Australian Commodities June Quarter 07.2

australian commodities june quarter 07.2

GPO Box 1563 Canberra 2601 Telephone +61 2 6272 2000 www.abareconomics.com

ABARE is a professionally independent government economic research agency

editor andrew wright ABARE project 1163

ISSN 1321-7844 abare contents

economic overview 269 outlook for Australia’s commodities sector 279 commodity outlook crops wheat 281 coarse grains 284 oilseeds 288 cotton 291 sugar 294 livestock sheep industry 297 wool 299 beef and veal 301 dairy 304 energy oil and gas 307 thermal coal 313 metals steel and steel making raw materials 317 gold 323 aluminium and alumina 328 nickel 333 copper 336 zinc 339 articles drought and irrigation in australia’s murray darling basin 343 tim goesch, ahmed haﬁ , mark oliver, sharon page, dale ashton, simon hone and brenda dyack

lupins – australia’s role in world markets 353 leanne lawrance

minerals and energy – major development projects – april 2007 listing 357 alan copeland and commodity analysts, resource markets and infrastructure section statisical tables 371 abare management 408

australian commodities > vol. 14 no. 2 > june quarter 2007 267 economic overviewcontents

> jammiecontact penm > +61 > +61 2 6272 2 6272 ???? 2030 > [email protected]> [email protected] economic overview prospects for world economic growth jammie penm

» World economic growth is assumed to average 4.5 per cent in both 2007 and 2008, compared with 5.4 per cent in 2006. » While economic growth has been easing in the United States, in China it has remained strong. Continued high rates of economic activity in China are expected to provide support for economic growth in neighbouring countries, including the Republic of Korea, Chinese Taipei and many south east Asian countries. » In Australia, under an assumption of a return to average seasonal conditions, economic growth is assumed to be around 3.75 per cent in 2007-08, compared with an estimated 2.5 per cent in 2006-07. world economic outlook world economic performance has been strong Despite weaker economic performance in the United States in early 2007, the global economy remains on track for continued robust growth in the next eighteen months. More importantly, downside risks to the economic outlook appear less threatening than they were at the beginning of 2007. While signifi cant volatility continues, world oil prices have declined from their highs in mid-2006. Favourable conditions in global fi nancial markets have helped to limit the spillover effects from a slowdown in housing activity in the United States. world economic growth Against the backdrop of global economic buoyancy, world economic growth has become more broadly based. In particular, robust economic performance continues in China, with year on year growth 5 of 11 per cent recorded in the March quarter 2007. In Japan, economic activity slowed in mid-2006, but 4 has regained momentum. In the euro area, growth has accelerated to its fastest pace in six years, as domestic 3 demand has strengthened in response to increasing business confi dence and improving labour markets. 2 In other parts of the world, the expansion in India’s 1 economy strengthened during the course of 2006, with economic growth averaging around 9.2 per cent for the year. Supported by strong commodity prices % and favourable fi nancial conditions, economic growth 19881992 1996 20002004 2008 australian commodities > vol. 14 no. 2 > june quarter 2007 269 economic overview

has also been sustained at robust rates in the Russian Federation, central and eastern Europe and many Latin American countries. robust world growth to continue The world economy is expected to continue to grow robustly in the remainder of 2007 and 2008 but with a modest deceleration from the rapid pace of 2006, bringing growth more in line with potential and helping to contain infl ationary pressures. World economic growth is assumed to average 4.5 per cent in both 2007 and 2008, compared with 5.4 per cent in 2006. The assumed rates of world economic growth in 2007 and 2008 remain relatively high from a historical perspective. For example, world economic growth averaged around 4.0 per cent in the fi rst half of the current decade and 3.7 per cent in the second half of the 1990s. In the OECD region, the easing in economic activity in the United States is likely to be more regional economic growth pronounced than previously anticipated, although the expected recovery should gather momentum 2006 toward late 2007 and into 2008. Economic 10 2007 growth is also assumed to ease in the euro area 2008 and Japan, refl ecting in part a gradual withdrawal 8 of accommodative monetary policy and some fi scal consolidation. 6 Emerging markets are expected to be the major contributor to world economic growth in the short 4 term, drawing continued support from global investment and favourable fi nancial conditions. 2 Economic growth in China is assumed to ease only moderately in 2007 and 2008 from its high % in 2006. The pace of expansion is also likely to OECD non-OECD Latin Russia, China world ease in India, refl ecting in part policy tightening in Asia America Ukraine, response to concerns of possible ‘overheating’ of eastern Europe the economy and higher infl ation. Commodity rich countries in central Asia, the Middle East and Latin America are expected to continue to prosper. Despite the spillovers from assumed slower growth in western Europe and the United States, countries in eastern Europe, including the Russian Federation and the Ukraine, are expected to continue to achieve relatively strong economic growth in the next two years. risk factors in the outlook While the strong pace of world economic growth is assumed to continue in the remainder of 2007 and 2008, there remain a number of risk factors that could signifi cantly affect world economic prospects. On the downside, risks related to the US housing sector, supply bottlenecks and infl ationary pressures appear to have receded in recent months, but they remain of concern. Similarly, there continues to be upside potential for world economic growth. Specifi cally, demand growth in emerging markets could be signifi cantly stronger than currently assumed. In addition, there remains a distinct possibility that growth in domestic consumption and investment could be higher than expected in Japan and western Europe.

270 australian commodities > vol. 14 no. 2 > june quarter 2007 economic overview downside risks from US housing market developments The housing market slowdown in the United States has led to a signiﬁ cant decline in residential investment. Over the past few months, there have been some tentative signs of improvement on the demand side, as sales of existing homes, mortgage applications and potential homebuyer intentions have improved. On the supply side, however, housing starts and permits are still relatively low, while inventories of unsold new homes remain high. Recently, there has been concern in ﬁ nancial markets about the subprime sector of the housing market — which key macroeconomic assumptions represents about 12 per cent of the total mortgage market — in the form of sharp increases in delinquency and World 2005 2006 2007 f 2008 f default rates. Although delinquencies in prime mortgages Economic growth OECD % 2.6 2.9 2.3 2.5 remain well contained, there is concern that problems in United States % 3.5 3.3 2.1 2.7 the subprime mortgage market could start to affect the Japan % 1.9 2.2 2.2 2.0 housing market and hence the economy as a whole. Western Europe % 1.6 2.6 2.3 2.3 – Germany % 0.9 2.7 2.0 2.0 Such a development, if it were to happen, could lead to a – France % 1.4 2.0 2.0 2.2 deeper and more prolonged economic slowdown in the – United Kingdom % 1.8 2.7 2.8 2.6 United States, with potential spillovers to other countries. – Italy % 0.1 1.9 1.8 1.5 Korea, Rep. of % 4.0 5.0 4.4 4.6 New Zealand % 2.2 1.5 2.3 2.6 upside potential from emerging markets Developing countries % 6.9 7.2 6.7 6.4 Over the past few years, economic forecasts have – Non-OECD Asia % 8.1 8.4 7.9 7.7 consistently underpredicted demand growth in emerging South East Asia a % 5.3 5.7 5.3 5.4 markets, as the economies of China and India have China b % 10.2 10.7 10.3 9.7 Chinese Taipei % 4.0 4.1 4.3 4.6 continued to outperform expectations. Consequently, India % 9.0 9.2 8.0 7.8 there remains a distinct possibility that demand growth – Latin America % 4.2 5.5 4.9 4.2 in emerging markets could prove to be more resilient Russian Federation % 6.4 6.7 6.4 5.7 Ukraine % 6.0 6.0 5.8 5.5 than currently expected. In particular, there is consider- Eastern Europe % 5.3 6.0 5.5 5.3 able uncertainty over whether demand growth in China World c % 4.9 5.4 4.5 4.5 will slow as a result of measures introduced in 2006 and Industrial production early 2007 aimed at moderating economic activity. Simi- OECD % 2.4 3.1 2.6 2.7 Inflation larly, demand growth in India could strengthen despite United States % 3.4 3.2 2.1 2.3 recent tightening of monetary policy. Interest rates Many other emerging markets are commodity US prime rate d % 6.2 8.0 8.3 8.3 exporters. There would seem to be some upward risks to US exchange rates e their economic performance in light of recent increases Yen/US$ 110 116 120 120 of many mineral prices on world markets. Nevertheless, Euro/US$ 0.80 0.80 0.75 0.77 the upside risks appear to be contained at this stage, 2004 2005 2006 2007 Australia -05 -06 -07 s -08 f as world mineral prices have reached high levels by Economic growth % 2.7 2.9 2.5 3.75 historical standards and further upside movements seem Inflation % 2.4 3.2 2.8 2.5 limited. As a result, further stimulus to these economies Interest rates g % 8.9 9.1 9.8 9.9 from higher export prices appears unlikely. Australian exchange rates US$/A$ 0.75 0.75 0.78 0.80 Yen/A$ 83 87 94 96 economic prospects in major world economies TWI for A$ h 63 63 65 66 a Indonesia, Malaysia, the Philippines, Singapore and Thailand. b Excludes Hong Kong. c Weighted using 2006 purchasing-power-parity growth slowing in the United States (PPP) valuation of country GDPs by the IMF. d Commercial bank prime Following relatively strong performance in 2006, lending rates in the United States. e Average of daily rates. g Prime lending rates to large businesses. h Base: May 1970 = 100. s ABARE economic growth in the United States slowed markedly in estimate. f ABARE assumptions. the March quarter 2007. Real gross domestic product is Sources: ABARE; ABS; IMF; OECD; RBA. australian commodities > vol. 14 no. 2 > june quarter 2007 271 economic overview

estimated to have increased by an annualised rate of 0.6 per cent in the quarter, compared with an annual growth rate of 3.3 per cent in 2006. The major contributors to economic growth in the March quarter were higher personal consumption spending, investment on equipment and software, exports and federal government expenditures. The effects were partially offset by a decline in private inventory investment and higher imports. Partial indicators released recently suggest that economic activity is continuing to grow, albeit at a relatively weak pace. For example, industrial production increased year on year by 1.7 per cent in the March quarter 2007, compared with growth of 3.5 per cent in the December quarter 2006. The unemployment rate was at 4.5 per cent in April 2007, compared with 4.7 per cent in the same month a year earlier. A major issue in the US economic outlook is whether infl ationary pressures will increase signifi cantly, leading to further tightening of monetary policy. The headline consumer price index recorded an annual increase of 2.6 per cent in April 2007. Producer prices rose year on year by 3.2 per cent in the same month. Excluding food and energy, core infl ation remained relatively low at an annualised rate of 2.3 per cent in April 2007. Since mid-2004, monetary policy in the United States has been tightened in order to avoid a signifi cant increase in infl ationary pressures. The federal funds rate was at 5.25 per cent in early June 2007, compared with a low of 1.0 per cent in mid-2004. While many commentators expect there will be no further rate rises in the short term, there remains a possibility that infl ationary pressures could increase as a result of a decline of spare capacity in the economy and higher energy prices. A marked increase in infl ationary pressures would place signifi cant upward pressure on interest rates. In preparing this set of commodity forecasts, economic growth in the United States is assumed to be around 2.1 per cent in 2007, before increasing to 2.7 per cent in 2008. One important issue relating to the US economic easing is whether there would be signifi cant spillover effects to other world economies. The potential for such spillovers is underlined by the experience in 2000–01 when the collapse of the ‘hi-tech’ stock market bubble in the United States quickly spread across the globe as both stock market valu- ations and business investment declined sharply in the context of a broader reappraisal of economic prospects. Consequently, a key question for the current economic outlook is whether the global economy would be able to decouple from an economic easing in the United States. So far, the easing of US economic growth has had a limited impact beyond its immediate neighbours — Canada and Mexico. This development refl ects a number of factors. First, the economic easing in the United States has been mainly focused on the residential sector, which has not yet had a signifi cant impact on consumer demand for imports. Second, the US economic easing has so far been relatively mild and the probability for it developing into a full blown recession remains low at this stage. Third, the housing downturn has been US specifi c, with housing markets elsewhere in the world remaining buoyant. However, a further signifi cant easing of US economic growth will increase the risk of spreading weakness to private consumption and business investment in other world economies. In particular, there would be important risks of spillovers to emerging markets, especially China, India and countries in Latin America. Another concern relates to the possible interaction between lower US economic growth and exchange rates. For example, a further signifi cant decline in the value of the US dollar in association with weaker US economic growth could place considerable upward pressures on freely fl oating international currencies, including the Australian dollar, and downward pressure on export performance of these economies.

272 australian commodities > vol. 14 no. 2 > june quarter 2007 economic overview economic growth in China remains robust Economic growth in China strengthened in early 2007, despite attempts by China’s government to slow economic activity to a more sustainable pace. Gross domestic product — the broadest measure of economic activity — grew by around 5.03 trillion yuan (about US$653 billion) in the March quarter 2007 (a year on year rise of 11 per cent). The rapid economic growth in that quarter was driven mainly by increased investment, consumption and net exports. The secondary sector, including manufacturing, mining and construction, grew at a year on year rate of 13 per cent in the quarter. This compares with year on year growth of 4.4 per cent for the primary sector and 10 per cent for the tertiary sector (including transport, post and telecommunications, catering, tourism, banking and insurance). In response to the signifi cant pace of economic growth, the consumer price index in China rose year on year by 2.7 per cent in the March quarter, 1.5 percentage points higher than for the same quarter a year earlier. Fixed assets investment rose year on year by 24 per cent to 1.75 trillion yuan (US$228 billion) in the March quarter. In the fi rst quarter of 2007, per person disposable income of urban residents in China rose by almost 17 per cent year on year in real terms, while average cash incomes of rural dwellers increased by more than 12 per cent in real terms. In an attempt to prevent an overheating of the economy, the People’s Bank of China raised its base lending rate by 0.27 percentage points twice in the fi rst half of 2007 to its current 6.57 per cent. Further tightening of monetary policy is expected in the remainder of 2007. The impressive growth of China’s economy in recent years has been in large part driven by capital accumulation (and exports). The ratio of investment to gross domestic product has been high and rising, to in excess of 40 per cent in recent years. One concern is that some of the investment, especially that by state owned enterprises, may be less productive than that occurring in the private sector. An increase in investment effi ciency would result in higher profi tability for the corporate sector and safeguard the balance sheet of the banking sector. In preparing this set of commodity forecasts, economic growth in China is assumed to be 10.3 per cent in 2007, before easing to 9.7 per cent in 2008. This compares with growth of 10.7 per cent in 2006. Considerable uncertainty remains in the economic outlook for China. On the downside, there remains a distinct possibility that the adverse effect of weaker US economic growth on China’s exports could be more signifi cant than currently expected. On the upside, there is also a possibility that the assumed gradual easing of economic growth in China may not materialise, especially if the effect of monetary tightening on private consumption and investment prove to be temporary. China’s strong trade and economic performance has resulted in signifi cant international pressure for a substantial revaluation of China’s currency. In July 2005, China changed its foreign exchange regime to a so-called ‘managed’ fl oat from being ‘pegged’ to the US dollar. Despite this change in the foreign exchange regime, international pressure for China to further revalue its currency has intensifi ed. China’s currency was trading around 7.65 yuan against the US dollar in late May 2007. This compares with 8.11 yuan against the dollar in July 2005. A move by China toward greater exchange rate fl exibility would have to be supported by a continuation of complementary fi nancial sector reform, which would strengthen the economy’s capacity to cope with greater interest rate and exchange rate movements. A australian commodities > vol. 14 no. 2 > june quarter 2007 273 economic overview

signifi cant appreciation in China’s currency would also increase households’ purchasing power. In the case of China, higher domestic consumption will also be an effective means of reducing its increasing trade surplus, especially with the United States. economic activity in Japan and the Republic of Korea Japan’s economic expansion weakened in mid-2006, mainly refl ecting an unexpected decline in private consumption spending, but economic growth rebounded strongly in late 2006. The economy’s underlying momentum remains favourable, with higher growth in private investment — supported by strong profi ts, improved corporate balance sheets and the resumption of bank lending — and rising export growth. Japan’s economy, measured by gross domestic product in real terms, expanded year on year by 2.4 per cent in the March quarter 2007, compared with growth of 5.0 per cent in the December quarter 2006. Partial indicators released recently suggest that economic recovery is continuing. Industrial production, for example, rose year on year by 1.6 per cent in March 2007 and the unemployment rate was 4.0 per cent also in March. The short term outlook for Japan depends crucially on whether growth in consumer spending is sustained. In this context, underlying fundamentals appear to be favourable. While wage growth has been modest, the unemployment rate has been declining. As fi rms continue to expand capacity and add workers, the tightening of the labour market is likely to be increasingly refl ected in rising real wages, providing support for consumer spending. In preparing the current set of commodity forecasts, economic growth in Japan is assumed to be around 2.2 per cent in 2007 and 2.0 per cent in 2008. A strengthening in private consumption is expected to largely offset an assumed easing of export growth in response to the assumed moderation in global economic growth. Risks to Japan’s economic outlook appear broadly balanced in the short term. On the upside, the strength of the business sector could translate into stronger than anticipated investment and employment growth. On the downside, the underlying strength of consumer spending remains uncertain, and a sharper than expected economic easing in the United States could markedly weaken Japan’s export performance, adversely affecting general economic activity. The movement of interest rates in Japan is closely tied to the economic outlook. With infl ation falling to negative in the year ended March 2007, the Bank of Japan has taken a cautious approach to raising interest rates, with its OECD economic growth benchmark interest rate now standing at around 0.5 per cent. United States Going forward, while interest rates will eventually Japan be raised to more neutral levels, monetary stimulus is 3 western Europe expected to be removed only at a gradual pace and on the basis of maintaining the continuing strength of current economic expansion. 2 outlook for western Europe Activity in western Europe gathered momentum in 1 2006, with economic growth in the euro area reaching 2.6 per cent, the highest since 2000. Germany was the principal locomotive, fuelled by robust export % growth and strong investment. Growth in France 2005 2006 2007 and Italy strengthened, with a pickup in employment

274 australian commodities > vol. 14 no. 2 > june quarter 2007 economic overview growth. The expansion also gained pace in the United Kingdom, driven by an accelera- tion of domestic demand, while investment and export performance remained solid. Looking forward, partial indicators released recently suggest that economic growth continues. Retail trade, in volume terms, grew year on year by 2.6 per cent in March 2007 and industrial production rose year on year by 3.7 per cent in the same month. There has been a signifi cant improvement in labour market performance across the region. For the euro area as a whole, the unemployment rate fell from around 10 per cent a few years ago to 7.2 per cent in March 2007, the lowest in fi fteen years. Improved labour market performance is expected to provide support for consumer demand. For western Europe as a whole, economic growth is assumed to be around 2.3 per cent in both 2007 and 2008. Given the recent upturn in economic performance, there has been growing interest in the extent to which the present expansion may refl ect improving economic fundamentals verses a cyclical upswing. Taking a longer term perspective, western Europe’s growth in per person income has fallen steadily behind that of the United States since 1995, with only a few smaller countries doing better. This difference in income growth mainly refl ects weaker performance in labour productivity in western Europe. Although unemployment rates have been progressively lowered in western Europe, the gap with the United States remains substantial. A major factor behind Europe’s lacklustre productivity performance relates to the slower takeup of new technologies, particularly advances in information and communica- tions technology (ICT). Western Europe generally has smaller ICT producing sectors, has invested less in ICT equipment, and experienced relatively lower total factor productivity growth in the services sector, including retail, wholesale and fi nance. These underline the importance of product and labour market reforms aimed at reducing barriers to competition and innovation, and encouraging greater spending on research and development. While some progress has been made in these areas, it will be important for the region to accelerate reforms and strengthen fi nancial integration. economic growth in east and south east Asia Supported by export demand from the United States, Japan and China, economic activity in non-OECD Asia has been strong. The resilience of export performance, particularly in the electronics sector, economic growth in Asia has supported overall economic activity in the newly industrialised economies, including the Republic of Korea and Chinese Taipei. 2006 Performance among south east Asian countries has 8 2007 varied. The pace of economic activity in Malaysia 2008 and Thailand has picked up. In Indonesia, domestic 6 demand has begun to strengthen in response to interest rate cuts. In the Philippines, typhoon related damage to agriculture led to temporarily weaker 4 growth in late 2006, but the economy’s underlying momentum remains strong. 2 For non-OECD Asia as a whole, economic growth is assumed to average around 7.9 per cent in 2007, % before easing to 7.7 per cent in 2008, compared E>FI>KA >I>VPF> FKD>MLOB EFK> LOB> EFKBPB with growth of 8.4 per cent in 2006. KALKBPF> EFIFMMFKBP BMLC >FMBF

australian commodities > vol. 14 no. 2 > june quarter 2007 275 economic overview

In Thailand, economic activity remains relatively robust, with industrial production rising year on year by 4.0 per cent in March 2007. The consumer price index rose year on year by 1.8 per cent in April 2007, compared with an average of 6.0 per cent in 2006. Economic growth in Thailand is assumed to be 4.0 per cent in 2007 and 4.5 per cent in 2008, compared with 4.6 per cent in 2006. In Indonesia, inﬂ ation has declined from an average rate of 15.4 per cent in 2006 to a year on year rate of 6.3 per cent in April 2007. In response, Indonesia’s central bank lowered its benchmark interest rate by 0.25 percentage points to 8.75 per cent in mid-May. Interest rates have fallen by 4 percentage points since their peak in early 2006. Economic growth in Indonesia is assumed to be 6.0 per cent in both 2007 and 2008, compared with 5.5 per cent in 2006. For south east Asia as a whole, economic growth is assumed to be 5.3 per cent in both 2007 and 5.4 per cent in 2008, compared with growth of 5.7 per cent in 2006.

economic prospects in Australia Economic performance in Australia strengthened in early 2007. Real gross domestic product, seasonally adjusted, rose by 1.6 per cent in the March quarter 2007, following a rise of 1.1 per cent in the December quarter 2006. The unemployment rate was at 4.2 per cent in May 2007, the lowest in thirty-three years. Australia’s current account performance improved marginally in early 2007, with a seasonally adjusted defi cit of $15.4 billion in the March quarter 2007, compared with $15.5 billion in the December quarter 2006. The trade account recorded a seasonally adjusted defi cit of around $3.3 billion in the March quarter 2007, compared with a defi cit of $3.7 billion in the December quarter. Refl ecting strong world demand for mineral resources, the Australian economy is expected to continue to benefi t from higher commodity export earnings. In addition, housing activity and growth in consumer spending are expected to strengthen gradually. Under the assumption of a return to average seasonal conditions, the rural sector is forecast to partially recover from the drought in 2007-08. However, the actual timing and distribution of rainfall will have an important impact on the prospects for rural production and exports. Furthermore, the current low water storage levels in many parts of the country will make it diffi cult for some rural industries to fully Australian economic indicators recover from drought. For example, there is a risk that irrigation farmers in the Murray Darling Basin economic will have little or no water allocations in 2007-08. growth For 2007-08, the volume of farm production is 8 inflation forecast to increase by around 13 per cent, after rate declining by around 21 per cent in 2006-07. While 6 prime the volume of crop production is forecast to rise by lending 36 per cent in 2007-08, livestock production is rate forecast to decline by 5 per cent in the year. The 4 small decline in livestock production mainly refl ects herd rebuilding after drought and a forecast decline 2 in milk production based on an expected lower availability of water for irrigated pasture. It is esti- % mated that the recovery in farm production will add 2005 2006 2007 around 0.5 percentage points to economic growth -06 -07 -08 in Australia.

276 australian commodities > vol. 14 no. 2 > june quarter 2007 economic overview

For 2007-08 as a whole, economic growth in Australia is assumed to be 3.75 per cent. This compares with an estimated growth rate of 2.5 per cent in 2006-07. infl ation Australia’s consumer price index rose year on year by 2.4 per cent in the March quarter 2007, compared with an increase of 3.3 per cent in the December quarter 2006. The most signifi cant price rises in the March quarter were for pharmaceuticals (a year on year rise of 13 per cent), house purchase (1.0 per cent), secondary education fees (7.1 per cent) and rents (1.4 per cent). The most signifi cant offsetting factors were price decreases for fruit (a year on year decline of 34 per cent), with banana prices returning to the pre-cyclone Larry levels of the March quarter 2006, furniture (3.3 per cent), overseas holiday travel and accommoda- tion (2.2 per cent) and audio, visual and computing equipment (2.4 per cent). Other price indexes released recently indicate that infl ationary pressures remain modest. For example, the producer price index for fi nal commodities rose year on year by 2.8 per cent in the March quarter 2007, compared with a rise of 3.5 per cent in the December quarter 2006. The domestic component of this price index increased year on year by 3.8 per cent, compared with a decline of 2.8 per cent in the import component. Australia’s infl ation rate is assumed to be 2.5 per cent in 2007-08, compared with an estimated 2.75 per cent in 2006-07. exchange rates For 2006-07 as a whole, the Australian dollar is estimated to have averaged around US78c and TWI 65, compared with US75c and TWI 63 in 2005-06. However, over the past few months, the Australian dollar has exhibited considerable volatility both against the US dollar and on a trade weighted basis. After remaining relatively stable against the US dollar in the fi rst few months of 2007, the Australian dollar appreciated markedly against the US dollar between early March and early June. The value of the Australian dollar increased from US77c and TWI 64 in early March to US84c and TWI 67 in early June. One factor that has contributed to the recent US–Australian exchange rate appreciation in the Australian dollar is the weakness in the US dollar against other international currencies. Against the euro, for example, the US dollar was trading around 74 euro cents in late May, 0.8 compared with 76 euro cents in early March. In response to weaker US economic growth, there has 0.7 been growing speculation in fi nancial markets about a possible easing of US monetary policy, which has 0.6 placed considerable downward pressure on the value of the US dollar. In addition to changing perceptions of US interest 0.5 rate movements, world commodity prices, especially for aluminium, nickel and base metals (copper, lead US$/A$ and zinc), have increased over the past few months. 1991 1995 1999 2003 2007 Higher commodity prices on world markets have -92 -96 -2000 -04 -08

australian commodities > vol. 14 no. 2 > june quarter 2007 277 economic overview

generated signifi cant support for the Australian dollar against international currencies, including the US dollar. In US dollar terms, prices of Australian commodities, in aggregate, are estimated to have increased by around 3.0 per cent between March and May 2007. Looking forward, US interest rates are assumed to remain relatively stable in the short term. Given this assumption, the downward pressure on the value of the US dollar is expected to gradually ease in the short term. Prime lending rates in the United States are assumed to average 8.3 per cent in both 2007 and 2008, compared with 8.0 per cent in 2006. Interest rate movements in Australia will also be important to movements in the Australian dollar over the year ahead. The main factor affecting Australian interest rates will be the outlook for economic growth and infl ation. Given strengthening economic growth and relatively modest infl ationary pressures in Australia, Australia’s prime lending rates are assumed not to increase signifi cantly in the short term. Australia’s prime lending rates are assumed to average 9.9 per cent in 2007-08, compared with an estimated 9.8 per cent in 2006-07. From an historical perspective, the value of the Australian dollar has been associated with changes in Australia’s terms of trade, and hence commodity price movements on world markets. Refl ecting the outlook for a gradual easing of world economic growth in the next few years, prices of some Australian commodities on world markets (in US dollar terms) are forecast to average lower, placing some downward pressure on the Australian dollar, especially in the latter half of 2007-08. Taking the above into account, the Australian dollar is assumed to average around US80c and TWI 66 in 2007-08. However, considerable uncertainty remains in the outlook for the Australian dollar. Movements in the Australian dollar can be signifi cantly infl uenced by changes in sentiment in fi nancial markets, leading to strong volatility in the Australian exchange rate. For example, over the past twelve months, the Australian dollar fl uctuated from a low of US73c and TWI 62 in late June 2006 to a high of US84c and TWI 68 in mid-April 2007.

278 australian commodities > vol. 14 no. 2 > june quarter 2007 economic overview outlook for Australia’s commodities sector commodity export prices to increase The index of unit export returns for Australian commodities, major Australian commodity exports in aggregate, is forecast to remain largely unchanged in 2007-08, following a rise of nearly 9 per cent in ¦ 2006-07. S>IRB S>IRB SLIRJB TLOIA For farm commodities, the index of unit export iron ore, MOF@B returns is forecast to rise by nearly 5 per cent in 2007- pellets metallurgical 08, after increasing by only 2 per cent in 2006-07. coal World indicator prices are forecast to average higher gold in 2007-08 for corn, soybeans, cotton, beef, wool and nickel dairy products. crude oil Unit export returns for Australian mineral and energy thermal coal commodities is forecast to ease by around 1 per cent copper in 2007-08, following a rise of over 10 per cent in alumina 2007-08 2006-07. lng While unit returns for energy exports are forecast 2006-07 aluminium to remain largely unchanged in 2007-08, unit export returns for metals and other minerals are forecast to fall zinc by around 2 per cent, compared with an increase of 26 beef, veal per cent in 2006-07. wheat wine higher earnings from commodity exports wool Earnings from Australia’s commodity exports are forecast dairy to be around $149.5 billion in 2007-08, compared with an estimated $139.7 billion in 2006-07, a rise of 7 per ? cent. The forecast increase in the value of commodity exports reﬂ ects higher earnings from both farm and mineral resource exports. For farm commodities, export earnings are forecast commodity exports to be around $28.1 billion in 2007-08, a rise of over Australia, in 2006-07 dollars 3 per cent from $27.2 billion in 2006-07. Agricultural commodities for which export earnings are forecast to farm 125 forestry and fishing increase in 2007-08 include most grains and oilseeds, minerals and energy wine, lamb and milk powders. For forest and ﬁ sheries 100 products, export earnings are forecast to be around $3.9 billion in 2007-08, a rise of 3 per cent from 2006-07. 75 The value of Australia’s minerals and energy exports is forecast to be around $117.5 billion in 2007-08, 50 compared with $108.7 billion in 2006-07. For energy commodities, export earnings are forecast to increase 25 from $40.0 billion in 2006-07 to $42.6 billion in 2007-08. For metals and other minerals, export earn- A$b ings are forecast to rise by 9 per cent to $74.9 billion in 1992 1995 1998 2001 2004 2007 2007-08. -93 -96 -99 -02 -05 -08

australian commodities > vol. 14 no. 2 > june quarter 2007 279 economic overview

major indicators of Australia’s commodity sector

Change from 2002 2003 2004 2005 2006 2007 previous year -03 -04 -05 -06 -07 s -08 f 2006-07 2007-08 %% Commodity exports Exchange rate US$/A$ 0.58 0.71 0.75 0.75 0.78 0.80 4.0 2.6 Unit returns a Farm index 100.0 92.0 91.5 91.5 93.4 97.7 2.1 4.6 Mineral resources index 100.0 94.5 120.1 158.2 174.5 173.0 10.3 – 0.9 – energy minerals index 100.0 88.9 122.9 166.5 153.0 153.4 – 8.1 0.3 – metals and other minerals index 100.0 99.0 118.0 151.9 191.1 188.1 25.8 – 1.6 Total commodities index 100.0 93.7 110.9 136.7 148.5 148.6 8.6 0.1 Value of exports Farm A$m 27 239 26 206 27 602 27 726 27 211 28 136 – 1.9 3.4 – crops A$m 13 241 13 354 13 542 14 052 13 117 13 901 – 6.7 6.0 – livestock A$m 13 998 12 852 14 060 13 674 14 094 14 235 3.1 1.0 Forest and fisheries products A$m 3 905 3 654 3 630 3 655 3 767 3 875 3.1 2.9 Mineral resources A$m 57 728 54 170 69 473 92 128 108 674 117 481 18.0 8.1 – energy minerals A$m 24 161 20 737 29 696 39 328 39 957 42 556 1.6 6.5 – metals and other minerals A$m 33 567 33 432 39 777 52 800 68 717 74 925 30.1 9.0 Total commodities A$m 88 872 84 030 100 706 123 509 139 653 149 492 13.1 7.0 Farm sector Gross value of farm prodn b A$m 31 645 35 896 35 180 38 470 32 786 38 005 – 14.8 15.9 – crops A$m 14 487 19 385 17 353 20 724 14 885 19 462 – 28.2 30.7 – livestock A$m 17 158 16 511 17 827 17 746 17 901 18 544 0.9 3.6 Farm costs A$m 27 766 29 367 29 968 30 658 30 324 31 531 – 1.1 4.0 Net cash income c A$m 9 844 11 168 10 529 11 617 6 389 10 520 – 45.0 64.6 Net value of farm prodn d A$m 3 879 6 529 5 212 7 812 2 462 6 475 – 68.5 163.0 Farmers’ terms of trade index 101.0 94.7 90.7 95.2 97.9 99.5 2.8 1.6 Volume of farm production index 93.6 111.9 110.7 107.7 85.2 96.5 – 20.9 13.3 – crops index 83.4 123.0 116.8 111.8 68.6 93.2 – 38.6 35.9 – livestock index 104.2 99.6 103.1 102.1 103.6 98.8 1.5 – 4.6 Crop area and livestock numbers Crop area (grains and oilseeds) ’000 ha 20 777 23 201 23 808 22 300 19 415 21 488 – 12.9 10.7 Sheep million 99.3 101.3 101.5 91.9 85.6 85.1 – 6.9 – 0.6 Cattle million 26.7 27.5 28.3 28.5 27.6 28.0 – 3.2 1.4 Minerals and energy sector Volume of mine production index 115.5 113.5 118.8 118.2 124.1 138.5 5.0 11.6 – energy index 115.0 111.0 113.4 111.5 120.7 127.4 8.3 5.6 – metals and other minerals index 115.8 115.9 124.0 124.7 128.0 147.8 2.6 15.5 Gross value of mine prodn A$m 55 419 52 003 66 694 88 443 104 327 112 782 18.0 8.1 New capital expenditure e A$m 8 766 9 282 10 253 18 608 17 898 na – 3.8 na Exploration expenditure A$m 1 728 1 731 2 073 2 503 na na na na – energy A$m 1 080 1 036 1 192 1 484 na na na na – metals and other minerals A$m 648 695 881 1 018 na na na na Employment Agriculture, forestry and fishing ’000 377 374 363 355 na na na na Mining ’000 86 92 93 115 na na na na Australia ’000 9 323 9 431 9 536 9 858 na na na 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.

280 australian commodities > vol. 14 no. 2 > june quarter 2007 contentscrops

> johncontact hogan > +61 > +61 2 6272 2 6272 ???? 2056 > [email protected] > [email protected] crops world grain prices to remain strong in 2007-08 amelia brown, natalie currey, leanne lawrance, frank drum and anton wood wheat leanne lawrance and natalie currey » [email protected]

Despite recent price volatility associated with uncertainties about crops in some key producing countries, the world wheat indicator price (US hard red winter, fob Gulf ports) is forecast to average around US$210 a tonne in 2007-08, the same as for the year just ending. With world consumption forecast to rise at about the same rate as production, world stocks are expected to remain relatively low. Reﬂ ecting the effects of an assumed stronger Australian dollar, the pool return for Australian premium white wheat (APW 10) in 2007-08 is forecast to decrease marginally to A$232 a tonne. Final pool outcomes will be affected by timing of sales, and the amount and timing of AWB hedging activity in grains and currency markets. world production to increase in 2007-08 World wheat production is forecast to increase by 32 million tonnes to 623 million tonnes in 2007-08, the second largest crop on record. The increased production will result from increased plantings and improved yields following poor seasonal conditions in some countries last year. world wheat indicator price Signiﬁ cantly improved crops are forecast for the major quarterly, ended June 2008 producing and exporting countries, including the Euro- pean Union, the United States, the Russian Federation, India and Australia. Higher wheat prices in 2006-07 220 have encouraged increased wheat plantings in many northern hemisphere countries in 2007. 200 Despite less than ideal seasonal conditions at the time of planting and the wet weather at the beginning of 180 June, which delayed the start of harvest and increased the risk of crop damage, wheat farmers in the United States are expected to harvest 23 per cent more winter 160 wheat in 2007-08 than they did in 2006-07. For 2007- 2006-07 08, winter wheat plantings in the United States have US$/t increased by 10 per cent to almost 18 million hectares. DecJune DecJune Dec June On this basis, US winter wheat production is forecast 2006 2007 2008 australian commodities > vol. 14 no. 2 > june quarter 2007 281 wheat

major wheat producers to be 43.5 million tonnes in 2007-08, up from 2006- 07’s drought affected harvest of 35.4 million tonnes. In European contrast, the area sown to spring wheat is estimated to 120 Union 27 have declined as US growers switched some land to China other grains, especially corn, in response to expected 100 India relatively higher returns from that crop. However, as United States winter wheat accounts for approximately 70 per cent 80 Russian Federation of all wheat grown in the United States, total wheat 60 production is forecast to increase by 18 per cent to 58 million tonnes in 2007-08. 40 In the European Union, wheat production in 2007- 20 08 is forecast to increase by 5 per cent to 131 million tonnes, assisted by recent rainfall. However in some Mt countries, such as France, Germany and Italy, warm 20052006 2007 and dry seasonal conditions mean that yields are likely to be below average. Production in the Russian Federation and India is also expected to rise in 2007-08, both by around 7 per cent, to 48 million tonnes and 74 million tonnes respectively. Good soil moisture and favourable seasonal conditions are expected to result in yields being closer to long term averages in those two countries. In contrast to other major producers, wheat production in China (the world’s largest producer) is forecast to fall by around 4 per cent to 101 million tonnes in 2007-08, as a result of poor seasonal conditions and reduced area planted. consumption increasing in 2007-08 World wheat consumption is forecast to rise by 13 million tonnes to 622 million tonnes in 2007-08, driven largely by higher animal feed use. Wheat used for human consumption is forecast to rise slightly to 444 million tonnes. Wheat for human consumption accounts for over 70 per cent of total wheat use and has increased on average by 1 per cent a year over the past ten years. Wheat used for livestock feed is forecast to rise to 105 million tonnes in 2007-08, an increase of 7 per cent over the previous year. The European Union consumes over half of the world’s feed wheat and is forecast to increase consumption by a further 3 per cent in 2007-08. In the United States, higher corn prices are leading to increased use of wheat in livestock feeds and, in 2007-08, this is forecast to amount to 6.3 million tonnes. Despite being relatively small, the fastest growing sector of world wheat demand in 2007-08 is for industrial use. Industrial use is forecast to increase by 11 per cent to 18 million tonnes, with new wheat based ethanol plants having opened in the European Union and Canada in 2006-07. trade to remain stable World wheat trade is forecast to remain around 107 million tonnes in 2007-08. Declines in shipments from most of the major exporters are expected to be offset by higher exports from the United States. India will remain a net importer of milling wheat in 2007-08 as the government continues to boost stocks through the procurement system. The aim of the stock building program is to ensure that adequate food grains are available for their ‘public distribution system’. India is forecast to import around 5 million tonnes of wheat in 2007-08, 1.5 million tonnes less than in 2006-07.

