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Editor All material in this publication is licensed under a Creative Commons Attribution 4.0 International Licence, with the exception of: David Thurtell • the Commonwealth Coat of Arms; • content supplied by third parties; Chapter Authors • logos; and Resource and energy overview: David Thurtell • any material protected by trademark or otherwise noted in this publication. Macroeconomic overview, oil: Nathan Pitts Creative Commons Attribution 4.0 International Licence is a standard form licence COVID-19: Esther Harvey 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 Steel and iron ore, uranium: Mark Gibbons https://creativecommons.org/licenses/by/4.0/. Metallurgical and thermal coal: Nikolai Drahos Wherever a third party holds copyright in material contained in this publication, Gas: Monica Philalay the copyright remains with that party. Their permission may be required to use the material. Please contact them directly. Gold, aluminium, alumina and bauxite: Thuong Nguyen Copper, nickel: Kate Martin Attribution Zinc, lithium: Caroline Lewis Content contained herein should be attributed as follows: Department of Industry, Science, Energy and Resources, Commonwealth of Acknowledgements Australia Resources and Energy Quarterly March 2020. The Commonwealth of The authors would like to acknowledge the contributions of: Australia does not necessarily endorse the content of this publication. Matt Boyce, Melissa Bray, Lou Brooks, Russ Campbell, Ken Colbert, Lauren Pratley. Requests and inquiries concerning reproduction and rights should be addressed to [email protected] Cover image source: Shutterstock ISSN 1839-5007 Disclaimer Vol. 10, no. 1 The views expressed in this report are those of the author(s) and do not necessarily © Commonwealth of Australia 2020 reflect those of the Australian Government or the Department of Industry, Science, Energy and Resources. Ownership of intellectual property rights This publication is not legal or professional advice. The Commonwealth of Australia does not guarantee the accuracy or reliability of the information and data in the Unless otherwise noted, copyright (and any other intellectual property rights, if any) publication. Third parties rely upon this publication entirely at their own risk. in this publication is owned by the Commonwealth of Australia.

2 Contents

Foreword 4 Resources insights About the edition 5 Macroeconomic Outlook Overview 6 2.1: COVID–2019 18

Macroeconomic Outlook 15 Macroeconomic Outlook Steel 26 2.2: US-China Phase One trade deal 20

Iron Ore 31 Gas 7.1: US-China trade deal — implications for Australian LNG 67 Metallurgical Coal 38

Thermal Coal 47 Oil 8.1: Impacts of diplomatic tensions on oil markets 75 Gas 60

Oil 71

Uranium 79

Gold 85

Aluminium 92

Copper 101 Trade summary charts and tables 125

Nickel 107 Appendix A: Definitions and classifications 133

Zinc 113 Appendix B: Glossary 135

Lithium 119 Appendix C: Contact details 141

3 Foreword Each March, the Resources and Energy Quarterly publishes an extended However, to credit this earnings boom purely to ‘price growth’ would be to miss decades of careful work, investment, innovation and automation, all five-year commodity outlook. The annual ‘big picture’ forecast seeks to of which have driven significant improvements in productivity and scale, look beyond immediate issues — e.g., trade tensions, COVID-19 — and considers some of the underlying, longer-term factors which affect placing Australia at the heart of the global iron ore market. Australia now commodity markets. As the world continues to urbanise, industrialise, and accounts for more than half of all global iron ore exports. This makes Australia crucial to the global economy itself, since steel is a vital input to improve its technology, commodities will continue to play a vital role. energy, infrastructure, housing, construction, transportation and all forms In recent decades, China’s economy witnessed deep industrialisation and of machinery. In addition to its pivotal role across other industries, steel is an injection of large quantities of iron, steel and coal. The next wave of among the world’s largest industries in its own right. emerging economies — such as India — could feature relatively less Another major industry — and similarly critical to the global economy — is manufacturing and more in services and information technology. Their gas and oil. Here, too, Australia has become more important over time, energy and transport systems may also develop differently. All these trends would add significant opportunities for commodities such as copper, emerging as the world’s top exporter of LNG in late 2019. Our exports of lithium, nickel, LNG, and aluminium. coal, gas and uranium make Australia pivotal to global energy markets. And our resources of lithium, copper, nickel and zinc are likely to hold us in This edition shows Australia’s resources and energy exports are expected good stead for the future. to reach $299 billion in 2019–20, before easing back in subsequent years as some of the surprising price gains of recent quarters unwind. However, Unavoidably, the outbreak of COVID-19 (coronavirus) will have some the possibility remains for new records to be set if prices continue to effect on forecasts for this edition. It is assumed that this event will have an impact on Chinese and global GDP in the first half of 2020, with the surprise on the upside. effects largely playing out by June 2020, though at the time of writing, this The classic case here is iron ore, which faced severe supply disruptions remained a rapidly evolving issue. following the collapse of the tailings dam at the Brumadinho iron ore mine in Brazil in early 2019. With reduced supply, iron ore prices surged above While near-term factors such as COVID-19 and trade tensions are often the focus of commodity analysis, a look at the bigger picture shows untold US$100 a tonne in 2019, but were gradually correcting — until another potential and a host of new opportunities as development progresses over wave of floods in Brazil and a cyclone in the Pilbara region of Western Australia sent prices spiking again in early 2020. This is leading to a the longer term in Asia, Africa and South America. Australia’s prospects as second surge in iron ore export revenue, making it likely that in 2019–20, a resource and energy commodity exporter continue to remain strong. iron ore will be the first commodity to exceed $100 billion in export earnings over a single year.

Resources and Energy Quarterly March 2020 4 About this edition The global environment in which Australia’s producers compete can change rapidly. Each edition of the Resources and Energy Quarterly The Resources and Energy Quarterly (REQ) contains the Office of the factors in these changes, and makes appropriate alterations to the Chief Economist’s forecasts for the value, volume and price of Australia’s forecasts/projections, by estimating the impact on Australian producers major resources and energy commodity exports. and the value of their exports. A ‘medium term’ (five year) outlook is published in the March quarter In this report, commodities are grouped into two broad categories, edition of the Resources and Energy Quarterly. Each June, September referred to as ‘resources’ and ‘energy’. ‘Energy’ commodities comprise and December edition of the Resources and Energy Quarterly features a metallurgical and thermal coal, oil, gas and uranium. ‘Resource’ ‘short term’ (two year) outlook for Australia’s major resource and energy commodities in this report are all other mineral commodities. commodity exports. The December Resources and Energy Quarterly also includes the annual Major Projects update. Unless otherwise stated, all Australian and US dollar figures in this report are in real (2020) terms. Inflation and exchange rate assumptions are Underpinning the forecasts/projections contained in the Resources and provided in tables 2.1 and 2.2 in the macroeconomic outlook chapter. Energy Quarterly is the Office of the Chief Economist’s outlook for global resource and energy commodity prices, demand and supply. The The impacts of the COVID-19 outbreak are assumed to affect Chinese and forecasts/projections for Australia’s resource and energy commodity global commodity demand over the first half of 2020, with a return to exporters are reconciled with this global context. normal in the third quarter of the year. Data in this edition of the Resources and Energy Quarterly is current as of 6 March 2020. Resources and Energy Quarterly publication schedule

Publication Expected release date Outlook period final year

June 2020 29 June 2020 Australian data: 2021–22 World data: 2022 September 2020 28 September 2020 Australian data: 2021–22 World data: 2022 December 2020 21 December 2020 Australian data: 2021–22 World data: 2022 March 2021 26 March 2021 Australian data: 2025–26 World data: 2026

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

Resources and Energy Quarterly March 2020 5

1.1 Summary Figure 1.1: Australia’s resource and energy export values/volumes . In the first quarter of 2020, the COVID-19 outbreak has moved the 125 300 prices of some commodities — notably, oil and base metals (down) and gold (up). Assuming China’s economy is largely back to normal by 100 240 the second half of 2020, these moves are likely to be fully unwound by then. Thereafter, supply issues will largely drive price moves.

20 = 20 = 100 75 180 . Iron ore prices have steadied at high levels, as supply problems offset – 20 A$ 20 A$ billion demand worries. Coal prices have steadied after the sharp declines of 50 120 2019. Base and precious metal prices have wavered (in opposite 2019 –

directions), on concerns about the COVID-19 outbreak. 2019 Index, 25 60 . Offsetting the impact of weaker prices, both higher export volumes and a lower-than-expected Australian dollar are likely to see Australia’s 0 0 resource and energy exports set a record $299 billion in 2019–20 2004–05 2008–09 2012–13 2016–17 2020–21 2024–25 (Figure 1.1). A stronger Australian dollar and price falls are likely to Volumes Values (rhs) reduce export earnings over the outlook period to 2024–25. Source: ABS (2020) International Trade in Goods and Services, 5368.0; Department of Industry, Science, Energy and Resources (2020) 1.2 Export values Australia’s export values forecast to reach almost $300 billion in 2019–20 Figure 1.2: Annual growth in Australia’s resources and energy export values, contributions from prices and volumes The Office of the Chief Economist’s (OCE) Resources and Energy Export Values Index rose by an estimated 7.8 per cent in the year to the March 50 quarter 2020. A 4.2 per cent fall in prices was more than offset by a 13.1 40 per cent rise in volumes. In 2019–20, resource and energy exports are 30 forecast to set a record of $299 billion, as a 0.5 per cent fall in prices is more than offset by a 7.5 per cent rise in volumes. Lower prices and a 20 rising Australian dollar are expected to lower export earnings (in real 10 terms) to $265 billion in 2021–22, after which earnings flatten (Figure 1.2). 0 Ongoing weakness in the Australian dollar is helping to support earnings cent Per -10 In Australian dollar terms, the OCE’s Resources and Energy Commodity Price Index fell by 0.7 per cent (preliminary estimate) in the March quarter, -20 and was 3.3 per cent lower than a year ago. In US dollar terms, the index -30 rose by 0.2 per cent in the quarter, but was 7.7 per cent lower than a year 2004–05 2008–09 2012–13 2016–17 2020–21 2024–25 before. The index of prices for resource commodity exports (in Australian Prices Volumes Values dollars) rose by 10.7 per cent in the year to the March quarter 2020, while Source: ABS (2020) International Trade in Goods and Services, 5368.0; Department of an index of prices of energy commodities fell by 17.5 per cent (Figure 1.3). Industry, Science, Energy and Resources (2020)

Resources and Energy Quarterly March 2020 7

Figure 1.3: Resource and energy export prices, AUD terms major central banks are likely to adopt a stimulatory monetary stance in 140 2020, aided by disinflationary impact of the COVID-19 outbreak. 120 The COVID-19 outbreak is a timely illustration of the huge influence that 100 China has on world resource and energy commodity markets. China consumes a large portion of world industrial metal output, and is also a 80 major miner and refiner of some metal and energy commodities. So 60 disruptions to resource and energy commodity supply and demand have 40 been significant, often cancelling each other out. Multi-nationals’ efforts to reduce the reliance on China in their supply chain(s) as a result of the 20 outbreak, may impact China’s economy adversely over the outlook period. Index, December 2019 = 100 2019 = Index, December 0 Jun-07 Jun-10 Jun-13 Jun-16 Jun-19 Jun-22 Jun-25 Assuming the impact of the COVID-19 outbreak has passed by the second Resources Energy Total resources and energy half of 2020, it is expected that annual growth in the Chinese economy will

Notes: The export price index is based on Australian dollar export unit values (EUVs, export drift lower over the outlook period, but remain above 5 per cent per values divided by volumes); the export price index is a Fisher price Index, which weights annum. Coming on a higher base than a decade ago — when Chinese each commodity’s EUV by its share of total export values. growth was routinely double digit — this still implies enormous commodity Source: ABS (2020) International Trade in Goods and Services, 5368.0; Department of Industry, Science, Energy and Resources (2020) demand in absolute terms. Strong growth in emerging Asia is likely to partially compensate for the impact of slower Chinese growth. 1.3 Macroeconomic, policy, trade and other factors Just as the world economy looked to be responding to an easing in US- The US 2020 (Presidential, House of Representatives and part Senate) China trade tensions — and to prior measures by several major central elections on 3 November 2020 may have some impact on a number of banks aimed at stemming the impact of those trade tensions — activity resource and energy commodity markets from 2021. The US President has been affected by the outbreak of COVID-19. Originating in China, at has committed to formally leaving the Paris Agreement on 4 November the time of writing the viral outbreak has spread globally and has not been 2020, the day after the US elections. Wins by the Democratic Party for the totally contained. The Chinese government has taken measures to offset Presidency, and majorities in both houses of US Congress, could see the economic impact of the outbreak. policy moves affecting carbon emissions, fracking and other environmental regulations governing energy commodity usage and production. The impact of the COVID-19 outbreak on the Chinese economy stems largely from its timing — during Lunar New Year (LNY) holidays, when A rise in the number of nations committing to phase out the sale of internal hundreds of millions of Chinese workers travel across the country to visit combustion engine vehicles and becoming carbon net neutral by 2050 relatives. Movement restrictions imposed by the Chinese government could start to impact (adversely) on commodities such as oil and thermal during the LNY holidays inhibited the return to work of over two thirds of coal, but have positive implications for metals used in renewable energy internal migrant workers. The number of new cases has now peaked in technology and electric vehicles, such as copper, nickel and lithium. China, and it seems likely that, as factories restart, Chinese activity will Continued trade tensions pose a significant risk to world growth and quickly rebound. It is assumed that the overwhelming majority of work resource and energy commodity trade over the outlook period. places in China will be fully operational by the end of June 2020. The

Resources and Energy Quarterly March 2020 8

1.4 Prices Figure 1.4: Bulk commodity prices After reaching US$120 in July 2019, the iron ore price has consolidated in 140 US$81-97 a tonne range since the December 2019 Resources and Energy 120 Quarterly. Supply disruptions in Australia and Brazil have offset the impact of reduced Chinese demand arising from the COVID-19 outbreak. The 100 price is forecast to fall during 2020 (Figure 1.4), as growth in Chinese steel output eases and (Brazilian) iron ore supply recovers. 80 After declines through 2019, the prices of metallurgical and thermal coal 60 steadied in the March quarter 2020. Metallurgical coal prices benefited 40

from supply problems in some of the major producing nations. A rise in 100 2012 = Index, June prices is likely over the latter half of the outlook period, as supply is slightly 20 outpaced by demand. Rising supply and softer demand has put pressure 0 on the thermal coal price. Prices are likely to rise modestly in the first few Jun-12 Jun-14 Jun-16 Jun-18 Jun-20 Jun-22 Jun-24 years of the outlook period, as shortages build (Figure 1.4). Iron ore Metallurgical coal Thermal coal Oil prices have declined sharply over the past quarter, as the COVID-19 Notes: Prices are in US dollars, and are the international benchmark prices outbreak and associated movement restrictions in China spark demand Source: Bloomberg (2020) concerns. The price should recover in the second half of 2020 assuming Figure 1.5: Base metal prices the impact of the COVID-19 outbreak recedes. Over the balance of the outlook period, oil prices should experience minor gains, staying below 200 US$80 a barrel. The value of Australia’s growing oil, condensate and LNG 180 exports will all move with the oil price as 75 per cent of our LNG is sold 160 under contract at prices linked to Japanese customs cleared oil prices. 140 120 The gold price pushed to a 7-year high above the US$1,600 an ounce 100 mark in mid-February, as worries about the COVID-19 outbreak sparked a move to safe haven assets. Price strength during 2020 is likely to attract 80 strong scrap supply and deter jewellery demand in price sensitive markets 60 such as India and China. After receiving a boost with the announcement of 40 the US-China Phase One trade deal in December 2019, base metal prices 2012 = 100 June Index, 20 have declined significantly on the back of the COVID-19 outbreak. Copper 0 and zinc have been particularly hard hit. Base metals should recover once Jun-12 Jun-14 Jun-16 Jun-18 Jun-20 Jun-22 Jun-24 the COVID-19 outbreak is largely contained, with nickel and copper likely Aluminium Copper Nickel Zinc to rise on low supply and strong demand for metals needed in electric Notes: Prices are in US dollars, and are the international benchmark prices vehicle and renewable energy generation (Figure 1.5). Source: Bloomberg (2020)

Resources and Energy Quarterly March 2020 9

1.5 Export volumes Figure 1.6: Australia’s nominal GDP vs resource and energy commodity export earnings, annual per cent change Export volumes to grow, driven by growing energy exports The OCE’s Resources and Energy Export Volumes Index (preliminary 80 11 estimate) rose by 0.4 per cent in the March quarter 2020 from the 60 9 December quarter 2019, and were 13.1 per cent higher than a year before. Resource commodity volumes rose by 13.8 per cent over the year and 40 7 energy commodity volumes rose by 12.3 per cent. Export volumes are expected to show solid growth (largely across-the-board) in 2019–20, but 20 5 more tepid growth over the rest of the outlook period output growth slows. Per cent Per cent 0 3 1.6 Contribution to growth and investment Mining industry continues to support overall economic growth -20 1 Australia’s real Gross Domestic Product (GDP) grew by 0.5 per cent in the -40 -1 December quarter 2019, and by 2.2 per cent though the year. The mining Jun-96 Jun-01 Jun-06 Jun-11 Jun-16 Jun-21 industry directly accounted for 28 per cent of the growth in Australia’s GDP Resources and energy export earnings Nominal GDP (rhs) in the year to the December quarter 2019. Mining value-added rose by 1.8 Source: Department of Industry, Science, Energy and Resources (2020) per cent in the December quarter to be 7.3 per cent higher over the year, driven by growth in coal, and base and precious metal mining. Mining investment is picking up After being the largest contributor to mining industry value-added growth in The ABS Private New Capital Expenditure and Expected Expenditure the last few years, the contribution of oil and gas extraction was relatively survey shows that investment by Australia’s mining industry was low in the December quarter. In the coming few years, it is likely that this $9.4 billion in the December quarter 2019, up 4 per cent over the year. sector will make a much smaller contribution to GDP growth than over the Total investment for 2018–19 summed to $33 billion, down by 8.3 per cent 2010s, as the fruits of the LNG expansion of the 2010’s diminish in size. from the year before. Since the global financial crisis, swings in Australian resource and energy Higher commodity prices in the past two years appear to have encouraged export earnings have correlated very closely with swings in nominal GDP some recovery in capital spending over the most recent quarters. This has (Figure 1.6). The rising share of resource and energy commodity export been led by growth in investment by the metal ore mining sector (Figure earnings in Australia’s nominal GDP — driven by favourable gains in our 1.7), which may have been encouraged by surging iron ore and steel terms of trade and the fruits of the resource commodity investment boom prices in mid and late 2019. — appears to have made resource and energy exports a significant swing Expenditure across the mining sector as a whole was driven by higher factor in the economy. With growth in resource and energy export values investment in machinery and equipment, which was up by 34 per cent over likely having peaked in the second half of 2019, if the correlation persists, the year to the December quarter (Figure 1.8). a sharp slowing in resource export earnings growth could have significant implications for nominal GDP growth.

Resources and Energy Quarterly March 2020 10

Figure 1.7: Mining industry capital expenditure by commodity Forward expectations (Figure 1.9) suggest that mining companies 18 generally expect investment over 2019–20 to lift by about 15 per cent, to an estimated $38 billion for the year. Actual spending for the December 15 quarter 2019 — the second quarter of the 2019–20 financial year — was 12 up 4 per cent from the level of December 2018. Growth in prices for gold, iron ore and other minerals are leading to new investment plans, including 9 the re-opening of mines. However, investment in new greenfield projects 6 remains well below the levels of early this decade. A$ billion A$ 3 Figure 1.9: Mining industry capital expenditure, fiscal year

0 100 2010 2013 2016 2019 Oil and gas extraction Metal ore mining 80 Coal mining Other mining

Notes: Other mining includes non-metallic mineral mining and quarrying and exploration and 60 other mining support services; chart data is in nominal terms Source: ABS (2020) Private New Capital Expenditure and Expected Expenditure, 5625.0 $ billion $ 40 Figure 1.8: Mining industry capital expenditure by type, quarterly 20 25 5 0 20 4 2009–10 2011–12 2013–14 2015–16 2017–18 2019–20

Actual Expected 15 3 Notes: Chart data is in nominal terms A$ billion A$ A$ billionA$ 10 2 Source: ABS (2020) Private New Capital Expenditure and Expected Expenditure, 5625.0

5 1 Data on exploration spending (adjusted for inflation) suggests that a recovery in mining capital expenditure is underway (Figure 1.10). 0 0 Exploration spending for all commodities grew by 23 per cent through the 2002 2005 2008 2011 2014 2017 2020 year, to reach $970 million in the December quarter in real terms. Buildings and structures Equipment, plant and machinery (rhs)

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

Resources and Energy Quarterly March 2020 11

Figure 1.10: Mining capital expenditure vs exploration, quarterly Figure 1.11: Resource and energy exports, by forecast release

30 2.5 300 275 24 2.0 250

18 1.5 225 200 A$ billion A$ 20 A$ 20 A$ billion 20 A$ 20 A$ bilion 12 1.0 175 2019 –

2019 – 150 6 0.5 125 0 0.0 100 2001 2004 2007 2010 2013 2016 2019 2008–09 2012–13 2016–17 2020–21 2024–25 Mining capex, chain volume measures Exploration, real (rhs) Mar-18 forecast Mar-19 forecast Mar-20 forecast Actual

Notes: Chart data is in real terms Notes: Chart data is in real (2019–20) terms

Source: ABS (2020) Private Capital Expenditure Survey, Mining, Chain Volume measure, Source: Department of Industry, Science, Energy and Resources (2020) 5625.0

1.7 Revisions to the outlook At $299 billion, the new forecast for Australia’s resources and energy export earnings in 2019–20 is $18 billion higher than forecast in the December 2019 Resources and Energy Quarterly (Figure 1.11). The three driving factors have been: much stronger than expected iron ore prices; a COVID-19-induced spike in the gold price; and a further (unexpected) decline in the Australian dollar. In 2020–21, weaker prices — virtually across the board — and a rising exchange rate, are expected to drive a noticeable fall in export earnings. Export earnings (in real terms) are now forecast to be $271 billion, and then fall to $265 billion in 2021–22 before stabilising at around that level for two years. Export earnings are projected to weaken modestly in 2024–25.

Resources and Energy Quarterly March 2020 12

Notes: f forecast; z projection. Source: ABS (2020) International Trade in Goods and Services, 5368.0; Department of Industry, Science, Energy and Resources (2020)

Resources and Energy Quarterly March 2020 13

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

Exports (A$m) 2018–19 2019–20f 2020–21f 2021–22f 2022–23z 2023–24z 2024–25z CAGRr

Resources and energy 281,300 299,319 276,050 275,693 283,878 288,522 289,375 0.5 – realb 286,586 299,319 270,703 264,662 266,131 263,871 258,086 –1.7 Energy 132,717 121,366 114,175 119,878 125,645 131,272 128,583 –0.5 – realb 135,210 121,366 111,963 115,082 117,790 120,056 114,680 –2.7 Resources 148,584 177,953 161,875 155,815 158,233 157,250 160,792 1.3 – realb 151,376 177,953 158,740 149,581 148,341 143,815 143,406 –0.9

Notes: b In 2019–20 Australian dollars; f forecast; r Compound annual growth rate; z projection. Source: ABS (2019) International Trade in Goods and Services, 5368.0; Department of Industry, Science, Energy and Resources (2020)

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

Prices Export volumes Export values (real 2019–20 terms), A$b Unit 2018–19 2019–20f 2024–25f Unit 2018–19 2019–20f 2024–25f 2018–19 2019–20f 2024–25f Iron ore US$/t 72 70 60 Mt 818 877 996 79 101 69 Metallurgical coal US$/t 206 156 182 Mt 184 186 205 44 37 38 LNG A$/GJ 12.6 11.5 11.8 Mt 75 80 80 51 49 44 Thermal coal US$/t 95 65 72 Mt 210 218 224 26 21 18 Gold US$/oz 1,264 1,471 1,372 t 326 389 377 19 26 21 Alumina US$/t 437 328 341 Mt 17,619 17,825 18,005 10 9 8 Copper US$/t 6,151 5,861 7,931 Kt 929 973 1,141 10 10 13 Oila US$/bbl 69 59 70 Kb/d 254 312 290 9 10 10 Aluminium US$/t 1,920 1,746 1,817 Kt 1,452 1,398 1,384 4.2 3.6 3.1 Zinc US$/t 2,658 2,204 2,073 Kt 1,325 1,542 1,759 4.0 3.6 3.1 Nickel US$/t 12,352 15,238 17,378 Kt 225 336 436 3.7 5.4 6.6 Lithium US$/t 720 535 531 Kt 1,298 1,177 2,474 1.6 1.0 3.0 Uranium US$/lb 27 25 48 t 7,571 7,000 5,800 0.7 0.6 0.7

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

Resources and Energy Quarterly March 2020

14

2.1 Summary Figure 2.1: Annual growth in global GDP . The IMF forecasts world GDP growth will slowly recover over the outlook 10 period, due to improving performances in developing economies. However, the IMF has suggested that 2020 growth will be revised down 8 due to the impact of the COVID-19 outbreak. . Stimulatory monetary policy is pushing down global bond yields and 6 supporting consumer spending. With global inflation low, monetary 4 conditions are likely to be supportive of growth over the medium term. Per cent . The Phase One trade deal between the US and China offers some 2 prospects for reducing trade tensions over time, though these tensions remain a notable risk to world GDP growth and commodity demand. 0 -2 Mar-15 Mar-17 Mar-19 Mar-21 Mar-23 Mar-25 Global economic outlook Japan Korea EU US Over the outlook period, world economic growth is expected to recover India China World from low levels recorded in 2019. The IMF estimates that world growth was 2.9 per cent in 2019 — the lowest rate since the global financial crisis Sources: Bloomberg (2020), IMF (2020) in 2009. Growth is forecast to recover to 3.3 per cent in 2020, with further Easing US-China trade tensions are expected to contribute to a pick-up in marginal increases over the rest of the outlook period. The IMF forecasts global industrial production growth over coming months (Figure 2.2). The global GDP will rise by 3.4 per cent in 2021 and 3.5 per cent by 2025. global Purchasing Managers Index (PMI) moved above 50 in January These projected values are still below the long-term average growth rate 2020— indicating expansionary conditions (Figure 2.3). This improvement of 3.8 per cent recorded between 2000 and 2018. has been temporarily disrupted by the COVID-19 outbreak, and the The IMF expects growth in advanced economies to fall from 1.7 per cent in resulting impacts are assumed to persist over the first half of 2020 (see 2019 to 1.6 per cent in 2020, remaining around these levels out to 2025. Box 2.1). COVID-19 has had a notable impact on industrial production in While there is significant uncertainty over Chinese growth in 2020 due to China, with the Chinese manufacturing PMI falling from 50 in January to the COVID-19 outbreak (Box 2.1), growth in emerging markets and 35.7 in February. World industrial production is expected to be constrained developing economies is forecast to rise from 3.7 per cent in 2019 to 4.4 for the first half of 2020 due to the importance of China in international per cent in 2020, and to 4.6 per cent in 2021. Some countries currently supply chains, and the global spread of the virus. The Chinese affected by domestic macroeconomic issues — including Argentina, India government is expected to embark on measures to cushion the impact of and Turkey — are expected to see a recovery in growth over 2020. An the COVID-19 outbreak, with industrial production growth expected to assumed easing in trade tensions is also expected to drive a recovery in receive a boost as a result. Assuming the economic impacts of the developing Asia, with overall growth improving from 2022 (Figure 2.1). COVID-19 outbreak ease in the second half of 2020, global industrial production growth is expected to return to pre-2019 levels.

Resources and Energy Quarterly March 2020 16 Figure 2.2: World industrial production and imports The UN projects that the world’s population will grow by 0.5 billion between 2019 and 2025, with growth concentrated in urban areas. This 25 15 urbanisation would usually be associated with rapid industrialisation. 20 12 However, a high proportion of population growth is expected to occur in 15 9 Sub-Saharan Africa, where the historical linkages between urbanisation 10 6 and industrialisation are lower than in other regions. As a result, medium- 5 3 term global industrial production growth is likely to be less influenced by 0 0 population growth drivers over the outlook period. -5 -3 -10 -6 Global trade fell in 2019, as a result of trade tensions between several Annual per Annual per cent change -15 -9 Annual per cent change major economies. Trade was notably lower for key manufacturing economies including China, the EU and Japan. Over the medium term, -20 -12 trade tensions are expected to ease, as China and the US continue -25 -15 Dec-01 Dec-04 Dec-07 Dec-10 Dec-13 Dec-16 Dec-19 bilateral negotiations (see Box 2.2) and the UK leaves the EU. If trade barriers are wound back and business confidence improves, global trade Imports Industrial production (rhs) can be expected to return towards trend growth. Sources: CPB Netherlands Bureau for Economic Policy Analysis (2020) Slowing industrialisation in parts of the world is likely to slightly reduce the Figure 2.3: World industrial production and manufacturing Purchasing demand growth for cement, coal, steel, and associated materials over the Managers’ Indices outlook period. However, technological change and a need for less 65 polluting energy sources are driving growth in other areas including minerals used in ‘high tech’ applications: copper, nickel and rare earths. 60 China 55 Chinese economic growth fell to 6.1 per cent in 2019 — the lowest rate in 50 29 years. Lower growth rates were driven by US-China trade tensions and Index slowing Chinese consumer demand. The IMF is forecasting that Chinese 45 growth will continue trending downward, falling to 6.0 per cent in 2020. 40 However, this reflects structurally slowing Chinese growth rather than impacts of the trade tensions that affected the Chinese economy in 2018 35 Aug-17 Feb-18 Aug-18 Feb-19 Aug-19 Feb-20 and 2019. The IMF revised Chinese growth estimates upwards by 0.2 US China Japan percentage points for 2020 following the announcement of the Phase One trade deal between China and the US. The impact of COVID-19 on the Australia Eurozone World Chinese economy remains uncertain, with the IMF suggesting on 22 Source: Bloomberg (2020) February 2020 that COVID-19 would decrease 2020 Chinese growth by

Resources and Energy Quarterly March 2020 17 0.4 percentage points from their baseline forecasts, with world growth Figure 2.4: Share of Chinese debt to GDP being 0.1 percentage points lower. 300 To offset the impacts of COVID-19 and, more generally, to prevent a further decline from the current 29-year growth low, the Chinese 250 government implemented a range of fiscal and monetary stimulus policies in late 2019 and early 2020. In February 2020, the People’s Bank of China 200 announced plans to inject US$173 billion into the money supply to increase liquidity and offset some of the economic impacts of the COVID- 150 19 outbreak on consumer spending.

Share of GDP Share 100 China has recently faced significant inflationary pressures as a result of an outbreak of African Swine Fever in the country’s pig population. With pig 50 meat being the most consumed meat in China, the slaughter of hundreds of millions of diseased pigs has pushed meat prices sharply higher. As a 0 result, the food price index rose by 17 per cent and the consumer price 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 index by 4.5 per cent. COVID-19 is also driving inflationary pressures, with Corporate debt Household debt Government debt Bank debt stockpiling and transport restrictions raising prices for consumer goods. This may increase the concerns of the Chinese central bank in adopting Source: Bloomberg (2020) more expansionary monetary policies over the medium term. Over the medium term, the Chinese government is expected to continue Box 2.1: COVID-19 targeting economic growth, poverty reduction and addressing pollution. On 31 December 2019, China reported the COVID-19 outbreak to the These policies will influence China’s energy consumption and the level of World Health Organisation (WHO). As at 9 March 2020 the WHO have industrial production, with mixed results for Australia’s resource and reported 109,577 confirmed cases, with 80,904 in China and 28,673 energy exports. outside of China. While the majority of COVID-19 cases have been reported from mainland China, a significant number of cases are now Chinese economic growth is expected to continue trending slightly being reported outside of mainland China including in Iran, Italy, Japan, downward, falling to 5.5 per cent in 2025. Assumed actions to reign in debt and South Korea. In response to the outbreak, the Chinese Government levels (Figure 2.4) and reduce risks to the Chinese financial sector are put in place a number of measures (including travel restrictions, delayed expected to increase economic stability, somewhat at the expense of return to work for many; and non-essential industries remaining closed) to economic growth. limit the outbreak, which generated substantial disruption within China.

Some Australian businesses whose operations have direct links with China have been immediately exposed. Some export-focused sectors are

experiencing a reduction or cancellation of orders by Chinese buyers,

Resources and Energy Quarterly March 2020 18 along with other business disruptions in China including to shipping Table 2.1: OECD economic growth projections movements and manufacturing capacity. Economy Interim 2020 growth Change from previous projections release Businesses that have operations in China and/or rely on Chinese inputs for their goods and services are experiencing supply chain disruptions. World 2.4 -0.5 The COVID-19 outbreak could result in further falls in commodity prices Australia 1.8 -0.5 within China, with potentially significant implications given resources and Euro Area 1.2 -0.3 energy exports accounted for $103 billion of Australia’s $153 billion of Japan 0.2 -0.4 exports to China in 2018–19. Korea 2.0 -0.3 While the medium and longer term impacts remain unclear, at the time of China 4.9 -0.8 writing, oil prices had fallen by more than 20 percent since January 2020. India 5.1 -1.1 This fall will drive commensurate falls in oil price-linked LNG contract Source: OECD (2020) prices. Commodity prices could swing sharply over the first half of 2020, reflecting the impact of the slow return to work in China’s resource- United States intensive industries and the potential for an offsetting influence from US economic growth slowed to 2.1 per cent in 2019, as trade tensions further Chinese stimulatory measures. Gold, however, is the notable negatively affected business spending and investment. This has been exception, benefitting from a flight to safety by investors. In addition, the partially offset by strong household and government spending, and the Australian dollar has declined as a result of these commodity price falls, impact of solid growth in employment (Figure 2.4). partly cushioning the impact of the outbreak on the Australian economy. To head off a potential slowdown in the US economy, the US Federal World economic growth is likely to fall as a result of COVID-19, with the Reserve cut rates three times in 2019. Economic growth stabilised in late outbreak having a global effect on consumption patterns, supply chains 2019, with key economic indicators improving. These improvements were and travel. On 22 February 2020, the IMF suggested that COVID-19 short lived, and the impacts of COVID-19 resulted in the US Federal would reduce their forecasts for Chinese economic growth by 0.4 Reserve cutting rates by a further 50 basis points on 3 March 2020. This percentage points, and world economic growth by 0.1 percentage points. cut came out-of-cycle, and is the first time such a cut has occurred since These forecasts are likely to be revised in the next IMF World Economic 2008. Further cuts are possible if COVID-19 continues to weigh on US Outlook, which is expected in April. economic growth. Interest rates are expected to rise modestly over the The OECD has also revised their forecasts in response to COVID-19. medium term. Rate increases could be constrained by high household Economic growth in China has been revised down 0.8 percentage points debt, which is likely to amplify the impacts of interest rate rises on in the latest forecast, and world growth has been revised down 0.5 consumer spending. percentage points. The OECD has also forecast significant impacts on

several other economies (Table 2.1).

