RE­SOURCE SEC­TOR POISED TO BOUNCE BACK

The Australian Mining Review - - CONTENTS - RAY CHAN

Aus­tralia’s re­sources and en­ergy ex­ports are ex­pected to reach $299b in 2019–20, be­fore eas­ing back in sub­se­quent years as some of the sur­pris­ing price gains of re­cent quar­ters un­wind.

How­ever, the pos­si­bil­ity re­mains for new records to be set if prices con­tinue to sur­prise on the up­side.

The re­cent Re­sources and En­ergy Quar­terly, which pub­lished an ex­tended five-year com­mod­ity out­look, in­di­cated a big­ger pic­ture out­look show­ing vast po­ten­tial and a host of new op­por­tu­ni­ties as de­vel­op­ment pro­gresses over the longer term in Asia, Africa and South Amer­ica.

It said Aus­tralia’s prospects as a re­source and en­ergy com­mod­ity ex­porter con­tinue to re­main strong, with the coun­try tipped to be­come the world’s big­gest pro­ducer of gold.

The fore­cast looked be­yond im­me­di­ate is­sues – such as trade ten­sions and the ef­fects of COVID-19 – and con­sid­ered some of the un­der­ly­ing, longer-term fac­tors which af­fect com­mod­ity mar­kets.

It said as the world con­tin­ued to ur­banise, in­dus­tri­alise, and im­prove its tech­nol­ogy, com­modi­ties will con­tinue to play a vi­tal role. In re­cent decades, China’s econ­omy wit­nessed deep in­dus­tri­al­i­sa­tion and an in­jec­tion of large quan­ti­ties of iron, steel and coal.

The next wave of emerg­ing economies – such as In­dia – could fea­ture rel­a­tively less man­u­fac­tur­ing and more in ser­vices and in­for­ma­tion tech­nol­ogy, while their en­ergy and trans­port sys­tems may also de­velop dif­fer­ently.

All these trends would add sig­nif­i­cant op­por­tu­ni­ties for com­modi­ties such as cop­per, lithium, nickel, LNG, and alu­minium.

The re­port looked at the un­ex­pected record prices for some com­modi­ties, like iron ore, which faced se­vere sup­ply dis­rup­tions 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 US$100/t in 2019, but were grad­u­ally cor­rect­ing – un­til an­other wave of floods in Brazil and a cy­clone in the Pil­bara re­gion of WA sent prices spik­ing again in early 2020.

This is lead­ing to a sec­ond surge in iron ore ex­port rev­enue, mak­ing it likely that in 2019–20, iron ore will be the first com­mod­ity to ex­ceed $100b in ex­port earn­ings over a sin­gle year.

How­ever, to credit this earn­ings boom purely to ‘price growth’ would be to miss decades of care­ful work, in­vest­ment, in­no­va­tion and au­to­ma­tion, all of which have driven sig­nif­i­cant im­prove­ments in pro­duc­tiv­ity and scale, plac­ing Aus­tralia at the heart of the global iron ore mar­ket.

Aus­tralia now 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 en­ergy, in­fra­struc­ture, hous­ing, con­struc­tion, trans­porta­tion and all forms of ma­chin­ery.

In ad­di­tion to its piv­otal role across other in­dus­tries, steel is among the world’s largest in­dus­tries in its own right. The re­port also high­lighted the gas and oil in­dus­try, which has be­come more im­por­tant to Aus­tralia over time, emerg­ing as the world’s top ex­porter of LNG in late 2019.

Ex­ports of coal, gas and ura­nium make Aus­tralia piv­otal to global en­ergy mar­kets, while the coun­try’s re­sources of lithium, cop­per, nickel and zinc are likely to hold it in good stead for the fu­ture.

The re­port an­tic­i­pates that the out­break of COVID-19 will have some ef­fect on fore­casts.

It is as­sumed that this event will have an im­pact on Chi­nese and global GDP in the first half of 2020, with the ef­fects largely play­ing out by June 2020.

Re­sources, Water and North­ern Aus­tralia Min­is­ter Keith Pitt said the re­port showed how re­source and en­ergy ex­ports con­tinue to sup­port the Aus­tralian econ­omy.

“The strength and diver­sity of Aus­tralia’s re­source and en­ergy com­modi­ties have al­lowed ex­port earn­ings to over­come chal­leng­ing world eco­nomic con­di­tions — to the ben­e­fit of the Aus­tralian econ­omy,” Mr Pitt said.

“We are see­ing that ex­plo­ration ex­pen­di­ture is solid and that there is room for fur­ther growth. The best thing that we as a Gov­ern­ment can do is to re­move any red and green tape that will sti­fle in­vest­ment and en­sure that our pol­icy set­tings and ac­tions for man­ag­ing chal­lenges like COVID-19 are right.”

Mr Pitt said the re­sources and en­ergy sec­tor is well po­si­tioned to lead a post­pan­demic bounce back, thanks to the sound eco­nomic man­age­ment of the Gov­ern­ment.

“Even if you’re not di­rectly in­volved in the re­sources in­dus­try, all Aus­tralians see the ben­e­fits of the pub­lic in­fra­struc­ture like roads and hos­pi­tals that the sec­tor’s roy­al­ties help fund,” he said. “Aus­tralia re­mains well placed to take ad­van­tage of grow­ing mar­ket op­por­tu­ni­ties go­ing for­ward.