282 australian commodities > vol. 14 no. 2 > june quarter 2007 wheat

In Canada, reduced production and lower stocks wheat production in Australia are forecast to lead to a 3 million tonne fall in exports South Australia Queensland to 17 million in 2007-08. In the European Union, Western Australia Victoria despite a rise in production and lower internal prices, 25 New South Wales exports in 2007-08 are expected to remain relatively unchanged at around 13 million tonnes. Increased 20 production in the United States and limited export availability in other countries are likely to contribute 15 to higher US wheat exports in 2007-08. US exports are forecast to increase by 1 million tonnes, to 26.5 10 million tonnes. 5 world stocks remain low In 2007-08, global wheat stocks are forecast to remain Mt historically low at around 117 million tonnes, with produc- 1999 2001 2003 2005 2007 tion and consumption being roughly in balance. -2000 -02 -04 -06 -08 Stocks in the major exporting countries are expected to remain relatively stable in 2007-08, with US and EU stocks likely to change little from 2006-07. Stocks were drawn down signifi cantly in 2006-07 as demand remained strong and poor seasonal conditions reduced production. Total stocks in the fi ve major exporting countries (Australia, Argentina, the United States, the European Union and Canada) are forecast to be 33.5 million tonnes in 2007-08, 6 million tonnes below their fi ve year average. wheat outlook Australian production to increase 2005 2006 2007 % -06 -07 s -08 f change Livestock producers who reduced animal numbers in 2006- World 07 in response to drought will be turning to more cropping, Production Mt 620 591 623 5.4 where feasible, to improve short term cash fl ows. As a result – China Mt 98 105 101 – 3.8 – EU27 Mt 134 125 131 4.8 the area sown to winter grain crops in 2007-08 is forecast to – India Mt 69 69 74 7.2 increase by around 10 per cent from last season to just over – Russian Fed. Mt 48 45 48 6.7 20 million hectares. – United States Mt 57 49 58 18.4 As a result of the early break to the season, the area sown Consumption Mt 623 609 622 2.1 to wheat is forecast to be 11 per cent higher in 2007-08 at – human Mt 440 440 444 0.9 – feed Mt 108 98 105 7.1 around 12.4 million hectares. Australian wheat yields are Closing stocks Mt 133 116 117 0.9 also expected to recover in 2007-08 and are forecast to Trade Mt 109 107 107 0.0 be around historical averages. As a result, Australian wheat Exports production is forecast to more than double, to 22.5 million – Argentina Mt 8 10 8 – 20.0 tonnes, which in turn is expected to lead to a recovery in – Australia Mt 15 12 15 25.0 – Canada Mt 16 20 17 – 15.0 domestic wheat stocks. – EU27 Mt 15 13 13 0.0 Average to above average rainfall across most of the – United States Mt 27 25 26 4.0 grains belt during April and May 2007, with the exception Price US$/t 176 210 210 0.0 of Queensland and Western Australia, provided growers Australia with a good autumn break to begin sowing winter crops. Area ’000 ha 12 543 11 138 12 409 11.4 Areas sown to wheat in New South Wales, Victoria and Production kt 25 367 9 819 22 489 129.0 South Australia are forecast to increase by 27 per cent, 14 Exports kt 15 168 11 880 15 214 28.1 – value A$m 3 296 2 926 3 695 26.3 per cent and 4 per cent respectively. Rainfall in early June APW 10 net in central Queensland and southern Western Australia has pool return A$/t 192 235 232 – 1.3 encouraged late plantings in these regions. See back tables for details. s ABARE estimate. f ABARE forecast.

australian commodities > vol. 14 no. 2 > june quarter 2007 283 coarse grains

Australian wheat exports to increase With an increase in production, Australian wheat exports are forecast to increase by 3.3 million tonnes to 15.2 million tonnes in 2007-08. The value of these exports is forecast to increase by 26 per cent to around $3.7 million. Changes to the operation of single desk wheat marketing arrangements are unlikely to have an effect on domestic production and wheat exports in 2007-08.

coarse grains

amelia brown » [email protected]

Although world production of coarse grains in 2007-08 is forecast to increase to a record 1.05 billion tonnes, continued strong growth in demand, particularly for corn for ethanol production, is forecast to result in a further decline in already low world stocks, placing 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$169 a tonne, a 5 per cent increase from 2006-07. World barley prices are forecast to remain strong in 2007-08, refl ecting increased world demand, particularly for feed use by livestock industries as prices for wheat and corn have also been higher, combined with low world stocks relative to consumption. Despite forecast higher world prices, Australian feed and malting barley prices are forecast to ease but to remain historically high in 2007-08. This price fall is mainly a refl ection of a forecast rebound in domestic production following the 2006-07 drought and consequent greater availability of barley in the local market. record world production forecast World coarse grains production is forecast to rise by 8 per cent to 1.05 billion tonnes in 2007-08, with a signifi cant increase in production forecast in the United States and Canada. Production in the European Union and Australia is also expected to increase from their drought affected 2006-07 crops. Production is expected to continue to expand in China, south America and the Russian Federation. world feedgrain prices The area planted to corn in the United States is monthly, ended June 2007 forecast to rise by 15 per cent to around 36 million hectares, the largest area planted since 1944 and 200 around 4.9 million hectares more than in 2006. The increase in the area planted is being driven by the 175 increase in prices and potential returns from corn relative to soybeans and other crops, refl ecting 150 EU feed barley strong demand for corn for ethanol production. 125 Assuming average seasonal conditions in 2007- 08, US corn production is forecast to increase by 100 18 per cent to a record 317 million tonnes. US corn Canadian corn production is forecast to increase 75 Black sea feed barley by 24 per cent to around 11.5 million tonnes in US$/t 2007-08, refl ecting a signifi cant increase in the June June June June area sown as a result of higher prices. Canadian 2004 2005 2006 2007 barley production is also forecast to rebound from

284 australian commodities > vol. 14 no. 2 > june quarter 2007 coarse grains the of low last season, to around 12 million tonnes, refl ecting an increase in the area planted in response to more favourable returns. Corn production in China is forecast to increase to around 146 million tonnes in 2007- 08, from the record 143 million tonnes produced in 2006-07, as a result of higher corn prices and strong domestic demand. Corn production in Argentina in 2006-07 is estimated to have risen by around 42 per cent to 22.5 million tonnes. Production in 2007-08 is forecast to increase by a further 7 per cent to around 24 million tonnes. In Brazil, 2006-07 corn production is estimated to have increased by 20 per cent to 50 million tonnes. Production is forecast to remain at a similar level in 2007-08. EU corn production is forecast to increase marginally to around 56 million tonnes in 2007- 08. EU barley production is forecast to increase by 3 per cent in 2007- 08 to around 58 million tonnes. Although the area sown to barley increased, current dry conditions are forecast to adversely affect yields. In the Ukraine, barley production in 2007-08 is forecast to fall by 21 per cent to around 9 million tonnes, refl ecting a slight decline in the area sown, combined with dry seasonal conditions. Corn production in 2007-08 is forecast to increase by around 17 per cent to 7.5 million tonnes, mainly because of an increase in area sown. The uncertainty surrounding government restrictions on cereal exports has again become an issue, as dry conditions have prompted the Ukraine Government to reintroduce export quotas until 1 October 2007. … and record consumption World consumption of coarse grains is forecast to be a record 1.06 billion tonnes in 2007- 08, refl ecting increasing ethanol demand combined with continued growth in global feed demand. A large part of the forecast 50 million tonne increase in consumption from last year will occur in the United States, where there is expected to be a signifi cant increase in the consumption of coarse grains in the production of ethanol. Feed coarse grains outlook use by livestock industries in developing Asian and Latin 2005 2006 2007 % American countries is also expanding and is forecast to -06 -07 s -08 f change grow in line with population and income growth. World Production Mt 974 975 1 051 7.8 Increasing ethanol production is the major driver of – barley Mt 138 138 142 2.9 coarse grains demand, and is being boosted by govern- – corn Mt 696 699 768 9.9 ment mandates and subsidies and by high gasoline Consumption Mt 986 1 010 1 060 5.0 prices. The continued expansion of the world’s livestock Closing stocks Mt 167 124 120 – 3.2 herds and rising high protein intake in south east Asia will US corn price US$/t 106 161 169 5.0 (fob Gulf, Sept–Aug) place additional pressure on feedgrain markets. Australia Area ’000 ha 6 575 5 619 6 472 15.2 ethanol–livestock competition in the United States – barley ’000 ha 4 447 3 990 4 396 10.2 The ethanol industry is expanding rapidly in the United – sorghum ’000 ha 769 457 751 64.3 States and may overtake livestock as being the main Production kt 14 287 5 854 13 320 127.5 consumer of coarse grains. In January 2000 there were – barley kt 9 563 3 722 9 051 143.2 – sorghum kt 1 973 952 1 905 100.1 around 54 operational ethanol plants in 17 states in Exports kt 5 683 3 207 5 586 74.2 the United States, with production capacity of around – value A$m 1 193 854 1 399 63.8 6.6 billion litres a year. In May 2007 there were 119 Feed barley price A$/t 187 272 205 – 24.6 operational ethanol plants in 26 states, with production Malting barley price A$/t 202 316 225 – 28.8 capacity of 23 billion litres and another 86 plants under See back tables for details. s ABARE estimate. f ABARE forecast.

australian commodities > vol. 14 no. 2 > june quarter 2007 285 coarse grains

US corn use construction or expansion. When these latter facilities are complete, US capacity will be around 48 feed billion litres a year. 140 ethanol Livestock feeding is currently the largest use of 120 US corn, typically accounting for around 50–60 per cent of production. As the price of corn has 100 increased rapidly, feed use in the United States has 80 started to decline. Feed use of corn is expected to decline by around 3 per cent in 2007-08. The 60 availability of distillers’ grains (a coproduct of dry 40 mill ethanol production) is replacing a proportion of corn in feed rations. However, the use of distillers’ 20 grains is still in the development stage and signifi - Mt cant research is being undertaken to determine its 1995 1998 2001 2004 2007 suitability for different animals. -96 -99 -02 -05 -08 Currently, ruminant animals, such as beef cattle and dairy cows, are the biggest users of distillers’ grains — which can comprise up to 40 per cent of the ration. Monogastric animals, such as pigs and poultry, are more limited in their ability to use distillers’ grains. Recommended maximum inclusion rates in animal feed rations are up to 20 per cent for pigs and 15 per cent for chickens. There have been problems with nutritional variability of distillers’ grains from different sources and from the same source at different times. The lack of consistency in nutrient content has made it diffi cult to determine the best inclusion rate and has made overall feed formulation more diffi cult. With feed demand expected to remain strong, there is an economic incentive for ethanol producers to pay attention to the nutritional value of distillers’ grains. Alterations to the ethanol production process are likely to improve the nutritional consistency. As the market develops, the livestock sector will also become more familiar with using distillers’ grains and should be able to better manage them in ration formulation. The emerging ethanol market is likely to reduce the US share of global corn trade. US corn exports usually make up 60–70 per cent of world coarse grain ending stock world corn trade. In 2007 it is estimated that the consumption of corn for ethanol production in the rest of world United States will increase by 55 per cent to total United States 125 million tonnes, thus leaving less grain for export. 200 China In addition, higher corn prices may result in reduced world import demand and increased production in 150 other countries in Latin America and Asia.

stocks to fall despite record production 100 Despite record production, world coarse grains stocks are forecast to decline by 3 per cent to 50 around 120 million tonnes in 2007-08. These will be the lowest season ending stocks since 1976- Mt 77. US corn stocks are expected to remain virtu- 1992 1995 1998 2001 2004 2007 ally unchanged, despite forecast record US corn -93 -96 -99 -02 -05 -08 production.

286 australian commodities > vol. 14 no. 2 > june quarter 2007 coarse grains

Corn stocks in China are expected to decline by around 16 per cent. This will be the eighth consecutive year in which China’s corn stocks have declined, refl ecting continued strong growth in feed demand combined with increased demand for corn for ethanol production. World barley stocks are also forecast to decline as demand for feed barley increases in response to relatively higher corn prices. international trade to remain strong World trade in coarse grains in 2007-08 is forecast to decline marginally from last year’s record, to around 107 million tonnes. US exports of corn are forecast to decrease by around 10 per cent in 2007-08 as increasing prices and competition from Argentina and Brazil curb demand for US corn in major importing countries. Corn exports from Argen- tina are estimated to have increased by 53 per cent in 2006-07. In 2007-08, Argenti- na’s corn exports are forecast to increase by a further 10 per cent to around 16 million tonnes, refl ecting increased production combined with continued strong world demand. The rise in corn prices is expected to increase coarse grain production demand for alternative feedgrains. In such a market Australia environment, feed barley demand is expected to remain strong in 2007-08. Increased wheat produc- 10 tion may also allow more wheat to be used in live- barley stock feed if the feed value and cost relativities with 8 other grains support that. Malting barley demand is expected to remain strong in 2007-08 as world 6 beer consumption continues to trend upwards. 4 Australia’s crop outlook improves With an early start to the 2007-08 winter crop- 2 sorghum ping season compared with previous years across a lot of the eastern and southern cropping belt of Mt Australia, optimism for a good crop year is running 1999 2001 2003 2005 2007 high. Total area sown to coarse grains is forecast -2000 -02 -04 -06 -08 to increase by around 15 per cent in 2007-08. Assuming average yields, production is forecast to more than double to around 13.3 million tonnes. Australian exports of coarse grains are forecast to increase by 74 per cent in 2007-08, as a result of the rebound in production. The area sown to barley is forecast to increase by around 10 per cent in 2007-08. Assuming a return to average yields, production is forecast to rise to exceed 9 million tonnes. Australian barley exports are forecast to reach around 5.3 million tonnes in 2007- 08, a 73 per cent increase, refl ecting the rebound in production. The value of barley exports is forecast to increase to around $1.3 billion in 2007-08, a 63 per cent increase from 2006-07. As was the case with the winter crops in 2006-07, last season’s summer crop was badly affected by drought. Dry conditions over the 2006-07 summer in southern Queensland and northern New South Wales resulted in depleted soil moisture profi les and water storages, limiting grain sorghum plantings. Total grain sorghum production is estimated to have fallen by 52 per cent to around 950 000 tonnes. Australian sorghum exports in 2006-07 are estimated to have declined by 54 per cent to around 45 000 tonnes.

australian commodities > vol. 14 no. 2 > june quarter 2007 287 oilseeds

oilseeds

leanne lawrance » [email protected]

Lower availability of oilseeds and rising global demand for oilseeds and oilseed products are expected to place upward pressure on prices of oilseeds in 2007-08. Reﬂ ecting these pressures, the world oilseeds indicator price (soybeans, cif Rotterdam) is forecast to increase by 5 per cent in 2007-08 to average US$329 a tonne. Assuming a recovery in Australian canola production in 2007-08, prices are forecast to fall as some of the drought related pressure on supplies eases. Australian canola prices are forecast to average around $430 a tonne in 2007-08, a decline of 20 per cent from the previous year. However, this forecast price is still relatively high when compared with prices in most years of this decade. world oilseeds production lower in 2007-08 oilseed prices World production of oilseeds is forecast to fall by around 9 million tonnes in 2007-08 as production in some of the major producing countries declines. canola While production is forecast to fall by 2 per cent, right axis 400 500 record opening season stocks of 71 million tonnes means that global supplies of oilseeds are forecast to decline by only 1 per cent in 2007-08. 300 400 Soybeans are the major oilseed produced around soybean the world, accounting for an average 57 per cent of left axis global oilseeds production. In 2007-08, soybean 200 300 production is forecast to fall as production in the three major producing countries — Argentina, Brazil and

2006-07 2006-07 the United States — declines. Balanced against the US$/t A$/t decline in soybean production is a forecast increase 1991 1995 1999 2003 2007 in production of canola/rapeseed (which on average -92 -96 -2000 -04 -08 accounts for 12 per cent of oilseeds production). Canola/rapeseed production is forecast to increase US soybeans in response principally to increased demand for canola/rapeseed oil from the biofuels industry. In its June oil crops outlook report, the US Depart- production ment of Agriculture indicated that growers in the United right axis 30 80 States have reduced the area planted to soybeans by 11 per cent in 2007-08. The reduced area reﬂ ects growers switching some land to the production of 20 60 corn. Strong demand for US corn based ethanol has resulted in high returns for corn relative to soybeans. Assuming average yields, soybean production in the 10 40 United States is forecast to fall by around 16 per cent in 2007-08. area left axis In Argentina and Brazil, soybean production is also million ha Mt forecast to fall in 2007-08, despite a likely increase 1991 1995 1999 2003 2007 in the area sown to soybeans. Soybean produc- -92 -96 -2000 -04 -08 tion in 2006-07 was the highest on record in both

288 australian commodities > vol. 14 no. 2 > june quarter 2007 oilseeds countries as yields rose above their longer term aver- EU biodiesel production capacity ages. In Argentina, yields were the highest on record at 2.88 tonnes per hectare, while in Brazil, yields increased to 2.80 tonnes per hectare compared with 6 United Kingdom the fi ve year average of 2.55 tonnes per hectare. As France Italy yields return closer to historical averages in 2007-08, 5 other production in both countries is forecast to decline. 4 Germany In 2007-08 canola/rapeseed production is forecast to increase in the major producing and exporting coun- 3 tries of Australia, China, Canada and the European Union. In the European Union, the area sown to canola 2 is forecast to be the highest on record. The record area 1 refl ects growers responding to the increased demand for canola oil from biodiesel producers, and associ- Mt ated higher prices. Assuming average yields, produc- 20032004 2005 2006 tion is forecast to increase by around 11 per cent in the European Union when compared with the previous season. oilseed demand continues to grow … Demand for oilseeds is expected to remain strong in 2007-08 as the derived demand from oilseed products increases. Global consumption of oilseeds is forecast to rise to 408 million tonnes in 2007-08, a 13 million tonne increase on the year before. Consumption of oilseed meal is forecast to rise by 4 per cent to 232 million tonnes as the demand for high protein livestock feed grows further. Vegetable oil consumption is forecast to rise by around 7 per cent to 130 million tonnes, largely refl ecting the increased use of vegetable oil for biodiesel. … with biodiesel driving vegetable oil consumption Total vegetable oil consumption has been rising steadily oilseeds outlook over the past fi ve years, with an average increase of 6 2005 2006 2007 % per cent a year. Total vegetable oil consumption is fore- -06 -07 s -08 f change cast to increase by 8 million tonnes to 130 million tonnes World in 2007-08. The major use of vegetable oil is for human Production Mt 390 404 395 – 2.2 consumption — averaging 85 per cent of total consump- Consumption Mt 382 395 408 3.3 – oilseed meal Mt 215 223 232 4.0 tion — and has increased by an average 4 per cent a year – vegetable oil Mt 115 122 130 6.6 over the past fi ve years. However, the fastest growing use Closing stocks Mt 64 71 61 – 14.1 of vegetable oil is for industrial purposes, increasing by an Soybeans indicator average 18 per cent a year over the past fi ve years. price US$/t 261 313 329 5.1 Growing demand for biodiesel — a product derived Australia from vegetable oil that can be used as a transport fuel Total production kt 2 517 1 026 1 803 75.7 — has resulted in increased consumption of vegetable oil. – winter kt 1 475 540 1 436 165.9 – summer kt 1 042 486 368 – 24.3 The largest producer of biodiesel is the European Union, Canola and over the past fi ve years, EU vegetable oil consump- Production kt 1 436 513 1 399 172.7 tion for industrial purposes has risen by an average 31 Exports (Nov–Oct) kt 831 256 909 255.1 – value $m 310 134 376 180.6 per cent a year. Biodiesel production capacity in Europe Price (Nov–Oct) A$/t 386 539 431 – 20.0 has increased dramatically from around 2 million tonnes in (delivered Melbourne) 2003 to around 6 million tonnes in 2006. See back tables for details. s ABARE estimate. f ABARE forecast.

australian commodities > vol. 14 no. 2 > june quarter 2007 289 oilseeds

Germany is the largest biodiesel producer in the European Union, accounting for around half of the European Union’s biodiesel production. In August 2006 the German Government announced a tax on biodiesel, at a rate of 10 euro cents a litre on biodiesel and 15 euro cents a litre on biodiesel used for blending. This has increased the cost of biodiesel relative to diesel and appears to have been a signiﬁ cant contributor to a fall in EU biodiesel sales in the December quarter 2006 relative to the same period in 2005. Despite the higher price of biodiesel in Germany, total demand for biodiesel in the European Union, and therefore vegetable oil (particularly canola/rapeseed), is expected to increase in 2007-08. oilseed meal demand continues to grow Oilseed meal, a coproduct of vegetable oil derived from the crushing of oilseeds, is used for livestock feeding. The largest consumers of oilseed meal are the European Union, China and the United States, which collectively account for an average 60 per cent of oilseed meal consumption each year. In 2007-08, oilseed meal consumption is forecast to rise by 9 million tonnes from the previous year. Growth in oilseed meal consumption has been greatest in China, where growth has averaged around 10 per cent a year over the past ten years, as demand for livestock and livestock products has continued to expand. In 2007-08, livestock sector output in China is forecast to continue to rise and hence the demand for oilseed meal can be expected to increase as well. timely rainfall boosts Australian canola plantings Timely rainfall in April 2007 provided growers across the grain belt of Australia with a much needed autumn break to the season. Good followup rainfall in mid to late May and early June across parts of New South Wales, Victoria and South Australia improved the outlook for canola and replenished soil moisture. With the more favourable start to the season and attractive prices in prospect, the area sown to canola is forecast to increase by 7 per cent to just over 1 million hectares in 2007- 08. An increased area sown to canola is forecast for all states, except Western Australia where rainfall has been patchy and late in some areas. The area sown to canola in Western Australia is forecast to remain unchanged from the 2006-07 season. The largest increase in area is in New South Wales, where canola plantings are forecast to rise by 18 per cent in 2007-08. In Victoria the area sown to canola is forecast to increase by 12 per cent in 2007-08, and in South Australia by 7 per cent. Total Australian canola production is forecast to be more than double the drought affected production of last year. Canola production is forecast to increase to 1.4 million tonnes in 2007-08, compared with 513 000 tonnes in 2006-07. At this early stage in the season, yields are assumed to be close to the historical averages of around 1.4 tonnes per hectare. These will need to be revised as the season progresses and the timing and extent of rainfall becomes known. Australian canola exports to increase Australian exports of canola are forecast to rise by 653 000 tonnes in 2007-08, as increased production adds to exportable supplies. The value of Australia’s canola exports is forecast to increase to around $376 million in 2007-08.

290 australian commodities > vol. 14 no. 2 > june quarter 2007 cotton cotton frank drum » [email protected] prices to increase in 2007-08 The world indicator price for cotton, the Cotlook ‘A’ China’s cotton imports index, declined by 6 per cent in the fi rst fi ve months of 2007 to average US56c/lb in May, underpinned 2005-06 by lower import demand from China and high cotton 2006-07 stocks in the United States. In China, new sliding scale 400 duties against imported cotton, in addition to record domestic cotton production in 2006-07, reduced 300 demand for imported cotton. Refl ecting this, China’s imports of cotton are estimated to have declined by 200 44 per cent, year on year, in the fi rst eleven months of 2006-07. In 2007-08, world cotton consumption is forecast 100 to exceed production, leading to another year of declining stocks. In addition, China’s net imports of kt raw cotton are forecast to increase by 40 per cent JJJAASOND FMM in 2007-08 to 3.5 million tonnes, with domestic consumption forecast to increase and domestic production to remain unchanged. As a result, the Cotlook ‘A’ index is forecast to increase by over 2 per cent in 2007-08 to average around US59c/lb. world production to remain unchanged in 2007-08 In 2007-08, world cotton production is forecast to remain relatively unchanged at 25.3 million tonnes, with forecast higher production in India and Pakistan expected to offset lower production in the United States.

India In India, the area planted to cotton in 2007-08 is forecast to rise slightly to 9.4 million hectares, following Indian cotton increased returns to farmers in recent seasons. Cotton yields in India are forecast to rise by 4 per cent in production 2007-08, refl ecting the increased adoption of geneti- area cally modifi ed cotton varieties and assuming average 4 8 seasonal conditions. In 2007-08, 50 per cent of the cotton area is expected to be planted to offi cially 3 6 approved GM varieties, up from 38 per cent in 2006-07. Refl ecting these factors, cotton production 2 4 in India is forecast to increase by 5 per cent in 2007- 08 to 4.9 million tonnes. 1 2 China million The area planted to cotton in China in 2007-08 is Mt ha forecast to rise by 3 per cent to 5.5 million hectares, 1991 1995 1999 2003 2007 underpinned by increasing returns to farmers and -92 -96 -2000 -04 -08 australian commodities > vol. 14 no. 2 > june quarter 2007 291 cotton

price indexes for US cotton and the development of a seed subsidy by the Chinese competing crops monthly, ended May 2007 Government. Under the program, US$65 million has been allocated to support the purchase of high 180 corn quality cotton planting seed and is expected to cover 40 per cent of the forecast planted area. Offsetting 160 this increase in area planted is a forecast 5 per cent decline in cotton yields, to a fi gure more consistent 140 with the average for the previous three seasons — following record yields in 2006-07. Refl ecting this, 120 cotton cotton production in China is forecast to remain unchanged in 2007-08, at 6.7 million tonnes. 100 soybean United States index January 2005=100 The area planted to cotton in the United States in June DecJune Dec 2007-08 is forecast to fall by 20 per cent to 4.9 2005 2006 2007 million hectares, the lowest area planted to this crop in the United States since 1989-90. Expected lower returns from cotton relative to alternative crops, such world polyester and cotton prices as corn and soybeans, have resulted in signifi cant monthly, ended May 2007 reductions in the area planted in many key producing 140 cotlook A index regions. According to the US Department of Agricul- ture’s prospective plantings survey, the area planted in 120 the Delta and South East regions (which represented 100 50 per cent of the total planted area in 2006-07) is forecast to fall by 31 per cent and 24 per cent respec- 80 tively. As a result, US cotton production is forecast to 60 polyester fall by 12 per cent in 2007-08 to 4.1 million tonnes.

40 Pakistan 20 Cotton production in Pakistan is forecast to rise by 2006-07 6 per cent in 2007-08 to 2.3 million tonnes, largely USc/lb through forecast increases in area planted and yields. 1994 1997 2000 2003 2006 Ideal seasonal conditions in the leadup to planting, increased fertiliser use and improved irrigation availability are forecast to underpin a 5 per cent increase cotton outlook in cotton yields. 2005 2006 2007 % -06 -07 s -08 f change cotton consumption continues to grow World Production Mt 24.9 25.4 25.3 – 0.4 In 2007-08, world consumption of cotton is forecast to Consumption Mt 25.3 26.6 27.1 1.9 increase by around 2 per cent to 27.1 million tonnes, Closing stocks Mt 11.7 10.5 8.7 – 17.1 underpinned by higher consumption in China, India Stocks to consumption ratio % 46.4 39.6 32.2 – 18.7 and Pakistan as textiles and clothing production in Cotlook ’A’ index USc/lb 56.0 57.8 59.2 2.4 those countries continues to increase. In addition, low Australia cotton prices relative to synthetics are expected to Area harvested ’000 ha 336 144 82 – 43.1 stimulate the use of cotton in mills. Lint production kt 597 274 164 – 40.1 Exports kt 650 473 238 – 49.7 Moderating the growth in cotton consumption will – value A$m 1 137 791 380 – 52.0 be an expected increase in clothing and textile prices in See back tables for details. s ABARE estimate. f ABARE forecast. the United States, the world’s largest importer of clothing

292 australian commodities > vol. 14 no. 2 > june quarter 2007 cotton and textiles, as an appreciation of a number of curren- price indexes for Australian cotton and cies against the US dollar restricts US demand for sorghum monthly, ended May 2007 clothing and textiles. For example, the Indian rupee rose by around 9 per cent against the US dollar in the sorghum fi rst fi ve months of 2007, but US imports of textiles and 200 clothing increased year on year by only 8 per cent in the fi rst three months of 2007. This compares with an 150 annual growth rate of 14 per cent in 2006. In addition, the Chinese Government continues to encourage 100 domestic textile and clothing producers to reorient their output toward high quality products, producing less cotton at higher values and thus reducing the potential risk 50 of exceeding safeguard limits applied by the United States and European Union. According to the US index May 2000=100 Department of Commerce, in the fi rst three months of 2000 2002 2004 2006 2007, US imports of textiles and clothing from China increased year on year by 25 per cent in volume terms and 46 per cent in value terms. Australian production to decline further Australian cotton production is estimated to have been 274 000 tonnes in 2006-07, 10 per cent above ABARE’s March forecast, but still 54 per cent below the 2005-06 crop. Despite low water availability in 2006-07 leading to the abandonment of some cotton crops, favourable weather conditions in the latter part of the growing season boosted yields in many areas. In 2007-08, the area planted to cotton is forecast to fall by 43 per cent to 82 000 hectares, the lowest area water storage and availability planted to cotton since 1980-81. Rela- tively poor price outcomes in 2006-07 capacity June 2003 June 2006 June 2007 and uncertainty over future allocations of GL % capacity % capacity % capacity irrigation water are expected to reduce southern Queensland Beardmore 82 71 45 4 the incentive for farmers to plant cotton. Fairbairn 1 301 27 19 19 With limited carryover water, signifi cant Glenlyon 254 11 28 13 water allocations to cotton producers are Leslie 106 7 15 8 unlikely, unless there are very substantial northern New South Wales fl ows into dam catchments in the next few Copeton 1 362 32 24 9 months. Refl ecting this, and with returns Keepit 426 16 17 4 from alternative crops remaining rela- Pindari 312 28 67 19 tively attractive, producers are expected southern New South Wales and Victoria to expand production of crops such as Blowering 1 631 4 43 15 Burrendong 1 188 11 28 4 sorghum, summer pulses, chick peas and Burrinjuck 1 026 6 33 24 winter cereals at the expense of cotton. Dartmouth 3 906 29 64 10 Therefore, Australian cotton production Hume 3 038 12 15 8 in 2007-08 is forecast to fall by 40 per Menidee Lakes 1 731 0 15 4 cent to around 164 000 tonnes (lint). Wyangala 1 220 9 23 4

australian commodities > vol. 14 no. 2 > june quarter 2007 293 sugar

sugar

anton wood » [email protected]

prices to fall in 2007-08 The world indicator price for sugar (New York no. 11, fob Caribbean) is forecast to fall by 20 per cent to average US9.0 cents a pound in 2007-08, reﬂ ecting an expected signiﬁ cant rise in stocks of sugar as production is forecast to grow faster than sugar consumption. Forecast lower prices in the year ahead represent a continuation of the declines evident since early 2006 as stocks have risen in the wake of expanded plantings and production in 2006-07. As newly planted cane achieves maturity, output of sugar can be expected to rise further in 2007-08. Export availability from Brazil, Australia, India and Thailand, some of the world’s major sugar exporting countries, is forecast to exceed global import demand in 2007-08. As a result, world stocks of sugar are forecast to rise by around 11 million tonnes over the course of the year. increase in export supply

Brazil Sugar production in Brazil is forecast to increase by 5–6 per cent In 2007-08 to nearly 35 million tonnes. Despite forecast lower sugar prices, the area planted to cane is forecast to continue to expand in most parts of Brazil in 2007- 08 as sugar cane is expected to remain profi table relative to other crops. However, sugar yields in 2007-08 are forecast to be lower than in 2006-07, when favourable weather during the harvest period contributed to yields that were 2 per cent above the ten year average. In Brazil, most sugar mills produce both sugar and ethanol, so millers have some fl exibility in switching outputs between sugar and ethanol, depending on relative prices. As a result, developments in the Brazilian ethanol market have an important infl uence on the amount of cane used for sugar production and, hence, on world prices. In 2007-08, demand for ethanol in Brazil is world indicator price for raw sugar expected to strengthen as the Brazilian Government weekly, ended 15 June 2007 is expected to raise the mandated blend of ethanol in petrol from 22 per cent to 25 per cent. In addition, with 17.5 sales of fl ex fuel vehicles that can run on any blend of petrol and ethanol currently making up more than 80 15.0 per cent of total new vehicle sales, there is potential for increased consumption of ethanol if price relativities 12.5 with petrol are favourable. However, even with nineteen new mills expected to 10.0 become operational in 2007-08, ethanol producers will be constrained in the amount of cane that they 7. 5 can use for ethanol production as they are already running at full capacity. With production of cane fore- USc/lb cast to increase by 6 per cent to 460 million tonnes in June DecJune Dec June Dec June 2007-08, Brazilian output of both sugar and ethanol 2004 2005 2006 2007 is forecast to rise.

294 australian commodities > vol. 14 no. 2 > june quarter 2007 sugar

Thailand raw sugar production Thai sugar production is forecast to rise by 1 per cent to 7 million tonnes in 2007-08 as favourable seasonal Brazil conditions are expected to lead to another record crop. 30 In 2007-08, the area planted to cane is expected to 25 increase slightly as the government supported cane India price is forecast to remain similar to the previous year’s 20 record of 800 baht (US$24) a tonne. Thailand, the second largest exporter of sugar after Brazil, is fore- 15 China cast to ship over 4 million tonnes of sugar in 2007-08, 10 similar to the amount exported in 2006-07. Most of Thailand Thailand’s sugar exports will be sent to Asian destina- 5 tions as Thai sugar is more competitive than Brazilian sugar in local markets because of lower freight costs. Mt Russia 2001 2003 2005 2007 India -02 -04 -06 -08 Sugar production in India is forecast to rise by 13 per cent in 2007-08 to a record 27 million tonnes as high cane prices are expected to lead to an increase in the area planted to cane. Given that high domestic transport costs make Indian sugar relatively less competitive on the world market, Indian exports are forecast to increase by only 150 000 tonnes to 1.5 million tonnes in 2007-08. import demand mixed In 2007-08, Russian import demand is expected to fall as a result of increases in areas planted to beet and a return to favourable seasonal conditions. In China, import demand is expected to rise only slightly in response to continued population growth and higher consumer spending, which are both forecast to lead to increased consumption.

Russian Federation Sugar production in the Russian Federation is forecast to rise by around 7 per cent in 2007- 08 to 3.8 million tonnes, mainly as a result of an increase in the area sown to beet. Although there is potential for Russian sugar production to rise, expansion of the industry is being constrained in many regions by a lack of capacity in the processing sector. Part of the processing capacity problem is that farmers are growing higher yielding imported beet sugar outlook varieties that cannot be stored for as long as the traditional 2005 2006 2007 % Russian varieties. -06 -07 s -08 f change Russian imports of sugar are forecast to fall by 300 000 World tonnes in 2007-08 to 2.9 million tonnes. Although sugar Production Mt 152.1 162.6 168.5 3.6 – Brazil Mt 30.4 32.9 34.7 5.5 beet producers and processors have been lobbying for Consumption Mt 149.3 153.5 157.5 2.6 higher seasonal import duties for sugar, with the aim of Closing stocks Mt 59.9 69.0 80.0 15.9 reducing imports in 2007-08, it appears that their requests Change in stocks Mt 2.7 9.1 11.0 will not be granted. Price USc/lb 15.8 11.3 9.0 – 20.4 Australia China Area ’000 ha 415 420 430 2.4 Production kt 5 108 4 650 5 100 9.7 Sugar production in China is forecast to increase by 3 per Exports kt 4 067 3 740 3 970 6.1 cent in 2007-08 to 12.3 million tonnes, as seasonal condi- – value A$m 1 597 1 350 1 005 – 25.6 tions have been favourable and the expansion in area under See back tables for details. s ABARE estimate. f ABARE forecast. australian commodities > vol. 14 no. 2 > june quarter 2007 295 sugar

cane and beet continues. The area planted to cane is expected to grow as returns from cane remain favourable compared with those from other crops. In addition, sugar cane yields are expected to increase as millers in many areas have been offering premiums for varieties with higher yields and sugar content. Sugar beet production is also expected to rise as processors have been paying higher prices for beet. Beet production has been lagging behind processing capacity in recent years. China’s strong economic growth and growing population are forecast to support an increase in sugar consumption of 7 per cent to over 13 million tonnes in 2007-08. Food and beverage manufacturers are expected to increase sugar consumption as higher corn prices will fl ow through to increased starch sugar prices, making such products relatively less attractive. As a result of expectations that consumption will exceed production, China’s imports of sugar are forecast to increase by about 350 000 tonnes in 2007-08 to 1.5 million tonnes. production in Australia recovering after cyclone damage in 2006 Sugar cane production in Australia is forecast to increase by 4 per cent in 2007-08 to around 37 million tonnes as the industry recovers from the tropical cyclones of 2006. Most of the increase in cane production is expected to be in the north, where rainfall has been ample in some areas and excessive elsewhere. Earlier concerns that heavy rainfall may have an adverse effect on a signifi cant proportion of the crop appear to be unfounded. Tropical cyclone Larry caused extensive damage to cane in the northern parts of Queensland, while cyclone Monica brought heavy rainfalls late in the growing season that impeded recovery and reduced the sugar content of the crop. Surveillance of sugar cane smut continues throughout Queensland and management plans are in place to control the spread of the disease. Although the disease is regarded as established and widespread, it is not expected to have a signifi cant effect on the 2007-08 crop as large areas remain untouched. As part of the management program, susceptible varieties are gradually being replaced with resistant ones. In contrast to the wetter areas, some parts of the Bundaberg–Isis region have been drought declared. In 2007-08, severely reduced water allocations are forecast to lead to less irrigation and a 650 000 tonne fall in that region’s cane production to around 2.8 million tonnes. With drought stressed cane being more susceptible to sugar cane smut (the disease thrives in hot dry conditions), infected cane is being found in areas that were smut free before January 2007. However, the affected areas only make up approximately 1 per cent of the cane expected to be harvested in this region in 2007-08. Commercial cane sugar values are expected to be about average (13–14 per cent) in 2007-08. Although the wet weather in north Queensland will have reduced the sugar content of some cane, this has been offset by the dry weather and resulting higher cane sugar values elsewhere. Australian sugar production is forecast to increase by 10 per cent to 5.1 million tonnes in 2007-08. Higher production and associated volumes shipped are expected to partly offset the effect on earnings of lower world prices and an assumed stronger Australian dollar. Overall, the value of Australian sugar exports is forecast to fall by 26 per cent to $1.0 billion in 2007-08.

296 australian commodities > vol. 14 no. 2 > june quarter 2007 livestockmeat

> john hogan > +61 2 6272 2056 > [email protected] livestock prices to rise in 2007-08 as seasonal conditions improve sally fl etcher, caroline gunning-trant, frank drum and peter berry sheep industry sally fl etcher » sfl [email protected]

The Australian weighted average saleyard price of lambs is forecast to rise by 16 per cent in 2007-08 to average 375 cents a kilogram. This is a result of forecast lower yardings and increased demand for restocking as producers begin rebuilding fl ocks following the drought. Continued strong demand in major export markets, such as the United States and Japan, is also expected to place some upward pressure on saleyard prices. Assuming average seasonal conditions in 2007-08, it is expected that producers will retain ewes for fl ock rebuilding. Refl ecting this, the weighted average saleyard price of sheep is forecast to increase by 48 per cent in 2007-08, to average 200 cents a kilogram. As a result of the higher slaughterings in 2006-07, the Australian sheep fl ock is estimated to fall by 7 per cent to 86 million by end June 2007. Flock numbers are forecast to fall slightly further by June 2008, as a result of a smaller breeding fl ock and continued high lamb slaughter rates. Australian lamb For wool, the eastern market indicator price is forecast to increase by over 2 per cent in 2007-08, following an increase of 21 per cent in 2006-07. saleyard price Higher wool prices are likely to cause producers 400 20 to place a greater emphasis on wool production as they rebuild their fl ocks. However, the current 300 15 reduced fl ock size resulting from the 2006-07 drought will delay any recovery in wool production 200 10 until the 2008-09 season. Reduced wool supplies in 2007-08, combined with steady demand, will keep slaughterings upward pressure on prices. 100 5

2006-07 sheep meat production to fall in 2007-08 Ac/kg million As a result of below average seasonal conditions 1995 1999 2003 2007 throughout 2006-07, adult sheep slaughter is esti- -96 -2000 -04 -08

australian commodities > vol. 14 no. 2 > june quarter 2007 297 sheep industry

mated to have increased by 12 per cent to 13.2 million. However, higher returns for wool and prime lambs in 2006-07, combined with improved seasonal conditions in recent months, will provide an incentive for producers to begin rebuilding fl ocks in 2007-08. Refl ecting this, slaughterings of adult sheep are forecast to fall by 30 per cent in 2007-08 to 9.3 million, with mutton production forecast to fall to 192 000 tonnes. Lower ewe numbers in 2007 are expected to lead to a decline in the number of lambs marked in 2007-08, and therefore a decrease in lamb slaughterings. However, slaughterings are forecast to fall by only 5 per cent to 18.5 million, as producers take advantage of relatively high lamb prices to generate cash fl ow following the drought. In line with this, lamb production in 2007-08 is forecast to fall by 5 per cent to 380 000 tonnes. strong export demand for lamb In 2007-08, domestic lamb production in the United States is forecast to continue falling and, with demand for lamb remaining relatively unchanged, meat consumption per person this is expected to lead to an increase in the US domestic Australia price of lamb. Refl ecting this, demand for Australian lamb in the United States is expected to increase in 2007-08. beef and veal As a result, exports of lamb to the United States are fore- 30 cast to rise by 5 per cent in 2007-08 to 44 000 tonnes. In contrast to the United States, exports to other markets poultry are forecast to fall because of the lower availability of 20 Australian lamb and higher prices. Overall, lamb exports pig meat in 2007-08 are forecast to fall by 5 per cent to 145 000 tonnes. However, because of higher prices, the value of lamb 10 lamb exports is forecast to increase. An assumed high Australian dollar is expected to reduce mutton the competitiveness of Australian mutton, a substitute with kg other low valued protein products, in export markets. The 1995 1999 2003 2007 fall in mutton production and resulting increase in prices is -96 -2000 -04 -08 forecast to result in lower Australian shipments of mutton, particularly to price sensitive markets such as the Middle East. Refl ecting these factors, mutton exports are forecast sheep outlook to fall by 43 000 tonnes in 2007-08 to 122 000 tonnes. 2005 2006 2007 % -06 -07 s -08 f change domestic consumption falling Slaughterings Sheep ’000 11 830 13 200 9 300 – 29.5 Higher retail prices for lamb relative to the price of substi- Lamb ’000 18 666 19 500 18 500 – 5.1 tute meats, particularly pork and poultry, are forecast to Production lead to a decline in domestic lamb consumption in 2007- Mutton kt 244 270 192 – 28.9 Lamb kt 382 400 380 – 5.0 08. Lamb consumption per person in Australia is forecast Exports (shipped weight) to fall to 9.6 kilograms, down from 10.3 kilograms in Mutton kt 145 165 122 – 26.1 2006-07. Lamb kt 143 152 145 – 4.6 – to United States kt 40 42 44 4.8 Total sheep meat live sheep exports to decline – value $m 1 199 1 222 1 181 – 3.4 Following the drought, the availability of sheep suitable Live sheep ’000 4 248 3 900 3 700 – 5.1 for the live export trade is expected to be lower, placing Saleyard prices Mutton Ac/kg 172 135 200 48.1 upward pressure on prices. As a result, live sheep exports Lamb Ac/kg 341 324 375 15.7 are forecast to fall by around 5 per cent in 2007-08 to See back tables for details. s ABARE estimate. f ABARE forecast. 3.7 million.

298 australian commodities > vol. 14 no. 2 > june quarter 2007 wool wool caroline gunning-trant » [email protected]

The eastern market indicator price for wool has been climbing steadily since November 2006, surpassing 1000 cents a kilogram at the end of May 2007, a price not seen since April 2003. For the 2006-07 season as a whole, the average price is estimated to be 21 per cent higher than the average achieved in 2005-06. The increase in prices has been driven principally by drought induced concerns about wool supplies — as evidenced by reduced offerings in March and April of this year — together with falling stocks of wool currently held on farms and in brokers’ stores, and by fi rm buyer demand. Prices are expected to ease from recent highs as the 2007-08 season progresses. Orders by buyers can be expected to soften as processors look to trim costs, through fi bre substitution, to remain competitive in the new retailing season. However, with Australian wool supply likely to remain relatively low until at least early in the 2008-09 season, prices for 2007-08 overall Australian eastern market indicator wool are forecast to be higher than in the season just ending. price weekly, ended 15 June 2007 The eastern market indicator is forecast to average 885 cents a kilogram in 2007-08, an increase of more than 1000 2 per cent on the 2006-07 price. 900 Australian cents China continues to drive demand 800 China continues to be the largest market for Australian 700 wool, with an export share of 62 per cent in 2006-07. Between July 2006 and April 2007, exports of wool 600 (greasy equivalent) to China increased by nearly 9 per 500 cent over the corresponding period a year earlier, with US cents 400 higher prices pushing up export earnings by 24 per cent. Chinese demand is forecast to remain strong in 2007-08, c/kg clean with apparel production increasing strongly. However, 2003 2004 2005 2006 2007 the higher price of wool, combined with the appreciation of the Australian dollar relative to the US dollar, could dampen demand slightly as textile processors Australian wool outlook look to alternative and less costly fi bres to fi ll orders. 2005 2006 2007 % According to Woolmark’s business survey, other -06 -07 s -08 f change factors that could soften demand in the upcoming four Sheep numbers million 92 86 85 – 1.2 months are the reduction of wool orders in the pipeline Sheep shorn million 104 101 97 – 4.0 and the building of stocks in the processing sector. Wool production (greasy) – shorn kt 461 425 410 – 3.5 – other kt 49 52 45 – 13.5 wool production continues to decline – total kt 510 477 455 – 4.6 Shorn wool production in Australia is estimated to have Total closing stocks fallen by 8 per cent in 2006-07 to 425 000 tonnes. – weight (greasy) kt 158 129 96 – 25.6 Wool exports (balance of payments basis) Despite expected fl ock rebuilding for the 2007-08 – volume (gr. equiv.) kt 538 510 490 – 3.9 season, the reduced size of the Australian fl ock in 2006- – value A$m 2 544 2 873 2 800 – 2.5 07 will continue to have an effect on wool production Market indicator (clean) – eastern Ac/kg 713 864 885 2.4 into the 2007-08 season. Shorn wool production is fore- – western Ac/kg 692 856 875 2.2 cast to fall by around 4 per cent to 410 000 tonnes Auction price (gr.) Ac/kg 464 562 575 2.3 in 2007-08 as a result of a reduced number of sheep See back tables for details. s ABARE estimate. f ABARE forecast.

australian commodities > vol. 14 no. 2 > june quarter 2007 299 wool

shorn wool production shorn from a smaller fl ock and lower average fl eece Australia weights stemming from the poor pasture conditions experienced during most of 2006-07. Recent and forecast higher average prices for 600 greasy wool are likely to encourage Australian producers to place a greater emphasis on wool production than there has been in the recent past. 400 However, any increases in wool production stemming from such decisions are not likely to be realised until the 2008-09 season. 200 export earnings supported by higher prices Australian wool exports in 2006-07 are estimated to kt have fallen by 5 per cent to 510 000 tonnes. However, 1995 1999 2003 2007 the higher market prices experienced during the -96 -2000 -04 -08 second half of the season in particular will more than offset the effects on revenues of the lower volumes shipped. As a result, wool export earnings in 2006-07 are estimated to be 13 per cent higher than 2005-06. Export earnings are expected to remain high in 2007-08. Lower shorn wool production will lead to a further fall in export volumes, by 4 per cent to around 490 000 tonnes. However, higher forecast average prices will largely mitigate the effects on export earnings of the lower volumes shipped. As a result, export earnings are forecast to fall by less than 3 per cent in 2007-08 to $2.8 billion. competition from alternative fi bres to remain intense Textile and apparel manufacturers have considerable choice in terms of the fi bres they use. Purchasing decisions are affected by retailer demand, the technical properties of fi bres, and by fi bre price relativities. The price competitiveness of wool against other fi bres is gauged by its price relative to that of synthetics and cotton. With wool prices consistently over 900 cents a kilogram since February 2007 and with the appreciation of the Austra- lian dollar relative to the US dollar over this period, wool has become less competitive against both cotton and synthetics. The ratio of 21 micron wool prices to polyester prices has been increasing since November 2006. By the end of May 2007 it was 4.2:1, 31 per cent higher than it was a year ago. As a rough guide, over the longer term the price ratio of wool to polyester fi bre has been around 3.5:1. The ratio of 21 micron wool prices to the Cotlook ‘A’ index reached a historical high of 6.8:1 in May 2007, a third higher than the longer term average of roughly 5:1. Little change from current price relativities is expected for 2007-08. In the past, there has been considerable substitution of other fi bres (especially synthetic fi bres) for wool if price relativities move outside their longer run bounds for any signifi cant period of time. This means that there is likely to be considerable demand risks facing wool over the coming season if prices remain close to recent highs.