Resources and Energy Quarterly March 2020 19 Figure 2.5: Contributions towards US GDP growth Box 2.2: US-China Phase One trade deal impact on energy markets On 15 January 2020, China and the US signed a Phase One trade deal 5 which reduced some US tariffs on Chinese goods in exchange for 4 Chinese pledges to purchase more American products. As part of the deal, China agreed to purchase an additional US$200 billion of US goods 3 and services in 2020 and 2021, relative to 2017 levels. Of this amount, 2 US$52 billion is to be met through imports of energy products — including LNG, crude oil (including refined products), and coal (including 1 metallurgical coal). The extent of increases in Chinese imports of US 0

Percentage points Percentage energy products remains unclear, as does the subsequent impact on -1 global trade flows. US supply constraints may also limit any increases in Chinese purchases of US energy products. Crude oil and LNG are -2 expected to account for the majority of higher US energy exports to China, Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 with potential negative flow-on implications to some of Australia’s resource Personal consumption Private investment and energy exports. Government consumption Exports The extent that Chinese imports of US of energy products increase is also Imports GDP complicated by impacts of the COVID-19 outbreak. At the time of writing,

Source: Bloomberg (2020) the outbreak has significantly reduced Chinese LNG and oil demand. This will likely reduce Chinese purchases of US energy products, although US policy priorities and levels of government spending over the outlook trade flows could still be diverted if Chinese purchasers were to prioritise period are less certain as the 2020 US general elections approach. purchasing US commodities. Despite the recent Phase One deal between China and the US, trade US oil exports to China could increase significantly under the Phase One tensions have the potential to reduce US economic activity over the trade deal. Between 2017 and 2019, US total oil exports rose dramatically, outlook period. Ongoing issues include potential tariffs on EU automobile but exports to China were constrained by trade tensions. Phase One imports, the January 2020 US tariff increases on aluminium and steel purchase targets may offset this constraint, though export growth could imports from numerous major producers, and US sanctions on Iran and still be contingent on further investments to refine more US oil, and Venezuela. expected minimal 2020 Chinese oil consumption growth as a result of US growth is forecast to slow to 2.0 per cent in 2020 and decline further to COVID-19. The largest impacts to Australia are likely to be through higher 1.7 per cent in 2021. Growth is projected to stabilise at 1.6 per cent competition for imports of US oil, since the US is now the second largest between 2022 and 2025. Slowing economic growth is expected largely source of Australian crude oil and refinery feedstock imports. due to falling consumption and employment growth. China may also choose to import greater amounts of US LNG, posing risks to Australian LNG export earnings. Impacts on Australia are likely to be somewhat tempered, since around 70 per cent of Australian LNG

Resources and Energy Quarterly March 2020 20 exports to China are on long-term contracts. On 17 February 2020, the Figure 2.6: Indian quarterly GDP growth Chinese government allowed firms to apply for exemptions from tariffs on 10 various US products, including LNG. This increases the competitiveness of US LNG against other sources including the 30 per cent of Australian LNG exports to China sold on spot markets (see Box 7.1). 8 US thermal coal exports to China are unlikely to increase notably. US coal 6 is relatively high cost, which is a barrier to bilateral trade growth.

The Phase One deal could offer limited upsides to Australian exports, 4 notably for commodities where Australia is not in competition with the US.

The IMF is forecasting that the Phase One deal will increase world Annual per cent change 2 economic growth slightly in 2020. China is Australia’s largest export market for Australian commodities, while the US is an important 0 consumption market for products using Australian commodities. As a Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 result, Australia would likely benefit from any lowering in trade tensions. Source: Bloomberg (2020)

India As a result of lower interest rates and the assumed passing of liquidity Indian economic growth slowed to an annualised 4.7 per cent in the pressures on NBFCs, the IMF is forecasting that Indian economic growth December quarter, the lowest value recorded in over six years (Figure will marginally recover to 5.8 per cent in 2020. Growth is forecast to 2.6). Growth has been affected by ongoing weakness in the financial increase further to 6.5 per cent between 2021 and 2025. These values are sector, as a result of financially stressed Indian nonbank finance marginally lower than the 2018 growth rate of 6.8 per cent. companies (NBFCs). Financial sector weakness also appears to be Europe materially affecting household consumption. Eurozone GDP growth slowed to 1.2 per cent in 2019, with growth in the In response to slowing economic growth and financial sector stress, the December quarter falling to 0.1 per cent (on a quarterly annualised basis). Reserve Bank of India cut interest rates five times in consecutive meetings Growth in the December quarter was minimal in France and Italy, and fell during 2019. The Reserve Bank of India is likely to consider further rate in Germany, with industrial production negatively affected by Brexit cuts in 2020. However, this will be complicated by consumer inflation uncertainty and global trade tensions. However, there are signs that being above the central bank’s target band, driven by soaring food prices. conditions in the region are improving, with the EU Composite PMI The Indian government’s 2020–21 budget included moderate fiscal recently stabilising (Figure 2.7), indicating that the outlook for the EU stimulus measures, mostly tax cuts. However, ongoing government manufacturing sector is beginning to turn. Remaining risks include the intentions to rein in the fiscal deficit reduce the likelihood of the Indian threat of US tariffs on imports of EU cars, as the automotive sector is a government introducing large scale fiscal stimulus packages over the significant contributor to the EU economy, and the US the number one medium term. destination for EU automotive exports.

Resources and Energy Quarterly March 2020 21 Figure 2.7: Eurozone composite PMI and GDP Japan 64 1.4 Japanese economic growth in 2019 was estimated to be 1.0 per cent. This represented a three-fold increase over the previous year, reflecting 57 0.7 improved household consumption and impacts of the Japanese 50 0.0 government’s fiscal stimulus packages. Consumption growth is expected 43 -0.7 to be more subdued over the medium term, with the October 2019 rise in

Index the national sales tax expected to weigh on household consumption, 36 -1.4 particularly early in 2020. Partially offsetting this should be the stimulatory 29 -2.1 impacts of the Tokyo 2020 Olympic Games, and planned infrastructure investment beyond the Olympic Games — part of the Japanese 22 -2.8 Quarterly per cent change Dec-07 Dec-09 Dec-11 Dec-13 Dec-15 Dec-17 Dec-19 government’s recently announced US$120 billion stimulus package. Eurozone Composite PMI Figure 2.8: Japanese Industrial production and manufacturing PMI Eurozone GDP lagged one month (rhs) 56 6 Source: Bloomberg (2020) 54 4 On 31 January 2020, the UK formally left the EU, and a trade agreement 2 between the two economies is being negotiated. These negotiations will 52 have implications for EU and UK growth over the medium term, and 0 50 ongoing negotiations are likely to affect investment and consumption in the Index -2 next year or two. The UK and the EU are also negotiating separate trade 48 -4 deals with the US, a major export market for both economies. Ratified agreements would deepen economic linkages between the economies, 46 -6 Annual per cent change and likely increase economic growth. 44 -8 In November 2019, the European Central Bank re-commenced a Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 quantitative easing program, purchasing €20 billion of bonds a month. The Manufacturing PMI Industrial production (rhs) central bank also reduced the deposit rate to -0.5 per cent — the lowest on record. This expansionary monetary policy is expected to continue over Source: Markit (2020) the short term, due to expected low EU growth rates and minimal The Japanese composite PMI increased in January 2020, suggesting opportunity for fiscal stimulus due to high debt levels. expansion across key industries. This rise was largely driven by the The IMF expects EU economic growth to rise slowly, reaching 1.3 per cent Japanese services industry, with Japanese households slowly adjusting to in 2020, 1.4 per cent in 2021, and 1.5 per cent by 2025. the October 2019 hike in sales taxes. Outcomes for the manufacturing sector were more subdued, with the index continuing to suggest contractionary conditions. The spread of COVID-19 through Japan

Resources and Energy Quarterly March 2020 22 resulted in a PMI values falling in February (Figure 2.8), with the impacts Korean government suspending its WTO case against Japan, and Japan amplified by the disease spreading throughout Japan and the deep removing restrictions on one of the three targeted chemicals. The outcome economic ties between China and Japan. of ongoing negotiations is likely to have a significant influence on medium term economic growth in both South Korea and Japan. Japanese growth in 2020 is forecast to fall to 0.7 per cent, as a result of lower household consumption growth. Growth is forecast to decline to 0.5 The IMF expects South Korean growth to recover to 2.2 per cent in 2020, per cent in 2021, stabilising at this level out to 2025. Economic growth in as a result of ongoing impacts of government stimulus and a gradual Japan will be constrained for the foreseeable future by the nation’s improvement in global economic activity. Over the medium term, growth is declining population and aging workforce. expected to increase further as trade tensions recede and higher global demand supports the export-oriented South Korean economy. South Korea In 2019, South Korean economic growth fell to 1.9 per cent, as global ASEAN trade tensions weighed on South Korean exports. Growth recovered Growth in the ASEAN-5 economies (Indonesia, Malaysia, the Philippines, partially in the December quarter as a result of higher government Singapore and Thailand) is estimated by the IMF to be 4.8 per cent in infrastructure spending. The Bank of Korea reduced rates twice in 2019, 2019. Global trade tensions have weighed on the export-oriented region, taking the official interest rate to a record low 1.25 per cent. These particularly in Indonesia and Thailand. Furthermore, Malaysian economic expansionary policies are expected to support growth in 2020, though growth has been affected by trade tensions with India, which has imposed strong growth is likely to be contingent on export demand and a recovery restrictions on imported Malaysian palm oil. from COVID-19. Industrialisation is expected to be a key driver of ASEAN growth. In There are signs that South Korean exports are beginning to increase, response to US tariffs on imports of Chinese goods, a number of particularly for semi-conductors, which accounted for 21 per cent of South companies have reportedly shifted supply chains into other parts of Korean exports in 2018. However, exports will continue to be affected by developing Asia, particularly Cambodia and Vietnam. trade tensions, including between Japan and South Korea. Tensions arose ASEAN-5 growth is forecast by the IMF to increase marginally to between South Korea and Japan in July 2019, when Japan placed trade 4.8 per cent in 2020, and to 5.3 per cent by 2025. Growth in 2020 may be restrictions on three chemical materials widely used by South Korean negatively affected by COVID-19 due to the presence of China in regional companies that make semiconductors. South Korea retaliated by removing supply chains, and the virus spreading further throughout South East Asia. Japan from the list of countries that receive stream-lined export protocols. Recent developments indicate trade tensions are easing, with the South

Resources and Energy Quarterly March 2020 23 Table 2.2: Key world macroeconomic assumptions Per cent 2019 2020a 2021a 2022a 2023a 2024a 2025a Economic growthb Advanced economies 1.7 1.6 1.6 1.6 1.5 1.6 1.6 United States 2.4 2.0 1.7 1.6 1.6 1.6 1.6 Japan 0.9 0.7 0.5 0.5 0.5 0.5 0.5 European Union 28 1.5 1.3 1.4 1.6 1.6 1.5 1.5 Germany 0.5 1.3 1.4 1.3 1.2 1.2 1.2 France 1.2 1.1 1.4 1.4 1.4 1.4 1.4 United Kingdom 1.2 1.3 1.3 1.5 1.5 1.5 1.5 South Korea 2.0 2.2 2.7 2.9 2.9 2.9 2.9 New Zealand 2.5 2.7 2.6 2.6 2.5 2.5 2.5 Emerging economies 3.9 4.4 4.6 4.8 4.8 4.8 4.8 Emerging Asia 5.9 5.8 5.9 6.1 6.0 6.0 6.0 South East Asiad 4.8 4.8 5.1 5.2 5.3 5.3 5.3 Chinae 6.1 6.0 5.8 5.7 5.6 5.5 5.5 Chinese Taipei 2.0 1.9 2.1 2.1 2.1 2.0 2.0 India 6.1 5.8 6.5 7.4 7.4 7.3 7.3 Latin America 0.2 1.6 2.3 2.6 2.8 2.7 2.7 Middle East 1.3 3.2 2.8 2.8 2.8 2.9 2.9 Worldc 3.0 3.3 3.4 3.6 3.6 3.6 3.6

Notes: a Assumption; b Year-on-year change; c Weighted using purchasing power parity (PPP) valuation of country gross domestic product by IMF; d Indonesia, Malaysia, the Philippines, Thailand and Vietnam; e Excludes Hong Kong. Source: Bloomberg (2020); Department of Industry, Science, Energy and Resources (2020): IMF (2020)

Resources and Energy Quarterly March 2020 24 Table 2.3: Exchange rate and inflation assumptions

2019 2020a 2021a 2022a 2023a 2024a 2025a

AUD/USD exchange rate 0.70 0.69 0.72 0.72 0.72 0.72 0.72 Inflation rate United States 1.8 2.1 2.1 2.3 2.3 2.3 2.3 2018–19a 2019–20a 2020–21a 2021–22a 2022–23a 2023–24a 2024–25a Australia 1.9 2.0 2.4 2.5 2.5 2.5 2.5

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

Resources and Energy Quarterly March 2020 25

3.1 Summary Figure 3.1: Steel production, monthly change . World steel consumption appears to be softening early in 2020, and is 20 expected to grow by 1.1 per cent over the year. However, longer term trends are more positive, with urbanisation and industrialisation across 10 Asia and Africa creating large new markets for steel. . World steel consumption is forecast to grow by around 16 per cent between 2020 and 2025, with most growth occurring in the second half 0 of the outlook period. year per per year cent change . World steel production is forecast to grow by around 17 per cent - on -10 between 2020 and 2025, with significant growth early in the outlook -

period as capacity utilisation rises. Year -20 3.2 World consumption and production 2016 2017 2018 2019 2020

Steel markets face significant pressure from a range of factors EU US India Japan

Steel demand appears to be easing in the early part of 2020. Some of this Notes: Monthly average for integrated basic oxygen furnace (BOF) steel mills is due to long-term factors, including softening automotive production over Source: Bloomberg (2020) China BOF Steel Profit Index the second half of 2019 and trade tensions between the US and China, which have weighed on steel markets for months. Building on the Figure 3.2: Steel production by region downward pressure, the COVID-19 outbreak in China has begun to affect 1,200 demand in early 2020. 1,000 Steel production trended down across much of the world towards the end of 2019 (see Figure 3.1), led by falls in the EU and Japan, where 800 steelmakers are facing difficult market conditions. Production growth is stabilising in early 2020, and is expected to pick up after 2021, with India 600 and other emerging Asian economies leading the growth (Figure 3.2). 400 Chinese steel markets are softening after years of strong growth (million)Tonnes 200 Chinese steel consumption has grown strongly in recent years, supported by a rising property market and state infrastructure spending, and this is 0 expected to continue over the outlook period. However, growing concerns 2004 2007 2010 2013 2016 2019 2022 2025 over pollution and air quality are leading to cuts and closures among some European Union India China Japan United States ROW inefficient steel smelters, and overall steel production remains under Source: World Steel Association (2020); Bloomberg (2020) pressure from trade tensions with the US.

Resources and Energy Quarterly March 2020 27

Property markets now appear to be flattening, though infrastructure Figure 3.3: Steel consumption growth by region spending is likely to remain strong as the Chinese government seeks to 50 increase economic stimulus.

However, the start of 2020 has been dominated by the effects of the ROW COVID-19 outbreak. Many Chinese industries temporarily close during the (604 Mt) India 25 Chinese New Year holiday. However, the outbreak has forced many industries to extend the standard shut-down period. Affected industries China include construction, steel fabrication, machinery, automotive and parts, USA (989 Mt) EU white goods, hardware, containers and shipbuilding, which all face period) over 0 sustained disruption as a result of COVID-19. Impacts appearing to be Sth Korea

2025 (total per cent growth cent (total per 2025 -25 0 25 50 particularly severe for construction, which has long been a key driver for Japan

Chinese steel demand. 2020 - Overall steel demand in China is expected to fall by 1 per cent in 2020 -25 2014-2019 (total per cent growth over period) following years of strong growth, though with a resumption of growth — albeit at a slower pace — expected over the outlook period. Source: Department of Industry, Science, Energy and Resources (2020)

Global steel markets are entering an uncertain period Figure 3.4: Steel production growth by region Global steel consumption faces sluggish growth, as a result of recent 50 softness in industrial production, ongoing trade tensions between the US and China, and slowing automotive manufacturing, which is likely linked ROW with downturns in consumer confidence. While it is too early to tell what (750 Mt) the full impact will be, if the COVID-19 outbreak has limited impacts, steel India 25 production is likely to grow more rapidly in 2020, encouraged by tight inventories. Other China Use and production of steel is shifting towards new growth sources (see EU) Europe (1,100 Mt) period) Figures 3.3 and 3.4), mostly in Asia. Manufacturing and industrial 0 production indexes for China, Japan, and the EU all appear to be sluggish -25 0 25 50 Sth. as the global economy moves further into 2020. Japan 2025 (total per cent growth over Korea Chinese steel production — which has long dominated global markets — is expected to grow at a slower rate in 2020. Mills in Gansu, Shaanxi, 2020 - -25 Shanxi and Sichuan provinces have recently announced significant output 2014-2019 (total per cent growth over period) cuts (of almost 60,000 tonnes a day) in response to slowing demand Source: Department of Industry, Science, Energy and Resources (2020)

Resources and Energy Quarterly March 2020 28 following the COVID-19 outbreak. A range of other steel mills are delaying Indian steel production has grown by around 75 per cent over the past 10 returns to operation beyond the New Year holiday. Liuzhou Steel and years, with the country expected to become an even more significant Chanjiang Steel have announced plans to shut down facilities by 2021, player in global steel markets in the near-term. Production over the next and production is scheduled to fall at the Tianjin Rochcheck Steel Group, five years is expected to grow by 28 per cent. Risks to this growth are where a blast furnace plant is set to close. considerable, however, and include tight margins, ample international supply, a potential domestic economic slowdown, and trade tensions. It is expected that growth will be affected most strongly in the first half of 2020, with a recovery from the third quarter. Rising steel inventories are Steel production is easing elsewhere likely to check production in the near-term. However, steel profits in China Steel production across most OECD nations is likely to decline over the remain relatively sound, supporting high capacity utilisation and strong outlook period. In the EU, profitability is under threat from trade tensions production (Figure 3.5). There is also a possible upside for steel in the and slowing global demand, with several high-profile closures occurring in form of potential stimulus measures in the wake of COVID-19. recent months. These include Tata Steel — a large steelmaker headquartered in Mumbai — which announced 3,000 jobs would likely be Figure 3.5: China’s steel consumption, production and exports cut in the United Kingdom (UK) and the Netherlands, as a result of the soft 1,400 140 global steel outlook. British Steel — the second largest steelmaker in the 1,200 120 UK — entered liquidation in 2019, and has subsequently been taken over by the Chinese-owned Jingye Group. 1,000 100 800 80 In Japan, the Nippon Steel Corporation confirmed that it will close down three blast furnaces and cut back output at some smaller facilities, 600 60 reducing its total capacity by almost 10 per cent over the next four years. 400 40 Tonnes (million)Tonnes (million)Tonnes The announcement follows years of falling domestic demand and rising 200 20 export competition from China. Japan’s declining population is significantly reducing the future pipeline for steel consumption, and this trend — in 0 0 2007 2010 2013 2016 2019 2022 2025 conjunction with falling steel prices brought about through trade tensions — is set to see the company lose US$4 billion in 2019–20. Closures have Steel production Steel consumption been scheduled to conclude by September 2023, and will lead to 5 million Implied net exports tonnes in steel output cuts over the long-term.

Source: Bloomberg (2020) World Steel Association; Department of Industry, Science, Energy and Resources (2020) Steel production around the world will likely continue to track closely with global industrial production and automotive construction, making these Emerging economies in Asia are becoming increasingly important measures crucial to the fortunes of global steelmakers. Growth is likely to become less dependent on China, as other countries in Asia, South Over the next five years, growth is expected to be led by Asian economies. America and Africa continue to urbanise and industrialise. India and Vietnam have recently unveiled plans to develop domestic steel industries, with significant growth in output over the next five years. Global steel production is expected to increase, from an estimated 1,904 million tonnes in 2020 to 2,233 million tonnes by 2025.

Resources and Energy Quarterly March 2020 29

Table 3.1: World steel consumption and production Million tonnes

Crude steel consumption 2019 2020s 2021f 2022z 2023z 2024z 2025z CAGRr

China 898 876 888 907 933 961 989 1.6

g European Union 28 207 209 212 217 225 232 240 2.5 United States 115 119 120 122 125 127 130 2.1 India 112 116 120 125 133 141 149 4.8 Japan 70 70 69 69 68 67 65 -1.2 Russia 47 45 45 44 44 43 42 -2.1 South Korea 56 57 57 57 56 55 55 -0.4 Brazil 7 21 22 22 23 24 24 23.0 World steel consumption 1901 1922 1957 2008 2080 2155 2232 2.7 Crude steel production 2019 2020s 2021f 2022z 2023z 2024z 2025z CAGRr China 993 1 000 1 018 1 038 1 064 1 092 1 120 2.0 European Union 28 149 156 161 167 174 182 189 4.1 India 111 119 124 130 137 145 153 5.4 Japan 99 100 99 98 97 96 95 -0.7 United States 88 92 94 96 98 101 104 2.8 Brazil 32 34 35 35 36 37 38 2.6 Russia 72 71 70 70 69 68 67 -1.0 South Korea 71 73 73 72 72 71 70 -0.3 World steel production 1845 1904 1956 2009 2081 2156 2233 3.2

Notes: f Forecast; g European Union 28 encompasses the aggregate output and demand for the 28 states which comprise the European Union; r Average annual growth between 2019 and 2025 or 2018–19 and 2024–25; s Estimate; z projection. Source: World Steel Association (2020); Department of Industry, Science, Energy and Resources (2020)

Resources and Energy Quarterly March 2020 30

4.1 Summary Figure 4.1: China's iron ore port stocks and spot price . Iron ore prices remain at unusually high levels as a result of persistent 200 125 supply disruptions in mid-to-late 2019. In 2020, the iron ore price is forecast to average about US$78 a tonne free on board (FOB) Australia. 160 100 . The real iron ore price is forecast to decline to average US$70 a tonne 120 75 (FOB Australia) in 2021, and US$61 a tonne by 2025. Supply disruptions are expected to be resolved over the next 12 months, with the seaborne 80 50 US$ a US$ tonne

market returning closer to balance. Million tonnes . Export volumes are expected to grow from 874 million tonnes in 40 25 2019–20 to 898 million tonnes by 2020–21, and to 996 million tonnes by 0 0 2024–25. The growth is largely a result of production commencing at 2015 2016 2017 2018 2019 2020 several large new mines in Western Australia. . Australia’s iron ore export values are set to rise from $79 billion in Weekly port stocks Iron ore price 62% CFR (rhs)

2018–19 to $101 billion in 2019–20 (in real terms), as volumes and Notes: China import Iron ore fines 62% Fe spot (CFR Tianjin port) prices grow. Over the rest of the outlook period, as prices ease, exports Source: Bloomberg (2019) Antaike iron ore port stocks and Metal Bulletin are forecast to fall to $84 billion in 2020–21, and $72 billion by 2024-25. Figure 4.2: Iron ore price spread between grades

4.2 Prices 60 60 Iron ore prices have reversed some of their early 2019 surge Iron ore prices have continued on a volatile trajectory in recent months 30 45 (Figure 4.1). After a large surge in 2019 following the Brumadinho tailings dam collapse in Brazil, prices appeared to be on a path back to normal as 0 30 production gradually recovered.

However, subsequent supply disruptions saw prices spiking again in late Price spread -30 15 2019 and early 2020. These included cyclones in the Pilbara region of Western Australia, and flooding in the south and east of Brazil. Iron ore markets remain tight — iron ore inventories remain near five-year lows — -60 0 Per cent difference to benchmark* difference Per cent 2015 2016 2017 2018 2019 2020 and this has increased the responsiveness of prices even to small shifts in production. Discount 58% fine ores Premium 66% fine ores The FOB Australia iron ore price (62% iron content) — at which most Spread (rhs)

Australian iron ore is sold — peaked above $110 a tonne in July 2019, but Notes: *Benchmark used is 62 per cent iron fines CFR subsequently eased to around $75 a tonne by November. Prices rose Source: Bloomberg (2019) China import prices back above US$85 a tonne over most of January and February 2020,

Resources and Energy Quarterly March 2020 32 and show few signs of losing ground in the short-term. The price premium Figure 4.3: Iron ore price by grade and China steel price index for high quality iron ore rose sharply in late-2018 (see Figures 4.2 and 125 5,000 4.3), as Chinese demand increased and high-quality ore supply from Brazil tightened. Subsequently, markets have adjusted to use greater quantities 100 4,000 of lower grade ore, with the price premium between grades easing recently. 75 3,000

Iron ore prices remain subject to supply disruptions and events in China 50 2,000 US$ a US$ tonne

China currently imports more than two-thirds of global seaborne iron ore, 25 1,000 Renminbi a tonne and in declines in its steel production in late 2019 (see Figure 4.4) have significant implications for iron ore markets. The COVID-19 outbreak 0 0 currently represents a significant risk to iron ore prices, port access, and Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 trade. Other influences include the progress of trade negotiations between CFR 58% CFR 62% the US and China (see the Macroeconomic Outlook chapter), the pace of CFR 66% FOB 62% China steel price index (rhs) global urbanisation, and the scale of transformation among key economies such as India. Construction will affect iron ore demand, as will changes in Notes: The OCE forecasts the FOB (free on board) Australia iron ore price, not the automotive builds away from steel and towards lighter aluminium. benchmark CFR (cost and freight) North China iron ore price. Source: Bloomberg (2019) Metal Bulletin; Department of Industry, Science, Energy and Prices face downward pressure in the near term, due to the impact of the Resources (2020) COVID-19 outbreak and flat global steel demand. Uncertainty created by Figure 4.4: Iron ore price vs China steel production growth COVID-19 is assumed to recede in the second half of 2020, and short term weather disruptions in Australia and Brazil are expected to pass by 15 125 the end of March. Rising supply in Brazil will likely put considerable 10 100 downward pressure on prices over coming quarters. However, further disruptions among major producers, unexpected delays in restoring 5 75 production, or additional Chinese stimulus measures could each put 0 50 countervailing upward pressure on prices over the next year. US$ a US$ tonne

year per per year cent change -5 25 A gradual price decline is expected over the next few years. Real prices on - are expected to fall from about US$86 a tonne in the March quarter 2020, - -10 0

to US$78 a tonne in the June quarter 2020, and US$71 a tonne by the Year 2015 2016 2017 2018 2019 2020 March quarter 2021. The market balance is forecast to move from a 20 China steel production Iron ore price (rhs) million tonne deficit in 2020 to a small surplus by 2022, as production returns to normal in Brazil and rises elsewhere. This shift is expected to Notes: China import Iron ore fines 62% Fe spot (CFR Tianjin port) result in further price falls in the latter half of the outlook period, with prices Source: Bloomberg (2019) China import prices; World Steel Association (2019) reaching US$56 a tonne by 2025 in real terms.

Resources and Energy Quarterly March 2020 33

4.3 World trade Figure 4.5: Outlook for global iron ore exports Export growth is recovering despite some recent setbacks 2500 Exports of iron ore are expected to grow only marginally in 2020 (see Figure 4.5). Large areas in the south and east of Brazil have faced heavy 2000 rainfall in early January 2020, leading to floods which have affected Brazilian production. Vale has announced scaled-down output for the first 1500 quarter of 2020 as a result of disruptions across several sites. However, the emergence of more information on the precise timing of repairs to 1000 facilities affected by the Brunhildo tailings dam collapse is expected to Million tonnes reduce some uncertainty in iron ore markets, potentially stabilising prices 500 to a degree. Vale has announced an intention to meet its US$436 million construction costs without requiring any outside equity. Outside of 0 short-term recovery, little growth is expected in exports from Brazil. 2015 2017 2019 2021 2023 2025 In China, demand is likely to be constrained to some degree by increasing Brazil Australia ROW checks on air pollution. Iron ore cargoes are also being offloaded in China Source: World Steel Association (2019); Department of Industry, Science, Energy and at a noticeably slower rate than was the case a year ago, with the COVID- Resources (2020) 19 outbreak being the most likely cause.

Increased supply elsewhere should gradually help ease the market deficit 4.4 Australia Supply is rising from new sources, including a range of projects in Africa. Australia’s export earnings are set to rise despite short-term setbacks These include the Glencore and Zanga joint venture in the Democratic Australia’s iron ore export earnings are set to reach a new record in Republic of Congo (DRC), which is expected to jointly supply 2 million 2019–20, rising to $101 billion amidst unexpectedly strong prices and tonnes of high grade iron ore over 2019 to 2020. The Sapro group also significant growth in volumes. As prices return to more typical levels, commenced a project in the DRC in mid-2019, and output is now ramping export earnings are expected to ease back to reach $72 billion by 2024–25 up, with the company projecting annual output of 12 million tonnes by (in real terms). Growth in volumes after 2021 should act as a partial offset 2022. to declining prices. The Société Minière de Boké–Winning consortium — which includes The recent surge in export revenues comes despite weather disruptions, Chinese, French, Singaporean and Guinean interests — has announced a which continue to affect production and exports from Western Australia. large bid for the Simandou deposit in Guinea. Rio Tinto revised its 2020 guidance for iron ore production down in February (from 330-343 million tonnes to 324-333 million tonnes). The Tacora’s Wabush high grade iron ore mine in Canada is on track to restart company has linked its lower production to Tropical Cyclone Damien, in June 2020, gradually ramping up to 6 million tonnes per annum. The which disrupted operations across the Pilbara in early February. mine previously closed in 2014, when iron prices fell to historical lows.

Resources and Energy Quarterly March 2020 34

The company notes that road access, communications, accommodation, Iron ore exploration expenditure is solid, but has room to grow and electrical infrastructure have all been affected by the recent weather. Australia’s iron ore exploration expenditure increased by 12 per cent year- Mine sites across the region have been hit by more than 200mm of rainfall, on-year to $84.6 million in the December quarter 2019. leading to flooding of some mines, along with minor slippages in pit walls. Shipments from connected ports have also been delayed, with no ships Iron ore exploration has benefited from the surge in prices early in 2019, leaving between the 7th and 10th of February. At this stage, it is not clear and robust demand from key markets including China. when full production will resume, though overall damage is currently less Iron ore exploration is overwhelmingly concentrated in Western Australia, than that caused by Cyclone Veronica in 2019. where a range of deposits are being investigated.

BHP production has edged back in recent quarters, and was towards the Figure 4.6: Australia’s iron ore export volumes and values lower end of guidance at the end of 2019. Weather disturbances from the ongoing cyclone season threaten to push 2019–20 production below 1250 125 target. However, the company has invested significantly in its iron ore network in recent months, which should improve operational robustness 1000 100 and support a rebound in production over time. 750 75 Australia’s iron ore production is expected to grow by around 15 per cent in volume terms over the outlook period. This reflects new output from 500 50 20 A$ billion several significant projects in the Pilbara region of Western Australia, Million tonnes including BHP’s South Flank project (from 2021), Fortesce’s Eliwana 2019 - project (from 2021), Brockman’s Maraillana mine (from 2021) and 250 25 Australasian Resources’ Balmoral South project (from 2024). 0 0 Australia’s iron ore export volumes are forecast to grow 2008–09 2012–13 2016–17 2020–21 2024–25

Export volumes are expected to follow the trajectory of production, Volume Value (rhs) increasing from an estimated 877 million tonnes in 2019–20 to almost one billion tonnes by 2024–25 (see Figure 4.6). This volume growth will help to Source: ABS (2020) International Trade, Australia, 5368.0; Department of Industry, Science, Energy and Resources (2020) offset falling prices, and could lead to new records for export earnings should prices lift again over the next few years.

