Resources and Energy Quarterly June 2019 WWW.INDUSTRY.GOV.AU/REQ 1 Further information Creative Commons licence For more information on data or government initiatives please access the report from the Department’s website at: www.industry.gov.au/oce Editor All material in this publication is licensed under a Creative Commons Attribution 4.0 International Licence, save for content supplied by third parties, logos, any David Thurtell material protected by trademark or otherwise noted in this publication, and the Commonwealth Coat of Arms. Chapter Authors Creative Commons Attribution 4.0 International Licence is a standard form licence Resource and energy overview: David Thurtell agreement that allows you to copy, distribute, transmit and adapt this publication provided you attribute the work. A summary of the licence terms is available from Macroeconomic outlook: Mark Gibbons https://creativecommons.org/licenses/by/4.0/ Steel and iron ore, zinc: Joseph Moloney The full licence terms are available from https://creativecommons.org/licenses/ Metallurgical and thermal coal: Monica Philalay by/4.0/legalcode Gas: Nikolai Drahos Content contained herein should be attributed as Resources and Energy Quarterly. Oil: Jeremy Coghlan Disclaimer: Uranium, lithium: Mark Gibbons The Australian Government as represented by the Department of Industry, Copper, nickel: Kate Martin Innovation and Science has exercised due care and skill in the preparation and Gold, aluminium, alumina and bauxite: Thuong Nguyen compilation of the information and data in this publication. Notwithstanding, the Commonwealth of Australia, its officers, employees, or agents disclaim any liability, Special topics including liability for negligence, loss howsoever caused, damage, injury, expense The Australian gold industry: Thuong Nguyen or cost incurred by any person as a result of accessing, using or relying upon any of the information or data in this publication to the maximum extent permitted by Nuclear power and uranium markets: Mark Gibbons law. No representation expressed or implied is made as to the currency, accuracy, reliability or completeness of the information contained in this publication. The Acknowledgements reader should rely on their own inquiries to independently confirm the information and comment on which they intend to act. This publication does not indicate The authors would like to acknowledge the contributions of: commitment by the Australian Government to a particular course of action. Mark Cully, Melissa Bray, Ken Colbert, Lauren Pratley, Lou Brooks. Cover image source: Shutterstock ISSN 1839-5007 Vol. 9, no. 2 © Commonwealth of Australia 2019 Ownership of intellectual property rights Unless otherwise noted, copyright (and any other intellectual property rights, if any) in this publication is owned by the Commonwealth of Australia. 2 Contents Foreword 4 Resources insights About the edition 5 LNG Box 7.1: LNG price forecasting and Australia’s Overview 6 eastern gas market 61 Macroeconomic Outlook 14 Oil Box 8.1: Higher fuel quality standards to Steel 21 reduce shipping pollution 65 Iron Ore 26 Oil Box 8.2: Australia exports oil to the Middle East 67 Metallurgical Coal 34 Thermal Coal 43 Gas 53 Oil 63 Uranium 71 Gold 77 Aluminium 84 Copper 92 Nickel 98 Zinc 103 Trade summary charts and tables 128 Lithium 108 Appendix A: Definitions and classifications 135 The Australian gold industry 114 Appendix B: Glossary 138 Nuclear power and uranium markets 122 Appendix C: Contact details 143 3 Foreword especially hard, and the impacts will inevitably flow on to the commodity producers who provide the raw materials to manufacturers. This could This edition brings a significant change to our commodity forecasts. In result in an outsized impact on nations with a high commodity exposure. recent years, we have predicted commodity export earnings would peak in Many firms were able to absorb the initial 10 per cent tariff into their 2018–19. As recently as March 2019, we suggested record earnings of margins. However, the escalated 25 per cent tariff will force major changes $278 billion in 2018–19, before earnings fell back in the following years. to global supply chains. The fallout of these changes may actually favour Our forecast for 2018–19 looks to be largely on target but, massive as this some steel producers in unanticipated ways. Should the Chinese revenue is, it is increasingly likely that the peak will now be in 2019–20. government proceed with further stimulus packages involving increased Resource and energy commodity earnings in 2019–20 have been revised infrastructure spending, steel use could actually rise in net terms. up by $12.9 billion to $285 billion. Geopolitics is magnifying uncertainties, especially in oil markets. Many oil The swing factor is iron ore prices. The fallout from the Brumadinho producers are facing sanctions as well as domestic turmoil. The age of tailings dam collapse has led to a sharp drop in Brazilian iron ore exports, nuclear power began with the oil crisis of 1973 (a subject explored in this and this shortfall now looks set to last at least two