300 australian commodities > vol. 14 no. 2 > june quarter 2007 beef andcontents veal beef and veal frank drum » [email protected]

The weighted average saleyard price of cattle in Australia is forecast to increase by 10 > contact > +61 2 6272 ???? > [email protected] per cent in 2007-08 to average 323 cents a kilogram. Prices will be underpinned by increased demand for cattle to rebuild herds as seasonal conditions improve, and by ﬁ rm demand in key export markets. Demand for Australian beef in Japan in 2007-08 is expected to remain relatively unchanged — assuming that import protocols relating to BSE (bovine spongiform encepha- lopathy or ‘mad cow’ disease) applied by Japan against US beef imports remain unaltered. However, demand for Australian beef in the Republic of Korea, is expected to be weaker in the short term. Import protocols applied against US beef in Korea are expected to be altered to allow imports of US ‘bone-in’ beef. This is likely to result in the displacement of some Australian beef from the Korean market. Australian beef

Australian beef production and exports to fall in production 2007-08 saleyard price 350 2000 In response to poor seasonal conditions in Australia throughout 2006-07, the rate of cow and heifer slaughter increased signifi cantly. In the March quarter 2007, the 300 1500 proportion of female cattle slaughtered increased to 47 per cent, compared with around 41 per cent in the 250 1000 September quarter 2005. Assuming improved seasonal conditions in 2007-08, 200 500 cattle producers are expected to retain greater numbers of cattle for herd rebuilding. As a result, cattle slaughter 2006-07 in 2007-08 is forecast to fall by 8 per cent to 8.3 million c/kg dw kt and beef production by a similar proportion to 2.1 million 1995 1999 2003 2007 tonnes. -96 -2000 -04 -08 The Australian cattle herd is forecast to increase to 28 million by June 2008, an increase of 400 000 from the beef and veal outlook previous year. Low opening cow numbers in June 2007, 2005 2006 2007 % leading to a reduced calf crop in 2007-08, is expected -06 -07 s -08 f change to limit the rate of increase in herd numbers. Cattle nos million 28.5 27.6 28.0 1.4 – beef million 25.7 24.9 25.4 2.0 OIE classifi es US beef ‘controlled risk’ for BSE Slaughterings ’000 8 401 9 013 8 300 – 7.9 Production kt 2 077 2 228 2 058 – 7.6 US beef exports to Japan in 2007-08 are forecast to remain Exports (shipped weight) well below pre-BSE levels, despite the recent decision by – to United States kt 295 306 275 – 10.1 the World Organisation for Animal Health (OIE) classifying – to Japan kt 388 406 380 – 6.4 – to Korea, Rep. of kt 121 155 110 – 29.0 US beef ‘controlled risk’ for BSE. – total kt 892 979 890 – 9.1 Controlled risk is the middle ranking in the OIE’s three – value A$m 4 272 4 372 4 374 0.0 tier classifi cation scheme and applies to a country with a Live cattle ’000 549 592 640 8.1 Price record of having BSE cases but with a proven ability to – saleyard Ac/kg 322 293 323 10.2 control the disease or to countries that have not had cases – US import USc/kg 276 283 299 5.7 but have a high risk of the disease being present. For coun- – Japan import USc/kg 430 477 483 1.3 tries with a ‘controlled risk’ ranking, the OIE recommends See back tables for details. s ABARE estimate. f ABARE forecast.

australian commodities > vol. 14 no. 2 > june quarter 2007 301 beef and veal

that countries permit imports of all beef from cattle under 30 months of age, and allow beef not containing specifi ed risk materials from cattle over 30 months of age. As it is unknown at this stage whether or not or when Japan will alter any of the key conditions of their import protocols, it is assumed that current protocols will remain unchanged in 2007-08, thus preventing any signifi cant increase in US exports to Japan. Under Japan’s existing import protocols (see the March quarter 2007 issue of Australian Commodities), the available supply of US beef suitable for export to Japan is limited, with only 5 per cent of US fed cattle having documentation proving chronological age. In addition, the A40 carcass classifi cation accepted by Japan is such a tight measure that, on average, less than 9 per cent of US cattle slaughtered are classifi ed as having A40 carcasses or below. Japanese demand for Australian beef to remain high Japanese demand for Australian beef is forecast to remain strong throughout 2007-08, as competition from the United States remains constrained by Japan’s strict import protocols. Despite this, Australian exports to Japan are forecast to import prices of Australian beef in Japan fall by 6 per cent in 2007-08 to 380 000 tonnes. High quarterly Australian saleyard cattle prices and associated costs shortfed fullsets of supplying beef are expected to be the main factors 550 limiting exports to Japan in 2007-08. Australian export prices for grainfed and grassfed beef are expected 500 to remain high in 2007-08, averaging 518 and 477 450 cents a kilogram respectively.

400 grassfed fullsets US and Korea to renegotiate import protocols In early April 2007, the United States and the Republic 350 of Korea agreed in principle to a free trade agree- 300 ment between the two countries. Korea has agreed to 2006-07 phase out its 40 per cent tariff on US beef over the next USc/kg fi fteen years. Under the agreement, a safeguard provi- June June June June June June June sion is to apply if imports from the United States exceed 2002 2004 2006 2008 270 000 tonnes in year one (20 per cent above pre- BSE 2003 levels), rising by 6000 tonnes a year to a maximum 360 000 tonnes to apply from year fi fteen onwards. Although the free trade agreement did not result in major changes to Korea’s BSE related import protocols, changes to Korea’s import protocols are expected. The United States and Korea are scheduled to resume negotiations midyear on ‘bone-in’ beef product and other import quarantine issues. Korea has acknowledged the recent decision by the OIE to classify US beef as ‘controlled risk’ for BSE, but stated that they will conduct their own eight step safety evaluation for US beef. Given that Korea already covered the eight point import risk analysis with the United States in 2005, negotiations are expected to proceed quickly. In addition, the impending ratifi cation of the free trade agreement between the United States and Korea in the US Congress is likely to increase the incentive for Korean offi cials to alter current import protocols. Refl ecting these developments, Korea is expected to alter their import protocols to allow imports of bone-in US beef during the second half of 2007, signifi cantly improving the United States’ ability to increase exports to that country. Historically, bone-in products have accounted for around 55 per cent of total Korean imports, with the vast majority of

302 australian commodities > vol. 14 no. 2 > june quarter 2007 beef and veal this being short rib product supplied by the United Australian beef exports to Korea States. monthly, ended May 2007 Assuming that the United States is able to gain greater access to the Korean market in the short term, their comparative advantage in producing 15 rib cuts is likely to result in increased exports of US beef to Korea. However, the increase is likely to be partially constrained by high US beef prices. On 10 10 May 2007 the Korea Economic Daily reported that US tenderloin beef had been offered wholesale at 41 000 won (A$55) a kilogram, almost double the 5 price (25 000 won) of Australian tenderloin and more expensive than Korean hanwoo beef (38 000 won). kt Australian exports of beef to Korea are forecast to June DecJune DecJune Dec fall by 29 per cent in 2007-08 to 110 000 tonnes. 2004 2005 2006 Increased competition from US beef and higher Australian saleyard prices are expected to be the main factors contributing to the decline. lower Australian exports to the United States in 2007-08 In 2007-08, higher domestic prices for manufacturing beef in the United States and Uruguay are expected to lead to increased US import demand for Australian beef. Cow slaughter in the United States is forecast to decline in 2007-08 as improved pasture conditions in early 2007 increase the incentive for US producers to rebuild herds, placing upward pressure on manufacturing beef prices. However, with Australian female cattle slaughter forecast to fall in 2007-08, Australia’s supply of manufacturing grade beef is expected to decline. Overall, Australian beef exports to the United States are forecast to fall by 10 per cent in 2007-08 to 275 000 tonnes, with export prices forecast to increase by 6 per cent to average close to 300 cents a kilogram. live cattle exports to increase Australian live cattle exports are forecast to increase by 8 per cent to 640 000 in 2007- 08, largely reﬂ ecting an expansion in the supply of cattle suitable for live export. Several years of above average seasonal conditions in northern Australia have resulted in higher calving rates, increasing the available supply of animals for live export. Demand for Australian live cattle in Indonesia, Australian largest export market, is expected to increase, underpinned by strong economic growth and further investment in feedlot infrastructure in Indonesia. Australian live cattle exports to Indonesia increased by 40 per cent in the ﬁ rst four months of 2007 to around 125 000. Australian beef exports in total are forecast to fall by 9 per cent to around 890 000 tonnes (shipped weight) in 2007-08, largely owing to lower Australian beef production. However, the total value of beef exports is forecast to be maintained at close to $4.4 billion because of the higher saleyard prices for cattle.

australian commodities > vol. 14 no. 2 > june quarter 2007 303 dairy

dairy

peter berry » [email protected]

Australian farmgate milk prices are forecast to average 18 per cent higher at around 38.5 cents a litre in 2007-08. These higher prices refl ect constrained growth in world dairy supplies set against continued growth in world demand. However, Australian producers will have limited ability to take advantage of higher world prices, given the continuing effects of severe drought across Australia’s major dairying regions that will result in lower Australian milk production. supply constraints to affect dairy trade Dairy product prices are expected to remain buoyant in the year ahead as supply constraints in the major exporting countries are expected to allow only a limited increase in trade. The key constraints to increased world dairy trade in 2007-08 are expected to be the lingering effects of drought in Australia, which will continue to affect water and fodder availability, and the effect of dairy market reforms in the European Union. In the European Union — the world’s largest exporter of dairy products — milk production is forecast to be around 2 per cent higher in 2007. Increased EU milk production is largely in response to continued strong domestic demand for dairy products together with higher world dairy prices that have largely offset the effect on returns of reductions in support under reforms to the European Union’s Common Agricultural Policy. Slow growth in production in the European Union, coupled with strong internal demand, has resulted in the effective exhaustion of EU intervention stocks of most dairy products. Lack of stocks together with expected low growth in production and cuts to export subsidies will constrain dairy product exports from the European Union in 2007. Also affecting world dairy markets has been the changing pattern of dairy product output and demand within the European Union. For example, EU cheese consumption has grown signifi cantly in recent years and has accounted for an increasing proportion of milk output. This has reduced the amount of milk available for the production of other dairy products like milk powders, which remain in strong demand, particularly in food processing and as a protein additive to stock feeds. As a result, the amount of milk powder available for export from the European Union has fallen over the past six months, and is unlikely to increase signifi cantly over the rest of 2007. Over the next few years, the European Union’s share of world dairy trade is expected to decline as production quotas continue to restrict output, while growing domestic consumption of dairy products accounts for an increasing proportion of EU milk output. In New Zealand, milk production is expected to increase moderately in 2007-08 in response to higher world prices and increasing herd sizes. However, although some increase in milk production is expected this year, the New Zealand dairy industry’s ability to respond quickly to higher world prices with greater exports may be constrained by lead times for building dairy cow numbers. Other issues, such as competing land use and regulations on effl uent disposal, may also affect the industry’s ability to expand in the short term. In Argentina — an emerging dairy exporter — milk and dairy product output has been increasing as a result of signifi cant new investment in processing facilities in recent years, together with improved herd husbandry and genetics. However, serious fl oods in Argentina’s major regions in the fi rst half of 2007 are expected to constrain growth

304 australian commodities > vol. 14 no. 2 > june quarter 2007 dairy in dairy production for the year as a whole. Dairy product exports from Argentina have also been constrained in recent times by policies aimed at reducing exports and maintaining low cost supplies to domestic consumers. dairy product prices to rise further With growth in world demand for dairy products expected to exceed slower growth in production and exports, world prices of dairy products are forecast to average signifi - cantly higher in 2007-08. Already in the fi rst half of 2007, world prices of dairy products have risen strongly as production in the major producing and exporting regions lagged growth in world demand. Prices for milk powders in particular are expected to rise sharply in 2007-08, in response to limited growth in world production and exports. Prices for skim milk powder and whole milk powder are both forecast to average around 60 per world dairy prices cent higher at US$5100 a tonne and US$4900 a tonne respectively for the year. skim milk The main drivers of higher prices for milk powders powder 4000 will be reduced production and strong demand within the European Union that, together with the reduction whole milk powder cheese in export subsidies, has sharply reduced export avail- 3000 abilities. At the same time as supply is lagging, growth in world import demand for milk powders remains 2000 strong, particularly for infant formulas and food processing in Asia and the Middle East. In the Euro- butter pean Union, the main source of growth in consump- 1000 tion is use as a protein supplement in animal feeds and 2007-08 in food processing. US$/t Cheese prices are forecast to rise by 28 per cent, to 2001 2003 2005 2007 average over US$3800 a tonne in 2007-08. World -02 -04 -06 -08 consumption of cheese (particularly in the European Union and developing countries in Asia) continues to dairy outlook grow strongly. In the European Union, cheese produc- 2005 2006 2007 % tion is expected to rise moderately in 2007-08, refl ecting -06 -07 s -08 f change the infl uences of growing domestic demand and Cow numbers ’000 1 870 1 800 1 780 – 1.1 higher world prices. However, increased EU cheese Milk yields L/cow 5 397 5 306 5 253 – 1.0 production is expected to be largely consumed within Production the European Union. Growing domestic consump- Total milk ML 10 092 9 550 9 350 – 2.1 – market sales ML 2 066 2 150 2 186 1.7 tion and reduced export subsidies for cheese under – manufacturing ML 8 026 7 400 7 164 – 3.2 reforms to the Common Agricultural Policy mean that Butter kt 146 130 131 0.8 cheese exports from the European Union are expected Cheese kt 373 360 331 – 8.1 WMP kt 158 143 143 0.0 to grow only moderately in 2007-08. SMP kt 212 190 198 4.2 B u t t e r p r i c e s a r e a l s o f o r e c a s t t o b e u p s t ro n g l y, r i s i n g Milk price Ac/L 33.1 32.6 38.5 18.1 by almost 29 per cent, to average almost US$2600 a Value of exports A$m 2 570 2 257 2 448 8.5 tonne in 2007-08 as global demand rises faster than World prices Butter US$/t 1 998 2 002 2 575 28.6 supply. Of particular importance is that lower butter Cheese US$/t 2 792 2 984 3 825 28.2 production in the European Union, together with the SMP US$/t 2 175 3 179 5 100 60.4 effective exhaustion of EU butter intervention stocks, WMP US$/t 2 192 3 062 4 900 60.0 means that EU exports will be down. See back tables for details. s ABARE estimate. f ABARE forecast.

australian commodities > vol. 14 no. 2 > june quarter 2007 305 dairy

Australian dairy production to decline in 2007-08 Australian milk production is estimated to have fallen by more than 5 per cent in 2006-07 to around 9.55 billion litres as a result of severe drought conditions in most major dairying regions — particularly in the southern Murray Darling Basin. Despite a good start to the 2006-07 season (where early warm conditions resulted in increased milk production in most states), persistent drought cut the availability of irrigation water, reduced pasture growth and drove fodder costs sharply higher. This led many dairy farmers to reduce herd numbers in order to contain cost rises. Rainfall in April, May and June may have provided some relief to producers who might have been contemplating herd reductions in some regions. However, rainfall has not been suffi cient to recharge water storages and signifi cantly improve water allocations. Fodder prices are expected to remain high until spring, when new crops will become available. The dairying regions where production is most affected by drought in 2006-07 are in the northern areas of Victoria and in New South Wales along the Murray River where reduced irrigation allocations are the main problem, and in southern Queensland. Other dairying regions fared better, with milk production increasing in the north coast and south coast regions of New South Wales. In 2006-07, milk production grew strongly in South Australia in the early part of the season, and also in Tasmania, where drought conditions have generally been less severe than on the mainland. In 2007-08, despite an assumed return of average seasonal conditions, milk production is forecast to decline again as a result of reduced water allocations to dairy farms that rely on irrigation in the Murray Darling Basin together with a small reduction in cow numbers. Initial water allocations in inland New South Wales and in northern Victoria are expected to be set at very low levels, although this may improve if above average rainfall is received in catchments as the season progresses. As a consequence of expected low water allocations and reduced dairy herds, Australian production is forecast to fall by a further 2 per cent to 9.35 billion litres in 2007-08. farmgate prices to rise signifi cantly After falling from 33.1 cents a litre in 2005-06 to average 32.6 cents a litre in 2006-07, Australian farmgate milk prices are forecast to rise by 18 per cent to 38.5 cents a litre in 2007-08. The forecast higher prices refl ect higher world dairy product prices, particularly for milk powders and cheese, and higher payments from Australia’s major dairy processors in order to maintain milk throughput in their factories. dairy export earnings down in 2006-07, up in 2007-08 The value of Australian dairy exports is estimated to have fallen by 12 per cent to around $2.26 billion in 2006-07, largely as a result of reduced supplies available for export. In 2007-08, however, earnings from dairy exports are forecast to rise by around 9 per cent to $2.45 billion, as the effect on revenues of higher world dairy prices outweighs that of another decline in export volumes. Forecast substantially higher world prices for milk powders are expected to result in higher earnings from exports of these products in 2007-08, with the value of skim milk powder exports up by 57 per cent to $807 million and whole milk powder exports up 18 per cent to $346 million. In contrast, the value of butter exports is forecast to fall by 1 per cent to $170 million, cheese by 12 per cent to $592 million and casein by 54 per cent to $46 million as the effects on revenues of lower volumes shipped outweigh those of higher prices.

306 australian commodities > vol. 14 no. 2 > june quarter 2007 contentsenergy

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

In the fi rst half of 2007, world oil prices continued to be volatile. Prices are expected to continue to exhibit a high degree of volatility over the coming year or so, refl ecting strong growth in demand, weak growth in oil supply and concerns over potential supply disruptions. An unseasonably warm winter in Europe, north America and north Asia resulted in lower than expected demand for heating oil and resulted in West Texas Intermediate (WTI) crude oil prices falling below US$52 a barrel in January 2007. Crude oil prices rose sharply during April and have remained above US$60 a barrel, refl ecting supply disruptions in Nigeria, and expectations of strong demand for crude oil by refi neries in the United States and Europe following shutdowns for maintenance in March and April. prices to remain high … Oil prices are expected to remain historically high, supported by strong consumption growth in China and the Middle East and the potential for production disruptions in the Middle East and Nigeria. The WTI oil price averaged US$58 a barrel during the March quarter 2007 and is estimated to average around US$65 a barrel in the June quarter. In the second half of 2007, oil prices are forecast to average U$63 a barrel, supported by continued growth in non-OECD demand and OPEC’s stated intention to maintain quota constrained production. For 2007 as a whole, West Texas Intermediate crude oil prices are forecast to average US$62 a barrel. Contributing to the strength in oil prices has been, in the fi rst half of 2007, OPEC producers’ general adherence to announced cuts to production quotas. OPEC has also signalled its intention to maintain current quota levels at least until its next meeting in September 2007. Beyond 2007, oil prices are forecast to ease moderately, refl ecting growth in production capacity and increased production of liquid fuels from alternative sources, such as oil sands, natural gas liquids (NGLs) and biofuels. … and volatile While world oil prices are forecast to ease in 2007 and 2008, considerable uncertainty remains about the short term 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 and changes in consumption. australian commodities > vol. 14 no. 2 > june quarter 2007 307 oil and gas

WTI vs OPEC spare production capacity As evident in the past two years, major disrup- monthly, ended April 2007 tions to supply, such as those caused by hurricanes effective spare WTI price Katrina and Rita in the Gulf of Mexico in 2005 6 capacity (excl. Iraq) 70 and geopolitical tensions in the Middle East, have the potential to sharply increase world prices. 5 60 Conversely, the recent warm winter in north America, Europe and Asia has resulted in downward pressure 4 50 on oil prices, with the WTI price falling by 12 per 3 40 cent in January 2007 because of reduced demand for heating and fuel oil 2 30 A reduction in OPEC spare capacity has become evident following a signifi cant increase in Chinese oil 1 20 consumption since 2003. With relatively weak growth mbd US$/bbl in non-OPEC production (especially in 2005), an June June June June June increasing proportion of world supply has come from 20022003 2004 2005 2006 OPEC producers. The result has been a substantial decline in OPEC spare production capacity, which limited the scope of production to respond quickly to unanticipated supply disruptions, particularly at a time of strong growth in demand. Since last year, there has been some increase in OPEC spare capacity as production has been reduced because of quotas and new capacity has come on stream. In April, OPEC’s average production capacity was estimated at around 30.4 million barrels a day, implying an average nominal spare capacity of 3.7 million barrels a day. Effective spare production capacity, which excludes spare capacity in Indonesia, Iraq, Nigeria and Venezuela where it is not considered feasible to increase production quickly, was 2.8 million barrels a day. This compares with effective spare capacity of around 2.0 million barrels a day in mid-2006 and around 6.0 million barrels a day in early 2002. divergence between crude prices In May 2007, the WTI price averaged US$1.38 a barrel less than the Dubai crude oil benchmark. Historically the WTI price has traded at a premium to the Dubai benchmark because of the low sulfur characteristics of the former. oil prices US refi neries prefer low sulfur crude over higher sulfur monthly, ended May 2007 crude from the Middle East because it is less costly to refi ne into the clean low sulfur fuels consumed in the 70 United States. The recent higher Dubai oil price compared with West Texas Intermediate 60 the WTI price refl ects in part lower seasonal demand 50 for light and low sulfur crude oil. During March and April, US refi neries schedule maintenance to coin- 40 Dubai cide with periods of lower refi ned product demand between winter and summer. In addition, in 2007 30 there have been a number of unplanned shutdowns 20 of refi nery capacity, which have resulted in a fall in crude oil demand and an associated buildup of WTI US$/bbl stocks. Dec Dec Dec Dec Dec While in the short term the premium for WTI oil 2003 2005 2007 is anticipated to return, over the medium and longer

308 australian commodities > vol. 14 no. 2 > june quarter 2007 oil and gas term, the price premium is expected to decline. An increasing proportion of US demand for refi ned products is forecast to be met by imports, as domestic demand grows faster than refi ning capacity. New refi neries, particularly in Asia and the Middle East, which are likely to be sources of refi ned products for the US market, are more effi cient at refi ning the heavier and higher sulfur grades of crude oil produced in the Middle East. This is expected to increase demand for heavier crude oil relative to lighter and low sulfur oils, resulting in the gradual reduction of the premium in the WTI price compared with the Dubai price. crude oil supply In 2007, crude oil production is forecast to average 85.6 million barrels a day, a small increase on the 2006 average. The moderate rate of growth in crude oil production refl ects OPEC members’ willingness to adhere to reduced production quotas. In 2008, world crude oil production is forecast to average 87.0 million barrels a day, an increase of under 2 per cent.

Angola now an OPEC member OPEC crude oil production in 2007 is forecast to average 30.3 million barrels a day, an increase of 1.7 per cent. However, this fi gure is infl ated by output from Angola, which became a member of OPEC at the start of the year. Angola’s forecast average production of 1.5 million barrels a day is now counted toward total OPEC production. Crude oil output from the other OPEC members in 2007 is forecast to average 28.7 million barrels a day, a decrease of 1.5 per cent from 2006. Decreased OPEC output largely refl ects members’ commitments to adhering to cuts in production quotas. In 2008, OPEC’s crude oil output (including that from Angola) is forecast to increase by 1 per cent to 30.6 million barrels a day. OPEC’s total output, which includes natural gas liquids (NGLs), is forecast to increase by 1.8 per cent (0.4 million barrels a day). Looking forward, there is the potential for OPEC production to increase further as spare capacity increases. OPEC could potentially increase its crude oil production capacity from 34.3 million barrels a day at present to around 36 million barrels a day by 2008 or above if production currently shut-in in Nigeria is restarted. In 2007, Angola is estimated to account for just under half of OPEC’s anticipated increased production capacity of 0.8 million barrels a day. OPEC production capacity in 2008 is anticipated to increase by a further 1.2 million barrels a day. In Saudi Arabia, increased production capacity is expected to be realised from the Khursaniyah, Nuayyim and Shaybah fi elds. It is also anticipated that Angolan production will increase by a further 0.3 million barrels a day in 2008. In Nigeria, around 0.4 million barrels a day of production has been shut in for an extended period of time. The ability of Nigeria to restart this capacity will depend on a reduction in the political violence and associated attacks on production facilities that have occurred over the past eighteen months. non-OPEC production to increase Non-OPEC oil production is forecast to average 50.4 million barrels a day in 2007, down 1 per cent from 2006. If Angola’s production is discounted from 2006 fi gures, non-OPEC production in 2007 is forecast to increase by 2 per cent. Growth in oil production is forecast for the Russian Federation, the Caspian Republics, Brazil and China. Offsetting these increases in oil production is forecast lower output from Mexico and Norway.

australian commodities > vol. 14 no. 2 > june quarter 2007 309 oil and gas

In 2008, non-OPEC production is forecast to increase by a further 1.9 per cent. The forecast growth refl ects increased growth from Canada’s oil sands industry; a complete recovery of oil production in the Gulf of Mexico following the hurricanes in 2005; and new production capacity in the Russian Federation and the Caspian republics. North American oil supply in 2007 is forecast to average 14.4 million barrels a day, an increase of 1 per cent. Further moderate increases in oil production are forecast for 2008. In addition to increased output associated with the recovery of hurricane damaged oil production, new projects are expected to commence operation in 2008 in the Gulf of Mexico. These projects include Blind Faith and Neptune. Offsetting these production gains is the expected continued production decline from Cantarell oil fi eld in Mexico, the world’s second largest producing oil fi eld. In 2006, production from Cantarell declined by 13 per cent and this rate of decline is expected to continue in 2007 and 2008. In 2008, Cantarell is expected to produce around 1 million barrels a day, around half the production rate at its peak in 2003. In 2007, oil production in OECD Europe is forecast to remain at around 5.2 million barrels a day, similar to that achieved in 2006. Growth in UK oil production associated with the commencement of operations at the Buzzard fi eld is forecast to be offset by lower output from Norwegian oil fi elds. The Buzzard fi eld, which is located in the North Sea, is expected to reach its production capacity of 0.2 million barrels a day by the middle of 2007. Norway’s oil production in the fi rst quarter of 2007 was hampered by the extended outage at the Kvitebjorn fi eld and the delayed startup of the Alvheim fi eld. These delays are expected to result in Norway’s 2007 oil production decreasing by around 0.15 million barrels a day to 2.6 million barrels a day. In 2005, Norway’s oil production averaged 3 million barrels a day.

production in China growing steadily Oil production in China in 2007 is forecast to increase by nearly 3 per cent to average 3.8 million barrels a day. Over the past decade, China’s oil production has risen steadily at an average annual rate of 2 per cent. Beyond 2007, it is anticipated that China’s oil production will continue to grow following the discovery of oil fi elds in western China and offshore. For example, the China National Petroleum Corporation recently announced the discovery of a large oil fi eld in Bohai Bay off the coast of north eastern China. The fi eld is estimated to contain proven reserves of 3 billion barrels and to be capable of supporting initial production of 0.2 million barrels a day.

moderate growth in oil consumption Despite strong economic growth, global oil consumption increased by only 0.5 per cent in the fi rst quarter of 2007, year on year, to an average of 85.5 million barrels a day. In the fi rst quarter of 2007, oil consumption in north America grew by 2.7 per cent year on year, while it fell by 4.3 per cent in Europe and 9.6 per cent in Japan. The main growth in oil consumption in the fi rst quarter of 2007 occurred in China (increase of 5.7 per cent year on year) and the Middle East (4.1 per cent). World oil consumption in 2007 is forecast to average 85.6 million barrels a day, an increase of nearly 2 per cent (1.5 million barrels a day). In 2007, increased growth in oil consumption in China and the Middle East is expected to be offset to some extent by lower than usual consumption in Europe and Japan, following warmer than average winter temperatures, and the continued shift toward lower oil consumption in Europe and Japan.

310 australian commodities > vol. 14 no. 2 > june quarter 2007 oil and gas

OECD demand fl at In 2007, growth in north American oil consumption is forecast to offset a reduction in consumption in western Europe and Japan. In western Europe an unseasonably warm winter reduced demand for heating and fuel oils. In addition, heavy rainfalls have increased water levels in European reservoirs, thus allowing for greater hydroelectric power generation and also improved cooling water supplies at nuclear plants. Increased hydro and nuclear electricity generation can be expected to reduce the demand for fuel oil used in oil fi red electricity generators. In Japan, the recent reduction in oil consumption by the transport and electricity generation sectors is forecast to continue. Demand for oil for electricity generation has been steadily decreasing and this trend is expected to continue, as increased quantities of gas and nuclear power are used in power generation. Consumers are continuing to change their transport preferences, replacing large vehicles with small ones. For example, in the fi rst quarter of 2007 new large car registrations declined by 10 per cent in Japan. demand growing strongly in China In contrast to developments in western Europe and Japan, oil consumption in China in 2007 is forecast to increase by over 6 per cent, refl ecting continued strong growth in the transport sector. China is now the world’s largest market for new vehicles, with sales growing by around 25 per cent in 2006. In 2007, growth in new vehicle sales is expected to match that achieved in 2006. Growth in oil consumption in China’s transport sector is being offset to some extent by decreased demand for fuel oil. Fuel oil is used in the electricity generation sector and, historically, has been a large contributor to growth in China’s oil consumption. Future demand for fuel oil is expected to decrease as electricity generators opt for lower cost fuels, such as natural gas and coal. Oil consumption in China in 2007 is forecast to average 7.6 million barrels a day, increasing by a further 7 per cent oil and gas outlook in 2008 to average 8.1 million barrels a day. At this rate of growth, China will remain the fastest growing and second 2006 2007 f 2008 f % largest consumer of oil in the world. World change Production mbd 85.1 85.6 87.0 1.6 In the Middle East, oil consumption is expected to Consumption mbd 84.1 85.6 87.0 1.6 grow strongly in 2007 and 2008 as strong economic Trade weighted crude oil growth, supported by high oil prices, continues. In 2007 price US$/bbl 60.21 60.29 58.25 – 3.4 West Texas Intermediate crude and 2008, oil consumption in the region is forecast to oil price US$/bbl 66.02 62.18 60.69 – 2.4 average 6.5 million barrels and 6.8 million barrels a day 2005 2006 2007 respectively. Australia -06 -07 s -08 f Crude oil and condensate Australian production and exports to grow Production ML 24 320 28 259 30 133 6.6 Exports ML 13 026 15 937 17 575 10.3 In 2006-07, Australian production of crude oil is esti- – value A$m 6 638 8 260 9 090 10.0 mated to have increased by 16 per cent to 28.3 gigalitres. Imports ML 24 416 24 640 23 942 – 2.8 Higher crude oil output refl ects increases in production at a Natural gas Production Gm3 42.2 43.2 47.6 10.2 number of fi elds that have recently been brought into oper- LNG exports Mt 12.50 15.20 15.50 2.0 ation, such as Enfi eld in Western Australia and Basker and – value A$m 4 416 5 455 5 665 3.8 Manter in the Gippsland Basin off the coast of Victoria. The LPG Production ML 4 722 4 770 5 180 8.6 increase in production from new oil fi elds in 2006-07 has Exports ML 2 800 2 908 3 150 8.3 been large enough to offset declining output from existing – value A$m 1 002 1 061 1 127 6.2 fi e l d s . See back tables for details. s ABARE estimate. f ABARE forecast. australian commodities > vol. 14 no. 2 > june quarter 2007 311 oil and gas

Australian crude oil and condensate Australian crude oil production in 2007-08 is exports forecast to increase by 7 per cent to over 30 giga- volume litres. Increased production will be sourced from value the commencement of operations at the Vincent 8 20 (100 000 barrels a day) and Stybarrow (80 000 barrels a day) oil fi elds in early 2008. These fi elds 6 15 are located off the coast of Western Australia near Exmouth and are both owned by Woodside and 4 10 its joint venture partners Mitsui and BHP Billiton respectively. The Vincent and Stybarrow fi elds are not expected to reach full production capacity until 2 5 2008-09. In addition, a number of other smaller oil 2006-07 fi elds are scheduled to enter into production in the A$b GL coming months, contributing to higher oil produc- 1998 2001 2004 2007 tion in 2007-08. These include AED’s Puffi n oil fi eld, -99 -02 -05 -08 700 kilometres west of Darwin (capacity of 30 000 barrels a day), and the South Lobe of the Wollybutt Australian LNG exports fi eld, which is scheduled to commence production in early 2008, with a capacity of 10 000 barrels a value day. 5 15 Refl ecting an increased proportion of production being located off north western Australia, exports are 4 12 forecast to increase in line with higher oil production. With close proximity to Asian markets, it is assumed 3 9 that oil production from the Bonaparte and Carnarvon volume Basins, such as from Stybarrow and Vincent oil fi elds, 2 6 will be exported. Australian exports of crude oil in 2006-07 are fore- 1 3 cast to total 15.9 gigalitres, increasing by 10 per cent

2006-07 to 17.6 gigalitres in 2007-08. The value of Australian A$b Mt crude oil exports is estimated to have increased by 1998 2001 2004 2007 24 per cent in 2006-07 to $8.3 billion, and then is -99 -02 -05 -08 forecast increase by a further 10 per cent in 2007-08 to $9.1 billion. Australia’s LNG exports to grow Australia’s exports of LNG in 2006-07 are estimated to have increased by 22 per cent to 15.2 million tonnes, largely refl ecting the commencement of operations at the 3.5 million tonne capacity Darwin LNG plant in early 2006. In 2007-08, Australian exports of LNG are forecast to increase a further 2 per cent to 15.5 million tonnes. Substantial further growth in Australian LNG exports is not forecast until the fi fth train at the North West Shelf commences operations in late 2008. Refl ecting higher export volumes, the value of Australian LNG exports in 2006-07 is estimated to have increased by 24 per cent to $5.5 billion and in 2007-08 by 4 per cent to $5.7 billion.

312 australian commodities > vol. 14 no. 2 > june quarter 2007 thermal coal thermal coal alan copeland » [email protected]

In March 2007, Australian suppliers and Japanese power utilities settled thermal coal contract prices for Japanese fi nancial year 2007-08 (JFY, April–March) at US$55.50 a tonne, an increase of around US$3 a tonne. The higher contract prices refl ect a combination of strong growth in coal fi red electricity generation capacity in Asia, reduced exports from China and export infrastructure capacity constraints in Australia. In mid-June, Newcastle thermal coal spot prices increased above US$60 a tonne for the fi rst time since mid-2004. The sharp increase was largely attributable to a severe storm, which prevented coal transport in the Hunter Valley and ship loading at the port of Newcastle for a week. The storm also resulted in a number of mines declaring force majeure. Before the storm, spot prices had increased above US$55 a tonne, after averaging US$52.40 a tonne during the fi rst quarter of 2007. Spot prices were being supported by reduced availability of exports from China that stimulated growth in demand for coal from Hunter Valley suppliers. Over the short term, thermal coal spot prices are expected to remain high, supported by the growth in demand for coal from electricity generators in Asia and supply constraints in Pacifi c markets. Growth in demand for thermal coal imports in Asia is expected to continue, particularly in China, India, the Republic of Korea and Malaysia. On the supply side, exports from China fell in the fi rst four months of 2007. The week long shut down of the Hunter Valley coal chain in June resulted in a loss of throughput of up to 2 million tonnes. In addition the full benefi ts of upgraded transport and port infrastructure in the Hunter Valley and Queensland are not expected to be delivered until 2008. China’s imports growing, exports falling China is the world’s largest coal producer, with 2006 production estimated to have been around 2.2 billion tonnes, double that in 2001. However, the rapid increase in coal production, including thermal coal, has not been suffi cient to meet domestic demand. Between 2001 and 2006, China’s thermal coal exports fell from 80 million tonnes to 59 million tonnes, while thermal coal imports rose from 2 million tonnes to 34 million tonnes. In 2008, China’s imports thermal coal prices and exports are forecast to be equal at around 40 monthly, ended June 2007 million tonnes each. In the fi rst four months of 2007, domestic prices at European spot China’s largest coal loading port, Qinhungdao, were 60 higher than prices that could be obtained in the export market. This provided an incentive for Chinese exporters to target sales in the domestic market, with the result 40 Asian that exports in the fi rst quarter of 2007 decreased by spot 35 per cent. High domestic coal prices in China are Japan contract being supported by strong electricity demand associ- 20 ated with continued strong economic growth. In 2007, China’s thermal coal consumption is forecast to increase by around 150 million tonnes. US$/t Despite signifi cant investment in production, rail and Dec Dec Dec port infrastructure, growth in thermal coal supply is not 2004 2005 2006 2007

australian commodities > vol. 14 no. 2 > june quarter 2007 313 thermal coal

thermal coal trade in China expected to be suffi cient to meet demand. Refl ecting possible production and transport constraints in 2007, Chinese suppliers were able to negotiate a 10–15 per 70 exports imports cent price increase for contracts (for export quality coal 60 on a calendar year basis) with domestic consumers. Also contributing to higher domestic prices in China 50 was the introduction of new taxes on coal producers in 40 the province of Shanxi, which accounts for over 20 per cent of China’s total coal production. In April 2007, the 30 Shanxi provincial government introduced three taxes: a 20 sustainable development tax, an environmental tax and a levy to fund the rehabilitation of mining areas. The tax 10 rates vary according to annual mine production, with Mt the rate of the sustainable development tax to be deter- 2002 2004 2006 2008 mined on an annual basis. The tax will add RMB29–43 a tonne (US$3.75–5.59 a tonne) to the cost of thermal coal production in Shanxi. Refl ecting high domestic thermal coal prices, China’s exports of thermal coal in 2007 are forecast to fall by 24 per cent to 45 million tonnes and by a further 9 per cent in 2008 to 41 million tonnes. Thermal coal exports to Japan, Korea and Chinese Taipei in the fi rst four months of 2007 were down by 29 per cent, 12 per cent and 40 per cent respectively. In contrast, China’s thermal coal imports are forecast to rise by 10 per cent in 2007 and 8 per cent in 2008. Increased volumes are expected to be sourced mainly from Vietnamese and Indonesian suppliers.

Shanxi mining taxes per tonne

annual mine production tax <0.45 million tonnes 0.45–0.90 million tonnes >0.9 million tonnes sustainable development RMB14 (US$1.80) RMB21 (US$2.73) 28 (US$3.64) environment RMB10 (US$1.30) RMB10 (US$1.30) RMB10 (US$1.30) rehabilitation RMB5 (US$0.65) RMB5 (US$0.65) RMB5 (US$0.65) total RMB29 (US$3.75) RMB36 (US$4.68 RMB43 (US$5.59) RMB = Chinese renminbi.

growth in world thermal coal trade Following growth of 7 per cent in 2006, world thermal coal trade is forecast to increase by 3 per cent in 2007 to 637 million tonnes and by a further 3 per cent in 2008 to 657 million tonnes. The strongest growth in thermal coal import demand is forecast to occur in Asia, with a growth rate of 5 per cent in both 2007 and 2008. In contrast, EU imports are forecast to decline by 1 per cent in 2007. In 2007, Japanese imports of thermal coal are forecast to increase by 1 per cent to 115 million tonnes and to remain similar in 2008. The modest growth in thermal coal imports refl ects growth in coal fi red electricity generation as a result of lower utilisation of nuclear and hydroelectric capacity in the fi rst four months of 2007. However, substantial growth in thermal coal consumption over the next eighteen months is expected as a result of 275 megawatts of net additions to coal fi red electricity generation capacity. This new capacity could create additional coal requirement of around 0.6 million tonnes a year.