Resources and Energy Quarterly March 2020 35

Table 4.1: World trade in iron ore Million tonnes

2019 2020s 2021f 2022z 2023z 2024z 2025z CAGRr

Total world trade 1,760 1,775 1,795 1,817 1,843 1,872 1,908 1.4 Iron ore imports

China 1,263 1,276 1,297 1,321 1,349 1,380 1,418 1.9

European Union 28 147 147 147 147 147 147 147 0.0

Japan 122 123 122 121 120 119 117 -0.7

South Korea 74 76 76 75 74 74 73 -0.3

India 5 5 5 5 5 5 5 0.0 Iron ore exports

Australia 836 892 907 938 938 953 1,033 3.6

Brazil 473 451 453 449 462 470 447 -0.9 Ukraine 38 36 37 36 37 38 36 -0.9 India 35 33 33 33 34 34 33 -14.3

Notes: f forecast; s estimate; z projection;. r Average annual growth between 2019 and 2025 or 2018–19 and 2024–25. Source: World Steel Association (2020); International Trade Centre (2020); Department of Industry, Science, Energy and Resources (2020)

Resources and Energy Quarterly March 2020 1 36

Table 4.2: Iron ore outlook

World Unit 2019 2020s 2021f 2022z 2023z 2024z 2025z CAGRr

Prices bc

– nominal US$/t 80.1 62.3 60.5 56.2 57.7 59.0 59.8 -4.8

– real d US$/t 81.9 62.3 59.2 53.8 54.0 53.9 53.4 -6.9 Australia Unit 2018–19 2019–20s 2020–21f 2021–22z 2022–23z 2023–24z 2024–25z Production

– Steel hs Mt 6.05 5.78 5.79 5.78 5.81 5.80 5.81 -0.7

– Iron ore Mt 924.2 918.3 930.5 943.4 962.4 965.2 1 023.4 1.7

Exports

Steel Mt 1.21 0.89 1.00 0.99 1.00 1.00 1.00 -3.2

– nominal value A$m 1 287 838 752 751 753 753 754 -8.5

– real value hi A$m 1 312 838 738 721 706 689 673 -10.5

Iron ore Mt 818.0 876.9 897.5 919.5 938.9 939.5 995.7 3.3

– nominal value A$m 77,553 100,980 85,755 77,897 76,262 74,526 77,691 0.0

i – real value A$m 79,010 100,980 84,094 74,780 71,494 68,158 69,291 -2.2

Notes: b fob Australian basis; c Spot price, 62 per cent iron content basis; d In 2020 US dollars; s estimate; f Forecast; z projection; h Crude steel equivalent; Crude steel is defined as the first solid state of production after melting. In ABS Australian Harmonized Export Commodity Classification, crude steel equivalent includes most items from 7206 to 7307, excluding ferrous waste and scrap and ferroalloys; i In 2019–20 Australian dollars; s estimate. r Average annual growth between 2019 and 2025 or 2018–19 and 2024–25. Source: ABS (2020) International Trade in Goods and Services, Australia, 5368.0; Bloomberg (2019) Metal Bulletin; World Steel Association (2020); AME Group (2020); Company Reports; Department of Industry, Science, Energy and Resources (2020)

Resources and Energy Quarterly March 2020 37

5.1 Summary end of February 2020. Mongolia’s decision to close its border with China . The premium HCC spot price is forecast to ease from US$183 a tonne until at least 30 March 2020, in order to prevent the spread of COVID-19, in 2019 to average around US$155 in 2022 (in real terms), due to a also appears to have supported Chinese seaborne import demand. combination of soft demand growth and the ramp up of new capacity. Mongolia accounts for almost half of Chinese metallurgical coal imports, The price is then expected to gradually recover, reaching around and the border closure reportedly disrupted crossings of coal trucks. US$167 a tonne in 2025 (in real terms). However, the impacts of COVID-19 on supply have been partly offset by its effects on demand, with China’s slowing economy weighing on steel . Australia’s export volumes are forecast to grow from 184 million tonnes production and thus reducing its metallurgical coal needs. in 2018–19 to reach 205 million tonnes in 2024–25. This reflects the ramp up of new mines and increased output at existing operations, partly Figure 5.1: Metallurgical coal prices, monthly offset by the impact of the depletion of resources at several mines. 350 . The real value of Australia’s metallurgical coal exports is projected to 300 decline from a record of $44 billion in 2018–19 to $35 billion in 2021–22, before eventually increasing to around $38 billion in 2024–25. 250 5.2 Prices 200 Metallurgical coal prices declined rapidly last year before stabilizing 150 US$ a US$ tonne The premium Australian hard coking coal (HCC) spot price stabilised in the 100 US$150-165 range over the first quarter of 2020, after declining rapidly 50 during 2019 to lows of around US$135 a tonne in November 2019 (Figure 0 5.1). In 2019, seaborne demand was weighed down by slowing global Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 economic growth and weak ex-China steel production. In India — the HCC Peak Downs Low Vol PCI Semi-soft world’s 2nd largest steel producer and metallurgical coal buyer — growth Notes: HCC stands for hard coking coal. PCI stands for pulverized coal for injection. in steel output slowed sharply, causing metallurgical coal imports to flatten Source: Platts (2020) out. In the meantime, new capacity continued to come online in Australia, Metallurgical coal prices are forecast to gradually decline to average Russia and Mongolia. The Australian HCC spot price averaged US$183 a around US$155 in real terms in 2022 (Figure 5.2). Demand growth is tonne in 2019 (in real terms), down from US$217 a tonne in 2018. expected to be subdued against the backdrop of slowing growth in steel The uptick in metallurgical coal prices in early 2020 (Figure 5.1) appears to production. Meanwhile, supply is expected to grow solidly, with Australia have been driven by supply disruptions stemming from weather conditions the main source of new capacity. Over the medium term, the price is in Canada, the collapse of a roof at Anglo American’s Moranbah North projected to recover. A modest lift in the real price to US$167 a tonne by mine in Queensland in late January 2020, and the outbreak of COVID-19. 2025 is projected, as supply growth slows relative to demand. COVID-19 affected China’s domestic production with miners unable to Chinese demand remains the key risk to the outlook for metallurgical coal return to work due to restrictions on the movement of people, although prices, due to the sheer size of its domestic coal market and ongoing most of China’s coal mining capacity was reportedly back online by the uncertainty over its import policy. A fall in Chinese imports would push

Resources and Energy Quarterly March 2020 39 prices lower than forecast. Countering this, the supply side of metallurgical 5.3 World trade coal markets remains highly concentrated, and supply chain disruptions World trade in metallurgical coal is estimated to have remained broadly have the potential to drive periodic price spikes. The price impacts of a stable in 2019 at around 340 million tonnes. China’s imports increased on supply chain disruption in Australia — which accounts for over half of the back of robust growth in steel production, but weak growth in steel seaborne supply — would be particularly pronounced. production outside of China weighed on seaborne demand. Figure 5.2: Australian premium HCC spot price, quarterly World metallurgical coal trade is projected to gradually increase to around 390 million tonnes in 2025. India and China are expected to be the key 300 sources of demand growth. Australia is expected to comfortably remain 250 the dominant exporter of metallurgical coal, holding its share of world imports steady at around 55 per cent over the outlook period. 200 Additional supplies of metallurgical coal are expected to come online from 150 Russia, Mongolia and Mozambique. Canada’s exports are expected to 100 remain flat. The US should continue to act as a swing supplier, with US

2020 US$ a tonne 2020 US$ producers near the top of the cost curve (Figure 5.3). The strength of the 50 US dollar is currently undermining the competitiveness of US exporters.

0 Dec-11 Dec-13 Dec-15 Dec-17 Dec-19 Dec-21 Dec-23 Dec-25 Source: Platts (2020); Department of Industry, Science, Energy and Resources (2020)

Figure 5.3: Metallurgical (including hard coking, PCI and semi-soft) coal FOB cost curve and average annual prices, 2019 200 180 160 140 120 100 80

US$ a US$ tonne 60 40 20 0 0 100 Million tonnes 200 300 Australia Russia US Mongolia Other Premium HCC Low vol PCI

Notes: Nominal terms; FOB is Free on Board; PCI stands for pulverized coal for injection; Premium HCC is the price for premium Australian hard coking coal. Source: AME Group (2020); Platts (2020); Department of Industry, Science, Energy and Resources (2020)

Resources and Energy Quarterly March 2020 40

5.4 World imports demand. Chinese metallurgical coal production is also expected to lift but China’s metallurgical coal imports projected to climb is not expected to keep pace with demand growth given that China has limited reserves, particularly of higher quality grades. China’s next phase China is the world’s largest steel producer and metallurgical coal importer. of supply-side reforms could adversely affect domestic metallurgical coal China’s metallurgical coal imports increased by 14 per cent to an production, supporting imports. The reforms are aimed at shutting down estimated 75 million tonnes in 2019. Demand was supported by robust and stopping the approval of small-scale coal mines, and China’s growth in Chinese steel production, which reached virtually 1 billion metallurgical coal output is more reliant on smaller mines than its thermal tonnes, thanks to a resilient property market, a push on infrastructure coal production. spending by the Chinese government and solid profit margins at steel mills (see steel chapter). Relatively low seaborne prices encouraged Nevertheless, a number of factors are expected to constrain growth in metallurgical coal imports, although imports appear to have fallen sharply metallurgical coal imports. The first is the growing use of scrap steel in towards the end of the year as policymakers tightened import restrictions steel production in China, which reduces the amount of metallurgical coal to limit total coal imports to the 300 million tonne mark (Figure 5.4). China requires to produce a given quantity of steel. A second factor is China’s coal import policy. Over the past few years, Chinese policymakers Figure 5.4: China’s metallurgical coal imports, monthly have sought to limit total coal import volumes (see thermal coal chapter for 10 further discussion), and a continuation of this policy would limit the scope 9 for growth in China’s metallurgical coal imports. 8 China represents the biggest risk to the outlook for metallurgical coal, as a 7 result of ongoing uncertainty surrounding its import policies, the pace of its 6 economic growth and the unfolding impacts of COVID-19, and the pace at 5 which scrap steel usage grows. 4

Million tonnes 3 India to rapidly increase its imports to support steel production 2 India is the world’s second largest steel producer and metallurgical coal 1 importer. India’s metallurgical coal imports are estimated to have remained 0 broadly unchanged in 2019 at around 53 million tonnes. After solid Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 increases in steel production in 2018, growth in India’s steel output slowed Australia Mongolia Russia Canada United States Rest of world markedly in 2019, with weak domestic demand from key sectors, particularly automotive and construction. In recent months, India, which Source: Bloomberg (2020) China customs sources the majority of its metallurgical coal from Australia, has held discussions with a number of other suppliers about diversifying its imports, China’s annual metallurgical coal imports are forecast to remain around including the United States, Mongolia and Russia. current levels in the short term, before climbing to around 85 million tonnes in 2025. Steel production is expected to continue to grow over the next five India’s metallurgical coal imports are projected to increase to 79 million years, albeit at a slower pace in the short term, driving metallurgical coal tonnes in 2025 (Figure 5.5). India has ambitious plans to increase crude steel production capacity from 142 million tonnes in 2018–19 to 300 million

Resources and Energy Quarterly March 2020 41 tonnes per year by Indian fiscal year 2030–31. However, India has very Korea’s imports are projected to be broadly flat over the outlook period, in limited domestic reserves of metallurgical coal, and will need to increase line with steel production. imports to support the rapid growth of its domestic steel sector. Taiwan’s imports of metallurgical coal were steady at 7 million tonnes in The pace at which India’s steel sector is able to expand remains uncertain, 2019, and are projected to remain flat over the next five years. and presents a risk to the outlook for India’s metallurgical coal imports, Metallurgical coal imports projected to rise in emerging economies with the sector facing ongoing financial, regulatory and other challenges. Metallurgical coal imports are projected to grow in emerging economies, Figure 5.5: Metallurgical coal imports, annual although from a low base. A number of countries, including Vietnam, have 90 blast furnace steel plants coming online over the outlook period, which 80 should drive an increase in the imports of emerging economies. 70 5.5 World exports 60 50 The US is expected to remain the swing producer in met coal markets 40 The US is the world’s second largest exporter of metallurgical coal. US 30 exports grew substantially between 2016 and 2018. Exporters responded

Million tonnes 20 to higher prices initially induced by a tighter market, and then exacerbated 10 by the impact of Cyclone Debbie on Australian production in 2017. 0 However, US exports fell back by 10 per cent to about 50 million tonnes in China Japan South Taiwan India EU28 2019, as falling prices curbed profitability. Korea US metallurgical coal exports are projected to decline gradually in line with 2018 2019s 2020f 2021f 2022f 2023z 2024z 2025z prices, before lifting from around 2023 as prices rise. The US is a swing Notes: s Estimate f Forecast z Projection producer in metallurgical coal markets — due to higher freight and Source: IHS (2020); IEA (2019) Coal 2019; Department of Industry, Science, Energy and Resources (2020) production costs — and growing supply from other producing nations will likely eat into US market share in the short term. Japan, South Korea and Taiwan’s imports to remain subdued Russia’s exports to lift on the back of recent investment Japan is the world’s third largest metallurgical coal importer. Japan’s Russia’s metallurgical coal exports are estimated to have remained imports were broadly unchanged at an estimated 47 million tonnes in broadly unchanged in 2019 at around 26 million tonnes. Over the next five 2019, despite a fall in Japan’s steel production. Metallurgical coal imports years, however, Russia’s metallurgical coal exports are projected to grow are expected to be broadly unchanged over the outlook period, as steel to 36 million tonnes in 2025 (Figure 5.6), driven by new additions to mining production stagnates. capacity, and by rail and port expansions. In September 2019, a third South Korea is the world’s fourth largest metallurgical coal importer, and export line came online at Russia’s largest coal terminal at the port of imports were stable at an estimated 37 million tonnes in 2019. South Vostochny, expanding capacity from 22 mtpa to 40 mtpa.

Resources and Energy Quarterly March 2020 42

Canada’s exports to remain stable Mongolia’s exports are expected to continue to climb over the next five Canada’s metallurgical coal exports were stable at an estimated 29 million years, reaching 44 million tonnes in 2025. There are plans to develop tonnes in 2019. Canada’s metallurgical coal exports are expected to Tavan Tolgoi — the world’s largest undeveloped coking coal mine — and remain largely unchanged over the next five years, with few new projects a 30 mtpa railway line from Tavan Tolgoi to the Chinese border is currently in the pipeline. under construction. A smaller 3 mtpa expansion is planned at TerraCom’s Baruun Noyon Uul coking coal mine complex. Mongolia is also Figure 5.6: Metallurgical coal exports, annual cooperating with Russia on a 10 mtpa coal terminal at Posyet Bay. The 250 port project is scheduled to begin operations in 2023, and could facilitate exports to both China and the broader Asia-Pacific market. 200 Mozambique’s exports to grow but challenges remain 150 Mozambique currently has two exporting metallurgical coal mines: Vale’s Moatize and Jindal Steel’s Songa mines. Mozambique — once touted as 100 the next major supplier of metallurgical coal — has faced a number of Million tonnes challenges in growing its exports, which are estimated to have fallen by 50 around 25 per cent to 5 million tonnes in 2019. The fall last year was, in part, driven by miners encountering an unanticipated section of lower 0 Australia US Canada Mongolia Russia Mozambique grade material at Vale’s Moatize mine that the mine’s wash plant was not configured to treat. The company will halt production at the mine for three 2018 2019s 2020f 2021f 2022f 2023z 2024z 2025z months sometime in the first half of 2020 to address the issue. Mozambique’s exports are projected to triple to 15 million tonnes in 2025, Notes: s Estimate f Forecast z Projection Source: IHS (2020); IEA (2019) Coal 2019; Department of Industry, Science, Energy and driven by the ramp up of Vale-Mozambique’s Moatize mine, and facilitated Resources (2020) by the Nacala logistics corridor rail line and Nacala port expansion. Mongolia to lift exports by addressing infrastructure constrains 5.6 Australia Mongolia appears to have surpassed both Russia and Canada to become Metallurgical coal export earnings forecast to reach record highs the world’s third largest metallurgical coal exporter in 2019, with exports The value of Australia’s metallurgical coal exports reached a record high climbing to 31 million tonnes. Mongolia primarily exports coal by trucking it for a second consecutive year in 2018–19. Export earnings increased to to China through the Gants Mod and Ceke border crossings, and exports $44 billion in real terms, driven by high prices and, to a lesser extent, surged over the first eleven months of the year before the Chinese growing export volumes. government ordered tighter controls on imports. In late January 2020, Metallurgical coal export earnings are projected to decline in real terms to Mongolian authorities announced the closure of its border with China to $35 billion in 2021–22, as prices ease, before recovering to $38 billion in contain the COVID-19 outbreak, which has reportedly disrupted crossings 2024–25. Export volumes are projected to grow solidly over the next five of coal trucks. years, increasing from 184 million tonnes in 2018–19 to 205 million tonnes in 2024–25 (Figure 5.7). Higher export volumes will be driven by the ramp

Resources and Energy Quarterly March 2020 43 up of production at a number of mines, the largest of which is Qcoal’s 10 Coal exploration expenditure rebounds mtpa Byerwen mine in the Bowen Basin in Queensland. Australia’s coal exploration expenditure reached $234 million in 2019, up The closure of a number of mines due to resource depletion is expected to by around $60 million on 2018. Coal exploration expenditure has been on weigh on export volumes towards the end of the outlook period. The the rise since reaching record lows over 2016 and 2017 (Figure 5.8). collapse of a roof at Anglo American’s Moranbah North mine in Queensland Figure 5.8: Australian coal exploration expenditure and prices in late January 2020 will weigh on production in the short term. Anglo American has revised down its metallurgical coal production guidance to 19- 350 250 21 million tonnes for 2020 as a result of the accident, after producing 23 million tonnes last year. 280 200

Figure 5.7: Australia’s metallurgical coal exports 210 150 240 60

140 100 million A$ US$ a US$ tonne 200 50 70 50 160 40 0 0 Dec-09 Dec-11 Dec-13 Dec-15 Dec-17 Dec-19 120 30 Million tonnes

20 A$ 20 A$ billion Exploration expenditure (rhs) Newcastle 6,000 kcal – 80 20 Premium Australian HCC

2019 Source: Source: ABS (2020); IHS (2020); Platts (2020) 40 10

0 0 2008–09 2012–13 2016–17 2020–21 2024–25

Volumes Values (rhs)

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

Resources and Energy Quarterly March 2020 44 Table 5.1: World trade in metallurgical coal Unit 2019s 2020f 2021f 2022f 2023z 2024z 2025z CAGRr

World trade Mt 340 342 352 360 372 379 391 2.4

Metallurgical coal imports

China Mt 75 73 74 75 79 82 85 2.1

India Mt 53 58 61 64 69 74 79 6.8

Japan Mt 47 48 48 48 48 49 49 0.6

European Union 28 Mt 41 42 43 43 43 44 45 1.3

South Korea Mt 37 38 38 37 37 37 36 -0.3

Metallurgical coal exports

Australia Mt 184 192 199 202 207 205 205 1.9

United States Mt 50 48 37 37 41 45 48 -0.7

Canada Mt 29 26 28 30 30 29 28 -0.4

Russia Mt 26 28 31 32 32 35 36 5.8

Mongolia Mt 31 28 35 35 37 39 44 5.9

Mozambique Mt 5 7 9 11 12 13 15 21.8

Notes: s Estimate; f Forecast; z Projection; r Compound annual growth rate from 2019 to 2025. Source: IEA (2019) Coal Information 2019; IEA (2019) Coal 2019; IHS (2020); Department of Industry, Science, Energy and Resources (2020)

Resources and Energy Quarterly March 2020 45 Table 5.2: Metallurgical coal outlook World Unit 2019 2020f 2021f 2022f 2023z 2024z 2025z CAGRr

Contract pricese

– nominal US$/t 184 160 161 162 172 178 186 0.1

– reald US$/t 188 160 157 155 161 163 166 -2.1

Spot pricesg

– nominal US$/t 179 162 160 162 174 178 186 0.7

– reald US$/t 183 162 157 155 162 163 167 -1.5

Australia Unit 2018–19 2019–20f 2020–21f 2021–22f 2022–23z 2023–24z 2024–25z CAGRr

Productions Mt 188 192 200 205 209 211 210 1.8 Export volume Mt 184 186 196 201 205 206 205 1.9 – nominal value A$m 43,637 36,935 36,437 35,895 38,212 41,065 42,403 -0.5 – real valuei A$m 44,457 36,935 35,731 34,459 35,823 37,556 37,818 -2.7

Notes: d In 2020 US dollars; e Contract price assessment for high-quality hard coking coal; g Hard coking coal fob Australia east coast ports; i In 2019–20 Australian dollars; r Compound annual growth rate from 2019 to 2025, and 2018–19 to 2024–25; s Estimate; f Forecast; z Projection. Source: ABS (2020) International Trade in Goods and Services, Australia, 5368.0; Department of Industry, Science, Energy and Resources (2020); Platts (2020)

Resources and Energy Quarterly March 2020 46

6.1 Summary The impact of COVID-19 on thermal coal prices has been modest so far . The Newcastle benchmark thermal coal spot price is projected to To date, COVID-19 appears to have had a modest impact on the supply- average US$60-75 a tonne in real terms over the five years to 2025, demand balance in thermal coal markets. Both Chinese domestic and down on US$76 a tonne in 2019. Seaborne imports are expected to international benchmark prices have lifted slightly since the spread of the edge down slightly, but the lack of new thermal coal projects in the virus began to accelerate from late January, with the most significant price pipeline should provide some support to prices. rises for the 5,500 kcal coal that China tends to import (Figure 6.1). . Australia’s export volumes are forecast to grow from 210 million tonnes China’s domestic output was initially affected by the spread of the virus, in 2018–19 to 224 million tonnes by 2024–25, as a number of mines with miners unable to return to work due to restrictions on people ramp up production. The continued shift in world coal trade towards the movements. However, at the same time, slower economic activity as a Asia-Pacific should favour Australia’s thermal coal exporters over result of COVID-19 kept power consumption low and thus reduced thermal competitors like the United States and Colombia. coal demand. By late February 2020, the vast majority of China’s thermal . The real value of Australia’s thermal coal exports is projected to decline coal capacity had reportedly resumed production. sharply from $26 billion in 2018–19 to $21 billion in 2019–20, as a result Figure 6.1: Thermal coal prices of the recent price decline. Export earnings are then expected to edge down and level out in the $17-20 billion range through to 2024–25, in 140 real terms. 120 6.2 Prices 100 Thermal coal prices stabilized in early 2020 after declining over 2019 80 The benchmark Australian thermal coal spot price — the Newcastle 6,000 kcal/kg NAR (Net As Received) — stabilised in the US$60-70 a tonne 60

range in the first quarter of 2020, after steadily falling from a peak of a US$ tonne US$120 a tonne in mid-2018 (Figure 6.1). The 2018 price spike was driven 40 by supply constraints in Indonesia (due to monsoonal rains), South Africa (where exports were diverted for domestic use) and China (due to coal 20 industry restructuring), combined with strong demand from China (due to weak hydro output and hotter than average summer temperatures) and 0 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 South Korea (where nuclear reactors were offline). As China increased Newcastle 6,000 kcal Newcastle 5,500 kcal domestic production and temporary influences receded, prices declined Indonesia 4,700 kcal QHD 5,500 kcal (domestic) over 2019. Low LNG prices also encouraged coal-to-gas switching, Notes: Qinhuangdao (QHD) is the largest coal port in China and QHD prices are a key particularly in Europe, and further weighed on thermal coal consumption. benchmark for coal prices in northeastern China. The Newcastle spot price averaged US$76 a tonne in 2019 in real terms. Source: IHS (2020)

Resources and Energy Quarterly March 2020 48 Thermal coal prices to remain subdued as seaborne demand edges down Nationally Determined Contributions (NDCs) every five years, with each NDC expected to contain more ambitious targets than the last. Stronger- The Newcastle 6,000 kcal spot price is expected to remain relatively than-expected emissions reductions targets and policy are a key risk to the steady over the next five years, averaging between US$60-75 a tonne on outlook for thermal coal demand. an annual basis in real terms (Figure 6.2). The Japanese Fiscal Year (JFY) contract price, which serves as a benchmark for the Asian market, is Difficulties obtaining finance for new thermal coal projects could also also forecast to decline from US$95 for 2019–20 (April 2019 to March constrain the development of new thermal coal supply. A growing list of 2020), but settle at a premium relative to the spot price. At the time of lenders have announced they will no longer finance thermal coal projects, writing, the 2020–21 (April 2020 to March 2021) contract price had not yet and pension and equity funds are divesting from thermal coal. State- been settled. owned enterprises and private equity have, to some extent, stepped into the gap to finance new projects and expansions. Other projects such as Relatively weak seaborne thermal coal demand is expected to weigh on Carmichael have self-financed. However, financing is likely to be a prices over the next five years. Europe and developed Asian economies challenge for some thermal coal project developers moving forward. look set to reduce thermal coal usage, while the world’s two largest consumers (China and India) have signalled their intention to reduce Figure 6.2: Thermal coal price outlook thermal coal imports by increasing domestic production. Growing demand 180 from South and Southeast Asia should mostly offset declining thermal coal imports elsewhere. Competition from LNG is also expected to weigh on 160 thermal coal demand by encouraging coal-to-gas switching, especially 140 while LNG prices remain near record lows in spot and short-term markets (see gas chapter). 120

The supply-side of seaborne thermal coal markets is expected to remain 100 relatively tight, providing some support to prices. Most thermal coal projects in the investment pipeline are designed to sustain production at 80 existing mines and greenfield expansions are rare. Country-specific factors

2020 US$ a tonne 2020 US$ 60 help to explain the tight supply outlook. Indonesia is aiming to reduce thermal coal exports to preserve its coal reserves for domestic use. 40 Domestic challenges have resulted in underinvestment in Colombia’s 20 thermal coal sector in recent years. 0 Uncertainty over the longer-term demand for thermal coal also appears to 2005 2009 2013 2017 2021 2025 be deterring investment in new mines and infrastructure capacity. Climate policies are the key source of uncertainty. A ratcheting up of current Newcastle 6,000 kcal JFY contract price climate targets, as envisaged in the Paris Agreement, would have Notes: JFY is Japanese Fiscal Year (April to March). implications for thermal coal demand. Under the Paris Agreement, Source: IHS (2020), Department of Industry, Science, Energy and Resources (2020) countries have agreed to submit updated climate targets as part of their

Resources and Energy Quarterly March 2020 49 6.3 World trade The continued shift of thermal coal consumption away from the Atlantic World thermal coal trade continued to climb in 2019, increasing by an Basin market and towards the Pacific Basin should see supply increase estimated 3 per cent to around 1.1 billion tonnes. This was the fourth from Australia, and from producers who can pivot eastward such as consecutive annual increase after the seaborne market contracted in 2015 Russia and South Africa. Exporters in the US and Colombia, which have for the first time this century. Emerging Asia — led by China and India — historically sold into the declining Atlantic market, are expected to face drove imports higher, offsetting lower demand in Europe, Japan, South difficulties securing a foothold in the Pacific market (Figure 6.4). Korea and Taiwan. Figure 6.4: Thermal coal exports

World trade in thermal coal is expected to decline at an average annual 500 rate of around 1 per cent a year between 2019 and 2025. Thermal coal 450 demand should continue to fall in Europe and developed Asia, and rising 400 coal consumers like India and China are seeking to reduce thermal coal 350 imports (Figure 6.3). However, Southeast and South Asia are expected to 300 increase thermal coal imports as coal-fired power stations currently under 250 construction are completed. 200

Figure 6.3: Thermal coal imports Million tonnes 150 250 100 50 200 0 Indonesia Australia Russia Colombia South US Africa 150 2018 2019s 2020f 2021f 2022f 2023z 2024z 2025z

100 Notes: s Estimate f Forecast z Projection

Million tonnes Source: IHS (2020); IEA (2019) Coal Market Report; ABS (2019); Department of Industry, Science, Energy and Resources (2020) 50 6.4 World imports 0 China’s imports to fall driven by government policy China Japan South Taiwan India Other EU28 Korea Asia As the world’s largest thermal coal consumer and importer, China has exerted a profound influence on seaborne markets. After declining 2018 2019s 2020f 2021f 2022f 2023z 2024z 2025z between 2014 and 2016, China’s thermal coal consumption appears to Notes: s Estimate f Forecast z Projection have risen for a third straight year in 2019, driven by growing electricity Source: IHS (2020); IEA (2019) Coal Market Report; Department of Industry, Science, Energy and Resources (2020) demand. China imported an estimated 241 million tonnes of thermal coal

Resources and Energy Quarterly March 2020 50 in 2019, up around 5 per cent on 2018, and domestic output also China’s coal production is expected to increase over the outlook period, increased over this period. increasingly eating into China’s import requirements (Figure 6.6). After several years of supply-side reform, the bulk of China’s capacity closures China’s thermal coal imports are projected to decline gradually to 218 have been completed and approvals for new coal mine capacity surged in million tonnes in 2025, with increases in domestic output slightly outpacing 2019. While the National Development and Reform Commission (NDRC) consumption growth. China’s coal usage is expected to rise over the next has announced a new phase of supply-side reforms, targeting the closure two years, before plateauing. Electricity demand in China continues to of smaller mines with capacity of less than 0.3 million tonnes per annum grow rapidly. While the bulk of new installed capacity is likely to come from (mtpa) and continuing industry consolidation, these are not expected to hydro and renewable generation, coal-fired power generation is also have the same impact on domestic production as previous reforms. expected to rise to meet China’s growing electricity demand. Domestic production will be supported by infrastructure improvements and China has a substantial pipeline of coal-fired power stations, following the expansions, including the 60 mtpa Haoji railway commissioned in October approval of a large amount of new capacity between September 2014 and 2019, which are increasingly connecting domestic supplies with demand March 2016. During this period, China’s central government delegated centres. permitting for coal-fired power stations to provincial authorities, which had strong incentives to approve new coal-fired power stations to meet Figure 6.5: Pipeline of coal-fired power stations in Asia economic targets for their provinces. China currently has over 1,000 GW of coal-fired power generation capacity, and in late 2019 there was a Malaysia further 116 GW under construction or in planning (Figure 6.5). Other data Thailand puts these figures higher, at around 121 GW under construction and a Mongolia further 74 GW at other stages of development, although not all this Taiwan capacity is expected to proceed. Cambodia Pakistan While China’s central government has subsequently acted to rein in the Philippines permitting of new coal-fired capacity and cancellations of projects in the South Korea pipeline have been rising, the current pipeline is enough to support Bangladesh increased coal-fired power generation over the outlook period to 2025. Japan Given the pipeline of coal projects in China, it is possible that the central Vietnam government will raise the coal power cap in the country’s 14th Five Year Indonesia Plan (2021-2025) to be released in 2020. China’s 13th Five-Year Plan India (2016-2020) set a coal power cap of 1,100 GW. State planning bodies China have recommended the cap be lifted to between 1,200-1,400 GW. Increases in coal consumption in power generation are likely to be partly 0 20 40 60 80 100 120 offset by falls in coal consumption in residential, commercial and small- Gigawatts scale industry sectors, as a result of China’s efforts to reduce air pollution. Construction Planned

Source: S&P Global Market Intelligence (2019)

Resources and Energy Quarterly March 2020 51 Chinese policymakers are expected to shape developments on seaborne Chinese policymakers have also sought to use policy measures to keep thermal coal markets over the outlook period to 2025. China’s government domestic thermal coal prices within the ‘green zone’ — a price band of 500 has actively sought to manage coal import levels over the past few years, to 570 Renminbi (RMB) (Figure 6.7). Prices in this range are understood to since its efforts to restructure its domestic coal industry led to Chinese be broadly acceptable to China’s power generators and industrial miners arguing that imports were being favoured over domestic consumers, while also providing high enough margins for domestic coal production. Although no official target was set, China reportedly sought to producers. Thermal coal import policy has been a key tool for stabilising cap total coal imports at around 280 million tonnes in 2019, at times domestic prices in the green zone: China’s government has tended to implementing measures that resulted in extended customs clearance ease import restrictions when domestic prices are high, and tighten times for vessels at Chinese ports. China’s combined (thermal and restrictions when domestic prices are at more acceptable levels. metallurgical) coal imports easily exceeded this quota in 2019, with Figure 6.7: China’s domestic thermal coal price Chinese government data putting total coal imports at 300 million tonnes — 225 million tonnes of thermal and 75 million tonnes of metallurgical 800 coal. Nevertheless, moving forward, similar limits — if more strictly 700 enforced — would limit the scope for import growth. 600 Figure 6.6: China’s thermal coal production and imports 500 4,000 400

3,500 300 RMB a tonneRMB

3,000 200 100 2,500 0 2,000 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 1,500 Qinhuangdao 5500 kcal Green zone Million tonnes

1,000 Notes: Qinhuangdao (QHD) is the largest coal port in China and QHD prices are a key benchmark for coal prices in northeastern China. 500 Source: Bloomberg (2020)

0 The outlook for China’s thermal coal imports remain highly uncertain, with 2005 2009 2013 2017 2021 2025 small swings in domestic production and consumption having a large impact on imports. Policy uncertainty has been — and will continue to be Domestic production Imports — a key risk. China’s coal policies will continue to be driven by the sometimes competing priorities of economic growth and supporting Source: IEA (2019) Coal Information; IEA (2019) Coal 2019; Bloomberg (2020) National Bureau of Statistics of China; Department of Industry, Science, Energy and Resources (2020) domestic production, reducing air pollution and minimising electricity prices, against the backdrop of international climate commitments.

Resources and Energy Quarterly March 2020 52 India’s imports to fall back from highs as production growth resumes production target of 1 billion tonnes by Indian fiscal year (April-March) 2023–24, up from 607 million tonnes in 2018–19. India is the world’s second largest thermal coal importer and consumer. After declining in 2015 and 2016, India’s thermal coal imports recorded Figure 6.8: India’s installed electricity generation capacity and their third consecutive annual increase in 2019, rising by 12 per cent to national electricity plan targets reach an estimated 211 million tonnes — a record high. Higher imports 700 were the result of increasing consumption coupled with a decline in domestic production, on the back of heavy rain in an extended monsoon 600 season. 500

In February 2020, India’s Minister for Coal and Mines announced India 400 would aim to stop importing thermal coal from Indian fiscal year 2023–24. 300 India faces considerable barriers to achieving this goal. In 2014, Indian government officials indicated that India would become self-sufficient in Capacity (GW) 200 thermal coal within 2-3 years, but imports have since climbed. However, 100 the announcement signals a renewed intent to cut thermal coal imports. 0 India’s thermal coal imports are expected to fall from current highs, as 2010–11 2018–19 2026–27* production growth resumes — driven by government targets and policy. Coal Gas Nuclear Hydro Renewables Annual imports should level out in the 185-190 million tonne range over the next five years. Notes: *Target as given in India’s 2018 national electricity plan. Installed capacity is at March each year. Hydro refers to large-scale hydro. Renewables include wind, solar, biomass and mini-hydro. Excludes diesel. India’s coal consumption is expected to grow rapidly over the next five Source: Central Electricity Authority (2020) years, as the country’s electricity demand grows. Under India’s 2018 national electricity plan, renewable generation and hydro account for the Second, the Indian government is looking to increase production by the majority of new capacity, but coal-fired power generation is expected to private sector, and has introduced a number of reforms to encourage grow from 204 GW in November 2019, reaching 217 GW in 2021–22 and private investment. In February 2018, the Indian government changed the 238 GW in 2026–27 (Figure 6.8). Increasing utilisation of existing coal- rules governing coal mine auctions to allow private producers to develop fired stations will also drive thermal coal demand. India has built a large new mines. In August 2019, the Indian government opened up the amount of coal generation capacity in recent years and coal-fired power country’s coal sector to 100 per cent foreign direct investment. Then, in plants in India are running well below capacity. January 2020, the Indian government introduced a raft of reforms that included removing end-use restrictions on coal blocks, allowing captive To meet rising coal demand, India is aiming to increase coal production. producers — private end users such as electricity generators, who The Indian government’s strategy has several elements. The first is to produce their own coal — to sell coal on the open market. India faces boost production by state-owned companies, particularly Coal India — substantial barriers to achieving its production targets, especially around which currently accounts for 85 per cent of production. Coal India has a approvals and land acquisition for new coal projects. While India will likely

Resources and Energy Quarterly March 2020 53 fall short of its production targets, government policy is nevertheless Figure 6.9: Japan and Taiwan’s power generation mix targets expected to propel Indian coal production higher over the next five years.

