarter 2007 india’s economic prospects

US$200 billion at the end of March 2007, equivalent to around twelve months of imports of goods and services. infl ationary pressures have emerged India’s rapid economic expansion has been assisted by the availability of spare capacity in the economy. However, excess capacity is being gradually absorbed as strong economic growth continues, and infl ationary pressures have begun to emerge. In response to increased demand growth and infl ationary pressures, the Reserve Bank of India (RBI) has been tightening monetary policy in the past two years. Prime lending rates were 12.75 per cent in mid-2007, compared with 10.25 per cent in 2005. India’s monetary policy aims to achieve an infl ation rate of close to 5 per cent in 2007-08 and around 4.0–4.5 per cent a year over the medium term. The value of the Indian rupee fl uctuated between fig G movements in India’s exchange 44 and 48 rupees against the US dollar in the fi rst rates half of the 2000s, before appreciating to an average exchange rate real effective of 41 rupees against the US dollar in the fi rst seven 48 against exchange rate 105 months of 2007-08. After declining by nearly 4 per US$ cent in 2006-07, the real effective exchange rate 46 100 (on a trade weighted basis) has also appreciated by around 8 per cent since the beginning of 2007-08 44 95 (fi gure G; RBI 2007b). 42 90 increasing labour force to support economic growth 40 85 Looking ahead, the strong economic performance in India is expected to continue, supported by a rapidly rupees/US$ index 1993-94 =100 increasing labour force. While India is the world’s 2001 2003 2005 2007 second most populous country, it is also one of the -02 -04 -06 -08 Note: 2007-08 data is April-October for the exchange rate few countries for which the share of the labour force and April-July for the real effective exchange rate. in total population is projected to grow over the longer term. Based on the United Nations projections, the working age population (aged 15–64 years) in India will increase from 632 million in 2000 to around 918 million by 2020 and to 1.1 billion by 2050. As a share of total population, the labour force is projected to increase from a current share of around 60 per cent to around 67 per cent by 2020 and 2050 (fi gure H; UN 2007). India’s increasing labour force underlines the potential for an extended period of rapid economic growth. challenges for sustaining rapid economic growth Although India’s economy has performed strongly in recent years, signifi cant challenges remain for sustaining rapid economic growth, especially over the medium to longer term. infrastructure – a major constraint on economic growth The limited availability of modern infrastructure is a major constraint on future economic prospects. The demand for infrastructure has increased rapidly across a range of sectors, driven mainly by rapid economic growth. On the supply side, although private sector capital formation has been growing strongly in recent years, capital investment in the australian commodities > vol. 14 no. 4 > december quarter 2007 681 india’s economic prospects

fig H population distribution in India public sector has increased at a much slower pace. By world standards, public infrastructure access is relatively low in India. age 2000 1046 million people Inadequate infrastructure, particularly in the transport and electricity sectors, has been a factor ¨ male female contributing to the weaker growth in manufacturing ¨ compared with the services sector. For example, the stability of the power network and the reliability of ¨ electricity supply are signifi cantly weaker than in other ¨ emerging market economies, with frequent interrup- ¨ tions (both planned and unplanned) and high voltage ¨ fl uctuations. On average, there are around seven- ¨ teen major power outages a month in India’s manu- ¨ facturing sector. This compares with less than fi ve in China (World Bank 2004). ¨ 120 80 400 40 80 120 insuffi cient power supply adversely affects million people production 2020 1379 million people Insuffi cient power supply is having an important impact on the productive capacity of India’s economy. As a result of power failures and outages, it is estimated ¨ male female that around 9 per cent of the total value of manufac- ¨ turing production has been lost annually. As an output ¨ share, this is signifi cantly higher than the estimated 2 ¨ per cent in China (World Bank 2004). ¨ In an attempt to overcome this shortfall, around 60 per cent of Indian manufacturing fi rms have their own ¨ power generators, compared with an estimated 27 ¨ per cent in China. This clearly has an adverse impact ¨ on production costs of manufacturing in India. The ¨ power shortage is even more severe in rural areas, 120 80 400 40 80 120 with around 66 per cent of rural households having million people no access to electricity. The underperformance of the electricity sector 2050 1658 million people is largely a consequence of an ineffi cient transmis- ¸ sion and distribution network and high levels of theft. ¨ male female As a result of sustained underinvestment, the power ¨ network is overloaded and suffers from large losses ¨ of electricity (estimated to be around 32–35 per cent by the IEA 2007). ¨ Cross subsidisation is another major issue in the ¨ electricity sector. While household consumers are ¨ supplied with electricity below cost or, in some cases, ¨ without a meter, industrial users are charged with tariffs ¨ that are signifi cantly above the cost of supply, and ¨ about ten times greater than the tariffs for agricultural users. The price of electricity for Indian households is 120 80 400 40 80 120 among the lowest in the world, whereas that for indus- million people trial users is among the highest (OECD 2007).

682 australian commodities > vol. 14 no. 4 > december quarter 2007 india’s economic prospects weakness in the transport sector While infrastructure facilities in India, such as ports, railways, airports and roads, are seri- ously overstretched, they also appear to be less productive than in many other countries. For example, Delhi and Mumbai international airports typically handle 25–28 fl ights per runway an hour. This compares with around 40 in a number of OECD countries and the Beijing international airport. India’s rail network is also much less effi cient than China’s. Additions and improvements in the Indian rail network have been signifi cantly less relative to China in recent years (OECD 2007). The Indian Government is taking measures to address infrastructure constraints in order to improve productivity. Private sector participation in infrastructure provision has increasingly been the focus of government policy. The government has established a Viability Gap Fund and the India Infrastructure Finance Company to provide grants and funding, respectively, for the private sector in infrastructure projects. It is also aiming to improve the regulatory framework and overall investment climate in the country. Despite the initiatives taken by the Indian Government, insuffi cient infrastructure provision is expected to remain a major issue for economic development over the short to longer term. Unless substantial inroads in infrastructure support can be achieved, bottlenecks and production constraints will become major impediments to economic growth. fi scal defi cits limit the scope of public services India’s fi scal defi cit and public sector debt are signifi cant as a share of gross domestic product, constraining its ability to fi nance major projects to improve infrastructure, educa- tion and basic services, which are critical to raising the potential for economic growth and reducing poverty. Over the past few years, there has been a gradual improvement in public sector fi nances. For example, as a share of gross domestic product, the public sector defi cit has been reduced from 10 per cent in 2003 to around 7 per cent in 2006. The Fiscal Respon- sibility and Budget Management legislation adopted by the Indian Government in 2003 aims for a reduction of the public sector defi cit to 6 per cent of GDP by 2008-09. income inequality poses a risk to economic prospects Despite relatively high economic growth in recent years, income inequality has widened across states. The higher income states (also the most economically reformist), including Punjab, Gujarat, Maharashtra, Haryana and Tamil Nadu, have achieved stronger income growth than the lower income states, such as Bihar, Uttar Pradesh, Orissa and Rajasthan. Increasing economic openness and a more favourable business operating environment have made the former states more attractive to domestic and foreign investors, with higher investment spending underpinning economic growth, employment and poverty reduction. As the poorer states are relatively more populous, there is concern that an increasing proportion of the population will remain in poverty, despite continued strong economic growth. The rising income inequality could potentially lead to social unrest and diffi culties for further economic reform of the Indian economy. food supplies an issue for long term development India needs to raise growth in food supplies in order to achieve food security and poverty alleviation, especially over the longer term. India has been targeting 4 per cent growth australian commodities > vol. 14 no. 4 > december quarter 2007 683 india’s economic prospects

in agricultural production since 1996-97, but the actual growth over the past decade has fallen below this target, averaging only around 3 per cent a year. Volatility of agricultural production continues to have a signifi cant impact on the levels and stability of food supplies. Slower growth in agricultural production compared with growth in the rest of the economy has also led to an increase in the disparities between rural and urban incomes. Achieving food security and self suffi ciency has been a major focus of Indian agricultural policy. The major policy measures currently in place were largely introduced in the mid-1960s and include subsidies on fertiliser, irrigation water and power, minimum price support, public food distribution to supply low income families with certain staples at subsidised prices, and trade protection. Given the increased demand for resources to sustain strong economic growth in India, it is likely that maintaining the food self suffi ciency policy is not the best option for long term economic development.

Australian exports to India If successful in addressing its economic challenges, the Indian economy could sustain economic growth at rates similar to those achieved in recent years in the foreseeable future. Rapid growth in the Indian economy will provide increased opportunities for Austra- lian primary producers and exporters. The main Australian exports to India have so far been minerals and energy commodities. India is one of Australia’s major trading partners, with merchandise trade (exports plus imports) amounting to nearly $11.5 billion in 2006-07. India is the fourth largest market for Australian merchandise exports, behind the United States, Japan and China, accounting for around 6 per cent of total Australian merchandise exports. In 2006-07, Australian merchandise exports to India grew by 37 per cent to $10.1 billion, following average annual growth of around 34 per cent in the previous ﬁ ve years. Merchandise imports from India increased by 6 per cent in 2006-07 to around $1.3 billion. Australian exports of minerals and energy commodities to India were around $8.8 billion in 2006-07. Among primary products, gold has become the major export, over- taking coal in recent years (table 2). The value of Australian agricultural exports to India remains relatively low, at around $0.8 billion in 2006-07.

2 Australian merchandise trade with India, 2006-07 major exports to India $m major imports from India $m nonmonetary gold 4 728 pearls and gems 105 coal 2 490 jewellery 44 copper ores 1 043 ﬂ oor coverings 38 wool 162 medicaments (incl. veterinary) 36 vegetables 150 tea and mate 29 other ores 115 food and live animals 27 machinery and transport equipment 103 crustaceans 26 chemicals and related materials 98 travel goods 23 nonferrous metals 94 pharmaceutical products 18 electrical machinery and appliances 59 textile yarn 17 total exports 10 104 total imports 1 314 Source: DFAT (2007).

684 australian commodities > vol. 14 no. 4 > december quarter 2007 india’s economic prospects agricultural exports India is a major world producer of many agricultural products, including milk, pulses, sugar, rice, cotton, wheat, eggs, meat, fruit and vegetables. In recent years, Australian agricultural exports to India have been gradually increasing. changing consumption patterns present opportunities As seen elsewhere around the world, the sustained increase in disposable incomes and urbanisation has led to a diversiﬁ cation in consumption patterns in India away from traditional diets, mostly based on rice, coarse grains and pulses, toward more wheat based products, livestock products, fruit and vegetables. Currently, per person consumption of coarse grains and pulses is about a third to a half of their levels in the early 1960s. In contrast, consumption of fruit increased from 26 kilograms per person in the early 1960s to 38 kilograms in the early 2000s, while consumption of vegetables increased from 38 kilograms per person to 70 kilograms over the same period. Similarly, there has been an increase in consumption of livestock products, in particular dairy products. Liquid milk is a major form of dairy product consumed in India, with milk consumption growing from 36 kilograms per person in the early 1960s to 53 kilograms in the early 2000s. Rapid economic and population growth together with the expanding middle income class and increased urbanisation are likely to drive further changes in food consumption patterns in India, including a shift toward livestock products, such as cheese and other dairy products, higher value fresh fruit and vegetables, and processed food products.

Australian wheat exports are infl uenced by Indian production Crop production, which dominates India’s agricultural output, is heavily dependent on seasonal conditions. Also, an ineffi cient distribution system has led to an extremely high level of post harvest losses for grains, fruit and vegetables of around 25–30 per cent (OECD 2007). This makes Australian agricultural exports to India, such as wheat, vary considerably from year to year. In 2006-07, for example, Australia exported almost 1.6 million tonnes of wheat to India as a result of a signifi cant decline in Indian production. This compares with 93 000 tonnes in 2005-06 and almost no exports to India in the previous fi ve years. Wheat is becoming an important part of the Indian diet, gradually replacing coarse grains in the staples segment. Although improvements in infrastructure, particularly in bulk commodity silos and grain transport links, would increase grain import and distribution capacity, more effi cient internal grain transport also has the potential to reduce domestic waste and lead to a reduction in wheat import demand (DFAT 2001). potential for wool and raw cotton demand India is a major producer, processor and exporter of woollen products, although it does not have an apparel grade wool growing industry. Australia is an important supplier of wool to India. In 2006-07, India was the third largest destination for Australian wool, with an export value of $162 million. Further expansion of India’s imports of wool would be possible if important reforms in labour markets, investment and infrastructure were undertaken. If successful, such reforms would allow India to attract more investment in the textile industry, enhance productivity, reduce delivery times and lead to higher volumes of textiles and clothing exports. Higher production of textiles and clothing will induce an increase in demand for wool. australian commodities > vol. 14 no. 4 > december quarter 2007 685 india’s economic prospects

Although the domestic production of cotton is sufﬁ cient for India’s textile industry, high levels of contamination as a result of local farming and harvesting practices support the demand for imported cotton to produce high quality cotton fabrics and value added ready made garments. Thus, there is potential demand for raw cotton. However, similar to wheat, it depends on the level of domestic production. Australia’s exports of raw cotton to India in recent years have been relatively low, averaging around 3600 tonnes a year over the past ﬁ ve years, compared with 60 500 tonnes in the early 2000s.

import regulations affect Australian livestock and horticultural exports In addition to changing consumption patterns, the demand for fruit and vegetables, both in fresh and processed form, in India is supported by the growth of the organised retailing segment (supermarkets and shopping malls), in contrast to the kiosks and small shops through which many Indians traditionally purchase food. Similarly, the market for high value dairy products, such as skimmed milk powder, whole milk powder, cheese, butter oil, whey powder and yoghurts, is also growing. The effi ciency of domestic production of dairy products and fruit and vegetables is low in India compared with other major producers. As mentioned earlier, a large proportion of fruit and vegetables is wasted or destroyed as a result of ineffi cient post harvest practices, and transport, refrigeration and processing infrastructure, while the average productivity of dairy animals in India is low (less than a fi fth of that in Australia). There is also minimal processing after the farm gate, apart from some small scale operations (Rabo India Finance 2007). However, tariffs and other import restrictions on food items, such as dairy products, meat products, fruit and vegetables, are maintained at a relatively high level. Partly refl ecting these import restrictions, Australian exports of dairy products, such as cheese, to India have been low, averaging 157 tonnes a year between 2000 and 2004. In contrast, commodities in short supply, including pulses, edible oil and dried fruit, are comparatively easy to import as there are practically no import restrictions and tariffs are low (Austrade 2007).

prospects for agricultural exports depend on trade reforms Apart from a few exceptions, Australia’s exports of agricultural products to India have been dependent on the size of domestic production and stocks in India. Currently, India remains a relatively minor participant in world agricultural trade. And productivity in the Indian agricultural sector is relatively low by world standards. The Indian Government’s policy of food self sufﬁ ciency has caused a growing divergence between the generally higher output of crops such as rice and shortfalls in domestic production of other crop varieties that are increasingly in demand, such as wheat, oilseeds and pulses. National production of food grains has expanded, with India now being among the major world rice exporters as well as being a small but somewhat intermittent wheat exporter (for example, India exported 5.4 million tonnes of wheat in 2003-04, compared with 0.1 million tonnes in 2006-07). However, it is not clear how much of this increased production has been based on the availability of subsidised inputs of fertiliser, power and water. There are concerns that these input subsidies are increasingly becoming environmen- tally and ﬁ nancially unsustainable. The natural resource base is being affected, with ground water tables falling and soil salination increasing. Excessive use of fertilisers is also

686 australian commodities > vol. 14 no. 4 > december quarter 2007 india’s economic prospects causing soil damage. India’s food subsidy, which includes the costs of price support and food distribution, is estimated to have been around 232 billion rupees, or US$5.2 billion, in 2005-06. Expenditure on subsidies is also ‘crowding out’ much needed investment and maintenance of rural infrastructure, such as roads and irrigation infrastructure, and investment in agricultural research and development. As mentioned earlier, the current state of Indian agriculture raises a question of whether the suite of policies introduced almost forty years ago requires signifi cant reform. India’s continued high economic growth and industrialisation are likely to place considerable pressure on its goal of food self suffi ciency. If India’s agricultural support policies were reformed, market access for imports would improve, as would the affordability and availability of food varieties for domestic consumers. Freer trade practices in India could also lead to more effi cient allocation of domestic resources to sustain high economic growth. exports of minerals and energy commodities Economic developments in India could follow China’s industrialisation path and result in increased demand for raw materials. Given continued strong economic growth, India needs to have secure access to raw materials in markets that have become increasingly competitive. The drivers of demand for mineral resources are similar in both India and China as both countries have large populations, strong economic growth, relatively low rates of materials use per person compared with developed countries, and increasing integration into the world economy. Opportunities exist for Australia to expand metallurgical coal and gold exports, while growth in other areas could depend on the pace of infrastructure investment and mining industry reforms, and improvements in governance. steel consumption growth to support demand for raw materials Strong growth in steel production is underpinning increases in India’s consumption of metallurgical coal and iron ore. India’s steel production capacity rose from 23 million tonnes in 1990 to around 45 million tonnes in 2005, with capacity utilisation rising from 65 per cent to 85 per cent over the same period. India’s iron and steel sector is expected to grow strongly in the short to medium term. ABARE projects that Indian steel production will increase at an average rate of 9 per cent a year to nearly 73 million tonnes by 2012 (fi gure I). fig I steel production Steel consumption in India is linked primarily to India manufacturing, housing and infrastructure investment. It has increased by more than 90 per cent since 1990, at an average growth rate of 4 per cent a year, 60 second only to China. However, at around 38 kilograms in 2005, per person crude steel consumption in India remains low by world standards. For example, 40 steel consumption in China was 270 kilograms per person in 2005 and higher in some other Asian nations, including Japan (644 kilograms), Republic of 20 Korea (959 kilograms) and Chinese Taipei (1129 kilograms). India has the potential to increase per person steel consumption as the processes of industrialisation Mt and urbanisation continue. 1992 19972002 2007 2012

australian commodities > vol. 14 no. 4 > december quarter 2007 687 india’s economic prospects

domestic iron ore consumption to rise India has signiﬁ cant reserves of high quality iron ore and is currently the third largest supplier of iron ore to China after Australia and Brazil. However, high transport costs stemming from a lack of infrastructure have adversely affected India’s competitiveness, with mining costs also being relatively high. Large production increases from the world’s major iron ore producers are expected to enable China to source more of its requirements from Australia and Brazil rather than from higher cost Indian producers. Also, substantial investment in new steel making capacity, driven by large infrastructure investment and the growing industrial sector, are expected to induce higher domestic consumption of iron ore in India.

increasing requirement for metallurgical coal to be met by imports Currently, just under half of India’s metallurgical coal requirements are met through imports. The Indian Government is aiming to limit the steel industry’s reliance on imported metallurgical coal by allocating domestic coal mines to individual steel plants to ensure supply security, and a mechanism has been established to share excess coal between steel plants. Despite these policies, imports are expected to supply the majority of increased requirements for metallurgical coal. This is because many Indian coal reserves remain underdevel- oped, and more than 97 per cent of coal reserves are of lower grade coal, implying an increased reliance on imports for higher grade metallurgical coal. Australia, as a major metallurgical coal exporter is well placed to meet India’s requirements for metallurgical coal imports. Australia is already the major supplier of metallurgical coal to India with an export value of $2.4 billion in 2006-07, accounting for around 95 per cent of India’s metallurgical coal imports in 2006. Australia, because of its geographic proximity, has a substantial freight advantage in supplying metallurgical coal to India over other main competitors — the United States and Canada.

opportunities for increased thermal coal exports Opportunities also exist for Australia to meet the increasing demand for thermal coal in the Indian electricity sector. Coal accounts for more than half of India’s commercial energy consumption and almost 70 per cent of electricity generation. The ‘Power for All’ government program that is due for completion by 2012 aims to increase national electricity generation capacity by around 6 per cent a year, for a total capacity addition of 47 gigawatts. This compares with actual capacity expansion of just over 3 per cent a year in the ﬁ ve years ended 2006. The expansion of power generation capacity implies that there will be increased coal demand from the electricity sector that is unlikely to be met by domestic production alone.

import demand for LNG is expected to rise Like other major world economies, India pursues fuel diversity in power generation. Natural gas is playing an increasingly important role in meeting India’s growing energy demand because of the fuel’s environmental characteristics and greater efﬁ ciency. Indian industry is also eager to secure a reliable, cost effective fuel source. Since the commissioning of India’s ﬁ rst LNG import terminal in 2004, LNG imports rose rapidly to 6.2 million tonnes in 2006, just under a quarter of India’s natural gas consumption. LNG imports are likely to continue to play an important role in meeting India’s energy demand.