years. The seaborne edition’s uranium special topic). Any substantial rise in oil prices, and tight iron ore market is thus likely to stay tight, and prices elevated, out to at carbon budgets, may accelerate the age of electrification, as nations seek least 2021. Extra Australian output will partly fill the gap, as mining to reduce emissions and curb oil dependency by embracing electric cars. expands and disruptive weather in Western Australia recedes. The weaker Australian dollar outlook has also pushed up our 2019–20 forecast. As ever, economic turning points are hard to predict, and the prospect of Partially offsetting this, thermal coal — Australia’s 4th largest export one in the near future adds a significant element of uncertainty to our commodity — is facing a tougher climate, with prices deteriorating in higher forecast. Should a turning point occur, our strength — record recent months. As a large producer and importer of thermal coal, China’s commodity exports — could also be our vulnerability. import policies, including extended customs clearance times, have added This edition contains two special topics. The first dwells on the Australian uncertainty into the market. Seasonal factors appear to have had a larger gold industry. Australia has the world’s largest economic demonstrated than normal impact this year: the northern hemisphere — where most resources of gold, and gold is forecast to overtake thermal coal as our thermal coal is burnt — has emerged from a warmer than usual winter, fourth largest export in 2019–20. The second special topic examines the which reduced heating-related energy use. Peak summer demand, when uranium market, currently emerging from a sharp downturn after the power air conditioner usage rises, is a month away. plant disaster at Fukushima. Uranium’s long term prospects depend on a Like any forecast, these ones are not without their risks — the most range of factors, such as climate change pressures, technological change, notable being the worsening of trade tensions between the US and its and the decisions of about 30 nations examining nuclear energy programs. major trading partners, particularly China. As we publish, the US and China are set for further trade discussions at the G20 meeting in Japan. Commodities helped to protect Australia from larger fallout during the Mark Cully Global Financial Crisis. However, the opposite could happen in a downturn Chief Economist sparked by trade disputes. Trade disruptions will hit global manufacturers Department of Industry, Innovation and Science Resources and Energy Quarterly June 2019 4 About this edition The Resources and Energy Quarterly (REQ) contains the Office of the The global environment in which Australia’s producers compete can Chief Economist’s forecasts for the value, volume and price of Australia’s change rapidly. Each edition of the Resources and Energy Quarterly major resources and energy commodity exports. factors in these changes, and makes appropriate alterations to the forecasts/projections, by estimating the impact on Australian producers A ‘medium term’ (five year) outlook is published in the March quarter and the value of their exports. edition of the Resources and Energy Quarterly. Each June, September and December edition of the Resources and Energy Quarterly features a In this report, commodities are grouped into two broad categories, ‘short term’ (two year) outlook for Australia’s major resource and energy referred to as ‘resources’ and ‘energy’. ‘Energy’ commodities comprise commodity exports. The December Resources and Energy Quarterly also metallurgical and thermal coal, oil, gas and uranium. ‘Resource’ includes the annual Major Projects update. commodities in this report are all other mineral commodities. Underpinning the forecasts/projections contained in the Resources and Unless otherwise stated, all Australian and US dollar figures in this report Energy Quarterly is the Office of the Chief Economist’s outlook for global are in nominal terms. Inflation and exchange rate assumptions are resource and energy commodity prices, demand and supply. The provided in the Appendix to the ‘Macroeconomics’ chapter. forecasts/projections for Australia’s resource and energy commodity Data in this edition of the Resources and Energy Quarterly is current as of exporters are reconciled with this global context. 20 June 2019. Resources and Energy Quarterly publication schedule Publication Expected release date Outlook period Australian data: 2020–21 September 2019 30 September 2019 World data: 2021 Australian data: 2020–21 December 2019 19 December 2019 World data: 2021 Australian data: 2024–25 March 2020 30 March 2020 World data: 2025 Australian data: 2021–22 June 2020 6 July 2020 World data: 2022 Source: Department of Industry, Innovation and Science (2019) Resources and Energy Quarterly June 2019 5 1.1 Summary Figure 1.1: Australia’s resource and energy export values/volumes . The prices of Australia’s major resource commodities have recently hit 120 300 7-year highs, but are likely to drift lower over the outlook period, due to softer demand and rising supply.