Overall, the outlook for India’s imports remains finely balanced. With 2017 India’s coal consumption and production both dwarfing import

requirements, small swings in either would exert a huge influence over the Japan trajectory of India’s thermal coal imports. The long-term outlook for India’s 2030 thermal coal imports is discussed in the Office of the Chief Economist’s Coal in India 2019 publication. 2018 Competing trends to leave Japan’s imports broadly unchanged

Japan is the world’s third largest thermal coal importer, importing an Taiwan 2025 estimated 135 million tonnes of thermal coal in 2019. Japan’s thermal coal imports are projected to be broadly unchanged over the next five years. 0 20 40 60 80 100 Per cent Competing trends are at work in Japan. There is around 6 GW of new Coal Gas Nuclear Renewables Other coal-fired coal capacity under construction, and few coal-fired power station retirements are expected before 2025. However, energy demand in Notes: Japanese fiscal years (April-March) 2017-18 and 2030-31. Japan is expected to decline slightly over the next five years, and Japan is Source: Taiwan Bureau of Energy (2019); Ministry of Economy, Trade and Industry (2018) planning to shift its power generation mix towards nuclear and renewable energy, and away from natural gas and coal. The 2011 Fukushima South Korea’s coal imports to decline as energy transition accelerates disaster resulted in the closure of Japan’s nuclear fleet. At the time of South Korea is the world’s fourth largest thermal coal importer, purchasing writing, nine of Japan’s 42 nuclear reactors had gained approval to restart. an estimated 99 million tonnes of thermal coal in 2019. South Korea’s More reactors are likely to come back online over the next five years, with thermal coal imports are projected to fall steadily over the next five years, 18 reactors having submitted applications to Japan’s Nuclear Regulation reaching 87 million tonnes in 2025. Authority to restart. If realised, Japan’s energy plan would see coal’s share South Korea’s long-term plan is to shift its energy mix towards renewables of power generation fall from 33 per cent in Japanese Fiscal Year (April- and gas, and away from nuclear and coal. Under South Korea’s energy March) 2017–18 to 26 per cent in 2030–31 (see Figure 6.9). plan, no new coal-fired power or nuclear capacity will be added, aside from The pace of nuclear restarts is the main uncertainty affecting the outlook that already under construction. for Japan’s thermal coal imports. Nuclear energy in Japan continues to The South Korean government has introduced strong environmental face public opposition and legal challenges. There remain significant risks regulations to improve air quality and reduce emissions. Sixty coal-fired of delays and slippages in nuclear restarts. The outlook for nuclear power stations across the country are limited to operating at 80 per cent generation is further complicated by new counterterrorism measures that capacity when air pollution reaches a certain threshold. Since 2018, older require nuclear reactors to complete additional upgrades to meet the new coal-fired power stations have been closed between March and June each security requirements. year. In late 2019, South Korea stepped up this approach, announcing that

Resources and Energy Quarterly March 2020 54 operations would be suspended at between 8 and 15 plants in the While countries in Southeast and South Asia are relatively small importers December 2019 to February 2020 period. A number of coal-fired power individually, collectively, the region is expected to play a substantial role in plants will close over the outlook period, although this will be offset by the thermal coal markets going forward. The thermal coal imports of Southeast commissioning of new coal generation capacity. and South Asia are expected to increase by 70 million tonnes over the next five years, reaching over 200 million tonnes in 2025 (Figure 6.10). South Korea’s government also introduced new tax arrangements in May Strong economic and population growth is driving robust growth in 2019 aimed at encouraging gas use over coal: it lowered consumption and demand for electricity, and coal-fired power generation is expected to play import taxes on LNG, and raised consumption taxes on coal. a key role in meeting growing usage. Southeast and South Asia’s share of Taiwan’s imports projected to decline under national energy plan world imports is expected to increase from 12 per cent in 2018 to 19 per cent in 2025. Taiwan’s thermal coal imports remained broadly steady in 2019, at an estimated 58 million tonnes. Taiwan’s thermal coal imports are projected In South Asia, Pakistan has recently commissioned a number of new coal- to decline over the outlook period to around 52 million tonnes. Taiwan is fired power stations and has around 2 gigawatts (GW) under construction aiming to shift its power generation mix towards gas and renewables, and and a further 7 GW planned. Bangladesh has around 5 GW under away from nuclear and coal (Figure 6.9). Under Taiwan’s energy plan, construction and a further 15 GW at the planning stage. coal’s share of power generation would fall from 46 per cent at present to Figure 6.10: South and South East Asia thermal coal imports 27 per cent in 2025. At a referendum held in November 2018, Taiwanese voters endorsed the government’s stance that no more coal-fired power 250 plants should be built. However, Taiwan faces challenges in achieving such a rapid energy 200 transition. Taiwan will need to quickly bring on LNG regasification capacity in order to ramp up LNG imports, and project slippage will remain a risk. 150 Taiwan’s energy plan also envisages a 10-fold expansion in solar photovoltaic capacity, but Taiwan is densely populated, and access to land 100 to support the ramp up remains a major challenge. To date, Taiwan’s Million tonnes expansion of offshore wind generation has gone relatively smoothly, with greater government control over offshore development rights. 50

Southeast and South Asia to be a key source of import growth 0 In 2018, Southeast and South Asia imported a combined 129 million 2010 2013 2016 2019 2022 2025 tonnes of thermal coal. The largest importers of thermal coal in Southeast Vietnam Philippines Malaysia Thailand Asia were Malaysia (33 million tonnes), Thailand (25 million tonnes), the Philippines (24 million tonnes) and Vietnam (22 million tonnes). In South Bangladesh Pakistan Other

Asia, Pakistan was the largest thermal coal buyer (14 million tonnes), Source: IEA (2019) Coal Market Report; IEA (2019) Coal Information; Department of followed by Bangladesh (3 million tonnes). Industry, Science, Energy and Resources (2020)

Resources and Energy Quarterly March 2020 55 In Southeast Asia, around 12 GW of new coal-based generation capacity are obliged to sell at least 25 per cent of production into the domestic is under construction in key importing countries, with another 46 GW at the market at capped prices. With constrained production and supply being planning stage. Vietnam is expected to be a key driver of import demand increasingly diverted to the domestic market, Indonesia’s thermal coal growth. Under Vietnam’s Power Development Plan, coal-fired power would exports are projected to fall to about 394 million tonnes by 2025. account for 49 per cent of the country’s generation capacity by 2025. South Africa to seek out new markets and increase exports Around 7 GW of coal-fired power capacity is under construction, with 34 GW at the planning stage. However, there are downside risks to the South Africa exported an estimated 77 million tonnes of thermal coal in outlook, with the country’s National Steering Committee for Power 2019. South Africa’s thermal coal exports are projected to rise over the Developing reportedly recommending that the Vietnamese government next five years, reaching 92 million tonnes in 2025, as several new mines scale back the target for coal-fired power to 37 per cent in 2025. commence operations. South Africa is expected to increase its exports to India, and increasingly target other Asian markets — such as Pakistan and Overall, while project cancellations appear to have been rising in recent South Korea — as European coal consumption declines. A modest decline years, the completion of coal-fired power stations currently under in domestic consumption should also help free up thermal coal for export. construction is expected to drive the region’s demand for thermal coal In October 2019, the South African government approved the National imports higher over the next five years (Figure 6.10). Development Plan, which foresees coal-fired power generation capacity 6.5 World exports falling from 37 GW at present to 33 GW by 2030. Indonesia’s exports to decline as coal is directed to the domestic market Russia’s exports forecast to grow on the back of recent investment Indonesia is the world’s largest thermal coal exporter. In 2019, Indonesia’s Russia’s thermal coal exports increased for the fourth consecutive year in exports grew by 7 per cent to an estimated 466 million tonnes — a record 2019, up by around 5 per cent to a record high of an estimated 181 million high. Coal production reached around 610 million tonnes, exceeding the tonnes. Russia has been investing heavily in transportation infrastructure government’s coal production target of 550 million tonnes. The Indonesian to the country’s eastern ports — targeting the Asian premium market, government is targeting an output cap of 550 million tonnes for 2020. where Japan’s utilities are diversifying their sources of supply, and South Whether this target can be achieved remains to be seen, with output Korea’s new regulations are increasing demand for Russia’s low sulphur having exceeded the target for the past few years. Indonesian producers coal. The low Russian ruble has also helped Russian coal miners. tend to be responsive to price rises, and the government has sometimes Russia’s thermal coal exports are expected to reach 192 million tonnes by relaxed output restrictions at times of high prices to help ease the current 2025. Export growth will be supported by ongoing government plans to account deficit. invest in the coal industry and in rail and port infrastructure. Russia’s Even if targets are not fully achieved, however, government policy should Ministry of Energy has announced plans to expand its total coal production drive Indonesia’s thermal coal exports lower over the next five years. The (metallurgical and thermal) from around 420 mtpa to 480 mtpa by 2030. Indonesian government is expected to limit annual production at lower US exports to decline due to cost and infrastructure challenges levels over the outlook period, in order to safeguard coal reserves for future use. The government is also expected to continue to increase the Falling prices saw US thermal coal exports fall sharply in 2019, to an Domestic Market Obligation (DMO), under which Indonesian producers estimated 34 million tonnes — down around 30 per cent on the previous

Resources and Energy Quarterly March 2020 56 year. The US is a price-sensitive swing supplier in the seaborne thermal increase production to 27 mtpa. Glencore’s Rolleston mine in the Bowen coal market, with most US producers considered high cost. A strong US Basin in Queensland — which produced around 16 million tonnes in 2018– dollar, falling demand in Europe (traditionally the destination for US coal), 19 — has approval to scale up production to 19 mtpa. New Hope’s New and a lack of infrastructure on the US west coast (near Asian markets) Acland mine in the Darling Downs region in Queensland has applied for have added to the difficulties facing US producers. These challenges are approval for an expansion that would see the mine’s capacity increased to expected to result in US thermal coal exports declining from current levels 7.5 mtpa. MACH Energy’s Mount Pleasant mine in New South Wales to reach 20 million tonnes in 2025. appears to be rapidly ramping up to full capacity of 7.5 mtpa. Overall, while some Australian mines may not reach their full approved capacity, at least Colombia’s thermal coal exports to remain stable within the outlook period, increased output from a number of established Colombia’s thermal coal exports declined from 80 million tonnes in 2018 to mines with relatively low production costs does appear likely. 75 million tonnes in 2019. Exports are projected to rebound slightly and Increases in output from new and established mines are expected to be then remain stable at around 80 million tonnes. A lack of investment in partly offset by the closure of several mines over the outlook period due to Colombia’s coal sector in recent years and falling coal consumption in resource depletion. The forecast for relatively low thermal coal prices Europe — where Colombian producers have historically sold their coal — presents a downside risk for higher cost mines. Yancoal has announced it are expected to limit the export growth. Most of Colombia’s coal mines are will place its Austar underground mine in New South Wales on care and on the Caribbean coast, and its producers face high shipping costs to maintenance from 31 March 2020 as the current mining area reaches growing demand centres in Asia. completion. 6.6 Australia Figure 6.11: Australia’s thermal coal exports Thermal coal exports earnings are expected to decline 250 30 The value of Australia’s thermal coal exports is projected to decline from $26 billion in 2018–19 to $21 billion (in real terms) in 2019–20, as a result 200 24 of price falls over the past year. Export earnings are then forecast to edge down and stabilise in the $17-20 billion range in 2020–21 and over the remainder of the outlook period (Figure 6.11). Australia’s thermal coal 150 18 export volumes are forecast to grow from 210 million tonnes in 2018–19 to

224 million tonnes in 2024–25. The continued shift in coal trade towards 100 12 20 A$ billion the Asia-Pacific should favour Australian producers, as well as exporters Million tonnes that can pivot eastward such as South Africa and Russia. 50 6 2019 – Increased Australian exports are expected to be driven by the ramp up of production at both new and existing thermal coal mines. Adani Group’s 0 0 10–15 mtpa Carmichael coal mine is expected to produce first coal in 2008–09 2012–13 2015–16 2018–19 2021–22 2024–25 Volumes Values (rhs) 2021. BHP’s Mount Arthur mine in the Hunter Valley in New South Wales — which produced 18 million tonnes in 2018–19 — has approval to Source: ABS (2020); Department of Industry, Science, Energy and Resources (2020).

Resources and Energy Quarterly March 2020 57 Table 6.1: World trade in thermal coal

Unit 2019s 2020f 2021f 2022f 2023z 2024z 2025z CAGRr

World trade Mt 1,143 1,124 1,117 1,124 1,123 1,108 1,092 -0.8

Thermal coal imports

Asia Mt 908 909 898 906 910 899 888 -0.4

China Mt 241 240 240 239 238 230 218 -1.7

India Mt 211 202 185 188 190 186 185 -2.2

Japan Mt 135 128 131 134 135 134 133 -0.2

South Korea Mt 99 98 97 95 92 89 87 -2.2

Thermal coal exports

Indonesia Mt 466 438 422 423 418 407 394 -2.8

Australia Mt 212 218 224 225 223 224 224 0.9

Russia Mt 181 184 191 190 190 190 192 1.0

Colombia Mt 75 80 80 80 80 80 80 1.1

South Africa Mt 77 80 82 85 91 92 92 2.9 United States Mt 34 30 25 24 24 20 20 -8.6

Notes: s Estimate; f Forecast; z Projection; r Compound average annual growth rate between 2019 and 2025. Source: IEA (2019) Coal Information 2019; IEA (2019) Coal 2019; IHS (2020); Department of Industry, Science, Energy and Resources (2020)

Resources and Energy Quarterly March 2020 58 Table 6.2: Thermal coal outlook

World Unit 2019 2020f 2021f 2022f 2023z 2024z 2025z CAGRr

Contract pricesb

– nominal US$/t 95 70 71 78 84 81 76 -3.6

– realc US$/t 95 69 68 73 77 72 67 -5.7

Spot pricesd

– nominal US$/t 74 65 66 72 77 75 70 -0.9

– reale US$/t 76 65 64 69 72 68 63 -3.1

Australia Unit 2018–19 2019–20f 2020–21f 2021–22f 2022–23z 2023–24z 2024–25z CAGRr

Production Mt 272 274 284 288 287 286 286 0.8

Export volume Mt 210 218 222 225 224 224 224 1.1

– nominal value A$m 25,958 20,713 17,986 19,306 21,250 21,811 20,453 -3.9

– real valueh A$m 26,446 20,713 17,637 18,534 19,921 19,948 18,241 -6.0

Notes: b Japanese Fiscal Year (JFY), starting April 1, fob Australia basis. Australia–Japan average contract price assessment for steaming coal with a calorific value of 6,700 kcal/kg gross air dried; c In current JFY US dollars; d fob Newcastle 6,000 kcal net as received; e In 2020 US dollars; f Forecast; h In 2019–20 Australian dollars; r Compound annual growth rate from 2019 to 2025, and 2018–19 to 2024–25. Source: ABS (2020) International Trade in Goods and Services, Australia, Cat. No. 5368.0; IHS (2020); NSW Coal Services (2020); Queensland Department of Natural Resources and Mines (2020); Company Reports; Department of Industry, Science, Energy and Resources (2020)

Resources and Energy Quarterly March 2020 59

7.1 Summary (A$5.10/GJ) in 2020. This forecast is sensitive to how quickly China’s . Australian LNG export prices are expected to decline in economic activity recovers from the impacts of COVID-19 (see the 2020, before gradually rising then falling again, tracking oil price-linked macroeconomic outlook chapter). While Asian LNG spot prices are contract prices (at which most Australian LNG is sold). Asian LNG spot forecast to recover from the current record lows, ongoing overcapacity in prices are forecast to recover from current record lows as the market global LNG markets is expected to constrain the extent of any price rebalances, before declining as a new wave of LNG projects ramp up. recovery over the next two years. . Australia’s LNG export volumes are forecast to rise from 75 million After 2021, rising demand is expected to gradually close the gap on tonnes in 2018–19 to 81 million tonnes in 2020–21, as the last two expanding global production capacity and support a rise in the Asian LNG projects in Australia’s recent wave of LNG investment ramp up, before spot price. LNG spot prices are expected to increase to US$6.30 per edging back down to 80 million tonnes by 2024–25. MMbtu (A$8.30/GJ) in real terms in 2023, reflecting a tighter global . The real value of Australia’s LNG exports is forecast to decline from market. In the final years of the outlook period, a new wave of LNG $51 billion in 2018–19 to $49 billion in 2019–20 and $44 billion in projects is expected to drive growth in LNG capacity (see Section 7.3). A 2020–21, and remain in the $44 to $47 billion range to 2024–25. surge in global LNG supply is expected to drive Asian LNG spot prices lower to US$4.70 per MMbtu (A$6.20/GJ) in real terms by 2025. 7.2 Prices Asian LNG spot prices expected to recover from current record lows Figure 7.1: LNG prices, quarterly A range of factors have continued to place downward pressure on Asian 15 90 LNG spot prices. Global LNG capacity has rapidly expanded over the last two years, with projects ramping up in Australia, the US and Russia. At the 12 72 same time, demand growth has been slowing from the traditional Asian buyers. Weak demand has been further exacerbated by a warmer-than- 9 54 usual northern hemisphere winter, and the impacts of COVID-19 in China. 6 36 COVID-19 has reduced gas demand in China, with LNG imports more

3 18 a barrel 2020 US$ heavily affected than domestic gas production and pipeline imports. There per MMbtu 2020 US$ were reports of some LNG cargoes destined for China being diverted, and some Chinese LNG buyers issuing force majeure notices to LNG suppliers 0 0 Mar-15 Mar-17 Mar-19 Mar-21 Mar-23 Mar-25 (although some these were reportedly rejected), driving Asian LNG spot Asian LNG spot price Indicative oil-linked contract price prices to a new record low of US$2.68 per MMbtu in mid-February. Brent crude oil (rhs)

The Asian LNG spot price averaged US$3.94 per MMbtu (A$5.47/GJ) in Notes: The Argus Northeast Asian spot price is shown. LNG prices are DES (Delivered Ex Ship). DES prices include shipping and insurance. The long-term oil-linked contract price is the first two months of 2020, 31 per cent lower from the December 2019 indicative only, and is estimated at 14 per cent of the 3-month lagged Japan Customs-cleared quarter and 47 per cent lower year-on-year. Asian LNG spot prices are crude oil price plus shipping. forecast to remain low over the first half of 2020, before lifting in the Source: Argus (2020); Bloomberg (2020); Department of Industry, Science, Energy and Resources (2020) second half of the year (Figure 7.1), and average US$3.70 per MMbtu

Resources and Energy Quarterly March 2020 61 Asian LNG contract prices are forecast to decline 7.3 World trade Most LNG traded in Asia is sold on long-term contracts (70 per cent in LNG trade has grown rapidly over the last few years, as the wave of 2018). These contracts link the price of LNG to the price of oil (commonly projects commissioned between 2009 and 2015 have come online. In the Japan customs-cleared crude, or JCC) with a time lag of several 2019, LNG trade totalled an estimated 348 million tonnes, an increase of months. Figure 7.1 shows how the indicative oil-linked contract price has 38 million tonnes, or 12 per cent, from 2018. Growth in global LNG supply followed oil prices lower over the last six months. LNG contract prices are capacity (of around 40 mtpa) has rapidly outpaced demand growth, and likely to fall further in 2020, reflecting the impacts of COVID-19 on oil the supply glut will likely persist in the short-term. prices (see the oil chapter). In 2021, the global LNG market is expected to begin rebalancing, as After 2020, LNG contract prices in Asia are forecast to gradually rise and demand growth absorbs new supply. Growth in supply capacity is then fall, tracking the projected movements in oil prices. If the large expected to slow dramatically, while demand is expected to grow rapidly, differential between spot and long-term contract prices persists, contract driven by China and emerging Asia (Figure 7.3). prices may come under downward pressure. Buyers are reportedly Growth in global LNG capacity is expected to begin accelerating in the pushing to have contract prices lowered during the periodic price reviews final two years of the outlook period as a new wave of LNG projects come that are built into long-term supply agreements, reducing purchases on online. Global LNG trade is projected to reach the 460 million tonne mark long-term contracts and increasing spot cargo purchases where their by 2025, a third higher than current levels. contract permits. In the longer term as contracts expire, low spot prices relative to oil-linked prices may encourage buyers to push for shorter, Figure 7.3: Annual change in LNG demand and world supply capacity more flexible, or more favourably-priced contracts. The average oil-linked 80 contract slope has been trending down over time (Figure 7.2). 60 Figure 7.2: Oil-linked contract slopes by signing year 18 40

16 20

14 0 Million tonnes 12 -20

Slope (per cent) (per Slope 10 -40 2015 2017 2019 2021 2023 2025 8 2008 2010 2012 2014 2016 2018 2020 Japan South Korea China Emerging Asia Europe Rest of world Contract signing year World supply capacity Oil-linked contract slope Linear trend Notes: 2019 data is an estimate. Shaded areas indicate the years where oversupply is Notes: The oil-linked contract slope measures the extent to which the LNG contract price expected during the outlook period, i.e. where the annual growth in LNG supply capacity is changes with respect to oil price changes. Only shows contracts where data is available. greater than the annual growth in demand. Source: BloombergNEF (2018) Global LNG contracts database; Nexant (2020) World Gas Source: Department of Industry, Science, Energy and Resources (2020); Nexant (2020) Model World Gas Model

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7.4 World imports Figure 7.4: LNG import projections Japan’s LNG imports to receive a temporary boost, before falling 140 Japan imported an estimated 75 million tonnes of LNG in 2019, a decline 120 of 7.5 per cent from 2018 due to the ongoing return of nuclear power 100 generation, and relatively mild winter and summer seasons — reducing energy demand for heating and cooling. 80 Japan’s LNG imports are forecast to increase to 77 million tonnes in 2020, 60 supported by the temporary closure of nuclear reactors to complete Million tonnes 40 security upgrades (see below). Japan’s LNG imports are then forecast to 20 ease back to 72 million tonnes by 2025 (Figure 7.4), and Japan is expected to lose its title as the world’s largest buyer of LNG (held since the 0 1970s) to China by 2022. Overall Japanese energy demand is expected to Japan South China Emerging Europe Rest of Korea Asia (ex world fall slightly, due to subdued economic growth, a declining population and China) improvements in energy efficiency. The share of gas in energy usage is also expected to decline, as nuclear and renewable power sources take 2019 2025 market share in the electricity generation sector in Japan. Notes: 2019 data is an estimate. Source: Nexant (2020) World Gas Model; Department of Industry, Science, Energy and The shrinking role for gas in Japan’s energy mix is reflected in the Resources (2020) country’s 10 year energy plan. The share of gas in Japan’s primary energy Figure 7.5: Japan’s future energy mix mix is expected to fall from 23 per cent in the 2017 Japanese fiscal year (JFY, April to March) to 18 per cent in JFY 2030 (Figure 7.5). The share of 100 gas in electricity generation is expected to fall from 40 per cent to 27 per 80 cent over the same period. 60 The major uncertainty in the outlook for Japan’s LNG imports will be the pace of nuclear restarts, and the potential for additional nuclear power 40 Per cent plant shutdowns. At the time of writing, nine of Japan’s 42 nuclear reactors had gained approval to restart, and seven were in operation. Another 18 20 reactors have applications to restart with the Nuclear Regulation Authority, 0 and further nuclear restarts appear likely over the next five years. 2017 2030 2017 2030 However, there is no firm schedule for restarts, and there are significant Primary energy mix Electricity generation risks of delays. The outlook for nuclear generation is further complicated by counterterrorism security measures. At least four nuclear reactors will Gas Coal Nuclear Oil LPG Renewables be offline in 2020 to complete the upgrades to meet the new security Notes: Japanese fiscal years (April to March) 2017–18 and 2030–31 requirements, which will likely provide a short-term boost to LNG demand. Source: Japan Agency for Natural Resources and Energy (2019)

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China’s LNG imports expected to grow, but at a slower pace China’s pipeline gas imports were largely flat in 2019, at 49 bcm, but China — currently the world’s second largest buyer of LNG — imported an pipeline imports are expected to rise over the next few years. Russia’s estimated 60 million tonnes of LNG in 2019, an increase of 18 per cent Power of Siberia pipeline to north-eastern China opened on 2 December from 2018. The pace of growth has slowed considerably from previous 2019, and is expected to ramp up towards full capacity of 38 bcm by 2025. years, due to both weaker economic growth and the relaxation of policies The Central Asia-China gas pipeline expansion, which would add 30 bcm to encourage coal-to-gas switching. to the existing 55 bcm of annual capacity, has faced ongoing delays and appears unlikely to proceed in the short to medium term. If the expansion The start of 2020 saw a decline in China’s imports of LNG of an estimated proceeds, this may reduce the need for LNG imports in the future. 7.1 per cent year-on-year in February. The impacts of COVID-19 have resulted in reduced gas demand in China’s power and industrial sectors, Figure 7.6: China’s gas consumption by source with LNG more heavily affected than pipeline imports and domestic 500 production. LNG cargoes have been delayed and diverted amidst rising inventories — already high due to a mild winter — and transportation 400 bottlenecks, the latter due to road blocks and reduced trucking capacity. 300 The impacts of COVID-19 may make it harder for China to meet the terms 200 of the recent US-China Phase One trade deal (see Box 7.1). 100

Despite these short-term setbacks, China’s LNG imports are projected to metres cubic Billion rise to 99 million tonnes by 2025 (Figure 7.4), overtaking Japan as the 0 world’s largest importer of LNG by 2022. LNG accounted for around 27 per 2005 2010 2015 2020 2025 Production Net pipeline imports cent of China’s gas consumption in 2019, and is expected to continue to LNG Imports Consumption play a major role in meeting China’s rapidly rising needs for gas. Growth in Source: Nexant (2020) World Gas Model, Department of Industry, Science, Energy and gas demand is expected to be driven by government policies to reduce air Resources (2020) pollution and raise the share of gas in the overall energy mix, up from 7 South Korea’s LNG imports projected to rise per cent in 2018. The role of gas in China’s energy mix will reportedly be a key theme in China’s 14th Five Year Plan, which will be released later this South Korea imported an estimated 35 million tonnes of LNG in 2019, a year. decrease of 14 per cent from 2018, driven by temporary factors. These factors include the return of nuclear generation capacity, after reactors China’s gas demand will also be met by growth in domestic gas production were offline in 2018, and milder winter and summer seasons relative to (57 per cent of gas consumption in 2019) and pipeline imports (16 per cent 2018, reducing energy demand. South Korea’s LNG imports are projected of gas consumption in 2019) (Figure 7.6). China produced 175 bcm of gas to rise over the outlook period to reach 43 million tonnes by 2025, driven in 2019, an increase of 10 per cent from 2018. Domestic gas production by supportive government policies. In 2019, the South Korean government will need to increase by 18 per cent this year in order for the country to lowered consumption and import taxes on LNG and raised consumption meet the 2020 production target of 207 bcm. China faces difficulties — taxes on coal. The South Korean government’s third Basic Energy Plan such as challenging geological conditions — in raising domestic output, envisages gas demand growing by 51 per cent between 2017 and 2040, and there is significant uncertainty over whether the target will be met. as coal and nuclear in power generation is phased out.

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LNG to play a larger role in Taiwan’s energy mix India is expected to account for a large share of the growth in emerging Taiwan imported an estimated 16 million tonnes of LNG in 2019, an Asian demand, with LNG imports forecast to almost double from 23 million increase of 7.3 per cent from 2018. Taiwan’s LNG imports are projected to tonnes in 2019 to 40 million tonnes in 2025. The Indian government is increase to 22 million tonnes by 2025. Taiwan’s energy plan envisages the aiming to lift the share of gas in its energy mix from around 6 per cent share of gas in the energy mix rising from 34 per cent to 50 per cent by currently to 15 per cent by 2030, although the target is considered 2025. To support this growth, 6 mtpa of LNG import capacity is expected ambitious. The precise scale of growth in India’s LNG imports over the to be added to existing capacity of 16.5 mtpa. However, there is some next five years is subject to uncertainty, and depends on the pace of uncertainty about achieving this target, given the history of significant infrastructure development and the progress of policy reforms, which will delays to major infrastructure projects in Taiwan. impact on the domestic gas production and consumption balance. While India’s domestic gas production is projected to grow, it is not expected to Emerging Asia will be a key driver of LNG demand growth keep pace with demand; the country’s gas sector is constrained by a Outside of the traditional LNG buyers in Asia, emerging Asian economies range of challenges. are expected to make a substantial contribution to growing global LNG Growth in gas demand in other emerging Asian economies is expected to demand over the outlook period (Figure 7.7). These countries include be largely driven by the power sector. While some of these countries have already established buyers — such as India, Pakistan, Bangladesh and domestic gas reserves, production is either in decline or not keeping pace Thailand — and new markets — such as Sri Lanka, Vietnam and the with consumption growth. As a result, LNG imports are projected to rise to Philippines. While these countries are relatively small importers of LNG fill this gap. Key risks to the outlook relate to infrastructure constraints, individually, collectively they are expected to account for a significant uncertainties regarding the profile of domestic gas production in some share of global LNG demand, and are expected to import 121 million countries (notably in Thailand and Vietnam), and competition from cheaper tonnes of LNG by 2025, making the collective region the world’s second coal and renewables. largest importer of LNG by 2025. Figure 7.7: Projected LNG demand from emerging Asia Europe’s LNG imports projected to decline from record highs Europe imported an estimated 86 million tonnes of LNG in 2019, a record 140 high, and 69 per cent higher than 2018 volumes. Europe — known as the 120 ‘destination of last resort’ for LNG due to its extensive storage capacity — 100 absorbed a large share of the increase in global LNG production in 2019. 80 However both storage capacity and opportunities for coal-to-gas switching 60 are beginning to be stretched. Europe’s LNG imports are projected to

Million tonnes 40 decline from current levels over the outlook period. European gas 20 consumption is expected to remain relatively flat, and LNG imports are 0 expected to face increasing competition from pipeline gas, offsetting the 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 impacts of declining European gas production. The Nord Stream II gas India Pakistan Bangladesh Thailand Malaysia Other emerging Asia pipeline, with a capacity of 55 bcmpa (40 mtpa), is expected to commence Source: Nexant (2020) World Gas Model, Department of Industry, Science, Energy and operations by late 2020 or early 2021. Resources (2020)

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7.5 World exports Figure 7.8: Annual change in LNG supply capacity and demand The current wave of LNG capacity additions is drawing to a close 60 The rapid expansion in global LNG supply capacity seen over the last few 50 years is expected to continue in 2020 — although at a slower pace — 40 driven by the continued ramp up of new operations in the US, Australia and Russia. Growth in global LNG capacity is set to slow dramatically in 30 2021 as these projects finish ramping up (Figure 7.8). 20

A new wave of LNG projects is on the horizon Million tonnes 10 Growth in global LNG capacity is expected to begin accelerating again in 0 the final years of the outlook period. A record 71 million tonnes of new -10 capacity was approved in 2019, reflecting confidence about long-term LNG 2013 2015 2017 2019 2021 2023 2025 demand growth. Most projects that received final investment decisions Australia North America (FIDs) in 2018 and 2019 are scheduled to come online in 2024 and 2025, Middle East Africa South East Asia Rest of the world driving a new wave of capacity additions. This second expansion in global World demand LNG capacity is expected to outpace growth in demand, and lead to a fall Notes: Nameplate capacity is the theoretical maximum annual production capacity of an LNG in the average capacity utilisation rate of LNG operations. plant. 2019 data is an estimate. Source: Department of Industry, Science, Energy and Resources (2020); Nexant (2020) At the time of writing, there was around 143 million tonnes of LNG capacity World Gas Model that could come online by 2025, including projects currently under construction and pre-FID projects. The list of potential projects is Figure 7.9: LNG export projections dominated by the US, with a number of projects also being considered 100 elsewhere around the world, discussed in further detail below. 90 80 Some project FIDs scheduled for 2019 were delayed, and postponements 70 could persist in 2020. While the US-China Phase One trade deal may 60 encourage more FIDs for US projects this year, the impacts of COVID-19 50 could further stall negotiations for projects in the US and elsewhere. 40

Buyers are also reportedly reluctant to commit to long-term agreements Million tonnes 30 20 against a backdrop of record low spot prices and the global supply glut. 10 The US is expected to be a key source of LNG export growth 0 Australia Qatar United Russia South Africa Rest of US exports surged by 47 per cent to 34 million tonnes in 2019, States East Asia world underpinned by the ramp up of new LNG projects. Three new liquefaction 2019 2025 facilities commissioned their first trains in 2019, and production is Source: Department of Industry, Science, Energy and Resources (2020); Nexant (2020) expected to continue to ramp up in 2020 and 2021. World Gas Model

Resources and Energy Quarterly March 2020 66 Towards the end of the outlook period, US LNG exports are projected to Box 7.1: US-China trade deal: Implications for Australian LNG reach 90 million tonnes — which will likely make the US the world’s largest On 15 January 2020, the US and China signed a Phase One trade deal, LNG exporter (Figure 7.9) — as the second wave of LNG projects begin to which included a commitment from China to purchase US$52 billion of ramp up. Two new LNG projects reached FID in 2019, including the 16.5 energy products from the US in 2020 and 2021 (see Box 1.2). While LNG mtpa Golden Pass LNG project. All US LNG projects currently under could contribute to this target, substantial uncertainty remains around the construction are expected to be completed by 2025. extent to which US LNG exports to China — which have halted since April Qatar’s LNG exports expected to grow 2019 — could rise. At the time of writing, the impacts of COVID-19 had resulted in weaker Chinese demand for LNG, which further complicates Qatar exported an estimated 75 million tonnes of LNG in 2019, making it understanding of how China could meet the terms of the deal. the world’s second largest exporter after Australia. In the short term, Qatar’s LNG exports are projected to remain steady at around 75 million The 25 per cent tariff (increased from 10 per cent in June 2019) on US tonnes, before beginning to grow from 2024 onwards. In November 2019, LNG imports to China remains in place, reducing the competitiveness of Qatar Petroleum announced plans to construct another two LNG ‘mega US LNG relative to other sources. However, the impacts of the tariff could trains’, which is expected to boost exports to 85 million tonnes by 2025. be softened by an announcement by Chinese authorities in February that Beyond the outlook period, the planned expansion could increase LNG firms will be able to apply for tariff exemptions, subject to approval. production capacity by 64 per cent to 126 million tonnes by 2027. The impact of the trade deal on Australian LNG is tempered by the Russia to increase its share of global LNG exports long-term LNG contracts between Australia and China (Table 7.1). An Russia exported an estimated 29 million tonnes of LNG in 2019, more than estimated 70 per cent of Australian LNG exports to China are sold on double the previous year, reflecting growth from the Yamal LNG project long-term contracts, leaving about 30 per cent of Australia’s LNG exports which reached full capacity at the end of 2018. Russia’s LNG exports are to China potentially impacted. This equates to around 8 million tonnes projected to reach 37 million tonnes by 2025. The first train of the 19.8 based on 2019 exports, or 10 per cent of Australia’s total LNG exports, mtpa Arctic LNG 2 project is expected to start by 2023, with the second much of which could be redirected to other destinations. In short, while the and third train to start up by 2024 and 2026, respectively. trade deal could result in greater competition, the direct impact on Australian LNG exports will likely be relatively contained in the short to There is a strong pipeline of projects elsewhere in the world medium term. Several LNG projects elsewhere in the world are also expected to contribute to the expansion of global LNG capacity. Petronas FLNG 2 in Table 7.1: Australia-China long-term LNG contracts Malaysia and Tangguh LNG Train 3 in Indonesia are scheduled to start Project Buyer Volume Start End operations by the end of this year, and in 2022, Coral South FLNG and Tortue FLNG in Africa are scheduled to start. The Nigeria LNG expansion NWS T1-T5 PetroChina 3.30 mtpa 2005 2030 was approved in 2019, which is expected to start by 2025, and an FID is Gorgon LNG PetroChina 2.25 mtpa 2016 2036 expected for the Rovuma LNG project in Mozambique this year. Other Australian Pacific LNG Sinopec 7.60 mtpa 2016 2036 LNG projects in Africa face challenges relating to financing and cost- Queensland Curtis LNG CNOOC 3.60 mtpa 2014 2034 competitiveness, and are not expected to materialise in the short-term. Source: Petroleum Economist (2018), GIIGNL (2019)

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7.6 Australia Figure 7.10: Australia’s LNG exports and export capacity Australia’s LNG capacity expansion is coming to an end 100 A wave of LNG investment in Australia saw over US$200 billion invested 80 in seven new LNG projects, which were commissioned between 2009 and 2012. The ramp up of these projects has seen Australia’s LNG exports 60 earnings reach $49 billion in 2019, and export volumes reach 77 million tonnes (Figure 7.10), making Australia the world’s largest LNG exporter in 40

2019. Million tonnes 20 Australia’s LNG export volumes to begin edging down after 2020–21 Prelude and Ichthys are the last two remaining projects that are ramping 0 up production following the wave of LNG investment. The Prelude project 2010–11 2013–14 2016–17 2019–20 2022–23 — which shipped its first LNG cargo in June 2019 — is expected to ramp Existing Capacity additions Export volume up over the course of 2019–20. Ichthys has ramped up faster than Source: ABS (2020); Department of Industry, Science, Energy and Resources (2020) expected, and is already producing at close to full capacity. Australia’s LNG exports are expected reach 81 million tonnes in 2020-21, There is upside potential for Australia’s LNG exports in the medium term before edging down towards 79 million tonnes by 2022–23 (Figure 7.10). There are a number of projects in the pipeline that could see Australia’s Production at the Darwin LNG plant is expected to halt after 2021, as gas LNG export capacity rise towards the end of the outlook period and from the Bayu-Undan field is exhausted. The Darwin operation will require beyond (Table 7.2). backfill from the Barossa project to continue production, although infill An FID is expected in 2020 for the Pluto LNG expansion project, with first drilling at Bayu-Undan may extend its lifespan and narrow the time production targeted for 2024. Building an additional train at the Pluto LNG between its closure and the start-up of the Barossa backfill project. An FID plant forms part of Woodside’s plans to develop the Scarborough gas field is expected for the Barossa project in the June quarter 2020, with first gas in the Carnavon Basin, connecting the offshore resource to the Pluto LNG expected in 2023. plant via a 430 kilometre pipeline. The expansion of Pluto LNG is expected Production at the North West Shelf project is also likely to decline from to offset the impacts of the halt in production at the North West Shelf around 2022 onwards. The development of Equus — which is on track for operation and enable a rise in Australian LNG export volumes to 80 million first gas by 2024 — is a potential source of gas for the North West Shelf tonnes in 2024–25. project. However, due to timing issues, it is likely that there will be fall in The Beetaloo sub-basin, a substantial shale gas resource in the Northern production for a period of time. In the longer term, backfill resources for the Territory, represents a longer-term opportunity for Australia. However, North West Shelf project will likely come from the Browse Basin project given exploration is only just commencing, it remains uncertain what fields of Calliance, Torosa and Brecknock. The FID for the Browse Basin proportion of the resource will be technologically and economically viable project has been delayed from late 2020 to late 2021, with first production to extract. targeted for 2026.