688 australian commodities > vol. 14 no. 4 > december quarter 2007 india’s economic prospects

To date, Australia has had a limited role in supplying LNG to India, with trade restricted to a few spot cargoes. However, India’s growing gas requirements and desire for diversity in gas supply sources may lead to an increase in Australian exports of LNG to India. There are currently a number of LNG supply projects in the Asia Paciﬁ c region, including Australia, both existing and planned, that have the capacity to meet India’s long term gas requirements. However, the current world LNG market is characterised by a tight supply–demand situation. As such, competition from major LNG importing countries that are willing to pay higher prices may be a constraint to India securing long term LNG supplies (Rumley 2007). conclusion Economic growth in India has improved markedly in recent years, placing it among the world’s fastest growing economies. Higher economic growth is mainly a result of the reform process that started in the early 1990s. Transformation of the Indian economy into a more open and market based economy has led to a signiﬁ cant rise in exports, imports and overall economic growth. India’s favourable demographics and attractiveness as an investment destination underlie the potential for an extended period of rapid economic growth. However, there remain major challenges, including the provision of infrastructure, raising productivity in agriculture and improving the governance and investment climate. Further reforms and opening of the Indian economy have the potential to sustain, and possibly increase, the pace of economic development into the future. India’s large population, geographic proximity and potential for strong income growth make it an increasingly important market for Australian exports. Australia’s commodity exports to India have increased rapidly in recent years, and there will be further opportunities as India’s economic expansion continues. The actual pace of export expansion will, however, depend on the progress of India’s economic policy reforms, including those relating to protective trade policies. references ADB (Asian Development Bank) 2007, Key Indicators 2007: Inequality in Asia, Manila. Austrade (Australian Trade Commission) 2007, Agribusiness to India, Canberra (www. austrade.gov.au). GoI (Government of India) 2007, Export Import Data Bank, Department of Commerce, Ministry of Commerce and Industry, New Delhi DFAT (Australian Government Department of Foreign Affairs and Trade) 2001, India: New Economy, Old Economy, Economic Analytical Unit Report, Canberra, November. —— 2007, Composition of Trade, Australia 2006-07, Market Information and Analysis Section, Canberra, November. IEA (International Energy Agency) 2007, World Energy Outlook 2007, OECD, Paris. IMF (International Monetary Fund) 2007, World Economic Outlook Database, October 2007 Edition, Washington DC. OECD (Organisation for Economic Cooperation and Development) 2007, OECD Economic Surveys: India, Paris

australian commodities > vol. 14 no. 4 > december quarter 2007 689 india’s economic prospects

Rabo India Finance 2007, Strengthening the India–Australia Corridor in Select Food and Agribusiness Sectors, Joint Australia–India study for the National Food Industry Strategy, New Delhi, June. RBI (Reserve Bank of India) 2007a, Database on Indian Economy, Mumbai. —— 2007b, RBI Monthly Bulletin, Mumbai, October. Rumley, C., Kim, M., Curtotti, R., Ball, A. and Schneider, K. 2007, Natural Gas in India – Prospects for LNG, ABARE Research Report 07.21, Canberra, December. UNCTAD (United Nations Conference on Trade and Development) 2006, World Invest- ment Report 2006, Geneva. United Nations 2007, World Population Prospects: The 2006 Revision, Population Divi- sion, United Nations Department of Economic and Social Affairs, New York. World Bank 2004, India: Investment Climate and Manufacturing Industry, Sector Report 31210, Washington DC. WTO (World Trade Organisation) 2002, Trade Policy Review of India, Report by the WTO Secretariat, Geneva. —— 2006, International Trade Statistics 2006, Geneva. —— 2007, Trade Policy Review of India, Report by the WTO Secretariat, Geneva.

690 australian commodities > vol. 14 no. 4 > december quarter 2007 farm management deposits

> milly> alan lubulwa copeland > +61 > +612 6272 2 6272 2069 2270 > [email protected] > [email protected]

farm management deposits use and interaction with exceptional circumstances assistance

caroline levantis and peter martin

» Farm businesses holding farm management deposits (FMDs) in 2005-06 were characterised by better fi nancial performance than farm businesses not holding such deposits. » The trigger for most farm management deposits is tax liability, with income smoothing being the second consideration. Accountants play a key advisory role in FMD decision making. » Withdrawals of farm management deposits have been mainly for farm working capital. » In addition to farm management deposits, debt fi nancing has been a preferred means of farm businesses to manage fl uctuations in farm income. » In some cases, the provision of Exceptional Circumstances may reduce the effectiveness of the FMD scheme as a risk management tool.

Farm Management Deposit scheme The Farm Management Deposit scheme was established in April 1999 as a tax linked, fi nancial risk management tool for primary producers. The primary objective of the scheme is to assist primary producers deal more effectively with fl uctuations in their cash fl ow resulting from climate variations and changes in market prices. The scheme is an element of the Agriculture Advancing Australia (AAA) package, an integrated policy package developed to encourage farmers to adopt a more self reliant approach to risk management. It allows eligible primary producers to set aside pretax primary production income in profi table years to establish cash reserves to help meet costs in low income years, facilitating increased fi nancial self reliance. FMDs are only available to individual primary producers. To be eligible to invest in an FMD, individual primary producers must not earn more than $65 000 in off-farm income in the year of deposit. In addition, only primary production income can be invested in FMDs, up to a maximum holding of $400 000 at any given time. Deposits are tax deductible in the year they are made, and withdrawals are included as taxable income in the year they are withdrawn. To qualify for the tax deduction, deposits must remain in the account for at least twelve months, unless the withdrawal is made in Exceptional Circumstances (EC), and the deposit was made prior to the area being EC declared.

australian commodities > vol. 14 no. 4 > december quarter 2007 691 farm management deposits

fi nancial and physical performance As at 30 June 2007, 40 574 farmers held a total 1 indicators for broadacre farms that held of $2.78 billion in FMDs. There was a small reduc- FMDs in 2005-06 tion in the number of deposit holders during 2006-07, refl ecting poor seasonal conditions across Australia. average per farm However, despite signifi cant fl uctuation in the total physical value of holdings throughout the course of the 2006- total area operated at 30 June ha 5 788 (49) 07 fi nancial year, the total value of holdings at 30 – total area sown to crops ha 543 (6) June 2007 ended up being similar to total holdings at sheep at 30 June no. 1 940 (7) 30 June 2006. – change in sheep numbers % –2 (143) beef cattle at 30 June no. 310 (17) – change in beef numbers % 5 (69) reviewing the scheme age of owner operator years 55 (1) In 2006 the effectiveness and effi ciency of the industry scheme was reviewed by a committee overseen by wheat and other crops % 24 (8) the Australian Government Department of Agriculture, mixed livestock–crops % 27 (7) Fisheries and Forestry. The committee found that the sheep % 17 (12) scheme was meeting its objectives as a tax linked, beef % 22 (10) fi nancial risk management tool for primary producers. sheep–beef % 10 (17) The 2006 review also examined the uptake and use fi n a n c i a l of FMDs during drought. Drought conditions have total cash receipts $ 414 074 (4) total cash costs $ 299 671 (4) been widespread throughout Australia since 2002- farm cash income $ 114 403 (8) 03 and during this period, FMD holdings have risen – farms with negative farm cash income % 11 (19) at a slower rate than previously. farm business profi t $ 33 158 (26) Some of the key issues surrounding the scheme are rate of return the characteristics of the farms using FMDs (table 1), – excl. capital appreciation % 1.7 (14) the role of FMDs in facilitating the self reliance of farm – incl. capital appreciation % 6.0 (12) businesses through the drawing down of available total farm capital at 30 June $ 3 739 027 (5) FMD reserves and the effectiveness of the scheme as – net capital additions $ 60 752 (21) a risk management tool for drought preparedness and farm debt at 30 June a $ 318 971 (10) management. Another important issue is the interac- – change in debt a $ 27 114 (42) – change in working capital debt a $ 13 749 (44) tion between FMDs and government funded drought – change in investment debt a $ 13 365 (83) assistance, particularly the Exceptional Circumstances equity ratio at 30 June % 91 (1) Relief Payment (ECRP) and Exceptional Circumstances Interest Rate Subsidy (ECIRS) provided to farms in EC liquid assets (including FMDs) at 30 June $ 216 850 (8) declared regions and industries. off-farm income – investment $ 16 101 (8) – wages and salary $ 9 242 (14) 2005-06 ABARE survey farm management deposits – held at 1 July $ 92 548 (7) To investigate these issues, ABARE collected informa- – held at 30 June $ 88 496 (9) tion on the awareness and use of FMDs in late 2006 – ratio of FMDs at 30 June to receipts % 21 (7) as part of its Australian agricultural and grazing indus- exceptional circumstances relief payment $ 1 499 (24) tries survey. This survey collected data on the physical government assistance to farm business $ 3 308 (21) and fi nancial performance of farms in 2005-06 from – ratio of total government assistance a total of 1450 broadacre farms. Around 480 of these to receipts % 1 (16) farms were asked supplementary questions on their estimated population no. 15 013 use of FMDs. This collection included information on sample no. 413 persons most infl uential in FMD decisions, reasons for a Debt responding farms only. Note: Figures in parentheses are standard errors expressed as percent- making FMD deposits, reasons for not making FMD ages of the estimates.

692 australian commodities > vol. 14 no. 4 > december quarter 2007 farm management deposits withdrawals, use of funds withdrawn from FMDs, likely uses of funds from future FMD withdrawals, alternatives if there is no early access to FMDs in EC declared areas, alternative uses for funds if the FMD scheme did not exist, the importance of the FMD scheme to risk management strategies, and risk management strategies in addition to the use of FMDs. Data from this survey have been analysed in conjunction with the core survey data, including information about the receipt of EC assistance. Analysis included tabulation of data by EC declaration status, change in FMD holdings, farm industry type, sources of FMD advice, age of farm operators and farm business size. characteristics of FMD holders Farm businesses holding farm management deposits in 2005-06 recorded superior fi nancial performance, including higher farm cash incomes, higher rates of return, higher farm equity ratios and higher liquid assets than farms of similar size and enterprise mix that did not hold FMDs. In 2005-06, the proportion of farm businesses fig A FMD holdings, by farm business size, holding FMDs rose with increasing farm business 2005-06 size (defi ned by a measure of turnover). Two-thirds of aggregate FMD deposits of broadacre farms share of farms were held by the largest third of farm businesses large (fi gure A). However, within all farm size groups, it medium was superior fi nancial performance that was the key proportion of small characteristic associated with FMD holding. farms with FMDs In recent years, the profi le of deposit holders in the FMD scheme has broadened to include a much share of total larger proportion of operators of medium size and FMD deposits small farm businesses, as well as younger farm operators than was the case in the early years of ratio of FMDs for farms the scheme. On average, the operators of farm busi- to farm receipts holding deposits nesses with FMDs were younger than those without % 20 40 60 80 FMDs in 2005-06. fig B reasons for making latest FMD analysing farmers’ decisions about FMDs deposit

tax management triggers for FMD deposits The majority of farm business operators indicated income smoothing that deposits were triggered in order to manage tax liability, with income smoothing a second consid- business strategy eration (table 2). Tax management triggered the personal savings

latest FMD deposit for the majority of farms in all size categories (ﬁ gure B) and all industry types, and proceeds from large S forced livestock sales

in EC declared areas and non-EC declared areas. medium small M Income smoothing was a distant second for all retirement savings groups, except small farms in EC declared areas.

While tax management remained the highest other L ranked trigger for FMD deposits, income smoothing % 20 40 60 80 was also ranked highly by small farms (ﬁ gure B). farms with FMDs in 2005-06

australian commodities > vol. 14 no. 4 > december quarter 2007 693 farm management deposits

reasons for decisions made by broadacre Deposits triggered as a business strategy, while low 2 farmers holding FMDs in 2005-06 for all farm sizes, were signifi cantly higher for large farms. Among non-EC declared farms, deposits for proportion of retirement savings were signifi cantly higher for medium responding farms %size farms. most infl uence on decisions relating to FMD In EC declared areas, around 7 per cent of medium accountant 58 (10) size businesses and 4 per cent of large businesses indi- bank manager 1 (74) cated that proceeds from forced livestock sales had trig- fi nancial adviser 1 (88) gered the FMD deposits. partner 6 (51) respondent 34 (17) rural fi nancial counsellors 0 (112) source of advice other 0 (998) Accountants were identifi ed as having the major advi- reasons for making most recent FMD deposit sory role in FMD decisions, particularly among larger tax management 75 (7) farm businesses and businesses operated by older income smoothing 33 (18) farmers. Accountants were nominated as the main business strategy 9 (32) infl uence on FMD decisions by 58 per cent of farm personal savings 4 (72) retirement savings 2 (67) businesses with FMDs (table 2). The farm operator receipt from forced livestock sales 3 (26) was the main infl uence nominated by a third of farm other 4 (73) businesses with FMD holdings in 2005-06. Smaller reasons for not making FMD withdrawal farm businesses and farm businesses in EC declared income suffi cient to meet needs 66 (17) areas relied equally on the farm operator and the farm used debt facility 7 (66) accountant in FMD decision making. keeping funds for retirement 12 (62) The average fi nancial performance of farm busi- received government assistance 11 (65) other 5 (101) nesses seeking professional advice on FMD use was better than that of farms not seeking professional made an FMD withdrawal 61 (10) advice. purposes of FMD withdrawal a For farm businesses using professional advice on working capital 69 (9) capital purchase 8 (35) FMD use, there was a stronger emphasis on FMD use debt reduction 19 (35) for tax management and a relatively lower ranking household expenses 4 (86) given to the importance of FMD use as a risk manage- off-farm investment 3 (80) ment strategy (fi gure C). Instead, farms in this group put retirement expenses 3 (73) stronger emphasis on debt fi nancing as a non-FMD tax management 11 (41) other 6 (43 risk management strategy compared with businesses that obtained no advice. Farms not using professional importance of FMD scheme to risk management strategy most important 13 (25) advice gave stronger emphasis to off-farm wages and highly important 40 (16) contracting as a risk management strategy (fi gure D). important 29 (20) Further, average liquid asset levels for the group using minor importance 17 (27) professional advice were more than double those of not important 1 (64) the group not seeking advice. risk management strategies other than FMD scheme a off-farm income from wages, contracting etc 37 (15) use of funds withdrawn from FMDs off-farm income from investments 38 (15) debt fi nancing 45 (11) The 2005-06 survey indicated that the majority of enterprise diversifi cation 20 (25) FMD withdrawals have been to provide working forward contracting/hedging 9 (36) capital, although debt reduction and tax management seasonal conditions forecasts 8 (35) are also signifi cant. Around 70 per cent of farms made insurance against loss of production 18 (25) their most recent FMD withdrawal to cover working other 5 (49) a Percentages do not add up to 100 as farmers could give more than capital, 19 per cent for debt reduction, 11 per cent for one response. tax management and 8 per cent for capital purchase

694 australian commodities > vol. 14 no. 4 > december quarter 2007 farm management deposits

(table 2). Withdrawal for household expenses, off- fig C reasons for using FMDs, by source farm investment and retirement expenses were each of advice for farms with FMDs in 2005-06 nominated by around 3 per cent of farms. Detailed ﬁ nancial and physical survey data suggest that tax management cattle purchase was likely to have been a signiﬁ cant income smoothing component of the expenditure funded by FMD withdrawals in 2005-06. business strategy While at least 50 per cent of farm operators in all personal savings age groups indicated the main reason for FMD with- no professional

drawal was to provide working capital, around 35 per advice

s retirement savings used professional Used profe

cent of farmers aged 51–60 used withdrawals for debt advice

o reduction. Around 25 per cent of farmers over 60 years other reasons No professi of age indicated that withdrawals were made for tax % 20 40 60 80 management purposes and these farmers generally put withdrawn funds to a broader range of uses (ﬁ gure E). fig D risk management strategies other than FMD scheme, by source of advice Similarly, farms with FMDs indicated that the most for farms with FMDs in 2005-06 likely reason for making FMD withdrawals in the debt financing future would be to fund working capital, with other reasons being tax management, debt reduction and off-farm income retirement, but these ranked much lower. from wages etc Withdrawals under the early access provisions of off-farm income EC were reported by only 4 per cent of farms with from investments FMDs in 2005-06 and 8 per cent of farms that had enterprise diversification FMDs prior to 2005-06. These withdrawals were almost all made by medium and large farm busi- insurance against loss of production nesses. forward contracting no professional

/ hedging advice risk management strategies used professional Used profes seasonal advice

Debt ﬁ nancing was listed by all farm size groups as conditions forecasts

o an important risk management strategy other than No professi the FMD scheme. However, small and medium size other farms with FMDs gave a signifi cantly higher rating to % 20 4060 80 off-farm wages and contracting as well as a higher fig E purposes of FMD withdrawal, rating to off-farm income from investments (fi gure F). by age of farm operator Nevertheless, a broader range of risk management for farms with FMDs in 2005-06 practices were identifi ed in the responses of larger farm working capital farm businesses. Debt fi nancing was identifi ed by an estimated debt reduction 45 per cent of FMD holders to be an important risk tax management management strategy other than FMDs. Off-farm income from wages and contracting and off-farm capital purchase

investments were each identiﬁ ed by around 38 per retirement expenses over 60 years 50

cent of respondents. Enterprise diversiﬁ cation was 51 to 60 years 51

identiﬁ ed by 20 per cent and insurance against off-farm investment 50 years or younger

v production losses by 18 per cent (table 2). Only 9 household expenses O per cent of farms indicated that forward contracting other or hedging was an alternative risk management % 20 40 60 80 australian commodities > vol. 14 no. 4 > december quarter 2007 695 farm management deposits

strategy. Larger incorporated farms, including feedlots and cotton producers that generally undertake more forward contracting or hedging, are not eligible to hold FMDs. A signifi cantly higher proportion of large farms with FMDs cited enterprise diversifi cation, forward contracting or hedging, seasonal conditions forecasts and insurance against production losses as important risk management strategies other than FMDs than did small and medium size farms with FMDs (fi gure F). These results are likely to refl ect the greater concentration of large cropping businesses in this size category. Reliance on debt fi nancing to manage fl uctuations in farm income is further supported by fi nancial data that indicated a strong preference for debt fi nancing of working capital requirements in recent years, even where holdings of FMDs have been substantial. While the impact of increases in working capital debt on farm equity has been more than offset by rising land and livestock values in recent years, increases in working capital debt are not productivity enhancing and reduce measures of farm fi nancial performance.

fig F risk management strategies other than FMD scheme, by farm business size

debt financing

off-farm income from investments

off-farm income from wages, contracting etc

enterprise diversification insurance against loss of production forward contracting / hedging large seasonal conditions forecasts medium small other

% 20 40 60 80 farms with FMDs in 2005-06

fig G risk management strategies other than FMD scheme, by age of farm operator

debt financing

off-farm income from investments

off-farm income from wages, contracting etc

enterprise diversification

insurance against loss of production

forward contracting / hedging over 60 years seasonal conditions forecasts 51 to 60 years 50 years or younger other

% 20 40 60 80 farms with FMDs in 2005-06

696 australian commodities > vol. 14 no. 4 > december quarter 2007 farm management deposits

The survey results indicate that emphasis on debt fi nancing to manage income fl uctuations declines with increasing age of the farm owner manager (fi gure G). Owner managers under 50 years of age put signifi cantly greater emphasis on access to a debt facility than do older farmers. This might be expected in view of the average age of these farmers (which at 44 puts them at an earlier stage in their careers) as well as the superior capacity of their businesses to service debt. Farmers over the age of 60 place greater emphasis on off-farm income from investments, while owner managers aged 51–60 put greatest emphasis on income from off-farm wages and contracting. Debt fi nancing was also relatively highly rated by farmers in this age group as a tool for managing income fl u c t u a t i o n s . reasons for not making an FMD withdrawal Around two-thirds of farms did not make a withdrawal in 2005-06 because they had suffi cient income to meet their needs. A further 12 per cent made no withdrawal because money was being kept for retirement; 11 per cent because government assistance was received; 7 per cent because they used their debt facility; and 5 per cent indicated other reasons (table 2). Current government policy allows for FMD holdings to be considered as exempt assets, in certain circumstances, when farmers apply for EC assistance. Therefore, it is diffi cult to draw meaningful conclusions about the impact of the FMD scheme in the context of exceptional circumstances events, including drought. However, there is some evidence of interaction between FMD holdings and assistance provided by government through the EC provisions. In 2005-06, farm businesses in EC declared areas with FMD holdings received signifi cantly less government assistance through Exceptional Circumstances Interest Rate Subsidy payments and Exceptional Circumstances Relief Payments than farms with no FMDs in both absolute terms as well as relative to their business size. This generally refl ects the better fi nancial performance of farms with FMD holdings. This may suggest that, in some cases, EC provisions reduce the effectiveness of the FMD scheme as a risk management tool.

australian commodities > vol. 14 no. 4 > december quarter 2007 697

15 may 2007

australian forest and wood products statistics out now. . . september and december quarters 2006 www.abareconomics.com abare

australian forest and wood products statistics

december release abareconomics.com

for free downloads of the december issue of the australian crop report, visit the ABARE website abareconomics.com > excel tables > free PDF download > on demand digital print development projects

>> alan alan copeland copeland > > +61 +61 2 2 6272 6272 2270 2270 > > [email protected] [email protected] minerals and energy major development projects – october 2007 listing alan copeland and commodity analysts, energy and minerals branch