“Our ex­ports of coal, gas and ura­nium are cru­cial to global en­ergy mar­kets and our suc­cess in ex­tract­ing and ex­port­ing lithium, cop­per, nickel and zinc also make Aus­tralia im­por­tant in sup­port­ing new tech­nol­ogy, in­clud­ing elec­tric ve­hi­cles and bat­ter­ies,” Mr Pitt said.

OVER­VIEW

In the first quar­ter of 2020, the COVID-19 out­break has shifted some com­mod­ity prices – no­tably, oil and base met­als (down) and gold (up). These shifts are ex­pected to un­wind by the sec­ond half of 2020 as­sum­ing China’s econ­omy re­turns to nor­mal by then.

Iron ore prices have stead­ied at high lev­els, as sup­ply prob­lems off­set de­mand wor­ries. Coal prices have stead­ied af­ter the sharp de­clines of 2019, while bBase and pre­cious metal prices have wa­vered (in op­po­site di­rec­tions), on con­cerns about the COVID-19 out­break.

Off­set­ting the im­pact of weaker prices, higher ex­port vol­umes and a low­erthan-ex­pected Aus­tralian dol­lar are likely to see Aus­tralia’s re­source and en­ergy ex­ports set the $299b record in 2019–20. Earn­ings are ex­pected to ease in sub­se­quent years as price gains un­wind.

MACROE­CO­NOMIC OUT­LOOK

While US-China trade ten­sions and the coro­n­avirus out­break are weigh­ing on world eco­nomic growth and in­dus­trial pro­duc­tion at the start of 2020, growth is ex­pected to rise slowly.

The IMF fore­casts world GDP growth will slowly re­cover over the out­look pe­riod, due to im­prov­ing per­for­mances in de­vel­op­ing economies. Stim­u­la­tory mon­e­tary pol­icy is push­ing global down bond yields and sup­port­ing con­sumer spend­ing.

With global in­fla­tion low, mon­e­tary con­di­tions are likely to be sup­port­ive of growth over the medium term.

The Phase One trade deal be­tween the US and China of­fers some prospects for re­duc­ing trade ten­sions over time, though these ten­sions re­main a no­table risk to world GDP growth and com­mod­ity de­mand.

URA­NIUM

In­ter­est­ingly, the fore­cast said tight sup­ply con­di­tions — in­clud­ing the clo­sure of Aus­tralia’s Ranger mine next year — could lift ura­nium prices, which have al­ready be­gun mov­ing up­wards away from a floor of around US$25/ lb placed un­der­neath it fol­low­ing pro­duc­tion cuts in Kaza­khstan and Canada.

But while the prices may be on the rise, the re­port notes many min­ing projects have been aban­doned or placed in hia­tus in re­cent years, and ura­nium mines can take sig­nif­i­cant time to start or restart.

LITHIUM

The re­port ex­pects prices to rise by 2025 to around US$10,400/t on the back of higher elec­tric ve­hi­cle sales, with short­ages of this min­eral pos­si­ble by 2023.

Global lithium con­sump­tion is pro­jected to rise from 291,000t in 2019 to around 750,000t by 2025, while back home, there is ex­pected to be a strong rise in spo­dumene ore out­put in 2022 and 2023.

Aus­tralia’s ex­port earn­ings are pro­jected to more than dou­ble by 2025 as world bat­tery pro­duc­tion in­creases and the lithium hy­drox­ide de­mand leads to sup­ply short­ages.

GOLD

The re­port said global mine pro­duc­tion will rise 2pc this year to 3533/t, then an­other 1.9pc to 3600/t next year.

Aus­tralia is tipped to over­take China as the world’s largest gold-pro­duc­ing coun­try in 2021 as min­ers re­spond to record prices. Chi­nese out­put has been af­fected by the COVID-19 out­break and in­creas­ing en­vi­ron­men­tal reg­u­la­tion.

CHINA

In­deed, the out­look for the world’s ma­jor com­mod­ity con­sumer, China, is per­haps a source of good news. Deloitte re­ports that with new COVID cases ap­pear­ing to have been suc­cess­fully con­tained, China’s Gov­ern­ment is mov­ing to restart the econ­omy.

The con­sul­tancy firm’s David Rum­bens and James Camp­bell-Sloan Stated the Peo­ple’s Bank of China has low­ered in­ter­est rates and cut the re­serve re­quire­ment for banks to stim­u­late new lend­ing, which is likely to flow into do­mes­tic in­fra­struc­ture in­vest­ment rather than new fac­to­ries or equip­ment, given weak de­mand in ex­port mar­kets. This bodes well for iron ore prices but less pos­i­tive for trade ex­posed in­dus­trial met­als.

COM­MOD­ITY OUT­LOOK

Fears of re­duced sup­plies of key com­modi­ties are grow­ing due to mea­sures to con­tain the virus at key mine oper­a­tions across the globe, Deloitte said. Sev­eral of the world’s big­gest min­ing groups have an­nounced de­lays to pro­duc­tion and de­vel­op­ment projects be­cause of travel and other re­stric­tions im­posed in re­sponse to the global pan­demic.

“We’ve seen that dy­namic play out in Peru re­cently where pro­duc­tion has come to a halt af­ter the gov­ern­ment de­clared a state of emer­gency,” the an­a­lysts said. “Bear­ing in mind that Peru pro­duces 12pc of the world’s cop­per, re­mov­ing sup­ply on this scale is likely to have a price im­pact.”

Iron ore will be the first com­mod­ity to ex­ceed $100b in ex­port earn­ings over a sin­gle year. Aus­tralia is tipped to over­take China as the world’s largest gold-pro­duc­ing coun­try in 2021.

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