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Australia’s LNG export earnings projected to decline from record highs Figure 7.11: Australia’s LNG exports Australia exported $51 billion of LNG in 2018–19 in real terms, up from 90 54 $32 billion in 2017–18. Higher export earnings were driven by a recovery 80 48 in oil prices relative to 2017–18, and growing export volumes, particularly 70 42 from the Ichthys and Wheatstone (which began producing at full capacity in the second half of 2018) LNG projects. 60 36 50 30 The value of Australia’s LNG exports is forecast to decline to $49 billion in 20 $billion 2019–20 and fall back further to $44 billion in 2020–21, in real terms, 40 24 driven by declining oil-linked contract prices (at which most Australian LNG Million tonnes 30 18 2019 – is sold). 20 12 Australia’s LNG export earnings are projected to remain in the $44 to $47 10 6 billion range, in real terms, over the remainder of the outlook period to 0 0 2024–25 (Figure 7.11). The impacts of declining gas production from the 2004-05 2009-10 2014-15 2019-20 2024-25 North West Shelf and Darwin projects are expected to be offset by a Volumes Values (rhs) modest uptick in oil-linked contract prices between 2021 and 2023, and the ramp up of the Pluto expansion in the final year of the outlook period. Source: ABS (2020); Department of Industry, Science, Energy and Resources (2020)

Table 7.2: Selected Australian LNG projects

Project Companies State Type Capacity Potential start date

Scarborough and Pluto Train 2 Woodside, Kansai Electric, Tokyo Gas, BHP WA Expansion 5 mtpa 2024 Barossa backfill to Darwin LNG ConocoPhillips, Santos, SK, ENI, Inpex, Tokyo Electric NT Sustaining n/a 2024+ Power, Tokyo Gas Crux backfill to Prelude FLNG Shell, Nexus Energy, Osaka Gas WA Sustaining n/a 2024+ Browse to North West Shelf Woodside, BP, PetroChina, Shell, Japan Australia LNG WA Sustaining n/a 2026+ Cash Maple Development PTTEP Australasia WA New project 2 mtpa 2026+ Gorgon (Train 4) Chevron, Shell, ExxonMobil WA Expansion 5.2 mtpa 2026+ Notes: mtpa is million tonnes per annum. Source: Department of Industry, Science, Energy and Resources (2019) Resources and Energy Major Projects, December 2019 Resources and Energy Quarterly

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Table 7.3: Gas outlook World Unit 2019 2020f 2021f 2022z 2023z 2024z 2025z CAGRr JCC oil pricea – nominal US$/bbl 66.4 57.1 63.9 67.6 70.8 70.6 69.5 0.8 – realh US$/bbl 67.9 57.1 62.6 64.7 66.2 64.6 62.1 -1.5 Asian LNG spot price g – nominal US$/MMbtu 5.4 3.7 4.8 5.6 6.8 6.1 5.3 -0.4 – realh US$/MMbtu 5.6 3.7 4.7 5.4 6.3 5.6 4.7 -2.6 Gas productions Bcm 4,041 4,116 4,196 4,292 4,394 4,481 4,550 2.0 Gas consumptions Bcm 4,059 4,131 4,210 4,300 4,392 4,491 4,593 2.1 LNG tradeds Mt 348 370 387 400 414 429 460 4.8

Australia Unit 2018–19 2019–20f 2020–21f 2021–22z 2022–23z 2023–24z 2024–25z CAGRr

Productionb Bcm 145.2 159.0 160.1 161.8 162.3 163.8 164.7 2.1

– Eastern market Bcm 55.3 57.2 56.8 57.1 57.7 58.5 58.3 0.9

– Western market Bcm 82.3 86.8 88.0 89.2 89.1 87.6 86.4 0.8

– Northern marketc Bcm 7.6 14.9 15.3 15.5 15.5 17.6 20.0 17.5

LNG export volumed Mt 74.8 80.3 80.9 79.9 78.8 79.1 79.7 1.1 – nominal value A$m 49,727 48,650 45,093 48,568 49,606 51,522 49,508 -0.1 – real valuee A$m 50,662 48,650 44,220 46,625 46,505 47,120 44,155 -2.3 LNG export unit valueg – nominal value A$/GJ 12.6 11.5 10.6 11.5 11.9 12.3 11.8 -1.1 – real valuee A$/GJ 12.8 11.5 10.4 11.1 11.2 11.3 10.5 -3.3 – nominal value US$/MMBtu 9.5 8.3 7.9 8.8 9.1 9.4 8.9 -1.0 – real valuee US$/MMBtu 9.7 8.3 7.8 8.4 8.5 8.6 8.0 -3.2 Notes: a JCC stands for Japan Customs-cleared Crude; b Production includes both sales gas and gas used in the production process (i.e. plant use) and ethane. Historical gas product ion data was revised in the June quarter 2017 to align with Australian Petroleum Statistics; c Gas production from Bayu-Undan Joint Production Development Area is not included in Australian production. Browse basin production associated with the Ichthys project is classified as Northern market; d 1 million tonnes of LNG is equivalent to approximately 1.36 billion cubic metres of gas; e In 2019–20 Australian dollars; f Forecast; g 1 MMBtu is equivalent to 1.055 GJ; h In 2020 US dollars; r Average annual growth between 2019 and 2025 or 2018–19 and 2024–25; s 2020 is an estimate; z Projection. Source: ABS (2020) International Trade in Goods and Services, 5368.0; Department of Industry, Science, Energy and Resources (2020); Company reports; Nexant (2020) World Gas Model

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8.1 Summary 24 per cent on 9 March 2020, down to a three-year low of US$34 a barrel. . Oil prices are forecast to fall to average US$60 a barrel in 2020, as the As of 10 March 2020, it is uncertain if future negotiations will address COVID–19 outbreak impacts global air and vehicular travel, especially tensions between OPEC+ members. While OPEC+ production is assumed in China. Over the medium term, price gains are likely to be minimal, to increase for the second quarter of 2020 and remain elevated for the due to slow demand growth and rapidly rising US shale oil supply. remainder of 2020, this outlook is subject to considerable uncertainty. Higher OPEC+ production is expected to weigh on prices in 2020, . Over the outlook period, global oil consumption growth is expected to particularly in the first half of 2020 when global oil consumption is slow further, and to be concentrated in China and India. assumed to be constrained by COVID-19. These developments are also . Annual real earnings from Australian oil exports are expected to peak in expected to increase competition in export markets, and low global prices 2021–22 at $11 billion, before declining to a projected $9.6 billion in are likely to affect the investment decisions of higher-cost producers. 2024–25. Also affecting oil prices are the impacts of the International Maritime 8.2 Prices Organisation 2020 (IMO 2020) regulations. IMO 2020 came into force in Oil prices are expected to recover, but remain relatively low January 2020, reducing the maximum amount of sulphur that can be Oil prices have recently declined to 13 month lows, largely driven by fears included in shipping fuels. These regulations have created price premiums of lower consumption growth. The negative impact of the COVID-19 for oils suited to refining into low-sulphur fuels, including Brent and WTI outbreak in China has more than offset the impact of OPEC+ production grades. These price premiums are expected to be sustained over the cuts and the December 2019 US-China Phase One trade deal. medium term. The COVID-19 outbreak has affected oil prices in early 2020. Brent oil Figure 8.1 Historical and projected real oil prices prices fell by 15 per cent in January, when the majority of cases were 140 confined to China. Despite the localised impacts, global oil prices fell significantly as China accounted for around 14 per cent of 2019 global 120 consumption, and around 80 per cent of global consumption growth. 100 Between 31 January and 5 March 2020, the global spread of the disease resulted in oil prices falling by a further 11 per cent. Oil consumption in the 80 first quarter of 2020 has been negatively affected by quarantine actions 60 that have reduced travel demand, and by many refineries scaling back

operations. a barrel 2020 US$ 40

Oil prices in 2020 are also expected to be negatively affected by assumed 20 higher OPEC+ production. After numbers in this report were finalised, 0 OPEC+ members met on 6 March 2020, but could not agree on production 2009 2011 2013 2015 2017 2020 2022 2024 targets to address the impacts of COVID-19. The organisation also could not reach an agreement to extend the production cuts already in place for WTI crude oil price Brent crude oil price the first quarter of 2020. These events resulted in Brent oil prices falling by Source: Bloomberg (2020); Department of Industry, Science, Energy and Resources (2020)

Resources and Energy Quarterly March 2020 72 Assuming the economic impacts of COVID-19 ease in the first half of Gains in oil output (mainly from the US, which has seen production costs 2020, prices are expected to increase in the second half of 2020. The fall and technology improve) are expected to exceed oil consumption price of Brent crude oil is expected to fall by 6.6 per cent to average growth over the outlook period (Figure 8.2). As a result, prices are unlikely US$60 a barrel in 2020, while the West Texas Intermediate (WTI) price is to be sustained above US$70 a barrel in real terms. The potential for expected to fall by 4.6 per cent to average US$54 a barrel. Both prices in unexpected outages in MENA output, and resolutions to current MENA real terms are well below the long-term averages between 2009 and 2019 tensions will remain influential factors in the oil market. (Figure 8.1). Tensions in the Middle East & North Africa (MENA) may lead to temporary production disruptions, which could increase prices (see Box 8.3 World oil consumption 8.1). However, over the rest of the outlook period, prices are expected to After negligible growth in 2019, global oil consumption is projected to grow slowly. Slowing consumption growth and rapid growth in US increase from 100 million barrels a day in 2019 to 107 million barrels a day production will continue to weigh on prices, and limit the effectiveness of by 2025. This growth is expected to be driven by non-OECD nations, most OPEC+ efforts to increase them. In 2021, the Brent oil price is forecast to notably China and India. Global consumption growth is forecast to vary average $US62 a barrel (in 2020 dollars). significantly between years, with consumption growth in 2020 expected to be constrained by lower travel demand as a result of COVID-19 impacts. Oil prices are expected to increase modestly over the outlook period, but remain lower than historical averages. Higher US production is likely to Should Chinese oil consumption conditions return to more usual limit the influence of OPEC+ actions to support global prices. The Brent oil conditions, growth is likely to pick up after 2020. Late in the outlook period, price is expected to rise steadily to reach $US65 a barrel in 2025. growth is expected to moderate due to structural slowdowns in developing Asia’s oil consumption growth and higher expected global electric vehicle Figure 8.2: Supply and demand outlook sales (see Lithium chapter). 110 Higher non-OECD consumption expected 105 Non-OECD consumption growth is forecast to increase from 52 million barrels a day in 2019 to reach 59 million barrels a day by 2025. 100 China’s consumption is forecast to increase from 13 million barrels a day 95 in 2019 to reach 15 million barrels a day in 2025 (Figure 8.3). The majority of this growth is expected to occur from 2021, since the COVID-19 90 outbreak is expected to limit 2020 consumption growth. Late in the Million barrels a day projection period, Chinese consumption growth is expected to slow due to 85 the Chinese government’s 2025 target that electric vehicles account for 25 80 per cent of new vehicle sales (see Lithium chapter). 2011 2013 2015 2017 2019 2021 2023 2025 Consumption Production Indian consumption growth is projected to increase by 20 per cent Sources: Department of Industry, Science, Energy and Resources (2020); International between 2019 and 2025 to reach 6.0 million barrels a day in 2025. Growth Energy Agency (2020). is expected to pick up in 2021 as economic growth gathers momentum.

Resources and Energy Quarterly March 2020 73 Figure 8.3: Chinese consumption growth 8.4 World oil production 18 1.2 In recent years, global oil production growth has faced countervailing pressures between rapidly expanding US production and production 15 1.0 limiting actions from OPEC+. A consequence of this has been the US 12 0.8 accounting for a higher share of global production, which has constrained the ability of OPEC+ to influence prices (Figure 8.4). 9 0.6 Figure 8.4: World production growth 6 0.4 3 Million barrels a day Million barrels a day 3 0.2 2

0 0.0 2015 2017 2019 2021 2023 2025 1 Consumption Annual growth (right axis) 0 Sources: Department of Industry, Science, Energy and Resources (2020); International Energy Agency (2020). Million barrels a day -1 Consumption growth in other non-OECD nations is expected to increase due to ongoing economic development. The majority of this growth is -2 expected to come from developing Asia and Africa. Higher Asian 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 consumption growth is expected to be met through more diversified OPEC US Rest of world World sources of supply. In recent years, major Asian importers have been Sources: Department of Industry, Science, Energy and Resources (2020); International substituting away from Middle Eastern oil and towards US product. Energy Agency (2020). This trend is expected to continue, due to both the geopolitical risks OPEC+ production to recover in late 2020 associated with Middle Eastern oil supply chains and growing availability In 2019, OPEC+ production fell by 2 per cent due to over-compliance with of US oil exports. China is expected to lift imports of US products, in order OPEC+ production cuts and unexpected outages in Iran and Venezuela. to contribute towards purchase targets for US energy products as part of Production in 2020 is forecast to increase, due to the assumed ending of the US–China Phase One trade agreement (see Box 2.1). OPEC+ production targets in the second quarter of 2020. As of 10 March 2020, the extent and likelihood of these increases remains uncertain, OECD consumption is expected to remain flat increasing the uncertainty of price and production forecasts. Libyan OECD consumption is expected to remain steady at 48 million barrels a production is forecast to fall as a result of instability in the country. day over the outlook period, as energy efficiency improves. With US consumption expected to sit at around 21 million barrels a day, this should Beyond 2020, OPEC+ production is expected to increase due to higher result in US exports increasing. production targets. Production from the largest OPEC+ producers is expected to increase moderately over the outlook period.

Resources and Energy Quarterly March 2020 74

Box 8.1: Impacts of diplomatic tensions on oil markets any disruption to trade could thus raise prices. This price gain would be Geopolitical tensions in the Middle East have historically affected global oil significant, since most OPEC+ spare capacity would be unavailable to markets, with developments in tensions having ripple effects on oil global consumers. production, trade and subsequently global prices. For most of 2019, it US sanctions have also played a role in the decline of the Venezuelan oil appeared that the tensions were posed by US sanctions on Iran and industry. Venezuelan production has been on a long-term decline, due to Venezuela. However, in September 2019 an attack on Saudi oil the nationalisation of the oil sector and low infrastructure investment. This infrastructure resulted in new concerns over global oil security. The threat decline has been accelerated by the steady escalation of US sanctions of production disruptions increased further in January 2020, due to from 2015. As a result, Venezuelan production declined by 63 per cent escalating tensions between Iran and the US, and domestic political between 2015 and 2019. conflict in Libya. On 14 September 2019, a terrorist attack on Saudi Arabian oil In 2018, the US government announced it was withdrawing from the Joint infrastructure caused fires and extensive damage. News of the attack Comprehensive Plan of Action, and would re-introduce sanctions on caused Brent oil futures contracts to rise by $12 a barrel when Asian international purchasers of Iranian oil. Several importers were granted markets next opened. This was the largest intraday move since the extensions on purchases of Iranian oil until May 2019 before facing US futures contract started trading in 1988. The attack reduced Saudi sanctions. As a result of these sanctions, Iranian exports and production production by 8.2 per cent month-on-month in September. This disruption have fallen. At the time of writing, negotiations between Iran and the US has proven to be temporary, with production recovering in October, to be have made little progress, and tensions escalated further in January 2020. above pre-attack levels. Nonetheless, this event has highlighted risks and On 3 January 2020, the US government announced that the US military vulnerabilities around Saudi oil production infrastructure. had conducted a strike that killed General Qasem Soleimani. On 8 In January 2020, a number of Libyan oil terminals and oil fields were January 2020, the Iranian government announced that they it was subject to a military blockade as part of a wider struggle for control of the responsible for the airstrikes at multiple Iraqi airbases housing US troops. Libyan government. On 18 January 2020, the state-owned oil company These tensions saw the US government announce new sanctions on Iran declared ‘force majeure’ on oil exports from affected ports. As of 14 on 10 January 2020. These sanctions target multiple sectors, including February 2020, export suspensions were estimated to have cost the construction, manufacturing, textiles and mining. Any further output government US$1.4 billion, impacting heavily on the economy. disruptions in Iran are unlikely to significantly affect global oil prices, as existing US sanctions are already limiting Iranian exports. But disruptions Resolutions to these tensions would likely have a significant impact on to production in other countries have the potential to quickly tighten the total OPEC+ production, since all countries facing tensions are members world market. of the bloc. With these countries exempt from current production targets, if tensions ease, production targets for OPEC+ members are likely to come Regional tensions may also affect oil trade, due to the potential for Iran to under pressure as the organisation seeks to sustain prices. In any case, disrupt ships passing through the Strait of Hormuz. This narrow channel all OPEC+ members are expected to be negatively impacted, either connects Middle Eastern oil exporters with global consumers, with an through lower production targets or lower global prices. estimated 20 per cent of global trade passing through the Strait. The proportion of OPEC+ exports passing through the Strait is higher still, and

Resources and Energy Quarterly March 2020 75

Russian production is projected to increase significantly in 2020, due to the medium-term (Figure 8.4) on the back of a long period of investment in the assumed ending of OPEC+ production targets. Between 2021 and exploration, wells and infrastructure. After hitting 17 million barrels a day in 2025, Russian production is forecast to increase further due to higher 2019 (growth of 11 per cent on 2018), US output is projected to reach 20 condensate production. Saudi Arabia accounted for a high proportion of million barrels a day in 2025 (average annual growth of 3.1 per cent). OPEC+ cuts in the first quarter of 2020, and Saudi production over the rest 8.5 Australia’s production and trade of the year is expected to increase significantly. Saudi production is forecast to remain relatively steady over the rest of the projection period. Export earnings grow strongly on output surge Quarterly crude and condensate export earnings in the December quarter Production in countries exempt from current OPEC+ targets is expected to 2019 reached $3.0 billion, a year-on-year increase of 18 per cent. The grow, although the growth rate remains uncertain. With these countries majority of this increase was due to a 16 per cent rise in export volumes. granted exemptions because of political tensions, future production growth Australian export earnings are expected to be $10 billion in 2019–20 in will be dependent on diplomatic negotiations. Iran is the OPEC+ member real terms, and decrease marginally in 2020–21. Export values are with the greatest potential to increase production over the medium term. projected to peak at $11 billion in 2021–22 before easing to $9.6 billion in Sanctions on Iranian oil are assumed to remain over the outlook period, 2024–25 (Figure 8.5). This trajectory largely reflects changes to real oil and production is projected to remain around current levels. With Iran prices in in Australian dollar terms. having the infrastructure to quickly scale production and exports, any easing in US sanctions is expected to result in a rapid rise in world output. Figure 8.5: Australia’s annual oil export volumes and values This would further complicate OPEC+ intentions to set global prices. 400 12 Production in Venezuela is forecast to remain relatively subdued, with out- dated oil infrastructure making it unlikely that production will notably 300 9 increase over the outlook period. However, there are signs that reforms are beginning in the Venezuelan oil sector, and production in Libya is 200 6 20 A$ 20 A$ billion forecast to recover in 2021, due to an assumed passing of blockades that 100 3 are affecting production in the first quarter of 2020. 2019 -

Strong non-OPEC+ production growth expected Thousand barrels a day 0 0 In 2019, gains in non-OPEC+ production growth exceeded the drop in 2016–17 2018–19 2020–21 2022–23 2024–25 Volume Value (rhs) OPEC+ production. Despite higher OPEC+ production forecast for 2020, Notes: Includes crude oil and condensate, but excludes LPG. higher global production is expected to be largely driven by non-OPEC+ Source: ABS (2020); Department of Industry, Science, Energy and Resources (2020) countries, particularly the US. Strong growth is also expected in Brazil, Canada and Norway. Non-OPEC+ growth is expected to slow over the Production growth to slow outlook period, but to remain the key driver of global output growth. In the Australian crude and condensate production reached 429,000 barrels a US, improving oil well efficiency continues to drive this growth, despite day in December 2019. This was 34 per cent higher than a year ago, and some infrastructure capacity constraints. The US is currently the largest oil reflected higher crude oil and condensate production. Crude oil output producer in the world, and is expected to drive world output growth over rose by 51 per cent as a result of a ramp up in production at Woodside’s

Resources and Energy Quarterly March 2020 76 Greater Enfield project. Condensate output rose by 26 per cent, largely as Australia’s refinery production steady a result of production ramp ups at the Prelude and Ichthys LNG projects. Australia’s refinery production averaged 490,000 barrels a day in 2019, Crude oil production is expected to increase in 2020–21 as the Greater slightly below than the 2018 average of 498,000 barrels a day. To meet Enfield project reaches peak production. Over the outlook period, crude oil Australian demand, 60 per cent of refined product was imported from production is expected to fall. No new projects are expected due to low overseas in 2018–19, including around 71 per cent of diesel and 35 per global oil prices and Equinor’s decision in February 2020 to discontinue cent of automotive gasoline. Over the outlook period Australian refinery their exploration drilling plan in the Great Australian Bight. production is expected to vary with scheduled maintenance, and is projected to average 485,000 barrels a day in 2024–25. With domestic Growing condensate output is expected to drive Australia’s petroleum production volumes steady over the outlook period, imports are expected production and export earnings over the outlook period. Production is to continue to increase to accommodate higher consumption. expected to rise at an average annual rate of 3.5 per cent over the outlook period, from 286,000 barrels a day in 2018–19 to 351,000 barrels a day in Figure 8.6: Australia’s petroleum production outlook 2024–25 (Figure 8.6). This is lower than growth over the last five years, as 600 only a few projects from the recent wave of LNG investment are still ramping up production. Forecast higher production will largely be from the 500 Prelude and Ichthys projects. Production may increase late in the outlook 400 period due to a number of LNG projects in the pipeline. These projects include Scarborough and Pluto LNG (see LNG chapter). 300 LPG production is also expected to rise strongly in 2019–20, gaining by 50 200 per cent to reach 99,000 barrels a day. Growth in output is expected to be driven by the Ichthys and Prelude projects. Over the outlook period, output 100 is expected to stay around these levels. Despite strong growth in the short Thousand barrels a day term, output of condensate, crude and LPG is not expected to increase 0 beyond 2020–21, a legacy of declining exploration expenditure, project 2004–05 2009–10 2014–15 2019–20 2024-25 economics and geological factors (Figure 8.6). Taking a longer historical Crude oil Condensate LPG perspective, even with strong volume growth described above, Australian Source: EnergyQuest (2020); Australian Petroleum Statistics (2020); Department of Industry, Science, Energy and Resources (2020) crude oil, condensate and LPG production is expected to be at least 25 per cent below the peak recorded in 2002–03. Exploration Australia’s petroleum exploration expenditure was $410 million in the Australian consumption December quarter, on a trend basis, and increase of 33 per cent year-on- Australian oil consumption has grown steadily in recent years, in contrast year. Petroleum exploration expenditure totalled $1.4 billion in 2019, 25 to stagnant consumption in most OECD nations. Oil consumption is per cent higher than in 2018. With the 2018 total the lowest in nominal expected to be around 9 per cent over the full outlook period, with the terms since 2005, there are signs that sentiment in the oil and gas sector result driven by rising population. is beginning to improve.

Resources and Energy Quarterly March 2020 77

Table 8.1: Oil outlook

World Unit 2019 2020 f 2021 f 2022 f 2023 z 2024 z 2025 z CAGR r

Production a mb/d 101.5 102.8 104.4 105.3 106.0 106.8 107.5 1.0 Consumption a mb/d 100.1 101.0 102.6 103.9 104.9 105.9 106.7 1.1

WTI crude oil price

Nominal US$/bbl 56.8 51.4 58.8 63.3 66.8 66.6 65.5 2.4

Real b US$/bbl 58.0 51.4 57.5 60.5 62.5 60.9 58.6 0.1

Brent crude oil price Nominal US$/bbl 64.0 57.1 63.9 67.6 70.8 70.6 69.5 1.4 Real b US$/bbl 65.4 57.1 62.6 64.7 66.2 64.6 62.1 -0.8

Australia Unit 2018–19 2019–20 f 2020–21 f 2021–22 f 2022–23 z 2023–24 z 2024–25 z CAGR r

Crude and condensate Production a kb/d 340 422 403 394 382 369 355 0.7 Export volume a kb/d 254 312 313 310 304 297 290 2.2 Nominal value A$m 9,071 10,463 9,948 10,956 11,171 11,304 10,762 2.9 Real value g A$m 9,242 10,463 9,755 10,518 10,473 10,338 9,599 0.6 Imports a kb/d 375 350 342 345 365 366 377 0.1 LPG production ac kb/d 66 99 101 101 100 99 98 6.9 Refined products Refinery production a kb/d 502 482 486 479 484 478 485 -0.6 Export volume ad kb/d 17 16 13 9 9 9 9 -9.5 Import volume a kb/d 645 652 688 730 739 759 768 3.0 Consumption kb/d 1,045 1,064 1,095 1,112 1,127 1,142 1,157 1.7

Notes: a The number of days in a year is assumed to be 365, and a barrel of oil equals 158.987 litres; f Forecast; s Estimate; z Projection; b In 2019 calendar year dollars; c Primary products sold as LPG; d Excludes LPG; e Domestic sales of marketable products; g In 2018–19 financial year Australian dollars; r Compound average annual growth between 2018 and 2024 or between 2017–18 and 2023–24. Sources: ABS (2019) cat. 5368.0, International Energy Agency (2020), Energy Quest (2020), US Energy Information Administration (2020), Department of Industry, Science, Energy and Resources (2020).

Resources and Energy Quarterly March 2020 78

9.1 Summary Figure 9.1: Uranium real price outlook . Uranium prices remain low, but tight supply conditions are expected to 180 force a lift in prices as demand edges up. Spot prices are expected to 160 rise from around $US25 per pound in early 2020, to over US$40 per 140 pound by 2025 in real terms. 120 . Uranium production in Australia is expected to decline, following the 100 scheduled closure of the Ranger uranium mine in 2021. However, new 80 prospects, including Boss Resources’ Honeymoon mine, could help to 60

lift production towards the end of the outlook period. a pound 2020 US$ 40 . The value of Australia’s uranium exports is forecast to lift from a low of 20 $558 million in 2019–20 to $652 million (real terms) by 2024–25. 0 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025

9.2 Prices Spot prices Contract prices Uranium prices are largely stable, but change is in prospect Source: Cameco Corporation (2020) Uranium Spot Price; Ux Consulting (2020) Uranium Uranium prices have hovered at around US$25 a pound since large Market Outlook producers in Kazakhstan and Canada cut their output in 2018. While this price remains relatively low, risks around further falls have abated in Figure 9.2: World nuclear power generation recent months. Buying has picked up among smaller firms, and recent 40 geopolitical tensions appear not to have led to any policy interventions 30 which significantly affect uranium trade and prices. 20 With supply remaining constrained, reactor constructions in Asia, the Middle East and Eastern Europe should push prices up slowly, with a 10 levelling out above $US40 a pound by 2024 (Figure 9.1). Nuclear 0 constructions are rising (see Figure 9.2), but large inventories of uranium and planned reactor closures in 2024 and 2025 will offset some upward -10 pressure on prices.

Electrical capacity (gigaawatts) -20 Overall risks to prices have shifted to the upside, with many mining 1958 1968 1978 1988 1998 2008 2018 projects having been abandoned or placed in hiatus in recent years. Nuclear generation added Nuclear generation removed Uranium mines can take significant time to start or restart, and may be slow to respond to growth in demand. This creates a risk of price surges in Source: International Energy Agency (2019); World Nuclear Association (2019); Department of Industry, Science, Energy and Resources (2020) the mid-2020s, though this is contained, in part, by the ability of large suppliers to increase production, and by the scale of current inventories.

Resources and Energy Quarterly March 2020 80 9.3 World consumption Figure 9.3: World uranium consumption and inventory build (U3O8)

Nuclear power growth faces a significant potential upside 120 Global nuclear generation capacity edged down slightly in 2019, from 393 100 to 392 Gigawatts electrical. Six new reactors were connected over the year, and construction commenced on a further three. Of the six newly 80 connected reactors, two were in China, and two were in Russia. One of 60 the Russian reactors was the world’s first floating nuclear plant, and is 40 intended to be a working prototype for floating modular plants. Thousand tonnes 20 However, nine aging reactors were formally closed in 2019. These included Taiwan’s Chinshan 2 reactor, Japan’s Genkai 2, Russia’s Bilibino 0 1, and the Three Mile Island 1 and Pilgrim reactors in the USA. Germany 2009 2011 2013 2015 2017 2019 2021 2023 2025 and South Korea also closed reactors in 2019, with both countries China European Union Japan Russia committed to a phase-down of nuclear power. United States Others Inventories Total production

Source: International Energy Agency (2019); World Nuclear Association (2020); Ux China, India and Russia remain the most significant developers of nuclear Consulting (2020) power. China has built a formidable nuclear export industry in recent years, and Russia and India have signalled new cooperation in Figure 9.4: New nuclear capacity: medium-term expansion constructing power plants in Africa, following previous cooperative work by both countries in Bangladesh. The United Arab Emirates and Belarus 60 continue to progress their nuclear programs, with both countries set to connect their first nuclear plants in 2020. Bangladesh and Turkey also commenced their first nuclear reactor constructions in 2019, though 40 connection to the electricity grid will be some years off.

Over the next 5 years, uranium use in nuclear reactors is expected to 20

broadly match supply, though demand sources are expected to diversify electric Gigawatts (Figures 9.3 and 9.4). Growth prospects remain mixed across much of the world, with nations moving in markedly different directions. In January 0 2020, the European Commission announced that one trillion euros would China Other Eastern North Western Africa & South be invested in low-carbon energy through its European Green Deal Asia Europe America Europe Middle America East Investment Plan, which aims to make the EU carbon neutral by 2050. Under construction Planned

However, the final version of this plan excludes nuclear power projects Source: International Energy Agency (2020); World Nuclear Association (2020); Department from being funded though the Green Deal mechanism. This cuts off one of Industry, Science, Energy and Resources (2020) potential avenue of funding for EU nuclear power over the coming years.

Resources and Energy Quarterly March 2020 81 The United Kingdom (UK) government has recently commenced a plan to 9.4 World production ‘turbo-charge’ investment in low-carbon energy. The plan, announced on Production is set to remain tight as producers try to lift prices 20 January 2020, will support all forms of low-carbon energy domestically Kazatomprom — the world’s largest supplier of uranium — has again and overseas, and could provide new funding for nuclear power. confirmed that production will be kept lower out to 2021. Constraints on In Asia, connection for units 5 and 6 of the Hongyanhe nuclear plant in supply may be applied for a longer period should prices remain low. China has been delayed to late 2021 and early 2022 (respectively), to Production cuts by the company have already removed almost 6,000 allow for additional safety measures to be incorporated. This continues a tonnes of uranium from annual global supply, though prices have thus far trend towards a slower construction pace in China, with the country risen only modestly. Supply cuts have also occurred in Canada, with the expected to connect only four new reactors between 2021 and 2025. possibility of these cuts being extended too.

Restarts in Japan have also faced delays. Units 2 and 3 of the Tokai plant These cuts should ensure that overall supply remains tight over the will now be kept offline for two extra years, to allow for additional safety outlook period, with few new mines entering operation, and many measures, while extended inspections are likely to take Takahama units 3 remaining in hiatus. However, further gradual increases in prices are and 4 offline in the second half of 2020. expected to see some easing in supply restrictions over the next three Technological progress in reactor development continues, with GE Hitachi years. In aggregate, global mine production is expected to edge up from 62,400 tonnes of triuranium octoxide (U3O8) in 2019, to 66,200 tonnes by commencing a licencing process for its new BWRX-300 reactor model. 2025 (Figure 9.5). This model, for a small, portable, modular reactor capable of mass production, is now being assessed by the US Nuclear Regulatory Figure 9.5: World uranium production and secondary supply (U3O8) Commission. 120 Nuclear generation has also been utilised recently in other fields, creating new potential avenues for the technology. In Senegal, nuclear techniques 100 have been used to reduce tsetse fly populations, which have long spread 80 serious diseases across farms and cities. The technique does not harm 60 other insects. In the US, a site has been selected for the new Electron Ion Collider, which will expand particle acceleration technology and offer new 40 insights into how atomic nuclei are held together. Thousand tonnes 20 Overall, global demand for uranium is expected to remain relatively steady 0 over the outlook period. Downward pressure is expected as a result of 2009 2011 2013 2015 2017 2019 2021 2023 2025 slowing construction in China and reconnection delays in Japan. A wave of Kazakhstan Canada Australia reactor closures is also expected in Canada, the UK and Belgium over the Africa Russia Others second half of the outlook period. Offsetting this will be growth from Asia and various new and emerging markets where reactors are being Source: International Energy Agency (2020); World Nuclear Association (2020); Ux connected for the first time. Consulting (2020)

Resources and Energy Quarterly March 2020 82 9.5 Australia Figure 9.6: Australia’s uranium production Low prices have sharply reduced uranium exploration 12

Only $2.3 million was invested in uranium exploration in Australia in the 10 December quarter. This is around 36 per cent below the level of a year ago and well below the peak in 2010, when quarterly exploration was 8 above $40 million. 6 Production is set to decline in the early part of the outlook period 4

The Ranger uranium mine in the Northern Territory is now entering its final Thousand tonnes year of operation, with closure scheduled for January 2021. Output is 2 trending down as a result (Figure 9.6), as activity at the site shifts towards 0 rehabilitation. Elsewhere, facilities at Olympic Dam are set to be upgraded 2008–09 2012–13 2016–17 2020–21 2024–25 over coming years, ensuring more robust long-term production from the Source: BHP (2019); Operational Review, Department of Industry, Science, Energy and mine, which is expected to remain operational for many decades. Resources (2020); Energy Resources of Australia (2018); ASX Announcements — Operations Review; company media announcements (2019) A recent feasibility study has been released, which suggests that Boss Resources’ Honeymoon uranium mine may become viable in the near Figure 9.7: Australia's uranium exports future. The mine has been in ‘care and maintenance’ since 2013, but the 12 1200 company has announced its intention to re-open it. The study suggests that the mine could produce around 770 tonnes of uranium per year over a 9 900 12 year lifetime, and Boss Resources has confirmed that the project could be fast-tracked into production within a year of a decision to do so. However, the mine is likely to require a $US50 per pound uranium price to 6 600

be viable. A return to prices near this level is expected by around 2023 or million A$

2024, which would provide a solid grounding for the mine to reopen Thousand tonnes 3 300 around the end of the outlook period.