» In 2006-07, exploration in Australia’s minerals and energy sector was around $4 billion, the highest level in real terms (2006-07) since 1981-82 and 73 per cent higher than the average over the past 25 years. » In the six months to October, a record 29 projects were completed, with a total capital expenditure of $7.8 billion. A further 91 projects are at an advanced stage with projected capital expenditure of $57.9 billion. exploration expenditure Exploration is an investment in knowledge about the location, size and quality of petroleum and mineral deposits. The ability of Australia’s minerals and energy sector to sustain its recent strong growth and expand its contribution to national economic performance in the medium and longer term depends on the amount of investment in minerals exploration. In general, decisions to invest in minerals exploration depend on the probability of discovering an economic mineral deposit or extending the resource base of a known deposit. A range of economic and policy factors will also inﬂ uence companies’ expectations of the likely return on investing in exploration. Such factors include: prevailing and expected mineral prices; existing mining and processing technologies; input costs more generally; fig A private minerals exploration land access; and government policies. expenditure – Australia In 2006-07, minerals exploration expenditure in other Australia totalled $3.9 billion, an increase of 53 per 3.5 base metals c e n t o n 2 0 0 5 - 0 6 ex p l o ra t i o n ex p e n d i t u re. I n re a l t e r m s gold 3.0 (2006-07 dollars), exploration expenditure in 2006- other energy 07 was the highest on record and around 73 per cent 2.5 petroleum higher than the average annual expenditure on explo- 2.0 ration over the past 25 years. The recent increase in exploration expenditure is a response to higher world 1.5 prices for most mineral and energy commodities. It 1.0 also reﬂ ects the trend toward developing projects with higher production capacities, which generally require 0.5 2006-07 larger resource delineation programs. While explora- $b tion expenditure has increased recently, it cannot be 1981 1986 1991 1996 2001 2006 determined from the Australian Bureau of Statistics -82 -87 -92 -97 -02 -07 australian commodities > vol. 14 no. 4 > december quarter 2007 699 development projects

data what proportion of the increased expenditure is related to increased exploration activity and what proportion is attributable to higher costs of inputs, such as labour and equipment. Over the past two years, expenditure on brownfi eld exploration — that is, exploration around existing or known deposits — has made up an increased proportion of total exploration expenditure. This can be partly explained by mining companies reassessing reserves at current and depleted mining areas with the view to extracting additional reserves that are now considered to be economic as commodity prices are currently high. Further, mining at or near existing deposits is attractive for companies because projects can be started sooner and generally require lower capital expenditure because there is already existing infrastructure in place. In 2006-07, exploration expenditure increased across all major commodities. Petro- leum exploration expenditure was $2.23 billion, an increase of 71 per cent from 2005- 06. Expenditure on petroleum exploration in 2006-07 was the highest in real terms since 1982-83 and 87 per cent higher than the annual average over the past 25 years. Increased petroleum exploration expenditure has been encouraged by historically high global oil prices. With world oil prices forecast to remain relatively high in the short term, exploration expenditure can be expected to remain high. Iron ore exploration expenditure in 2006-07 is estimated to have almost doubled to $320 million. Successive annual contract price rises and the prospect of continued strong Chinese demand for iron ore over the medium term are important drivers behind the signifi - cant increase in expenditure. In 2006-07 gold exploration expenditure totalled $456 million, an increase of 11 per cent. The increase in gold exploration activity has been driven largely by the increase in Australian dollar gold prices, which in 2006-07 averaged around $800 an ounce, an increase of 15 per cent from 2005-06. Exploration expenditure on base metals (including copper, lead, nickel and zinc) was $555 million in 2006-07, an increase of 51 per cent from 2005-06. This overall increase was underpinned by strong rises in expenditure on exploration for copper, nickel and silver–lead–zinc, in line with substantial increases in global prices for these commodities. For example, in 2006-07, copper prices increased by more than 40 per cent compared with 2005-06, while nickel prices rose by more than 145 per cent over the same period. In real terms, exploration expenditure on base metals in 2006-07 was more than double the 25 year average of $255 million (in 2006-07 dollars) and the highest on record. Over the medium term, exploration expenditure is expected to be infl uenced by a common set of factors in each of the main exploration sectors. In the petroleum sector, short to medium term oil prices are an important factor in encouraging increased exploration expenditure. However, there are other factors that are likely to have a signifi cant bearing on decisions on exploration expenditure. These include: longer term oil price trends; Australia’s relative prospectivity for petroleum; the prospects for Australia’s share of growing global LNG trade; the need for long term planning, particularly for relatively expensive offshore petroleum exploration; cost increases; shortages of skilled labour; and the concurrent commitment of resources (funds, equipment and labour) to other activities, such as project development. Movements in the Australian dollar price of gold will be a key factor infl uencing gold exploration expenditure. However, expected future costs of exploration and development will also play an important role in determining future expenditure. Rising costs of labour, fuel and other inputs (such as steel) have increased development costs and could have a negative infl uence on gold exploration expenditure over the medium term.

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Equally, in the base metals sector, in addition to the price outlook, other important factors include assessments of the development potential of several known (but as yet undeveloped) base metal deposits in Australia; higher costs; and Australia’s relative attractiveness for exploration. capital expenditure Data from the ABS survey of new capital expenditure in the mining and metal products industries give an indication, in aggregate terms, of the pace and scale of development in the minerals and energy sector, both historically and in the short term (fi gure B). ABS survey data show that new capital expenditure in the mining industry was $22.1 billion in 2006-07, 15 per cent higher than in 2005-06. In real terms (2006-07 dollars), new capital expenditure in 2006-07 was more than double the average annual expenditure over the past 25 years ($9.2 billion). In addition, there are indications that capital expenditure in the mining sector may continue to increase rapidly in 2007-08. Based on industry intentions canvassed in the September quarter 2007, ABS data indicate that capital expenditure on mining in 2007-08 may be fig B new capital expenditure around $30 billion. If this capital expenditure in 2007- 08 is realised, this would represent an increase of 32 per cent from the record expenditure in 2006-07. The 30 expected continued high level of capital expenditure 25 metal products in the mining industry in the near future is consistent with mining the development trends shown in the full list of major 20 mineral and energy projects. Capital expenditure in the metal products sector, 15 which includes the minerals processing activities 10 covered in ABARE’s projects list, was $4.6 billion in 2006-07, approximately 7 per cent below expendi- 5 ture in 2005-06. Despite the moderate fall in nominal 2006-07 terms, real expenditure in the sector in 2006-07 was $b still at historically high levels and almost double the 1983 1987 1991 1995 1999 2003 2007 -84 -88 -92 -96 -2000 -04 -08 25 year annual average of $2.4 billion (in 2006-07 dollars). However, surveyed industry intentions suggest that metal products expenditure could fall in 2007-08 to about $3.8 billion, refl ecting the imminent completion of some large projects. Nonetheless, the fall will be partially offset by the commitment of new projects such as the Yarwun Alumina refi nery. recently commissioned projects In the six months to the end of October 2007, a record 29 major minerals and energy projects, with a total capital expenditure of $7.8 billion, were completed. The completion of these projects is expected to result in increased production and export capacity in a range of commodities, including coal, gas, alumina, base metals, gold, iron ore and mineral sands. A summary of these projects is provided in table 1. The total number of projects completed in the six months ended October 2007 is six more than in the six months ended April 2007 and two higher than the previous record number (27) completed in the six months to April 2006 (table 2). However, total capital

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fig C completed projects expenditure was signifi cantly higher than in the six month periods ended April 2007 and October 2006. The average value of projects completed in the six total capital cost of projects left axis months ended October 2007 was $269 million, an 8 400 average capital increase from the historical nominal average over the cost of projects past nine years of around $240 million (fi gure C). 6 right axis 300 Looking ahead, ABARE’s project list indicates that the rate of project completion is likely to accelerate 4 200 in the short term, with more than fi fty advanced projects scheduled for completion before the end of 2 100 2008. However, there is the possibility that some of these projects will not meet announced scheduled completion dates or forecast budgets, refl ecting $b $m J D J D J D J D J D AprOct Apr Oct Apr Oct Apr OctApr Oct strong industrywide competition for skilled labour 1998 2000 2002 2003 2004 2005 2006 2007 and equipment.

abare’s list of major minerals and energy development projects

the full list ABARE’s listing of major minerals and energy projects expected to be developed over the medium term is compiled every six months. Information contained in the list spans the mineral resources sector and includes energy and minerals mining projects and minerals processing projects. The information comes predominantly from publicly available sources but, in some cases, is supplemented by information direct from companies. The list is fully updated to reﬂ ect developments in the previous six months. The projects list is released around May and November each year.

what’s in the list The latest projects list contains information on 305 projects, providing the following details: » project name » location » expected startup date » capital cost of the project » proponent company or joint venture » project status » additional output capacity » additional employment, where available.

With one industry exception, ABARE’s listing provides details of each announced project for which total capital expenditure is expected to exceed $40 million. The exception is the gold industry, which typically has a relatively large number of smaller projects. For gold, the expenditure threshold for inclusion in the listing is $15 million. In general, included projects are at relatively advanced stages of planning. That is, for new projects, stage of planning categories range from ‘prefeasibility study underway’ through to ‘under construction’. Projects are listed by the principal mineral commodity to be produced, under the broad headings: ‘Energy mining projects’, ‘Minerals mining projects’ and ‘Minerals processing projects’. The listing includes new greenﬁ elds projects as well as expansions of existing projects.

where to get the list The list is available from ABARE’s website abareconomics.com under ‘latest releases’ enquiries: [email protected] or phone +61 2 6272 2010.

702 australian commodities > vol. 14 no. 4 > december quarter 2007 development projects

major mineral resource developments – projects completed, April to 1 October 2007 capital commodity/project location company expenditure $m energy mining projects black coal North Wambo longwall NSW Peabody 101 Abbot Point Coal Terminal X21 expansion Qld Ports Corporation of Queensland 116 Bluff to Blackwater Duplication (rail) Qld Queensland Rail 58.5 Hay Point Coal Terminal (phase 2) Qld BHP Billiton Mitsubishi Alliance (BMA) 70 coal seam methane Argyle Qld Queensland Gas Company 100 Spring Gully (phase IV) Qld Origin Energy 114 Tipton West Qld Arrow Energy/ Beach Petroleum/ 119 Australian Pipeline Trust petroleum Otway Gas Vic Woodside Energy/Origin/ Benaris/ 1 100 CalEnergy Puffi n North East oil fi eld NT AED Oil 150 West Kimberley Power Project WA Energy Developments Limited 320 minerals mining projects copper Lady Annie Qld CopperCo 86 Leichhardt (stages 1&2) Qld Matrix Metals 15 gold Bronzewing redevelopment WA View Resources 30 Mount Wright Qld Resolute Mining 25 (feed for Ravenswood operations) Wallaby underground extension WA Barrick Gold 35 Sunrise Dam underground development WA AngloGold Ashanti 109 iron ore Dampier port expansion (phase B) WA Rio Tinto 956 Hamersley Iron Yandicoogina mine WA Rio Tinto 631 expansion Koolan Island WA Mt Gibson Iron 147 Project Magnet SA OneSteel 395 lead–zinc–silver Flinders zinc SA Perilya 35 Jaguar base metals WA Jabiru Metals 69 Potosi (stage 1) NSW Perilya 18 mineral sands Goondicum Qld Monto Minerals 73 Waroona WA Iluka Resources 39 other commodities Ellendale (pipe 9 stages 1&2) (diamonds) WA Kimberley Diamond Company 26 minerals processing projects alumina Alcan refi nery expansion NT Alcan 2 700 copper Townsville refi nery expansion Qld Xstrata 7 and upgrade crude iron and steel Coating plant NSW Bluescope Steel 150

australian commodities > vol. 14 no. 4 > december quarter 2007 703 development projects

completed energy projects In the six months ended October 2007, ten energy projects (including infrastructure) were completed, with a capital expenditure of $2.2 billion. The largest of these was the $1.1 billion Otway project, located 70 kilometres off the coast of western Victoria. The project, which has a production capacity of 60 petajoules of gas as well as condensate and liquid petroleum gas, is operated by Woodside and owned with joint venture partners Origin Energy, Benaris International and CalEnergy. Off the northern coast of Australia, 700 kilometres west of Darwin, AED Oil’s Puffi n North East project (capacity of 30 000 barrels a day) was completed at a capital cost of $150 million. Oil production, storage and offl oading facilities will be located on a vessel, which will be moored over the oil fi eld. The largest onshore energy project completed during the six months to October 2007 was Energy Development’s West Kimberly Power project, which had a capital cost of $320 million. The project encompasses annual production of 73 000 tonnes of liquefi ed natural gas, which will be delivered by trucks to small remote gas fi red power stations located in north western Western Australia. In Queensland, six energy projects were completed — three coal and three coal seam methane projects. All of the completed coal projects were infrastructure related, including two port and one rail upgrade. The 4 million tonne annual capacity increase at the Hay Point coal terminal was completed at a cost of around $70 million, while at Abbot Point, a 6 million tonne upgrade was completed at a cost of completed projects, June 1998 to $116 million. Further expansion work at Abbot Point 2 October 2007 coal terminal is undergoing feasibility studies. Three coal seam methane projects were capital cost of projects completed; Queensland Gas Company’s Argyle projects total average project, Origin Energy’s Spring Gully Phase IV and no. $m $m Arrow Energy’s Tipton West project. The three proj- six months ended June 1998 3 415 138 ects will have a total production capacity of around December 1998 18 3 500 194 33 petajoules a year, equivalent to around 40 per June 1999 19 6 500 342 cent of Queensland’s gas consumption. December 1999 16 4 300 269 June 2000 9 1 800 200 completed minerals mining projects December 2000 9 1 700 189 June 2001 5 282 56 In the six months ended October 2007, sixteen December 2001 5 262 52 minerals mining projects were completed at a capital June 2002 10 1 082 108 cost of $2.7 billion. Four iron ore projects accounted December 2002 10 2 110 211 for around 80 per cent of this capital expenditure. four months ended The largest two projects were completed by Rio Tinto April 2003 4 400 100 — the $956 million phase B expansion at the Dampier six months ended port and the $631 million expansion at the Hamer- October 2003 6 937 156 sley Iron Yandicoogina mine in the Pilbara region April 2004 13 4 956 381 of Western Australia. The expansion of the port at October 2004 9 3 328 370 April 2005 23 5 812 253 Dampier will allow for increased annual throughput October 2005 12 2 012 168 of 16 million tonnes, while there will be a 24 million April 2006 27 8 854 328 tonne increase in annual capacity at the Yandicoo- October 2006 24 5 824 243 gina mine. OneSteel completed its $395 million April 2007 23 3 314 144 Project Magnet, which will produce 3 million tonnes October 2007 29 7 795 269 of hematite ore and 0.22 million tonnes of pellets. The total 274 65 183 238 fourth iron ore project completed was Mount Gibson

704 australian commodities > vol. 14 no. 4 > december quarter 2007 development projects

Iron’s Koolan Island project located in northern Western Australia. The project, which has a capital cost of $147 million and an annual capacity of 4 million tonnes, is expected to reach full production toward the end of 2008. Australia’s gold production capacity will increase with the completion of four gold projects; the Bronzewing redevelopment, the Wallaby underground extension, the Sunrise Dam underground development and Mount Wright. The largest of these projects in terms of production capacity is Barrick Gold’s Wallaby underground extension ($35 million in capital expenditure), which has a production capacity of 120 000 ounces a year. The redevelopment of the Bronzewing mine ($30 million), undertaken by View Resources, is targeting production of 50 000–70 000 ounces a year. Resolute Mining has commenced production from the Mount Wright project ($25 million), which will supply feed to the nearby Ravenswood processing facilities. The production target is 650 000 ounces over an eight year period Australia’s base metal production capacity has increased with the completion of fi ve projects, the largest of which in terms of capital expenditure are CopperCo’s Lady Annie and Jabiru Metals’ Jaguar project. Lady Annie (capital expenditure $86 million) in north western Queensland has an annual production capacity of 25 000 tonnes of copper cathode. The Jaguar project ($69 million), 250 kilometres north of Kalgoorlie, has an anticipated annual output of 33 600 tonnes of zinc, 9600 tonnes of lead and 900 000 ounces of silver. In terms of capital expenditure, three smaller base metals projects recently commenced production. These are Perilya’s $35 million Flinders zinc project (annual production capacity of 57 000 tonnes of zinc oxide ore), Perliya’s $18 million stage 1 of the Potosi project (38 000 tonnes of zinc, 21 000 of lead and 19 000 tonnes of silver) and Matrix Metals $15 million stage 1 and 2 of the Leichhardt project (10 000 tonnes of copper cathode). In the six months ended October 2007, two mineral sands projects were completed — Monto Minerals $73 million Goondicum project and Iluka Resources $39 million Waroona project. In Western Australia, the Kimberley Diamond Company completed the $26 million expansion of its Ellendale operations. completed mineral processing projects In September 2007, Alcan’s upgrade of its alumina refi nery at Gove was completed after a three and a half year construction period. The announced capital cost of the project was US$2.3 billion (A$2.7 billion), which in terms of capital expenditure makes it Australia’s largest single stage metal mining/processing project. The refi nery upgrade will increase annual production capacity by 1.8 million tonnes to 3.8 million tonnes and reduce operating costs by around US$30 a tonne (A$25 a tonne). Bluescope Steel completed its $150 million steel coating plant, which has an annual capacity of 120 000 tonnes. advanced projects At the end of October 2007, there were 91 projects at advanced stages of development included in ABARE’s project list (table 3) — these projects are either committed or under construction. This is one more than the number of advanced projects in the April 2007 list. The number of advanced projects in the October 2007 list includes nine that are either newly committed or entered the list at an advanced stage during the previous six months. The total capital expenditure of the 91 advanced projects at the end of October 2007 is $57.9 billion, an increase of 33 per cent from April 2007 and 66 per cent year on year.

australian commodities > vol. 14 no. 4 > december quarter 2007 705 development projects

number and estimated capital cost of advanced projects, by state 3 – October 2007 energy minerals minerals mining mining processing total no. $m no $m no. $m no. $m New South Wales 6 1 036 3 793 2 464 11 2 293 Victoria 3 315 1 120 0 0 4 435 Queensland 17 6 831 4 740 3 2 931 24 10 502 Western Australia 12 22 478 24 19 530 1 30 37 42 038 South Australia 1 50 3 1 224 0 0 4 1 274 Tasmania 0 0 2 102 0 0 2 102 Northern Territory 5 930 4 328 0 0 9 1 258 Australia 44 31 640 41 22 837 6 3 425 91 57 902

map 1 advanced minerals and energy projects Capital expenditure october 2007 $0–100m $101–500m $501–1000m >$1000m Ranger (uranium) liquid helium plant Processing Mine/ Puffin South West (oil) Bonaparte facility platform Montara/Skua (oil) gas pipeline Darwin Blacktip (gas) Angel gas & condensate field Browns oxide Cape Lambert (copper) port expansion Mugana (zinc) (iron ore) McArthur River Argyle (diamonds) (zinc/lead) Lucky Break (nickel) Perseus over Goodwyn (gas) Ellendale(diamonds) Yabulu refinery (nickel) Pluto (gas) Sonoma (coal) Dalrymple Bay NorthWest Shelf Mt Isa concentrator coal terminal (LNG) (zinc – lead) Mt Isa smelter (copper) Lake Lindsay (coal) Woolybutt Rapid Growth 3 &4 (iron ore) Moranbah ammonium Yarwun refinery (oil) Pilbara (iron ore) nitrate plant stage 2 (alumina) Stybarrow Carborough Downs (coal) Callemondah to RG (oil) Hope Downs (iron ore) Clermont (coal) Tanna rail (coal) RG Tanna coal Vincent (oil) Vermont (coal) Dampier to Bunbury Blackwater to Burngrove rail duplication (coal) terminal (oil) Queensland gas pipeline Pyrenees gas pipeline stage 5 Blackwater(coal) Cosmos (nickel) QSN link Dawson mine (coal) Darling Downs–Tallinga Cliffs (nickel) Gwalia Deeps (gold) Prominent Hill (copper) Darling Downs (coal seam methane) Windimurra Sinclair (nickel) including Spring Gully (vanadium) Brisbane Mt Weld (rare earths) (coal seam methane) Mungada Hematite Hillgrove(gold) (iron ore) Extension Hill (iron ore) Narrabri(coal) Glendell (coal) Frog’s Leg (gold) Honeymoon Liddel (coal) Karara Magnetite (uranium) Mt Owen(coal) (iron ore) Carnilya Hill (nickel) Northparkes Perth E48 (copper) Bulga underground Kwinana LNG plant Higginsville (gold) Mindarie (coal) Kwinana ammonium (zircon) Kooragang island nitrate plant Adelaide coal terminal expansion Gwindinup (zircon) Ravensthorpe (nickel) Sydney Canberra Port Kembla blast Boddington (gold) Forestania concentrator (nickel) Angas (zinc) furnace reline Flying Fox stages 1, 2 (nickel) Ballarat (gold) Melbourne (iron & steel) South Gippsland gas pipeline Brooklyn – Lara Loop pipeline Longtom (gas) Mt Bischoff (tin) Renison (tin) Avebury (nickel) Hobart

706 australian commodities > vol. 14 no. 4 > december quarter 2007 development projects