314 australian commodities > vol. 14 no. 2 > june quarter 2007 thermal coal

Coal is an important part of Korea’s energy mix because of coal’s high supply security and its cost competitiveness (on a per heat unit basis). Thermal coal imports are forecast to increase in 2007 and 2008, refl ecting increased demand associated with new coal fi red electricity generation capacity. In the fi rst half of 2007, two 500 megawatt power plants commenced operations, with a further eight coal fi red power stations to commence operations in the following eighteen months. Korean thermal coal imports are forecast to increase by 7 per cent in 2007, to 63 million tonnes and then by a further 7 per cent in 2008 to over 67 million tonnes. India is the world’s third largest producer of hard coal. However, much of the coal produced is of a low quality, high in ash. Coal is imported for blending purposes in order to reduce the average ash content and increase the average energy value. Indian imports of thermal coal in 2007 are forecast to increase by 15 per cent to 27 million tonnes. The growth in imports refl ects the strong performance of the Indian economy and associated rapid growth in electricity demand. In 2008, imports of thermal coal are forecast to increase by a further 11 per cent to 30 million tonnes. EU imports are forecast to fall by around 2 million tonnes in 2007, refl ecting an unseasonably warm winter and the increased use of alternative fuels for electricity generation. Above average winter temperatures, particularly in December and January, resulted in a reduction in thermal coal demand associated with lower demand for electricity. In addition, the warm weather reduced demand for gas, which resulted in a decrease in gas prices. In turn, lower gas prices encouraged increased use of gas fi red electricity generation capacity. The combi- thermal coal outlook nation of these factors has resulted in a buildup of coal stocks, which is expected to result in reduced demand for 2006 2007 f 2008 f % imports over the remainder of 2007. Coal stocks at UK World change power stations at the end of March are estimated to have Total trade Mt 618.2 636.7 656.3 3.1 increased by around 30 per cent from March 2006. Imports Also placing downward pressure on demand for Asia Mt 330.7 347.9 364.3 4.7 thermal coal in the European Union was good spring rain- – China Mt 33.6 37.0 40.1 8.4 – Chinese Taipei Mt 58.7 61.0 63.0 3.3 fall in catchment areas over continental Europe. With more – India Mt 23.4 27.0 30.0 11.1 water in storages, there is expected to be increased utilisa- – Japan Mt 113.5 114.5 114.7 0.2 – Korea Mt 58.9 63.0 67.4 7.0 tion of hydroelectric generation. In addition, the good falls – Malaysia Mt 11.1 13.0 14.5 11.5 of rain should ensure that there is suffi cient water for cooling – Other Asia Mt 31.5 32.4 34.6 6.8 nuclear power stations over the summer. Increased nuclear Europe Mt 207.0 205.7 207.1 0.7 – EU 25 Mt 169.2 167.0 167.5 0.3 generation capacity is expected to lead to a reduction in – Other Europe Mt 37.8 38.7 39.6 2.3 coal fi red electricity generation and associated demand Other Mt 80.5 83.1 85.0 2.3 for thermal coal. Refl ecting this, EU thermal coal imports in Exports 2007 are forecast to total 167 million tonnes, a decrease Australia Mt 111.6 115.5 124.0 7.4 China Mt 58.9 45.0 41.0 – 8.9 of over 1 per cent. Colombia Mt 58.3 65.0 70.0 7.7 In 2006, Indonesian thermal coal exports increased Indonesia Mt 161.0 178.0 188.0 5.6 by around 25 per cent to 161 million tonnes. Indonesia Russia Mt 74.0 77.0 79.0 2.6 South Africa Mt 67.4 67.5 68.0 0.7 has not been required to add large and expensive infra- United States Mt 19.7 17.8 17.0 – 4.5 structure, such as railways and land based coal loading Other Mt 67.3 70.9 69.3 – 2.3 terminals, to increase its exports. A signifi cant proportion 2005 2006 2007 of coal transport in Indonesia is water based. Barges trans- -06 -07 s -08 f Australia port coal along rivers and out to the open sea where it is Production Mt 175.0 179.9 187.5 4.2 loaded directly on to a vessel. This has allowed Indonesia Exports Mt 110.8 111.4 121.0 8.6 to increase production and export capacity quickly and at – value A$m 7 206 6 823 7 992 17.1 relatively low cost. See back tables for details. s ABARE estimate. f ABARE forecast. australian commodities > vol. 14 no. 2 > june quarter 2007 315 thermal coal

In 2007, Indonesian exports are forecast to increase by a further 11 per cent, refl ecting continuing strong demand from China and India. In the fi rst four months of 2007, Indonesian exports to China are estimated to have almost quadrupled to 5.5 million tonnes, while exports to India increased by 14 per cents to 8.5 million tonnes. Increased imports of Indonesian thermal coal by China and India refl ect its freight advantage over other suppliers, given its proximate location to both markets. In 2008, Indonesian exports are forecast to increase by a further 6 per cent to 188 million tonnes. Continued growth in Asia’s thermal coal demand and Indonesia’s ability to increase supply relatively quickly will be the main factors underpinning the expansion. In 2007, Colombian exports are forecast to increase by 11 per cent to 65 million tonnes and in 2008, by 8 per cent to 70 million tonnes. This rate of export growth is the second fastest in the world, behind that of Indonesia. The United States is the largest export market for Colombian coal, accounting for a third of its thermal coal exports in 2006. Exports to the United States are forecast to increase, refl ecting decreased domestic production and stricter sulfur emission standards. Colombian coal is attractive to US power stations because of its proximity to import terminals on the south coast and it has a low sulfur and high energy content. The potential for increased exports to the United States has encouraged a number of Colombian producers to invest in additional mine and export infrastructure capacity. In South Africa, exports in 2007 and 2008 are expected to be around 68 million tonnes, with increases in South African exports being constrained by port capacity limits. Australian exports to benefi t from new infrastructure In 2006-07, Australian thermal coal exports are forecast to increase only marginally to 111.4 million tonnes. As a result of a severe storm that struck the Hunter Valley coal chain in early June, it is estimated that up to 2 million tonnes of coal throughput will be lost. It may be possible to recover some of the lost throughput in the second half of 2007 because port and rail operators were able to undertake some maintenance during the forced shutdown that had been previously scheduled for later in the year. Before the storm, Australian exports had been forecast to increase by more than 2 per cent to 113.4 million tonnes. The increased exports would have been enabled by increases in mine and infrastructure capacity in New South Wales and Queensland. In New South Wales, the 13 million tonne expansion to the coal handling capacity at the port of Newcastle was completed in March 2007, while in Queensland increased throughput has been achieved at the port of Gladstone as a result of increased loading capacity. In 2007-08, Australian thermal coal exports are forecast to increase by 9 per cent, as the benefi ts of expanded mine and infrastructure start to take effect. For example, the Wambo underground mine is scheduled to commence operations in the second half of 2007 and it is expected that production will increase from the Boggabri, Tarawonga and Ashton mines following their commencement of operation in late 2006. In Queensland, the Dawson project (5.7 million tonnes of thermal and coking coal) is scheduled to be completed at the end of 2007. To accommodate increased exports from Queensland mines, expansions are being undertaken at the ports of Abbot Point, Dalrymple Bay and Gladstone, which will allow for increased throughput in 2007-08. In 2006-07, the value of thermal coal exports is forecast to fall 5 per cent to $6.8 billion, refl ecting weak growth in export volumes and a stronger Australian dollar. In 2007- 08, a combination of higher prices and increased export volumes is forecast to result in a 17 per cent increase in export values to around $8.0 billion.

316 australian commodities > vol. 14 no. 2 > june quarter 2007 contentsmetals

> alancontact copeland > +61 >2 6272+61 2 ???? 6272 > 2270 [email protected] > [email protected] metals world prices holding up kate penney, rohan kendall, chris rumley, rebecca mccallum and eamon mcginn steel and steel making raw materials rohan kendall » [email protected]

After rising by 9 per cent in 2006, world crude steel production is forecast to grow by nearly 7 per cent in 2007 to 1.33 billion tonnes and 6 per cent in 2008 to 1.41 billion tonnes. China is expected to account for the majority of the growth in world crude steel production but strong growth is also expected in India and the Russian Federation. Steel output is expected to decline in the United States in 2007, refl ecting production cutbacks in the fi rst quarter of the year in response to falling prices in late 2006 and high inventories. World steel prices are expected to remain fi rm over the remainder of 2007, mainly owing to an easing in the rate of growth in exports from China in the second half of the year. Contributing to the slowing in China’s exports will be the replacement in June of an export rebate on a range of steel products with an export tax of 5–15 per cent. With assumed global economic growth of over 4 per cent in 2008, demand for steel is expected to remain strong. However, increases to steel making capacity, particularly in China, India steel prices and Brazil, are expected to result in steel inventories monthly, ended May 2007 rising and prices falling. Japan Europe raw material prices 700 iron ore United 600 States Negotiated iron ore contract prices for fi nes and lump have risen by 9.5 per cent in Japanese fi nancial year (JFY, April–March) 2007-08. This is the fi fth consecu- 500 tive year of price increases for fi nes and lump and China contract prices have almost tripled since JFY 2002- 400 03. Iron ore pellet prices in JFY 2007-08 were settled 2007 at 5.28 per cent higher, after falling by 3 per cent in US$/t JFY 2006-07. June DecJune Dec 2005 2006 2007

australian commodities > vol. 14 no. 2 > june quarter 2007 317 steel

raw material prices The latest rise in iron ore contract prices refl ects in 2006-07 US dollars continued growth in global iron ore demand, led in particular by China’s steel industry. Looking forward, 120 hard coking coal US$/t the introduction of an iron ore export duty by the Indian Government and strong growth in world steel 100 production is expected to continue to place upward 80 pressure on iron ore prices. However, future increases in iron ore prices could be limited by strong growth in 60 iron ore production capacity in Australia and Brazil. semisoft 40 coking coal metallurgical coal US$/t 20 iron ore fines In January, contract prices for Australian hard coking USc/dltu coal for JFY 2007-08 were settled with Japanese steel 0 mills at around US$98 a tonne (US$116 in JFY 2006- 1998 2001 2004 2007 07), a fall of 16 per cent. The lower contract price -99 -02 -05 -08 refl ects weak export growth in 2006, which resulted in a buildup of Australian producer stocks. In addition, there have been increases to Australian metallurgical coal production capacity. Contract prices for semisoft coking coal were settled about 10 per cent higher at around US$64 a tonne for JFY 2007-08, while prices for Australian pulverised coal injection (PCI) coals were settled at about $68 a tonne, similar to last year’s price. Australian PCI coal producers have been able to negotiate higher contract prices with European and south American steel mills. A primary reason for higher prices compared with those settled with Japanese steel mills has been the emergence of coal supply problems associated with infrastructure congestion in Australia. For example, because of supply diffi culties within the Goonyella coal chain the Dalrymple Bay Coal Terminal (DBCT), Australia’s largest metallurgical coal port, operated below 80 per cent of capacity in the fi rst quarter of 2007. The supply diffi culties in Australia combined with increasing world coal demand raises the possibility of higher metallurgical coal prices at the next set of contract negotiations. steel consumption World crude steel consumption is forecast to grow by 7 per cent in 2007 to 1.30 billion tonnes and by a further 6 per cent to 1.38 billion tonnes in 2008. China continues to be an important driver of global steel consumption and strong growth is also forecast in India and the Russian Federation, associated with strong economic growth. China is expected to account for over 60 per cent of the increase in world steel consumption in 2007 and 2008. China’s crude steel consumption is forecast to grow by 13 per cent in 2007 to 448 million tonnes and by a further 10 per cent in 2008 to 493 million tonnes. Growth in steel consumption in China is being driven by investment in fi xed assets, which increased by 25 per cent year on year in the fi rst quarter of 2007. Much of this growth refl ects continuing strong demand for new factories, buildings and associated infrastructure (such as electricity, gas, water and transport). Production of steel intensive manufactured goods also remains an important driver of steel consumption in China. In the fi rst quarter of 2007, production of motor vehicles, white goods, computers and ships increased rapidly. Shipbuilding in China has grown particularly rapidly, with the tonnage of vessels completed increasing by 51 per cent year on year in the fi rst quarter of 2007.

318 australian commodities > vol. 14 no. 2 > june quarter 2007 steel steel production and raw material demand In the ﬁ rst four months of 2007, world crude steel production rose by 10 per cent year on year to 430 million tonnes. Declining steel production in north America has been more than offset by increases in all other regions. For 2007 as a whole, world crude steel production is forecast to grow by nearly 7 per cent to 1.33 billion tonnes and by a further 6 per cent in 2008 to 1.41 billion tonnes. Underpinned by strong growth in global steel production, world iron ore consumption is forecast to rise by over 7 per cent to 1.59 billion tonnes in 2007 and by almost 7 per cent to 1.70 billion tonnes in 2008. Metallurgical coal consumption is forecast to rise by 8 per cent in 2007 to around 750 million tonnes and by 7 per cent to 800 million tonnes in 2008.

China continues to dominate growth in steel output Chinese steel production increased by 22 per cent year on year in the fi rst quarter of 2007 to 115 million tonnes. For 2007 as a whole, China is forecast to produce around 480 million tonnes of crude steel, up from 423 million tonnes in 2006, an increase of 14 per cent. China’s steel production is forecast to grow by a further 12 per cent in 2008 to 539 million tonnes. In 2006, rapid growth in steel production resulted in China becoming a net exporter of steel for the fi rst time. According to data from the Chinese Ministry of Commerce, net exports of steel totalled 25 million tonnes in 2006. In 2005, China was a net importer of around 5 million tonnes of steel. China’s net steel exports have continued to grow in 2007, totalling 16 million tonnes in the fi rst four months. Over the remainder of 2007, growth in China’s net exports of crude steel are expected to moderate, world steel outlook given that the Chinese Government is actively trying to slow growth in steel exports. In an attempt to curb steel exports, the Chinese Ministry of Commerce implemented an export 2005 2006 2007 2008 licence system for a range of steel products in May. Tax Mt Mt Mt Mt crude steel consumption rebates for a range of steel exports were also replaced with European Union 27 182 194 199 201 an export tax, which has the effect of reducing returns from U n i t e d S t a t e s 113 114 115 116 exports relative to domestic sales. Brazil 19 19 20 21 An additional factor that may slow growth in China’s steel Russian Federation 36 39 43 45 exports was the decision to speed up the appreciation of China 350 396 448 493 Japan 83 86 88 90 the yuan against the US dollar by increasing its trading band Korea, Rep. of 49 49 50 52 from 0.3 per cent to 0.5 per cent on either side of the daily Chinese Taipei 24 24 24 24 fi xing rate and to raise interest rates. A stronger yuan will India 41 47 52 57 reduce returns to Chinese exporters, as goods in international world total 1 126 1 217 1 304 1 379 markets are generally priced in US dollars. crude steel production China’s National Development and Reform Commission European Union 27 196 206 217 220 (NDRC) has stated its intention to close 82 million tonnes of United States 95 98 97 97 small, outdated and ineffi cient iron and steel making plants Brazil 32 31 32 34 by 2010. The NDRC intends to shut down 23 million tonnes Russian Federation 66 71 74 77 China 356 423 481 539 of iron making capacity and 24 million tonnes of steel making Japan 112 118 118 119 capacity in 2007. A further 17 million tonnes of iron making Korea, Rep. of 48 48 50 50 capacity and 18 million tonnes of steel making capacity will Chinese Taipei 19 21 20 21 be shut by 2010. Announcements of further shutdowns of India 38 43 46 51 outdated capacity are likely to be made in the future. world total 1 140 1 244 1 327 1 406 australian commodities > vol. 14 no. 2 > june quarter 2007 319 steel

China’s iron and steel making capacity is expected to continue to grow rapidly through modern and large scale developments. The trend away from small scale, energy intensive blast furnaces toward larger and technologically advanced blast furnaces will lead to improvements in the efﬁ ciency of raw material use in steel production. Continued rises in Chinese steel output will be sufﬁ cient to support further large increases in demand for metallurgical coal and iron ore.

steel production growing strongly elsewhere … While China is as important driver of global growth in steel production, steel output in many other countries is also growing rapidly, most notably in India, the Russian Federation and the European Union. In India, steel production is forecast to grow by 7 per cent to 46 million tonnes in 2007 and by a further 11 per cent in 2008 to 51 million tonnes. Underpinning growth in India’s steel production have been substantial investments in new capacity associated with the Indian Government’s policy of increasing steel production to 100 million tonnes by 2020. Steel production in the Russian Federation has grown on average by 6 per cent a year since 1998. In 2006 it grew by 8 per cent to 71 million tonnes. This growth can be attributed to the turnaround in the Russian economy (which has grown by around 6 per cent a year since 1998), combined with restructuring and investment in the Russian steel industry. Looking ahead, Russian steel production is forecast to grow by 4 per cent in both 2007 and 2008 as strong domestic demand and high prices in key export markets, such as western Europe, support continued growth in output. Steel production in the European Union grew by 5 per cent to 206 million tonnes in 2006, with strong growth in key steel producing countries, such as France, Germany and Italy. Robust steel demand, underpinned by growth in EU construction activity, is encouraging European steel producers to increase steel output. Reﬂ ecting these developments, EU steel output is forecast to rise by 5 per cent to 217 million tonnes in 2007 and by a further 1 per cent to 220 million tonnes in 2008.

… except north America In response to rising stocks and declining steel prices, US steel producers reduced steel output in late 2006 and early 2007. Reﬂ ecting these cutbacks, US steel output in 2007 is forecast to fall by around 1 million tonnes to 97 million tonnes. Steel production in the United States is forecast to remain subdued in 2008 as competition from Asian and south American imports and weak domestic consumption growth are expected to keep prices relatively low. Australian steel production and exports Australian iron and steel production is forecast to rise by 2 per cent to 8.0 million tonnes in 2006-07 and by a further 3 per cent to 8.3 million tonnes in 2007-08. The majority of this increased output is expected to come from the HIsmelt direct iron plant in Western Australia as it continues to increase production. With the pig iron produced by the HIsmelt plant being exported to Asian steel mills, the volume of Australian iron and steel exports in 2007-08 is expected to rise in line with production growth. The value of iron and steel exports is expected to grow at a slower rate than volumes because of an assumed decline in prices.

320 australian commodities > vol. 14 no. 2 > june quarter 2007 iron ore iron ore supply Global iron ore production is forecast to rise by 8 per cent to 1.60 billion tonnes in 2007 and by a further 6 per cent to 1.69 billion tonnes in 2008. Most of this increase is expected to occur in Australia, Brazil and China, as new iron ore projects and expansions come on line. strong growth in iron ore exports from Australia and Brazil The volume of Australian iron ore exports is forecast to rise by 14 per cent to 281 million tonnes in 2007 and by a further 9 per cent to around 307 million tonnes in 2008, refl ecting large increases in production capacity. Iron ore production in Australia is forecast to rise by 28 million tonnes to 292 million tonnes in 2006-07 and by a further 30 million tonnes to around 322 million tonnes in 2007-08. BHP Billiton is expected to commission its Rapid Growth 3 project in late 2007, which will increase BHP Billiton’s iron ore production capacity by 20 million tonnes. Rio Tinto is on track to complete its Hammersley expansion by the end of 2007, which will increase capacity by 16 million outlook for world iron ore and tonnes. metallurgical coal trade There are also a number of new entrants expected to commence iron ore production over the next two years. 2005 2006 2007 2008 Mt Mt Mt Mt The largest of these is Fortescue Metals which is expected iron ore imports to begin shipping iron ore from its Chichester Range project European Union 27 160 172 175 182 (45 million tonnes a year) in the second quarter of 2008. Japan 132 134 139 141 In Brazil, iron ore exports are forecast to rise by 7 per cent China 275 326 392 442 in 2007 to around 269 million tonnes and by a further 15 Korea, Rep. of 43 44 44 46 Chinese Taipei 15 15 16 16 per cent in 2008 to 310 million tonnes. Increases in Brazil’s exports are being driven by large production increases by world total 744 781 842 913 CVRD in response to especially strong demand from China. iron ore exports CVRD is increasing production at the Carajas iron ore mine Australia 239 247 281 307 Brazil 223 252 269 310 toward its new annual capacity of 100 million tonnes. India 81 95 97 99 Production increases are also expected from the Brucutu iron Canada 28 28 26 27 ore mine and Samarco pellet plant. Overall, Brazilian iron South Africa 27 26 30 33 ore production is forecast to increase by 23 million tonnes Sweden 18 19 20 22 world total 744 781 842 913 to 345 million tonnes in 2007 and by a further 44 million tonnes to around 390 million tonnes in 2008. metallurgical coal imports European Union 27 51.4 53.5 58.2 59.7 iron ore production to continue growing in China Japan 63.4 62.8 63.4 64.0 while prices are high China 7.2 4.7 4.8 10.1 Korea, Rep. of 20.6 20.7 21.8 21.4 After rising by 40 per cent in 2006, production of iron ore in Chinese Taipei 5.2 5.0 4.1 4.9 China is forecast to increase by a further 15 per cent in 2007 India 19.6 19.3 20.4 23.0 to 318 million tonnes. However, Chinese iron ore contains Brazil 14.7 14.0 14.7 15.5 around 30 per cent iron (on average), which is lower than world total 205.8 207.6 218.7 226.6 the iron content in Australian, Brazilian and Indian iron ore metallurgical coal exports (around 60 per cent). The lower iron grade means that Australia 124.9 124.4 135.9 141.0 Chinese iron ore production costs are generally higher than Canada 26.2 22.4 22.4 22.7 those in Australia and Brazil. However, at current prices, iron United States 26.0 24.9 24.4 24.3 ore in China can be mined profi tably and this is refl ected in Russian Federation 12.1 16.7 17.5 16.3 the large increase in China’s production in recent years. world total 205.8 207.6 218.7 226.6

australian commodities > vol. 14 no. 2 > june quarter 2007 321 metallurgical coal

Indian export tax introduced in 2007 The most signifi cant development in the iron ore industry in the fi rst half of 2007 has been the introduction of a tax on Indian iron ore exports. In order to ensure suffi cient iron ore supplies for domestic steel makers, the Indian Government has imposed a tax of 300 rupees (US$7) a tonne on iron ore exports. The export duty for iron ore fi nes with an iron content of less than 62 per cent has since been reduced to 50 rupees (US$1.20) a tonne. This is because Indian blast furnaces and pelletising facilities are not equipped to handle iron ore fi nes with a low iron content. The imposition of a tax on iron ore exports is expected to limit the growth of Indian exports in 2007 and 2008. Indian iron ore exports are forecast to increase by around 2 per cent in both 2007 and 2008, refl ecting the tax induced higher price and subsequent softer demand for Indian iron ore in international markets.

metallurgical coal trade Global metallurgical coal trade is forecast to increase by 5 per cent to 219 million tonnes in 2007 and by a further 4 per cent to 227 million tonnes in 2008. Australia is expected to account for the majority of the increase in exports, while export growth from Canada is expected to remain weak. strong growth in Australian exports Following a decline in 2005-06, Australian exports of metallurgical coal are forecast to rise by around 10 per cent to 132 million tonnes in 2006–07. However, the value of exports is forecast to fall as lower prices more than offset higher volumes. In 2007-08, Australian exports of metallurgical coal are forecast to increase by a further 5 per cent to 139 million tonnes, refl ecting higher mine output and increased export capacity in Queensland. The value of Australia’s metallurgical coal exports in 2007-08 is forecast to rise, refl ecting higher export volumes and the expectation of higher prices. The main threat to Australia not achieving these exports is capacity in coal supply chains, particularly in Queensland. The forecast increases in Australian exports of metallurgical coal refl ect additions to production capacity in 2007 and 2008. In Queensland, the Carborough Downs, Curragh North, Isaac Plains and Poitrel coal mines all commenced operations in late 2006 or early 2007. In addition, Anglo Coal Australia’s Dawson coal Australian iron and steel outlook mine (5.7 million tonnes a year capacity) and Qcoal’s 2005 2006 2007 % Sonoma coal mine (2 million tonnes a year capacity) are -06 -07 s -08 f change expected to begin production in late 2007. Queensland’s Production Iron and steel s Mt 7.87 8.00 8.27 3.4 coal production will be further boosted when Anglo Coal Iron ore Mt 263.8 291.8 322.0 10.3 Australia’s 4 million tonne capacity opencut mine at Lake Metallurgical coal Mt 132.5 136.9 144.2 5.3 Lindsay begins operations in 2008. Exports In New South Wales, production capacity of semi- Iron and steel Mt 2.43 2.65 2.81 6.0 – value A$m 1 674 1 743 1 786 2.5 soft coking coal is expected to be increased with the Iron ore Mt 239.4 263.8 295.3 11.9 startup of the Ashton and Newpac longwall mines, which – value A$m 12 854 15 914 18 695 17.5 Metallurgical coal Mt 120 132 139 5.3 commenced operation in early 2007. Overall, Australia’s – value A$m 17 003 15 004 15 242 1.6 metallurgical coal production is forecast to rise by 3 per cent in 2006-07 to 137 million tonnes and a further 5 per See back tables for details. s ABARE estimate. f ABARE forecast. cent to 144 million tonnes in 2007-08.

322 australian commodities > vol. 14 no. 2 > june quarter 2007 gold gold chris rumley » [email protected]

Weak growth in mine production together with strong jewellery demand and high levels of dehedging resulted in a tight supply–demand balance in early 2007. From the beginning of January to late April 2007, gold prices increased by around 8 per cent, to a yearly high of over US$690 an ounce, driven largely by increased gold price and US dollar/euro investment demand. Higher crude oil prices and the daily, ended 15 June 2007 potential for increased infl ation are likely to have gold price encouraged greater investment in gold as a hedge 1.35 700 against possible infl ationary pressures. After averaging US$650 an ounce in the fi rst three 1.30 600 months of 2007, gold prices averaged US$680 an ounce in April, the highest monthly average since 1.25 500 May 2006. Apart from greater investment demand, the rise in gold prices also refl ected weakness in the 1.20 400 US dollar against other major currencies, such as the euro, and continued reductions in the outstanding 1.15 US$/euro 300 hedge positions of major gold producers. After peaking in April, gold prices subsequently US$/euro US$/oz fell to around US$644 an ounce in mid-June. Central JulyJan July Jan bank gold sales in this latter period may have altered 2005 2006 2007 investor perceptions of the supply–demand situation, contributing to the easing in gold prices. prices to remain high into 2008 Gold prices are forecast to remain high in the second half of 2007 and into 2008, largely because of expected strength in investment demand. World gold prices in 2007 are forecast to average 11 per cent higher at around US$670 an ounce. In 2008, prices are forecast to average around US$680 an ounce, largely refl ecting expected continued strength in investment demand. Uncertainty over the outlook for interest rate move- gold priceprices ments in the United States, concerns about the US daily, ended 15 June 2007 current account defi cit and indications that a number of central banks may consider reducing their holdings rand 140 of US dollars are all expected to encourage investment demand for gold as a hedge against a possible 130 US$ depreciation in the US dollar. Although investment demand is expected to be 120 the major infl uence on gold prices over the forecast period, a number of other factors are expected to 110 underpin the gold price. First, gold sales by signatories A$ to the second European Central Bank Gold Agree- 100 euro ment are forecast to remain below the annual limit of 500 tonnes. Second, fabrication demand is expected index to recover modestly from the downturn experienced JanApr July Oct Jan Apr in 2006 as consumer incomes in key regions such as 2006 2007 australian commodities > vol. 14 no. 2 > june quarter 2007 323 gold

India, the Middle East and China grow. Third, dehedging is forecast to continue, albeit at lower rates than in 2006, and will be a positive for prices in the near term. world mine production to rise in 2007 and 2008 After falling by 3 per cent in 2006, world gold mine production in 2007 is forecast to increase by 3 per cent to around 2550 tonnes. Increased production in China and Indonesia is expected to more than offset a decline in output in South Africa and lower production in Canada. In the fi rst quarter of 2007, production from Freeport’s Grasberg mine in Indonesia more than doubled (to just over 33 tonnes) year on year, as the operation mined ore containing higher grades of gold. The startup of a number of smaller scale projects in Australia and Peru as well as the buildup of output from existing operations in the United States are also expected to support an increase in world gold mine production in 2007. A number of new mines will move to full production in 2007. In Ghana, Newmont’s Ahafo mine commenced operation in mid-2006 and is expected to produce between 410 000 and 450 000 ounces in 2007 as the mine enters its fi rst full year of production. In the United States, Newmont’s Leeville and Phoenix mines (combined production of around 750 000 ounces a year) both commenced commercial operation at the end of 2006 and are expected to achieve full production in 2007. Additional production is also expected from new mines in the United States and China. In the United States, mining at Barrick Gold’s Ruby Hill operation in Nevada (initial production of 120 000 ounces a year) commenced in the fi rst quarter of 2007. In China, Sino Gold’s Jinfeng mine in Guizhou province started production in mid-2007 and is expected to initially produce 180 000 ounces of gold. Another Chinese operation, Jinshan producer hedging Gold Mines’ Chang Shan Hao (217) project in Inner Gold producers may choose to sell forward a Mongolia, is expected to commence operation in the portion of their future output in order to reduce their second half of 2007, with annual production of 117 000 exposure to the risk of lower gold prices at the time ounces. of actual production. South African gold mine production has declined Producer hedging involves gold loaned by the substantially over the past decade, as production costs offi cial sector for producer forward sales being immediately sold on the spot market (to be later have increased and rand denominated gold prices repaid to the central bank from mine production). have fallen. Production is expected to stabilise in 2007 As a result, future mine supply of gold is effectively as Gold Fields’ South Deeps mine returns to full produc- brought forward. tion and projects to deepen existing gold operations When gold producers in aggregate increase are completed. Canadian gold output in 2006 was the their hedge positions, there is effectively an lowest since 1985. The decline was mainly attributable increase in gold supply on the spot market. This to a number of mine closures and lower ore grades at was the situation in much of the 1980s and 1990s, when producers responded to expectations of operating mines. continued relatively low prices by hedging some In 2008, world mine production is forecast to increase of their future production. by over 3 per cent to around 2630 tonnes, largely However, since 2000, expectations among because of higher output in Australia, the United States producers of gold price increases reduced the and China and a partial recovery in South Africa’s gold incentive to sell forward their future production. production. In South Africa, Harmony Gold’s Tshepong This has resulted in net producer dehedging over Decline project in Free State (production of 170 000 this period, with an effective reduction in gold supply as the rate of gold repayments to central ounces a year) is expected to commence production banks exceeds new producer hedging. by mid-2008. Another Harmony Gold operation, the Hidden Valley project in Papua New Guinea, is expected

324 australian commodities > vol. 14 no. 2 > june quarter 2007 gold

to produce around 250 000 ounces of gold a year when it commences production in late 2008. European gold production is forecast to increase from mid-2008 as Agnico Eagle’s Kittilä project in northern Finland begins operation. The mine is expected to produce 150 000 ounces a year.

gold output to increase in China In 2006, gold production in China increased by around 8 per cent to just over 247 tonnes, ranking China alongside Australia as the world’s equal third largest gold producer behind South Africa and the United States. Most of China’s gold output is consumed domestically. Growth in China’s gold mine production is expected to remain strong in 2007 and 2008. The uptake of more efﬁ cient mining techniques and better exploration technology by domestic producers as well as continued investment in explo- gold price volatility rolling 22 day ration and development by international mining annualised rate, ended 15 June 2007 companies is expected to support this increase.

world fabrication demand to recover in 2007 30 World gold fabrication demand declined by just over 11 per cent in 2006 to 2918 tonnes, largely because of a fall in gold jewellery demand in the 20 Middle East, India and Europe. However, much of the drop in fabrication demand occurred in the ﬁ rst half of 2006 as demand for gold jewellery, particu- 10 larly in India, was negatively affected by high and volatile gold prices. Despite high gold prices and in contrast to a decline in consumption in other key % markets, China’s gold jewellery consumption rose by Jan JulyJan July Jan 2 per cent to 245 tonnes in 2006, as strong growth 2005 2006 2007 in consumer incomes supported purchases of luxury gold outlook items, such as gold.

World gold fabrication demand is forecast to 2006 2007 f 2008 f % recover in 2007 largely because of expected World change stronger demand for gold jewellery in India, the Fabrication Middle East and China. In China, continued strong consumption t 2 918 3 053 3 140 2.8 economic growth and rising urban incomes is Mine production t 2 474 2 548 2 631 3.3 expected to result in further increases in demand for Scrap sales t 1108 1 050 850 – 19.0 Net stock sales t – 663 – 545 – 341 – 37.4 gold jewellery in 2007. In the ﬁ rst quarter of 2007, – official sector t 328 420 380 – 9.5 world jewellery consumption increased by an esti- – private sector t (618) (665) (521) mated 17 per cent year on year. – producer hedging t (373) (300) (200) Price US$/oz 605 670 680 1.6 In India and the Middle East, a reduction in gold 2005 2006 2007 price volatility has encouraged consumers to re-enter -06 -07 s -08 f the market and invest in jewellery and other gold Australia ornaments. Over the remainder of 2007 and in 2008, Mine production t 250 252 270 7.1 Exports t 315 369 386 4.6 the anticipated pickup in fabrication consumption in – value A$m 7 089 9 542 10 648 11.6 these markets will be driven largely by continued Price A$/oz 707 814 858 5.4 growth in household disposable incomes. See back tables for details. s ABARE estimate. f ABARE forecast.

australian commodities > vol. 14 no. 2 > june quarter 2007 325 gold

offi cial sector sales In 2006, offi cial sector sales dropped by 51 per cent to 328 tonnes, mainly as a result of reduced sales from signatories to the second European Central Bank Gold Agreement. Of the signatories to the agreement, France was the largest seller, with sales of over 100 tonnes. Partially offsetting gold sales by other central banks in 2006 were bullion purchases by the central bank of the Russian Federation. In early 2006 the Russian central bank indicated that it would consider increasing its holdings of gold. Subsequently, in the second half of 2006, it increased its offi cial holdings by around 15 tonnes, refl ecting a long term commitment to increase the share of gold in its total reserves to around 10 per cent. However, at current gold prices, gold accounts for the equivalent of only 2 per cent of total asset reserves in the Russian Federation. Offi cial sector sales in 2007 are forecast to rise by around 28 per cent to 420 tonnes, largely because of an increase in sales by central banks that are signatories to the second central bank agreement. In the fi rst fi ve months of 2007, gold sales by signatories to the agreement amounted to around 202 tonnes, led by the central banks of Spain (gold sales of around 108 tonnes) and France (39 tonnes), substantially more than in the fi rst fi ve months of 2006 but similar to the same period in 2005. There has been ongoing debate among some market participants about the potential for the central banks of China and certain oil exporting nations to increase their gold holdings, in order to reduce the weighting of US dollar holdings in their asset portfolios. In March 2007, the value of China’s foreign exchange reserves was around US$1.2 trillion, the majority being US dollar denominated assets. At current gold prices, gold accounts for the equivalent of only 1 per cent of total asset reserves in China. dehedging Gold producers cut 373 tonnes from their outstanding hedge positions in 2006, substantially more than the reduction of 86 tonnes in 2005. In the fi rst quarter of 2007, gold producers are estimated to have reduced their outstanding hedge positions by around 128 tonnes. The majority of the dehedging was conducted by Barrick Gold (40 tonnes), as it elimi- nated the hedge book inherited when it purchased Placer Dome. A number of other major gold producers reduced their outstanding hedge books in the fi rst quarter of 2007. Gold Fields closed out around 22 tonnes of the Western Areas’ hedge that it acquired when it took over that company, and AngloGold Ashanti cut its hedge position by just under 19 tonnes. In 2007, dehedging is forecast to be around 300 tonnes. Continued dehedging is likely to be supported by producer expectations of gold price increases. For example, in April 2007, Lihir Gold announced it would close its hedge book (around 44 tonnes) over the remainder of 2007 to take advantage of continued high gold prices. In 2008, dehedging is expected to decline, largely because the ability of major mining companies to further cut their outstanding hedge positions will be constrained by the reduced size of their hedge books. Australia production and exports to rise in 2007-08 In 2006-07, Australian gold production is estimated to have increased by less than 1 per cent to 252 tonnes. Increases in production at Anglo Gold’s Sunrise Dam mine and the

326 australian commodities > vol. 14 no. 2 > june quarter 2007 gold startup of a number of new operations were partially offset by lower production from other operations. In the fi rst quarter of 2007, production declined to around 61 tonnes as cyclonic conditions and heavy monsoonal rains adversely affected production at a number of operations in Western Australia and the Northern Territory. Production at the Telfer mine in Western Australia declined by around 12 per cent relative to production in the December quarter 2006, as higher than average rainfall curtailed operations. The increase in Australian dollar gold prices over the past year is expected to have a positive effect on domestic gold production. Australian prices have increased from around $760 an ounce in mid-2006 to around $800 an ounce in mid-2007. In 2007-08, gold production is forecast to increase by 7 per cent to 270 tonnes as production at a number of existing operations increases and a number of new mines commence production. GBS Gold International’s Union Reefs operation (150 000 ounces a year) in the Northern Territory and Citigold’s Warrior mine (40 000 ounces a year) in Queensland both commenced production in late 2006 and will build up to targeted production during the remainder of 2007. In addition, Crescent Gold’s Laverton mine (90 000 ounces a year) and View Resources’ Bronzewing mine (initial production of 50 000 – 70 000 ounces a year) both commenced production in the fi rst half of 2007. A number of new mines are also expected to commence production in the remainder of 2007. Avoca Resources’ Trident project (190 000 ounces a year) in Western Australia is expected to commence production in mid-2007. Production from Straits Resources’ Hillgrove project in New South Wales (initial production of 20 000 ounces a year) is expected to commence in the third quarter of 2007. The value of Australian gold exports in 2006-07 is estimated to have increased by 35 per cent to $9.5 billion, as both export volumes and prices rise. In 2007-08, the value of gold exports is forecast to increase by around 12 per cent to $10.6 billion, refl ecting an increase in volumes shipped and higher export prices. The trend for exports to remain above domestic gold production in Australia is expected to continue in 2006-07 and 2007-08 as gold dore (up to 99 per cent pure) and scrap are sourced from overseas and refi ned into gold bullion.

australian commodities > vol. 14 no. 2 > june quarter 2007 327 aluminium

aluminium

eamon mcginn » [email protected]

prices remain high in early 2007 Driven principally by strong demand, in the fi rst fi ve months of 2007, world aluminium prices averaged US$2800 a tonne (US127c/lb). These prices were around 10 per cent higher than in the corresponding period of 2006 and are consistent with the buoyancy in metals markets in general. … but forecast to ease later in the year However, the recent strength in aluminium prices is unlikely to be maintained over the whole year as new production comes on stream and stocks begin to build. Taking into account the expected easing in prices in the second half of the aluminium stocks vs prices year, aluminium prices are forecast to average around October 2001 to March 2007 US$2660 a tonne (US120c/lb), 3 per cent higher than in 2006. Year end stocks of aluminium are fore- March 2007 cast to increase by 19 per cent to around 4.6 weeks 2500 of consumption. In 2008, global aluminium prices are forecast to 2000 average around US$2240 a tonne (US102c/lb), 15 per cent lower than in 2007. Production is forecast to 1500 exceed world consumption for a second year in succes- sion. As a result, stocks are forecast to rise further to the equivalent of 4.9 weeks of consumption by year’s end. 1000 global consumption increasing 2007 US$/t World aluminium consumption in 2007 is forecast 34567 to rise by 9 per cent to 37.1 million tonnes as strong stocks in weeks of consumption demand growth in China provides most of the impetus to the market. Consumption in the fi rst quarter of 2007 aluminium relative to copper prices increased by 12 per cent year on year, with China quarterly, ended March 2007 accounting for almost all of the increase. In 2008, world aluminium consumption is forecast to increase by almost 8 per cent to 39.9 million tonnes. 80 China is expected to continue to be the main driver of growth in global aluminium consumption as investment 60 in infrastructure to cater for rapid economic growth and large scale rural–urban migration continues at high rates. 40 Aluminium consumption is also benefi ting from the metal’s price competitiveness relative to other metals, 20 such as copper, for which it can be substituted in some uses. In the case of copper, aluminium prices in the past % have typically been around 80 per cent of the price of DDDDDDDDDD copper. However, since June 2002, aluminium prices 1997 2000 2003 2006 have declined relative to copper, and in recent times

328 australian commodities > vol. 14 no. 2 > june quarter 2007 aluminium have been only around 30–40 per cent of copper prices. Aluminium can substitute for copper in applications such as radiators, airconditioning, plumbing, electrical transformers and long distance electricity transmission cables. global consumption growth continues to be driven by China Aluminium consumption in China increased by 47 per cent year on year in the fi rst quarter of 2007, driven by strong growth in building construction, electrical power grids and consumer durables. In the fi rst quarter of 2007, investment in fi xed assets, such as factories and housing, increased by around 25 per cent year on year, and motor vehicle production increased by 18 per cent to just over 2 million vehicles. In 2007, around 95 gigawatts of generation capacity is expected to be added to China’s electricity grid. For 2007 as a whole, China’s consumption of aluminium is forecast to grow by almost 30 per cent to 11.2 million tonnes. In 2008, consumption of aluminium in China is forecast to increase by 18 per cent to 13.2 million tonnes, based on continued strong economic and industrial production growth. Part of this growth is linked to the transport sector, which accounts US vehicle production growth for 14 per cent of China’s aluminium consumption. The year on year, monthly, ended March 2007 National Development and Reform Commission has set a production target of 10 million motor vehicles 5 in 2008, up from 8 million in 2006 — an average car contains 120 kilograms of aluminium. % US consumption declining in 2007 –5 In the fi rst quarter of 2007, US consumption of primary aluminium declined by 3 per cent year on year, largely –10 because of a decrease in domestic vehicle production. For 2007 as a whole, US consumption is forecast –15 to decrease by 2 per cent to 6 million tonnes. The transport sector, which accounts for around 40 per –20 cent of US aluminium consumption, has been weak Dec Dec Dec since late 2005. For example, in the fi rst quarter of 20042005 2006 2007 2007, US production of trucks fell by 25 per cent year on year. In 2008, US consumption of primary aluminium is forecast to remain steady at around 6 million tonnes. An assumed increase in US economic growth is expected to support increased growth in the machinery and equipment, construction and packaging sectors, all major users of aluminium. Activity in the automobile and transport sector, more broadly, is expected to remain relatively subdued. world production increasing After increasing by 6 per cent in 2006, global aluminium production is forecast to increase by 11 per cent in 2007 to 37.6 million tonnes, mainly refl ecting the commissioning of new capacity in China, Iceland, the United Arab Emirates and the Russian Federation. In addition, the renegotiation of power contracts in the United States has allowed a number of previously idled smelters to be recommissioned. In the fi rst quarter of 2007, world production of aluminium increased by 12 per cent year on year, with China accounting for around 84 per cent of this increase. India was the second largest contributor, accounting for 5 per cent of global growth in aluminium in the period.

australian commodities > vol. 14 no. 2 > june quarter 2007 329 aluminium

increases in world production of In 2008, world aluminium production is forecast aluminium to increase by over 7 per cent to 40.4 million tonnes, Americas largely from continued strong production growth in 3.0 Europe China. rest of world China China, the key driver 2.0 Facilitated by increased availability of domestically produced alumina, aluminium production in China increased by 40 per cent year on year in the fi rst quarter of 2007. In 2007 as a whole, production 1.0 in China is forecast to grow by 28 per cent to 11.8 million tonnes, as 2.3 million tonnes of new capacity is expected to be commissioned in 2007. Mt In 2008, China’s production is forecast to grow by 2005 2006 2007 2008 15 per cent to 13.8 million tonnes. Around 750 000 tonnes of capacity is expected to be commissioned in 2008, including a further 300 000 tonnes at Shandong Weiqiao. Recent expansions notwithstanding, further growth of aluminium smelting capacity in China faces some important challenges. In particular, the electricity intensive nature of aluminium production, and the fact that most electricity in China is generated from coal fi red power stations, means that expansions to aluminium smelting capacity can, indirectly, have adverse environmental impacts. To address this issue, the Chinese Government has indicated its desire to limit the production and export of aluminium. In late 2006, the Chinese Government imposed regulations on the size, capital investment requirements and environmental standards of new smelters, and also increased the tax on exports of aluminium metal to 15 per cent (from 5 per cent). Refl ecting the new tax, in the fi rst quarter of 2007, China’s exports of primary aluminium fell by half, year on year, to 142 000 tonnes. At the same time, however, exports of semi- fabricated products, such as tubes and wires, which receive an export subsidy, increased by 89 per cent year on year.

expected capacity expansions in China in 2007

company location expansion kt Lanzhou Aluminium Lanzhou, Gansu 260 Baotou Aluminium Baotou, Inner Mongolia 250 Chiping Xinfa Power Renping, Shandong 240 Hunan Chuangyan Aluminium Changsha, Hunan 200 Emeishan Aluminium Group Emeishan, Sichuan 150 Jiaozuo Wanfang Aluminium Jiaozuo, Henan 140 MAQ Meishan Qimingzing Sichuan 125 Guangxi Anshun Guangxi 100 Henan Dengfeng Aluminium Dengfeng, Henan 100 Shandong Weiqiao Aluminium Shandong 100 Shanxi Guanlu Aluminium Yuncheng, Shanxi 100 Zouping Aluminium Zouping, Shandong 75 Henan Shenhuo Aluminium Yongcheng, Henan 70 various (small) various 350

330 australian commodities > vol. 14 no. 2 > june quarter 2007 aluminium elsewhere, production is moving to countries with low cost power In contrast to China, in the ﬁ rst quarter of 2007, production elsewhere in the world is estimated to have increased by a relatively modest 2.5 per cent year on year. With energy making up to around 30 per cent of the total cost of producing aluminium metal, producers have an incentive to relocate to countries that have relatively low energy costs. Reﬂ ecting this, strong production growth is occurring in Iceland, the United Arab Emirates and the Russian Federation, all of which have relatively low energy costs. In 2007, increased production in Iceland, the Russian Federation and the Middle East will be derived largely from the commissioning of new capacity. Alcoa’s Fjardaal smelter, in Iceland, was commissioned in April. At full capacity the smelter is expected to produce around 320 000 tonnes of aluminium a year. In the United Arab Emirates, a further 60 000 tonne expansion at Dubal’s Jebel Ali smelter is also expected to be commissioned, bringing total capacity to 720 000 tonnes. In the Russian Federation, expansions at Rusal’s Krasnoyarsk and Sayanogorsk smelters will bring their capacities to 948 000 and 750 000 tonnes a year respectively. In the United States, new contracts for the supply of notable world producers of aluminium power have allowed restarts at Intalco’s Bellingham ABARE estimates smelter in Washington, CFAC’s Columbia Falls smelter in Montana and Ormet’s smelter in Hannibal, production growth Ohio. These smelters have a combined capacity of 2007 2008 2007 2008 725 000 tonnes a year. kt kt % % In 2008, the commissioning of Rusal’s Komi smelter, Iceland 600 650 84 8 in the Russian Federation, and a 40 000 tonne a United Arab Emirates 930 950 18 2 Russian Federation 4 000 4 255 8 6 year expansion at Nordural’s Grundartangi smelter United States 2 550 2 600 12 2 in Iceland, are expected to support further production increases.