Conditions for exporters remain difficult, but price growth should help 0 0 2008–09 2012–13 2016–17 2020–21 2024–25 The closure of Ranger will reduce export volumes from 2021, though price growth will help to protect export earnings (Figure 9.7). An opening of the Volume Value (rhs) Honeymoon project late in the outlook period would see export values and Source: Department of Industry, Science, Energy and Resources (2020) volumes rise above forecast levels.

Resources and Energy Quarterly March 2020 83 Table 9.1 Uranium outlook

World Unit 2019 2020s 2021f 2022z 2023z 2024z 2025z CAGRr

Production kt 62.4 63.0 63.0 62.8 64.8 65.4 66.2 1.0 Africab kt 10.4 10.4 10.4 9.7 10.2 10.4 10.9 0.9 Canada kt 8.2 8.2 8.2 8.2 8.6 8.6 8.6 0.8 Kazakhstan kt 26.8 26.8 27.6 27.9 29.0 29.4 29.7 1.7 Russia kt 3.5 3.6 3.8 4.0 4.0 4.0 4.0 2.1 Consumption kt 83.6 84.1 81.7 82.9 83.2 84.1 83.6 0.0 China kt 12.9 13.5 14.7 15.1 15.2 15.2 15.6 3.2 European Union 28 kt 22.5 22.4 23.1 20.3 20.3 20.9 18.2 -3.4 Japan kt 1.9 1.9 – 0.6 1.4 1.4 1.4 1.4 -5.1 Russia kt 7.7 7.4 7.6 7.6 6.8 8.3 8.1 1.0 United States kt 21.8 21.7 18.8 21.0 21.2 21.2 21.3 -0.4 Spot price US$/lb 25.7 27.7 37.0 43.3 46.1 47.3 47.2 10.7 realc US$/lb 26.2 27.7 36.2 41.4 43.1 43.3 42.2 8.3

Australia Unit 2018–19 2019–20s 2020–21f 2021–22z 2022–23z 2023–24z 2024–25z Mine production t 7,618 7,000 6,500 5,800 5,800 5,800 5,800 -4.4 Export volume t 7,571 7,000 6,500 5,800 5,800 5,800 5,800 -4.3 – nominal value A$m 734 558 597 623 692 719 731 -0.1 – real valued A$m 748 558 585 598 649 657 652 -2.3 Average price A$/kg 96.9 79.7 91.8 107.5 119.4 123.9 126.0 4.5 – reald A$/kg 98.8 79.7 90.0 103.2 111.9 113.3 112.4 2.2

Notes: b Includes Niger, Namibia, South Africa, Malawi and Zambia; c In 2020 US dollars; d in 2019–20 Australian dollars; f forecast; r Average annual growth between 2019 and 2025 or 2018–19 and 2024–25; s estimate; z projection. Source: Department of Industry, Science, Energy and Resources (2020); Cameco Corporation (2020); Ux Consulting (2020) Uranium Market Outlook

Resources and Energy Quarterly March 2020 84

10.1 Summary historical terms, the opportunity cost of holding gold is low, raising its . The gold price is forecast to reach a 7-year high of US$1,475 an ounce attractiveness as an investment asset in times of uncertainty. (in real terms) in 2020, due to uncertainties over the COVID-19 outbreak The gold price could exceed expectations in the short term if the and its impacts on the world economy, particularly China. A global ––19 outbreak turns out to have a larger than expected adverse impact on rebound is projected to see the price slide to US$1,220 an ounce by the world economy. 2025. Figure 10.1: US and Australian dollar real gold prices . Australia is expected to overtake China as the world’s largest gold producing country in 2021, with high prices encouraging an expansion 1,600 2,400 in production. . The real value of Australia’s gold exports is forecast to set a record of 1,200 1,800 $26 billion in 2019–20, driven by higher prices and export volumes, before declining to $21 billion in 2024–25 as gold prices ease back. 800 1,200 10.2 Prices Gold prices rose strongly in 2019 400 600

The London Bullion Market Association (LBMA) gold price averaged A$ 2020 pricesan ounce 2020 prices US$ US$ an ounce 2020 prices US$1,420 an ounce in 2019 (in 2020 price terms), a rise of 7.7 per cent 0 0 from 2018. The price was largely propelled by the impact of trade tensions 2015 2017 2019 2021 2023 2025 between the US and China. The same trade tensions helped push the Real US dollar gold price Real Australian dollar gold price (rhs)

Australian dollar to an 11-year low of US$0.6756 on 5 August 2019. The Source: LBMA (2020) Gold price PM; Department of Industry, Science, Energy and lower Australian dollar, in combination with a higher US dollar gold price, Resources (2020) pushed the Australian dollar gold price to a new annual average record of A$2,045 an ounce in 2019 (Figure 10.1). After 2020, gold prices are projected to fall by around 3.7 per cent a year, to US$1,220 an ounce in 2025 (real terms), due to the recovery of the Gold prices to rise in 2020, then fall in the medium term global economy and a higher interest rate environment. These factors are Gold prices are forecast to average US$1,475 an ounce in 2020. This expected to undermine some of gold’s appeal to institutional investors. represents a rise of 3.7 per cent (in real terms) on 2019, driven by higher Funds are expected to move out of safe haven assets like gold into riskier investor demand for gold as a safe haven asset. The COVID-19 outbreak assets. The pace of central bank gold buying is expected to decrease at is likely to have an impact on Chinese and global economic growth. an annual rate of 4.0 per cent over the outlook period, amidst a modestly Geopolitical tensions in the Middle East and the Korean peninsula are lower appetite for gold reserves (Figure 10.2). unlikely to be resolved in the short term. The low interest rate environment is likely to continue be a major factor driving institutional investment The lower US dollar gold price, in combination with higher Australian demand for gold. With (real) interest rates remaining low in dollar, is expected to push the Australian dollar gold price lower over the outlook period, to average A$1,695 an ounce (real terms) in 2025.

Resources and Energy Quarterly March 2020 86 10.3 Consumption Gold used in industrial fabrication fell by 2.4 per cent in 2019, to 327 World gold consumption fell in 2019 tonnes, as US-China trade tensions impacted on the sale of consumer electronics. Over this period, gold used in electronics decreased by 1.9 per World gold consumption declined by 1.0 per cent in 2019, to 4,356 tonnes cent to 263 tonnes. Higher gold prices also affected the demand for gold (Figure 10.2), as higher gold prices reduced the demand for gold jewellery used in the dental sector, which was down by 6.7 per cent in 2019, as (which accounts for 48 per cent of global gold consumption) by 5.9 per consumers substituted ceramics for gold for their dental requirements. cent in 2019 to 2,107 tonnes. Jewellery consumption in China and India — the world’s two largest jewellery consuming nations — decreased by 7 and Offsetting falling jewellery consumption, gold-backed exchange traded 9 per cent over this period, to 637 and 545 tonnes, respectively. In China, funds (ETF) holdings rose by 428 per cent in 2019 to 401 tonnes — the the trade tensions with the US, slowing economic growth, and higher gold largest inflows since 2016. Lower interest rates, and rising US–China trade prices all contributed to weaker consumer sentiment and reduced demand tensions drove investment flows into ETFs. for jewellery. In India, high Rupee gold prices, higher import duties, and concerns about the country’s economic slowdown all impacted negatively Gold consumption expected to rise after 2020 on the country’s demand for jewellery. Global gold consumption is forecast to fall by 2.3 per cent in 2020 to 4,255 tonnes (Figure 10.2), as higher gold prices and the outbreak of COVID–19 Figure 10.2: World gold consumption by sector weigh on the sale of gold jewellery. As a result, global jewellery demand is 5,000 expected to fall by 3.0 per cent in 2020 to 2,044 tonnes.

4,000 Central bank gold buying is forecast to increase by 8.0 per cent in 2020 to 702 tonnes, as some central banks are expected to continue adding to 3,000 their gold reserves in 2020. It is estimated that China will need to purchase over 1,000 tonnes of gold in order to have gold comprise 5 per cent of total 2,000 Tonnes reserves. The US–Iran tensions are expected to encourage gold buying 1,000 from central banks in the Middle East region.

0 After 2020, world gold consumption is projected to rise at an annual rate of 2015 2017 2019 2021 2023 2025 2.1 per cent, to 4,712 tonnes in 2025 (Figure 10.2), as lower gold prices boost jewellery demand and retail investment. Total Fabricated Investment Official sector Global jewellery consumption is projected to rise at an annual rate of 5.0 Source: World Gold Council (2020) Gold Demand Trends; Department of Industry, Science, Energy and Resources (2020) per cent over the 5-year outlook. Consumption should reach 2,608 tonnes by 2025, driven by lower gold prices and stronger economic growth. Central banks and other government institutions (the “official sector”) Demand from China is expected to pick up, as price-sensitive Chinese continued to purchase gold in 2019, but net official sector purchases fell by consumers react to price falls. Economic growth, ongoing urbanisation, 0.9 per cent to 650 tonnes. Economic uncertainty, and a desire to diversify and rising incomes are all expected to contribute to higher jewellery out of the US dollar, appear to have been the main driving factors for demand in India. In addition, compulsory branding by Indian jewellery continued strong central bank gold buying.

Resources and Energy Quarterly March 2020 87 retailers in 2020 could support consumer confidence and stimulate Figure 10.3: World gold supply demand for gold. 5,000 In the US and Europe, an improvement in consumer confidence is also likely to support the demand for gold jewellery in those markets. 4,000 Gold retail investment is expected to grow at an annual rate of 2.2 per cent 3,000 over the outlook period, to reach 990 tonnes by 2025. The forecast decline

in gold prices will likely attract retail and institutional investors back to the Tonnes 2,000 gold bar and coin markets. After reaching a peak of 702 tonnes in 2020, the pace of central bank gold 1,000 buying is expected to decrease by 4.0 per cent a year, falling to 573 tonnes in 2025. Both Russia and Turkey aim to have their gold reserves 0 reach 20 per cent of total reserves. However, it is highly unlikely these two 2015 2017 2019 2021 2023 2025 countries will actively increase gold’s share of their total reserves over the Mine production Scrap outlook period, as an improvement in world trade and a recovery in the Source: World Gold Council (2020) Gold Demand Trends; Department of Industry, Science, global economy are expected to reduce central banks’ desire to diversify Energy and Resources (2020) their reserves. World gold supply expected to peak in 2021 10.4 Production World gold supply is forecast to reach a peak of 4,962 tonnes in 2021, and then decline moderately to 4,736 tonnes in 2025 (Figure 10.3). In the short World gold supply increased in 2019 term, increasing total gold supply will be propelled by higher mine World gold supply grew by 2.2 per cent in 2019 to 4,776 tonnes (Figure production and scrap output. 10.3), propelled by an 11 per cent rise in gold scrap. Higher gold prices encouraged consumers to sell gold to recyclers. China was the main driver Global mine production is forecast to increase by 2.0 per cent (to 3,533 of the growth, as low cost and convenient online gold recycling platforms tonnes) in 2020 and by 1.9 per cent (to 3,600 tonnes) in 2021. An boosted gold buy backs. expected upward movement in gold prices in 2020 — in both US dollar and other major currency terms — and a solid pipeline of projects in World gold mine production fell by 1.3 per cent in 2019 to 3,464 tonnes. Australia, Russia and Canada — are all likely to drive higher global gold Production in China — the world’s largest gold producer — declined by 5.9 mine output, with miners focusing on expansions and extending the life of per cent, to 380 tonnes, with stricter environmental regulation leading to existing mines. some modest production cuts. The shift of Indonesia’s Grasberg gold mine from open cut to underground reduced global supply by 42 tonnes in 2019. Australia is expected to overtake China as the world’s largest gold However, production in Australia and Canada increased by 4.1 and 7.9 per producing country in 2021, producing 383 tonnes, as miners respond to cent in 2019, to 326 and 208 tonnes, respectively, with output in both record prices (see Section 10.5 Australia’s exports and production). In nations benefiting from production from new mines. China, the COVID–19 outbreak and stricter environmental regulation are

Resources and Energy Quarterly March 2020 88 likely to reduce Chinese gold mine production by 2.9 per cent in 2020 to 10.5 Australia’s exports and production 369 tonnes. After 2020, China’s gold mine production is forecast to Export values expected to peak in 2019–20 rebound modestly and then steady at around 2019 levels (Figure 10.4). The value of Australia’s gold exports is forecast to set a record peak of Figure 10.4: Top 5 global gold producing countries $26 billion (in real terms) in 2019–20, driven by higher prices and export volumes. Export volumes are forecast to rise by 19 per cent in 2019–20, 500 reaching 389 tonnes (Figure 10.5). Rising export volumes will be driven by 400 higher local mine production, up 7.1 per cent year-on-year, to 344 tonnes. Export values are projected to decline after 2019–20, falling at an average 300 annual rate of 4.4 per cent over the outlook period to $21 billion (2019–20 dollars) in 2024–25. The steady decline will be driven by lower US and

Tonnes 200 Australian dollar gold prices (see Section 10.2 Prices) and, to a lesser extent, lower export volumes. 100 Figure 10.5: Australia’s gold exports 0 420 28 2015 2017 2019 2021 2023 2025 360 24 China Australia Russia US Canada 300 20

Source: China Gold Association (2020); Refinitiv (2020); Department of Industry, Science, 240 16 Energy and Resources (2020). 20 A$ 20 A$ billion

180 12 - Tonnes Gold scrap supply is forecast to rise at an average annual rate of 2.0 per 120 8 2019 cent over the next two years, to 1,357 tonnes in 2021, as high gold prices 60 4 — both in US dollar and local currency terms — encourage gold selling in 0 0 major jewellery consuming markets such as China and India. 2014–15 2016–17 2018–19 2020–21 2022–23 2024–25 Volume Real value (rhs) World gold supply is set to decline over latter half of the outlook period Source: ABS (2020) International Trade, 5464.0; Department of Industry, Science, Energy After 2021, world gold supply is projected to fall at an average annual rate and Resources (2020) of 1.1 per cent, due to lower scrap supply. World recycled gold supply is Higher production in the short term projected to fall from 1,357 tonnes in 2021 to 1,140 tonnes in 2025. An expected downward movement in gold prices is likely to discourage gold Australian gold mine production is forecast to increase by 7.1 per cent in selling. 2019–20 and 9.0 per cent in 2020–21, reaching a peak of 378 tonnes in 2021–22 (Figure 10.6). Growth is expected to be driven by both mine World mine production is expected to grow until 2022, and is then expansions and production from new mines. Five gold projects reached projected to decline at an annual rate of 0.5 per cent between 2023 and final investment decision stage in 2019, including Newcrest’s $685 million 2025, to 3,596 tonnes in 2025, as ore grades decline. Cadia Stage 1 Expansion project in New South Wales (NSW), Regis

Resources and Energy Quarterly March 2020 89 Regis Resources’ $200 million McPhillamys gold project in NSW, Resolute Figure 10.7: Gold mine AISC costs by country Mining’s $134 million Ravenswood expansion project in Queensland, 1,000 Capricorn Metals’ $132 million Karlawinda gold project in Western 900 Australia (WA), and St Barbara’s $100 million Gwalia extension project in WA. These five projects are expected to add around 37 tonnes of new 800 production per year over the outlook period. 700

Lower production in the medium term 600 US$ US$ a troy ounce After reaching a peak in 2021–22, Australian mine output is projected to 500 decline by 0.8 per cent annually to 370 tonnes in 2024–25 (Figure 10.6). 2020 2021 2022 2023 2024 2025 Production will be weighed down by lower grade ores, reserve exhaustion China Australia Russia US Canada and closures, as prices fall back. Ramelius’ 1.9 tonne per year Edna May Source: AME (2020) gold operation in WA is expected to cease operations in 2022. Production at Northern Star’s Jundee gold operation in WA is expected to decline Exploration expenditure continued to increase from 12 tonnes in 2019 to about 9 tonnes in 2025. Australia’s gold exploration expenditure increased by nearly 20 per cent in 2019 to nearly $1.1 billion — accounting for 40 per cent of Australia’s total Figure 10.6: Australia’s gold production minerals exploration expenditure during the year — driven by a seven-year 400 high US dollar gold prices and record high Australian dollar gold prices. Western Australia remained the centre of gold exploration activity in 300 Australia, accounting for 68 per cent (or $726 million) of total gold exploration expenditure (Figure 10.8). 200 Tonnes Figure 10.8: Australian gold exploration expenditure

800 100 700 600 0 500 2014–15 2016–17 2018–19 2020–21 2022–23 2024–25 400 Source: Department of Industry, Science, Energy and Resources (2020)

A$ milion A$ 300 Figure 10.7 shows gold production all-in sustaining costs (AISC) — a 200 measure of all direct and recurring costs required to mine a unit of ore — 100 of select major gold producing countries between 2020 and 2025. 0 Australian gold producers are less competitive (have a higher AISC) than 2009 2011 2013 2015 2017 2019 Chinese, Russian, the US and Canadian gold producers. WA Rest of Australia Source: ABS (2020) Mineral and Petroleum Exploration, Australia, 8412.0

Resources and Energy Quarterly March 2020 90 Table 10.1: Gold outlook

World Unit 2019 2020f 2021f 2022f 2023z 2024z 2025z CAGRr

Total demand t 4,356 4,255 4,313 4,408 4,502 4,603 4,712 1.3 Fabrication consumptionb t 2,434 2,361 2,457 2,559 2,665 2,777 2,896 2.9 Mine production t 3,464 3,533 3,600 3,625 3,633 3,614 3,596 0.6 Pricec Nominal US$/oz 1,392 1,474 1,450 1,421 1,392 1,378 1,365 -0.3 Reald US$/oz 1,422 1,474 1,420 1,360 1,303 1,261 1,220 -2.5

Australia Unit 2018–19 2019–20f 2020–21f 2021–22f 2022–23z 2023–24z 2024–25z CAGRr

Mine production t 321 344 374 378 376 376 370 2.4 Export volume t 326 389 413 417 415 414 377 2.5 – nominal value A$m 18,722 26,388 26,329 26,294 25,963 25,890 23,495 3.9 – real valuee A$m 19,074 26,388 25,819 25,242 24,340 23,678 20,955 1.6 Price – nominal A$/oz 1,754 2,108 1,982 1,962 1,949 1,945 1,934 1.6 – reale A$/oz 1,786 2,108 1,944 1,883 1,827 1,779 1,725 -0.6

Notes: b includes jewellery consumption and industrial applications; c London Bullion Market Association PM price; d In 2020 calendar year US dollars; e In 2019–20 financial year Australian dollars; f Forecast; z Projection; r Compound annual growth rate for the period from 2019 to 2025, or from 2018–19 to 2024–25. Source: ABS (2020) International Trade, 5465.0; London Bullion Market Association (2020) Gold Price PM; World Gold Council (2020); Department of Industry, Science, Energy and Resources (2020)

Resources and Energy Quarterly March 2020 91

11.1 Summary Figure 11.1: World aluminium and alumina prices . Slowing demand and strong supply are expected to see aluminium and 2,500 500 alumina prices fall in the short term, before recovering as global economic growth picks up. Prices are projected to average US$1,640 2,000 400 a tonne for aluminium and US$307 a tonne for alumina in 2025 (in real terms). 1,500 300 . With no planned expansions to smelter or refinery capacity, annual Australian output is expected to be broadly steady over the outlook 1,000 200 period, at 1.6 million tonnes of aluminium and 20 million tonnes of alumina. 500 100

. After reaching a peak of $16 billion in 2018–19, the total value of US$ a tonne2020 prices 0 0 a tonne Australia)(FOB2020 SU$ Australian exports of aluminium, alumina and bauxite is projected to fall 2015 2017 2019 2021 2023 2025 at an average annual rate of 4.6 per cent, to $12 billion (in real terms) in Average LME aluminium real price 2024–25, due to softening prices for aluminium and alumina, and lower Average FOB Australia alumina real price (rhs) bauxite export volumes. Source: LME (2020) spot prices; Metals Bulletin (2020) Alumina monthly price; Department of 11.2 Prices Industry, Science, Energy and Resources (2020). Aluminium and alumina prices fell strongly in 2019 reflects the combination of growing aluminium production — which is The London Metal Exchange (LME) spot price for aluminium fell by 17 per projected to increase at an annual average rate of over 2.5 per cent over cent in 2019, averaging US$1,830 a tonne (Figure 11.1). Prices were the outlook period — and weaker aluminium consumption — which is affected by US-China trade tensions, US aluminium import tariffs, and expected to decrease at an average rate of 1.2 per cent a year in 2020 slowing world economic growth. The US government lifted sanctions on and 2021. A consequent build-up of aluminium stocks is expected in the United Company Rusal — a major producer — in late January 2019, short term (Figure 11.2). easing supply concerns and causing the aluminium spot price to fall. The COVID-19 (coronavirus) outbreak is expected to reduce aluminium The free on board (FOB) Australian alumina price was also lower in 2019, demand in China — which accounts for 57 per cent of global aluminium averaging US$342 a tonne (Figure 11.1). The price decline was driven by consumption — by 2.5 per cent in 2020. Despite a recent easing of rising supply — with the return to full production of Brazil’s Alunorte monetary policy in China, there will be considerable lags before a boost in refinery after 19 months of restricted operation — and lower aluminium demand shows through in the construction sector. Adding further pressure demand. to aluminium prices is the impact of falling input costs, with alumina prices Aluminium and alumina prices to fall in 2020 and 2021 and then rebound forecast to continue declining through the outlook period. The LME aluminium spot price is forecast to decrease by 7.1 per cent to The FOB Australian alumina price is forecast to fall by 5.9 per cent to average US$1,699 a tonne in 2020, and to fall by a further 7.0 per cent in average US$322 a tonne in 2020, and then to US$305 a tonne in 2021 (in 2021 to average US$1,581 a tonne in real terms (Figure 11.1). The fall

Resources and Energy Quarterly March 2020 93 Figure 11.2: Aluminium real prices and stocks 11.3 Consumption 12 2,400 Falls in global aluminium and alumina demand in 2019 Global aluminium consumption fell by 3.3 per cent in 2019, to be just 10 2,000 under 64 million tonnes (Figure 11.3). US–China trade tensions and a 8 1,600 related slowing in global economic growth resulted in softer demand for aluminium. China — the world’s largest aluminium consumer — consumed 6 1,200 36 million tonnes of aluminium in 2019, a fall of 3.8 per cent.

4 800 a US$ tonne Sales in the Chinese automotive sector (one of the country’s largest aluminium consumers) fell by 8.1 per cent in 2019 to nearly 26 million Weeks of consumption 2 400 units. The fall in car sales in China was due to the withdrawal of 0 0 government subsidies for low priced hybrid and electric cars. 2015 2017 2019 2021 2023 2025 World alumina usage declined by 2.2 per cent in 2019 to 117 million Stocks (Weeks of consumption) LME aluminium real prices (rhs) tonnes (Figure 11.4), driven by lower global aluminium production, which Source: Macquarie (2020); Department of Industry, Science, Energy and Resources (2020) was down by 1.2 per cent in 2019. Aluminium output in China fell by 1.9 per cent in 2019, as US–China trade tensions impacted negatively on real terms) (Figure 11.1). The price decline is expected to be driven by Chinese aluminium demand. growing global alumina supply (due to the return to full production of Alunorte) and slowing global demand from aluminium producers. Slowing World bauxite usage rose by 2.6 per cent in 2019 to 299 million tonnes, demand growth from the world automotive sector is having a considerable propelled by increased global alumina production (up 6.0 per cent in impact on global aluminium demand and prices. 2019). The growth in alumina production was driven by the resumption to full production at Brazil’s Alunorte alumina refinery and a production ramp- After 2021, the LME aluminium spot price is projected to rise at an annual up at the UAE’s 4 million tonnes per year Al Taweelah alumina refinery. rate of 0.9 per cent to average US$1,640 a tonne (in real terms) in 2025 (Figure 11.1), as growth in the global economy picks up. Recovering Short term decline in aluminium demand, but medium term rises for Chinese aluminium consumption is expected to be a driver of the recovery aluminium, alumina and bauxite demand in aluminium prices. World primary aluminium demand is forecast to fall at an average annual World alumina production is projected to grow at an annual rate of 1.5 per rate of 1.2 per cent in 2020 and 2021, to 62 million tonnes by 2021 (Figure cent after 2021, falling below demand. As a result, the FOB Australian 11.3). The decline is expected to be driven by slowing demand from the alumina price is projected to rise at 0.2 per cent a year to US$307 a tonne automotive industry. The COVID-19 outbreak is likely to postpone in 2025 in real terms (Figure 11.1). consumers’ vehicle purchase decisions, with new vehicle sales in China expected to fall in the short term. The outbreak is also expected to impact the production and sales of vehicles in Japan, South Korea, and Europe, though to a lesser extent. In the US, higher vehicle prices (driven by new import tariffs) are expected to reduce consumer demand for vehicles.

Resources and Energy Quarterly March 2020 94 After 2021, global aluminium consumption is projected to grow at an China is expected to be a major driver of higher energy-efficient vehicle annual rate of 3.5 per cent to reach over 71 million tonnes in 2025, driven output, with passenger EV sales projected to grow at an annual rate of 21 by rising infrastructure spending and demand from the transport and per cent, to 4.7 million units in 2025. consumer durable sectors. Global industrial production, strongly correlated Figure 11.4: World alumina production, consumption and prices with aluminium demand, is projected to increase at an average of 2.3 per cent per annum over the outlook period. 150 500

Figure 11.3: World aluminium production, consumption and prices 120 400 80 2,800 90 300

60 2,100 60 200 Million tonnes 30 100 40 1,400 0 0 2020 US$ a tonne a tonne Australia)(FOB2020 US$

Million tonnes 2015 2017 2019 2021 2023 2025 20 700 a tonne2020 US$ World production World consumption 0 0 Average FOB Australia alumina real prices (rhs) 2015 2017 2019 2021 2023 2025 Source: International Aluminium Institute (2020); AME (2020); World Bureau of Metal World production Statistics (2020); Department of Industry, Science, Energy and Resources (2020) World consumption World alumina consumption is projected to increase at an average annual Average LME aluminium real price (rhs) rate of 1.2 per cent over the outlook period, reaching nearly 126 million Source: International Aluminium Institute (2020); AME (2020); World Bureau of Metal tonnes by 2025 (Figure 11.4). Alumina demand is driven by primary Statistics (2020); Department of Industry, Science, Energy and Resources (2020) aluminium production, which is projected to increase by 2.3 per cent a The production of automobiles is expected to be a significant driver of year between 2021 and 2025. aluminium demand going forward, as the auto sector attempts to improve World bauxite consumption is projected to grow at an average annual rate energy-efficiency by switching from steel to aluminium components. of 1.8 per cent over the next five years, reaching 337 million tonnes by Growing electric vehicle production will add to this trend. Bloomberg New 2025. This is expected to be driven by new alumina capacity in China and Energy Finance estimates that passenger electric vehicle (EV) sales will Indonesia. rise from 2.6 million units in 2019 to 9.9 million units in 2025. With an estimated average aluminium content of 250 kilograms per electric vehicle, aluminium usage in EVs is projected to increase from 740 thousand tonnes in 2019 to about 2.8 million tonnes in 2025 (Figure 11.5).

Resources and Energy Quarterly March 2020 95 Figure 11.5: Global electric vehicle sales and aluminium demand refinery in the UAE has produced around 1.0 million tonnes of alumina 10 3.0 since commencing production in April 2019. World bauxite production increased by 4.9 per cent in 2019 to nearly 345 8 2.4 million tonnes (Figure 11.6), driven by the production ramp-up at the 6 1.8 Amrun bauxite project in Western Australia and Aluminium Corporation of China’s 12 million tonnes a year Boffa bauxite mine in Guinea which 4 1.2 started production in December 2019. Million units Million Million tonnes 2 0.6 Aluminium, alumina and bauxite output set to rise over the outlook period World aluminium production is projected to rise by 2.3 per cent a year over 0 0.0 the outlook period, reaching nearly 74 million tonnes by 2025 (Figure 2019 2020 2021 2022 2023 2024 2025 11.3). The gains will be driven by additional capacity in China, Iran and Global electric vehicle sales Indonesia. In China, more greenfield aluminium smelters are anticipated, Aluminium demand in electric vehicles (rhs) located in regions (such as Yunnan province) where power is cheap and abundant. The 396,000 tonnes per annum Baiyinhua aluminium smelter is Source: Bloomberg New Energy Finance (2020); Aluminium Insider (2020); Department of Industry, Science, Energy and Resources (2020) expected to commence production in late 2020 or early 2021. The 250,000 tonnes per annum Henan Yulian Group’s Yulian Guangyuan aluminium smelter is expected to come online in 2025. 11.4 Production Outside of China, Iran is implementing a plan to increase its annual Aluminium production fell, but alumina and bauxite output grew in 2019 aluminium production to 1.5 million tonnes by 2025, with the first phase World aluminium production for 2019 was nearly 64 million tonnes (Figure (300,000 tonnes) of the 1 million tonnes per year SALCO aluminium 11.3), a 1.2 per cent fall from 2018, due to lower output in China. smelter commencing production in 2019. In July 2019, PT Indonesia Production in China — the world’s largest aluminium producer — Asahan Aluminium (Inalum) announced plans to increase production at the decreased by 1.9 per cent in 2019 — the first yearly fall in a decade — to Asahan aluminium smelter in Indonesia from 250,000 tonnes to 2.0 million just under 36 million tonnes. Trade tensions with the US and the Chinese tonnes per year by 2035. government’s stricter environmental regulations slowed production growth in China. World alumina production is projected to increase at an average annual rate of 1.5 per cent over the outlook period, reaching nearly 131 million World alumina supply rose by 6.0 per cent in 2019, to above 122 million tonnes by 2025 (Figure 11.4). This growth is expected to be driven by tonnes (Figure 11.4). The Alunorte alumina refinery in Brazil operated at China, India and Cameroon. In India, bauxite sourcing has improved, with half of its 6.3 million tonne per annum capacity between March 2018 and Vedanta planning to increase production capacity at its Lanjigarh refinery June 2019, due to restrictions imposed by Brazilian environmental to 2.7 million tonnes in the short term, and 6.0 million tonnes in the authorities (amid concerns of water contamination). The refinery’s return to medium term. full production has brought three million tonnes per year of alumina capacity back online. The two million tonne per year Al Taweelah alumina

Resources and Energy Quarterly March 2020 96 Figure 11.6: World bauxite production 11.4 Australia’s production and exports 400 Steady aluminium, alumina and bauxite production over the outlook No expansions or major disruptions are expected at existing aluminium and alumina operations in Australia. This implies little change in production 300 over the short to medium term. Australia’s aluminium production is projected to remain at around 1.6 million tonnes a year out to 2024–25 200 (Figure 11.7). Alumina production is expected to remain at around 20 million tonnes per annum over the outlook period (Figure 11.9). Million tonnes

100 Figure 11.7: Australia’s aluminium exports and production 2.0 5

0 2015 2017 2019 2021 2023 2025 1.6 4

Source: Department of Industry, Science, Energy and Resources (2020) 1.2 3 In China, greenfield alumina refineries are expected to be constructed in 20 A$ 20 A$ billion order to comply with the Chinese government’s stricter environmental – 0.8 2 regulation. Notably, Aluminium Corporation of China’s Chalco Guangxi Million tonnes 2019 Huasheng alumina refinery is expected to commence production (of around 2 million tonnes per year) from 2023. In Cameroon, the 3 million 0.4 1 tonnes per year joint-venture CAL alumina refinery project (Emirates Global Aluminium, Hindalco and Hydromine) is expected to come online in 0.0 0 2022. 2014–15 2016–17 2018–19 2020–21 2022–23 2024–25 Aluminium production Export volumes Export real value (rhs) World bauxite production is projected to grow at an average annual rate of

1.2 per cent over the outlook period, reaching 376 million tonnes by 2025 Source: ABS (2020) International Trade in Goods and Services, 5368.0; Department of (Figure 11.6). The gains are expected to be driven by newly added Industry, Science, Energy and Resources (2020) capacity in Australia — the world’s largest bauxite producer — and A recent power outage — caused by severe weather conditions during Guinea, where production is rising rapidly. The Compagnie des Bauxites summer — poses a risk for aluminium production. Any power blackout that de Guinée (CBG) mine in Guinea, which expanded from 13 to 18 million lasts for more than three hours has the potential to damage production tonnes per annum in 2019, is due to expand to 28 million tonnes per infrastructure. On 31 January 2020, Alcoa’s Portland aluminium smelter in annum by 2022. Emirates Global Aluminium is planning to ramp up Victoria operated at 55 per cent of capacity, after a storm cut power lines production at its bauxite mine in Guinea, with a goal of 12 million tonnes for more than three hours. per year by the second half of the outlook period.

Resources and Energy Quarterly March 2020 97 Other risks to the aluminium outlook include the operating costs of Figure 11.8: Aluminium smelter total operating costs aluminium smelters. Figure 11.8 shows the total operating costs of 3,200 aluminium smelters in the United States (US), Australia, the United Arab Emirates (UAE), Brazil and China. Australian smelters’ total operating costs are lower than the US, but higher than the UAE, Brazil and China. 2,800 High operating costs have been a challenging issue for aluminium smelters in Australia. US-based Alcoa announced a review of its global aluminium operations at the end of 2019 — which includes the Portland 2,400 Aluminium smelter in Victoria. Rio Tinto has also announced a review of its US$ a US$ tonne aluminium smelter operation in New Zealand. 2,000 Australia’s bauxite production is forecast to grow by 6.0 per cent in 2019–20, reaching 105 million tonnes (Figure 11.10). This is expected to 1,600 be driven by the attainment of full production capacity at Amrun (23 million 2020 2021 2022 2023 2024 2025 tonnes per year) and Bauxite Hills (6 million tonnes per year). After 2019–20, production is projected to remain steady out to 2024–25, with no United States Australia planned expansions or major disruptions expected at existing operations. United Arab Emirates Brazil China

Lower aluminium and alumina prices lead to weaker export outlook Source: AME (2020) After reaching a record high of $16 billion in 2018–19, Australia’s aluminium, alumina and bauxite export earnings are forecast to fall at an steel and aluminium bumpers, steel nails, aluminium wires, and body average annual rate of 4.6 per cent, to $12 billion (in real terms) in stamping for tractors. 2024–25. The decline is due to softening prices for aluminium and Australian bauxite exports could be affected by the rise of Guinea as a alumina, and lower bauxite export volumes, which will only be partially major producer and exporter of bauxite. Guinea is China’s second largest offset by increased export volumes of alumina. supplier of bauxite (after Australia), accounting for 44 per cent of China’s Risks to the aluminium outlook include trade protection policies that have total bauxite imports in 2019. Over the last few years, Chinese and the potential to slow global demand and prices in the short term. On 24 European companies have invested heavily in Guinea to build up the January 2020, the US Administration introduced additional tariffs on steel country’s bauxite production capacity. and aluminium imports, which commenced on 8 February 2020. The The Chinese government’s environmental policies for curbing air pollution announced tariff measures are small but targeted imported steel and are likely to remain an important influence on aluminium and alumina aluminium from Taiwan, China, Japan and the European Union. Australia, production. Chinese smelters and refineries that fail to meet new Canada and Mexico have been exempted from the additional tariffs. The regulations are likely to close. This could tighten global aluminium and announced tariffs cover 1 per cent of the steel and aluminium trade that alumina supply, creating an opportunity for Australian producers, but could were covered in the March 2018 tariffs — US$450 million of US imports of also reduce demand for Australian alumina and bauxite in the short term.