However, even projects that have reached the committed stage may be deferred, modifi ed or even cancelled if economic or competitive circumstances change signifi cantly. This is particularly relevant in the current period of rapid project development in which the mineral resources sector is experiencing signifi cant diffi culties in securing suffi cient inputs, including materials, equipment and skilled and professional labour. The impact of this capacity constrained environment is being manifested in delays to scheduled completion dates for projects and in increases in project capital costs. In line with previous ABARE project listings, current investment intentions in the Australian minerals sector, as refl ected in the large number and record value of minerals and energy projects committed to, or under construction, indicate strong growth in the sector over the next few years. The 91 advanced projects as at October 2007 indicate continued expansion across most of the minerals and energy commodities. advanced energy mining projects As at October 2007, energy developments accounted for 44 of the 91 advanced projects and around 55 per cent (or $31.6 billion) of committed capital expenditure. Estimated capital expenditure on energy projects has doubled since April 2007, largely refl ecting Woodside’s construction approval for the Pluto LNG project and the BHP Billiton–Apache Energy Pyrenees oil project. Approval of these two projects has added more than $14 billion to the value of committed energy projects. In July, Woodside formally approved the Pluto LNG project, which has an announced capital cost of $12 billion. In terms of capital expenditure, this is the largest current commitment to a single project in Australia’s mining and energy industry. The project will have an annual production capacity of 4.2 million tonnes of LNG and is scheduled for completion in late 2010. The gas has been purchased under long term supply contracts by Tokyo Gas and Kansai Electric. Also in July, BHP Billiton (operator) and Apache Corpora- tion approved the development of the Pyrenees oil fi eld, which is located offshore, 50 kilometres north of Exmouth in Western Australia. The project will have an annual production capacity of 96 000 barrels a day when completed in the fi rst quarter of 2010. Six large petroleum developments — four of them operated by Woodside — account for a further $7.4 billion or around 23 per cent of the total value of energy projects and are all located off Western Australia. The largest of these projects is the $2.6 billion North West Shelf Extension Project, which involves the construction of a fi fth LNG processing train, with gross annual capacity of 4.2 million tonnes of LNG. The fi fth train is currently under construction and is expected to be completed toward the end of 2008. Two new offshore oilfi eld developments in the Carnarvon Basin in Western Australia — Vincent ($1 billion) and Stybarrow ($803 million) — are expected to add around 180 000 barrels a day of crude oil production capacity. Vincent (Woodside operated) and Stybarrow (BHP Billiton operated) are expected to begin production in 2008. The other three petroleum projects are the $1.6 billion Angel gas and condensate fi eld in the Carnarvon Basin, scheduled for completion in 2008; the $800 million Perseus-over-Goodwyn project, aimed at enabling full utilisation of the existing Goodwyn gas platform; and the $620 million offshore Blacktip gas fi eld project in the Bonaparte Basin south west of Darwin, scheduled for completion in 2009. Almost all of these large advanced petroleum projects are scheduled to be completed by the end of 2008. In August, Nexus Energy gave fi nal approval to the Longtom project, which allows for the annual extraction of 25 petajoules of gas from Bass Strait off the coast of Victoria. Gas

australian commodities > vol. 14 no. 4 > december quarter 2007 707 development projects

from the $195 million project will be purchased by Santos for processing at the Patricia Baleen gas plant in Victoria. As at the end of October 2007, there were seven natural gas pipelines at an advanced stage, including the recently approved Dampier–Bunbury stage 5A(2) pipeline and the QSN link. In terms of capital expenditure, Dampier–Bunbury stage 5A is the largest, with a value of $660 million. Completion of this project will add around 36.5 petajoules a year to pipeline capacity. Capacity of the Dampier–Bunbury pipeline will increase further when the $245 million stage 5A(2) is completed, adding an additional 14.6 petajoules. In Queensland, Epic Energy has committed to constructing the 180 kilometre QSN link, which will connect the existing south western Queensland gas network to the Moomba gas hub in northern South Australia. When the $140 million pipeline is complete, gas will be able to be piped from Queensland into the southern and eastern gas markets. Coal mine and coal infrastructure projects account for a further 12 per cent (or $7.0 billion) of the estimated capital cost for all advanced projects. The largest coal mine development in terms of capital cost is the $1.1 billion Dawson Project (Anglo Coal Australia– Mitsui), south west of Gladstone. This project is expected to add around 5.7 million tonnes of coking and thermal coal capacity, commencing toward the end of 2007. Much of the construction associated with the Dawson project has been completed and commissioning activities were taking place at the end of October. Anglo Coal – Mitsui is also developing the large new Lake Lindsay opencut mine (capital cost $690 million) near German Creek in central Queensland. The mine is expected to commence production in 2008, with output building up to full capacity of around 4 million tonnes a year, mainly of hard coking and PCI coals. Rio Tinto is committed to developing its $900 million Clermont opencut mine as a replacement for the existing Blair Athol mine. The Clermont mine is scheduled to be commissioned in 2010, with output expected to be around 12 million tonnes a year of thermal coal. In the six months ended October, four coal mine projects were added to the list of advanced projects. Two of these are in New South Wales, Xstrata’s upgrade of the Liddel washplant (capital expenditure $91 million) and stage 1 of Whitehaven’s Narrabri Coal project ($140 million). A further two projects are in Queensland, Bowen Basin Coal’s Vermont mine ($176 million) and CVRD’s longwall at Carborough Downs ($360 million). Annual production from Narrabri and Liddel will increase by 2.5 million tonnes and 1.4 million tonnes of thermal coal respectively, while the Vermont mine and Carborough Downs longwall will have production capacities of 3 and 4 million tonnes a year respectively. Apart from those listed above, ﬁ ve other advanced coal mine developments in Queensland and New South Wales are expected to raise coal production capacity by around 7 million tonnes a year in the next two to three years. The combined capital cost of these ﬁ ve projects is $880 million. The large number of coal projects recently commissioned and scheduled for completion in the short to medium term has provided the impetus for expanded coal infrastructure (rail and coal terminal) capacity. At the end of October 2007, there were four coal terminal expansions and three rail expansions either committed or under construction. These include the recently approved upgrade to the Kooragang Island coal terminal at the port of Newcastle. The $331 million project will add 11 million tonnes of throughput when completed in 2009. These expansions have a total estimated capital cost of $2.6 billion or around 36 per cent of total committed capital expenditure in the coal industry.

708 australian commodities > vol. 14 no. 4 > december quarter 2007 development projects advanced minerals mining projects At the end of October 2007, there were 41 advanced minerals mining projects, collectively valued at around $22.8 billion. Two-thirds of these projects are located in Western Australia and comprise more than 85 per cent ($19.5 billion) of the estimated total capital expenditure. Nine minerals mining projects — six iron ore, one gold, one nickel and one diamonds — account for almost 90 per cent ($17.5 billion) of committed capital expenditure to metal mining in Western Australia. In the six months ended October 2007, four iron ore projects, with an estimated total capital expenditure of $2.2 billion, were added to the advanced project list. The largest of these was Gindalbie Metals Karara magnetite project ($1.6 billion), which will have a production capacity of 8 million tonnes of iron ore concentrates. Gindalbie Metals also approved the construction of the Manguda hematite project ($94 million), which is scheduled for completion in 2009 and will have an annual production capacity of 3 million tonnes. Rio Tinto committed to an 8 million tonne expansion of its Hope Downs project (Hope Downs South), which is scheduled for completion in early 2009 at a capital cost of $417 million. Finally, Mount Gibson Iron has decided to proceed with its $84 million Extension Hill direct shipment ore project, which is scheduled for completion in 2009. At full capacity, mount Gibson Iron will produce around 3 million tonnes of hematite to be exported for processing. In terms of capital expenditure, the largest iron ore project under construction is Fortescue Metals Group Pilbara project, which will cost around $2.9 billion. The project will have a production capacity of around 45 million tonnes and also include dedicated port and rail facilities. BHP Billiton and Rio Tinto are progressing another four iron ore projects, with a collec- tive capital expenditure of $6.6 billion. BHP Billiton’s Rapid Growth 3 and 4 projects are under construction at a total capital cost of $4.4 billion. The projects will increase iron ore production capacity by 46 million tonnes a year and also includes upgrading associated rail and port infrastructure at Port Hedland. Rapid Growth 3 is due to be completed at the end of 2007, while Rapid Growth 4 is scheduled for completion in 2010. Rio Tinto is constructing the $1.2 billion fi rst stage of the Hope Downs project, which will add 22 million tonnes of production and export capacity, and the $1.0 billion 25 million tonne expansion of its Cape Lambert port facilities. The signifi cant growth in planned capital expenditure on iron ore projects refl ects signifi - cant increases in iron ore prices over the past fi ve years and the prospect of continued strong demand growth. Much of the projected growth in traded iron ore is expected to come from China as increases in its domestic production fail to keep pace with increased demand associated with higher steel output. In addition, the healthy outlook for iron ore is encouraging new participants to the industry, such as Fortescue Metals Group and Gindalbie Metals. The most notable advanced gold project is Newmont and AngloGold Ashanti’s $2 billion redevelopment of the Boddington gold mine near Pinjarra in Western Australia. The redevelopment of Boddington is scheduled to be completed in 2008, with an annual capacity of 900 000 ounces of gold and 30 000 tonnes of copper. Six other gold projects located in New South Wales, Victoria and Western Australia are either committed or under construction, at a combined capital cost of $976 million. There are three copper projects currently under construction, the largest of which is Oxiana’s Prominent Hill project in South Australia and Rio Tinto’s expansion of its North- parkes mine in central New South Wales. Prominent Hill is a Greenfi eld project located

australian commodities > vol. 14 no. 4 > december quarter 2007 709 development projects

south east of Coober Pedy and is due for completion in late 2008. The $1080 million project will produce 90 000 tonnes of copper in concentrates, 115 000 ounces of gold and 420 000 ounces of silver. In central New South Wales, Rio Tinto is undertaking a $211 million upgrade of its Northparkes mine, which is due to be completed in 2009. The upgrade to Northparkes will not result in an increase in capacity, but will allow for production at the mine to continue until 2016. The largest advanced nickel project is BHP Billiton’s Ravensthorpe development near Esperance in Western Australia. The project has an estimated capital cost of $2.6 billion, and a productive capacity of 50 000 tonnes of nickel and 1400 tonnes of cobalt when completed in early 2008. advanced minerals processing projects At the end of October 2007, there were six advanced minerals processing projects, the same number listed in April 2007. However, combined capital expenditure of these projects is $3.4 billion, a decrease of $0.9 billion fig D value of advanced projects, by from the fi gure quoted in the April 2007 listing. The commodity october 2007 lower capital expenditure refl ects the completion of $57.9 billion the $2.7 billion Alcan Refi nery Expansion. However, other 13% partially offsetting the reduced capital expenditure petroleum 41% associated with the completion of the Gove Refi nery was Rio Tinto’s approval of the Yarwun alumina iron ore 20% refi nery expansion in Gladstone, at a capital expenditure of $2.1 billion. The refi nery is scheduled to be completed in 2011. In terms of capital expenditure, two other large minerals processing projects under nickel 5% construction are the Yabulu Extension Project and gold 5% the reline of the Port Kembla blast furnace no. 5. In alumina 4% coal 12% Townsville, BHP Billiton’s $731 million expansion of its Yabulu nickel refi nery is scheduled for completion in early 2008 and will refi ne nickel produced at the fig E value of advanced projects, by state Ravensthorpe nickel mine development in Western october 2007 Australia. The reline at Bluescope’s Port Kembla blast furnace in New South Wales will cost $330 million $57.9 billion and be completed in 2009. Northern Territory 2% New South Figure D provides a breakdown of proposed Tasmania 0.2% Wales 4% capital expenditure on advanced projects, by major South Australia 2% Victoria 1% commodity grouping. Figure E shows the estimated capital cost on a regional basis. Queensland 18% At the end of October 2007, both the number of advanced projects (fi gure F) and the total value of advanced projects (fi gure G) were at a historically high level (in 2007 dollars). On average the real value of advanced projects Western Australia at the end of October 2007 ($611 million) was well 73% above the average for all years since 1995 ($400 million) — fi gure H.

710 australian commodities > vol. 14 no. 4 > december quarter 2007 development projects less advanced projects fig F number of advanced projects Projects in the less advanced planning category are either still undergoing feasibility study (in some minerals processing selected cases, prefeasibility study) or not subject 40 minerals to a defi nite decision on development following energy the completion of a feasibility study. Some of these 30 projects cannot proceed for several years and may confront changes in economic or competitive conditions, or may be targeting the same emerging market 20 opportunities, necessitating rescheduling. In addition, securing fi nance for project development — even for 10 high quality projects that have a high probability of success — is not guaranteed. no. Also, with an exceptionally large number of 1995 1999 J D AprOct Apr Oct Apr Oct AprOct Apr Oct minerals and energy projects currently committed or 2002 2003 2004 2005 2006 2007 under development in the next few years, competition for skilled labor and materials and the associ- fig G total value of advanced projects ated cost pressures are unlikely to ease in the short to medium term. This makes it likely that the feasibility minerals processing of many less advanced projects will need to be re- 50 examined. This may also imply that, from a commer- minerals cial perspective, some project developments may be energy 40 deferred beyond their scheduled startup dates. However, despite the uncertainty inherent in proj- 30 ects at these earlier stages of consideration, the significant number of large scale projects at less advanced 20 planning stages that are under active consideration for development is expected to provide a fi rm platform 10 for future growth in the medium term and beyond. 2006-07 Of the 305 projects (a record) in ABARE’s October $b 2007 projects list, 70 per cent (214 projects) remain 1995 1998 2001 2004 2007 uncommitted. Table 4 contains a summary of the numbers and commodity distribution of the 214 less advanced projects, together with their potential fig H average value of advanced projects capital expenditure. The potential capital expenditure data should be used as an approximate guide only. minerals processing Capital expenditure data for many early stage proj- minerals ects are either not available or, if available, likely to 1500 change signifi cantly if these do proceed to develop- energy ment. In addition, changes in market conditions can often lead to signifi cant variations in capital expendi- 1000 ture estimates. However, most of the projects that will ultimately proceed to development in the medium term are 500 included in ABARE’s current list of 214 less advanced projects. 2006-07 Among the more notable large scale projects in $m ABARE’s October 2007 list that are still undergoing 1995 1998 2001 2004 2007 australian commodities > vol. 14 no. 4 > december quarter 2007 711 development projects

feasibility studies are seven proposed LNG developments that, collectively, could add around 50 million tonnes of annual LNG production capacity in the medium to longer term. These projects include the Browse, Gorgon, Icthys and Scarborough projects off the coast of Western Australia and two coal seam methane based LNG projects in Queensland being proposed by Santos and LNG Ltd. The largest less advanced metal mining project is BHP Billiton’s proposed $6 billion Olympic Dam expansion, currently undergoing prefeasibility studies. This project aims to more than double the mine’s current output of copper, uranium, gold and silver. Among the less advanced iron ore projects, six have an estimated capital expenditure of $1 billion or more. These are: Australasian Resources Balmoral South magnetite project ($2.5 billion); CITIC Paciﬁ c’s Sino Iron project ($4.0 billion) Murchison Metals’ Jack Hills stage 2 mine ($3 billion); Yilgarn’s Oakajee port and rail project ($2 billion); Atlas Iron’s Pardoo magnetite project ($1 billion); and Gindalbie Karara magnetite mine ($1 billion).

4 number of less advanced projects, October 2007 potential capital NSW Vic Qld WA SA Tas NT Aust expenditure $m energy mining projects black coal 16 0 34 0 0 0 0 50 14 523 coal seam methane 3 0 0 0 0 0 0 3 275 petroleum 0 6 7 10 0 0 6 29 84 320 uranium 0 0 3 1 4 0 2 10 1 030 sub-total 19 6 44 11 4 0 8 92 100 148 minerals mining projects bauxite 0 0 1 0 0 0 0 1 700 copper 1 0 4 1 4 0 0 10 7 224 gold 4 1 4 12 2 0 2 25 2 173 iron ore 0 0 0 20 2 0 0 22 21 174 lead-zinc-silver 5 0 3 1 0 0 1 10 1 302 mineral sands 3 4 0 4 1 0 0 12 1 103 nickel 0 0 3 12 0 0 0 15 8 397 rare earths 0 0 0 0 0 0 1 1 750 tin 0 0 0 0 0 1 0 1 53 vanadium 0 0 0 1 0 0 0 1 256 other commodities 2 0 1 5 0 1 1 10 2 600 subtotal 15 5 16 56 9 2 5 108 45 732 minerals processing projects alumina 0 0 2 2 0 0 0 4 5 600 aluminium 1 1 0 0 0 0 0 2 2 250 crude iron and steel 0 0 1 0 0 0 0 1 536 magnesium 0 1 0 0 0 0 0 1 1 000 nickel 0 0 0 2 0 0 0 2 na titanium minerals 1 0 0 2 0 0 0 3 602 zinc 0 0 1 0 0 0 0 1 na subtotal 2 2 4 6 0 0 0 14 9 988 total 36 13 64 73 13 2 13 214 155 868 na Not available.

712 australian commodities > vol. 14 no. 4 > december quarter 2007 development projects projects new to abare’s list There are 51 projects (both advanced and less advanced) that are new to ABARE’s list since April 2007. Since the end of October 2006, 94 projects have been added to ABARE’s project list. The number of newly listed projects in this timespan is unprecedented and is another indication of the current high level of investment interest in the mineral resources sector. Figure I provides a summary of the 51 newly listed projects in the six months ended October 2007 by commodity category. Of the 51 projects added to the list, 9 are either committed or already under construction. Among the more notable less advanced projects new to the list are two LNG projects in Queensland. Santos and LNG Ltd are proposing to each build an LNG plant based in Gladstone, Queensland. Santos fig I projects added to list is proposing a 3–4 million tonne, $5–7 billion LNG six months to october 2007 total = 51 project, while LNG Ltd is proposing a 1 million tonne, coal $400 million project. These projects are signifi cant because they will both use coal seam methane as the petroleum gas feedstock. Also new to the list are seven oil and gas devel- iron ore opments that will add to Australia’s future production gold capacity. These include the Pyrenees oil fi eld development. which is under construction and the Van Gogh, nickel Puffi n South West and Talbot oil fi elds that are at a less advanced stage. New gas fi elds to the list include the uranium Julimar and Reindeer fi elds located off the coast of other northern Western Australia and the Turrum gas fi eld, which is in Bass Strait, off the coast of Victoria. no.21012 4 6 8 14

australian commodities > vol. 14 no. 4 > december quarter 2007 713

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statisical tables GDP, imports

contribution to GDP, Australia in 2006-07 dollars

1996-97 2006-07 $673.1b $952.7b agriculture, forestry and fishing 3% agriculture, forestry and fishing 2% mining 6% mining 5% manufacturing 12% manufacturing 10% building and construction 7% building and construction 5%

services 74% services 76%

share of Australian imports, by source in 2006-07 dollars

1996-97 2006-07 total $102.5b $180.8b United States United States 14% other 39% 22% other 43% Japan 10%

Japan 13% China 15% China 5% Germany 5% New Zealand 5% Germany 6% New Zealand 3% Singapore 3% United Kingdom 7% Singapore 6% United Kingdom 4% agriculture $4.9b $8.6b China 3% China 6% other 17% other 22% ASEAN 16% ASEAN 14% United States other Asia 4% other Asia 6% 11% United States 14%

European New Zealand 17% European Union 25 31% New Zealand 15% Union 25 24% minerals and energy $9.6b $31.8b Indonesia 14% Indonesia 7% Malaysia 1% other 26% Malaysia 7% Singapore 6% other 34% Vietnam 4% other Asia 8% New Zealand 2% Singapore 20% Middle East 8% Middle East 24% Viet Nam 11% New Zealand 9% other Asia19%

716 australian commodities > vol. 14 no. 4 > december quarter 2007 export markets

markets for Australian exports in 2006-07 dollars 1996-97 2006-07

total $100.8b $168.2b Japan 19% Japan 19% other 39% other 30% China 5% China 14% Korea, Rep. of 9% Korea, Rep. of 8% United States 7% European Union (25) 11% United States 6% European Union (25) 11 % New Zealand 8% India 2% India 6% New Zealand 6%

agriculture $29.0b $27.6b China 7% China 11 % other 20% other 16% Japan 16% United States 5% United States 11 % Japan 17%

Middle East 10% Middle East 6% ASEAN 17% European Union (25) 10% European Union (25) 9% ASEAN 15% Other Asia 15% Other Asia 15%

energy $16.6b $39.3b other 15% other 19% Japan 42% Japan 39% European Union (25) 9% European Union (25) 8%

Other Asia 14% Other Asia 9% India 5% India 6% Korea, Rep. of 12% Chinese Taipei 7% Korea, Rep. of 10% Chinese Taipei 5%

minerals $29.5b $69.1b China 5% Thailand 3% China 20% other 26% India 1% other 19% Japan 16% Thailand 4% European Union (25) 10% India 10% European Union (25) 7% Other Asia 13% Korea, Rep. of 19% Japan 16% Other Asia 23% Korea, Rep. of 8%

manufacturing $24.2b $28.3b China 3% Japan 6% China 16% other 28% other 18% Korea, Rep. of 2% Japan 1% Korea, Rep. of 3%