Australian aluminium export earnings to decline aluminium outlook

Australia’s aluminium production is estimated to have 2006 2007 f 2008 f % increased by 2 per cent in 2006-07 to 1.95 million World aluminium change tonnes. Production increased at the Kurri Kurri smelter Production kt 33 953 37 620 40 411 7.4 kt 34 023 37 085 39 913 7.6 in New South Wales (up 10 per cent) and the Boyne Consumption Closing stocks kt 2 764 3 300 3 797 15.1 Island smelter in Queensland (up 5 per cent), following – weeks consumption 4.2 4.6 4.9 6.5 capacity expansions completed in 2005. Production in Price US$/t 2 570 2 655 2 244 – 15.5 2007-08 is forecast to remain close to 2 million tonnes USc/lb 116.6 120.4 101.8 – 15.4 World alumina as no new capacity is expected to come on line. Spot price US$/t 433 331 247 – 25.4 In 2006-07, Australian export earnings from 2005 2006 2007 aluminium are estimated to have increased by around Australia -06 -07 s -08 f 20 per cent to $5.7 billion, reﬂ ecting substantially Production Bauxite Mt 60.9 64.2 66.5 3.6 higher export prices and greater volumes shipped. In Alumina kt 17 826 18 731 20 530 9.6 2007-08, export earnings are forecast to decline by 8 Aluminium kt 1 912 1 949 1 950 0.1 per cent to $5.3 billion as the effect of higher export Exports Alumina kt 14 499 15 246 16 727 9.7 volumes are more than offset by forecast lower export – value A$m 5 262 6 339 6 306 – 0.5 prices. Aluminium kt 1 617 1 641 1 647 0.4 – value A$m 4 788 5 741 5 277 – 8.1 See back tables for details. s ABARE estimate. f ABARE forecast.

australian commodities > vol. 14 no. 2 > june quarter 2007 331 alumina

alumina

eamon mcginn » [email protected]

Alumina spot prices declined substantially in the second half of 2006 following an easing in the tight supply–demand balance. However, in the fi rst quarter of 2007, spot alumina prices increased to around US$317 a tonne, 38 per cent up on the December 2006 average of US$230 a tonne. Disruptions to production in Guinea, which holds around 30 per cent of world bauxite reserves, forced a number of refi neries to reduce alumina production. alumina spot prices to decline in 2007 and 2008 For 2007 as a whole, alumina spot prices are forecast to decline by 24 per cent to average US$330 a tonne. Production increases in China, Brazil and Australia are expected to exceed consumption growth. In 2007, world production of alumina is forecast to increase by 7 per cent to 78 million tonnes, largely through the commissioning of new capacity. For example, Alunorte’s Barcarena refi nery in Brazil is expected to increase production in 2007 by around 760 000 tonnes. In Australia, the 1.8 million tonne expansion at Alcan’s Gove refi nery is also expected to be commissioned in 2007. In 2008, alumina spot prices are forecast to decline by 25 per cent to average US$247 a tonne, as higher global production is expected to more than offset increased consumption. Global alumina production in 2008 is forecast to increase by around 6 per cent to 82.3 million tonnes. Expansions in Brazil, at Alunorte’s Barcarena refi nery (2.3 million tonnes a year) and Alumar’s Sao Luis refi nery (2.1 million tonnes a year), are expected to be major contributors to this increase. higher Australian production, but lower export earnings Australian production of alumina is estimated to have increased by 5 per cent to 18.7 million tonnes in 2006-07, largely through increased production at Rio Tinto’s Yarwun refi nery in Gladstone, Queensland. Delays in the expansion at Alcan’s Gove refi nery in the Northern Territory hampered further Australian production growth. In 2007-08, Australian alumina production is forecast to increase by 10 per cent to 20.5 million tonnes, driven largely by Alcan’s Gove refi nery expansion in the Northern Territory, which is due to be commissioned in the third quarter of 2007. Australia’s alumina export earnings in 2006-07 are estimated at $6.3 billion, 20 per cent higher than in 2005-06, refl ecting high export prices and volumes. In 2007-08 Australian export earnings from alumina are forecast to remain relatively unchanged as increased export volumes are offset by forecast lower export prices.

332 australian commodities > vol. 14 no. 2 > june quarter 2007 nickel

nickel

rebecca mccallum » rmccallum @abare.gov.au

In a period of resource markets buoyancy, nickel has been the standout performer. In the fi rst fi ve months of 2007, nickel prices averaged around US$45 000 a tonne, 86 per cent higher than the average for 2006 (US$24 250) and an increase of 172 per cent year on year. These prices are the highest ever (in real terms), refl ecting low stocks and constrained growth in production capacity. Nickel stocks are currently at a historical low of 2.5 weeks of world consumption. The rapid increase in the nickel price since 2005 has been the result of strong demand growth for stainless steel and nickel alloys coupled with supply constraints, such as a lack of new production capacity and labour disputes. As a result of the tight supply–demand situation, any real or perceived threat to the future availability of nickel such as labour strikes, port closures or project delays, has resulted in price increases. prices to remain high in 2007 and 2008 world nickel In mid-May, nickel prices were around US$54 000 a tonne, more than double the 2006 average. Prices eased stocks early in June to around US$40 000 a tonne as London Metal Exchange (LME) stocks increased and changes to 30 000 12 LME nickel metal lending rules were announced. In 2007 price as a whole, nickel prices are forecast to average around US$41 500 a tonne, an increase of 71 per cent on the 20 000 8 2006 average. The record nickel prices in 2007 refl ect strong growth in demand for stainless steel in China, robust demand for nickel alloys because of increased 10 000 4 orders for commercial, civil and military aircraft and limited additions to global nickel production capacity. 2007 weeks Nickel stocks are expected to build slowly toward US$/t consumption the end of 2008 as growth in mine production, 1988 1992 1997 2002 2007 2008 supported by production of nickel pig iron in China, outpaces demand growth. Refl ecting the improved world nickel stocks to real price supply–demand situation, nickel prices are forecast to monthly, January 1995 to March 2007 ease in 2008 to average around US$35 000 a tonne March 2007 — still very high in historical terms. However, falls in nickel prices are expected to be limited by the rate at which 40 000 new mines are able to reach full production capacity and by the high cost of producing nickel pig iron. 30 000 substitution possibilities limited 20 000 During the fi rst quarter of 2007, nickel prices averaged 180 per cent higher than in the March quarter 2006. Yet during the same period, world consump- 10 000

tion of primary nickel increased by 8 per cent year on 2007 year, reﬂ ecting limited substitution options. The recent US$/t increases in nickel prices have ﬂ owed through to stain- 2468101214 less steel prices and encouraged substitution away weeks of world consumption

australian commodities > vol. 14 no. 2 > june quarter 2007 333 nickel

from stainless steels containing nickel to the limited extent that this is possible. For some applications, plastics or galvanised steel can be used but in many instances the product must have properties — such as corrosion resistance — that can only be achieved by the use of stainless steel that contains nickel. As a Nickel pig iron, also referred to as nickel chromium pig iron, is a result, the consumption of nickel in stainless steel ferronickel pig iron produced from low grade nickel laterite ore production has continued to increase. The stain- sourced primarily from Indonesia and the Philippines. Nickel pig less steel industry accounts for around 60 per iron generally contains less than 5 per cent nickel (compared with cent of primary nickel consumption. 25–40 per cent in conventional ferronickel) and has a higher There are also few or no substitution possibili- phosphorous and sulfur content than conventional ferronickel. However, some producers are reporting that they are able to ties in some industry applications, such as aero- produce nickel pig iron with a nickel content of up to 30 per cent. space, where changing the chemical composition China is currently the only country known to be producing of superalloys used or switching to an alternative nickel pig iron. The product is not exported since it attracts a 10 material would require substantial research and per cent export tax. In an attempt to contain costs, some stainless development costs. Nickel based superalloys are steel producers in China are using nickel pig iron as a partial substi- used in the aerospace industry in turbine blades tute for some of the refi ned nickel metal or ferronickel used in the and components of jet engines, in the oil and gas manufacturing process to offset high nickel prices. Nickel pig iron is cheaper than conventional ferronickel; however, its use is limited industry for downhole tubing and in turbines in by high concentrations of phosphorous and carbon. Nickel pig gas fi red engines for electrical power generation iron is consumed primarily in the production of 200 series stainless because of their corrosion resistance and strength steels, which have a lower nickel content than the 300 series. at high temperatures. Given the small proportion In the short term, nickel pig iron production capacity could of total costs accounted for by nickel in these replace up to 80 000 tonnes of nickel, mainly in the produc- applications, demand for nickel in superalloys is tion of the lower grade 200 series stainless steels. However, continuing to rise, despite the high nickel price. increased use of nickel pig iron is not expected to result in a reduction in overall demand for nickel. Nevertheless, it may slow growth in demand for refi ned nickel or ferronickel as it consumption growth forecast to remain supplements supplies of the metal. high but moderating The use of nickel pig iron in 300 series stainless steels has so In 2007, world nickel consumption is forecast far been limited, since nickel pig iron is still in an experimental to increase by over 4 per cent to 1.46 million phase. Attempts are being made to increase its use in the 300 tonnes. Nickel demand in China is expected series; however, it is uncertain how purchasers and end users of stainless steel will respond to what is currently seen as a low to remain strong, with consumption forecast to quality material being used in higher grade stainless steels. grow by around 23 per cent to 312 000 tonnes Relatively high production costs mean that the scope for in 2007 as strong growth in industrial production signifi cant production and use of nickel pig iron on a longer term drives increased demand for stainless steel and basis may be limited. The cost of producing a tonne of nickel hence also for nickel. Higher domestic produc- pig iron with nickel content equivalent to that of refi ned nickel is tion capacity in China has reduced the need to approximately US$26 000 — which at current prices results in an import stainless steel. Refl ecting this, stainless attractive return to producers. In comparison, the highest reported cash costs for producing refi ned nickel are around US$9900 steel imports declined from 500 000 tonnes in a tonne (mining costs of US$7700 a tonne and refi ning costs the fi rst quarter of 2006 to 98 000 tonnes in the of US$2200 a tonne). This means lower nickel prices over the fi rst quarter of this year. medium term, as more supply capacity comes into operation, are Growth in nickel consumption in Europe and likely to result in the closure of nickel pig iron capacity. the United States is forecast to moderate in 2007 A further diffi culty in expanding nickel pig iron capacity in as stainless steel production falls. Very high and China is that the government is moving to consolidate industries volatile nickel prices have encouraged EU and associated with iron and steel production to improve competitiveness, resource utilisation and to limit environmental damage. US suppliers to draw down existing stocks of Under these policies, it is unlikely that nickel pig iron production stainless steel. This year, producers are expected will continue to grow in the medium term as it is produced in small, to meet orders from stocks as far as possible, localised blast and electric arc furnaces, is energy intensive and particularly in the September quarter when emits high levels of pollutants. demand is typically lower.

334 australian commodities > vol. 14 no. 2 > june quarter 2007 nickel

In 2008, world nickel consumption is forecast to increase by around 3 per cent to 1.50 million tonnes, mainly refl ecting continued growth in China’s industrial production and construction activity. In addition, there is expected to be continued growth in consumption of stainless steel, nickel superalloys in the aerospace industry and increased use of nickel in batteries. production increasing slowly In 2007, mine production is forecast to rise by 2 per cent to 1.50 million tonnes, supported by increased output from existing mines in the Russian Federation, Canada, the Philippines and Indonesia. In 2008, nickel mine production is forecast to increase by 3 per cent to 1.56 million tonnes. The increase in production refl ects the commencement of production at a number of mines around the world, including in Turkey, Brazil, New Caledonia and Australia. The full benefi t of increased production from this new capacity is not expected to be realised until after 2008, refl ecting the time required for production to reach full capacity. Despite only moderate growth in mine output in 2007, production of refi ned nickel is forecast to increase by 6 per cent to 1.43 million tonnes. Increased production is expected to occur at existing refi neries that have been operating below capacity and from small additions to capacity, particularly in China. Refi ned nickel production is forecast to increase by 5 per cent to 1.51 million tonnes in 2008 as new mines provide increased input for nickel smelters. China is expected to account for a signifi cant proportion of increased output of ferronickel. Refi ning capacity outside China will also increase in 2008, largely from the expansion at BHP Billiton’s Yabulu refi nery in Australia. Australian production and exports rising Mine production in Australia in 2006-07 is estimated to have increased by 6 per cent to 198 000 tonnes. Western Areas’ Forrestania project (capacity of 13 000 tonnes a year) commenced operation during the March quarter, and there were fewer supply disruptions from cyclones in Western Australia than in 2005-06. In 2007-08, production is forecast to increase by 16 per cent to 230 000 tonnes. Allegiance’s Avebury mine (capacity of 8500 tonnes a year) in Tasmania is scheduled to start operations at the end of 2007 and BHP Billiton’s Ravensthorpe project in Western Australia (capacity of 50 000 tonnes a year) is due to be commissioned in early nickel outlook 2008. A planned shutdown at Minara Resources’ Murrin 2006 2007 f 2008 f % Murrin operations in late 2007 may offset some of the World change production gains associated with the increased produc- Production kt 1 352 1 434 1 506 5.0 Consumption kt 1 401 1 463 1 501 2.6 tion capacity in 2007-08. Closing stocks kt 87 58 62 6.9 Refi ned nickel production is estimated to have increased – weeks consumption 3.2 2.0 2.2 10.0 by 6 per cent to 122 000 tonnes in 2006-07. Increased Price US$/t 24 252 41 500 35 000 – 15.7 production at Kalgoorlie throughout the year is expected USc/lb 1 100 1 882 1 588 – 15.7 2005 2006 2007 to have offset lower production at Kwinana in the March Australia -06 -07 s -08 f quarter during a planned maintenance shutdown. Production The value of Australian nickel exports is estimated to Mine kt 186 198 230 16.2 Refined kt 115 122 141 15.6 have risen by 160 per cent in 2006-07 to $9.02 billion Intermediate kt 74 61 64 4.9 and is forecast to increase by a further 11 per cent in Exports s kt 198 225 265 17.8 2007-08 to $10.0 billion, refl ecting the high forecast – value A$m 3 457 9 024 9 973 10.5 world nickel prices and increased export volumes. See back tables for details. s ABARE estimate. f ABARE forecast.

australian commodities > vol. 14 no. 2 > june quarter 2007 335 copper

copper

kate penney » [email protected]

After declining in the second half of 2006 and early 2007 to around US$5200 a tonne in early February, copper prices recovered strongly to over US$8000 a tonne in May, driven largely by stock rebuilding in China and supply disruptions (such as rockslides, labour disputes and mine fl ooding). The tight supply–demand balance in early 2007 has resulted in a steady decline in copper stocks on the London Metal Exchange. prices to change little in 2007… A modest easing from recent highs is forecast to result in global copper prices averaging over US$6700 a tonne (around US306c/lb) in 2007, close to the average in 2006. World refi ned production is forecast to increase by more than 4 per cent to 18.2 million tonnes, despite the continued likelihood of disruptions to supply through a shortage of copper concentrates. World copper consumption is forecast to increase by almost 6 per cent to 18.0 million tonnes, world copper price with demand from China remaining strong. Refl ecting monthly, ended May 2007 these factors, global stocks of copper are forecast to increase to 875 000 tonnes, equivalent to around 2.5 weeks of consumption. 6000 … but to ease in 2008 World copper prices are forecast to fall by 12 per cent 4000 in 2008 to average US$5900 a tonne (US268c/lb). Global copper consumption is forecast to increase by 5 per cent to around 19 million tonnes, based largely 2000 on continued strong consumption growth in China. With global refi ned production forecast to increase by 2007 over 4 per cent to just under 19 million tonnes in 2008, US$/t global copper stocks are forecast to remain at around 1990 1994 1998 2002 2006 2.5 weeks of consumption. consumption to increase in China after destocking in 2006 In the fi rst quarter of 2007, copper consumption in China is estimated to have increased by 36 per cent year on year, driven by continued strong economic and industrial production growth. Refl ecting China’s rapid growth in economic activity, in the fi rst four months of 2007, production of copper intensive products rose strongly. For instance, production of personal computers and motor vehicles increased by 30 per cent and 19 per cent, year on year, respectively. Over the same period, investment in fi xed assets — of which new construction is a major component — was almost 26 per cent higher than in the corresponding period of 2006. High copper prices, particularly in the fi rst half of 2006, encouraged Chinese consumers to delay purchases of refi ned copper and instead draw down existing stocks. Lower copper prices in the second half of 2006 and early 2007 encouraged the Chinese Government and copper users to rebuild stocks. Refl ecting the turnaround in sentiment and purchasing activity, China’s imports of all copper (concentrates, blister, scrap, refi ned, alloys and semi- fabricated) are estimated to have increased by over 40 per cent year on year in the fi rst four months of 2007. Also encouraging increased imports of refi ned copper and copper

336 australian commodities > vol. 14 no. 2 > june quarter 2007 copper scrap were cuts in output from some smelters due to China’s net imports of refined copper diffi culties in securing copper concentrates. monthly, ended April 2007 For the remainder of 2007 and in 2008, Chinese copper consumption is expected to remain high, refl ecting strong demand from continued 150 industrialisation, urbanisation and the expansion of electric power output. An additional 95 gigawatts of 100 capacity is expected to be connected to the electricity grid in 2007. Since the power industry accounts for 50 around half of China’s copper consumption (where copper is used in electricity generation), additions to total power capacity are expected to underpin kt growth in China’s consumption of copper. –50 weaker construction activity to affect US 1997 1999 2001 2003 2005 2007 consumption In the fi rst quarter of 2007, US copper consumption declined by 25 per cent year on year, largely owing to weakness in the residential housing market. In the fi rst four months of 2007, construction spending and new residential home sales declined by 3 per cent and 20 per cent, year on year, respectively. US copper consumption is expected to recover toward the end of 2007 as consumer confi dence improves and nonhousing consumption remains strong. In 2008, US copper consumption is forecast to increase by 3 per cent to 2.2 million tonnes, based largely on an expected recovery in residential construction activity. fewer disruptions to mine supply expected In 2007, world copper mine production is forecast to increase by 5 per cent to 16 million tonnes on the basis of fewer expected supply disruptions and the commissioning of a number of new projects. An estimated 700 000–800 000 tonnes of copper production was lost in 2006 as labour disputes and other production disruptions, as well as the mining of lower grade ores, adversely affected production in a number of major copper outlook producing regions. 2006 2007 f 2008 f % Additional copper mine capacity is expected from World change Freeport’s Cerro Verde expansion in Peru (an increase Production – mine kt 15 234 15 996 17 185 7.4 of approximately 145 000 tonnes a year), which was – refined kt 17 437 18 196 18 992 4.4 commissioned in early 2007; and, after being mothballed Consumption kt 17 066 18 024 18 959 5.2 in 1998, the restart of BHP Billiton’s Pinto Valley operations Closing stocks kt 703 875 907 3.7 – weeks consumption 2.1 2.5 2.5 0.0 in the United States (70 000 tonnes a year). Price US$/t 6 741 6 735 5 900 – 12.4 World copper mine production in 2008 is forecast to USc/lb 305.8 305.5 267.6 – 12.4 increase by a further 7 per cent to 17.2 million tonnes as 2005 2006 2007 new projects in Chile, the United States and Zambia come -06 -07 s -08 f on line. In Chile, Codelco plans to commission its Gaby Australia Mine output kt 933 900 1 112 23.6 project (150 000 tonnes a year capacity) and expand Refined output kt 461 451 608 34.8 output at Andina (by 80 000 tonnes a year). In addition, Exports Anglo American and Xstrata plan to increase production – ores and conc. kt 1 635 1 566 1 681 7.3 – refined kt 314 305 474 55.4 from Collahuasi by 105 000 tonnes a year following a – total value A$m 5 653 6 769 7 700 13.8 debottlenecking program. Further capacity expansions are See back tables for details. s ABARE estimate. f ABARE forecast.

australian commodities > vol. 14 no. 2 > june quarter 2007 337 copper

expected from Freeport’s Safford mine (109 000 tonnes) in the United States and Equinox Minerals Lumwana mine (169 000 tonnes) in Zambia. refi ned production to expand World production of refi ned copper is forecast to increase by 4 per cent to 18.2 million tonnes in 2007 and a further 4 per cent to 19.0 million tonnes in 2008, driven largely by forecast higher production in China and Chile. Over the past fi ve years, China’s refi ned copper production has increased by around 84 per cent, accounting for around a third of total growth in global refi ned production. China’s refi ning capacity is expected to continue to grow strongly in 2007 and 2008 through the anticipated commissioning of over 900 000 tonnes of new capacity. Included in this is Jiangxi Copper’s expected expansion of its Guixi smelter by 300 000 tonnes a year toward the end of 2007. Although refi ning capacity in China is being expanded, the extent to which this expansion is refl ected in production will be affected by refi neries’ ability to import raw materials. This is because growth in domestic production of concentrates and blister copper is expected to be relatively slower than growth in China’s refi ned production. In Chile, additional production capacity includes the Spence SX–EW (solvent extraction – electrowinning) project (200 000 tonnes a year) that was commissioned at the end of 2006 and the expected commissioning of the Gaby SX–EW project in 2008. Australian copper production to increase in 2007-08 Copper mine production in Australia in 2006-07 is estimated to have declined by 4 per cent to 900 000 tonnes. Lower production from Xstrata’s north Queensland operations, BHP Billiton’s Olympic Dam mine in South Australia and Newcrest Mining’s Telfer mine in Western Australia more than offset higher production at Oxiana’s Golden Grove mine in Western Australia and the commencement of production at Kagara Zinc’s Thalanga processing plant in Queensland. In 2007-08, Australian copper mine production is forecast to increase by 24 per cent to 1.1 million tonnes as a number of new projects are commissioned. Copperco’s Lady Annie mine in Queensland (25 000 tonnes a year), Newcrest Mining’s Ridgeway Deeps project in New South Wales (20 000 tonnes a year), Compass Resource’s Brown’s Oxide mine in the Northern Territory (10 000 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) are all expected to begin production in mid to late 2007. Production of refi ned copper in Australia is estimated to have declined by 2 per cent to 451 000 tonnes in 2006-07 as higher production from Xstrata’s Townsville copper refi nery was more than offset by lower output from Olympic Dam. In 2007-08, refi ned copper production is forecast to increase by 35 per cent to just under 608 000 tonnes. This increase is attributable to expected higher output from the Townsville copper refi nery (an expansion of 20 000 tonnes) and the commencement of SX–EW production from the Brown’s Oxide, Lady Annie and Leichhardt operations. After increasing by an estimated 20 per cent in 2006-07, Australian copper export earnings in 2007-08 are forecast to increase by a further 14 per cent to $7.7 billion. An increase in export volumes is expected to more than offset the effect on earnings of forecast lower export prices.

338 australian commodities > vol. 14 no. 2 > june quarter 2007 zinc zinc rebecca mccallum » rmccallum @abare.gov.au

At the beginning of April 2007, global zinc stocks had fallen to 1.8 weeks of world consumption following supply constraints and strong demand growth. Refl ecting this tight supply–demand balance, prices averaged US$3550 a tonne in the fi rst fi ve months of 2007, an increase of 33 per cent year on year. prices to remain high In 2007, stocks are forecast to remain at historical lows as consumption is expected to exceed production for the fourth consecutive year. For 2007 as a whole, prices are forecast to average around US$3580 a tonne, 9 per cent higher than the 2006 average. In 2008, increased capacity at new and existing mines, providing greater availability of concentrates, is forecast to result in zinc production exceeding consumption. Consequently, stocks are forecast to increase to 2.5 weeks of world consumption by world zinc the end of the year and prices to ease by 17 per cent to average under US$3000 a tonne for the year. stocks consumption growing despite high prices 3000 12 Zinc consumption is forecast to grow by almost 3 per cent in 2007 to around 11.4 million tonnes and by a price further 3 per cent in 2008 to 11.7 million tonnes. 2000 8 Increased demand for galvanised steel and zinc based alloys will be an important driver of increased zinc consumption. Half of all refi ned zinc is consumed 1000 4 in the construction sector and a further 25 per cent in transport industries, including motor vehicle manu- 2007 weeks facturing. These industries are expanding rapidly in US$/t consumption developing Asia, particularly India and China, as their 1992 1996 2000 2004 2008 economies grow. Despite zinc prices doubling in 2005–06, there is zinc outlook no evidence of signifi cant moves to the use of substi- 2006 2007 f 2008 f % tutes for zinc. Nevertheless, in the case of zinc alloys World change there has been some substitution of aluminium, plas- Production kt 10 736 11 273 11 836 5.0 tics and other materials in die casting where this is Consumption kt 11 068 11 356 11 696 3.0 Closing stocks kt 495 412 552 34.0 technically and economically feasible. However, any – weeks consumption 2.3 1.9 2.5 31.6 reductions in zinc use in this area have been offset by Price US$/t 3 276 3 577 2 963 – 17.2 increased demand for zinc in galvanised steel. Part USc/lb 148.6 162.2 134.4 – 17.1 of this latter growth refl ects high nickel prices and 2005 2006 2007 -06 -07 s -08 f consequent rises in prices of stainless steel that have Australia provided an incentive to use more galvanised steel in Mine output kt 1 380 1 370 1 687 23.1 some applications. Refined output kt 446 492 501 1.8 Exports – ores and conc. kt 1 821 1 878 2 372 26.3 some destocking in China to feed exports … – refined kt 388 385 444 15.3 During 2005 and the early months of 2006, China – total value A$m 2 540 4 349 4 938 13.5 was both the world’s largest producer and a net See back tables for details. s ABARE estimate. f ABARE forecast.

australian commodities > vol. 14 no. 2 > june quarter 2007 339 zinc

China’s zinc exports importer of refi ned zinc. Since then, however, and monthly, ended April 2007 as zinc prices have increased, China has become net exports a net exporter of zinc. Although production of 4000 40 zinc in China remains high and is increasing, in the price fi rst three months of 2007, apparent zinc consump- 3000 20 tion fell by 1 per cent year on year. While high prices may have discouraged some consump- 2000 kt tion, underlying demand is robust. As prices have increased, zinc producers in China may have 1000 –20 been attempting to take advantage of high prices by exporting stocks built up while prices were 0 –40 relatively low. In overall terms, China’s demand for zinc is US$/t –60 expected to remain strong for the rest of 2007 and Dec Dec Dec Dec in 2008, as transport and electricity infrastructure 2003 2004 2005 2006 2007 construction, requiring large quantities of the metal, continues at a rapid pace. … and moderate US consumption growth The United States is the world’s second largest consumer of refi ned zinc, using around 1.1 million tonnes a year. Growth in US zinc consumption is expected to be moderate in 2007, partly refl ecting lower housing construction starts in the second half of 2006. A forecast increase in housing starts in the second half of 2007 is expected to support a 3 per cent increase in zinc consumption in the United States in 2008. global supply response accelerating … Mine production is forecast to grow by 3 per cent in 2007 to 10.7 million tonnes, refl ecting increased production at new and existing mines. High prices have encouraged maximum production at existing mines, while operations are scheduled to commence at a number of locations in south America, Australia and Canada. These projects include San Cristobal in Bolivia (capacity of 165 000 tonnes a year), Cerro Lindo in Peru (110 000 tonnes a year), the Lennard Shelf restart in Australia (75 000 tonnes a year) and Langolis in Canada (54 000 tonnes a year). Refl ecting the growth in mine output, refi ned zinc production in 2007 is forecast to increase by 5 per cent to 11.3 million tonnes. A large proportion of the increase in refi ned zinc production is expected to come from new smelters in China and India. In addition, some new smelting capacity is expected to be commissioned in Peru in October, using increased zinc production associated with new mines. … but supply disruptions still a threat Refi ned zinc production in Iran is forecast to be lower in 2007 because of reduced local availability of zinc concentrates following a wall collapse at the Angouran mine in late 2006. The country’s largest zinc producer — Iran Zinc Mines Development Company — announced that unless it is able to import around 500 000 tonnes of ore in 2007, refi ned production may be reduced by up to 80 000 tonnes. If this is the case, refi ned zinc production in Iran in 2007 may be as low as 60 000 tonnes, down from 140 000 tonnes in 2005 before the mine wall collapsed.

340 australian commodities > vol. 14 no. 2 > june quarter 2007 zinc

In 2008, world mine production is forecast to increase by a further 6 per cent as mines that commenced operations in 2007 produce at an increased rate. In addition, Ozernoye (capacity of 300 000 tonnes a year) in the Russian Federation is scheduled to commence production in 2008. In 2008, refi ned production is forecast to increase by 5 per cent to 11.8 million tonnes, as new capacity is added in China and Canada. Australian production and exports to rise strongly in 2007-08 Zinc mine production in Australia is estimated to have been close to 1.4 million tonnes in 2006-07, similar to production in 2005-06. Increased production from Xstrata’s McArthur River mine (160 000 tonnes a year), CBH Resources’ Endeavor mine (80 000 tonnes a year) and the commencement of operations at Intec’s Hellyer Metals Project (30 000 tonnes a year) was offset by disruptions elsewhere. Production was lower at Perilya’s Broken Hill operations, Kagara Zinc’s Mount Garnet mine was affected by fl ooding, and there was reduced zinc output at Oxiana’s Golden Grove operation caused by lower zinc grades. Refi ned output of zinc is estimated to have increased by 10 per cent in 2006-07 to 492 000 tonnes as higher production at the Townsville and Hobart refi neries more than offset lower output at the Port Pirie smelter from a planned shutdown in August 2006. In 2007-08, Australian zinc mine production is forecast to increase by 23 per cent to almost 1.7 million tonnes. Higher production is forecast to result from the commencement of operations at Terramin’s Angas Zinc project (capacity of 65 000 tonnes a year), Perilya’s Flinders project (57 000 tonnes a year), Jabiru’s Jaguar mine (33 600 tonnes a year) and the restart of Teck Cominco and Scarborough Minerals’ Lennard Shelf mine (75 000 tonnes a year). In addition, higher output is expected from the expansion of Xstrata’s McArthur River and Mount Isa mines. Refi ned zinc production is forecast to increase to 500 000 tonnes in 2007-08, refl ecting the increased mine production. Exports of zinc ores and concentrates are estimated to have increased by 3 per cent in 2006-07 to nearly 1.9 million tonnes, while refi ned exports are estimated to have remained just under 390 000 tonnes. In line with increased production, exports of ores and concentrates and refi ned zinc are forecast to increase by 26 per cent to 2.4 million tonnes and by 15 per cent to 444 000 tonnes respectively in 2007-08. The total value of zinc exports in 2006-07 is estimated to have been $4.3 billion, refl ecting higher world prices. In 2007-08, export values are forecast to increase by 14 per cent to $4.9 billion as higher export volumes offset the effect on earnings of forecast lower prices.

australian commodities > vol. 14 no. 2 > june quarter 2007 341 drought and irrigation

> tim goesch > +61 2 6272 2009 > [email protected] drought and irrigation in Australia’s Murray Darling Basin tim goesch, ahmed haﬁ , mark oliver, sharon page, dale ashton, simon hone and brenda dyack

» On 19 April 2007, Australia’s Prime Minister announced that it was unlikely that any water would be available for irrigation at the commencement of the upcoming water year (1 July 2007) because of the need to provide a critical minimum supply of water to urban communities within the Murray Darling Basin. » Irrigators with large capital assets, such as perennial plants or core breeding stock, potentially face signifi cant costs if they receive low water allocations in 2007-08. » These potential losses suggest that irrigators may benefi t from being able to manage production risk in a more fl exible manner. Two possible options for improving fl exibility include freeing up interregional trade in water and allowing irrigators to carry over part of their allocation to the next season.

The volume of water held in storage in the Murray Darling Basin is critically low, as infl ows over the past few years have been historically low. In April this year, federal, state and territory leaders received a contingency planning report for the Murray Darling Basin stating that ‘unless there were very substantial early infl ows, there will be insuffi cient water available to allow any allocation at the commencement of the 2007-08 water year for irrigation, the environment or any other purpose other than critical domestic supplies’ (Overview Contingency Planning Report 2007a). On 19 April 2007, the Prime Minister announced that it was unlikely that any water would be available for irrigation at the commencement of the upcoming water year (1 July 2007) based on the need to provide a critical minimum supply of water to urban communities within the basin (Prime Minister of Australia 2007a). The Prime Minister noted that zero allocations could have a potentially devastating impact on irrigators, particularly those in the perennial horticulture and dairy industries (Prime Minister of Australia 2007a), and added that contingency measures would be modifi ed if seasonal conditions improved (Prime Minister of Australia 2007b). On 20 June 2007, a second contingency planning report was released, providing an update on the situation in the Murray Darling Basin (Overview Contingency Planning Report 2007b). The report states that, while rainfall across the basin returned to near average between January and May, infl ows to the Murray system remained low. The report also states that it is still possible that allocations to entitlement holders will be zero or very small in the southern part of the basin at the beginning of 2007-08, with the states announcing fi nal opening allocations for next season between mid-June and early July. australian commodities > vol. 14 no. 2 > june quarter 2007 343 drought and irrigation

To date, the South Australian Government has announced that Murray River irrigators will receive at least 1 per cent of their allocations as well as some carryover water from 2006-07 at the start of the 2007-08 season. Goulburn-Murray Water has also announced that carryover water from 2006-07 will be available to irrigators in July, while the New South Wales Government has announced that 2 gigalitres of water will be available for permanent plantings and key industrial users along the Murray River. First Ministers also agreed to a recommendation in the report that ‘any water that becomes available to entitlement holders should be available for trading both within and between states, under normal circumstances, in order to facilitate the early development of a water market and ensure limited water supply is used to its highest value’ (Prime Minister 2007c). While the probability of receiving infl ows in 2007-08 similar to those in 2006-07 is very low (for the twelve months to March 2007, infl ows were the lowest on record; MDBC 2007), the potential impact of reduced allocations on the major irrigated activities in the southern Murray Darling Basin needs to be assessed. Also, the management options available to irrigators to help mitigate such impacts need to be considered. The emphasis in this article is on the southern Murray Darling Basin (map 1). This is where most urban communities that are at risk of not receiving adequate water supplies for domestic use are located. Moreover, this is where the bulk of the perennial horticulture and dairy activities are located within the basin, and it is these industries that may fi nd it diffi cult and costly to adjust to signifi cant restrictions on access to water. The potential impact of reduced allocations on food prices is also considered. The substantial potential economic effects on irrigators of high value crops if little or no water is allocated to irrigation highlight the potential benefi ts from removing restrictions on interregional trade in water in the event that some water is made available for irrigation. The potential benefi ts from providing irrigators with a carryover facility so that

map1 southern Murray Darling Basin southern MDB irrigation areas

Broken Hill

er iv Dubbo R g n i l

a South Australia D Orange MDB Bathurst Mildura Griffith Murrumbidge e Ri ver Adelaide Murrumbidgee Murray Bridge Wagga Wagga Murray River Canberra Victoria MDB NSW Murray Queanbeyan Albury Echuca Wodonga Wangaratta Shepparton Horsham Bendigo

Ballarat Melbourne Geelong

344 australian commodities > vol. 14 no. 2 > june quarter 2007 drought and irrigation they can better manage their production risk in the map 2 seasonal outlook June–Aug 2007 future are also highlighted. chance of exceeding median rainfall 40–45 per cent water storages in the basin 45–50 per cent 50–55 per cent An extended period of severe drought has reduced infl ows into the Murray Darling Basin. While storage capacity in the main water storages located in the basin is around 26 000 gigalitres, the total volume of water currently held in these storages is only 2230 gigalitres. Of particular concern has been the extremely low rainfall in the headwater catchments feeding the Murray River. These catchments normally generate around half of total infl ows into the Murray River. Table 1 indicates that the volume of water held in storage in the southern Murray Darling Basin has fallen dramatically over the past year, with storage levels falling from 64 to 12 per cent in Dartmouth Dam, and from 43 to 13 per cent in Blowering Dam. seasonal conditions 1 selected major storages The Bureau of Meteorology reported in June 2007 that autumn rainfall was average to above level of storage at May average over much of inland New South Wales, northern and western Victoria and southern South river capacity 2006 2007 GL % % Australia. The bureau also advised that the El New South Wales Niño event affecting Australia in 2006-07 has Hume dam Murray 3 038 13 5 fully dissipated, and there are signs that the basin Menindee lakes Darling 1 678 16 5 may receive average or above average rain- Blowering dam Murrumbidgee 1 631 43 13 fall in coming months. For instance, the bureau Copeton dam Gwydir 1 362 24 11 Wyangla dam Lachlan 1 220 23 4 has forecast the probability of receiving above Burrendong dam Macquarie 1 188 29 5 median rainfall over winter to be close to 50 per Burrinjuck dam Murrumbidgee 1 026 33 24 cent for much of the basin (map 2), and there is Keepit dam Namoi 426 18 5 a large body of cool surface water located in the Pindari dam Severn 312 67 20 central to eastern Pacifi c, raising the potential for Snowy Snowy 5 307 25 8 a La Niña event to develop in 2007. Moreover, Victoria the Southern Oscillation Index has been relatively Dartmouth dam Mitta Mitta 3 906 64 12 Lake Eildon Goulburn 3 390 22 5 neutral in recent months. Warranga Goulburn 411 27 11 Despite the improved seasonal outlook, catch- Lake Mokoan Broken 365 30 10 ments remain extremely dry. The amount of water Eppalock Campaspe 312 5 1 available for irrigation depends on infl ows to stor- Queensland ages, and the relationship between rainfall and Glenlyon dam Dumaresq 254 29 13 infl ows is poorly understood. There is a risk that Leslie dam Condamine 106 15 8 a return closer to average seasonal conditions in Beardmore dam Balonne 82 48 5 catchments that are extremely dry will not generate Murray Darling Basin 26 014 30 9 signifi cant runoff, at least initially. This risk was Sources: State Water; Goulburn Murray Water; Sun Water.

australian commodities > vol. 14 no. 2 > june quarter 2007 345 drought and irrigation

highlighted recently in the southern catchments of the Murray Darling Basin. While these catchments received near average rainfall in February and March this year, inﬂ ows into the Murray River system over this same period were the lowest on record (MDBC 2007).

agricultural activity in the Murray Darling Basin The Murray Darling Basin accounts for nearly 40 per cent of the gross value of agricultural production in Australia (table 2). More speciﬁ cally, it accounts for over 50 per cent of the gross value of cropping activities, and around a third of the value of livestock activities (including slaughterings and livestock products). These values comprise revenue from both dryland and irrigated activities. The focus in this article is irrigated activities carried out in the basin. Around three-quarters of Australia’s total area of irrigated cotton and all irrigated rice (all rice is irrigated in Australia) is located in the Murray Darling Basin (table 2). Unfortunately the ABS statistics do not distinguish between dryland and irrigated agriculture for other agricultural activities. This presents a problem for activities, such crop and livestock production, 2004- as horticulture and dairy, that include a mix of dryland 2 05 and irrigated production. The Murray Darling Basin is an important region for these activities, accounting for around half of the total area devoted to perennial horticul- Australian Murray Darling total Basin share ture, and nearly a third of the total area devoted to dairy % production. crop areas ‘000 ha cereals for all purposes 22 035 48 – rice for grain 51 100 impact of reduced water allocations on other (noncereal) crops 4 232 38 irrigated agriculture – irrigated cotton 270 76 – nonirrigated cotton 34 81 The impact of reduced water allocations on irrigated – total cotton 304 77 agriculture in the basin will differ depending on the nature vegetables – for human consumption 123 28 of the irrigated activity in question. For example, losses – for seed 5 23 incurred by irrigators who irrigate annual crops on the horticultural crops 473 44 basis of annual water availability will be conﬁ ned largely – fruit (excl. grapes) 165 46 to 2007-08. Also, these losses may be mitigated to some – grapes 163 58 extent by the pursuit of dryland farming activities on land – total fruit 329 52 pasture that would otherwise have been used for irrigation. In – cut for hay and silage 1 021 42 contrast, reduced allocations may have short, intermediate – harvested for seed 161 54 and longer term impacts on perennial horticulture indus- livestock numbers ‘000 tries and the dairy industry. The short term impacts will sheep and lambs 101 125 43 include lower production in 2007-08, whereas interme- cattle – meat 22 997 31 diate impacts will include any production losses incurred cattle – dairy 3 056 31 beyond the current year. The longer term impacts include pigs 2 538 61 chickens – meat 62 251 21 the potential loss of capital assets, such as permanent chickens – layers 13 175 35 plantings and dairy breeding stock, if reduced water avail-

value $b ability continues over the coming seasons. gross value of agriculture 36.0 39 There are a number of management strategies that crops 17.8 54 irrigators can adopt to help preserve capital assets. Key livestock slaughterings 12.0 36 to implementing any management strategy is timing. As livestock products 5.7 36 discussed below for speciﬁ c agricultural activities, if

346 australian commodities > vol. 14 no. 2 > june quarter 2007 drought and irrigation action is taken too early, unnecessary yield and production losses may be incurred for the next few seasons. Alternatively, if action is taken too late, or the action taken is inadequate, the survival of permanent plantings may be threatened or the culling of core breeding stock required. The following analysis begins with an analysis of the impact of reduced water allocations on rice production, the main annual irrigated cropping activity carried out in the southern Murray Darling Basin. This is followed by a discussion on the impact of reduced allocations on dairying and perennial horticulture activities. rice Australian rice is produced exclusively in the Murray Darling Basin, with production being concentrated in the Murray and Murrumbidgee Valleys of south western New South Wales and northern Victoria (map 1). The requirement for plants to be fl ooded for extended periods means that rice is critically dependent on irrigation water. In 2001-02, a year when irrigators received allocations closer to the longer term average, around 1.2 million tonnes of rice was produced, with a gross value of around $375 million (in 2006-07 dollars). Low water allocations in recent years have resulted in a decline in the area planted to rice, and consequently a fall in production. Low water allocations in 2006-07 resulted in only 16 000 hectares of rice being planted in that year, with total production falling to around 167 000 tonnes, the lowest production in at least twenty years. If rice farmers have no access to groundwater, zero surface water allocations would mean that no rice would be produced next season. However, some producers may be able to mitigate the impact of reduced surface water allocations if they have access to groundwater. There is also a possibility that rice growers may receive access to carryover water in 2007-08 if there are suffi cient infl ows. The New South Wales Government suspended general security irrigators’ access to carryover water in 2006-07, but has indicated that it will reinstate access to this water if seasonal conditions allow. Most rice farmers who expect that there is little chance of receiving water allocations for next season appear to have planted alternative winter crops, such as wheat or barley. If such growers receive a water allocation following the planting of winter crops, they are likely to have other options available. For instance, they could sell their water allocation and maintain existing winter crops until harvest, or they could use some of their allocation to fi nish existing crops. Alternatively, they could spray out existing crops and plant rice or cut existing winter crops for hay in spring and plant quick maturing rice varieties. dairy Around a third of Australia’s dairy cattle are located in the Murray Darling Basin. The major characteristics of the main dairying activities carried out in the southern Murray Darling Basin are described in table 3. While these activities are spread across the southern catchments, they are heavily concentrated in the Victorian catchments (map 1), which account for around 90 per cent of dairy farms and dairy cattle located in the southern part of the basin. The 2006-07 drought severely affected pasture availability in the parts of the Murray Darling Basin that rely on rainfall. Even where dairy producers have been able to use irrigation to supplement local rainfall, pasture growth was below par because of lower than average water allocations. Results from ABARE’s Australian dairy industry survey for 2006-07 indicate that dairy farmers have responded to the drought in a variety of ways, including increasing their use of purchased feed and reducing herd size. australian commodities > vol. 14 no. 2 > june quarter 2007 347 drought and irrigation

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 herds in order to maintain milk production. At the same time, feedgrain prices rose as the impact of drought on winter and summer grain production became more apparent. Even though farmgate milk prices were reasonably attractive for producers, some farmers chose to reduce cow numbers rather than pay the higher grain and fodder costs. Consequently, there was widespread destocking in the industry in 2006-07 as many dairy farmers reduced herd sizes in order to reduce feed costs. The strategies used by individual dairy farmers to manage drought will have an important bearing on their net ﬁ nancial returns. Strategies will focus on substituting grains and fodder for pasture and reducing overall demand for feed. The latter will be achieved by drying cows off, agisting or leasing cattle off farm, or culling and selling cattle. Ultimately, the strategy followed by individual producers will depend on factors such as the avail-

number of dairy farms, area irrigated and total water requirement, 3 2005-06

average dairy dairy area water water farms a cows irrigated application requirement b no. no. ha/farm ML/ha GL Murrumbidgee 15 5 000 143 9 19 Murray – New South Wales 130 52 500 143 9 167 – Victoria 800 255 200 57 9 410 – Victorian tributaries 1 470 468 900 57 9 754 – South Australia 106 41 200 133 9 127 total 2 521 822 800 65 9 1 477

ability of feed on their property, the cost and availability of purchased feed, herd composition, livestock and milk prices, their ﬁ nancial reserves, and attitudes toward risk. horticulture The Murray Darling Basin is an important horticultural region, accounting for around half of the total area devoted to perennial horticultural crops in Australia and around 30 per cent of the total area devoted to annual horticultural crops (ABS 2005). The focus of discussion here is on perennial horticulture because of the potential for large capital costs to be incurred in the event that tree and vine crops are denied access to water for an extended period. These high costs are reﬂ ected in data supplied by the various state government agriculture agencies that suggest that the costs of establishing perennial horticulture can exceed $20 000 per hectare for some crops. Data supplied by various state agriculture departments indicate that around 140 000 hectares of land located in the southern Murray Darling Basin is planted to the main perennial horticulture crops, which include almonds, citrus, vines, stone fruit and pome fruit. The largest areas are devoted to vine (about 57 per cent of total planted area) and citrus plantings (around 16 per cent).