Resources and Energy Quarterly March 2020 98 Figure 11.9: Australia’s alumina exports and production Figure 11.10: Australia’s bauxite exports and production

24 12 120 1,800

20 10 100 1,500

16 8 80 1,200

60 900

12 6 20 A$ million – Million tonnes 20 $billion 40 600 – 8 4 2019 Million tonnes

4 2 2019 20 300

0 0 0 0 2014–15 2016–17 2018–19 2020–21 2022–23 2024–25 2014–15 2016–17 2018–19 2020–21 2022–23 2024–25 Alumina production Export volumes Export real value (rhs) Bauxite production Export volumes Export real value (rhs)

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

Resources and Energy Quarterly March 2020 99 Table 11.1: Aluminium, alumina and bauxite outlook World Unit 2019 2020f 2021f 2022z 2023z 2024z 2025z CAGR r Primary aluminium Production kt 63,635 65,927 68,555 69,805 71,083 72,397 73,729 2.5 Consumption kt 63,680 63,220 62,106 64,260 66,503 68,851 71,287 1.9 Prices aluminiumc - nominal US$/t 1,792 1,699 1,614 1,679 1,746 1,799 1,835 0.4 - reald US$/t 1,830 1,699 1,581 1,607 1,634 1,645 1,640 -1.8 Prices alumina spot - nominal US$/t 335 322 311 320 328 337 344 0.5 - reald US$/t 342 322 305 307 307 308 307 -1.8 Australia Unit 2018–19 2019–20f 2020–21f 2021–22z 2022–23z 2023–24z 2024–25z CAGR r Production Primary aluminium kt 1,573 1,574 1,573 1,573 1,573 1,573 1,573 0.0 Alumina kt 20,103 20,233 20,205 20,180 20,206 20,197 20,195 0.1 Bauxite Mt 99.4 105.4 105.8 105.8 105.8 105.8 105.8 1.0 Consumption Primary aluminium kt 156 198 247 248 244 249 250 8.2 Exports Primary aluminium kt 1,452 1,398 1,384 1,384 1,384 1,384 1,384 -0.8 - nominal value A$m 4,166 3,620 3,229 3,166 3,292 3,407 3,492 -2.9 - real valuee A$m 4,244 3,620 3,167 3,040 3,087 3,116 3,115 -5.0 Alumina kt 17,619 17,825 17,861 17,897 17,933 17,969 18,005 0.4 - nominal value A$m 10,245 8,589 8,330 8,413 8,497 8,582 8,668 -2.7 - real valuee A$m 10,437 8,589 8,168 8,076 7,966 7,849 7,731 -4.9 Bauxite kt 33,546 40,409 36,307 33,929 31,746 31,749 31,749 -0.9 - nominal value A$m 1,401 1,638 1,498 1,427 1,370 1,398 1,426 0.3 - real valuee A$m 1,427 1,638 1,469 1,369 1,285 1,279 1,272 -1.9 Total value - nominal value A$m 15,811 13,848 13,057 13,006 13,160 13,388 13,586 -2.5 - real valuee A$m 16,108 13,848 12,805 12,485 12,337 12,244 12,117 -4.6 Notes: c LME cash prices for primary aluminium; d In 2020 calendar year US dollars; e In 2019–20 financial year Australian dollars; f Forecast; r Average annual growth between 2019 and 2025 or 2018–19 and 2024–25; z Projection. Source: ABS (2020) International Trade in Goods and Services, 5368.0; AME Group (2020); LME (2020); Department of Industry, Science, Energy and Resources (2020); International Aluminium Institute (2020); World Bureau of Metal Statistics (2020)

Resources and Energy Quarterly March 2020 100

12.1 Summary Figure 12.1: Recent copper prices and stock movements . Copper prices are expected to increase over the outlook period, as 1,000 8,000 consumption outpaces production. Prices are forecast to average US$5,990 a tonne in 2020, before rising an average 2.0 per cent each year to reach a projected US$6,900 a tonne in 2025 (in real terms). 750 6,000 . Australia’s copper exports are projected to rise from 929,000 tonnes in 2018–19 to around 1.1 million tonnes (in metal content terms) in 500 4,000 2024–25, driven by growing production from new and existing mines.

. As prices and output grow, Australia’s copper export earnings are a US$ tonne

projected to lift from $10 billion in 2018–19 to $13 billion in 2024–25 (in Thousand tonnes 250 2,000 real terms).

12.1 Prices 0 0 Mar-18 Sep-18 Mar-19 Sep-19 Mar-20 After a lacklustre 2019, copper prices continue to face headwinds Stocks at major exchanges Spot price (rhs) After a poor period in mid-2019, copper prices showed signs of recovery Source: LME (2020) official cash price; Bloomberg (2020) inventories LME, COMEX, SHFE towards the end of the year, with confirmation of the US-China Phase One Figure 12.2: Outlook for copper stocks and prices trade deal improving market sentiment. In 2019, the London Metal Exchange (LME) copper spot price averaged US$6,000 a tonne, 8.0 per 4 10,000 cent lower than the previous year (Figure 12.1). So far, prices have continued to be challenged in 2020, with copper prices 3 7,500 responding to the impact of the COVID-19 outbreak. Copper prices fell 6.2 per cent in the first two months of the year, affected by the rising US dollar, 2 5,000 reduced industrial activity in China, as well as pessimistic sentiment around world GDP growth. Copper stocks declined over the last two quarters of 2019, but have started to build in 2020, amid stalling demand. 1 2,500 a tonne US$ 2020 Efforts to support the economy and boost activity, including lower interest Weeks of consumption rates and stimulus, have provided some support for prices. 0 0 While the impacts of COVID-19 are still evolving, lower copper 2015 2017 2019 2021 2023 2025 consumption in China over the start of the year could facilitate China’s full Stock levels LME spot price (rhs) year consumption growth to be negative in 2020. Copper price growth forecasts have consequently been revised down, and in 2020 the copper Source: LME (2020) official cash price; Bloomberg (2020) Department of Industry, Science, Energy and Resources (2020) spot price is forecast to average US$5,990 a tonne.

Resources and Energy Quarterly March 2020 102 Over the rest of the outlook period, rising consumption and constrained second half of 2020. The copper market is expected to remain in deficit production are expected to drive inventories lower and result in a modest over 2020, though the size of this deficit has been revised down, due to recovery in copper prices. Prices are projected to increase at an average the impact from the COVID-19 outbreak. rate of 2.0 per cent a year, to reach US$6,900 a tonne by 2025, in real terms (Figure 12.2). Energy transition and growing applications to support consumption In the medium term, copper consumption is likely to be bolstered by an These price projections are sensitive to the balance of world copper ongoing energy transition towards lower carbon-intensive power production and consumption, which in turn will be affected by the pace of generation and transport. Copper’s conductivity, malleability and durability world economic growth. Markets will be influenced by US-China trade make it vital to electric vehicles, batteries and renewable energy negotiations, the impacts of COVID-19 (including offsetting stimulatory generation. Electric vehicles (EV) use around 80 kilograms of copper, policy measures), and changes in China’s usage. compared to around 22 kilograms used in internal combustion engines. 12.2 World consumption Expanding EV charging infrastructure will also support demand for copper. The level of adoption, and subsequent consumption trajectories for these Moderating consumption growth surrounded by risks markets is difficult to determine with high precision, as the uptake is World GDP growth, and subsequently copper consumption, were weighed dependent on rapidly changing cost profiles and government policies. down by trade tensions and slowing activity in 2019. The stagnant World copper consumption is projected to grow at an average 2.3 per cent consumption of 2019 could continue into 2020, as the impacts of a year over the outlook period, to reach 27 million tonnes in 2025. This

COVID– 19 filter through the world economy. World consumption is projection is heavily dependent on China’s future economic growth, as well forecast to increase by 2.2 per cent in 2020, to reach 24 million tonnes as the health of the world economy and world trade. (Figure 12.3). Figure 12.3: Outlook for refined copper consumption World copper consumption is expected to increase further over the 30 4 remainder of the outlook period. The projection is heavily dependent on consumption in China, which consumes half of the world’s copper. Declining macroeconomic indicators in December 2019 and January 2020 23 3 point to a weakening in China’s consumption, which will likely be compounded by impacts related to COVID–19. These factors are expected 15 1 to see China’s copper consumption growth remain stagnant over 2020, at Per cent 8 0 around 12 million tonnes. Provided conditions do not deteriorate further Thousand tonnes than current expected impacts, COVID-19 could reduce China’s copper consumption by as much as 1-2 per cent over 2020, although stimulus 0 -1 spending may offset some of this decline. Delayed copper imports to 2015 2017 2019 2021 2023 2025 China, slow restarts, and supply chain interruptions have reduced Refined copper consumption Annual change (rhs) consumption in the March quarter. At the time of writing, industrial Source: World Bureau of Metal Statistics (2020); Department of Industry, Science, Energy production and economic activity in China is assumed to recover in the and Resources (2020)

Resources and Energy Quarterly March 2020 103 12.3 World production Figure 12.4: Outlook for copper mine production 30 Outages and declining ore grades weigh on copper production World copper production contracted slightly in 2019, after healthy growth 25 in 2018. In 2020, production is expected to grow again, supported by the 20 ongoing ramp up of the Cobre Panama mine in Peru, which started production in October 2019. World mine production is forecast to expand 15 to 21 million tonnes in 2020, up 2.2 per cent on 2019.

Million tonnes 10 Copper production constrained by numerous factors over the outlook 5 Many of the world’s major copper producers are facing production challenges. Rising electricity costs, civil unrest and changes to tax regimes 0 are having a significant impact on operations and profitability in the current 2005 2010 2015 2020 2025 low price environment. Mine production is nonetheless projected to Americas Europe Africa Asia Oceania World expand by an average 2.5 per cent a year over the outlook period, to reach 24 million tonnes in 2025 (Figure 12.4). However, this is subject to Source: World Bureau of Metal Statistics (2020); Department of Industry, Science, Energy and Resources (2020) significant uncertainty, particularly on the downside. Chile is expected to maintain its status as the world’s largest producer of Figure 12.5: Outlook for refined copper production mined copper over the outlook period. Production from the state-owned 30 3 Codelco dropped in 2019, as the company dealt with falling ore grades, heavy rains and protests at the Chuquicamata mine. Codelco has plans for new mines and expansions over the next five years, but finance is yet to 23 2 be obtained. Copper prices, as well as the prices of common co-products like cobalt, 15 1 will determine the pace of mine expansions and restarts over the outlook Per cent

period. Low cobalt prices prompted the temporary closure of Glencore’s Thousand tonnes 8 0 Mutanda cobalt-copper mine in the Democratic Republic of the Congo in late 2019. This mine is expected to be in care & maintenance for the next 0 -1 two years. 2015 2017 2019 2021 2023 2025 Refined copper production Annual change (rhs) Refined production growth dependant on China’s capacity Source: World Bureau of Metal Statistics (2020); Department of Industry, Science, Energy Output of refined copper is forecast pick-up in 2020, increasing by less and Resources (2020) than 1 per cent over the year to reach 24 million tonnes (Figure 12.5).

Resources and Energy Quarterly March 2020 104 Production from China, which accounts for about 40 per cent of world grow by 2.6 per cent a year to exceed 1 million tonnes in 2024–25. A refined production, is expected to be constrained, as COVID-19 impacts ramp-up in production at Oz Mineral’s Carrapateena mine in South reduce operating capacity. Supply chain interruptions, including Australia — which started operations in late 2019, and has an annual concentrate availability and the sale of sulphuric acid by-products, pose a capacity of 65,000 tonnes — is expected to contribute to this growth. threat to production rates. The impact of this has led to a downward There are also a number of mine life extension projects underway, which revision in expected refinery output in 2020. are expected to come online over the medium term. These include Refinery production is forecast to increase at an average annual rate of Newcrest’s Telfer and Sandfire’s DeGrussa projects. Havilah Resources’ 1.8 per cent over the outlook period, to reach a projected 27 million tonnes Kalkaroo project, which is Australia’s largest undeveloped open pit copper in 2025. Over the outlook period, new refinery capacity is expected to deposit, is also being investigated. Greenfield exploration projects, such as come online in China, Peru, Russia and Indonesia. Refined copper BHP’s Oak Dam project in South Australia, are currently under review. production also faces expansion challenges, concentrate and electricity Development of these projects will depend on improving world prices. cost pressures, increasingly tight emission and sulphur capture limits, as Strong gold prices and booming gold production are also likely to have well as generally tighter approval processes. New capacity in China may positive flow-on effects in areas where copper is co-produced. be delayed due to the ongoing impacts of COVID–19. Figure 12.6: Australia’s copper export volumes and values 12.4 Australia 1,200 16 Short-term decreases overcome with higher prices and production In 2019–20, subdued copper prices are expected to weigh on export 900 12 earnings, which are forecast to fall by 1.6 per cent to $9.6 billion in real terms. Further out, a gradual recovery in copper prices and expanding 600 8 domestic production, are expected to support export earnings growth at an average 5.0 per cent a year, to reach a projected $13 billion in 2024–25 (in billionsA$ 300 4 real terms) (Figure 12.6). Metallic content kilo tonnes Copper exports to grow, supported by higher production 0 0 2014–15 2016–17 2018–19 2020–21 2022–23 2024–25 After significant growth in 2018–19, Australia’s mined copper production is Volumes Values (rhs) forecast to fall by 3.1 per cent in 2019–20, to 905,000 tonnes, as a number of mine closures take effect. Low copper prices continue to pose a risk to Source: ABS (2020) International Trade in Goods and Services, 5368.0; Department of some of Australia’s operations, as evidenced by the closure of Metals X’s Industry, Science, Energy and Resources (2020) Nifty mine and suspended operations at EMR’s Golden Grove mine, both Interest in gold continues to help spur copper exploration in Western Australia, in late 2019. Copper exploration has continued to trend up, reaching $125 million in the As prices recover, production is expected to grow steadily, with new December quarter, 53 per cent higher year-on-year. An increase in gold projects and expansions coming online. Copper production is projected to interest could be spurring activity in co-existing gold and copper deposits.

Resources and Energy Quarterly March 2020 105 Table 12.1: Copper outlook

World Unit 2019 2020f 2021f 2022z 2023z 2024z 2025z CAGRr

Production –mine kt 20,512 20,965 21,532 22,566 23,132 23,443 23,805 2.5 –refined kt 23,838 24,022 24,670 25,238 25,769 26,209 26,604 1.8 Consumption kt 23,506 24,026 24,743 25,416 25,896 26,440 26,896 2.3 Closing stocks kt 1 394 1 390 1 317 1 139 1 012 782 490 -16.0 –weeks of consumption 3.1 3.0 2.8 2.3 2.0 1.5 0.9 -17.9 Prices LME –nominal US$/t 6,005 5,989 6,500 7,081 7,699 8,010 7,734 4.3 USc/lb 272 272 295 321 349 363 351 4.3 –realb US$/t 6,134 5,989 6,366 6,777 7,203 7,326 6,916 2.0 USc/lb 278 272 289 307 327 332 314 2.0

Australia Unit 2018–19 2019–20f 2020–21f 2021–22z 2022–23z 2023–24z 2024–25z CAGRr Mine output kt 934 905 906 955 1,004 1,071 1,087 2.6 Refined output kt 435 402 401 401 266 223 223 -10.5 Exports –ores and cons.c kt 1,895 1,987 1,945 2,133 2,842 3,264 3,327 9.8 –refined kt 396 404 409 409 271 228 228 -8.8 –total metallic content kt 929 971 964 1,013 1,058 1,125 1,141 3.5 Export value –nominal A$m 9,770 9,611 9,673 10,264 13,735 13,250 14,971 7.4 –reald A$m 9,953 9,611 9,486 9,853 12,877 12,118 13,352 5.0

Notes: b In 2020 calendar year US dollars; c Quantities refer to gross weight of all ores and concentrates; d In 2019–20 financial year Australian dollars; f Forecast; r Average annual growth between 2019 and 2025 or 2018–19 and 2024–25; z Projection. Source: ABS (2020) International Trade, 5465.0; LME (2020) spot price; World Bureau of Metal Statistics (2020) World Metal Statistics; Department of Industry, Science, Energy and Resources (2020)

Resources and Energy Quarterly March 2020 106

13.1 Summary Figure 13.1: Recent nickel prices and LME stock level trends . Strong nickel consumption is expected to support price rises over the 400 20,000 outlook period. After averaging US$14,200 a tonne is 2019, nickel prices are forecast to average US$15,300 a tonne in 2020 and US$15,800 a 300 15,000 tonne in 2025 (in real terms). . New projects and expansions are expected to lift Australia’s export volumes from 225,000 tonnes in 2018–19 to a projected 436,000 tonnes 200 10,000 in 2024–25. US$ a US$ tonne . Export earnings are expected to strengthen with higher prices and 100 5,000 growing volumes. Australia’s export earnings are projected to reach $6.6 Stocks (thouosandd tonnes) billion in 2024–25, up from $3.7 billion in 2018–19 (in real terms). 0 0 13.2 Prices Mar–18 Sep–18 Mar–19 Sep–19 Mar–20 LME Stocks Price (rhs)

Market disruptions expected to support prices Source: Bloomberg (2020), London Metal Exchange (2020) After significant volatility in 2019, nickel prices are expected to be relatively stable in 2020. In 2019, the negative impacts of US-China trade tensions and lower stainless steel production in China were outweighed by Figure 13.2: Projected nickel spot prices and stock levels Indonesia’s announcement of a ban on exports of nickel ore. Despite a 30 18,000 steep fall in stocks, the price rose to over US$18,000 a tonne in September before falling back sharply (Figure 13.1). More recently, the impacts of COVID-19 have weighed on nickel prices. 20 12,000 Going forward, the nickel market is expected to be characterised by a growing market deficit; as Indonesia’s export ban restricts world production amid healthy consumption growth. In 2020, the nickel price is forecast to average US$15,300 a tonne, up 7.7 per cent on the real price of 10 6,000 2020 US$ a tonne 2020 US$

US$14,200 a tonne in 2019. of Weeks consumption Medium term price growth dependant on existing and new battery demand 0 0 Nickel consumption is expected to drive price growth over the forecast 2015 2017 2019 2021 2023 2025 period. Solid demand for stainless steel will likely continue, with growing Total stocks LME nickel price (rhs) momentum in nickel consumption for battery manufacturing. Nickel prices Notes: Total stocks include warehouse and privately held stocks. are projected to increase by an average 1.8 per cent year to reach Source: Bloomberg (2020) London Metal Exchange (2020); S&P Platts Global (2020), US$15,800 a tonne in 2025, in real terms (Figure 13.2). Department of Industry, Science, Energy and Resources (2020)

Resources and Energy Quarterly March 2020 108 13.3 World consumption Figure 13.3: Refined nickel consumption by major country 250 Strong consumption growth supported by stainless steel production Supported by ongoing stainless steel production, nickel consumption is 200 expected to rise steadily over the outlook period, growing from 2.4 million tonnes in 2019 to a projected 2.8 million tonnes by 2025. The projected 150 rate of consumption growth, at around 2.2 per cent a year, is lower than in recent years, reflecting a slowdown in growth in Chinese and world GDP 100 growth. Higher nickel prices may also weigh on consumption growth. Thousand tonnes China drives consumption growth 50 Higher usage in China is expected to account for most of the growth in 0 nickel consumption over the outlook period. China currently accounts for Dec–16 Sep–17 Jun–18 Mar–19 Dec–19 just over half of world consumption, which is expected to continue to grow, China Rest of world Japan United States Indonesia driven by rising stainless steel production and growing battery Source: International Nickel Study Group (2019), Department of Industry, Science, Energy manufacturing (Figure 13.3). However, in the short-term there are and Resources (2019) challenges imposed by the impacts of the COVID-19 outbreak and the Indonesian export ban. Reduced industrial activity in February and March 13.4 World production are expected to weigh on 2020 consumption, which may be partially offset Healthy production growth in 2019 by Chinese government stimulus. China’s nickel pig iron processing is heavily reliant on imports of Indonesian nickel ore, which may be Nickel mine production grew rapidly for the third successive year in 2019, constrained by Indonesian export restrictions introduced in January 2020. growing 7.3 per cent to reach 2.6 million tonnes (Figure 13.4). Indonesia’s Imports may be substituted with imports from the Philippines, China’s mine production has continued to gain momentum, with output increasing existing stocks or more expensive ‘class 1’ nickel. by 40 per cent over the year to an estimated 854,000 tonnes, as a result of new projects and the export rush prior to the introduction of Indonesia’s Nickel’s growing role in battery manufacturing nickel ore export ban in January 2020. Indonesia now accounts for around The use of nickel in battery manufacturing is expected to expand over the a third of world mined production. outlook period, as both the scale of battery manufacturing expands and Mine production growth expected to continue the nickel intensity of battery technologies rises. Technological advances Mine production is expected to continue expanding over the outlook are facilitating the manufacture of batteries with a higher amount of nickel, which is favoured for its efficiency, longevity and cost-effectiveness. The period, rising by an average 2.0 per cent a year to reach 2.9 million tonnes share of nickel used in battery manufacturing currently accounts for about in 2025. However, this growth path is not expected to be linear, with 4 per cent of nickel usage. Growth in battery manufacturing is dependent production contracting in the nearer term. Higher output from China, Brazil and Australia will be offset by lower production in Indonesia, as an on the trajectory of electric vehicle sales, which slowed in 2019 (with the removal of subsidies in China), but recovered towards the end of the year. expected reaction to the export ban in the short-term.

Resources and Energy Quarterly March 2020 109 Figure 13.4: World nickel production accounts for around 16 per cent of world refinery production, which is 3000 expected to expand with energised motivation under the recently introduced ban on ore exports, which increases the availability of nickel ore and incentivises investment in downstream refining capacity.

2000 Figure 13.5: Refined nickel production by major country 200

1000 150 Thousand tonnes Thousand

100 0 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

World mined production World refined production Thousand tonnes 50

Source: International Nickel Study Group (2020), Department of Industry, Science, Energy and Resources (2020) 0 Dec–16 Jun–17 Dec–17 Jun–18 Dec–18 Jun–19 Dec–19

Refinery capacity to grow over outlook period China Rest of world Indonesia Japan Russia The outlook for refined nickel production is also positive. Growth in 2019 Source: International Nickel Study Group (2020), Department of Industry, Science, Energy was significant, expanding by 8.6 per cent over the year to reach 2.4 and Resources (2020) million tonnes (Figure 13.5). Ongoing growth in refined production is expected, however at a less rapid pace. 13.5 Australia China’s refined nickel production has declined at the start of 2020, partly Strong prices and growing output expected to boost export earnings constrained by COVID-19 impacts. While there are no nickel pig iron Nickel export earnings are expected to grow significantly over the outlook plants in Hubei province, interrupted input supply-chains have disrupted period, bolstered by stronger nickel prices and investment in new capacity. production. As such, world refined production is forecast to be broadly stagnant in 2020 at 2.4 million tonnes, before increasing later in the In 2019–20, export earnings are forecast to be $5.4 billion, 46 per cent outlook period. higher than 2018–19 real export earnings of $3.7 billion (Figure 13.6). This momentum is expected to continue over the outlook period, with real New refining capacity in China, as well as expected investment in export earnings growing just over 10 per cent a year to reach a projected Indonesia, are likely to come online over the outlook period, provided $6.6 billion by 2024–25. While stronger prices are a significant driver short-term delays due to COVID-19 are overcome. behind this growth, export volumes are also expected to grow steadily. Refined production is projected to grow an average 2.4 per cent over the Export volumes are projected to reach 436,000 tonnes by 2024–25, up outlook period to reach 2.7 million tonnes in 2025. Indonesia currently from 225,000 tonnes in 2018–19.

Resources and Energy Quarterly March 2020 110 Positive market growth support expansions and restarts Figure 13.6: Australia’s nickel export volumes and values Stronger nickel prices and expectations of (battery led) demand growth 500 8.0 have stimulated investment in nickel capacity, as well as a number of potential mine restarts. Going forward, Australia’s mine production is 400 6.4 projected to lift from 161,000 tonnes in 2019–20 to 275,000 tonnes in 2024–25, growing an average 9.4 per cent a year. Investment in BHP’s 300 4.8 Nickel West projects in Western Australia, including the Yakadindie and

Venus deposits, as well as parallel investment in processing at the 20 A$ billion 200 3.2 Kwinana Refinery, is expected to support volumes growth. Panoramic Thousand tonnes Resources’ Savannah mine, which restarted operations in late 2018, is 2019 - expecting higher production over the outlook as ore grades improve. 100 1.6 There are a number of potential restarts on the cards, including Mincor’s 0 0.0 Long and Cassini projects, First Quantum’s Ravensthorpe mine and 2008–09 2011–12 2014–15 2017–18 2020–21 2023–24 Poseidon Nickel’s Black Swan project. This upside potential will be Export volumes Export value (rhs) influenced by nickel prices. Source: ABS (2020) International Trade in Goods and Services, 5368.0; Department of Industry, Science, Energy and Resources (2020) In response to growing consumption of battery-grade nickel, there are a number of refinery capacity expansion plans are underway. Australia’s Figure 13.7: Quarterly nickel and cobalt exploration expenditure nickel sulphate capacity is expected cater to this growing demand, producing product for export to battery manufacturing facilities in China 90 and elsewhere in Asia. With new investment in BHP’s Kwinana refinery, 75 Australia’s refinery production is projected to increase from 117,000 tonnes in 2019–20 to 139,000 tonnes in 2024–25, growing an average 3.4 60 per cent a year. BHP have indicated the potential for further expansions at 45 the Kwinana refinery, depending on market conditions.

A$ million A$ 30 Exploration expenditure Nickel and cobalt exploration continued to increase in the December 15 quarter, reaching $63 million, 25 per cent higher year-on-year (Figure 0 13.7). Higher nickel prices and Australia’s geological resource potential, as 2009 2011 2013 2015 2017 2019 well as interest in co-products copper and cobalt, may have stimulated exploration activity. Source: Source: ABS (2020) Mineral and Petroleum Exploration 8412.0

Resources and Energy Quarterly March 2020 111

Table 13.1: Nickel outlook

World Unit 2019 2020f 2021f 2022z 2023z 2024z 2025z CAGRr

Production – mine kt 2,558 2,604 2,596 2,640 2,728 2,793 2,885 2.0

– refined kt 2,371 2,389 2,461 2,525 2,583 2,645 2,732 2.4

Consumption kt 2,432 2,468 2,530 2,585 2,645 2,700 2,768 2.2

Stocks kt 679 600 531 471 409 353 317 -11.9

– weeks of consumption 14.5 12.6 10.9 9.5 8.0 6.8 6.0 -13.8

Price LME

– nominal US$/t 13,904 15,270 15,864 16,225 16,629 17,128 17,642 4.0 Usc/lb 631 693 720 736 754 777 800 4.0

– realb US$/t 14,203 15,270 15,538 15,529 15,557 15,666 15,776 1.8

Usc/lb 644 693 705 704 706 711 716 1.8

Australia Unit 2018–19 2019–20f 2020–21ff 2021–22z 2022–23z 2023–24z 2024–25z CAGRr

Production

– minecs kt 161 161 228 255 268 277 275 9.4 – refined kt 114 117 137 139 139 139 139 3.4

– intermediate 13 19 27 30 30 30 30 15.4

Export volumeds kt 225 336 398 439 433 438 436 11.7

– nominal values $m 3,631 5,391 6,206 6,927 6,960 7,247 7,430 12.7

– real valuees $m 3,700 5,391 6,085 6,650 6,525 6,628 6,627 10.2

Notes: b In 2020 calendar year US dollars; c Nickel content of domestic mine production; d Includes metal content of ores and concentrates, intermediate products and nickel metal; e In 2019–20 financial year Australian dollars; f Forecast, r Compound annual growth rate from 2019 to 2025, and 2018–19 to 2024–25, z Projection. Source: ABS (2020) International Trade in Goods and Services, Australia, Cat. No. 5368.0; Company reports; Department of Industry, Science, Resources and Energy; International Nickel Study Group (2020); LME (2020); World Bureau of Metal Statistics (2020)

Resources and Energy Quarterly March 2020 112

14.1 Summary The LME zinc spot price is forecast to average US$2,045 a tonne during . Zinc prices are expected to decline in real terms over the next five years, 2020 (Figure 14.1). The impact of COVID-19 is expected to weigh on as production starts to respond to the high prices of recent years. A prices in the first half of the year. Much will depend on the depth and down-tick in prices in real 2020 terms is projected by the end of the length of the COVID-19 outbreak: China refines a large amount of the outlook period as production comes on line and stocks build with most world’s zinc, and could be impacted by worker shortages. price reduction in the short term. Prices are projected to decrease from Beyond 2020, rising inventories are expected to place a tight cap on US$2,605 a tonne in 2019 to US$1,864 a tonne in 2025, in real terms. prices. The price should come under downward pressure over the outlook . Australia’s zinc production is projected to increase from 1.2 million period, averaging a projected US$1,864 a tonne in real terms in 2025. tonnes (in metallic content) in 2018–19 to 1.8 million tonnes in 2024–25. Figure 14.1: Zinc prices and stocks . Increasing production, combined with falling prices is expected to see 8 4,000 the real value of Australia’s zinc exports decrease from $4.0 billion in 2018–19 to $3.1 billion by 2024–25. 14.2 Prices 6 3,000 Price declines reflect macroeconomic uncertainty Zinc has been affected by US-China trade tensions and resultant 4 2,000 dampening manufacturing and automotive activity but has benefitted from the Phase One deal. The average London Metals Exchange (LME) zinc 2 1,000 a tonne 2020 US$ price in 2019 was 16 per cent lower than in 2018, ending the year at Weeks of consumption US$2,293 a tonne. At the time of writing, prices have continued to fall in early 2020, as market concerns grow over the impact of the COVID-19 0 0 outbreak. 2015 2017 2019 2021 2023 2025

Zinc stocks remain low Stocks Price (rhs)

Inventories of zinc remain low, despite recent price falls on the back of the Source: London Metal Exchange (2020) and Department of Industry, Science, Energy and COVID-19 outbreak. This suggests that market participants are Resources (2020) anticipating — rather than actually experiencing — a swing towards a Zinc price upside wildcard more balanced market. LME data shows stocks hit a 20 year low of 51,000 tonnes in December 2019, down from 129,000 tonnes in December 2018. A wildcard for zinc prices includes the increasing potential for zinc-bromine Shanghai Futures Exchange (SHFE) inventories ended 2019 at 46,000 based batteries as an alternative to lithium ion batteries, particularly in the tonnes, having peaked in March 2019 at 110,000 tonnes. Supply energy storage space. It is early days yet, but towards the end of the shortages reflect environmental constraints on smelter production and a outlook period, this potential source of demand may see consumption rise, consequent failure by smelters to keep pace with concentrate supply. putting upward pressure on prices.

Resources and Energy Quarterly March 2020 114 14.3 World consumption China is expected to continue to dominate global zinc consumption, The COVID-19 outbreak is assumed to affect China’s GDP growth in the though rising construction spending in India is expected to boost its market first half of 2020 with the IMF suggesting that COVID-19 would decrease share over the outlook period. 2020 Chinese growth by 0.4 percentage points from their baseline Global zinc consumption is projected to rise modestly over the outlook forecasts. This may lower Chinese zinc consumption in the short term with period, from 14 million tonnes in 2019 to 15 million tonnes in 2025. potential for a 2 per cent annual drop in Chinese zinc consumption, However, with mine supply of concentrate set to increase and smelter depending on Chinese government stimulus measures (see the macro capacity for uptake limited, this may place mines under pressure to review chapter). This, despite February inventory levels at the LME and the output to match offtake agreements or scale back production. SHFE, has led to price falls. The easing of trade tensions between China and the US signified by the Phase One deal has given prospects for the Figure 14.2: Annual change in global steelmaking and zinc medium-term for global zinc demand a boost. However, this is tempered consumption by the outlook for its uses. 10 10 Zinc’s primary use is galvanising steel, either through hot dipping or cold plating. Therefore consumption is expected to move with steel production 5 5 (Figure 14.2), which is in turn influenced by global industrial production, construction spending and vehicle production. On the vehicle production 0 0 front, apart from the electric vehicle component, the automotive industry is very sluggish; producers have been impacted by delayed purchases by -5 -5 per cent change change (annual) cent per per cent (annual) cent change per - consumers who are worried about uncertain economic conditions and - changing emission requirements in major countries/regions. -10 -10 Zinc 2015 2017 2019 2021 2023 2025 Steel Other applications for zinc are in aerospace and the emerging field of energy storage in domestic and commercial applications, according to Global zinc consumption Steel production (rhs) ASX listed Redflow, United States based Aerojet Rocketdyne and ZAF

Energy and Canadian, Zinc8. Zinc8 recently won a competition for storage Source: International lron and Steel Institute (2020); Department of Industry, Science, Energy with the New York State Power Authority. Zinc energy storage has pros and Resources (2020) and cons compared with lithium energy storage but may find increased 14.4 World production use with utilities. This is likely to start playing out towards the end of the Mine production is set to rise slowly over the outlook period outlook period, as the demand for lithium rises and prices potentially increase for that metal (see the lithium chapter). Additionally, as zinc can Global mine output is expected to rise slowly over the outlook period, often be a by-product of other mining — compared to largely singular reaching 13 million tonnes by 2025. Production gains are predominantly production for lithium — this has price implications for the metal, and from Africa, with Canada assisting towards the end of the outlook period consequently makes other applications potentially more attractive. but higher grade production in diverse locations is a specific feature of the outlook period.