New Zealand 25% New Zealand 22% United States 18% United States 19%

European Union (25)18% European Union (25) 21% australian commodities > vol. 14 no. 4 > december quarter 2007 717 agriculture

principal markets for Australian agricultural exports

wheat barley Indonesia Saudi Arabia

India China Japan Japan 2006-07 United Arab Korea, Rep. of Emirates 1996-97 2006-07 Malaysia Korea, Rep. of 1996-97 Sudan Viet Nam kt 500 1000 1500 2000 2500 kt 200 400600 800 1000

sugar wine Korea, Rep. of United Kingdom Indonesia United States Japan Canada 2006-07 2006-07 Malaysia Germany 1996-97 1996-97 Chinese Taipei New Zealand Canada China kt 200 400 600800 1000 ML 50 100 150 200 250

wool beef and veal China Japan Italy United States India Korea, Rep.of Czech 2006-07 Republic 1996-97 2006-07 Chinese Taipei Chinese Taipei 1996-97 Japan Canada

kt50 100 150 200 250 300 350 kt 100 200 300 400

sheep meat cheese United States Japan Saudi Arabia Saudi Arabia Japan United States 2006-07 European Korea, Rep. of 2006-07 Union 25 1996-97 1996-97 South Africa Netherlands China Indonesia

kt 1020 30 40 50 60 kt 20 40 60 80

718 australian commodities > vol. 14 no. 4 > december quarter 2007 minerals and energy

principal markets for Australian mineral and energy exports

thermal coal metallurgical coal Japan Japan Korea, Rep of India Chinese Taipei Korea, Rep of 2006-07 2006-07 China Netherlands 1996-97 1996-97 Malaysia Chinese Taipei India Brazil A$m 1000 2000 3000 A$m 1000 2000 3000 4000 5000

oil and gas gold

Japan India Singapore United Kingdom

Korea, Rep.of Thailand 2006-07 2006-07 New Zealand Japan 1996-97 1996-97 Indonesia Singapore China Korea, Rep.of A$m 1000 2000 3000 4000 5000 6000 A$m 1000 2000 3000 4000

iron ore aluminium China Japan

Japan Korea, Rep of Korea, Rep of Thailand Chinese Chinese Taipei Taipei 2006-07 2006-07 United Kingdom 1996-97 Malaysia 1996-97 France Hong Kong A$m 2000 4000 6000 8000 A$m 5001000 1500 2000

copper iron and steel

Japan Korea, Rep of China United States India China Chinese Taipei New Zealand 2006-07 2006-07 Thailand Japan 1996-97 1996-97 Korea, Rep of Hong Kong A$m200 400 600 8001000 1200 A$m 50100 150 200 250300 350 australian commodities > vol. 14 no. 4 > december quarter 2007 719 prices

indexes of prices received by farmers 1 australia 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 f Crops sector Grains Winter crops Barley 130.8 159.9 105.9 100.1 94.9 190.7 195.3 Canola 99.7 100.9 104.4 84.5 87.7 120.5 133.0 Lupins 127.7 149.0 120.4 105.2 101.9 184.9 194.2 Oats 128.2 160.3 101.1 98.1 110.1 212.0 242.7 Wheat 132.3 134.4 109.1 99.6 103.5 134.4 172.4 Summer crops Sorghum 102.2 120.9 93.8 79.4 85.9 163.8 183.0 Total grains a 123.7 134.0 105.2 95.7 98.2 147.2 171.7 Cotton 92.7 100.1 88.2 87.0 85.0 78.9 87.0 Sugar 88.5 83.2 76.3 84.1 92.3 88.9 84.3 Hay 104.2 155.0 125.0 128.0 147.8 177.4 182.7 Fruit 117.8 108.9 123.9 114.3 187.7 225.2 232.0 Vegetables 104.3 123.8 124.6 122.2 141.2 169.4 174.5 Total crops sector 113.6 118.7 106.3 99.3 110.3 138.0 150.4 Livestock sector Livestock for slaughter Cattle 167.7 145.0 160.4 177.2 181.2 162.4 164.1 Lambs b 167.2 176.7 190.1 184.3 177.7 162.3 167.0 Sheep 204.7 185.4 230.3 195.4 202.9 152.1 188.2 Live sheep for export 156.1 179.3 178.0 164.1 176.1 179.1 177.1 Pigs 123.6 109.7 109.4 117.8 115.6 126.9 117.0 Poultry 93.0 98.5 97.7 91.9 83.9 94.1 105.3 Total 151.5 139.1 149.2 157.4 157.6 147.8 151.2 Livestock products Wool 113.9 153.2 116.5 107.4 104.3 142.8 153.4 Milk 110.5 90.7 93.4 105.7 111.0 111.2 147.4 Eggs 82.8 92.4 89.2 85.4 91.2 100.4 103.4 Total 109.0 114.0 101.6 104.6 106.9 121.8 146.0 Store and breeding stock 145.3 125.8 144.0 159.5 157.6 147.8 151.2 Total livestock sector 133.4 128.1 129.3 135.4 136.4 135.9 146.5 Total prices received 122.5 122.6 116.5 115.2 121.8 134.9 146.1

a Total for the group includes commodities not separately listed. b Lamb saleyard indicator weight 18-20kg to 2002-03, from 2003-04 18-22kg. s ABARE estimate. f ABARE forecast. Note: 1 ABARE revised the method for calculating these indexes in October 1999. The indexes for commodity groups are calculated on a chained weight basis using Fisher's ideal index with a reference year of 1997-98 = 100. Indexes for most individual commodities are based on annual gross unit value of production. 2 Prices used in these calculations exclude GST. Source: ABARE.

720 australian commodities > vol. 14 no. 4 > december quarter 2007 prices

indexes of prices paid by farmers, and terms of trade 2 australia 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 f

Farmers’ terms of trade a 108.6 101.0 94.7 91.0 92.6 96.5 99.3 Materials and services Seed, fodder and livestock Fodder and feedstuffs 105.5 167.5 148.3 140.4 140.4 184.1 204.6 Seed, seedlings and plants 112.9 118.3 104.9 95.3 90.5 114.4 125.5 Store and breeding stock 145.3 125.8 144.0 159.5 157.6 147.8 151.2 Total 116.5 150.3 142.0 140.3 139.3 165.3 179.6 Chemicals 105.6 108.0 110.0 111.9 114.6 117.1 119.5 Electricity 100.4 100.5 100.0 101.3 103.5 105.5 107.3 Fertiliser 104.3 106.9 102.8 108.8 111.6 114.3 117.2 Fuel and lubricants 128.3 127.0 144.3 167.2 208.7 207.6 229.8 Total 113.1 126.0 125.2 128.7 133.8 144.6 153.5 Labor 113.3 117.9 121.6 125.7 129.7 133.5 137.2 Marketing 112.4 115.9 118.7 121.5 125.4 129.1 132.6 Overheads Insurance 118.6 124.5 128.8 131.9 135.1 139.4 143.5 Interest paid 104.2 110.7 118.1 123.7 130.6 144.7 159.3 Rates and taxes 115.5 119.1 121.9 124.8 128.8 132.6 136.2 Other overheads 111.9 115.4 118.1 121.0 124.8 128.5 132.0 Total 109.9 115.2 120.6 125.1 130.6 140.4 150.5 Capital items 115.2 118.3 121.3 124.4 128.4 132.3 136.1 Total prices paid 112.9 121.5 123.0 126.6 131.4 139.7 147.1 Excluding capital items 112.4 121.8 123.1 126.8 131.7 140.6 148.4 Excluding capital and overheads 113.0 123.3 123.7 127.2 131.9 140.5 147.7 Excluding seed, fodder and store and breeding stock 112.1 115.6 119.2 123.9 129.9 134.5 140.6

a Ratio of index of prices received by farmers and index of prices paid by farmers. s ABARE estimate. f ABARE forecast. Note: 1 ABARE revised the method for calculating these indexes in October 1999. The indexes for commodity groups are calculated on a chained weight basis using Fisher's ideal index with a reference year of 1997-98 = 100. 2 Prices used in these calculations exclude GST. Sources: Australian Bureau of Statistics; ABARE.

australian commodities > vol. 14 no. 4 > december quarter 2007 721 costs and returns

farm costs and returns 3 australia Unit 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 f

Costs Materials and services Chemicals $m 1 550 1 649 1 691 1 749 1 545 1 593 Fertiliser $m 1 820 1 827 1 851 1 747 1 572 1 687 Fuel and lubricants $m 1 520 1 702 1 765 2 203 2 191 2 426 Marketing $m 2 433 3 567 3 433 3 610 2 472 2 737 Repairs and maintenance $m 2 392 2 453 2 493 2 602 2 466 2 563 Seed and fodder $m 4 874 4 317 4 267 3 814 5 441 6 040 Other $m 3 329 3 378 3 473 3 685 3 553 3 669 Total $m 17 918 18 893 18 974 19 411 19 240 20 713 Labor $m 3 226 3 420 3 410 3 778 3 654 3 755 Overheads Interest paid $m 2 295 2 614 2 888 3 249 3 848 4 247 Rent and third party insurance $m 412 422 432 446 447 459 Total $m 5 933 6 456 6 730 7 473 7 950 8 461 Total cash costs $m 23 851 25 349 25 705 26 884 27 190 29 174 Depreciation a $m 3 915 4 017 4 122 4 255 4 383 4 509 Total farm costs $m 27 766 29 367 29 826 31 139 31 572 33 683 Returns Gross value of farm production $m 33 203 37 300 36 552 38 417 34 330 38 327 Gross farm cash income b $m 35 253 37 922 37 747 37 967 33 880 37 877 Net returns and production Net value of farm production c $m 5 437 7 933 6 726 7 278 2 758 4 644 Real net value of farm production d $m 6 055 8 632 7 144 7 491 2 758 4 538 Net farm cash income e $m 11 403 12 573 12 042 11 083 6 690 8 703 Real net farm cash income d $m 12 698 13 679 12 790 11 407 6 690 8 504 a Based on estimated movements in capital expenditure and prices of capital inputs. b Gross value of farm production less increase in farmers’ assets held by marketing organisations. c Gross value of farm production less total farm costs. d In 2006-07 Australian dollars. e Gross farm cash income less total cash costs. s ABARE estimate. f ABARE forecast. Note: Prices used in these calculations exclude GST. Sources: Australian Bureau of Statistics; ABARE.

unit export returns 4 australia Annual indexes a 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 f Farm 118.1 115.5 106.5 105.7 105.5 110.1 121.6 Energy minerals 140.8 135.1 120.2 166.0 224.9 205.2 211.3 Metals and other minerals 110.3 106.2 105.5 125.2 162.2 202.2 187.5 Total mineral resources 122.2 117.5 111.3 141.0 186.5 204.1 197.2 Total commodities 121.3 117.2 110.0 130.0 160.6 174.1 172.1

2005-06 2006-07 2007-08

Quarterly indexes b June Sep. Dec. Mar. June Sep. p Dec. s Mar. f June f Farm 106.1 106.8 109.4 111.3 108.8 110.6 122.5 121.3 122.0 Energy minerals 239.7 236.1 217.4 212.2 204.7 206.2 222.0 213.8 254.4 Metals and other minerals 199.3 211.3 214.2 219.5 231.0 213.8 196.9 193.7 207.8 Total mineral resources 215.9 222.1 216.5 217.7 221.6 211.4 207.6 202.4 226.9 Total commodities 177.0 181.7 178.6 180.0 181.9 176.1 176.2 172.3 189.4

a In Australian dollars. Base: 1989-90 = 100. b In Australian dollars. Base: 1994-95 = 100. p Preliminary. s ABARE estimate. f ABARE forecast. Source: ABARE.

722 australian commodities > vol. 14 no. 4 > december quarter 2007 exports

contribution to exports by sector balance of payments basis 5 australia

proportion of proportion of exports merchandise exports of goods and services

2006-07 other merchandise rural a 15% 18% mineral resources 63% services mineral other 21% resources 49% merchandise 19% rural a 14%

2005-06 rural a Other merchandise 17% 20% mineral resources 59% services mineral other 21% resources 46% merchandise 21%

rural a 16% 2004-05 rural a other merchandise 24% 17% mineral resources 54% mineral other services resources 41% merchandise 24% 22%

rural a 18%

2003-04 other merchandise rural a 18% 26% mineral resources 49% mineral resources 36% services 26% other merchandise 25% rural a 20%

2002-03 rural a other merchandise 19% 26% mineral resources 49% mineral resources 37% services other 24% merchandise 25% rural a 20% a Includes farm, forest and fisheries products. Source: Australian Bureau of Statistics; ABARE.

australian commodities > vol. 14 no. 4 > december quarter 2007 723 exports

annual exports summary balance of payments basis 6 australia 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 f $m $m $m $m $m $m At current prices Rural Cereal grains and products 4 487 5 093 5 159 4 852 4 171 3 512 Sugar and honey 1 363 1 123 1 292 1 763 1 563 1 057 Meat and meat preparations 5 655 5 758 6 937 6 709 7 078 6 617 Wool and sheepskins 3 545 2 778 2 838 2 544 3 065 2 809 Other rural a 14 813 14 128 14 128 14 607 14 445 15 075 Total 29 863 28 880 30 354 30 475 30 321 29 071 Mineral resources Coal, coke and briquettes 11 987 11 002 17 236 24 353 21 928 21 826 Other mineral fuels 11 049 8 777 11 151 13 220 15 642 18 233 Metalliferous ores and other minerals bs 15 361 15 439 20 537 29 772 36 074 37 354 Gold 7 648 7 031 6 472 9 087 10 739 12 005 Other metals cs 10 958 11 337 13 151 14 684 22 208 19 028 Total s 57 002 53 586 68 548 91 115 106 591 108 446 Total commodities sector s 86 865 82 466 98 902 121 591 136 913 137 516 Other merchandise s 28 938 27 007 28 965 32 834 32 642 na Total merchandise s 115 803 109 473 127 867 154 425 169 555 na Services 35 987 37 746 39 695 41 849 46 245 na Total goods and services 151 790 147 219 167 562 196 274 215 800 na Chain volume measures d Rural Cereal grains and products 3 501 4 748 5 133 4 851 3 685 2 396 Sugar and honey 1 702 1 701 1 786 1 763 1 638 1 597 Meat and meat preparations 6 449 6 178 6 872 6 710 7 294 7 015 Wool and sheepskins 2 318 2 354 2 679 2 545 2 682 2 202 Other rural a 14 449 14 534 13 779 14 607 14 160 11 078 Total 28 419 29 515 30 249 30 476 29 459 24 289 Mineral resources Coal, coke and briquettes 21 939 23 125 24 482 24 353 25 761 27 061 Other mineral fuels 15 734 13 635 13 793 13 220 15 930 16 697 Metalliferous ores and other minerals bs 25 182 26 065 28 454 29 772 29 794 26 964 Gold 9 658 9 282 8 346 9 087 9 265 9 498 Other metals cs 15 998 15 780 14 789 14 684 14 959 15 457 Total s 88 510 87 887 89 864 91 115 95 708 95 676 Total commodities sector s 116 930 117 402 120 113 121 591 125 167 119 965 Other merchandise s 27 857 29 164 30 838 32 834 33 867 na Total merchandise s 144 787 146 566 150 951 154 425 159 034 na Services 39 100 40 241 41 076 41 849 44 674 na Total goods and services 182 461 186 357 192 045 196 275 203 711 na

a Includes other farm, forest and fisheries products. Includes exports of wine and of paper and paperboard, which are not included in this balance of payments item by the ABS. b Includes diamonds, which are not included in this balance of payments item by the ABS. c Includes ABARE estimates for steel and nickel which were confidentialised by the ABS. d For a description of chain volume measures, see ABS, Introduction of chain volume measures, in the Australian National Accounts, cat. no. 5248.0, Canberra. Reference year is 2004-05. s ABARE estimate. f ABARE forecast. na Not available. Sources: ABS, Balance of Payments, Australia, cat. no. 5302.0, Canberra; ABARE.

724 australian commodities > vol. 14 no. 4 > december quarter 2007 exports

quarterly exports summary balance of payments basis 7 australia 2005-06 2006-07 2007-08 June Sep. Dec. Mar. June Sep. p Dec. s Mar. f June f $m $m $m $m $m $m $m $m $m At current prices Rural Cereal grains and products 1 286 1 441 1 006 930 794 899 809 931 873 Sugar and honey 502 595 488 275 205 346 285 248 179 Meat and meat preparations 1 773 1 799 2 027 1 632 1 620 1 609 1 731 1 511 1 766 Wool and sheepskins 666 609 799 794 863 568 820 701 720 Other rural a 3 726 3 807 3 761 3 289 3 587 3 703 3 859 3 582 3 930 Total 7 953 8 251 8 081 6 920 7 069 7 125 7 505 6 973 7 468 Mineral resources Coal, coke and briquettes 6 021 5 805 5 472 5 456 5 195 5 103 4 897 4 840 6 987 Other mineral fuels 3 097 4 300 3 982 3 638 3 722 3 943 4 897 4 607 4 786 Metalliferous ores and other minerals bs 8 887 8 791 9 772 8 318 9 193 9 666 8 733 8 454 10 501 Gold 3 281 2 533 2 505 2 613 3 088 2 929 2 971 3 056 3 049 Other metals cs 4 384 5 018 5 351 5 745 6 095 4 728 4 471 4 922 4 906 Total s 25 670 26 447 27 082 25 770 27 292 26 369 25 969 25 879 30 229 Total commodities sector s 33 623 34 698 35 163 32 690 34 361 33 494 33 473 32 851 37 697 Other merchandise s 8 714 8 376 8 395 7 419 8 453 9 688 na na na Total merchandise s 42 337 43 074 43 558 40 109 42 814 43 182 na na na Services 10 424 11 093 11 692 11 924 11 536 12 334 na na na Total goods and services 52 761 54 167 55 250 52 033 54 350 55 516 na na na Chain volume measures d Rural Cereal grains and products 1 256 1 407 897 749 632 686 523 609 578 Sugar and honey 403 514 468 307 349 467 447 391 292 Meat and meat preparations 1 787 1 837 2 025 1 667 1 765 1 745 1 825 1 607 1 838 Wool and sheepskins 661 595 718 659 710 469 635 539 559 Other rural a 3 771 3 771 3 678 3 849 2 862 2 923 2 845 2 671 2 640 Total 7 878 8 124 7 786 7 231 6 317 6 290 6 275 5 817 5 907 Mineral resources Coal, coke and briquettes 6 286 6 371 6 310 6 441 6 639 6 619 6 753 6 590 7 099 Other mineral fuels 2 957 4 031 4 176 3 867 3 856 4 019 4 156 4 272 4 251 Metalliferous ores and other minerals bs 7 603 7 268 8 101 6 910 7 514 8 217 6 199 6 055 6 493 Gold 2 830 2 196 2 202 2 205 2 662 2 627 2 318 2 290 2 263 Other metals cs 3 643 3 546 3 871 3 798 3 745 3 530 3 644 4 074 4 209 Total s 23 319 23 412 24 660 23 221 24 416 25 012 23 068 23 281 24 315 Total commodities sector s 31 197 31 535 32 446 30 452 30 733 31 302 29 343 29 098 30 222 Other merchandise s 8 779 8 747 8 484 7 118 9 519 10 523 na na na Total merchandise s 39 976 40 282 40 930 37 570 40 252 41 825 na na na Services 10 288 10 849 11 292 11 500 11 033 11 631 na na na Total goods and services 50 230 51 132 52 222 49 071 51 286 53 456 na na na a Includes other farm, forest and fisheries products. Includes exports of wine and of paper and paperboard, which are not included in this balance of payments item by the ABS. b Includes diamonds, which are not included in this balance of payments item by the ABS. c Includes ABARE estimates for steel and nickel which were confidentialised by the ABS. d For a description of chain volume measures, see ABS, Introduction of chain volume measures, in the Australian National Accounts, cat. no. 5248.0, Canberra. Reference year is 2004-05. p Preliminary. s ABARE estimate. f ABARE forecast. na Not available. Sources: ABS, Balance of Payments, Australia, cat. no. 5302.0, Canberra; ABARE.

australian commodities > vol. 14 no. 4 > december quarter 2007 725 sectors

industry gross value added a 8 australia Unit 2002-03 2003-04 2004-05 2005-06 2006-07 Agriculture, forestry and fishing Agriculture $m 18 423 24 738 24 651 26 040 21 035 Forestry and fishing $m 2 430 2 605 2 501 2 388 2 332 Total $m 20 806 27 340 27 153 28 427 23 366 Mining Mining (excludes services to mining) $m 41 861 40 460 41 784 41 063 44 157 Services to mining $m 3 949 3 715 4 369 4 173 4 595 Total $m 45 596 43 949 46 152 45 235 48 751 Manufacturing Food, beverage and tobacco $m 19 540 19 483 19 689 19 581 19 695 Textile, clothing, footwear and leather $m 3 644 3 371 2 744 2 566 2 517 Wood and paper products $m 6 987 6 976 7 030 6 748 6 596 Printing, publishing and recorded media $m 10 923 11 251 10 967 10 736 10 984 Petroleum, coal, chemical, etc. $m 13 290 12 708 12 713 12 216 11 973 Non–metallic mineral products $m 4 281 4 430 4 651 5 193 5 303 Metal products $m 17 440 17 501 17 037 16 866 18 840 Machinery and equipment $m 16 523 17 364 17 466 18 409 18 377 Other manufacturing $m 4 154 4 424 4 068 3 691 3 696 Total $m 96 528 97 422 96 366 96 007 97 980 Building and construction $m 50 974 54 353 56 941 62 405 67 280 Electricity, gas and water supply $m 19 867 19 999 20 148 20 321 20 093 Taxes less subsidies on products $m 71 268 73 706 75 946 77 043 79 194 Statistical discrepancy $m 0 1 0 – 439 –2 670 Gross domestic product $m 839 187 873 197 896 568 922 690 952 723

a Chain volume measures, reference year is 2004-05. Source: ABS, National Income, Expenditure and Product, cat. no. 5206.0, Canberra.