348 australian commodities > vol. 14 no. 2 > june quarter 2007 drought and irrigation

The major grape growing areas are located in the Riverland regions of South Australia and north western Victoria, which account for over 60 per cent of total vine area in the southern basin. Most almond plantings are also situated in these two regions, as well as around half of total citrus plantings. A further 38 per cent of citrus plantings are located in the Murrumbidgee Valley. The majority of pome and stonefruit plantings are concentrated in north western Victoria and the Victorian Goulburn irrigation system. The impact of reduced water availability on orchards and vineyards depends on the severity of the reduction. Generally, impacts on production can be grouped into three broad scenarios of increasing severity: » yield losses in the short term — when reduced allocations result in a yield reduction for just the 2007-08 irrigation year » yield losses in the intermediate term — when reduced allocations result in yield reductions extending beyond the 2007-08 irrigation year » plant losses — when allocations are suffi ciently low to result in tree/vine death. In the short term, growers have a number of management actions that can be taken to reduce water demand in orchards and vineyards. The actions taken will depend on water availability, and include controlling and prioritising water use where water is available, weed growth control/mulching, pruning, fl ower suppression/fruit thinning, severe pruning (skeletonising) and sacrifi cing less productive trees. Some of these options will result in forgone production in order to reduce the risk of tree and vine death. In situations where severe pruning is undertaken it may take several years for plants to return to full productivity under normal seasonal and irrigation conditions. Hence, it is a crucial planning decision if plants are to be severely pruned. If rains are forthcoming, and irrigation water is available, those who severely prune may not produce any crop even though conditions are favourable. options for dealing with a loss of water allocations Irrigators with large capital assets, such as perennial plants or core breeding stock, potentially face a range of costs if they receive low water allocations next season. These losses suggest that there may be signifi cant benefi ts from providing irrigators with more fl exibility to deal with production risk. For example, if seasonal conditions allow some water to be allocated to entitlements next season, interregional trade has the potential to signifi cantly reduce the overall cost of reduced access to water. The benefi ts from water trade arise from differences in the marginal value of water use between irrigators. The marginal value of water use is the net return that irrigators earn from the use of an additional megalitre of water. These marginal values vary according to differences in the irrigated activities undertaken, regional biophysical attributes, and water availability. Trade will facilitate the transfer of water to its highest value use. For example, irrigators with a marginal value of water use lower than the market price may sell water, in which case the income from selling water will be greater than the loss of not irrigating. Conversely, for irrigators with a marginal value of water use higher than the market price, the cost of purchasing water will be less than the loss from not irrigating. Thus, the overall loss is reduced in a mutually benefi cial way. Governments have the capacity to reduce the costs of limited access to water by removing any barriers to interregional trade that are not based on physical limitations or environmental concerns. First Ministers recently agreed that any water that becomes available to entitlement holders should be available for both intrastate and interstate trade.

australian commodities > vol. 14 no. 2 > june quarter 2007 349 drought and irrigation

Irrigators may also benefi t from the increased fl exibility that a carryover facility would provide. A carryover facility would allow irrigators to carry some of their current year allocation into the following year. Such a facility would offer an additional level of protection to irrigators, especially those with high value assets such as permanent plantings. A carryover facility is already available to New South Wales general security irrigators, while Victorian irrigators in the Murray and Goulburn systems and South Australian irrigators in the Murray system will be able to carry over a portion of any unused water allocated in 2006-07 to the 2007-08 season. Access to carryover water in Victoria and South Australia in 2007-08 is at this stage a one-off drought response measure (Cago 2007; Goulburn-Murray Water 2007). The New South Wales Government also announced late last year that any unused high security water allocated in 2006-07 could be carried over into 2007-08 (DNR 2007a,b). There are likely to be additional benefi ts from extending the coverage of carryover facilities beyond 2007-08 for Victorian and South Australian irrigators, and for New South Wales high security irrigators. The effectiveness of a carryover facility in mitigating the risk of low or zero allocations for individual irrigators will also depend on jurisdictions honouring obligations to deliver water under such a facility. As stated earlier, the New South Wales Government suspended general security irrigators’ access to carryover water in 2006-07, although it has indicated that it will reinstate access to this water if seasonal conditions allow. When used in tandem, a carryover facility and free interregional trade have the potential to signifi cantly reduce irrigators’ exposure to production risk.

effects on food prices There is some concern that reduced water allocations in the Murray Darling Basin in 2007-08 could lead to signiﬁ cant increases in food prices. While reduced irrigated output would put upward pressure on food prices, the extent of these increases would vary between commodities, and be offset to some extent by several mitigating factors. For instance, it may be possible to offset reduced production in the basin in the short term by diverting Australian produce from export markets to the domestic market, and through increased imports. The capacity for agricultural regions located outside of the basin to cover production shortfalls will depend on the productive capacity of these regions, the prevailing seasonal conditions in these regions, and relative domestic prices versus export prices. The potential for increased imports will depend on quarantine restrictions, tariffs or other restrictions on imports and the prices that overseas producers receive for exports relative to what they receive for the domestic product. By commodity, rice is totally irrigation dependent and grown entirely in the basin. While over 50 per cent of production is usually exported, Australia also imports rice. Recent imports have equated to around 15 per cent of domestic production. While there is no capacity for other regions in Australia to make up any shortfall in domestic production in the basin, higher rice imports have the potential to satisfy domestic consumption if required. Fruit and vegetable crops grown in the Murray Darling Basin are also highly dependent on irrigation water. Roughly half of the area devoted to fruit production in Australia is located in the basin, and around 30 per cent of the area devoted to vegetable production. With relatively short crop production cycles, vegetable growers outside the basin may be able to increase domestic production, which would be likely to constrain price

350 australian commodities > vol. 14 no. 2 > june quarter 2007 drought and irrigation increases. Moreover, a signifi cant amount of Australia’s processed vegetable requirements are imported, and any expansion in these imports would act to limit price rises. Around two-thirds of Australia’s dairy cattle are located outside of the Murray Darling Basin. Australia is also a major exporter of processed dairy products, such as cheese and butter, with exports of these two products accounting for around 50–60 per cent of domestic cheese and butter production. There may therefore be scope to divert some milk from the manufacture of products to the fresh milk market if reduced milk output contributed to higher prices of fresh milk. There is also potential to import more processed dairy products from New Zealand and other countries. The extent of any price increases for fruit and vegetables (and other commodities) will also depend on how consumers respond to rising prices of individual products, and the availability and prices of substitute foods. As was evident from the impact of Cyclone Larry on banana supply and prices, consumers readily adjust their expenditure patterns (including cutting back on consumption) to refl ect changing price relativities. conclusion The Southern Oscillation Index has been relatively neutral in recent months, and there is a possibility that a La Niña event may develop in 2007. Despite this promising outlook, there is a risk that rainfall in 2007-08 may not deliver suffi cient infl ows to allow anything other than minimal surface water allocations to irrigation in the southern Murray Darling Basin. The impact of reduced allocations on irrigated agriculture will differ depending on the nature of the irrigated activity. For example, any losses incurred by irrigators who irrigate annual crops will be largely confi ned to 2007-08, and may be mitigated to some extent by expansion of dryland activities on land that would otherwise have been used for irrigation. In contrast, reduced water allocations may have short, intermediate and longer term impacts on the perennial horticulture and dairy industries. The short term and intermediate impacts are confi ned to production losses, whereas the longer term impacts include the loss of capital assets, such as permanent plantings and dairy breeding stock. There are management strategies that irrigators can adopt to preserve capital assets. Key to any management strategy is timing. If action is taken too early, unnecessary yield and production losses may be incurred for the next few seasons. Alternatively, if action is taken too late or the action taken is inadequate, the survival of permanent plantings may be threatened or the culling of core breeding stock required. The signifi cant costs that dairy and perennial horticulture farmers could face in the event that little or no water is allocated to irrigation next season highlight the need to provide irrigators with increased fl exibility to manage their own risk. For example, if seasonal conditions allow some water to be allocated to entitlements next season, interregional trade has the potential to signifi cantly reduce the overall cost of reduced access to water in a way that is mutually benefi cial to both buyer and seller. A carryover facility also has the potential to provide irrigators with an additional level of protection, especially to those with high value assets, such as permanent plantings.

australian commodities > vol. 14 no. 2 > june quarter 2007 351 drought and irrigation

references ABS (Australian Bureau of Statistics) 2005, Agricultural Commodity Survey 2004-05, Canberra. DNR (New South Wales Department of Natural Resources) 2007a, ‘Trade and carryover rules for NSW Murray irrigators’, Media Release, Murray Murrumbidgee Regional Offi ce, Deniliquin, 8 March (www.dnr.nsw.gov.au/mediarelnr/mm20070308_3619. html). —— 2007b, ‘Trade and carryover rules for NSW Murrumbidgee irrigators’, Media Release, Murray Murrumbidgee Regional Offi ce, Deniliquin, 8 March (www.dnr.nsw. gov.au/mediarelnr/mm20070308_3620.html). Gago, C. 2007, ‘New measures to help secure water supplies for 2007-08’, Media Release, Premier and Cabinet of South Australia, Adelaide, 22 March (www.ministers. sa.gov.au/news.php?id=1392) Goulburn-Murray Water 2007, Carryover information sheet for G-MW irrigators (www. g-mwater.com.au/downloads/Carryover_Information_Sheet.pdf). MDBC (Murray Darling Basin Commission) 2007, E-letter no 66, Canberra, May. Overview Contingency Planning Report 2007, Murray Darling Basin Dry Infl ow Contin- gency Planning, Overview Report to First Ministers, Canberra, April (www.environment. gov.au/water/publications/mdb/pubs/dry-infl ow-planning.pdf). —— 2007b, Murray Darling Basin Dry Infl ow Contingency Planning, Overview Report to First Ministers, Canberra, May (www.environment.gov.au/water/publications/mdb/ pubs/dry-infl ow-planning-may07.pdf) Prime Minister of Australia 2007a, ‘Murray-Darling Basin irrigation allocations’, Media Release, Parliament House, Canberra, 19 April. —— 2007b, ‘Water contingency planning in the southern Murray Darling Basin’, Joint Statement by the Prime Minister and the Premiers of New South Wales, Victoria and South Australia, April 2007, Media Release, Parliament House, Canberra, 20 April. —— 2007c, ‘Dry infl ow contingency planning in the Murray Darling Basin’, Joint State- ment by the Prime Minister and the Premiers of New South Wales, Victoria and South Australia and the Chief Minister of the Australian Capital Territory, June 2007, Media Release, Parliament House, Canberra, 20 June.

352 australian commodities > vol. 14 no. 2 > june quarter 2007 lupins

>> alan leanne copeland lawrance > +61 > +61 2 6272 2 6272 2270 2028 > [email protected] > [email protected] lupins australia’s role in world markets leanne lawrance

» Australia is the dominant world producer of lupins, accounting for around 85 per cent of world lupin production over the past ten years. Other producers include Belarus, Chile, the European Union and the Russian Federation, where production is relatively small compared with Australia’s. » The main use of lupins (a legume) is for stockfeed, with the cattle, pigs, poultry and aquaculture industries being the major consumers. There is some use of lupins for human consumption but this is relatively small compared with livestock feeding. » The European Union, Japan and the Republic of Korea are the major destina- tions for Australia’s lupin exports, accounting for an average 90 per cent of total exports.

Although lupins are a relatively minor crop compared with some of the major grains, such as wheat and barley, they are an important contributor to Australia’s grain production and exports. lupin production Lupins are a member of the Fabaceae family and are a legume (pulse) crop. Legume plants have an ability to fi x atmospheric nitrogen into ammonia that, in turn, can have a fertilising effect in the soil for subsequent nonlegume crops and pasture. This process occurs through bacteria, known as rhizobia, found in the root nodules of legume plants. Because of their nitrogen fi xing ability, lupins (and other pulse crops) can be used in cropping rotations to replenish nitrogen depleted soils. Lupins are the major pulse crop produced in Australia and have accounted for around half of Australia’s total pulse production over the past ten years. Other major pulse crops grown in Australia include fi eld peas, chickpeas, faba beans and lentils. The major varieties of lupins produced in Australia are narrow leafed lupins (Lupinus angustifolius) and sweet albus lupins (L. albus). However, production of sweet albus lupins is relatively small compared with narrow leafed lupins. In the drought affected 2006-07 year, sweet albus lupins accounted for around 5 per cent of both the total Australian area sown to lupins and total lupin production. In 2004-05 and 2005-06, which were more ‘normal’ seasons, sweet albus lupins accounted for 2 per cent and 4 per cent respectively of the total area sown to lupins, and 2 per cent and 5 per cent respectively of total lupin production. australian commodities > vol. 14 no. 2 > june quarter 2007 353 lupins

1 Australian lupin production New Queens- Western South Tas- South Wales Victoria land Australia Australia mania Australia kt kt kt k kt kt kt 1997-98 75 33 0 1 347 106 0 1 561 1998-99 175 46 0 1 372 102 0 1 695 1999-2000 240 45 0 1 603 80 0 1 968 2000-01 127 47 0 783 98 0 1 055 2001-02 123 41 0 904 147 0 1 215 2002-03 37 11 0 587 90 1 726 2003-04 56 32 0 969 122 1 1 180 2004-05 55 20 1 792 68 1 937 2005-06 62 37 0 1 104 125 0 1 328 2006-07 14 5 0 125 30 0 174

In Australia, lupins are generally sown between late April and early June, with harvest occurring in October and November. Over the past ten seasons, lupin production in Australia has averaged almost 1.2 million tonnes a year. In the 2006-07 season, lupin production in Australia was drastically reduced as a result of the drought. Total Australian lupin production dropped to 174 000 tonnes, the smallest volume produced in at least the past twenty years. The largest lupin producing state is Western Australia, which accounts for an average 80 per cent of total Australian production. Lupins are grown widely in that state because of the plant’s ability to adapt to the sandy and acidic soils that are more prevalent in Western Australia than in cropping areas in the rest of Australia. Over the past ten years, Western Australia has produced on average 959 000 tonnes of lupins a year. The next largest lupin producing state is South Australia, with an average 97 000 tonnes of lupins produced a year over the same ten year period. This is closely followed by New South Wales, with an average production of around 96 000 (table 1). Assuming a return to average seasonal conditions in 2007-08, lupin production is forecast to be more than triple that of the previous year. This is based on a return to average yields. Over the medium term (to 2011-12) the area sown to fig A world lupin production lupins is forecast to increase to around the 1 million hectares a year that was sown during the 1990s and early 2000s. With continued increases in productivity 2000 through varietal improvement and better management, lupin production is projected to be around 1.2 million tonnes by 2011-12, an 8 per cent increase over other 1500 predrought production. Global lupin production is dominated by Australia 1000 (ﬁ gure A; FAO database). Other producers include Belarus, Chile, the European Union and the Russian Federation. The European Union 27 (that is, the 500 Australia current full 27 members of the EU) is the second largest producer of lupins, averaging 65 000 tonnes kt over the past ten seasons, equating to an average 5 19901993 1996 1999 2002 2005 per cent of global lupin production.

354 australian commodities > vol. 14 no. 2 > june quarter 2007 lupins lupin consumption The majority of the world’s lupins are used by stockfeed manufacturers for animal feed. It is estimated that less than 4 per cent of global lupin production is currently consumed as human food (information resource portal for lupins). Lupins for human consumption have many different uses, including fl our, pasta, tofu, tempe, soy sauce and snack foods. Lupin seeds possess many nutritional and food processing qualities, making them an attractive alternative to dry beans and soybeans. Lupin seeds are high in protein and high in the dietary fi bre component that is associated with lowering cholesterol. In many EU countries, bitter large seeded lupins are commonly eaten as a snack food preserved in brine (information resource portal for lupins). Lupins are often used as a substitute for high protein soybean meal in livestock feeds. The composition of the lupin grain has different nutritional characteristics for ruminants (cattle) and monogastrics (particularly poultry). The hull of lupins is a readily digestible fi bre for ruminants yet is of limited value to monogastrics. Dehulling (removing the hull or outer coating) can improve the utilisation of lupins, with the kernel directed to monogastric feeds and the hulls and other particles processed into stockfeed for ruminants. Ruminants are effi cient in accessing the energy contained in the lupin seed. The low levels of starch and high levels of fermentable carbohydrate make lupins a desirable feed for ruminants such as cattle and sheep. Australia, Europe and Japan use sweet lupins in dairy production. However, in Australia the largest utilisation of lupins is whole grain feeding to sheep, to supplement low grade roughage diets. Commercial pig producers have successfully used up to 30 per cent narrow leafed lupin seed in pig diets. Poultry diets normally contain less than 10 per cent lupins because of ‘sticky’ or ‘wet’ droppings (Hawthorne 2006). This is aesthetically undesirable and a potential health risk to the birds, but is not known to affect feed conversion rates. The use of lupins in aquaculture has been increasing. The aquaculture industry uses lupins (lupin seed and lupin kernel meal) as a feed to replace high protein fi sh meal in diets. Feeds for salmon and prawns are high in protein and lupin kernel meal is used widely in feed formulations. It is estimated that up to 50 per cent of the fi sh meal or soybean meal in diets of tiger prawns can be replaced by lupins (Department of Agriculture and Food, Western Australia). The use of lupins in aquaculture diets varies and it is estimated that diets of rainbow trout can contain up to 25 per cent whole lupins. Commercial diets of tilapia and milkfi sh can contain up to 10 per cent lupins and pink snapper diets can contain up to 40 per cent lupin seed meal with no loss in productivity (Department of Agriculture and Food, Western Australia 2007). lupin exports Lupin exports from Australia averaged 41 per cent of annual production over the fi ve years to 2005-06. Over this period, exports averaged around 430 000 tonnes, with a value of nearly $100 million a year. Shipments of lupins account for around 2 per cent of the total value and volume of Australian exports of grains and oilseeds. In the 2006-07 marketing year (November–October), however, exports are estimated to have been down substantially because of the widespread drought and reduced lupin production. Lupin exports are forecast to be 70 000 tonnes in 2006-07, a reduction of around 85 per cent from exports in the previous year. The value of lupin exports is also

australian commodities > vol. 14 no. 2 > june quarter 2007 355 lupins

fig B Australian lupin exports forecast to fall, from $100 million in 2005-06 to $17 million in 2006-07. However, reﬂ ecting the other reduced Australian and global supply of lupins, Chinese Taipei the unit value of exports is estimated to increase 600 Korea, Rep. of from $202 a tonne in 2005-06 to about $243 a Japan EU27 tonne in 2006-07. Over the medium term, domestic consumption 400 of lupins for livestock feed and export demand are both projected to increase. Australian exports of lupins are projected to be around 550 000 200 tonnes in 2011-12, around half of total lupin production. The major destination for Australia’s lupin kt exports is the Republic of Korea, which takes 2000 2001 2002 2003 2004 2005 around half of Australia’s lupin exports. The other -2001 -02 -03 -04 -05 -06 major markets for Australian lupins include the European Union (27 countries), which accounts for 27 per cent, Japan 12 per cent and Chinese Taipei 3 per cent (ﬁ gure B). Consumption of livestock products has increased considerably in Korea, leading to growth in the Korean livestock sector and consumption of livestock feeds. The increased consumption of livestock products in Korea has resulted in increased imports of lupins from Australia. With consumption of livestock and livestock products expect to continue to rise in Korea, lupin imports from Australia are likely to continue to increase.

references Department of Agriculture and Food, Western Australia 2007, Australian Sweet Lupin (Lupinus angustifolius) Narrow leafed lupin, Perth (www.agric.wa.gov.au/servlet/ page?_pageid=449&_dad=portal30&_schema=PORTAL30). FAO (Food and Agriculture Organisation of the United Nations) 2007, Statistical database, Rome (www.faostat.fao.org/waicent/portal/statistics_en.asp). Hawthorne, W. 2006, Pulses: Nutritional Value and their Role in the Feed Industry, Edge- cliff, New South Wales. Information resource portal for lupins, About lupins (www.lupins.org/).

356 australian commodities > vol. 14 no. 2 > june quarter 2007 development projects

>> alan alan copeland copeland >> +61+61 22 62726272 22702270 >> [email protected] [email protected] minerals and energy major development projects – april 2007 listing alan copeland and commodity analysts, resource markets and infrastructure section

» Expenditure on minerals and energy exploration in Australia, at an estimated $4 billion in 2006-07, is the highest in real terms (2006-07 dollars) since 1982-83. » New capital expenditure in Australia’s mining industry in 2005-06 was $18.6 billion, more than double the average annual expenditure in real terms (2006- 07 dollars) for the past 25 years. Surveys of industry intentions indicate the possibility of further increases to almost $23 billion in 2006-07 and over $30 billion in 2007-08. 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. The recent strong growth in Australia’s minerals and energy sector output and expected future increased contribution to the Australian economy are underpinned by recent exploration activity. Expenditure on minerals and energy exploration in Australia is estimated to total over $4 billion in 2006- fig A private minerals exploration 07, an increase of over 56 per cent on exploration expenditure – Australia expenditure in 2005-06. In real terms (2006-07 other dollars), 2006-07 exploration expenditure will be the 3.5 base metals highest on record and around 72 per cent higher than gold 3.0 the average annual expenditure on exploration over other energy the past 25 years. While exploration expenditure has 2.5 petroleum increased recently, it cannot be determined from ABS 2.0 data what proportion of the increased expenditure is related to increased exploration activity or attrib- 1.5 utable to higher costs of inputs, such as labour and 1.0 equipment. In the ﬁ rst half of this decade, exploration expenditure in Australia, in real terms, was well below 0.5 2006-07 the annual average of the past 25 years. $b The signiﬁ cant number of projects on ABARE’s 1981 1986 1991 1996 2001 2006 project list indicates that there will be strong growth -82 -87 -92 -97 -02 -07

australian commodities > vol. 14 no. 2 > june quarter 2007 357 development projects

in minerals and energy production capacity. Average exploration expenditure will need to be maintained above levels achieved in 2005-06 (in real terms) in order to increase the resource base needed to underpin future development of the minerals and energy sector. Over the past two years, 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 the current trend of developing projects with larger production capacities, which generally require larger resource delineation programs. In addition, mining companies are reassessing reserves at current and depleted mining areas, with the view of extracting additional reserves that are now considered to be economic at current high commodity prices. Mining at or around existing deposits is attractive for companies because projects can be started sooner and generally have a lower capital expenditure because often there is existing infrastructure in place. In 2006-07, exploration expenditure is expected to increase across all major commodities. Petroleum exploration is estimated to increase to $2.14 billion, an increase of 64

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 commodities 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 listing is released around May and November each year.

what’s in the list The latest projects list contains the following details on projects: » project name » proponent company or joint venture » location » capital cost of the project » expected startup date » additional employment, where available. » additional output capacity » project status 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 head- ings: ‘Mining projects – energy’, ‘Mining projects – minerals’ and ‘Minerals processing facilities’. The listing includes new greenﬁ elds projects as well as expansions of existing projects.

where to get the list The list is available only as an electronic product. The list can be downloaded from ’latest releases’ at abareconomics.com enquiries: [email protected] or phone +61 2 6272 2010.

358 australian commodities > vol. 14 no. 2 > june quarter 2007 development projects per cent from 2005-06. Petroleum exploration expenditure in 2006-07 is likely to be the highest (in real terms) since 1982-83 and 74 per cent higher than the annual average over the past 25 years. Increased petroleum exploration 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 historically high. Iron ore exploration expenditure in 2006-07 is estimated to almost double to $320 million. A number of successive annual contract price rises and the prospect of continued strong Chinese demand for iron over the medium term are important drivers behind the signifi cant increase in expenditure. Since 2003-04, gold exploration expenditure in real terms has remained relatively stable at around $400 million a year. In 2006-07, however, gold exploration expenditure is estimated to increase by 25 per cent to $515 million. The increase in gold exploration activity is attributable to the increase in Australian dollar gold prices, which in 2006 averaged $800 an ounce, an increase of 37 per cent from 2005. Base metals exploration expenditure in 2006-07 is estimated to total $560 million, an increase of 52 per cent from 2005-06. This increase is mainly attributable to strong rises in expenditure on copper, nickel and silver–lead–zinc exploration, refl ecting substantial rises in global prices for these commodities. For example, in 2006, copper prices increased by over 80 per cent, while nickel prices rose by more than 65 per cent. In real terms, exploration expenditure on base metals in 2006-07 is expected to be more than double the 25 year average ($260 million) and the highest on record. In general, decisions to invest in 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: expectations and risks relating to mineral prospectivity; prevailing and expected mineral prices; existing mining and processing technologies; input costs more generally; land access; and government policies. medium term exploration expenditure Over the medium term, exploration expenditure is expected to be infl uenced by a different set of factors in each of the main exploration sectors. In the petroleum sector, short term oil prices are an important factor in encouraging increased exploration activity. However, there are a number of other factors that are likely to have a signifi cant bearing on decisions relating to exploration activity. These include: longer term oil price trends, Australia’s relative prospectivity for petroleum; prospects for Australian companies’ share of growing global LNG trade; the need for long term planning, particularly for relatively expensive offshore petroleum exploration; exploration costs; availability of skilled labour; and the concurrent commitment of resources (funds, equipment and labour) to other in 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. Rises in the costs of labor, fuel and other inputs (such as steel) have increased development costs and could be a negative infl uence on gold exploration expenditure over the medium term. In the base metals sector, the price outlook will clearly be important, as demonstrated by the rise in copper and silver–lead–zinc exploration expenditure. Other important factors are expected to be: future Chinese demand for base metals (including nickel);

australian commodities > vol. 14 no. 2 > june quarter 2007 359 development projects

assessments of the development potential of several known (but as yet undeveloped) base metal deposits in Australia; costs of exploration; and Australia’s relative attractive- ness for exploration.

capital expenditure Data from the Australian Bureau of Statistics 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 $18.6 billion in 2005-06, 80 per cent higher than in 2004-05. In real terms (2006-07 dollars), new capital expenditure in 2005-06 was more than double the average annual expenditure for the past 25 years ($8.6 billion). There are indications that capital expenditure in the mining sector may increase rapidly in 2006-07 and again in 2007-08. Based on industry intentions canvassed in the March quarter 2007, fig B new capital expenditure ABS data indicate that capital expenditure on mining in 2006-07 may be just under $23 billion and over $30 billion in 2007-08. If the capital expenditure in 30 2006-07 and 2007-08 is realised, this would represent increases of 22 per cent and 61 per cent respec- metal products 25 tively from the record expenditure in 2005-06. The mining 20 expected continued high level of capital expenditure in the mining industry in the near future is consistent 15 with the development trends shown in the full list of major mineral and energy projects (see map 1). 10 Capital expenditure in the metals products sector, 5 which includes the minerals processing activities 2006-07 covered in ABARE’s projects list, was $4.8 billion in $b 2005-06, 41 per cent above expenditure in 2004- 1983 1987 1991 1995 1999 2003 2007 05. Paralleling the result in mining, real expendi- -84 -88 -92 -96 -2000 -04 -08 ture in the metal products sector in 2005-06 is the highest on record and more than double the 25 year annual average of $2.5 billion (in 2006-07 dollars). However, surveyed industry intentions suggest that metal products expenditure could fall in 2006-07 to about $4.1 billion and $3.2 billion in 2007-08. The possible decreases in metal products capital expenditure reﬂ ect the imminent completion of some large projects and the lack of commitment to any large metal processing projects in the past twelve months. recently commissioned projects In the six months ended April 2007, 23 major minerals and energy projects, with a total capital expenditure of $3.36 billion, were completed. The completion of these projects will result in increased production and export capacity for a range of commodities, including coal, natural gas, bauxite, base metals, gold, iron ore, mineral sands and nickel. A summary of these projects is provided in table 1.

360 australian commodities > vol. 14 no. 2 > june quarter 2007 development projects

The total number of projects completed in the six months ended April 2007 was one less than for the six months ended October 2006 and just below the record number (27) completed in the six months to April 2006 (table 2, fi gure C). However, the total capital cost was signifi cantly less than in the six months ended April 2006 and October 2006. The average value of projects completed in the six month period to April 2007 was $144 million, down from the historical nominal average over the past nine years of around $234 million. Looking ahead, ABARE’s project list indicates that the rate of project completions is likely to increase in the short term, with over 45 advanced projects scheduled for completion in the second half of 2007. However, there is the possibility that some of these projects will not meet announced scheduled completion dates or cost budgets, refl ecting strong industrywide competition for skilled labour and equipment. In addition, progress on a

major mineral resource developments – projects completed, october to april 2007 1

capital commodity project location company expenditure $m mining – energy projects black coal Ashton longwall NSW Felix Resources/Itochu/IMC Pan Asia 150 Boggabri opencut NSW Idemitsu Kosan 35 Newpac longwall NSW Resource Paciﬁ c 75 Tarawonga opencut NSW Whitehaven Mining/Idemitsu 38 Wilpinjong opencut NSW Peabody 123 Curragh North QLD Wesfarmers 360 Ensham Central dragline QLD Ensham Resources 100 Isaac Plains QLD Aquila/CVRD 66 Kogan Creek opencut QLD C S Energy 80 New Acland opencut QLD New Hope Corporation 60 Poitrel QLD BHP Billiton/Mitsui 330 Wilkie Creek (washplant upgrade) QLD Peabody Surat 15 petroleum Goodwyn A Low Pressure Train WA Woodside Energy 326 infrastructure – energy projects Kooragang Island coal terminal expansion NSW Port Waratah Coal Services 170 Dampier–Bunbury gas pipeline (Stage 4) WA DBP 433 mining – minerals projects bauxite Weipa bauxite mine expansion QLD Rio Tinto 156 Ely bauxite mining project QLD Alcan/ Rio Tinto 0 copper Northern 3500 underground orebody QLD Xstrata 38 gold Charters Towers (Warrior deposit) QLD Citigold Corporation 50 Laverton redevelopment WA Crescent Gold 15 iron ore Tom Price/Marandoo/ Nammuldi mine WA Rio Tinto 382 lead–zinc–silver Lennard Shelf WA Teck Cominco/Xstrata 28 mineral sands Douglas Vic Iluka Resources 284

australian commodities > vol. 14 no. 2 > june quarter 2007 361 development projects

fig C completed projects number of projects has been hampered by unfavour- able weather conditions, particularly in Western Australia. total capital cost of projects left axis 8 400 energy projects average capital cost of projects In the six months ended April 2007, 15 energy proj- 6 right axis 300 ects (including infrastructure) were completed, with a capital expenditure of $2.4 billion. The largest of 4 200 these projects was the $433 million stage 4 expansion of the Dampier–Bunbury gas pipeline. The stage 2 100 4 expansion will increase the pipeline’s capacity by 100 terajoules a day. The pipeline owners, Dampier Bunbury Pipeline, has already committed to the $b $m J D J D J D J D J D AprOct Apr Oct Apr Oct Apr Oct Apr stage 5A expansion, which will cost around $700 1998 2000 2002 2003 2004 2005 2006 2007 million and add a further 100 terajoules a day of

map 1 advanced minerals and energy projects Capital expenditure april 2007 $0–100m $101–500m Ranger laterite $501–1000m processing plant Alcan refinery >$1000m (uranium) expansion Bonaparte (alumina) Processing Mine/ gas pipeline facility platform Puffin (oil) Darwin Dampier Port expansion stage 2 (gas) (iron ore) Blacktip Mugana (zinc) Browns oxide Angel gas & Yabulu refinery (nickel) condensate field Koolan Island (copper) (iron ore) Townsville copper refinery Perseus (gas) McArthur River Argyle (diamonds) (zinc/lead) Abbot Point coal terminal Cape Lambert Sonoma (coal) port expansion Ellendale(diamonds) (iron ore) Leichhardt Dalrymple Bay West Kimberley Lady Annie (copper) (copper) NorthWest Shelf power project coal terminal Mt Isa smelter (copper) Mount Wright (LNG) Nullagine (gold) (gold) Hay Point Woolybutt (oil) Panorama (zinc/copper) Mt Isa concentrator coal terminal (zinc – lead) Stybarrow Rapid growth project 3 &4 (iron ore) Moranbah ammonium Lake Lindsay (coal) Pilbara (iron ore) nitrate plant (oil) RG Tanna coal Yandicoogina (iron ore) Clermont (coal) terminal Vincent (oil) Hope Downs (iron ore) Bluff to Blackwater rail duplication (coal) Blackwater(coal) Blackwater to Burngrove rail duplication (coal) Goondicum (mineral sands) Jaguar Base Metals Spring Gully (coal seam gas) Dawson mine (zinc, copper, silver) Bronzewing (gold) Argyle (coal seam methane) (coal) Prominent Hill (copper) Windimurra Wallaby (gold) Tipton West (coal seam methane) Brisbane Dampier to Bunbury (vanadium) Mt Weld (rare earth) gas pipeline stage 5 Honeymoon Hillgrove(gold) Gwalia Deeps Flinders (zinc) (uranium) (gold) Project Magnet Northparkes E48 Glendell (coal) Mt Owen(coal) Kwinana LNG plant Trident (gold) (iron ore) (copper) Perth Potosi (zinc) Bulga underground Waroona (zircon) Mindarie (coal) (zircon) Kwinana ammonium Wambo (coal) nitrate plant Adelaide Coating plant (steel) Sydney Gwindinup (zircon) Ravensthorpe (nickel) Angas (zinc) Canberra Port Kembla blast Boddington (gold) Flying Fox stages 1, 2 (nickel) furnace reline (crude iron & steel) Ballarat (gold) Melbourne

Otway (gas) South Gippsland gas pipeline Longtom gas project Brooklyn – Corio loop pipeline

Avebury (nickel)

Hobart

362 australian commodities > vol. 14 no. 2 > june quarter 2007 development projects capacity. There was one other natural gas project completed — Woodside’s $326 million Goodwyn A Low Pressure Train, located 130 kilometres off the coast of northern Western Australia. The newly completed project will allow Woodside to initially increase its gas production rate from the Goodwyn Platform and ultimately enhance gas recovery. Thirteen coal projects — six in New South Wales and seven in Queensland — were completed in the six months to April 2007, with a total capital expenditure of $1.6 billion. The largest of these projects is Wesfarmers’ $360 million Curragh North project, which will produce around 2.5 million tonnes a year of coking coal. Another large Queensland coal project that was recently completed was the 3 million tonne BHP Billiton and Mitsui Poitrel mine. The Poitrel mine and Millennium mine, completed in July 2006, will share the Red Mountain Joint Venture’s coal handling and preparation plant that was commissioned in October 2006. Other black coal projects to be completed in Queensland for the period ended April 2007 include two new mines, Isaac Plains and Kogan Creek. Isaac Plains, located north east of Moranbah, will produce around 1.6 million tonnes of thermal and pulverised coal injection coal, while the Kogan Creek mine will supply 2.8 million tonnes a year of thermal coal to the Kogan Creek power station, which itself is in the fi nal stages of construction. The New Acland and Wilkie Creek mines were expanded, which resulted in increased thermal coal production capacity of 1.5 million tonnes and 0.6 million tonnes respectively. At Ensham, 40 kilometres north east of Emerald, construction was completed on a $100 million dragline. The new dragline will not add signifi cantly to productive capacity; however, it will enhance Ensham’s cost competitiveness. In New South Wales, the largest project completed, in terms of capital expenditure, was the expansion of the completed projects – january 1998 to april Kooragang Terminal at the Port of Newcastle. The $170 2 2007 million expansion will increase coal loading capacity at number of total capital average capital the port by 13 million tonnes to 77 million tonnes. The projects cost of projects cost of projects operators of Kooragang Terminal recently received no. $m $m state government approval to expand the Terminal’s six months ended capacity by a further 43 million tonnes a year. Produc- June 1998 3 415 138 tion capacity of the New South Wales coal industry December 1998 18 3 500 194 will increase following the completion of the Wilpinjong June 1999 19 6 500 342 December 1999 16 4 300 269 (3 million tonnes thermal coal), Boggabri (1.5 million June 2000 9 1 800 200 tonnes thermal coal) and Tarawonga (1.3 million tonnes December 2000 9 1 700 189 thermal and semisoft coking coal) opencut mines and June 2001 5 282 56 the Ashton (3 million tonnes thermal and semisoft coking December 2001 5 262 52 coal) and Newpac (4 million tonnes coking coal) long- June 2002 10 1 082 108 December 2002 10 2 110 211 walls. All fi ve mines will export coal via the expanded Port of Newcastle. four months ending April 2003 4 400 100 metal mining projects six months ending October 2003 6 937 156 On the metal mining front, the largest development April 2004 13 4 956 381 commissioned in the six months ended April 2007 October 2004 9 3 328 370 was the expansion of Rio Tinto’s Tom Price, Marandoo April 2005 23 5 812 253 and Nammuldi mines in the Pilbara region of Western October 2005 12 2 012 168 Australia. The expansion of the mines cost around April 2006 27 8 854 328 October 2006 24 5 824 243 $382 million and will add around 15 million tonnes of April 2007 23 3 314 144 increased iron ore production capacity. It is anticipated total 245 57 388 234 that in the second half of 2007, fi ve iron ore projects will australian commodities > vol. 14 no. 2 > june quarter 2007 363 development projects

be completed including BHP Billiton’s Rapid Growth 3 Project and Rio Tinto’s Dampier port expansion. In Queensland, Rio Tinto completed a $156 million upgrade of its Weipa bauxite mine, which included construction of a power station, tailings dam and a ship loader. Rio Tinto will also operate the Ely bauxite deposit which is owned by Alcan and located adjacent to the Weipa deposit. The Ely deposit will produce 2.5 million tonnes a year of bauxite; however, the mine did not require any startup capital expenditure because Rio Tinto will use equipment and infrastructure associated with their Weipa operations to mine the Ely deposit. In central Queensland, Citigold Corporation’s Warrior deposit at the Charters Towers goldﬁ eld was completed at a cost of $50 million and has an annual gold production capacity of around 40 000 ounces. Citigold has recently completed prefeasibility studies for the Sunburst, Brilliant and Day Dawn deposits, which would also mine the Charters Towers goldﬁ eld. In late 2006, Iluka Resources completed the Douglas mineral sands located 40 kilometres south west of Horsham in Victoria. Total capital expenditure on the project was around $284 million and annual production capacity is 98 000 tonnes of rutile, 135 000 tonnes of zircon and 200 000 tonnes of ilmenite. In terms of capital expenditure, a number of smaller projects across a range of commodities were completed in the six months to April 2007. These include Xstrata’s $38 million, Northern 3500 underground ore body (annual capacity of 22 000 tonnes of copper concentrates), Xstrata and Teck Cominco’s $28 million restart of the Lennard Shelf mine (70 000–80 000 tonnes of zinc) and Cresent Gold’s $15 million redevelopment of the Laverton mine (22 500 ounces of gold). Xstrata’s 3500 tonne underground ore body is located near Mount Isa in north western Queensland. Lennard Shelf and Laverton are located in northern and south eastern Western Australia respectively.

advanced projects At the end of April 2007, there were 91 projects at advanced stages of development included in ABARE’s projects list (table 3) — these projects are either committed or under construction. This is three fewer than the number of advanced projects included in the October 2006 list. Despite the slight reduction in the number of advanced projects in the April 2007 list, there were still around 18 projects either newly committed or entered the list at an advanced stage in that six month period. The announced capital expenditure of the 91 advanced projects at the end of April 2007 sums to $43.4 billion. However, it should be noted that even projects that have reached the committed stage may be deferred, modifi ed or even cancelled if economic or competitive circumstances change suffi ciently. 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, skilled labour and professionals. In this environment, where demand from developers is rising faster than supply, the impact on project development 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 mineral resources sector, as refl ected in the large number and record value of minerals and energy projects committed to or under construction, continue to bode well for the sector’s growth over the next few years.