Resources and Energy Quarterly March 2020 115 High grade production is due to come online in 2020–21 from a number of US$240 a tonne. With mine supply of concentrate set to increase and deposits. Production from Peru is set to decline slightly, based on minor smelter capacity for uptake limited, this may place mines under pressure movements from numerous deposits but higher grade ore at Antamina will to review output to match offtake agreements or scale back production. see output recover from the 2019 dip. Antamina’s production should be India’s smelter capacity is expected to increase over the outlook period, more than 450,000 tonnes per annum of zinc over the outlook period. High with expansions across several smelters owned by Hindustan Zinc grade production is also scheduled to come on line from the Dairi project expected to add 113,000 tonnes per annum in new capacity. in Indonesia. The resource grade of 11.5 per zinc and is one of the higher grade undeveloped resources. 14.5 Australia’s exploration, production and exports High grade production is also due from the refurbishment of Kipushi in the Exploration expenditure declined Democratic Republic of Congo. Resource grades average just below 11 The outlook for exploration for zinc is subdued based on the present per cent but higher grade zinc rich sections average over 35 per cent zinc. outlook for the metal. As exploration for copper continues on the back of Production is likely to initiate around 130,000 tonnes per annum, battery materials demand, zinc is likely to be a side beneficiary. This may increasing to 200,000 tonnes per annum over the outlook period. In depress the price of zinc but give an impetus for other uses. Eritrea, the Bisha poly-metallic deposit is likely to phase out and be replaced by Asmara at around 100,000 tonnes per annum of zinc. Exploration expenditure for silver, lead and zinc has declined 38 per cent Gamsberg in South Africa is ramping up in 2020 towards 200,000 tonnes based on a quarter to quarter comparison between December 2018 and per annum and higher beyond the outlook period. Production in southern December 2019, following a decline in zinc prices. Zinc prices have Africa is also growing, providing further concentrate supply for processing. declined further since and the decline in exploration expenditure is in the same order of magnitude as the zinc price. Canadian production is likely to be bolstered towards the end of the outlook period as a result of by-product from other polymetallic deposits, Figure 14.3: Australia’s exploration expenditure on silver, lead and zinc versus zinc prices where these deposits contain other ‘battery metals’ required for electric vehicle manufacture. Prairie Creek in Canada’s Northwest Territories is 4,000 40 likely to head towards production soon, after receiving final permits in 2019. Production from the United States remains relatively flat, despite 3,000 30 movements in individual mines. Additionally, IMIDRO’s Mehdiabad Mine in Iran is slated for production in 2020 ramping up over the outlook period 2,000 20

towards 400,000 tonnes per annum of zinc. million A$ US$ a US$ tonne 1,000 10 Refinery production may struggle to keep pace with mine output Refinery production is expected to largely follow the trajectory of mined 0 0 production. Capacity utilisation at smelters in China is currently high, Dec-10 Dec-13 Dec-16 Dec-19 reported at 85 per cent in late 2019. Smelter utilisation is expected to Silver, lead, and zinc exploration expenditure (rhs) remain above 80 per cent in 2020, with output rising by around 200,000 LME Zinc Price tonnes, encouraged by high treatment and refining charges of around Source: Company reports; Department of Industry, Science, Energy and Resources (2020)

Resources and Energy Quarterly March 2020 116 Australian mine production is increasing Figure 14.4: Australia’s zinc exports, metallic content Australia’s zinc mine production was largely unchanged during the December quarter 2019 at 344,000 tonnes (in metal content terms). 2,000 8 Production is projected to expand towards around 1.8 million tonnes a year (in metallic content terms) over the outlook period (Figure 14.4). 1,500 6 Increasing production at McArthur River, in the Northern Territory, as well as the ramp-up of Century in Queensland (capitalising on the low capital 1,000 4 cost processing of tailings), is likely to continue to support Australian 20 A$ billion production growth, albeit with a limited mine life based on tailings. Thousand tonnes 500 2 Offsetting this, Mt Isa is expected to decline over the outlook period with 2019 – production at Cannington and Dugald River expected to remain steady. 0 0 However, production from smaller deposits outside Queensland and the 2014–15 2016–17 2018–19 2020–21 2022–23 2024–25 Northern Territory is forecast to decline and then cease at Jaguar, Elura Volume Value (rhs) and Rosebery. Meanwhile, production may be initiated at Sulphur Springs. Increasing production for Queensland in particular is expected to be seen Source: ABS (2020) International Trade in Goods and Services, 5368.0; Department of Industry, Science, Energy and Resources (2020) over the outlook period (Figure 14.5). Production in Queensland is likely to be bolstered by zinc produced as a by-product from other polymetallic Figure 14.5: Australia’s zinc mine production by state deposits, particularly where these deposits contain other ‘battery metals’ required for electric vehicle manufacture. 2,000

Refined production of zinc projected to rise modestly Australia refines about 3.4 per cent of the world’s zinc. There are two zinc 1,500 refiners in Australia: Nyrstar, which refines zinc at its Hobart refinery, and Korean-owned Sun Metals, which operates a smelter near Townsville. 1,000 At around 500,000 tonnes, Australian refined zinc production has remained largely flat — with occasional small declines — since 2001. This Thousand tonnes trend is expected to persist over the outlook period, although there is 500 potential for a small increase from 2021, following an expansion at the Sun Metals facility. 0 Exports declining in real terms 2014–15 2016–17 2018–19 2020–21 2022–23 2024–25 Increasing production, combined with falling prices is expected to see the QLD NT NSW WA TAS SA VIC real value of Australia’s zinc exports decrease over the outlook period, from $4.0 billion in 2018–19 to $3.1 billion by 2024–25. Source: Company reports; Department of Industry, Science, Energy and Resources (2020)

Resources and Energy Quarterly March 2020 117 Table 14.1: Zinc outlook

World Unit 2019s 2020f 2021f 2022f 2023z 2024z 2025z CAGRr

Production – mine kt 12,929 12,449 12,719 13,101 13,252 13,139 13,158 0.3 – refined kt 13,149 14,057 14,220 14,385 14,556 14,732 14,917 2.1 Consumption kt 13,772 13,934 14,097 14,262 14,432 14,609 14,794 1.2 Closing stocks kt 829 952 1,076 1,199 1,322 1,445 1,569 11.2 – weeks of consumption 3 4 4 4 5 5 6 9.9 Price – nominal US$/t 2,550 2,045 1,996 2,005 2,035 2,060 2,085 -3.3 USc/lb 116 93 91 91 92 93 95 -3.3 – real a US$/t 2,605 2,045 1,955 1,919 1,904 1,884 1,864 -5.4 USc/lb 118 93 89 87 86 85 85 -5.4

Australia Unit 2018–19 2019–20f 2020–21f 2021–22f 2022–23z 2023–24z 2024–25z CAGRr Mine output kt 1,235 1,428 1,627 1,690 1,646 1,732 1,753 6.0 Refined output kt 480 450 477 522 504 499 506 0.9 Export volume – ore and concentrate b kt 2,091 2,684 2,895 3,035 2,935 3,132 3,179 7.2 – refined kt 420 352 337 382 364 359 366 -2.3 – total metallic content kt 1,325 1,529 1,606 1,713 1,651 1,731 1,759 4.8 Export value – nominal A$m 3,952 3,542 3,128 3,277 3,187 3,360 3,456 -2.2 – real c A$m 4,026 3,542 3,067 3,146 2,988 3,073 3,083 -4.4 Notes: a In 2020 US dollars; b Quantities refer to gross weight of all ores and concentrates; c In 2019–20 Australian dollars; f Forecasts; r Compound annual growth rate; s Estimate; z Projection. Source: ABS (2020) International Trade in Goods and Services, Australia, Cat. No. 5368.0; Company reports; Department of Industry, Science, Energy and Resources (2020); International Lead Zinc Study Group (2020); LME (2020); World Bureau of Metal Statistics (2020)

Resources and Energy Quarterly March 2020 118

15.1 Summary Figure 15.1: Prices of spodumene ore and lithium hydroxide . The lithium hydroxide price (delivered to China) eased by 18 per cent, 20,000 1,000 from US$9,410 a tonne to US$7,750 a tonne over the December quarter. Prices are projected to rise to around US$10,400 a tonne in 2025 (in real 15,000 750 terms) amidst higher electric vehicle uptake, with shortages possible from 2023. 10,000 500 . Australian production is expected to rise from 244,000 tonnes (lithium carbonate equivalent) in 2018–19 to 393,000 tonnes in 2024–25, after a 2020 US$ a tonne US$ 2020 sharp pullback in late 2019 and early 2020 due to falling prices. a tonne2020 US$ 5,000 250 . After dipping from $1.6 billion in 2018–19 to $0.6 billion (in real terms) in 2020–21, rising lithium hydroxide production is projected to drive export 0 0 earnings to $3.0 billion (in real terms) by 2024–25. 2018 2019 2020 2021 2022 2023 2024 2025 15.2 Prices Lithium hydroxide Spodumene (rhs)

Lithium prices have declined across the board Source: Roskill (2019); Brokers (2019), Department of Industry, Science, Energy and Lithium carbonate prices (delivered to China) declined by 14 per cent over Resources (2020) the December quarter. The price averaged US$7,110 a tonne in 2019, Figure 15.2: Lithium production and consumption down 39 per cent from 2018. This compared with price declines into Europe of 13 per cent for the quarter and 30 per cent for 2019 to 1,000 US$11,150 a tonne delivered. Lithium hydroxide prices (delivered to China) declined by 18 per cent over 750 the quarter and by 49 per cent over 2019 (average US$7,750 a tonne). This compared with price declines into Europe of 20 per cent for the 500 quarter and 33 per cent for the year (US$10,000 a tonne delivered). Spodumene prices (delivered to China) declined by 4.6 per cent over the Thousand tonnes 250 December quarter, and by 24 per cent in 2019 based on a price average of US$515 a tonne, taking the total decline from the July 2018 peak to 44 per cent. Prices vary based on lithium content and types of impurities. The 0 sharp pullback in Australian production in recent months has helped ease 2018 2019 2020 2021 2022 2023 2024 2025 downward pressure on prices. The market is expected to tighten over the Production Consumption second half of the outlook period, with prices expected to rise after 2021 Source: Roskill (2019); BloombergNEF (2020); Department of Industry, Science, Energy and (Figure 15.1). Resources (2020)

Resources and Energy Quarterly March 2020 120

15.3 World consumption The United Kingdom accelerated its banning of internal combustion Strong consumption growth is likely over the outlook period engines from 2040 to 2035. The ban excludes hybrid vehicles. Global lithium consumption is projected to rise from 291,000 tonnes Vehicle makers continue to focus on battery prices to drive down vehicle (lithium carbonate equivalent) in 2019 to around 750,000 tonnes by 2025 costs and drive vehicle volumes up (Figure 15.4). Barring changes in (Figure 15.2). technology, the majority of battery costs are the material inputs. Major off- take partners for the Mt Holland mine in Australia were listed as LG, Mitsui Tesla and Volkswagen are increasingly competing with each other and Tesla, but the financial investment decision on the project has been China has increased its electric vehicle target to 25 per cent of all new put on hold until the first quarter of 2021. It is worth noting that in early automobile sales by 2025, despite a slowdown of sales in 2019 (caused by automotive history Ford invested in mining. cuts to subsidies). Electric vehicle sales in China recovered by the end of 2019 (Figure 15.3). India is also moving to establish a full electric vehicle Electric vehicle sales are expected to expand significantly over the longer production chain. Battery cell and pack manufacturing has started up in term as manufacturers develop facilities and the prices reach the India, with the country seeking to expand into the battery manufacture and ‘crossover’ point which will make electric vehicles cheaper than internal chemicals industries. Meanwhile multiple vehicle manufacturers are combustion vehicles. This draws closer at mid US$20,000’s. In battery attempting large scale roll outs with models designed for the mass market. terms, the crossover is mooted at US$100 a kilowatt hour.

Tesla began production of its Tesla 3 at its Shanghai factory in late 2019, Figure 15.3: World monthly electric vehicle sales with order books filling rapidly. Production was halted initially with the COVID-19 outbreak but resumed in mid-February 2020. The factory was 300 originally scheduled to produce 100,000 vehicles per year by end 2020, but may now achieve 150,000 per year. Volkswagen’s Anting factory, near Shanghai has started ‘pre-production’, with full production set for October 200 2020. Volkswagen have planned capacity of 600,000 vehicles per year split between two factories in China.

Outside China, Tesla is sourcing battery cells from Panasonic. In China, Thousands 100 Tesla are pursuing batteries through Contemporary Amperex Technology Company Limited, with battery supply tightening for other vehicle manufacturers. But Tesla is currently recruiting for engineers in battery cell manufacturing, in order to avoid the risk of battery constraints as it 0 increases its volumes of vehicle manufacturing. Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Whilst COVID-19 has been slowing down production in China, it has 2016 2017 2018 2019 presented an opportunity for Volkswagen, who might otherwise have been battery constrained. Volkswagen is now planning to deliver their ID.3 into Source: Inside electric vehicles (2019) Monthly Sales Scorecard until post July 2019. These are based on reconciled monthly or quarterly sales data by major plug-in automakers & the market in the United Kingdom in late March 2020, ahead of schedule. matthewturner.co.uk/wp (Jan 2020).

Resources and Energy Quarterly March 2020 121

Figure 15.4: Long-term electric vehicles sales projection World production is projected to rise to 858,000 tonnes (lithium carbonate 30 30 equivalent) by 2025. However, given the current level of over-supply, and the rapidly accelerating scale of vehicle manufacture capacity, producers 25 25 are likely to pay close attention to offtake agreements, vertical integration opportunities and strategic considerations before embarking on expansion. 20 20 Medium term – carbonate versus hydroxide 15 15 Lithium carbonate is likely to remain well supplied, but the demand for Millions Per cent lithium hydroxide may exceed supply by 2023. Lithium hydroxide is 10 10 suitable for use in batteries with high levels of nickel cathode. However, Tesla announced a move to using lithium phosphate batteries in China, 5 5 rather than the nickel cobalt chemistry that is still used in its US factories. 0 0 This chemistry is suitable for shorter travel ranges typical in China. 2018 2020 2022 2024 2026 2028 2030 Sociedad Quimica y Minera de Chile (SQM) at Salar Del Carmen in Chile Electric vehicle sales Share of all vehicle sales (rhs) produce lithium hydroxide and carbonate. Piedmont in the US and Keliber

Source: International Energy Agency (2019), BloombergNEF (2019), Department of Industry, in Finland also plan to produce lithium hydroxide by 2025. Australia’s Science, Energy and Resources (2020) share of global lithium hydroxide output (Figure 15.5) hinges on project development plus transport issues from potential moisture absorption. 15.4 World production Production is set to grow rapidly over the outlook period Figure 15.5: World lithium hydroxide production

At 495,000 tonnes of lithium carbonate equivalent in 2019, production 600 30 exceeded consumption considerably, leading to a price drop and some rapid pull backs in production in Australia and elsewhere. Nemaska has recently filed for bankruptcy, stalling their Whabouchi spodumene project 400 20 in Quebec. However not all news was supply negative: Rio Tinto is assessing a lithium borate deposit, Jadar, in Serbia. An FID is reportedly due in 2021. ASX-listed Galaxy is pursuing development of its Chile lithium 200 10 Percent Percent of global brine assets, along with existing production from Olaroz in Argentina. Thousand tonnes South American production is growing, but continues to face significant water issues in the Atacama region, with one tonne of lithium requiring 0 0 70,000 litres of water. Less water-intensive methods of extraction via ion- 2020 2021 2022 2023 2024 2025 exchange beads and nano-filtration are being trialled for brine deposits as Global production Australian production (rhs) well. Source: BloombergNEF (2020), Department of Industry, Science, Energy and Resources (2020)

Resources and Energy Quarterly March 2020 122

15.5 Australia Figure 15.6: Australian spodumene ore production Production forecast to dip before recovering 400 Production is forecast to swing sharply over the outlook period. After a price induced slowdown in the short term, there is likely to be a strong 300 recovery in 2022 and 2023 (Figure 15.6), as the demand for lithium and, in particular, lithium hydroxide rises. There are likely to be a number of significant discussions between miners and manufacturers, given vehicle 200 manufacturers needs for low-cost batteries to gain economies of scale.

Production forecasts are particularly difficult to make as a result of the Thousand tonne LCE 100 suspension of two major projects (Mt Holland and Wodgina) and the shift to ‘care and maintenance’ for Bald Hill and possibly Mt Marion. Production 0 has also been scaled back at Mt Cattlin and Pilgangoora (Pilbara 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Minerals). This leaves Greenbushes still operating normally, while Notes: Lithium hydroxide is not included. Pilgangoora (Altura) has just undertaken operational refinancing. Source: Company reports, Roskill (2020), Department of Industry, Science, Energy and Resources (2020) Spodumene production in Australia has scaled back sharply in recent quarters, but capacity to refine lithium hydroxide is ramping up. Export Figure 15.7: Australian spodumene concentrate exports earnings are projected to more than double by 2025, as world battery 3,000 6,000 production increases and the demand for lithium hydroxide leads to shortfalls in the market (Figure 15.7). Australian producers are forecast to ramp up production, as Kwinana, Kemerton and Mt Holland’s associated Kwinana production plant are commissioned. However, there are 2,000 4,000 commissioning risks for some plants. Export earnings forecasts do not include any incremental income to Pilbara Minerals from the development 20 A$ 20 A$ million of offshore hydroxide and or carbonate processing with POSCO in Korea. 1,000 2,000 Thousand tonnes The key risk to the forecast is that margins in the production of lithium 2019 – hydroxide will not be sufficient to attract capital. Whilst lithium hydroxide is a high value product, it is costly to produce. Margins between lithium 0 0 carbonate and lithium hydroxide are around US$500 a tonne (on a tonne 2014–15 2016–17 2018–19 2020–21 2022–23 2024–25 for tonne basis). This, coupled with direct conversion from spodumene to Spodumene volumes Spodumene values (rhs) hydroxide, may make it less attractive for lenders, and lead to more de- risking via joint ventures. Europe is investing heavily to try to reduce its Notes: Income figures include lithium hydroxide and spodumene volumes contain hydroxide. reliance on Asia for battery chemicals and battery cells which may present Source: Company reports, Roskill (2020), Department of Industry, Science, Energy and Resources (2020). opportunities for Australian producers.

Resources and Energy Quarterly March 2020 123

Table 15.1: Lithium Outlook

World Unit 2019s 2020f 2021f 2022f 2023z 2024z 2025z CAGR r

Lithium production a kt 495 439 447 461 567 697 858 9.6

Consumption kt 291 343 409 493 606 675 753 17.2

Stocks b kt 624 720 758 725 686 708 813 4.5

– weeks of consumption 111.5 109.0 96.3 76.4 58.9 54.5 56.1 -10.8

Spodumene price

– nominal US$/t 600 469 462 510 519 527 536 -1.9

– real c US$/t 613 469 452 488 485 482 479 -4.0

Lithium hydroxide price

– nominal US$/t 11,400 7,700 8,855 9,625 10,290 11,130 11,620 0.3

– real c US$/t 11,645 7,700 8,673 9,212 9,627 10,180 10,391 -1.9

Australia Unit 2018–19 2019–20f 2020–21f 2021–22ff 2022–23z 2023–24z 2024–25z CAGR r

Mine production a kt 244 191 141 224 339 382 393 8.3

Export volume d kt 1,298 1,177 935 1,398 2,116 2,428 2,474 11.3

– nominal value A$m 1,616 1,041 657 1,273 2,119 2,801 3,355 13.0

– real value e A$m 1,646 1,041 644 1,222 1,986 2,561 2,992 10.5 Notes: a Lithium Carbonate Equivalent. This is a measure of the quantity of refined product produced from spodumene ore; b Stockpile estimates possibly inaccurate due to changing specifications; c In 2020 calendar year US dollars; d Spodumene concentrates: 2018–19 products included direct ship ore, 4 per cent Li2O concentrate and 6 per cent Li2O concentrate, thereafter 6 per cent Li2O concentrate; e In 2019–20 financial year Australian dollars, direct ship ore increasing 2018–19 value; f Forecast; r Compound annual growth rate; s Estimate; z Projection. Source: Department of Industry, Science, Energy and Resources (2020); Company reports; Roskill (2020); Government of Western Australia Department of Mines, Industry Regulation and Safety (2019)

Resources and Energy Quarterly March 2020

124 Trade summary charts and tables

125

Figure 16.1: Industry shares of GDP Figure 16.3: Principal markets for Australia’s resources exports, 2019–20 dollars 80 60 53 Exports: $107 b GDP: $1462 b 58 61 60 Exports: $151 b 40 GDP: $1887 b 32 40 Per cent

Per cent 18 20 17 20 11 13 11 9 10 8 8 8 6 7 8 6 7 5 5 2 2 1 3 2 0 0 Agriculture, Mining Manufacturing Building and Services China Other Other Japan South EU28 India Thailand forestry and construction Asia Korea fishing 2008–09 2018–19 2008–09 2018–19

Source: ABS (2020) Australian National Accounts, National Income, Expenditure & Production, 5204.0 Source: ABS (2020) International Trade in Goods and Services, 5368.0

Figure 16.2: Principal markets for Australia’s resources and energy Figure 16.4: Principal markets for Australia’s energy exports, exports, 2019–20 dollars 2019–20 dollars

50 60 Exports: $205 b 40 Exports: $98 b 40 44 Exports: $287 b 40 Exports: $135 b 30 28 31 25 19 18

Per cent 20 14 Per cent 20 10 10 12 13 11 9 8 9 8 10 10 9 9 9 10 6 5 8 4 6 3 1 1 0 0 China Japan Other South Other India EU28 United Japan China Other South India Other EU28 Korea Asia States Asia Korea

2008–09 2018–19 2008–09 2018-19

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

Resources and Energy Quarterly March 2020 126 Figure 16.5: Principal markets for Australia's total exports, Figure 16.7: Proportion of goods and services exports by sector 2019–20 dollars 80 60 58 60 53 55 Exports: $290 b 48 40 36 Exports: $380 b 31 40 27 23 Per cent 24 22 22 21

Per cent 17 13 14 20 16 20 12 12 10 12 12 11 8 7 7 4 5 5 4 3 4 3 0 0 Rural Mineral Other Services China Japan South India United Hong New Other resources merchandise Korea States Kong Zealand 2015–16 2016–17 2017–18 2018–19 2008-09 2018-19 Source: ABS (2020) Balance of Payments and International Investment Position, 5302.0 Source: ABS (2020) International Trade in Goods and Services, 5368.0

Figure 16.6: Australia's total imports by country of origin, Figure 16.8: Proportion of merchandise exports by sector 2019–20 dollars 80 73 60 68 70 63 47 Imports: $275 b 43 60

40 Imports: $312 b 25 40 Per cent Per cent 17 19 20 18 16 16 12 11 20 15 13 15 14 8 7 6 5 5 5 5 4 0 0 China United Japan South Thailand Germany Other Rural Mineral resources Other merchandise States Korea 2015–16 2016–17 2017–18 2018–19 2008–09 2018–19 Source: ABS (2020) Balance of Payments and International Investment Position, 5302.0

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

Resources and Energy Quarterly March 2020 127 Table 16.1: Principal markets for Australia’s thermal coal exports, 2019–20 dollars

Unit 2014–15 2015–16 2016–17 2017–18 2018–19

Japan $m 7,727 7,345 8,692 10,187 11,849

China $m 2,979 1,860 3,702 4,906 4,309

South Korea $m 2,905 2,707 2,706 3,077 3,884

Taiwan $m 1,924 1,692 2,385 2,662 3,222

Malaysia $m 635 527 680 774 922

Vietnam $m 4 106 154 132 677 Total $m 17,490 15,837 19,952 23,389 26,446

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

Table 16.2: Principal markets for Australia’s metallurgical coal exports, 2019–20 dollars

Unit 2014–15 2015–16 2016–17 2017–18 2018–19

India $m 5,553 5,020 8,985 10,009 11,642

China $m 5,285 4,218 8,217 8,842 10,241

Japan $m 5,108 4,746 7,449 7,667 7,930

South Korea $m 2,636 2,272 3,960 3,871 4,167

Taiwan $m 1,262 1,058 1,956 2,040 2,690

Netherlands $m 906 982 1,991 1,855 1,825

Total $m 23,742 21,246 37,298 39,137 44,457

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

Resources and Energy Quarterly March 2020 128 Table 16.3: Principal markets for Australia’s crude oil and refinery feedstocks exports, 2019–20 dollars

Unit 2014–15 2015–16 2016–17 2017–18 2018–19

Singapore $m 1,979 676 1,069 1,216 1,982

Malaysia $m 4 155 451 606 1,671

Thailand $m 1,373 745 595 1,194 1,141

China $m 29 757 746 653 1,027

South Korea $m 1 482 475 716 707

Indonesia $m 36 380 969 1,355 661

Total $m 9,583 5,926 5,879 7,206 9,242

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

Table 16.4: Principal markets for Australia’s LNG exports, 2019–20 dollars

Unit 2014–15 2015–16 2016–17 2017–18 2018–19

Japan $m 15,581 11,307 11,940 15,028 21,617

China $m 1,423 3,156 6,021 9,901 17,821

South Korea $m 1,035 1,802 2,697 3,819 5,364

Taiwan $m 44 172 268 774 2,429

Singapore $m 154 427 1,510 1,176 1,261

Malaysia $m 121 201 221 376 890

Total $m 18,388 17,795 23,547 32,006 50,662

Notes: Department of Industry, Science, Energy and Resources estimates based on International Trade Centre data, except for 2016–17 where ABS trade data is available. Source: ABS (2020) International Trade in Goods and Services, 5368.0; International Trade Centre (2020) International Trade Statistics 2001–2019

Resources and Energy Quarterly March 2020 129 Table 16.5: Principal markets for Australia’s iron ore exports, 2019–20 dollars

Unit 2014–15 2015–16 2016–17 2017–18 2018–19

China $m 45,826 41,629 54,400 51,902 64,660

Japan $m 7,288 5,027 5,686 5,521 5,865

South Korea $m 4,405 3,278 4,125 3,735 4,754

Taiwan $m 1,412 1,097 1,511 1,279 1,801

India $m 118 7 6 310 242

Indonesia $m 30 58 46 46 44

Total $m 59,339 51,316 66,096 63,576 79,010

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

Table 16.6: Principal markets for Australia’s aluminium exports, 2019–20 dollars

Unit 2014–15 2015–16 2016–17 2017–18 2018–19

Japan $m 1,586 748 984 1,422 1,344

South Korea $m 836 1,197 782 874 782

Thailand $m 312 288 324 387 399

Taiwan $m 532 320 218 339 299

Indonesia $m 149 101 160 189 122

China $m 54 100 53 35 17

Total $m 4,161 3,480 3,343 4,156 4,244

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

Resources and Energy Quarterly March 2020 130

Table 16.7: Principal markets for Australia’s copper exports, 2019–20 dollars Unit 2014–15 2015–16 2016–17 2017–18 2018–19

China $m 3,968 3,851 2,848 3,901 3,674

Japan $m 2,166 1,533 1,432 1,579 1,868

Malaysia $m 573 663 908 901 1,264

India $m 398 526 471 301 696

South Korea $m 273 236 419 173 623

Philippines $m 3,968 3,851 2,848 3,901 3,674

Total $m 9,217 8,707 7,989 8,751 9,953

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

Table 16.8: Principal markets for Australia’s gold exports, 2019–20 dollars Unit 2014–15 2015–16 2016–17 2017–18 2018–19

China $m 7,569 7,028 2,448 3,043 5,167

Hong Kong $m 206 2,710 10,145 8,328 4,450

United Kingdom $m 634 4,228 4,130 3,385 4,398

Singapore $m 3,389 1,284 319 1,198 1,619

Thailand $m 976 273 562 1,183 1,355

Switzerland $m 16 93 238 809 1,111

Total $m 7,569 7,028 2,448 3,043 5,167

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

Resources and Energy Quarterly March 2020 131 Appendices

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

Resources and Energy Quarterly March 2020 133 A.4 Commodity classifications In this report, benchmark prices and Australian production and exports are The DISER OCE defines exports for each commodity by a selected set of forecast for 21 commodities, as shown in Table A3. In estimating a total for 8-digit Australian Harmonised Export Commodity Classification (AHECC) Australia’s resources and energy exports, the remaining commodities, codes. Where possible, the choice of AHECC codes is based on alignment defined as ‘other resources’ and ‘other energy’, are forecast as a group. with international trade data, to ensure that direct comparisons can be made. For example, groupings for various commodities are aligned with classifications used by the International Energy Agency, World Steel Association, International Nickel Study Group, International Lead and Zinc Study Group, International Copper Study Group and World Bureau of

Metal Statistics.

Table A2: Resources and energy commodities groupings and definitions

Resources (non-energy) Energy

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

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

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

Notes: The AHECC chapter is the first two digits of the trade code. Groupings are made at the 8-digit level. Source: Department of Industry, Science, Energy and Resources (2020)

Resources and Energy Quarterly March 2020 134 Appendix B Glossary

Term Description

A$ Australian dollar

ABS Australian Bureau of Statistics

AHECC Australian Harmonized Export Commodity Classification

AISC All-In Sustaining Cost — an extension of existing cash cost metrics and incorporates costs related to sustaining production.

Base metals A common metal that is not considered precious (includes aluminium, copper, lead, nickel, tin, zinc)

Bbl Barrel

Bcm Billion cubic metres

Benchmark A standard specification used to price commodities.

BF and BOF Blast furnace and basic oxygen furnace — used in an integrated steelmaking process that uses iron ore and coal.

Bulks Non-liquid and non-gaseous commodities shipped in mass and loose (iron ore, coal, bauxite)

CAGR Compound annual growth rate

Capex Capital expenditure

CFR Cost and freight — Seller clears exports, and pays freight.

CIF Cost, Insurance, and Freight

Coal Seam Gas (CSG) Natural gas found in coal seams. Also known as Coal Bed Methane (CBM)

Coke Made by heating coal at high temperatures without oxygen, and used to reduce iron ore to molten iron saturated with carbon, called hot metal

Resources and Energy Quarterly March 2020 135 Conventional gas Natural gas that can be produced from reservoirs using traditional techniques. Contrasts with unconventional gas.

COVID-19 2019 Novel Coronavirus

CPB CPB Netherlands Bureau for Economic Policy Analysis

Consumer Price Index — measures quarterly changes in the price of a basket of goods and services which account for a high proportion of CPI expenditure by the CPI population group (i.e. metropolitan households).

Crude steel Steel in the first solid state after melting, suitable for further processing or for sale.

DES Delivered Ex Ship — price of LNG including shipping and insurance.

DISER Department of Industry, Science, Energy and Resources

DMO Domestic Market Obligation — a policy to reserve energy commodities for domestic usage

DRC Democratic Republic of the Congo

ECB European Central Bank

An increase in the capacity of an economy to produce goods and services, compared from one period of time to another. It is measured in Economic growth nominal or real gross domestic product (GDP).

EIA The United States Energy Information Administration

EAF Electric arc furnace — a furnace that melts steel scrap using the heat generated by a high power electric arc.

ETF Exchange Traded Fund — an exchange traded fund that allows investors to invest in gold on the exchange.

EUV Export unit value — export value/volumes exported

EV Electric vehicle

f Forecast — a two year outlook

FEED Front end engineering design

FID Final investment decision

Resources and Energy Quarterly March 2020 136 FOB Free on board — seller clears export, buyer pays freight.

GAD Gross air dried basis — For measuring coal quality.

GAR Gross as received basis — For measuring coal quality.

GBP Great Britain Pounds

GDP Gross Domestic Product — measures the value of economic activity within a country/group.

GFC Global Financial Crisis — the period of extreme stress in global financial markets and banking systems between mid-2007 and early 2009.

GJ Gigajoule

GST Goods and Services Tax — a value-added tax levied on most goods and services sold for domestic consumption.

Hard coking coal — The best grade of metallurgical coal used in the steel production process. Australian hard coking coal is regarded as the HCC industry benchmark.

IEA International Energy Agency

IMF International Monetary Fund — an international organisation that promotes international financial stability and monetary cooperation.

IMO International Maritime Organisation

IP Industrial Production — measures the output of the industrial sector that comprises mining, manufacturing, utilities and construction.

IPO Initial public offering — a process of offering shares of a private corporation to the public in a new stock issuance.

ISM US Institute for Supply Management

ISM Institute of Supply Management

Japan Customs-cleared Crude (or Japan Crude Cocktail) — average price of crude oil imported by Japan and a common price index in long-term JCC LNG contracts.

JFY Japanese fiscal year kcal/kg Kilocalories per kilogram

Resources and Energy Quarterly March 2020 137 kt Thousand tonnes ktpa Kilotonnes per annum

LBMA London Bullion Market Association

LCE Lithium Content Equivalent

Li OH Lithium Hydroxide

LME London Metal Exchange

LNG Liquefied natural gas

LNY Lunar New Year

LPG Liquefied petroleum gas

LVPCI Low volatile pulverised coal injection — a type of low volatile coal used in the PCI process m Million

MMbtu Million British thermal units

Mt Million tonnes mtpa Million tonnes per annum

MW Megawatts

Nameplate capacity The theoretical maximum annual production capacity

NAR Net as received basis — For measuring coal quality

NDRC China’s National Development and Reform Commission

NEV New energy vehicle — term used for plug-in electric vehicles eligible for public subsidies (battery electric vehicles and plug-in hybrid vehicles)

Resources and Energy Quarterly March 2020 138 OCE Office of the Chief Economist

OECD Organisation for Economic Co-operation and Development

OPEC Organisation of Petroleum Exporting Countries, a formal alliance of 14 countries to collaborate to manage the world oil market

OPEC+ Informal term for agreements between OPEC and ten other oil-producing countries (which are not members of OPEC)

Oz Ounce

PCE Personal Consumption Expenditure — a measure of the changes in price of consumer services and goods.

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

PCI Pulverised coal injection — a process used in blast furnace operations

PM The afternoon price of gold set at 3.00pm each business day at the London Bullion Market Association

PMI Purchasing Managers Index — an indicator of economic health for manufacturing and service sectors.

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

RoW Rest of world

s Estimate — Incomplete data or subject to revision

Shale gas Natural gas found in shales

SDR Special drawing right

SHFE Shanghai Futures Exchange

Semi-soft coking coal — A type of metallurgical coal used in the steel production process alongside hard coking coal, but results in a lower coke SSCC quality and more impurities.

Tariff A tax on imports or exports that is used by governments to generate revenue or to protect domestic industries from competition.

Tight gas Natural gas found in low quality reservoirs

Resources and Energy Quarterly March 2020 139 TWI Trade Weighted Index — a measure of the foreign exchange value of the US dollar against a basket of major foreign currencies.

U3O8 Triuranium octoxide — a compound of uranium.

UAE United Arab Emirates

UK United Kingdom

Unconventional gas Natural gas that is more difficult to extract, including coal seam gas, shale gas and tight gas. Contrasts with conventional gas.

US United States

US$ United States dollar

WEO The International Energy Agency’s World Energy Outlook

WTI West Texas Intermediate crude oil price z Projection — a five year outlook

Resources and Energy Quarterly March 2020 140 Appendix C Contact details

Chapter/s Author Email

Overview David Thurtell [email protected]

Macroeconomic outlook, oil Nathan Pitts [email protected]

Steel, iron ore, uranium Mark Gibbons [email protected]

Metallurgical coal, thermal coal Nikolai Drahos [email protected]

Gas Monica Philalay [email protected]

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

Copper, nickel Kate Martin [email protected]

Zinc, lithium Caroline Lewis [email protected]

Resources and Energy Quarterly March 2020 141