726 australian commodities > vol. 14 no. 4 > december quarter 2007 production, employment

volume of production indexes 9 australia 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 f Farm Grains and oilseeds 59.3 138.6 113.2 133.9 51.8 73.0 Total crops 83.4 123.0 116.8 111.3 67.8 76.6 Livestock slaughterings 109.8 104.4 109.3 108.5 115.5 112.1 Total livestock 104.2 99.6 103.1 102.2 104.1 99.6 Total farm sector 93.6 111.9 110.7 107.5 85.4 88.3 Forestry a Broadleaved 116.4 116.5 125.3 121.1 137.2 147.5 Coniferous 126.3 131.8 128.9 130.5 134.9 135.6 Total forestry 121.4 124.2 127.1 125.9 135.8 141.1 Mine b Energy minerals 115.0 111.0 113.4 111.5 117.6 126.0 Metals and other minerals 115.6 115.5 123.6 124.2 124.5 138.1 Total minerals 115.2 113.3 118.6 118.0 120.9 132.2 a Volume of roundwood equivalent removed from forests. b Uranium is included with energy. s ABARE estimate. f ABARE forecast. Note: ABARE revised the method for calculating production indexes in October 1999. The indexes for the different groups of commodities are calculated on a chained weight basis using Fishers' ideal index with a reference year of 1997-98 = 100. Sources: Australian Bureau of Statistics; ABARE.

employment a 10 australia 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 p ’000 ’000 ’000 ’000 ’000 ’000 Agriculture, forestry and fishing Agriculture 385 323 319 310 303 308 Forestry and logging 13 10 12 12 11 11 Commercial fishing 18 17 16 14 12 10 Total (including services) 443 375 373 364 353 355 Mining Coal 20 21 21 23 28 27 Oil and gas extraction 4 4 6 7 9 10 Metal ore 34 35 38 35 43 46 Other mining (including services) 23 26 27 29 34 37 Total 81 86 92 93 115 120 Manufacturing Food, beverages and tobacco 182 183 171 196 182 192 Textiles, clothing, footwear and leather 74 73 65 55 56 50 Wood and paper product 70 74 78 71 72 72 Printing, publishing and recorded media 105 115 110 109 106 110 Petroleum, coal and chemical product 107 112 100 91 88 89 Non–metallic mineral product 43 47 44 36 38 35 Metal product 155 164 157 139 163 164 Other manufacturing 324 323 309 294 297 292 Total 1 077 1 091 1 033 991 1 002 1 003 Other industries 7 532 7 769 7 933 8 088 8 387 8 644 Total 9 133 9 321 9 431 9 536 9 857 10 123

a Average employment over four quarters. p Preliminary. Source: ABS, The Labour Force, Australia, cat. no. 6291.0, Canberra.

australian commodities > vol. 14 no. 4 > december quarter 2007 727 business, banks

business income 11 australia 2002-03 2003-04 2004-05 2005-06 2006-07 $m $m $m $m $m Farm Net value of farm production 5 437 7 933 6 726 7 278 2 758 Company profits in selected industries a Mining 15 092 12 133 17 599 35 208 38 487 Manufacturing Food, beverages and tobacco 3 778 5 998 5 597 5 053 na Textiles, clothing and footwear 515 758 670 549 na Wood and paper products 1 739 1 704 1 527 1 357 na Printing, publishing and recorded media 2 627 2 799 3 400 3 334 na Petroleum, coal and chemical product 2 789 2 567 3 741 4 716 na Non–metallic mineral product 1 380 1 529 1 299 1 343 na Metal product 4 595 4 344 7 451 6 725 na Machinery and equipment 2 944 3 440 3 949 3 843 na Other manufacturing 703 976 1 000 1 033 na Total 21 070 24 115 28 634 27 953 25 856 Other industries (including services) 40 487 47 604 52 691 50 305 62 209 Total (including services) 76 649 83 852 98 924 113 466 126 552

a Company profits before income tax. na Not available. Sources: ABS, National Income and Expenditure and Product, cat. no. 5206.0, Canberra; ABS, Company Profits, Australia, cat. no. 5651.0, Canberra; ABS, Business Indicators, cat. no. 5676.0, Canberra; ABS, Australian Industry , cat. no. 8155.0, Canberra; ABARE.

all banks lending to business a 12 australia 2004-05 2005-06 2006-07

June Sep. Dec Mar June Sep. Dec Mar June $b $b $b $b $b $b $b $b $b Agriculture, fishing and forestry 39.3 39.8 39.3 41.4 43.5 44.1 43.6 44.5 47.2 Mining 5.7 5.9 6.1 6.7 6.8 10.9 9.3 8.1 9.6 Manufacturing 31.3 32.4 35.1 36.4 37.1 37.6 38.4 39.4 41.1 Construction 19.4 19.9 20.8 21.6 21.3 22.9 23.5 23.9 24.8 Wholesale, retail trade, transport and storage 54.9 56.3 59.5 61.5 64.2 66.5 67.8 70.5 75.4 Finance and insurance 49.6 51.8 54.9 55.7 62.5 72.6 77.5 82.8 92.4 Other 173.9 181.3 191.0 200.4 204.1 208.4 223.5 240.5 248.9 Total 374.1 387.4 406.7 423.6 439.5 463.0 483.7 509.7 539.3

a Includes variable and fixed interest rate loans outstanding plus bank bills outstanding. Source: Reserve Bank of Australia, Bank Lending to Business - Selected Statistics, Bulletin Statistical Table D8.

728 australian commodities > vol. 14 no. 4 > december quarter 2007 farm debt

rural indebtedness to ﬁ nancial institutions a 13 australia 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 $m $m $m $m $m $m Rural debt All banks a 26 829 28 957 34 115 39 261 43 546 47 188 Other government agencies b 711 739 750 825 897 1 016 Pastoral and other finance companies 2 691 1 628 3 379 3 112 2 336 4 592 Large finance institutional debt 30 231 31 324 38 244 43 198 46 779 52 796 Other farm debt cs 1 967 2 017 2 067 na na na Total rural debt 32 198 33 341 40 311 na na na Deposits Farm management deposits 2 074 2 480 2 619 2 792 2 797 2 782

a Derived from all banks lending to agriculture, fishing and forestry. b Includes the government agency business of state banks and advances made under War Service Land Settlement. Prior to 1996 includes loans from the Queensland Industry Development Corporation. From 1996 these loans are included in bank lending. c Includes loans from life insurance companies, lease agreements and indebtedness to hire purchase companies, trade creditors, private lenders and small financial institutions. s ABARE estimate. na Not available. Sources: Department of Agriculture, Fisheries and Forestry; Reserve Bank of Australia, Estimated Rural Debt to Specified Lenders, Bulletin Statistical Table D9; ABARE.

australian commodities > vol. 14 no. 4 > december quarter 2007 729 capital expenditure

capital expenditure of private enterprises 14 australia 2002-03 2003-04 2004-05 2005-06 2006-07 $m $m $m $m $m At current prices Gross fixed capital formation a All sectors 194 080 213 140 230 870 257 319 282 547 New capital expenditure Mining b 8 766 9 282 10 253 18 608 22 119 Manufacturing Food, beverages and tobacco 2 614 2 274 2 418 2 472 2 305 Textiles, clothing, footwear and leather 230 200 268 187 163 Wood and paper products 709 912 711 802 737 Printing, publishing and recorded media 553 538 558 867 593 Petroleum, coal and chemical product 1 608 2 090 2 423 2 473 1 959 Non–metallic mineral products 965 590 711 837 720 Metal products 2 158 2 689 3 390 4 804 4 590 Machinery and equipment 2 180 1 877 1 875 2 503 1 734 Other manufacturing 367 257 328 483 461 Total 11 385 11 423 12 681 15 428 13 264 Total surveyed industries 50 815 51 247 57 554 72 642 77 552 Chain volume measures c Gross fixed capital formation a All sectors 201 287 217 904 230 872 251 653 268 657 New capital expenditure Mining 9 623 10 116 10 747 18 609 21 083 Manufacturing 10 782 11 505 12 796 15 427 13 151 Other selected industries 27 172 29 308 34 065 38 604 42 323 Total surveyed industries 47 655 51 053 57 847 72 641 76 558

a Estimates taken from ABS national accounts, which include taxation based statistics. b Includes industries covered by Division B (for example, the metallic and nonmetallic minerals, coal, oil and gas, construction materials and other nonmetallic minerals industries) as defined in the 1993 edition of the Australian New Zealand Standard Industrial Classification (ANZSIC). c Reference year is 2005-06. Sources: Australian Bureau of Statistics; ABARE.

730 australian commodities > vol. 14 no. 4 > december quarter 2007 mineral exploration

private mineral exploration expenditure 15 australia 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 $m $m $m $m $m $m At current prices Energy Petroleum Onshore 164.6 191.3 230.5 270.1 355.8 498.2 Offshore 718.1 803.8 713.6 774.6 906.1 1 727.3 Total 882.7 995.1 944.1 1 044.7 1 261.9 2 225.5 Coal 50.4 77.8 81.5 126.8 166.4 193.2 Uranium 8.7 6.9 10.6 20.7 56.1 114.1 Total 941.8 1 079.8 1 036.2 1 192.2 1 484.4 2 532.8 Metals and other minerals a Gold 331.3 378.4 397.1 391.7 399.6 455.9 Iron ore 25.2 44.5 63.7 137.9 161.3 285.4 Base metals, silver and cobalt b 132.9 142.4 151.9 261.3 356.7 555.0 Mineral sands 33.2 27.3 23.8 27.6 29.2 37.3 Diamonds 35.4 29.9 25.9 23.7 22.6 26.9 Other 23.6 25.6 32.2 38.7 48.8 46.8 Total metals and other minerals a 581.6 648.1 694.6 880.9 1 018.2 1 407.3 Total expenditure 1 523.4 1 727.9 1 730.8 2 073.1 2 502.6 3 940.1 a Uranium is included with energy. b Base metals include copper, lead, nickel and zinc. Sources: Australian Bureau of Statistics; ABARE.

australian commodities > vol. 14 no. 4 > december quarter 2007 731 world prices 16 annual world indicator prices of selected commodities Unit 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 f Crops Wheat a US$/t 160 160 154 176 212 310 Corn b US$/t 107 115 97 104 151 165 Rice c US$/t 199 220 278 301 320 345 Soybeans d US$/t 245 321 275 261 335 445 Cotton e USc/lb 55.4 68.3 52.4 56.0 58.1 68.5 Sugar g USc/lb 8.0 7.9 10.5 15.8 11.7 11.0 Livestock products Beef h USc/kg 202 242 286 276 282 288 Wool i Ac/kg 1 049 820 767 713 864 950 Butter j US$/t 1 186 1 621 2 208 1 998 2 023 4 350 Cheese j US$/t 1 775 2 358 2 856 2 792 3 004 5 400 Skim milk powder j US$/t 1 587 1 862 2 210 2 175 3 188 5 275 Energy Crude oil Dubai US$/bbl 25.90 29.35 40.72 58.30 60.66 76.45 West Texas intermediate US$/bbl 29.92 33.76 48.77 64.22 63.30 80.09 Brent US$/bbl 27.82 31.42 46.23 62.44 63.48 79.52 World trade weighted average k US$/bbl 26.26 29.33 41.18 57.25 59.45 75.38 Coal l Thermal US$/t 25.86 29.45 47.14 49.34 50.29 54.61

Uranium (U3O8) m US$/lb 10.22 14.90 22.20 36.79 81.17 94.17 Minerals and metals n Aluminium US$/t 1 360 1 569 1 807 2 245 2 692 2 490 Copper US$/t 1 595 2 267 3 151 5 062 7 087 7 091 Gold o US$/oz 334 389 422 527 639 765 Iron ore (negotiated) q USc/dltu 28.28 30.83 36.57 62.72 74.63 81.73 Lead US$/t 445 700 964 1 061 1 694 3 159 Manganese (negotiated) r US$/mtu 1.97 2.12 2.45 3.98 3.00 2.70 Nickel US$/t 7 666 12 264 14 957 15 488 37 942 29 798 Silver t USc/oz 461 579 695 928 1 274 1 425 Tin US$/t 4 371 6 627 8 491 7 403 11 455 15 741 Zinc US$/t 775 962 1 171 2 118 3 672 2 482

a US hard red winter wheat, fob Gulf. b US no. 2 yellow corn, delivered US Gulf. c Prices previously reported by the Thailand Board of Trade are no longer available. From September 1998 the price quoted is the USDA sourced nominal quote for Thai white rice, 100 per cent, Grade B, fob, Bangkok (August–July basis). d US cif Rotterdam (October–September basis). e Cotlook 'A' index. g Average of monthly averages of New York no.11 spot price; basis: fob Caribbean ports (October-September basis). h US cif price. i Australian Wool Exchange eastern market indicator. j Average of traded prices (excluding subsidised sales). k World trade weighted average price compiled by the US Department of Energy. Official sales prices or estimated contract terms for major internationally traded crude oils. l Average export unit value, fob Australia. m Average of weekly restricted spot prices over the period, published by Ux Consulting. n Average LME spot price unless otherwise stated. o London gold fix, London Bullion Market Association. q Australian hematite fines to Japan (fob) for Japanese fiscal year commencing 1 April. r Japanese fiscal year commencing 1 April. t London silver fix, London Bullion Market Association. Prior to March 2001, Handy and Harman, commercial bar price used. s ABARE estimate. f ABARE forecast. Sources: Australian Bureau of Statistics; Australian Dairy Corporation; Meat and Livestock Australia; Australian Wool Exchange; Cotlook Ltd; Food and Agriculture Organisation; General Agreement on Tariffs and Trade; International Energy Agency; International Wheat Council; ISTA Mielke and Co.; London Bullion Market Association; The London Metal Exchange Ltd; New York Board of Trade; Reuters Ltd; Ux Consulting Company; Platts Oilgram; US Department of Agriculture; US Department of Energy; World Bureau of Metal Statistics; ABARE.

732 australian commodities > vol. 14 no. 4 > december quarter 2007 world prices 17 quarterly world indicator prices of selected commodities 2005-06 2006-07 2007-08 Unit June Sep Dec Mar June Sep p Dec s Mar f June f Crops Wheat a US$/t 198 207 217 209 215 294 333 311 311 Corn b US$/t 110 117 156 171 160 153 167 169 172 Rice c US$/t 314 319 307 323 327 334 328 352 359 Soybeans d US$/t 264 264 290 318 338 396 451 447 449 Cotton e USc/lb 55.3 58.1 57.9 58.4 57.8 67.5 69.0 68.0 69.3 Sugar g USc/lb 17.5 14.3 12.3 11.6 10.9 11.8 11.5 11.0 10.5 Livestock products Beef h USc/kg 269 282 285 282 279 284 282 290 297 Wool i Ac/kg 742 746 804 932 975 918 965 956 963 Butter j US$/t 1 808 1 683 1 858 2 092 2 458 3 483 4 542 4 650 4 725 Cheese j US$/t 2 683 2 600 2 792 3 042 3 583 4 658 5 492 5 650 5 800 Skim milk powder j US$/t 2 075 2 125 2 675 3 375 4 575 4 867 5 109 5 438 5 686 Energy Crude oil Dubai US$/bbl 65.35 66.40 57.63 54.03 64.58 70.33 82.45 74.00 79.00 West Texas intermediate US$/bbl 70.41 70.42 59.96 58.02 64.79 75.35 87.50 76.00 81.50 Brent US$/bbl 69.53 69.62 59.68 56.80 67.81 75.06 86.50 75.50 81.00 World trade weighted average k US$/bbl 63.87 65.70 54.99 52.50 64.62 72.15 81.35 72.00 76.00 Coal l Thermal US$/t 48.96 49.35 49.88 49.68 52.25 52.31 52.36 52.42 61.35 Uranium (U3O8) m US$/lb 43.33 50.00 65.00 85.00 124.67 98.33 89.67 94.00 94.67 Minerals and metals n Aluminium US$/t 2 653 2 482 2 723 2 801 2 762 2 547 2 530 2 485 2 400 Copper US$/t 7 251 7 670 7 098 5 941 7 637 7 715 7 050 6 500 7 100 Gold o US$/oz 629 622 614 650 668 680 800 800 780 Lead US$/t 1 100 1 186 1 629 1 646 2 096 3 084 3 690 3 000 2 800 Nickel US$/t 19 925 29 141 33 134 41 439 48 055 30 190 30 000 31 000 28 000 Silver q USc/oz 1 229 1 170 1 262 1 331 1 334 1 270 1 478 1 500 1 450 Tin US$/t 8 529 8 653 10 335 12 729 14 103 14 983 16 380 16 100 15 500 Zinc US$/t 3 292 3 363 4 207 3 456 3 664 3 229 2 600 2 200 1 900

a US hard red winter wheat, fob Gulf. b US no. 2 yellow corn, delivered US Gulf. c Prices previously reported by the Thailand Board of Trade are no longer available. From September 1998 the price quoted is the USDA sourced nominal quote for Thai white rice, 100 per cent, Grade B, fob, Bangkok. d US cif Rotterdam. e Cotlook ’A’ index. g Average of monthly averages of New York no.11 spot price; basis: fob Caribbean ports. h US cif price. i Australian Wool Exchange eastern market indicator. j Average of traded prices (excluding subsidised sales). k World trade weighted average price compiled by the US Department of Energy. l Average export unit value, fob Australia. m Average of weekly restricted spot prices over the period, published by Ux Consulting. n Average LME spot price unless otherwise stated. o London gold fix, London Bullion Market Association. q London silver fix, London Bullion Market Association. Prior to March 2001, Handy and Harman, commercial bar price used. s ABARE estimate. f ABARE forecast. Sources: Australian Bureau of Statistics; Australian Dairy Corporation; Meat and Livestock Australia; Australian Wool Exchange; Cotlook Ltd; Food and Agriculture Organisation; General Agreement on Tariffs and Trade; International Energy Agency; International Wheat Council; ISTA Mielke and Co.; Reuters Ltd; London Bullion Market Association; The London Metal Exchange Ltd; New York Board of Trade; Ux Consulting Co.; Platts Oilgram; US Department of Agriculture; US Department of Energy; World Bureau of Metal Statistics; ABARE.

australian commodities > vol. 14 no. 4 > december quarter 2007 733 unit values

gross unit values or prices of farm products a 18 australia Unit 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 f Crops b Grains and oilseeds Winter crops Barley $/t 255 169 159 151 304 311 Canola $/t 446 403 326 338 465 513 Field peas $/t 344 232 235 276 442 508 Lupins $/t 292 236 206 199 362 380 Oats $/t 219 138 134 150 290 332 Triticale $/t 258 153 152 178 324 321 Wheat $/t 266 216 197 205 266 341 Summer crops Maize $/t 233 223 194 190 362 345 Rice $/t 348 325 297 262 411 485 Sorghum $/t 205 159 134 145 277 312 Soybeans c $/t 384 365 283 301 359 351 Sunflowerseed c $/t 400 349 341 428 642 706 Industrial crops Cotton lint d c/kg 222 225 167 179 176 181 Sugar cane (cut for crushing) $/t 28 23 26 28 27 26 Wine grapes $/t 810 787 715 609 655 820 Livestock for slaughter Beef e c/kg 256 289 320 322 292 294 – yearling e c/kg 289 324 359 366 329 345 – ox e c/kg 285 309 331 332 318 329 – cow e c/kg 226 260 289 288 255 271 Lamb eg c/kg 369 381 360 347 326 332 Mutton e c/kg 167 200 164 175 136 165 Pig e c/kg 244 221 243 232 255 235 Poultry h c/kg 385 387 396 368 367 375 Livestock products Wool i c/kg 1 049 820 767 713 864 950 Milk j c/L 27.1 27.9 31.5 33.1 33.2 44.0

a Average gross unit value across all grades in principal markets, unless otherwise indicated. Includes the cost of containers, commission and other expenses incurred in getting the commodities to their principal markets. These expenses are significant. b Average unit gross value relates to returns received from crops harvested in that year, regardless of when sales take place, unless otherwise indicated. c Price paid by crusher. d Australian base price for sales in the financial year indicated. e Average saleyard price (dressed weight). g Lamb saleyard weight indicator 18–20 kg to 2002-03, from 2003-04 18-22kg. h Retail, frozen. i Australian Wool Exchange eastern market indicator. j Weighted average farmgate price. s ABARE estimate. f ABARE forecast. Note: Prices used in these calculation exclude GST. Sources: Australian Bureau of Statistics; ABARE.