364 australian commodities > vol. 14 no. 2 > june quarter 2007 development projects

The 91 advanced projects as at April 2007 indicate continued expansion across most of the minerals and energy industry spectrum. advanced energy projects Energy developments account for 39 of the 91 advanced projects (43 per cent) and around 39 per cent (or $16.8 billion) of the estimated capital cost of $43.4 billion for all of the advanced projects (table 3). Seven large petroleum developments — fi ve of them operated by Woodside — together with one natural gas pipeline project account for just over half of the total value of energy projects. The largest of these projects is the $2.4 billion North West Shelf Extension Project in Western Australia, 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 four petroleum projects are the $1.6 billion Angel gas and condensate fi eld in the Carnarvon Basin, scheduled for completion in 2008; the $1.1 billion Otway gas project in offshore Victoria, expected to be completed in mid-2007; the $800 million Perseus-over-Goodwyn project, aimed at enabling full utilisation of the existing Goodwyn gas platform; and the $620 million offshore Blacktip gasfi eld project in the Bonaparte Basin south west of Darwin scheduled for completion in 2009. The gas pipeline project is stage 5A of the Dampier–Bunbury pipeline expansion ($700 million). It is noteworthy that almost all of these large advanced petroleum projects are scheduled to be completed by the end of 2008. Coal mine, and coal infrastructure, projects account for a further 14 per cent (or $6.1 billion) of the estimated capital cost of $43.4 billion 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 is an expansion project that is expected to add around 5.7 million tonnes of coking and thermal coal capacity, commencing toward the end of 2007. 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

3 advanced projects, april 2007 – number and estimated capital cost, by state minerals energy projects mining projects processing total no. $m no. $m no. $m no. $m New South Wales 4 601 3 259 2 460 9 1 320 Victoria 4 1 402 1 120 0 0 5 1 522 Queensland 17 5 914 7 975 3 799 27 7 688 Western Australia 10 8 531 26 19 367 0 0 36 27 898 South Australia 1 55 5 1 325 0 0 6 1 380 Tasmania 0 0 1 77 0 0 1 77 Northern Territory 3 262 3 245 1 3 000 7 3 508 Australia 39 16 766 46 22 368 6 4 259 91 43 393

australian commodities > vol. 14 no. 2 > june quarter 2007 365 development projects

subsequently 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. Apart from those listed above, six other advanced coal mine developments in Queensland and New South Wales are expected to raise coal production capacity by around 9 million tonnes a year in the next two to three years. The combined capital cost of these six projects is $1.1 billion. 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 April 2007, there were fi ve coal terminal expansions and three rail expansions, all in Queensland, either committed or under construction. These expansions, most of which are scheduled to be completed before the end of 2008, have an estimated capital cost of $2.3 billion. advanced metal mining projects At the end of April 2007, there were 46 advanced minerals mining projects collectively valued at around $22.4 billion. Over half of these projects are located in Western Australia and comprise almost 90 per cent ($19.4 billion) of the estimated total capital expenditure. Nine metal mining projects — seven iron ore, one nickel and one diamond project — account for around 85 per cent ($16.4 billion) of committed capital expenditure to metal mining in Western Australia. In the six months to April 2007, three iron ore projects, with an estimated capital expenditure of $5.9 billion were added to the advanced projects list. The largest of these was BHP Billiton’s Rapid Growth 4 expansion ($2.8 billion), which will add 26 million tonnes of production capacity when complete in 2010. Fortescue Metals Group is progressing its 45 million tonnes a year Pilbara Iron Ore project at a total capital cost of $2.78 billion. The project is due for completion in early 2008 and includes construction of a dedicated rail line and port. Finally, Rio Tinto has given its approval to the expansion of the Cape Lambert Port near Dampier. The upgrade will cost $1.12 billion and provide Rio Tinto, with an additional 25 million tonnes of iron ore export capacity. In addition, BHP Billiton and Rio Tinto are progressing another four iron ore projects, with a collective capital expenditure of $5 billion. BHP Billiton’s Rapid Growth 3 project is under construction at a capital cost of about $2 billion. The project involves the expansion of Area C mining and upgrading associated rail and port infrastructure at Port Hedland. The Rapid Growth 3 project is due to be completed at the end of 2007 and will add 20 million tonnes of production capacity. Rio Tinto is expanding its Dampier Port ($1.04 billion) and Yandicoogina mine ($688 million), which will add annual capacity of 24 million tonnes and 16 million tonnes respectively. Rio Tinto is also constructing the $1.27 billion fi rst stage of the Hope Downs project, which will add 22 million tonnes of production and export capacity. 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 emanate 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.

366 australian commodities > vol. 14 no. 2 > june quarter 2007 development projects

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. Eight other gold projects located in New South Wales, Victoria, Queensland and Western Australia are either committed or under construction, at a combined capital cost of $556 million. There are fi ve 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 south east of Coober Pedy and is due for completion in late 2008. The $775 million project will produce 104 000 tonnes of copper in concentrates, 114 000 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 $2.9 billion, an increase of $650 million from the announced fi gure reported in the October 2006 listing. The Ravensthorpe development will have a productive capacity of 50 000 tonnes and 1400 tonnes of copper when complete in early 2008. advanced minerals processing projects At the end of April 2007, there were six advanced minerals processing projects — the same projects that were listed in October 2006. However, combined capital expenditure of these projects is $4.3 billion, an increase of $0.6 billion from the fi gure quoted in the October 2006 listing. The higher capital expenditure refl ects cost increases at the two largest listed projects: the $3 billion Alcan refi nery expansion (cost increase of $500 million) and the $731 million Yabulu extension project ($115 million). The expansion of Alcan’s alumina refi nery at Gove in the Northern Territory is almost complete, with commissioning scheduled for mid-2007. In 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 Ravensthorpe nickel mine development in Western Australia. fig D value of advanced projects, by commodity april 2007 capital value of all projects $43.4 billion Figure D provides a breakdown of proposed other 14% capital expenditure on advanced projects, by major petroleum 23% commodity grouping. Figure E shows the estimated iron ore 29% capital cost on a state basis. At the end of April 2007, the number of advanced projects was at a historically high level (fi gure F), as was the total value (in 2006 dollars) of advanced projects (fi gure G). The average coal 14% value of advanced projects at the end of April 2007 ($471 million) was just a little below the average alumina 7% nickel 7% gold 6% for all years since 1995 ($375 million in 2006-07 dollars) — fi gure H.

australian commodities > vol. 14 no. 2 > june quarter 2007 367 development projects

fig E value of advanced projects, by state less advanced projects april 2007 Projects in the less advanced planning category $43.4 billion are either still undergoing feasibility study (in some Tasmania 1% selected cases, prefeasibility study) or no defi nite Northern South Australia 3% decision has been taken on development following Territory 8% the completion of a feasibility study. Some of these New South Western Australia projects cannot proceed for several years and may Wales 3% 64% confront changes in economic or competitive condi- Victoria 3% tions, or may be targeting the same emerging market Queensland opportunity, necessitating rescheduling. In addition, 18% securing fi nance for project development — even for high quality projects that have a high probability of success — can present problems, particularly if there is perceived to be excess global supply and/or an uncertain demand outlook. Also, with an exceptionally large number of fig F number of advanced projects minerals and energy projects currently committed or under development in the next few years, competition for skilled labor and materials and the attendant cost minerals processing pressures are unlikely to ease in the short to medium 80 minerals term. This makes it likely that the feasibility of many less energy advanced projects will need to be re-examined. It 60 may also mean that, from a market perspective, some project developments may be deferred beyond their optimal startup dates. 40 However, despite the uncertainty that attaches to projects at these earlier stages of consideration, 20 the signifi cant number of large scale projects at less advanced planning stages that are under active 0 consideration for development is expected to provide 1996 1998 2000 JuneDecAprOct AprOct Apr OctApr Oct Apr a fi rm platform for future growth in the medium term 2002 2003 2004 2005 2006 and beyond. Of the record 279 projects in ABARE’s April 2007 fig G value of advanced projects projects list, 67 per cent (188 projects) remain uncommitted. Table 4 contains a summary of the numbers minerals processing and commodity distribution of the 188 uncommitted projects together with their potential capital expen- 40 minerals diture. The potential capital expenditure data should energy be used as a rough guide only. Capital expenditure 30 data for many early stage projects are either not available or, if available, will change signifi cantly if they 20 do proceed to development. In addition, changes in market conditions can often lead to signifi cant varia- tions in capital expenditure estimates. 10 However, most of the projects that will ultimately

2006-07 proceed to development in the medium term are $b included in ABARE’s current list of 188 less advanced 19951998 2001 2004 2007 projects.

368 australian commodities > vol. 14 no. 2 > june quarter 2007 development projects

Among the more notable large scale projects in fig H average value of advanced projects ABARE’s April 2007 list that are still undergoing feasibility studies are seven proposed LNG developments that, collectively, could add around 50 million tonnes of annual LNG production capacity in the medium to 400 long term. The project most likely to be developed ﬁ rst is Woodside’s Pluto gas discovery. Woodside has not 300 yet made a ﬁ nal investment decision on the project; however, it has approved the expenditure of $1.4 billion so that initial site development can commence 200 and equipment with long lead times can be ordered. The largest less advanced metal mining project 100 is BHP Billiton’s proposed $6 billion Olympic Dam expansion, currently undergoing prefeasibility studies. 2006-07 $m This project aims to more than double the mine’s current 1995 19982001 2004 2007

number of less advanced projects – april 2007 4

potential capital NSW Vic Qld WA SA Tas NT Aust expend. no. no. no. no. no. no. no. no. $m mining – energy projects black coal 16 0 23 0 0 0 0 39 10 270 coal seam methane 1 0 0 0 0 0 0 1 35 petroleum 0 4 6 6 0 0 7 23 50 310 uranium 0 0 3 1 3 0 1 8 835 sub-total 17 4 32 7 3 0 8 71 61 450 mining – minerals projects bauxite 0 0 1 0 0 0 0 1 700 copper 2 0 4 1 2 0 0 9 7 092 gold 4 1 4 8 2 0 2 21 2 277 iron ore 0 0 0 20 0 0 0 20 15 827 lead–zinc–silver 5 0 2 0 0 0 1 8 860 mineral sands 3 3 0 4 1 0 0 11 1 086 nickel 0 0 3 14 0 0 0 17 7 167 rare earths 0 0 0 0 0 0 1 1 150 tin 0 0 0 0 0 2 0 2 78 vanadium 0 0 0 2 0 0 0 2 546 other commodities 1 0 1 5 0 1 2 10 1 925 subtotal 15 4 15 54 5 3 6 102 37 708 minerals processing alumina 0 0 3 2 0 0 0 5 8 900 aluminium 1 1 0 0 0 0 0 2 2 250 crude iron and steel 1 0 1 0 0 0 0 2 684 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 1 0 0 0 2 142 zinc 0 0 1 0 0 0 0 1 na subtotal 3 2 5 5 0 0 0 15 12 976 total 35 10 52 66 8 3 14 188 112 134 australian commodities > vol. 14 no. 2 > june quarter 2007 369 development projects

output of copper, uranium, gold and silver. Among the less advanced iron ore projects, seven have an estimated capital expenditure of $1 billion or more. These are: Austral- asian Resources Balmoral South magnetite project ($2.8 billion); Mineralogy’s Cape Preston stage 1 and stage 2 mine and pellet plant (estimated capital cost of $2.6 billion and $1.3 billion respectively); Murchison Metals’ Jack Hills stage 2 mine ($1.8 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). projects new to abare’s list There are 43 projects (both advanced and less advanced) that are new to ABARE’s list since October 2006. In the two year period from the end of April 2005 to the end of April 2007, over 166 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 fig I projects added to list 43 newly listed projects in the six months ended six months to april 2007 total = 43 April 2007, by commodity category. Of the 43 projects added to the list, nine are either committed coal or already under construction. petroleum Among the more notable less advanced proj- iron ore ects new to the list are the $1 billion gas to liquids project in Queensland and a $2.8 billion iron ore nickel project in Western Australia. Arrow Energy and gold Alcan are proposing to build a gas to liquids plant capable of producing 14 000 barrels a day of zinc/lead low sulfur diesel, 5000 barrels a day of naphtha uranium and 1000 barrels a day of liquefi ed petroleum gas. A prefeasibility study has been completed on other the project; a feasibility and front end engineering and design study is yet to commence. The propo- no.268 4 nents have not yet fi nalised the exact location of the project, although it will be located on the coast of Central Queensland. Australasian Resources is undertaking a feasibility study on the Balmoral South project, which has a total capital cost of $2.76 billion. The current project proposal involves the construction of a mine and processing plant capable of producing suffi cient iron ore to produce 5.2 million tonnes of concentrates, 4.5 million tonnes of pellets and 1.45 million tonnes of hot briquette iron. In addition to the Balmoral South project, there have been another fi ve iron ore projects added to the April 2007 listing. These include the second stages of the Cape Preston and Hope Downs projects, stages 1 and 2 of the Wiluna West project and the Yalgoo iron project.

370 australian commodities > vol. 14 no. 2 > june quarter 2007 australian commodities

statisical tables GDP, imports

contribution to GDP, Australia reference year 2004-05

1995-96 2005-06 $647.7b $922.8b agriculture, forestry and fishing 3% agriculture, forestry and fishing 3% mining 6% mining 5% manufacturing 13% manufacturing 10% building and construction 7% building and construction 5%

services 73% services 75%

share of Australian imports, by source in 2005-06 dollars

1995-96 2005-06 total $99.4b $167.6b United States United States 14% other 38% 23% other 44% Japan 10%

Japan 14% China 14% China 5% Germany 5% New Zealand 5% Germany 6% New Zealand 3% Singapore 3% United Kingdom 6% Singapore 6% United Kingdom 4% agriculture $4.7b $7.2b China 3% China 5% other 14% other 22% ASEAN 16% ASEAN 15% United States other Asia 5% other Asia 7% 11% United States 13%

European New Zealand 19% European Union 25 31% New Zealand 16% Union 25 23% minerals and energy $8.5b $30.0b Indonesia 11% Indonesia 9% Malaysia 2% other 20% Malaysia 9% Singapore 7% other 40% Vietnam 4% New Zealand 2% other Asia Middle East 6% Singapore 24% 8%

Middle East 21% New Zealand 7% other Asia18% Vietnam 12%

372 australian commodities > vol. 14 no. 2 > june quarter 2007 export markets markets for Australian exports in 2005-06 dollars 1995-96 2005-06

total $97.1b $152.3b Japan 22% Japan 20% Other 38% Other 31% China 5% China 12%

Korea, Rep. of 9% Korea, Rep. of 8% European Union 25 12% European Union 25 11 % United States 6% United States 6% India 2% New Zealand 7% India 5% New Zealand 6%

agriculture $25.9b $27.7b China 9% China 11% Other 18% Other 15%

United States 5% Japan 20% United States 11 % Japan 18%

Middle East 7% Middle East 8%

European Union 25 10% European Union 25 9% ASEAN 15% ASEAN 17% Other Asia 14% Other Asia 13%

energy $16.3b $39.4b

Other 22% Other 14% Japan 41% Japan 41% European Union 25 8% European Union 25 10%

Other Asia 8% Other Asia 11 % India 5% India 7% Korea, Rep. of 12% Chinese Taipei 7% Korea, Rep. of 9% Chinese Taipei 5%

minerals $28.5b $52.8b China 4% Thailand 4% China 21% Other 27% India 1% Other 19%

Japan 19% Thailand 4% European Union 25 11% India 8% European Union 25 7% Other Asia 12% Korea, Rep. of 17% Japan 17% Other Asia 21% Korea, Rep. of 8%

manufacturing $23.4b $28.8b China 5% China 8% Other 21% Japan 10% Other 25% Korea, Rep. of 5% Korea, Rep. of 4%

United States 16% New Zealand 23% New Zealand 22% United States 18% European Union 25 21% European Union 25 22% australian commodities > vol. 14 no. 2 > june quarter 2007 373 agriculture

principal markets for Australian agricultural exports

wheat barley Indonesia Saudi Arabia Korea, Rep. of Egypt China Japan Japan 2005-06 United Arab 2005-06 Korea, Rep. of Emirates 1995-96 1995-96 Malaysia Korea, Rep. of

Iraq Kuwait kt 500 1000 1500 20002500 3000 kt 500 10001500 2000

sugar wine

Korea, Rep. of United Kingdom Malaysia United States Japan Canada 2005-06 2005-06 Indonesia Germany 1995-96 1995-96 Chinese Taipei New Zealand Canada Sweden kt 200 400 600 8001000 1200 ML 50 100 150 200 250

wool beef and veal China Japan Italy United States India Czech Korea, Rep.of Republic 2005-06 2005-06 Chinese Taipei 1995-96 Chinese Taipei 1995-96

Malaysia Canada

kt50 100 150 200 250 300 kt 100 200 300 400

sheep meat cheese United States Japan Saudi Arabia Saudi Arabia Japan United States European 2005-06 2005-06 Union 25 Korea, Rep. of 1995-96 1995-96 South Africa Netherlands

China Indonesia

kt 1020 30 40 50 kt 20 40 60 80

374 australian commodities > vol. 14 no. 2 > june quarter 2007 minerals and energy

principal markets for Australian mineral and energy exports

thermal coal metallurgical coal Japan Japan Korea, Rep of India 2005-06 2005-06 Chinese Korea, Rep of Taipei 1995-96 1995-96 China Netherlands Malaysia Chinese Taipei India Brazil A$m 1000 2000 3000 4000 A$m 1000 2000 3000 4000 5000 6000

oil and gas gold

Japan India Singapore United Kingdom

Korea, Rep.of Thailand 2005-06 2005-06 New Zealand Japan 1995-96 1995-96 Indonesia Singapore China Korea, Rep.of A$m 1000 2000 3000 4000 5000 6000 A$m 500 1000 1500 2000 2500 3000

iron ore aluminium China Japan

Japan Korea, Rep of Korea, Rep of Thailand Chinese Chinese Taipei Taipei 2005-06 2005-06 United 1995-96 1995-96 Kingdom Malaysia France Hong Kong A$m 2000 4000 6000 A$m 250 500750 1000 1250 1500

copper iron and steel

Japan Korea, Rep of China United States India China Chinese Taipei New Zealand 2005-06 2005-06 Thailand 1995-96 Japan 1995-96 Korea, Rep of Hong Kong A$m200 400 600 8001000 1200 A$m 50100 150 200 250300 350 australian commodities > vol. 14 no. 2 > june quarter 2007 375 prices

indexes of prices received by farmers 1 australia

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 s 2007-08 f Crops sector Grains Winter crops Barley 130.8 159.9 105.9 100.1 121.2 182.2 132.0 Canola 99.7 100.9 104.4 84.5 96.4 134.7 107.8 Lupins 127.7 149.0 120.4 105.2 105.7 169.1 143.7 Oats 128.2 160.3 101.1 98.1 141.0 221.8 166.3 Wheat 132.3 134.4 109.1 99.6 115.4 134.3 123.8 Summer crops Sorghum 102.2 120.9 93.8 79.4 103.2 159.3 140.4 Total grains a 123.7 134.0 105.2 95.7 113.0 145.4 124.9 Cotton 92.7 100.1 88.2 87.0 85.0 78.9 82.8 Sugar 88.5 83.2 76.3 84.1 90.6 112.1 109.2 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 99.3 117.2 140.0 134.2 Livestock sector Livestock for slaughter Cattle 167.7 145.0 160.4 177.2 178.6 161.1 177.2 Lambs b 167.2 176.7 190.1 184.3 183.8 157.3 189.2 Sheep 204.7 185.4 230.3 195.4 202.0 152.1 222.4 Live sheep for export 156.1 179.3 178.0 164.1 176.1 189.4 175.5 Pigs 123.6 109.7 109.4 117.8 112.6 122.7 99.4 Poultry 93.0 98.5 97.7 91.9 93.1 89.3 90.6 Total 151.5 139.1 149.2 157.4 158.2 145.5 156.6 Livestock products Wool 113.9 153.2 116.5 107.4 98.2 142.8 146.2 Milk 110.5 90.7 93.4 105.7 110.9 109.2 129.0 Eggs 82.8 92.4 89.2 85.4 91.2 100.4 103.4 Total 109.0 114.0 101.6 104.6 104.6 120.7 133.2 Store and breeding stock 145.3 125.8 144.0 159.5 158.2 145.5 156.6 Total livestock sector 133.4 128.1 129.3 135.4 135.9 134.0 145.4 Total prices received 122.5 122.6 116.5 115.2 125.3 135.3 138.5

a Total for the group includes commodities not separately listed. b Lamb saleyard indicator weight 18–20 kilograms. 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.

376 australian commodities > vol. 14 no. 2 > june 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 s 2007-08 f

Farmers’ terms of trade a 108.6 101.0 94.7 90.7 95.2 97.9 99.5 Materials and services Seed, fodder and livestock Fodder and feedstuffs 105.5 167.5 148.3 140.4 140.4 172.0 154.5 Seed, seedlings and plants 112.9 118.3 104.9 97.6 90.5 107.9 99.1 Store and breeding stock 145.3 125.8 144.0 159.5 158.2 145.5 156.6 Total 116.5 150.3 142.0 140.5 139.4 157.1 148.2 Chemicals 105.6 108.0 110.0 111.9 114.6 117.0 119.2 Electricity 100.4 100.5 100.0 101.3 103.5 105.3 106.9 Fertiliser 104.3 106.9 102.8 114.4 111.6 114.3 117.2 Fuel and lubricants 128.3 127.0 144.3 167.2 208.7 207.4 208.7 Total 113.1 126.0 125.2 129.6 134.1 142.0 140.4 Labor 113.3 117.9 121.6 125.7 129.7 133.3 136.6 Marketing 112.4 115.9 118.7 121.5 125.4 128.9 132.1 Overheads Insurance 118.6 124.5 128.8 131.9 135.1 139.4 143.3 Interest paid 104.2 110.7 118.1 123.7 130.6 144.5 149.6 Rates and taxes 115.5 119.1 121.9 124.8 128.8 132.4 135.7 Other overheads 111.9 115.4 118.1 121.0 124.8 128.3 131.5 Total 109.9 115.2 120.6 125.1 130.6 139.5 143.8 Capital items 115.2 118.3 121.3 124.4 128.4 132.1 135.7 Total prices paid 112.9 121.5 123.0 127.1 131.5 138.2 139.2 Excluding capital items 112.4 121.8 123.1 127.3 131.8 138.9 139.6 Excluding capital and overheads 113.0 123.3 123.7 127.8 132.1 138.7 138.5 Excluding seed, fodder and store and breeding stock 112.1 115.6 119.2 124.4 130.0 134.2 137.6

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. 2 > june quarter 2007 377 costs and returns

farm costs and returns 3 australia

Unit 2002-03 2003-04 2004-05 2005-06 2006-07 s 2007-08 f

Costs Materials and services Chemicals $m 1 550 1 649 1 691 1 749 1 545 1 590 Fertiliser $m 1 820 1 827 1 851 1 747 1 572 1 689 Fuel and lubricants $m 1 520 1 702 1 907 2 203 2 189 2 204 Marketing $m 2 433 3 567 3 433 3 662 2 506 3 511 Repairs and maintenance $m 2 392 2 453 2 493 2 602 2 464 2 557 Seed and fodder $m 4 874 4 317 4 267 3 814 5 118 4 607 Other $m 3 329 3 378 3 473 3 685 3 550 3 657 Total $m 17 918 18 893 19 116 19 463 18 944 19 814 Labor $m 3 226 3 420 3 410 3 778 3 649 3 740 Overheads Interest paid $m 2 295 2 614 2 888 2 716 2 907 3 024 Rent and third party insurance $m 412 422 432 446 446 458 Total $m 5 933 6 456 6 730 6 940 7 002 7 222 Total cash costs $m 23 851 25 349 25 846 26 403 25 946 27 036 Depreciation a $m 3 915 4 017 4 122 4 255 4 378 4 495 Total farm costs $m 27 766 29 367 29 968 30 658 30 324 31 531 Returns Gross value of farm production $m 31 645 35 896 35 180 38 470 32 786 38 005 Gross farm cash income b $m 33 695 36 518 36 375 38 020 32 336 37 555 Net returns and production Net value of farm production c $m 3 879 6 529 5 212 7 812 2 462 6 475 Real net value of farm production d $m 4 326 7 115 5 545 8 052 2 466 6 317 Net farm cash income e $m 9 844 11 168 10 529 11 617 6 389 10 520 Real net farm cash income d $m 10 980 12 170 11 200 11 974 6 400 10 263 Gross value added g $m 18 423 24 738 24 652 25 939 19 685 23 045 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. g Chain volume measures at basic prices. Reference year is 2004-05. 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 117.2 114.8 105.6 105.0 105.0 107.2 112.1 Energy minerals 140.8 135.2 120.2 166.1 225.0 206.7 207.4 Metals and other minerals 110.3 106.0 105.0 125.1 161.0 202.5 199.4 Total mineral resources 122.3 117.4 111.0 141.0 185.7 204.9 203.2 Total commodities 121.1 116.9 109.6 129.7 159.8 173.6 173.7

2005-06 2006-07 2007-08

Quarterly indexes b June Sep. Dec. Mar. June p Sep. s Dec. f Mar. f June f Farm 107.0 107.3 107.9 111.5 103.5 113.6 110.7 112.3 113.1 Energy minerals 239.9 236.2 217.6 212.7 210.6 213.9 213.8 222.4 229.6 Metals and other minerals 198.1 211.8 214.4 214.7 236.4 215.4 218.0 216.6 213.9 Total mineral resources 215.2 222.5 216.7 215.0 227.4 215.9 217.5 219.8 220.9 Total commodities 176.8 181.9 178.1 178.0 184.1 179.3 179.4 181.5 182.4

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.

378 australian commodities > vol. 14 no. 2 > june 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

2005-06 rural a other merchandise 20% 17% mineral resources 46% other services merchandise 21% 21% mineral resources 59% rural a 16% 2004-05 rural a other merchandise 24% 17% mineral resources 41% other services merchandise 24% 23% mineral resources 53% rural a 18%

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

2002-03 rural a other merchandise 26% 19% mineral resources 37% other services merchandise 24% 25% mineral resources 49% rural a 20%

2001-02 rural a other merchandise 28% 19% mineral resources 37% other merchandise services 24% 22% mineral resources 48% rural a 22% a Includes farm, forest and fisheries products. Source: Australian Bureau of Statistics; ABARE.

australian commodities > vol. 14 no. 2 > june quarter 2007 379 exports

annual exports summary Balance of payments basis 6 australia

2002-03 2003-04 2004-05 2005-06 2006-07 s 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 4 246 5 373 Sugar and honey 1 363 1 123 1 292 1 763 1 488 1 110 Meat and meat preparations 5 655 5 758 6 937 6 709 7 187 6 780 Wool and sheepskins 3 545 2 778 2 838 2 544 2 873 2 800 Other rural a 14 809 14 072 14 124 14 599 14 440 15 002 Total 29 859 28 824 30 350 30 467 30 234 31 065 Mineral resources Coal, coke and briquettes 11 987 11 002 17 236 24 353 21 949 23 372 Other mineral fuels 11 049 8 777 11 151 13 220 16 121 17 251 Metalliferous ores and other minerals bs 15 312 15 327 20 512 29 462 35 969 38 810 Gold 7 648 7 031 6 472 9 087 10 015 11 180 Other metals cs 10 958 11 337 13 151 14 684 23 333 25 650 Total s 56 953 53 474 68 522 90 806 107 388 116 264 Total commodities sector s 86 812 82 298 98 873 121 272 137 622 147 329 Other merchandise s 28 991 27 161 28 994 33 153 na na Total merchandise s 115 803 109 459 127 867 154 425 na na Services 35 987 37 746 39 695 41 849 na na Total goods and services 151 790 147 205 167 562 196 274 na na Chain volume measures d Rural Cereal grains and products 3 520 4 774 5 159 4 877 3 809 5 005 Sugar and honey 1 231 1 231 1 292 1 275 1 161 1 220 Meat and meat preparations 6 509 6 238 6 937 6 773 7 375 6 652 Wool and sheepskins 2 456 2 494 2 839 2 696 2 757 2 548 Other rural a 14 146 14 258 14 124 15 013 14 541 15 379 Total 27 862 28 995 30 351 30 634 29 643 30 804 Mineral resources Coal, coke and briquettes 15 446 16 282 17 236 17 145 18 168 19 306 Other mineral fuels 12 719 11 023 11 151 10 686 13 226 14 289 Metalliferous ores and other minerals bs 18 164 18 751 20 512 21 166 22 332 25 555 Gold 7 490 7 198 6 472 7 047 7 044 8 210 Other metals cs 14 364 14 138 13 151 13 017 13 662 15 949 Total s 68 183 67 393 68 522 69 061 74 432 83 309 Total commodities sector s 96 045 96 387 98 873 99 695 104 075 114 112 Other merchandise s 26 618 27 768 28 994 31 141 na na Total merchandise s 122 663 124 155 127 867 130 836 na na Services 37 785 38 886 39 695 40 438 na na Total goods and services 159 183 162 583 167 562 171 275 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. s ABARE estimate. f ABARE forecast. na Not available. Sources: ABS, Balance of Payments, Australia, cat. no. 5302.0, Canberra; ABARE.

380 australian commodities > vol. 14 no. 2 > june quarter 2007 exports

quarterly exports summary Balance of payments basis 7 australia

2005-06 2006-07 2007-08

June Sep. Dec. Mar. p June s Sep. f Dec. f 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 1 006 935 864 1 001 1 388 1 544 1 440 Sugar and honey 502 595 360 312 221 339 309 266 196 Meat and meat preparations 1 773 1 799 2 028 1 641 1 719 1 679 1 774 1 531 1 795 Wool and sheepskins 666 609 799 799 666 638 746 682 733 Other rural a 3 724 3 806 3 752 3 271 3 611 3 831 3 715 3 587 3 869 Total 7 951 8 250 7 945 6 958 7 081 7 488 7 933 7 611 8 034 Mineral resources Coal, coke and briquettes 6 021 5 805 5 472 5 469 5 203 5 406 5 543 5 960 6 464 Other mineral fuels 3 097 4 300 3 986 3 573 4 262 4 358 4 066 4 331 4 497 Metalliferous ores and other minerals bs 8 817 8 759 9 610 8 089 9 512 9 364 9 649 9 548 10 250 Gold 3 281 2 533 2 504 2 607 2 371 2 584 2 688 2 928 2 980 Other metals cs 4 384 5 018 5 439 5 782 7 093 5 934 6 534 6 695 6 487 Total s 25 600 26 415 27 011 25 520 28 442 27 646 28 480 29 461 30 677 Total commodities sector s 33 551 34 664 34 956 32 478 35 524 35 134 36 413 37 072 38 711 Other merchandise s 8 786 8 410 8 466 7 526 na na na na na Total merchandise s 42 337 43 074 43 422 40 004 na na na na na Services 10 424 11 092 11 663 11 860 na na na na na Total goods and services 52 761 54 166 55 085 51 864 na na na na na Chain volume measures d Rural Cereal grains and products 1 262 1 417 904 759 729 886 1 279 1 459 1 381 Sugar and honey 289 364 309 279 209 353 336 304 227 Meat and meat preparations 1 804 1 855 2 046 1 691 1 783 1 637 1 724 1 528 1 762 Wool and sheepskins 700 630 760 700 667 605 707 592 644 Other rural a 3 876 3 876 3 782 3 949 2 934 3 488 4 113 3 868 3 910 Total 7 931 8 142 7 801 7 378 6 322 6 969 8 159 7 751 7 924 Mineral resources Coal, coke and briquettes 4 424 4 502 4 456 4 527 4 683 4 785 4 695 4 790 5 036 Other mineral fuels 2 388 3 247 3 366 3 124 3 489 3 531 3 476 3 636 3 646 Metalliferous ores and other minerals bs 5 416 5 249 5 853 5 006 6 224 6 205 6 383 6 249 6 718 Gold 2 202 1 719 1 732 1 741 1 852 1 992 2 019 2 075 2 124 Other metals cs 3 230 3 143 3 431 3 377 3 711 3 731 3 964 4 133 4 120 Total s 17 660 17 860 18 838 17 775 19 958 20 243 20 538 20 884 21 644 Total commodities sector s 25 591 26 002 26 639 25 153 26 280 27 213 28 697 28 635 29 568 Other merchandise s 8 294 8 220 8 091 6 732 na na na na na Total merchandise s 33 885 34 222 34 730 31 885 na na na na na Services 9 942 10 484 10 892 11 061 na na na na na Total goods and services 43 827 44 706 45 623 42 946 na na 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. 2 > june quarter 2007 381 sectors

industry gross value added a 8 australia

Unit 2001-02 2002-03 2003-04 2004-05 2005-06 Agriculture, forestry and fishing Agriculture $m 24 790 18 423 24 738 24 652 25 939 Forestry and fishing $m 2 437 2 430 2 605 2 501 2 388 Total $m 27 194 20 806 27 340 27 152 28 327 Mining Mining (excludes services to mining) $m 42 304 41 861 40 460 41 784 41 068 Services to mining $m 3 702 3 949 3 715 4 369 4 173 Total $m 45 735 45 596 43 949 46 152 45 241 Manufacturing Food, beverage and tobacco $m 19 346 19 540 19 483 19 689 19 581 Textile, clothing, footwear and leather $m 3 956 3 644 3 371 2 744 2 566 Wood and paper products $m 6 853 6 987 6 976 7 030 6 748 Printing, publishing and recorded media $m 10 661 10 923 11 251 10 967 10 737 Petroleum, coal, chemical, etc. $m 12 574 13 290 12 708 12 713 12 216 Non–metallic mineral products $m 3 943 4 281 4 430 4 651 5 193 Metal products $m 16 838 17 440 17 501 17 037 16 866 Machinery and equipment $m 15 431 16 523 17 364 17 466 18 409 Other manufacturing $m 3 945 4 154 4 424 4 068 3 691 Total $m 93 132 96 528 97 422 96 366 96 008 Building and construction $m 43 776 50 974 54 353 56 941 62 406 Electricity, gas and water supply $m 19 690 19 867 20 000 20 146 20 471 Taxes less subsidies on products $m 67 598 71 268 73 706 75 947 77 043 Statistical discrepancy $m 0 0 – 1 0 – 554 Gross domestic product $m 813 543 839 187 873 196 896 568 922 771

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

382 australian commodities > vol. 14 no. 2 > june quarter 2007 production, employment

volume of production indexes 9 australia

2002-03 2003-04 2004-05 2005-06 2006-07 s 2007-08 f Farm Grains and oilseeds 59.3 138.6 113.2 134.1 52.0 117.5 Total crops 83.4 123.0 116.8 111.8 68.6 93.2 Livestock slaughterings 109.8 104.4 109.3 108.6 114.7 108.4 Total livestock 104.2 99.6 103.1 102.1 103.6 98.8 Total farm sector 93.6 111.9 110.7 107.7 85.2 96.5 Forestry a Broadleaved 119.4 119.3 128.1 123.9 137.2 147.5 Coniferous 126.3 131.8 129.0 130.8 134.9 135.6 Total forestry 123.1 125.8 128.8 127.5 136.1 141.3 Mine b Energy minerals 115.0 111.0 113.4 111.5 120.7 127.4 Metals and other minerals 115.8 115.9 124.0 124.7 128.0 147.8 Total minerals 115.5 113.5 118.8 118.2 124.1 138.5 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

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 p ’000 ’000 ’000 ’000 ’000 ’000 Agriculture, forestry and fishing Agriculture 373 386 326 320 312 305 Forestry and logging 13 13 10 12 12 11 Commercial fishing 19 18 17 16 14 12 Total (including services) 435 444 377 374 363 355 Mining Coal 18 20 21 21 23 28 Oil and gas extraction 6 4 4 6 7 9 Metal ore 30 34 35 38 35 43 Other mining (including services) 24 23 26 27 29 34 Total 79 81 86 92 93 115 Manufacturing Food, beverages and tobacco 179 182 183 171 196 182 Textiles, clothing, footwear and leather 84 74 73 65 55 56 Wood and paper product 70 70 74 78 71 72 Printing, publishing and recorded media 118 105 115 110 109 106 Petroleum, coal and chemical product 107 107 112 100 91 88 Non–metallic mineral product 42 43 47 44 36 38 Metal product 175 155 164 157 139 162 Other manufacturing 319 324 323 309 294 297 Total 1 113 1 077 1 091 1 033 991 1 001 Other industries 7 389 7 532 7 769 7 933 8 089 8 388 Total 9 016 9 134 9 323 9 431 9 536 9 858

a Average employment over four quarters. p Preliminary. Source: ABS, The Labour Force, Australia, cat. no. 6291.0, Canberra. australian commodities > vol. 14 no. 2 > june quarter 2007 383 business, banks

business income 11 australia

2001-02 2002-03 2003-04 2004-05 2005-06 $m $m $m $m $m Farm Net value of farm production 11 127 3 879 6 529 5 212 7 812 Company profits in selected industries a Mining 14 895 15 092 12 133 17 599 36 013 Manufacturing Food, beverages and tobacco 4 819 3 778 5 998 na na Textiles, clothing and footwear 438 515 758 na na Wood and paper products 1 313 1 739 1 704 na na Printing, publishing and recorded media 2 006 2 627 2 799 na na Petroleum, coal and chemical product 2 011 2 789 2 567 na na Non–metallic mineral product 996 1 380 1 529 na na Metal product 3 923 4 595 4 344 na na Machinery and equipment 2 471 2 944 3 440 na na Other manufacturing 698 703 976 na na Total 18 675 21 070 24 115 23 537 23 060 Other industries (including services) 27 964 40 487 47 604 57 605 54 495 Total (including services) 61 534 76 649 83 852 98 741 113 568

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

Dec. Mar June Sep. Dec Mar June Sep. Dec $b $b $b $b $b $b $b $b $b Agriculture, fishing and forestry 35.7 36.9 39.3 39.8 39.3 41.4 43.5 44.1 43.6 Mining 6.0 5.7 5.7 5.9 6.1 6.7 6.8 10.9 9.3 Manufacturing 30.5 31.1 31.3 32.4 35.1 36.4 37.1 37.6 38.4 Construction 18.1 19.4 19.4 19.9 20.8 21.6 21.3 22.9 23.5 Wholesale, retail trade, transport and storage 51.9 53.7 54.9 56.3 59.5 61.5 64.2 66.5 67.8 Finance and insurance 49.6 48.7 49.6 51.8 54.9 55.7 62.5 72.6 77.5 Other 162.9 166.1 173.9 181.3 191.0 200.4 204.1 208.4 223.5 Total 354.7 361.6 374.1 387.4 406.7 423.6 439.5 463.0 483.7

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.

384 australian commodities > vol. 14 no. 2 > june quarter 2007 farm debt

rural indebtedness to ﬁ nancial institutions a 13 australia

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 $m $m $m $m $m $m Rural debt All banks a 25 174 26 829 28 957 34 115 39 261 43 546 Other government agencies b 701 711 739 751 820 891 Pastoral and other finance companies 2 639 2 691 1 628 3 379 3 112 3 352 Large finance institutional debt 28 514 30 231 31 324 38 246 43 193 47 789 Other farm debt cs 1 920 1 967 2 017 2 067 na na Total rural debt 30 434 32 198 33 341 40 313 na na Deposits Farm management deposits 1 033 2 074 2 480 2 619 2 792 2 797

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. 2 > june quarter 2007 385 capital expenditure

capital expenditure of private enterprises 14 australia

2001-02 2002-03 2003-04 2004-05 2005-06 $m $m $m $m $m At current prices Gross fixed capital formation a All sectors 168 831 193 788 211 722 228 646 254 912 New capital expenditure Mining b 7 250 8 766 9 282 10 253 18 608 Manufacturing Food, beverages and tobacco 2 205 2 614 2 274 2 418 2 472 Textiles, clothing, footwear and leather 213 230 200 268 187 Wood and paper products 593 709 912 711 802 Printing, publishing and recorded media 687 553 538 558 867 Petroleum, coal and chemical product 1 284 1 608 2 090 2 423 2 473 Non–metallic mineral products 554 965 590 711 837 Metal products 1 541 2 158 2 689 3 390 4 804 Machinery and equipment 1 854 2 180 1 877 1 875 2 503 Other manufacturing 251 367 257 328 483 Total 9 181 11 385 11 423 12 681 15 428 Total surveyed industries 44 380 50 815 51 247 57 554 72 642 Chain volume measures c Gross fixed capital formation a All sectors 175 108 199 857 216 272 228 646 249 348 New capital expenditure Mining 7 603 9 138 9 682 10 253 17 807 Manufacturing 8 209 10 590 11 374 12 681 15 308 Other selected industries 23 956 27 445 29 699 34 621 39 268 Total surveyed industries 39 762 47 105 50 708 57 554 72 383

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 2004-05. Sources: Australian Bureau of Statistics; ABARE.