734 australian commodities > vol. 14 no. 4 > december quarter 2007 world 19 world production, consumption, stocks and trade for selected commodities a Unit 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 f Farm Grains Wheat Production Mt 566 556 628 620 590 602 Consumption Mt 600 588 617 624 610 610 Closing stocks Mt 165 128 140 137 118 109 Exports b Mt 107 102 110 110 111 105 Coarse grains Production Mt 875 916 1 016 977 980 1 054 Consumption Mt 901 943 978 989 1 006 1 053 Closing stocks Mt 170 140 178 164 135 135 Exports b Mt 102 104 101 107 115 117 Rice Production c Mt 378 392 401 418 418 421 Consumption c Mt 405 411 405 412 418 422 Closing stocks c Mt 103 82 75 77 77 74 Exports bd Mt 28 27 29 29 30 30 Oilseeds and vegetable oils Oilseeds Production Mt 330 335 381 391 406 392 Consumption Mt 326 336 366 383 395 405 Closing stocks Mt 47 43 57 64 72 58 Exports Mt 70 67 74 76 83 87 Vegetable oils Production Mt 96 102 111 115 119 123 Consumption Mt 96 100 108 112 118 124 Closing stocks Mt 8 8 10 9 8 7 Exports Mt 36 39 42 46 48 48 Vegetable protein meals Production Mt 185 190 206 216 225 233 Consumption Mt 186 189 204 215 223 232 Closing stocks Mt 7 7 8 7 7 7 Exports Mt 54 59 60 65 67 71 Industrial crops Cotton Production Mt 19 21 27 26 27 26 Consumption Mt 21 21 24 25 27 28 Closing stocks Mt 8 7 10 10 10 9 Exports Mt 7 7 8 10 8 9 Sugar Production Mt 148 142 142 152 163 169 Consumption Mt 141 145 147 150 155 159 Closing stocks Mt 49 52 57 58 67 79 Exports Mt 44 45 46 45 45 47 Continued

australian commodities > vol. 14 no. 4 > december quarter 2007 735 world 19 world production, consumption, stocks and trade for selected commodities a continued Unit 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 f Livestock products Meat deg Production Mt 210 218 226 232 238 na Consumption Mt 207 214 221 227 233 na Closing stocks Mt 12.6 16.6 17.9 22.1 26.8 na Exports b Mt 18.2 19.2 21.0 20.5 21.0 na Wool h Production kt 1 233 1 220 1 220 1 229 1 204 1 180 Consumption di kt 1 256 1 214 1 225 1 196 1 210 1 185 Closing stocks j kt 124 164 163 165 140 110 Exports k kt 567 533 578 567 540 520 Butter dg Production kt 6 613 6 625 6 725 7 046 7 433 7 550 Consumption kt 6 205 6 250 6 333 6 724 7 052 7 150 Closing stocks kt 423 342 312 290 261 230 Exports kt 867 905 797 765 795 810 Skim milk powder gl Production d kt 3 658 3 306 3 300 3 285 3 188 3 250 Consumption d kt 3 254 3 210 3 140 2 944 2 977 3 000 Closing stocks d kt 949 563 365 291 277 200 Exports kt 1 172 1 165 1 001 1 007 1 062 1 075 Energy d Crude oil Production World m mbd 79.7 83.0 84.5 85.1 85.4 87.8 OPEC n mbd 30.7 32.8 34.2 34.4 33.9 36.5 Consumption m mbd 79.3 82.4 83.6 84.1 85.7 87.8 Closing stocks OECD o days 52.0 52.0 51.0 53.0 na na Coal d Production Hard coal q Mt 4 133 4 525 4 821 5 249 5 775 6 150 Brown coal Mt 903 893 905 888 871 922 Exports Metallurgical coal Mt 192 206 211 219 228 233 Thermal coal Mt 535 573 578 635 660 692

Uranium (U3O8) d Production rs kt 41.7 46.4 49.2 46.8 50.8 60.3 Consumption kt 77.8 78.5 78.8 77.2 78.1 78.0 Metals d Bauxite production kt 158 315 168 032 176 363 182 784 239 033 255 954 Alumina production kt 52 591 62 526 66 525 74 007 81 028 86 764 Aluminium Production kt 28 001 29 922 32 021 33 967 37 730 40 440 Consumption kt 27 607 29 959 31 709 33 970 37 218 39 599 Closing stocks t kt 3 672 3 033 3 010 2 764 3 277 4 118 Exports kt 20 132 20 280 20 348 23 000 25 238 26 754 Continued

736 australian commodities > vol. 14 no. 4 > december quarter 2007 world 19 world production, consumption, stocks and trade for selected commodities a continued Unit 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 f Iron and steel d Production Iron ore u Mt 1 074 1 184 1 316 1 486 1 609 1 745 Pig iron Mt 670 724 793 872 943 1 018 Crude steel Mt 970 1 068 1 140 1 244 1 339 1 414 Iron ore trade Mt 582 673 736 763 837 909 Gold d Mine production t 2 620 2 492 2 550 2 477 2 506 2 590 Supply t 4 181 3 845 4 110 3 934 3 896 3 820 Fabrication consumption v t 2 995 3 166 3 282 2 918 3 246 3 358 Base metals d Copper Production w kt 15 221 15 850 16 612 17 328 17 972 19 111 Consumption kt 15 317 16 672 16 655 17 044 18 029 18 932 Closing stocks kt 1 212 518 547 703 646 825 Lead Production w kt 6 762 6 954 7 636 7 918 8 124 8 369 Consumption kt 6 848 7 282 7 809 7 976 8 106 8 356 Closing stocks kt 407 299 283 276 294 307 Nickel Production w kt 1 192 1 252 1 293 1 352 1 424 1 523 Consumption kt 1 219 1 246 1 248 1 396 1 417 1 503 Closing stocks kt 99 98 112 87 94 114 Tin Production w kt 276 345 353 349 346 355 Consumption kt 302 336 349 365 356 360 Closing stocks kt 38 28 38 33 23 18 Zinc Production w kt 9 874 10 353 10 229 10 691 11 225 11 831 Consumption kt 9 843 10 646 10 629 11 034 11 252 11 590 Closing stocks kt 1 158 1 039 808 486 459 701 Mineral sands d Production Ilmenite x kt 10 180 10 386 11 028 11 685 11 971 12 655 Titaniferous slag kt 1 995 2 082 2 274 2 419 2 345 2 355 Rutile concentrate kt 391 378 414 522 650 741 Zircon concentrate kt 1 088 1 148 1 189 1 275 1 316 1 384

a Some figures are not based on precise or complete analyses. b Includes intra–EU trade. c Milled equivalent. d On a calendar year basis, e.g. 1991-92 = 1992. e Beef and veal, mutton, lamb, goat, pig and poultry meat. g Selected countries. h Clean equivalent. i Virgin wool at the spinning stage in 65 countries. j Held by marketing bodies and on-farm in five major exporting countries. k Five major exporting countries. l Nonfat dry milk. m Includes crude oil, marine bunkers, refinery fuel, nonconventional oil and natural gas liquids. 1 million litres a year equals about 17.2 barrels a day. n Includes OPEC natural gas liquids. o Industry stocks in OECD countries at the start of the financial year. q Includes anthracite and bituminous coal, and for the United States, Australia and New Zealand, sub-bituminous coal. r World production data has been revised to exclude reprocessed uranium. t LME and producer stocks. u China's iron ore production adjusted to world average. v Includes jewellery consumption. w Primary refined metal. x Excludes some small producers and large tonnages produced from ilmenite–magnetite ore in the Commonwealth of Independent States. s ABARE estimate. f ABARE forecast. na Not available. Sources: Australian Bureau of Statistics; Meat and Livestock Australia; Commodities Research Unit; Commonwealth Secretariat; Consolidated Gold Fields; Department of Agriculture, Fisheries and Forestry Australia; Economic Commission for Europe; Fearnleys; Food and Agriculture Organisation; Gold Fields Mineral Services; International Atomic Energy Agency; International Energy Agency; International Iron and Steel Institute; International Lead–Zinc Study Group; International Nickel Study Group; International Sugar Organization; International Wheat Council; ISTA Mielke and Co.; Metallgesellschaft A.G.; Ministry of Agriculture, Forestry and Fisheries (Japan); New Zealand Dairy Board; New Zealand Wool Board; UNCTAD Trust Fund on Iron Ore; United Nations; Uruguayan Association of Wool Exporters; US Department of Agriculture; World Bureau of Metal Statistics; ABARE.

australian commodities > vol. 14 no. 4 > december quarter 2007 737 australia

commodity production 20 australia Unit 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 f Crops Grains and oilseeds Winter crops Barley kt 3 865 10 382 7 740 9 563 3 722 5 545 Canola kt 871 1 703 1 542 1 436 513 931 Chickpeas kt 136 178 116 123 232 313 Field peas kt 178 487 289 478 149 268 Lupins kt 726 1 180 937 1 328 174 331 Oats kt 957 2 018 1 282 1 695 633 821 Triticale kt 327 826 611 676 300 550 Wheat kt 10 132 26 132 21 905 25 367 9 819 12 695 Summer crops Cottonseed s kt 546 494 912 844 388 146 Maize kt 310 395 418 380 247 353 Rice kt 438 553 339 973 167 15 Sorghum kt 1 465 2 009 2 011 1 970 952 2 003 Soybeans kt 18 74 54 55 32 45 Sunflowerseed kt 25 58 62 98 18 38 Other oilseeds a kt 63 72 70 83 76 68 Total grains and oilseeds kt 20 056 46 560 38 289 45 069 17 420 24 122 Industrial crops Cotton lint kt 387 349 645 597 274 103 Sugar cane (cut for crushing) kt 36 995 36 993 37 822 38 224 35 500 34 500 Sugar (tonnes actual) kt 5 461 4 994 5 196 5 108 4 722 4 658 Wine grapes kt 1 411 1 895 1 938 1 873 1 265 1 503 Livestock slaughterings Number slaughtered Cattle and calves ’000 9 228 8 779 8 853 8 401 9 081 8 800 Cattle exported live b ’000 977 581 574 549 638 720 Sheep ’000 13 657 10 421 11 443 11 830 13 271 10 800 Lambs ’000 16 870 16 562 17 331 18 666 20 158 19 400 Sheep exported live b ’000 5 843 3 843 3 233 4 248 4 138 3 650 Pigs ’000 5 742 5 591 5 342 5 370 5 322 5 450 Meat produced Beef and veal c kt 2 073 2 033 2 162 2 077 2 226 2 138 Lamb c kt 329 341 354 382 413 400 Mutton c kt 268 220 237 244 271 222 Pig meat kt 420 406 389 389 382 390 Poultry meat c kt 726 732 792 817 855 854 Total kt 3 816 3 732 3 934 3 909 4 147 4 004 Continued

738 australian commodities > vol. 14 no. 4 > december quarter 2007 australia

commodity production continued 20 australia Unit 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 f Livestock products Wool d kt 551 509 520 510 477 437 Milk e ML 10 328 10 076 10 127 10 089 9 583 9 000 Butter g kt 164 149 147 146 133 124 Cheese kt 379 384 388 373 364 323 Casein kt 13 14 13 12 8 7 Skim milk powder h kt 197 182 189 205 191 169 Wholemilk powder kt 198 187 189 158 135 129 Buttermilk powder kt 17 17 17 16 14 13 Forestry Roundwood '000 m3 25 821 26 499 27 000 26 736 27 083 29 898 Fisheries i Tuna j kt 13.4 14.7 11.3 12.7 12.0 13.8 Other fish k kt 151.7 165.3 172.9 146.5 164.4 156.2 Prawns kt 26.4 27.6 23.7 23.2 20.2 19.3 Rock lobster kt 17.1 19.9 18.5 16.2 14.4 15.1 Abalone kt 5.2 5.8 6.0 5.5 5.6 5.8 Scallops kt 9.6 9.3 15.4 8.7 10.3 8.6 Oysters kt 10.5 12.7 10.4 12.0 12.5 12.3 Other molluscs kt 9.9 11.0 10.4 8.6 10.0 9.6 Other crustaceans kt 8.1 8.1 7.3 5.9 7.1 6.8 Energy Coal Black, salable Mt 274.9 286.0 305.0 307.2 323.9 330.3 Black, raw Mt 348.9 360.4 393.4 398.4 409.1 428.6 Brown Mt 66.8 66.3 67.2 67.7 71.9 72.4 Petroleum Crude oil and condensate ML 35 023 30 713 27 311 24 315 28 555 29 541 Petroleum products l ML 46 723 43 486 44 555 40 679 43 652 43 223 Natural gas m Gm3 36.8 37.0 41.3 42.2 43.6 45.4 LPG (naturally occurring) ML 4 681 4 639 4 628 4 722 4 550 4 565

Uranium (U3O8) t 9 172 9 569 10 964 9 974 9 594 10 600 Metalliferous minerals and metals n Aluminium Bauxite Mt 54.5 56.3 57.6 60.9 62.7 62.1 Alumina kt 16 413 16 690 17 161 17 826 18 506 19 980 Aluminium (ingot metal) kt 1 855 1 877 1 890 1 912 1 957 1 983 Copper Mine production o kt 883 811 899 936 859 878 Refined, primary kt 537 458 479 461 435 448 Gold Mine production o t 277.8 266.7 265.6 250.0 251.0 251.7 Continued

australian commodities > vol. 14 no. 4 > december quarter 2007 739 australia

commodity production continued 20 australia Unit 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 f Metalliferous minerals and metals (continued) Iron and steel Ore and concentrate q Mt 199.1 222.8 251.9 263.8 287.7 311.5 Iron and steel Mt 9.4 9.4 7.4 7.9 8.0 8.3 Lead Mine production o kt 695 677 682 762 642 668 Refined r kt 267 247 234 234 191 223 Bullion kt 181 143 153 141 114 129 Manganese Ore, metallurgical grade kt 2 472 3 094 3 563 4 088 5 071 5 021 Metal content of ores and concentrates kt 1 186 1 169 1 710 1 962 2 434 2 410 Nickel Mine production o kt 183 185 192 186 192 191 Refined, class I s kt 117 113 117 105 104 94 Refined, class II u kt 12 11 10 10 15 20 Total ore processed v kt 230 234 229 227 237 239 Silver Mine production o t 1 892 2 056 2 303 2 218 1 674 1 768 Refined t 672 619 722 655 618 650 Tin Mine production o t 6 328 1 512 1 650 1 805 2 061 2 291 Refined t 708 553 445 736 321 0 Titanium Ilmenite concentrate kt 2 072 1 911 1 993 2 185 2 403 2 530 Leucoxene concentrate kt 43 53 68 87 174 180 Rutile concentrate kt 204 152 173 184 277 372 Synthetic rutile s kt 673 696 751 711 721 735 Titanium dioxide pigment s kt 189 196 204 208 207 218 Zinc Mine production o kt 1 529 1 355 1 352 1 380 1 382 1 530 Refined kt 570 502 464 446 496 480 Zircon concentrate kt 459 448 432 442 565 654 Other minerals Diamonds ’000 ct 32 006 24 310 32 471 25 354 24 632 20 805 Salt kt 10 438 10 618 12 254 11 467 11 209 11 960

a Linseed and safflowerseed. b Excludes animals exported for breeding purposes. c In carcass weight and includes carcass equivalent of canned meats. d Greasy equivalent of shorn wool (includes crutching), dead and fellmongered wool and wool exported on skins. e Includes the wholemilk equivalent of farm cream intake. g Includes the butter equivalent of butteroil, butter concentrate, ghee and dry butterfat. h Includes mixed skim and buttermilk powder. i Liveweight. j Tuna captured under joint venture or bilateral agreements or transhipped at sea is included. k Includes an estimated value of aquaculture but excludes inland commercial fisheries. l Includes production from petrochemical plants. m Includes ethane, methane and noncommercial natural gas. n Uranium is included with energy. o Primary production, metal content. q Excludes iron oxide not intended for metal extraction. r Includes lead content of lead alloys from primary sources. t Products with a nickel content of 99 per cent or more. Includes electrolytic nickel, pellets, briquettes and powder. u Products with a nickel content of less than 99 per cent. Includes ferronickel, nickel oxides and oxide sinter. v Includes imported ore for further processing. s ABARE estimate. f ABARE forecast. Sources: Australian Bureau of Statistics; Australian Dairy Corporation; Consolidated Gold Fields; Coal Services Pty Limited; International Nickel Study Group; Queensland Government, Department of Natural Resources and Mines; Raw Cotton Marketing Advisory Committee; ABARE.

740 australian commodities > vol. 14 no. 4 > december quarter 2007 value of production

gross value of farm and ﬁ sheries production 21 australia 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 f $m $m $m $m $m $m Crops Grains and oilseeds Winter crops Barley 984 1 750 1 233 1 445 1 130 1 724 Canola 389 686 503 486 238 477 Chickpeas 65 58 36 57 153 196 Field peas 61 113 68 132 66 136 Lupins 212 278 193 265 63 126 Oats 210 279 172 255 183 272 Triticale 84 126 93 120 97 177 Wheat 2 692 5 636 4 317 5 194 2 609 4 328 Summer crops Maize 72 88 81 72 89 122 Rice 153 180 101 255 69 7 Sorghum 300 319 270 286 264 625 Soybeans 7 27 15 17 11 16 Sunflowerseed 10 20 21 42 12 27 Other oilseeds a 30 44 36 29 31 31 Total grains and oilseeds 5 440 9 837 7 364 8 917 5 267 8 549 Industrial crops Cotton lint and cotton seed b 844 689 1 222 1 105 471 195 Sugar cane (cut for crushing) 1 019 854 980 1 056 941 880 Wine grapes 1 143 1 491 1 385 1 141 828 1 232 Total industrial crops 3 006 3 034 3 587 3 302 2 240 2 307 Horticulture Table and dried grapes 192 166 220 212 240 230 Fruit and nuts (excl grapes) 2 216 2 184 2 547 2 537 2 700 2 570 Vegetables 2 258 2 380 2 315 2 752 2 545 2 575 Other horticulture 1 556 1 385 1 372 1 433 1 495 1 453 Total horticulture 6 223 6 115 6 454 6 933 6 980 6 828 Other crops nei c 1 376 1 803 1 321 1 446 1 658 1 812 Total crops 16 045 20 789 18 725 20 598 16 145 19 496 Continued

australian commodities > vol. 14 no. 4 > december quarter 2007 741 value of production

gross value of farm and ﬁ sheries production continued 21 australia 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 f $m $m $m $m $m $m Livestock slaughterings Cattle and calves d 5 842 6 341 7 455 7 325 7 035 6 829 Cattle exported live e 569 318 374 358 437 477 Sheep g 468 454 418 444 370 375 Lambs gh 1 161 1 318 1 327 1 378 1 360 1 355 Sheep exported live 408 266 207 291 289 252 Pigs 911 879 906 890 960 904 Poultry 1 281 1 281 1 304 1 229 1 442 1 611 Total livestock slaughterings k 10 676 10 896 12 033 11 965 11 937 11 847 Livestock products Wool i 3 318 2 397 2 196 2 093 2 678 2 640 Milk j 2 795 2 809 3 194 3 343 3 181 3 960 Eggs 294 336 328 353 338 340 Honey and beeswax 75 74 77 66 50 44 Total livestock products 6 482 5 615 5 794 5 854 6 248 6 984 Total farm 33 203 37 300 36 552 38 417 34 330 38 327 Forestry products Roundwood 1 476 1 564 1 650 1 669 1 687 1 954 Fisheries products l Tuna m 317 280 172 175 164 207 Other fin fish n 585 581 569 597 703 738 Prawns 367 360 309 302 264 232 Rock lobster 463 411 427 470 460 469 Abalone 216 198 233 226 221 229 Scallops 33 25 47 25 28 28 Oysters 62 77 74 84 92 97 Pearls 124 122 122 122 122 122 Other molluscs o 64 73 68 64 68 67 Other crustaceans 63 66 60 49 58 56 Total fish q 2 313 2 207 2 105 2 133 2 200 2 263

a Linseed, safflowerseed and peanuts. b Value delivered to gin. c Mainly fodder crops. d Includes dairy cattle slaughtered. e Excludes animals exported for breeding purposes. g Excludes skin values. h Lamb saleyard indicator weight 18–20 kg to 2002-03, from 2003-04 18-22kg. i Shorn, dead and fellmongered wool and wool exported on skins. j Milk intake by factories and valued at farmgate. k Total livestock slaughterings includes livestock disposals. l Value to fishermen of product landed in Australia. m Tuna captured under joint venture or bilateral agreements or transhipped at sea is included. n Includes an estimated value of aquaculture. o Includes Northern Territory aquaculture production. q Also includes fish and aquaculture values not elsewhere included. s ABARE estimate. f ABARE forecast. Note: The gross value of production is the value placed on recorded production at the wholesale prices realised in the market place. The point of measurement can vary between commodities. Generally the market place is the metropolitan market in each state and territory. However, where commodities are consumed locally or where they become raw material for a secondary industry, these points are presumed to be the market place. Note: Prices used in these calculations exclude GST. Sources: Australian Bureau of Statistics; ABARE.