386 australian commodities > vol. 14 no. 2 > june quarter 2007 mineral exploration

private mineral exploration expenditure 15 australia

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 $m $m $m $m $m $m At current prices Energy Petroleum Onshore 176.9 164.6 191.3 230.5 270.1 355.8 Offshore 847.9 718.1 803.8 713.6 774.6 906.1 Total 1 024.8 882.7 995.1 944.1 1 044.7 1 261.9 Coal 41.2 50.4 77.8 81.5 126.8 166.4 Uranium 8.4 8.7 6.9 10.6 20.7 56.1 Total 1 074.4 941.8 1 079.8 1 036.2 1 192.2 1 484.4 Metals and other minerals a Gold 370.1 331.3 378.4 397.1 391.7 399.6 Iron ore 23.4 25.2 44.5 63.7 137.9 161.3 Base metals, silver and cobalt b 165.3 132.9 142.4 151.9 261.3 356.7 Mineral sands 23.6 33.2 27.3 23.8 27.6 29.2 Diamonds 31.8 35.4 29.9 25.9 23.7 22.6 Other 19.5 23.6 25.6 32.2 38.7 48.8 Total metals and other minerals a 633.7 581.6 648.1 694.6 880.9 1 018.2 Total expenditure 1 708.1 1 523.4 1 727.9 1 730.8 2 073.1 2 502.6

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. 2 > june quarter 2007 387 world prices 16 annual world indicator prices of selected commodities

Unit 2002-03 2003-04 2004-05 2005-06 2006-07 s 2007-08 f Crops Wheat a US$/t 160 160 154 176 210 210 Corn b US$/t 107 115 97 104 151 167 Rice c US$/t 199 220 278 301 320 324 Soybeans d US$/t 245 321 275 261 313 329 Cotton e USc/lb 55.4 68.3 52.4 56.0 57.8 59.2 Sugar g USc/lb 8.0 7.9 10.5 15.8 11.3 9.0 Livestock products Beef h USc/kg 202 242 286 276 283 299 Wool i Ac/kg 1 049 820 767 713 864 885 Butter j US$/t 1 186 1 621 2 208 1 998 2 002 2 575 Cheese j US$/t 1 775 2 358 2 856 2 792 2 984 3 825 Skim milk powder j US$/t 1 587 1 862 2 210 2 175 3 179 5 100 Energy Crude oil Dubai US$/bbl 25.90 29.35 40.72 58.30 60.59 60.90 West Texas intermediate US$/bbl 29.92 33.76 48.77 64.22 63.02 62.19 Brent US$/bbl 27.82 31.42 46.23 62.44 63.40 63.63 World trade weighted average k US$/bbl 26.26 29.33 41.18 57.25 59.37 60.53 Coal l Thermal US$/t 25.86 29.45 47.14 49.34 50.29 51.48

Uranium (U3O8) m US$/lb 10.22 14.90 22.20 36.79 81.17 139.29 Minerals and metals n Aluminium US$/t 1 360 1 569 1 807 2 245 2 694 2 388 Copper US$/t 1 595 2 267 3 151 5 062 7 102 6 375 Gold o US$/oz 334 389 422 527 639 681 Iron ore (negotiated) q USc/dltu 28.28 30.83 36.57 62.72 74.63 81.73 Lead US$/t 445 700 964 1 061 1 488 1 173 Manganese (negotiated) r US$/mtu 1.97 2.12 2.45 3.98 3.00 2.70 Nickel US$/t 7 666 12 264 14 957 15 488 38 304 37 265 Silver t USc/oz 461 579 695 928 1 276 1 163 Tin US$/t 4 371 6 627 8 491 7 403 11 450 11 142 Zinc US$/t 775 962 1 171 2 118 3 694 3 413

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.

388 australian commodities > vol. 14 no. 2 > june quarter 2007 world prices 17 quarterly world indicator prices of selected commodities

2005-06 2006-07 2007-08 Unit June Sep Dec Mar June p Sep s Dec f Mar f June f Crops Wheat a US$/t 198 207 217 209 208 203 216 211 210 Corn b US$/t 110 117 156 171 161 159 163 170 174 Rice c US$/t 314 319 307 323 327 312 306 335 343 Soybeans d US$/t 264 264 290 318 323 315 319 334 331 Cotton e USc/lb 55.3 58.1 57.9 58.4 56.6 58.8 58.7 59.2 59.9 Sugar g USc/lb 17.5 14.3 12.3 11.5 10.8 10.0 9.5 9.0 8.8 Livestock products Beef h USc/kg 269 282 285 282 283 295 310 302 290 Wool i Ac/kg 742 746 804 932 975 945 890 850 855 Butter j US$/t 1 808 1 683 1 858 2 092 2 373 2 612 2 414 2 503 2 770 Cheese j US$/t 2 683 2 600 2 792 3 042 3 503 3 877 3 587 3 728 4 108 Skim milk powder j US$/t 2 075 2 125 2 675 3 375 4 542 5 285 4 750 4 933 5 432 Energy Crude oil Dubai US$/bbl 65.35 66.40 57.63 54.03 64.30 63.50 60.50 58.50 61.10 West Texas intermediate US$/bbl 70.41 70.42 59.96 57.20 64.50 66.00 61.00 59.50 62.25 Brent US$/bbl 69.53 69.62 59.68 56.80 67.50 69.50 63.50 60.50 61.00 World trade weighted average k US$/bbl 63.87 65.70 54.99 52.50 64.30 64.60 59.75 57.85 59.90 Coal l Thermal US$/t 48.96 49.35 49.88 49.68 52.25 52.31 52.36 52.42 48.84 Uranium (U3O8) m US$/lb 43.33 50.00 65.00 85.00 124.67 137.17 140.00 143.00 137.00 Minerals and metals n Aluminium US$/t 2 653 2 482 2 723 2 801 2 770 2 580 2 470 2 200 2 300 Copper US$/t 7 251 7 670 7 098 5 941 7 700 6 800 6 500 6 200 6 000 Gold o US$/oz 629 622 614 650 669 679 680 685 681 Lead US$/t 1 100 1 186 1 629 1 646 2 096 2 100 1 733 1 617 1 500 Nickel US$/t 19 925 29 141 33 134 41 439 49 500 35 500 39 560 38 000 36 000 Silver q USc/oz 1 229 1 170 1 262 1 331 1 340 1 320 1 202 1 112 1 017 Tin US$/t 8 529 8 653 10 335 12 729 14 084 13 000 11 500 10 267 9 800 Zinc US$/t 3 292 3 363 4 207 3 456 3 700 3 650 3 500 3 400 3 150

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. 2 > june quarter 2007 389 unit values

gross unit values or prices of farm products a 18 australia

Unit 2002-03 2003-04 2004-05 2005-06 2006-07 s 2007-08 f Crops b Grains and oilseeds Winter crops Barley $/t 255 169 159 193 290 210 Canola $/t 446 403 326 372 520 416 Field peas $/t 344 232 235 202 320 262 Lupins $/t 292 236 206 207 331 281 Oats $/t 219 138 134 193 303 227 Triticale $/t 258 153 152 203 294 221 Wheat $/t 266 216 197 228 266 257 Summer crops Maize $/t 233 223 194 292 327 318 Rice $/t 348 325 297 362 411 444 Sorghum $/t 205 159 134 175 269 238 Soybeans c $/t 384 365 283 301 365 307 Sunflowerseed c $/t 400 349 341 428 518 440 Industrial crops Cotton lint d c/kg 222 225 167 179 177 177 Sugar cane (cut for crushing) $/t 28 23 26 35 28 24 Wine grapes $/t 810 787 715 609 655 820 Livestock for slaughter Beef e c/kg 256 289 320 322 293 323 – yearling e c/kg 289 324 359 366 330 345 – ox e c/kg 285 309 331 332 318 335 – cow e c/kg 226 260 289 288 256 270 Lamb eg c/kg 369 376 352 341 324 375 Mutton e c/kg 167 199 166 172 135 200 Pig e c/kg 244 221 243 232 255 215 Poultry h c/kg 385 387 396 368 360 368 Livestock products Wool i c/kg 1 049 820 767 713 864 885 Milk j c/L 27.1 27.9 31.5 33.1 32.6 38.5

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. 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.

390 australian commodities > vol. 14 no. 2 > june 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 s 2007-08 f Farm Grains Wheat Production Mt 566 556 628 620 591 623 Consumption Mt 600 588 617 623 609 622 Closing stocks Mt 165 125 136 133 116 117 Exports b Mt 107 103 110 109 107 107 Coarse grains Production Mt 874 916 1 014 974 975 1 051 Consumption Mt 901 943 975 986 1 010 1 060 Closing stocks Mt 167 140 178 167 124 120 Exports b Mt 104 104 102 104 109 107 Rice Production c Mt 378 392 401 418 417 421 Consumption c Mt 405 410 405 412 417 422 Closing stocks c Mt 107 85 78 77 75 72 Exports bd Mt 28 27 29 29 30 29 Oilseeds and vegetable oils Oilseeds Production Mt 330 335 381 390 404 395 Consumption Mt 325 336 367 382 395 408 Closing stocks Mt 48 44 57 64 71 61 Exports Mt 70 67 75 77 82 88 Vegetable oils Production Mt 96 102 111 113 117 122 Consumption Mt 96 100 108 115 122 130 Closing stocks Mt 8 8 10 10 8 8 Exports Mt 36 39 42 46 48 49 Vegetable protein meals Production Mt 185 190 206 215 225 234 Consumption Mt 186 189 204 215 223 232 Closing stocks Mt 7 7 8 7 7 7 Exports Mt 54 59 60 65 68 71 Industrial crops Cotton Production Mt 19 21 26 25 25 25 Consumption Mt 21 21 24 25 27 27 Closing stocks Mt 10 9 12 12 11 9 Exports Mt 7 7 8 10 8 9 Sugar Production Mt 148 142 142 152 163 169 Consumption Mt 141 145 147 149 154 158 Closing stocks Mt 49 52 57 60 69 80 Exports Mt 44 45 46 45 45 47 Continued

australian commodities > vol. 14 no. 2 > june quarter 2007 391 world 19 world production, consumption, stocks and trade for selected commodities a continued

Unit 2002-03 2003-04 2004-05 2005-06 2006-07 s 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 1 227 1 221 1 215 1 230 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 6 612 6 626 6 741 7 036 7 420 7 650 Consumption kt 6 206 6 251 6 352 6 698 7 099 7 325 Closing stocks kt 423 342 312 290 261 230 Exports kt 865 905 793 742 729 735 Skim milk powder gl Production d kt 3 658 3 303 3 299 3 282 3 313 3 390 Consumption d kt 3 442 3 390 3 321 2 943 2 939 3 000 Closing stocks d kt 949 563 365 291 277 200 Exports kt 1 172 1 165 1 012 1 052 1 054 1 060 Energy d Crude oil Production World m mbd 79.7 83.0 84.5 85.3 85.8 87.7 OPEC n mbd 30.7 32.8 34.2 34.4 33.9 36.5 Consumption m mbd 79.3 82.4 83.6 84.5 85.9 89.5 Closing stocks OECD o days 52.0 52.0 51.0 53.0 na na Coal d Production Hard coal q Mt 4 133 4 533 4 970 5 375 5 775 6 150 Brown coal Mt 903 893 905 888 871 922 Exports Metallurgical coal Mt 185 197 207 209 220 227 Thermal coal Mt 535 573 578 611 636 652

Uranium (U3O8) d Production rs kt 41.7 46.4 49.3 46.6 51.1 59.1 Consumption kt 77.8 78.5 78.8 77.2 78.9 78.7 Metals d Bauxite production kt 158 315 167 595 175 811 180 062 200 108 210 360 Alumina production kt 52 591 54 872 56 157 58 395 78 246 86 000 Aluminium Production kt 28 001 29 922 32 021 33 953 37 620 40 411 Consumption kt 27 605 29 962 31 707 34 023 37 085 39 913 Closing stocks t kt 3 672 3 033 3 010 2 764 3 300 3 797 Exports kt 16 852 18 091 16 975 15 465 16 125 16 872 Continued

392 australian commodities > vol. 14 no. 2 > june 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 s 2007-08 f Iron and steel d Production Iron ore u Mt 1 074 1 184 1 316 1 480 1 602 1 690 Pig iron Mt 670 724 785 881 931 1 011 Crude steel Mt 970 1 068 1 140 1 244 1 327 1 406 Iron ore trade Mt 582 669 744 781 842 913 Gold d Mine production t 2 590 2 470 2 519 2 474 2 548 2 631 Supply t 4 152 3 842 4 085 3 910 4 018 3 861 Fabrication consumption v t 2 990 3 163 3 280 2 918 3 053 3 140 Base metals d Copper Production w kt 15 221 15 850 16 612 17 437 18 196 18 992 Consumption kt 15 317 16 657 16 765 17 066 18 024 18 959 Closing stocks kt 1 212 518 547 703 875 907 Lead Production w kt 6 762 6 954 7 636 7 937 8 204 8 449 Consumption kt 6 848 7 283 7 750 7 949 8 169 8 389 Closing stocks kt 407 299 283 276 311 371 Nickel Production w kt 1 192 1 252 1 293 1 352 1 434 1 506 Consumption kt 1 219 1 246 1 248 1 401 1 463 1 501 Closing stocks kt 99 98 112 87 58 62 Tin Production w kt 276 345 353 349 360 410 Consumption kt 302 336 349 365 380 395 Closing stocks kt 38 28 38 33 13 28 Zinc Production w kt 9 874 10 353 10 229 10 736 11 273 11 836 Consumption kt 9 843 10 646 10 628 11 068 11 356 11 696 Closing stocks kt 1 158 1 039 808 495 412 552 Mineral sands d Production Ilmenite x kt 10 180 10 393 10 944 10 422 10 474 10 787 Titaniferous slag kt 1 995 2 082 2 274 2 160 2 170 2 190 Rutile concentrate kt 387 377 410 461 557 627 Zircon concentrate kt 1 137 1 168 1 192 1 210 1 318 1 440

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. 2 > june quarter 2007 393 australia

commodity production 20 australia

Unit 2002-03 2003-04 2004-05 2005-06 2006-07 s 2007-08 f Crops Grains and oilseeds Winter crops Barley kt 3 865 10 382 7 740 9 563 3 722 9 051 Canola kt 871 1 703 1 542 1 436 513 1 399 Chickpeas kt 136 178 116 123 232 432 Field peas kt 178 487 289 478 149 473 Lupins kt 726 1 180 937 1 328 174 582 Oats kt 957 2 018 1 282 1 695 633 1 480 Triticale kt 327 826 611 676 300 598 Wheat kt 10 132 26 132 21 905 25 367 9 819 22 489 Summer crops Cottonseed s kt 546 494 912 844 388 233 Maize kt 310 395 418 380 247 287 Rice kt 438 553 339 973 167 43 Sorghum kt 1 465 2 009 2 011 1 973 952 1 905 Soybeans kt 18 74 54 55 32 43 Sunflowerseed kt 25 58 62 98 18 51 Other oilseeds a kt 63 72 70 83 76 78 Total grains and oilseeds kt 20 056 46 560 38 289 45 072 17 420 39 141 Industrial crops Cotton lint kt 387 349 645 597 274 164 Sugar cane (cut for crushing) kt 36 995 36 993 37 822 38 169 36 000 37 300 Sugar (tonnes actual) kt 5 461 4 994 5 196 5 108 4 650 5 100 Wine grapes kt 1 411 1 895 1 938 1 873 1 264 1 503 Livestock slaughterings Number slaughtered Cattle and calves ’000 9 228 8 779 8 853 8 401 9 013 8 300 Cattle exported live b ’000 973 581 574 549 592 640 Sheep ’000 13 657 10 421 11 443 11 830 13 200 9 300 Lambs ’000 16 870 16 562 17 331 18 666 19 500 18 500 Sheep exported live b ’000 5 843 3 843 3 233 4 248 3 900 3 700 Pigs ’000 5 742 5 591 5 342 5 370 5 331 5 600 Meat produced Beef and veal c kt 2 073 2 033 2 162 2 077 2 228 2 058 Lamb c kt 329 341 354 382 400 380 Mutton c kt 268 220 237 244 270 192 Pig meat kt 420 406 389 389 383 403 Poultry meat c kt 726 732 792 817 854 874 Total kt 3 816 3 732 3 934 3 909 4 134 3 908 Continued

394 australian commodities > vol. 14 no. 2 > june quarter 2007 australia

commodity production continued 20 australia

Unit 2002-03 2003-04 2004-05 2005-06 2006-07 s 2007-08 f Livestock products Wool d kt 551 509 520 510 477 455 Milk e ML 10 326 10 075 10 125 10 092 9 550 9 350 Butter g kt 164 149 147 146 130 131 Cheese kt 379 384 388 373 360 331 Casein kt 13 14 13 13 11 10 Skim milk powder h kt 203 184 191 212 190 198 Wholemilk powder kt 198 187 189 158 143 143 Buttermilk powder kt 17 17 17 16 16 16 Forestry Roundwood '000 m3 25 714 26 333 26 904 26 665 28 778 29 898 Fisheries i Tuna j kt 13.4 14.7 11.3 12.7 12.0 13.1 Other fish k kt 151.7 165.3 172.9 146.5 143.2 145.2 Prawns kt 26.4 27.6 23.7 23.2 20.9 21.2 Rock lobster kt 17.1 19.9 18.5 16.2 14.7 15.6 Abalone kt 5.2 5.8 6.0 5.5 5.7 5.9 Scallops kt 9.6 9.3 15.4 8.7 12.6 11.4 Oysters kt 10.5 12.7 10.4 12.0 12.1 12.9 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 7.3 7.1 Energy Coal Black, salable Mt 274.9 286.0 305.0 307.2 316.8 331.7 Black, raw Mt 348.9 360.4 393.4 398.4 426.0 446.6 Brown Mt 66.8 66.3 67.2 71.2 71.9 72.4 Petroleum Crude oil and condensate ML 35 142 30 719 27 311 24 320 28 259 30 133 Petroleum products l ML 46 723 43 486 44 555 40 679 43 003 39 711 Natural gas m Gm3 36.8 37.0 41.3 42.2 43.2 47.6 LPG (naturally occurring) ML 4 681 4 639 4 628 4 722 4 770 5 180

Uranium (U3O8) t 9 172 9 569 10 964 9 974 9 221 10 116 Metalliferous minerals and metals n Aluminium Bauxite Mt 54.5 56.3 57.6 60.9 64.2 66.5 Alumina kt 16 413 16 690 17 161 17 826 18 731 20 530 Aluminium (ingot metal) kt 1 855 1 877 1 890 1 912 1 949 1 950 Copper Mine production o kt 883 811 899 933 900 1 112 Refined, primary kt 537 458 479 461 451 608 Gold Mine production o t 277.8 266.7 265.6 250.0 251.5 269.7 Continued

australian commodities > vol. 14 no. 2 > june quarter 2007 395 australia

commodity production continued 20 australia

Unit 2002-03 2003-04 2004-05 2005-06 2006-07 s 2007-08 f Metalliferous minerals and metals (continued) Iron and steel Ore and concentrate q Mt 199.1 222.8 251.9 263.8 291.8 322.0 Iron and steel Mt 9.4 9.4 7.4 7.9 8.0 8.3 Lead Mine production o kt 695 677 682 761 646 827 Refined r kt 267 247 234 234 191 251 Bullion kt 181 143 153 141 114 155 Manganese Ore, metallurgical grade kt 2 472 3 094 3 563 4 088 4 874 4 614 Metal content of ores and concentrates kt 1 186 1 169 1 710 1 962 2 340 2 215 Nickel Mine production o kt 183 185 192 186 198 230 Refined, class I s kt 117 113 117 105 107 117 Refined, class II u kt 12 11 10 10 16 24 Total ore processed v kt 230 234 229 227 250 291 Silver Mine production o t 1 892 2 056 2 303 2 169 1 679 1 762 Refined t 672 619 722 655 625 678 Tin Mine production o t 6 328 1 512 1 650 1 805 2 213 3 300 Refined t 708 553 445 736 321 40 Titanium Ilmenite concentrate kt 2 072 1 911 1 993 2 185 2 440 2 584 Leucoxene concentrate kt 43 53 68 81 158 194 Rutile concentrate kt 204 152 173 184 284 378 Synthetic rutile s kt 673 696 751 711 727 760 Titanium dioxide pigment s kt 189 196 204 208 214 220 Zinc Mine production o kt 1 529 1 355 1 352 1 380 1 370 1 687 Refined kt 570 502 464 446 492 501 Zircon concentrate kt 459 448 432 442 554 684 Other minerals Diamonds ’000 ct 32 006 24 310 32 471 25 354 26 743 21 125 Salt kt 10 438 10 618 12 254 11 438 11 235 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.

396 australian commodities > vol. 14 no. 2 > june 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 s 2007-08 f $m $m $m $m $m $m Crops Grains and oilseeds Winter crops Barley 984 1 750 1 233 1 846 1 079 1 902 Canola 389 686 503 534 266 581 Chickpeas 65 58 36 57 155 246 Field peas 61 113 68 97 48 124 Lupins 212 278 193 275 58 164 Oats 210 279 172 327 192 336 Triticale 84 126 93 137 88 132 Wheat 2 692 5 636 4 317 5 790 2 607 5 785 Summer crops Maize 72 88 81 111 81 91 Rice 153 180 101 352 69 19 Sorghum 300 319 270 344 256 452 Soybeans 7 27 15 17 12 13 Sunflowerseed 10 20 21 42 9 22 Other oilseeds a 30 44 36 47 53 51 Total grains and oilseeds 5 440 9 837 7 364 10 238 5 225 10 205 Industrial crops Cotton lint and cotton seed b 844 671 1 222 1 105 471 295 Sugar cane (cut for crushing) 1 019 854 980 1 331 1 016 910 Wine grapes 1 143 1 491 1 385 1 141 828 1 232 Total industrial crops 3 006 3 016 3 587 3 577 2 315 2 437 Horticulture Table and dried grapes 192 166 220 250 240 230 Fruit and nuts (excl grapes) 2 216 2 184 2 547 2 650 2 700 2 570 Vegetables 2 258 2 380 2 315 2 565 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 6 898 6 980 6 828 Other crops nei c 1 374 1 802 1 321 1 445 1 860 1 445 Total crops 14 487 19 385 17 353 20 724 14 885 19 462 Continued

australian commodities > vol. 14 no. 2 > june quarter 2007 397 value of production

gross value of farm and ﬁ sheries production continued 21 australia

2002-03 2003-04 2004-05 2005-06 2006-07 s 2007-08 f $m $m $m $m $m $m Livestock slaughterings Cattle and calves d 5 845 6 341 7 455 7 218 6 983 7 055 Cattle exported live e 567 318 374 358 417 467 Sheep g 468 454 418 442 365 384 Lambs gh 1 161 1 318 1 327 1 425 1 296 1 425 Sheep exported live 408 266 207 291 273 253 Pigs 911 879 906 867 930 832 Poultry 1 281 1 281 1 304 1 385 1 414 1 480 Total livestock slaughterings k 10 676 10 896 12 033 12 029 11 721 11 941 Livestock products Wool i 3 318 2 397 2 196 1 970 2 678 2 619 Milk j 2 795 2 809 3 194 3 340 3 113 3 600 Eggs 294 336 328 340 338 340 Honey and beeswax 75 74 77 66 50 44 Total livestock products 6 482 5 615 5 794 5 716 6 180 6 603 Total farm 31 645 35 896 35 180 38 470 32 786 38 005 Forestry products Roundwood 1 469 1 555 1 646 1 666 1 807 1 918 Fisheries products l Tuna m 317 280 172 175 164 197 Other fin fish n 585 581 569 597 587 605 Prawns 367 360 309 302 264 282 Rock lobster 463 411 427 470 457 479 Abalone 216 198 233 226 229 238 Scallops 33 25 47 25 36 34 Oysters 62 77 74 84 82 90 Pearls 124 122 122 122 122 122 Other molluscs o 64 73 68 64 61 62 Other crustaceans 63 66 60 49 62 62 Total fish q 2 313 2 207 2 105 2 133 2 067 2 184

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 kilograms. 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.

398 australian commodities > vol. 14 no. 2 > june quarter 2007 areas, stock

crop areas and livestock numbers 22 australia

Unit 2002-03 2003-04 2004-05 2005-06 2006-07 s 2007-08 f Crop areas Grains and oilseeds Winter crops Barley ’000 ha 3 864 4 477 4 645 4 447 3 990 4 396 Canola ’000 ha 1 298 1 211 1 377 979 944 1 011 Chickpeas ’000 ha 201 152 113 105 244 312 Field peas ’000 ha 380 354 413 280 342 292 Lupins ’000 ha 1 025 851 845 832 500 457 Oats ’000 ha 911 1 089 894 936 794 900 Triticale ’000 ha 408 445 389 347 328 360 Wheat ’000 ha 11 170 13 067 13 399 12 543 11 138 12 409 Summer crops Maize ’000 ha 50 70 72 76 50 65 Rice ’000 ha 46 66 51 99 16 5 Sorghum ’000 ha 667 734 755 769 457 751 Soybeans ’000 ha 10 33 26 24 14 21 Sunflowerseed ’000 ha 40 46 46 79 17 45 Other oilseeds a ’000 ha 44 51 55 54 43 49 Total grains and oilseeds ’000 ha 20 777 23 201 23 808 22 300 19 415 21 488 Industrial crops Cotton ’000 ha 224 198 321 336 144 82 Sugar cane b ’000 ha 448 448 434 415 420 430 Winegrapes ’000 ha 140 146 153 152 160 161 Livestock numbers c Cattle Beef million 23.62 24.41 25.42 25.70 24.93 25.36 Dairy million 3.05 3.06 2.86 2.78 2.67 2.64 milking herd d million 2.05 2.04 1.94 1.87 1.80 1.78 Total million 26.66 27.47 28.28 28.48 27.60 28.00 Sheep million 99.3 101.3 101.5 91.9 85.6 85.1 Pigs million 2.66 2.48 2.68 2.70 2.82 2.77

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. 2 > june quarter 2007 399 yields

average farm yields 23 australia

Unit 2002-03 2003-04 2004-05 2005-06 2006-07 s 2007-08 f Crops Grains and oilseeds Winter crops Barley t/ha 1.00 2.32 1.67 2.15 0.93 2.06 Canola t/ha 0.67 1.41 1.12 1.47 0.54 1.38 Chickpeas t/ha 0.68 1.17 1.02 1.17 0.95 1.38 Field peas t/ha 0.47 1.38 0.70 1.71 0.43 1.62 Lupins t/ha 0.71 1.39 1.11 1.60 0.35 1.27 Oats t/ha 1.05 1.85 1.43 1.81 0.80 1.65 Triticale t/ha 0.80 1.86 1.57 1.95 0.91 1.66 Wheat t/ha 0.91 2.00 1.63 2.02 0.88 1.81 Summer crops Maize t/ha 6.20 5.64 5.81 5.03 4.94 4.41 Rice t/ha 9.52 8.38 6.60 9.83 10.44 8.60 Sorghum t/ha 2.20 2.74 2.66 2.57 2.08 2.54 Soybeans t/ha 1.77 2.21 2.07 2.33 2.35 2.06 Sunflowerseed t/ha 0.62 1.26 1.35 1.24 1.06 1.13 Industrial crops Cotton (lint) t/ha 1.72 1.76 2.01 1.78 1.91 2.00 Sugar cane (for crushing) t/ha 83 83 87 92 86 87 Winegrapes t/ha 10.08 12.98 12.67 12.32 7.90 9.34 Livestock Wool a kg/sheep 4.25 4.51 4.57 4.43 4.21 4.25 Wholemilk L/cow 5 037 4 943 5 214 5 397 5 306 5 253

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

400 australianaustralian commodities commodities > vol. > vol. 14 14 no. no. 2 2> >june june quarter quarter 2007 2007 export volumes

volume of commodity exports 24 australia

Unit 2002-03 2003-04 2004-05 2005-06 2006-07 s 2007-08 f Farm Grains and oilseeds Winter crops Barley a kt 3 462 5 308 6 499 5 315 3 086 5 331 Canola kt 612 1 049 1 019 884 278 819 Chickpeas kt 89 164 151 211 239 309 Lupins kt 208 646 419 469 150 243 Oats (unprepared) kt 177 172 165 190 64 198 Peas b kt 108 209 116 156 224 283 Wheat c kt 10 845 15 073 15 779 15 168 11 880 15 214 Summer crops Cottonseed kt 259 167 214 204 143 123 Rice kt 591 234 271 254 476 77 Sorghum kt 70 289 513 173 46 51 Other oilseeds d kt 16 19 28 18 14 29 Total grains and oilseeds kt 16 436 23 329 25 175 23 044 16 601 22 677 Industrial crops Raw cotton e kt 596 459 410 650 473 238 Sugar kt 4 167 4 060 4 153 4 067 3 740 3 970 Wine ML 508 584 661 736 877 824 Meat and live animals for slaughter Beef and veal gh kt 902 860 948 892 979 890 Live cattle i ’000 973 581 574 549 592 640 Lamb g kt 98 112 123 143 152 145 Live sheep i ’000 5 843 3 843 3 233 4 248 3 900 3 700 Mutton g kt 152 120 137 145 165 122 Pig meat g kt 63 51 43 43 43 49 Poultry meat g kt 23 20 20 22 28 34 Wool Greasy js kt 307 321 373 372 341 330 Semiprocessed kt (gr.eq.) 171 127 114 91 83 81 Skins kt (gr.eq.) 56 54 61 75 85 80 Total js kt (gr.eq.) 534 503 548 538 510 490 Dairy products Butter k kt 111 83 69 82 78 67 Cheese kt 208 212 227 202 206 155 Casein kt 21 18 13 8 10 5 Skim milk powder kt 181 155 141 181 170 159 Wholemilk powder kt 142 117 105 110 103 71 Continued

australian commoditiescommodities > vol.> vol. 14 no.14 2no. > 2june > quarter june quarter 2007 2007 401 export volumes

volume of commodity exports continued 24 australia

Unit 2002-03 2003-04 2004-05 2005-06 2006-07 s 2007-08 f Forest products Woodchips kt 5 437 5 264 5 598 5 363 5 829 6 135 Fisheries products Tuna l kt 12.6 12.8 10.9 11.7 11.1 12.0 Other fish kt 17.4 13.2 15.0 11.6 11.2 11.4 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 6.9 6.8 Rock lobster Tails kt 1.7 2.1 1.8 1.6 1.4 1.7 Whole kt 9.5 10.9 10.2 9.9 8.3 9.5 Abalone Fresh, chilled or frozen kt 1.7 2.1 2.0 2.1 2.2 2.4 Prepared or preserved kt 2.5 2.8 2.0 1.5 1.7 1.8 Scallops n kt 1.2 1.5 1.2 1.5 1.2 1.6 Mineral resources Energy Crude oil o ML 20 950 17 526 15 731 13 026 15 937 17 575 LPG ML 3 194 2 916 2 844 2 800 2 908 3 150 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 2 157 2 160 Petroleum products ML 3 140 2 474 1 847 2 082 2 259 2 125 Metallurgical coal Mt 107.8 111.7 124.9 120.5 131.8 139.0 Thermal coal Mt 99.9 106.7 106.4 110.8 111.4 121.0

Uranium (U3O8) t 9 593 9 099 11 249 10 253 8 856 10 116 Continued

402 australian commodities > vol. 14 no. 2 > june quarter 2007 export volumes

volume of commodity exports continued 24 australia

Unit 2002-03 2003-04 2004-05 2005-06 2006-07 s 2007-08 f Mineral resources (continued) Metalliferous minerals and metals t Aluminium Alumina kt 13 168 13 572 14 073 14 499 15 246 16 727 Aluminium (ingot metal) kt 1 551 1 546 1 512 1 617 1 641 1 647 Copper Ore and concentrate kt 1 193 1 286 1 326 1 635 1 566 1 681 Refined kt 359 301 322 314 305 474 Gold v t 282 315 309 315 369 386 Iron and steel Iron ore and pellets Mt 181.5 194.8 228.5 239.4 263.8 295.3 Iron and steel w kt 3 589 3 818 2 338 2 428 2 648 2 806 Lead Ores and concentrates kt 366 417 417 502 425 489 Refined kt 269 231 243 244 219 251 Bullion kt 150 113 164 140 126 155 Manganese Ore s kt 2 014 2 603 3 128 3 215 4 174 3 030 Nickel vs kt 208 213 218 198 225 265 Titanium Ilmenite concentrate x kt 1 020 783 633 722 974 618 Leucoxene concentrate kt 41 125 93 86 135 196 Rutile concentrate kt 195 146 158 169 307 384 Synthetic rutile s kt 456 470 517 472 508 521 Titanium dioxide pigment kt 147 165 175 177 168 172 Refined silver t 511 415 517 482 420 485 Tin v t 5 963 143 1 529 1 556 2 025 3 305 Zinc Ores and concentrates kt 1 913 1 844 1 953 1 821 1 878 2 372 Refined kt 486 396 397 388 385 444 Zircon concentrate y kt 445 443 428 438 555 677 Other minerals Diamonds ’000 ct 32 274 24 326 32 471 25 354 26 743 21 125 Salt kt 10 172 10 285 12 128 10 776 10 849 11 721 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. 2 > june quarter 2007 403 export values

value of commodity exports (fob) 25 australia

2002-03 2003-04 2004-05 2005-06 2006-07 s 2007-08 f $m $m $m $m $m $m Farm Grains and oilseeds Winter crops Barley a 954 1 239 1 274 1 108 810 1 321 Canola 289 453 397 331 129 348 Chickpeas 52 71 65 106 165 167 Lupins 57 148 89 99 31 57 Oats 66 66 36 47 23 62 Peas b 43 56 33 43 70 88 Wheat c 3 109 3 475 3 488 3 296 2 926 3 695 Summer crops Cottonseed 82 62 55 53 43 45 Rice 371 145 173 168 336 57 Sorghum 17 61 96 33 13 13 Other oilseeds d 21 25 33 20 24 33 Total grains and oilseeds 5 062 5 800 5 739 5 304 4 569 5 886 Industrial crops Raw cotton e 1 153 982 770 1 137 791 380 Sugar 1 220 982 1 098 1 597 1 350 1 005 Wine 2 386 2 494 2 750 2 799 3 257 3 450 Total 4 759 4 458 4 618 5 533 5 398 4 835 Other crops 3 420 3 096 3 186 3 214 3 149 3 181 Total crops 13 241 13 354 13 542 14 052 13 117 13 901 Meat and live animals for slaughter Beef and veal 3 756 3 793 4 584 4 272 4 372 4 374 Live cattle g 567 318 374 358 417 467 Lamb 533 603 673 767 755 790 Live sheep g 408 266 207 291 273 253 Mutton 442 380 398 432 467 390 Pig meat 256 181 150 140 148 150 Poultry meat 22 20 20 21 26 32 Total 5 984 5 560 6 404 6 281 6 458 6 457 Wool Greasy h 2 266 1 850 1 994 1 868 2 115 2 059 Semiprocessed 991 632 505 389 392 385 Skins 288 296 339 287 366 356 Total h 3 545 2 778 2 838 2 544 2 873 2 800 Dairy products Butter 224 182 188 224 171 170 Cheese 800 738 875 835 675 591 Casein 128 122 116 89 100 46 Skim milk powder 406 386 420 529 514 807 Wholemilk powder 380 321 324 334 293 346 Other dairy products 555 540 564 559 504 488 Total 2 493 2 290 2 488 2 570 2 257 2 448 Other livestock exports 1 977 2 224 2 329 2 279 2 505 2 530 Total livestock exports 13 998 12 852 14 060 13 674 14 094 14 235 Total farm exports 27 239 26 206 27 602 27 726 27 211 28 136 Continued

404 australian commodities > vol. 14 no. 2 > june quarter 2007 export values

value of commodity exports (fob) continued 25 australia

2002-03 2003-04 2004-05 2005-06 2006-07 s 2007-08 f $m $m $m $m $m $m Forest products Woodchips 808 794 858 839 911 959 Other forest products 1 253 1 207 1 230 1 269 1 263 1 270 Fisheries products Tuna i 321 273 166 179 170 196 Other fish 164 137 139 115 109 121 Prawns j Headless 12 5 7 3 2 2 Whole 193 151 153 129 100 103 Rock lobster Tails 113 103 101 97 95 117 Whole 344 318 330 387 361 408 Abalone Fresh, chilled or frozen 109 117 124 132 140 142 Prepared or preserved 107 120 139 114 108 117 Scallops k 29 35 33 39 31 40 Pearls 332 310 291 290 319 308 Other fisheries products 121 81 61 62 157 90 Total 1 844 1 652 1 542 1 547 1 593 1 646 Total rural exports l Derived as sum of above 31 144 29 860 31 232 31 381 30 978 32 011 On balance of payments basis m 29 859 28 824 30 350 30 467 30 234 31 065 Mineral resources Energy Crude oil n 6 402 5 055 6 330 6 638 8 260 9 090 LPG 855 647 804 1 002 1 061 1 127 LNG 2 607 2 174 3 199 4 416 5 455 5 665 Bunker fuel o 775 696 951 1 322 1 286 1 217 Other petroleum products 1 198 918 844 1 195 1 438 1 409 Metallurgical coal 7 448 6 510 10 758 17 003 15 004 15 242 Thermal coal 4 448 4 372 6 336 7 206 6 823 7 992

Uranium (U3O8) 427 364 475 546 630 814 Total Derived as sum of above 24 161 20 737 29 696 39 328 39 957 42 556 On balance of payments basis (excl. bunker fuel) 23 036 19 779 28 387 37 573 38 070 40 623 Metalliferous minerals and metals Aluminium Bauxite s 159 125 123 127 149 162 Alumina 3 660 3 781 4 383 5 262 6 339 6 306 Aluminium (ingot metal) 3 696 3 441 3 726 4 788 5 741 5 277 Copper p Ore and concentrate 1 048 1 242 1 750 3 492 4 008 3 906 Refined 956 924 1 332 2 161 2 761 3 794 Continued

australian commodities > vol. 14 no. 2 > june quarter 2007 405 export values

value of commodity exports (fob) continued 25 australia

2002-03 2003-04 2004-05 2005-06 2006-07 s 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 9 542 10 648 Iron and steel Iron ore and pellets 5 342 5 277 8 120 12 854 15 914 18 695 Iron and steel 1 855 2 004 2 031 1 674 1 743 1 786 Lead p Ores and concentrates 289 387 490 711 797 1 133 Refined 203 199 305 350 445 598 Bullion 165 142 246 235 300 426 Manganese Ore s 312 371 473 424 460 451 Titanium Ilmenite concentrate q 135 82 63 76 112 80 Leucoxene concentrate 16 33 25 25 51 92 Rutile concentrate 149 94 114 138 259 309 Synthetic rutile s 293 253 306 321 361 352 Titanium dioxide pigment 428 399 422 441 407 400 Nickel s 2 337 3 107 3 743 3 457 9 024 9 973 Refined silver 136 118 161 197 215 243 Tin p 38 1 8 12 26 37 Zinc p Ores and concentrates 670 677 852 1 542 2 508 2 823 Refined 757 557 614 998 1 841 2 115 Zircon concentrate r 282 260 319 398 478 456 Total 28 061 28 983 35 130 46 771 63 481 70 060 Other minerals Diamonds s 789 484 658 526 565 461 Salt 233 186 226 229 241 258 Other 4 485 3 779 3 763 5 274 4 430 4 147 Total mineral resources exports 57 728 54 170 69 473 92 128 108 674 117 481 Total commodity exports Derived as sum of above 88 872 84 030 100 706 123 509 139 653 149 492 On balance of payments t 86 812 82 298 98 873 121 272 137 622 147 329

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.

406 australian commodities > vol. 14 no. 2 > june quarter 2007 import value

value of imports and exports of selected commodites 26 australia

2001-02 2002-03 2003-04 2004-05 2005-06 s $m $m $m $m $m Vegetable oilseeds and products a Imports 399 401 382 352 341 Exports 784 443 603 551 470 Dairy products Imports Cheese 166 168 158 187 227 Other dairy products 84 92 101 124 122 Total 250 260 259 311 349 Exports Cheese 1 033 800 738 875 835 Other dairy products 2 245 1 693 1 552 1 613 1 734 Total 3 278 2 493 2 290 2 488 2 570 Edible fisheries products Imports Shellfish b 352 360 360 412 426 Fin fish 537 591 545 547 602 Total 889 950 905 959 1 028 Exports Shellfish b 1 160 1 000 909 932 943 Fin fish c 502 485 410 304 295 Total 1 662 1 485 1 319 1 236 1 237 Forest products Imports Sawnwood 443 505 502 492 419 Wood based panels 170 206 193 219 231 Pulp and paper products 2 611 2 784 2 719 2 809 2 841 Other d 529 591 585 587 528 Total 3 752 4 086 3 998 4 107 4 020 Exports Woodchips 712 808 794 858 839 Pulp and paper products 841 834 820 839 854 Other e 431 418 388 392 415 Total 1 984 2 060 2 002 2 089 2 108 Petroleum Imports Crude oil g 7 458 8 610 6 594 9 995 12 820 Petroleum products h 1 625 2 050 3 595 5 123 8 761 Total 9 083 10 661 10 190 15 118 21 581 Exports Crude oil g 6 390 6 402 5 055 6 330 6 638 LPG i 721 855 647 804 1 002 LNG 2 613 2 607 2 174 3 199 4 416 Bunker fuel j 760 775 696 951 1 322 Other petroleum products 1 234 1 198 918 844 1 195 Total 11 719 11 838 9 490 12 126 14 573

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. 2 > june quarter 2007 407 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 macroeconomic analyst jammie penm [email protected] 6272 2030 commodity outlook and regional conferences vince o’donnell [email protected] 6272 2255 agriculture branch manager (acting) lisa elliston [email protected] 6272 2091 agriculture and biosecurity ben buetre [email protected] 6272 2404 crops, livestock and food industries john hogan [email protected] 6272 2056 energy and minerals branch manager paul ross [email protected] 6272 2349 energy projections and analysis vacant 6272 2055 resource markets and infrastructure vacant 6272 2173 international energy and mineral analysis allison ball [email protected] 6272 2295 farm surveys and analysis branch manager vacant 6272 2043 regional farm data analysis and collection milly lubulwa [email protected] 6272 2069 data management geoff armitage [email protected] 6272 2367 international branch manager (acting) jammie penm [email protected] 6272 2030 international economic analysis neil andrews [email protected] 6272 2242 climate change and trade modelling (acting) melanie ford [email protected] 6272 2285 natural resource management branch manager peter gooday [email protected] 6272 2138 ﬁ sheries david galeano [email protected] 6272 2094 land and forests thilak mallawaarachchi [email protected] 6272 2011 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

408 australian commodities > vol. 14 no. 2 > june quarter 2007