742 australian commodities > vol. 14 no. 4 > december quarter 2007 areas, stock

crop areas and livestock numbers 22 australia Unit 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 f Crop areas Grains and oilseeds Winter crops Barley ’000 ha 3 864 4 477 4 645 4 447 3 990 4 350 Canola ’000 ha 1 298 1 211 1 377 979 944 1 061 Chickpeas ’000 ha 201 152 113 105 244 306 Field peas ’000 ha 380 354 413 280 342 293 Lupins ’000 ha 1 025 851 845 832 500 454 Oats ’000 ha 911 1 089 894 936 794 901 Triticale ’000 ha 408 445 389 347 328 360 Wheat ’000 ha 11 170 13 067 13 399 12 543 11 138 12 257 Summer crops Maize ’000 ha 50 70 72 76 50 68 Rice ’000 ha 46 66 51 99 16 2 Sorghum ’000 ha 667 734 755 767 457 795 Soybeans ’000 ha 10 33 26 24 14 22 Sunflowerseed ’000 ha 40 46 46 79 17 33 Other oilseeds a ’000 ha 44 51 55 54 43 49 Total grains and oilseeds ’000 ha 20 777 23 201 23 808 22 299 19 415 21 349 Industrial crops Cotton ’000 ha 224 198 321 336 144 56 Sugar cane b ’000 ha 448 448 434 406 400 400 Winegrapes ’000 ha 140 146 153 152 160 161 Livestock numbers c Cattle Beef million 23.62 24.41 25.42 26.05 25.13 24.96 Dairy million 3.05 3.06 2.86 2.79 2.67 2.64 milking herd d million 2.05 2.04 1.94 1.88 1.80 1.78 Total million 26.66 27.47 28.28 28.85 27.80 27.60 Sheep million 99.3 101.3 102.5 92.7 86.8 85.0 Pigs million 2.66 2.48 2.73 2.76 2.88 2.81

a Linseed and safflowerseed. b Cut for crushing. c At 30 June. d Cows in milk and dry. s ABARE estimate. f ABARE forecast. Sources: Australian Bureau of Statistics; ABARE.

australian commodities > vol. 14 no. 4 > december quarter 2007 743 yields

average farm yields 23 australia Unit 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 f Crops Grains and oilseeds Winter crops Barley t/ha 1.00 2.32 1.67 2.15 0.93 1.27 Canola t/ha 0.67 1.41 1.12 1.47 0.54 0.88 Chickpeas t/ha 0.68 1.17 1.02 1.17 0.95 1.02 Field peas t/ha 0.47 1.38 0.70 1.71 0.43 0.91 Lupins t/ha 0.71 1.39 1.11 1.60 0.35 0.73 Oats t/ha 1.05 1.85 1.43 1.81 0.80 0.91 Triticale t/ha 0.80 1.86 1.57 1.95 0.91 1.53 Wheat t/ha 0.91 2.00 1.63 2.02 0.88 1.04 Summer crops Maize t/ha 6.20 5.64 5.81 5.03 4.94 5.19 Rice t/ha 9.52 8.38 6.60 9.83 10.44 7.50 Sorghum t/ha 2.20 2.74 2.66 2.57 2.08 2.52 Soybeans t/ha 1.77 2.21 2.07 2.33 2.35 2.05 Sunflowerseed t/ha 0.62 1.26 1.35 1.24 1.06 1.18 Industrial crops Cotton (lint) t/ha 1.72 1.76 2.01 1.78 1.91 1.85 Sugar cane (for crushing) t/ha 83 83 87 94 89 86 Winegrapes t/ha 10.08 12.98 12.67 12.29 7.90 9.36 Livestock Wool a kg/sheep 4.25 4.51 4.57 4.43 4.21 4.23 Wholemilk L/cow 5 038 4 944 5 215 5 395 5 324 5 056

a Shorn (including lambs). s ABARE estimate. f ABARE forecast. Sources: Australian Bureau of Statistics; ABARE.

744 australian commodities > vol. 14 no. 4 > december quarter 2007 export volumes

volume of commodity exports 24 australia Unit 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 f Farm Grains and oilseeds Winter crops Barley a kt 3 462 5 308 6 499 5 315 3 135 2 841 Canola kt 612 1 049 1 019 884 238 481 Chickpeas kt 89 164 151 211 244 235 Lupins kt 208 646 419 469 202 140 Oats (unprepared) kt 178 172 165 190 62 98 Peas b kt 108 209 116 156 248 179 Wheat c kt 10 845 15 074 15 780 15 168 11 196 6 958 Summer crops Cottonseed kt 259 167 214 204 104 31 Rice kt 591 234 271 254 475 77 Sorghum kt 70 289 513 173 46 77 Other oilseeds d kt 16 20 28 18 13 20 Total grains and oilseeds kt 16 437 23 332 25 175 23 045 15 962 11 136 Industrial crops Raw cotton e kt 596 459 410 650 487 217 Sugar kt 4 167 4 060 4 153 4 067 3 656 3 600 Wine ML 508 581 661 736 797 840 Meat and live animals for slaughter Beef and veal gh kt 902 860 948 892 974 925 Live cattle i ’000 977 581 574 549 638 720 Lamb g kt 98 112 123 143 150 148 Live sheep i ’000 5 843 3 843 3 233 4 248 4 138 3 650 Mutton g kt 152 120 137 145 162 135 Pig meat g kt 63 51 43 44 41 43 Poultry meat g kt 23 20 20 22 28 32 Wool Greasy js kt 305 320 372 377 402 341 Semiprocessed kt (gr.eq.) 171 127 114 91 82 67 Skins kt (gr.eq.) 56 54 61 75 83 68 Total js kt (gr.eq.) 532 502 547 543 566 476 Dairy products Butter k kt 111 84 69 83 81 61 Cheese kt 208 212 228 202 212 154 Casein kt 21 18 13 8 12 7 Skim milk powder kt 182 156 141 181 164 129 Wholemilk powder kt 142 117 105 110 94 75 Continued

australian commodities > vol. 14 no. 4 > december quarter 2007 745 export volumes

volume of commodity exports continued 24 australia Unit 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 f Forest products Woodchips kt 5 437 5 264 5 598 5 363 5 952 6 142 Fisheries products Tuna l kt 12.6 12.8 10.9 11.7 11.6 13.6 Other fish kt 17.4 13.2 15.0 11.6 11.4 11.6 Prawns m Headless kt 0.6 0.3 0.4 0.1 0.1 0.1 Whole kt 8.7 8.9 9.6 8.4 6.0 4.1 Rock lobster Tails kt 1.7 2.1 1.8 1.6 1.5 1.4 Whole kt 9.5 10.9 10.2 9.9 8.3 8.4 Abalone Fresh, chilled or frozen kt 1.7 2.1 2.0 2.1 2.2 2.2 Prepared or preserved kt 2.5 2.8 2.0 1.5 1.7 1.3 Scallops n kt 1.2 1.5 1.2 1.5 1.4 1.1 Mineral resources Energy Crude oil o ML 20 950 17 526 15 731 13 026 15 963 16 574 LPG ML 3 194 2 916 2 844 2 800 2 824 3 068 LNG qs Mt 7.826 7.914 10.589 12.495 15.200 15.500 Bunker fuel r ML 2 238 2 216 2 207 2 163 2 156 2 162 Petroleum products ML 3 159 2 488 1 864 2 102 1 762 2 044 Metallurgical coal Mt 107.8 111.7 124.9 120.5 131.9 137.2 Thermal coal Mt 99.9 106.7 106.4 110.8 111.7 114.6

Uranium (U3O8) t 9 593 9 099 11 249 10 253 9 519 10 519 Continued

746 australian commodities > vol. 14 no. 4 > december quarter 2007 export volumes

volume of commodity exports continued 24 australia Unit 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 f Mineral resources (continued) Metalliferous minerals and metals t Aluminium Alumina kt 13 168 13 572 14 073 14 499 15 054 16 263 Aluminium (ingot metal) kt 1 551 1 546 1 512 1 617 1 638 1 709 Copper Ore and concentrate kt 1 193 1 286 1 326 1 635 1 493 1 545 Refined kt 359 301 322 314 290 328 Gold v t 282 315 309 315 400 410 Iron and steel Iron ore and pellets Mt 181.5 194.8 228.5 239.4 257.4 289.8 Iron and steel w kt 3 589 3 818 2 338 2 428 2 648 2 863 Lead Ores and concentrates kt 366 417 417 502 422 393 Refined kt 269 231 243 244 215 227 Bullion kt 150 113 164 140 112 141 Manganese Ore s kt 2 014 2 603 3 128 3 215 4 667 3 624 Nickel vs kt 208 213 218 198 215 214 Titanium Ilmenite concentrate x kt 1 020 783 633 722 999 1 023 Leucoxene concentrate kt 41 125 93 86 123 172 Rutile concentrate kt 195 146 158 169 307 392 Synthetic rutile s kt 456 470 517 472 508 513 Titanium dioxide pigment kt 147 165 175 177 171 183 Refined silver t 511 415 517 482 431 425 Tin v t 5 963 143 1 529 1 556 1 867 2 469 Zinc Ores and concentrates kt 1 913 1 844 1 953 1 821 1 948 2 096 Refined kt 486 396 397 388 374 420 Zircon concentrate y kt 445 443 428 438 555 651 Other minerals Diamonds ’000 ct 32 274 24 326 32 471 25 354 24 632 20 805 Salt kt 10 172 10 285 12 128 10 776 10 749 11 187 a Includes the grain equivalent of malt. b Includes field peas and cowpeas. c Includes the wheat equivalent of flour. d Includes soybeans, linseed, sunflowerseed, safflowerseed and peanuts. Excludes meals and oils. e Excludes cotton waste and linters. g In shipped weight. Fresh, chilled or frozen. h Includes meat loaf. i Excludes breeding stock. j ABS recorded trade data adjusted for changes in stock levels held overseas by Wool International. k Includes ghee, dry butterfat, butter concentrate and butteroil, dairy spreads, all expressed as butter. l Exports of tuna landed in Australia. Tuna captured under joint venture or bilateral agreements or transhipped at sea is not included. m Excludes volume of other prawn products. n Includes crumbed scallops. o Includes condensate and other refinery feedstock. q 1 million tonnes of LNG equals about 1.31 billion cubic metres of gas. r International ships and aircraft stores. t Uranium is included with energy. u Exports of bauxite are confidential. v Quantities refer to total metallic content of all ores, concentrates, intermediate products and refined metal. w Includes all steel items in ABS, Australian Harmonized Export Commodity Classification , ch. 72, ’Iron and steel’, excluding ferrous waste and scrap and ferroalloys. x Excludes leucoxene and synthetic rutile. y Data from 1991-92 refer to standard grade zircon only. s ABARE estimate. f ABARE forecast. Sources: ABS, International Trade, Australia, cat. no. 5465.0, Canberra; Australian Mining Industry Council; Department of Foreign Affairs and Trade; Department of Agriculture, Fisheries and Forestry; International Nickel Study Group; ABARE.

australian commodities > vol. 14 no. 4 > december quarter 2007 747 export values

value of commodity exports (fob) 25 australia 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 f $m $m $m $m $m $m Farm Grains and oilseeds Winter crops Barley a 955 1 239 1 275 1 108 833 864 Canola 289 453 397 331 108 239 Chickpeas 52 71 65 106 168 148 Lupins 57 148 89 99 44 39 Oats 44 38 36 47 20 33 Peas b 43 56 33 43 80 69 Wheat c 3 109 3 475 3 488 3 296 2 765 2 309 Summer crops Cottonseed 82 62 55 53 31 14 Rice 371 145 173 168 335 57 Sorghum 17 61 96 33 13 20 Other oilseeds d 21 26 33 21 22 30 Total grains and oilseeds 5 040 5 773 5 739 5 305 4 421 3 823 Industrial crops Raw cotton e 1 153 982 771 1 137 823 365 Sugar 1 220 982 1 098 1 597 1 413 957 Wine 2 386 2 545 2 748 2 799 2 991 3 150 Total 4 759 4 509 4 617 5 534 5 228 4 472 Other crops 3 499 3 213 3 322 3 270 3 196 3 237 Total crops 13 299 13 496 13 679 14 108 12 844 11 532 Meat and live animals for slaughter Beef and veal 3 756 3 793 4 584 4 272 4 634 4 430 Live cattle g 569 318 374 358 437 477 Lamb 533 602 673 767 749 758 Live sheep g 408 266 207 291 289 252 Mutton 442 380 398 432 458 412 Pig meat 256 181 150 143 142 144 Poultry meat 22 20 20 21 26 31 Total 5 987 5 560 6 405 6 284 6 735 6 502 Wool Greasy h 2 265 1 850 1 994 1 868 2 316 2 088 Semiprocessed 991 632 505 389 393 402 Skins 288 296 339 287 356 322 Total h 3 545 2 778 2 838 2 544 3 065 2 812 Dairy products Butter 224 183 188 225 179 288 Cheese 800 739 877 837 825 1 036 Casein 128 123 116 89 113 111 Skim milk powder 408 388 420 529 505 705 Wholemilk powder 380 322 324 334 275 423 Other dairy products 558 544 568 561 546 694 Total 2 499 2 298 2 494 2 574 2 443 3 257 Other livestock exports 2 535 2 419 2 496 2 436 2 578 2 691 Total livestock exports 14 566 13 055 14 232 13 838 14 821 15 263 Total farm exports 27 865 26 550 27 911 27 947 27 664 26 794 Continued

748 australian commodities > vol. 14 no. 4 > december quarter 2007 export values

value of commodity exports (fob) continued 25 australia 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 f $m $m $m $m $m $m Forest products Woodchips 808 794 858 839 950 980 Other forest products 1 283 1 245 1 260 1 301 1 402 1 442 Fisheries products Tuna i 321 273 166 179 162 210 Other fish 164 137 139 115 118 124 Prawns j Headless 12 5 7 3 2 2 Whole 193 151 153 129 89 55 Rock lobster Tails 113 103 101 97 102 100 Whole 344 318 330 387 357 340 Abalone Fresh, chilled or frozen 109 117 124 132 139 133 Prepared or preserved 107 120 139 114 108 95 Scallops k 29 35 33 39 35 27 Pearls 332 310 291 290 314 307 Other fisheries products 121 81 61 62 69 67 Total 1 844 1 652 1 542 1 547 1 495 1 461 Total rural exports l Derived as sum of above 31 800 30 242 31 571 31 633 31 512 30 675 On balance of payments basis m 29 863 28 880 30 354 30 475 30 321 29 071 Mineral resources Energy Crude oil n 6 402 5 055 6 330 6 638 8 318 9 549 LPG 855 647 804 1 002 1 038 1 228 LNG 2 607 2 174 3 199 4 416 5 222 5 836 Bunker fuel o 775 696 951 1 322 1 295 1 360 Other petroleum products 1 198 918 844 1 195 1 098 1 658 Metallurgical coal 7 448 6 510 10 758 17 003 15 035 14 382 Thermal coal 4 448 4 372 6 336 7 206 6 762 7 330

Uranium (U3O8) 427 364 475 546 660 864 Total Derived as sum of above 24 161 20 737 29 696 39 328 39 428 42 207 On balance of payments basis (excl. bunker fuel) 23 036 19 779 28 387 37 573 37 570 40 059 Metalliferous minerals and metals Aluminium Bauxite s 159 125 123 127 153 180 Alumina 3 660 3 781 4 383 5 262 6 224 5 556 Aluminium (ingot metal) 3 696 3 441 3 726 4 788 5 648 4 867 Copper p Ore and concentrate 1 048 1 242 1 750 3 492 3 910 3 589 Refined 956 924 1 332 2 161 2 610 2 617 Continued

australian commodities > vol. 14 no. 4 > december quarter 2007 749 export values

value of commodity exports (fob) continued 25 australia 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 f $m $m $m $m $m $m Mineral resources (continued) Metalliferous minerals and metals (continued) Gold p 5 133 5 510 5 523 7 089 10 320 11 445 Iron and steel Iron ore and pellets 5 342 5 277 8 120 12 854 15 519 18 030 Iron and steel 1 855 2 004 2 031 1 674 1 743 1 822 Lead p Ores and concentrates 289 387 490 711 855 1 124 Refined 203 199 305 350 457 799 Bullion 165 142 246 235 268 551 Manganese Ore s 312 371 473 424 482 566 Titanium Ilmenite concentrate q 135 82 63 76 113 123 Leucoxene concentrate 16 33 25 25 35 59 Rutile concentrate 149 94 114 138 259 275 Synthetic rutile s 293 253 306 321 361 303 Titanium dioxide pigment 428 399 422 441 408 411 Nickel s 2 337 3 107 3 743 3 457 8 381 5 802 Refined silver 136 118 161 197 221 221 Tin p 38 1 8 12 25 43 Zinc p Ores and concentrates 670 677 852 1 542 2 599 1 755 Refined 757 557 614 998 1 707 1 311 Zircon concentrate r 282 260 319 398 478 433 Total 28 061 28 983 35 130 46 771 62 775 61 882 Other minerals Diamonds s 838 596 683 836 726 658 Salt 233 186 226 229 239 246 Other 4 485 3 779 3 763 5 274 4 719 4 812 Total mineral resources exports 57 777 54 282 69 498 92 438 107 887 109 805 Total commodity exports Derived as sum of above 89 577 84 524 101 070 124 071 139 399 140 480 On balance of payments t 86 865 82 466 98 902 121 591 136 913 137 516

a Includes the grain equivalent of malt. b Field peas and cowpeas. c Includes the wheat equivalent of flour. d Includes soybeans, linseed, sunflowerseed, safflowerseed and peanuts. Excludes meals and oils. e Excludes cotton waste and linters. g Excludes breeding stock. h On a balance of payments basis. ABS recorded trade data adjusted for changes in stock levels held overseas by Wool International. i Exports of tuna landed in Australia. Tuna captured under joint venture or bilateral agreements or transhipped at sea is not included. j Other prawn products included in other fisheries products. k Includes crumbed scallops. l Sum of farm, forest and fisheries products. m The value of exports derived as the sum of published detailed items differs from the balance of payments aggregates shown in table 6 for two main reasons: the ABS makes special adjustments to some recorded trade data for balance of payments purposes; and ABARE derives its own estimates, (using non-ABS sources), for several items as footnoted. For more detail on a balance of payments basis, see table 7. n Includes condensate and other refinery feedstock. o International ships and aircraft stores. p Value of metals contained in host mine and smelter products are not available separately and are included in the value of the mineral product or metal in which they are exported. q Excludes leucoxene and synthetic rutile; data from 1991-92 refer to bulk ilmenite only. r Data refers to standard grade zircon only. t As derived in table 6. s ABARE estimate. f ABARE forecast. Sources: ABS, International Trade, Australia, cat. no. 5465.0, Canberra; ABARE.

750 australian commodities > vol. 14 no. 4 > december quarter 2007 import value

value of imports and exports of selected commodites 26 australia 2002-03 2003-04 2004-05 2005-06 2006-07 s $m $m $m $m $m Vegetable oilseeds and products a Imports 544 520 504 532 771 Exports 444 605 552 472 240 Dairy products Imports Cheese 170 160 190 229 278 Other dairy products 114 118 137 140 178 Total 283 279 326 369 456 Exports Cheese 800 739 877 837 825 Other dairy products 1 699 1 559 1 617 1 737 1 618 Total 2 499 2 298 2 494 2 574 2 443 Edible fisheries products Imports Shellfish b 360 360 412 426 483 Fin fish 591 545 547 602 701 Total 950 905 959 1 028 1 184 Exports Shellfish b 1 000 909 932 943 879 Fin fish c 485 410 304 295 280 Total 1 485 1 319 1 236 1 237 1 159 Forest products Imports Sawnwood 505 502 492 419 418 Wood based panels 206 190 216 228 279 Pulp and paper products 2 784 2 719 2 809 2 841 3 009 Other d 591 585 587 528 568 Total 4 086 3 995 4 104 4 017 4 275 Exports Woodchips 808 794 858 839 950 Pulp and paper products 855 838 854 872 949 Other e 427 408 406 429 453 Total 2 091 2 040 2 119 2 140 2 352 Petroleum Imports Crude oil g 8 610 6 594 9 995 12 820 13 361 Petroleum products h 2 050 3 595 5 123 8 761 8 584 Total 10 661 10 190 15 118 21 581 21 945 Exports Crude oil g 6 402 5 055 6 330 6 638 8 318 LPG i 855 647 804 1 002 1 038 LNG 2 607 2 174 3 199 4 416 5 222 Bunker fuel j 775 696 951 1 322 1 295 Other petroleum products 1 198 918 844 1 195 1 098 Total 11 838 9 490 12 126 14 573 16 971

a Includes peanuts, oilseeds, vegetable oils and vegetable protein meals. b Includes all crustaceans and molluscs including canned. c Excludes tuna transhipped at sea or captured under joint venture or bilateral agreements. d Includes roundwood, other processed wood and minor forest products. e Includes roundwood, sawnwood, sleepers, processed wood and minor forest products. g Includes condensate and other refinery feedstock. h Includes LPG. i Naturally occurring and refinery byproduct gas. j International ships and aircraft stores. s ABARE estimate. Sources: Australian Bureau of Statistics; Department of Agriculture, Fisheries and Forestry; ABARE.

australian commodities > vol. 14 no. 4 > december quarter 2007 751 abare management

contacts

executive director phillip glyde [email protected] 6272 2100 deputy executive director karen schneider [email protected] 6272 2033

chief economist don gunasekera [email protected] 6272 2040 chief commodity analyst terry sheales [email protected] 6272 2054 commodity outlook and client relations vince o’donnell [email protected] 6272 2255 agriculture and surveys branch manager lisa elliston [email protected] 6272 2091 agricultural economics ben buetre [email protected] 6272 2404 agricultural commodity analysis john hogan [email protected] 6272 2056 survey analysis milly lubulwa [email protected] 6272 2069

agricultural trade and data resources branch manager (acting) jammie penm [email protected] 6272 2030 international economic analysis (acting) yeon kim [email protected] 6272 2136 biosecurity and biotechnology (acting) robert curtotti [email protected] 6727 2014 data resources geoff armitage [email protected] 6272 2367 energy and minerals branch manager jane mélanie [email protected] 6272 2349 Australian energy projections arif syed [email protected] 6272 2083 energy and minerals commodity analysis vacant 6272 2173 international energy and minerals allison ball [email protected] 6272 2295 climate change analysis branch manager helal ahammad [email protected] 6727 2366 climate change and modelling (acting) melanie ford [email protected] 6272 2285 climate adaptation thilak mallawaarachchi [email protected] 6272 2011 natural resource management branch manager peter gooday [email protected] 6272 2138 fi s h e r i e s (acting) paul newton [email protected] 6272 2294 land and forests (acting) santhi wicks [email protected] 6272 6413 water tim goesch [email protected] 6272 2009 corporate management corporate manager annette blyton [email protected] 6272 2222 media and events maree fi nnegan mfi [email protected] 6272 2260 publishing and marketing andrew wright [email protected] 6272 2290 publications enquiries denise fl amia dfl [email protected] 6272 2211 recruitment peter cahill [email protected] 6272 2022

752 australian commodities > vol. 14 no. 4 > december quarter 2007