But outlook beyond 2020 is harder to read
Volatility in the global commodity markets is not expected to unduly rattle Australia’s commodity outlook through 2020, but the 2021 picture is less rosy, according to government research.
A recent report from Australia’s Department of Industry, Innovation and Science maintains a confident outlook for the coming year. Resources and Energy Quarterly, published at the end of September, anticipates that Australian resource exports will hold up in 2019-20, projecting A$282 billion in exports over the forecast period.
But with a less stable world industrial production outlook, the demand forecast for 2021 is not as clear-cut for commodity-dependent countries like Australia. According to the report, export earnings for 2020–21 may only reach $258 billion with the decline reflecting the impact of the steady return of Brazilian iron ore production to normal, following the fallout from the Brumadinho mine tailings dam collapse.
David Turvey, acting division head of the Department, noted that global cutbacks in manufacturing production are already flowing through into commodity markets and that the importance of China’s burgeoning middle class means that any further decline in Chinese economic growth could have even more significant effects on global supply chains for a range of technology and other products.
“Thus far, problems within the global economy remain somewhat quarantined,” he said. “The usual catalysts for global downturns — miscalculations with interest rates, financial freeze-ups, abrupt collapses in investment — have not yet materialised.”
“But uncertainty is growing. Central banks and governments still have firepower to deploy to prevent a major slowdown, though perhaps less ammunition than was available 10 years ago.”
That said, Mr Turvey noted that more established commodities, such as steel and aluminium, could actually benefit from some carefully chosen Chinese stimulus measures.
Encouragingly, data for the report suggests that mining investment in Australia has turned a corner. “For the first time in six years, mining companies are planning to increase their annual spend on building new mines/wells and on expanding and replacing their fleet of plant, machinery and equipment,” said the report.
Provisional indications support the likelihood that the first quarter of 2019 could well have marked the low point of the mining investment cycle. Expectations for capital expenditure suggest a rise of around 14% in 2019-20, to just over $38 billion. The report sees investment stemming from the recent rebound in bulk commodity prices and new prospects for lithium and other critical minerals.
While Australia’s iron ore export volumes slipped 0.2% year-on-year in the second quarter 2019 to 219 million tonnes – hit by the disruption caused by Cyclone Veronica – production recovered in the third quarter as ports in the Pilbara region returned to regular operation.
Iron ore export volumes are forecast to increase by an annual average of 2.9% from 2018-19 to 2020-21, rising from 820 million tonnes to 869 million tonnes. “Higher volumes should be underpinned by Fortescue’s Iron Bridge project, and also by development of three large iron ore projects in the Pilbara region,” said the report. These large projects are Fortescue’s Eliwana, expected to commence in December 2020 and produce 30 million tonnes per year; Rio Tinto’s Koodaideri, expected to start in late 2021 and produce 43 million tonnes per year; and BHP’s South Flank, set to produce 80 million tonnes annually and replace existing production from the Yandi operations from 2021.
Australia’s coal export volumes are forecast to grow from 210 million tonnes in 2018-19 to 214 million tonnes in 2020-21, thanks to modest production growth from new capacity and expansions, a recovery from recent disruptions, and productivity improvements.
Meanwhile, the aluminium forecast is expected to remain stable at 1.6 million tonnes for 2020-21. This builds on a strong year in 2018-19, driven largely by increased exports to the US – up 326% to 281,000 tonnes – due to the tariff-exempt status that was granted to Australia.
2018-19 bauxite volumes that were supported by environmental priorities in China led to a 12%, or near 33 million tonne, increase in exports to China. However, Guinea threatens to dilute this strength. In June 2019, Guinea accounted for 52% of China’s total bauxite imports whereas Australia only accounted for 32% of China’s total bauxite imports. The report notes it is “likely” that the Malaysian Government will relax its ban on bauxite mining in Pahang next year, an area that accounts for 70% of Malaysia’s bauxite production. “The decision is expected to add pressure to Australian bauxite exporters, as another major bauxite supplier enters the Chinese bauxite market,” said the report.
Rare earth focus
While Australia’s rare earth metal volumes are a far cry from its heavy iron ore dominance, it’s a mining and export area that it is looking to develop in the coming years. Australia is looking to challenge China’s leading edge and is advancing separate talks with the US, Japan and South Korea over the development of local rare earths mining projects outside of China.
Rare earths are a group of 17 elements needed in components for missile systems to consumer electronics and have been highlighted as a potential weapon in the US-China trade tensions.
According to the US Geological Survey, China mined 180,000 tonnes in 2018, compared with Australia’s 20,000 tonnes.
Australian Trade and Investment Commission has highlighted the potential for Australia to increase exports of this group of minerals, as well as critical minerals such as cobalt, magnesium and lithium.
Minerals Council of Australia chief executive Tania Constable commented that world advances in computing, manufacturing, energy and transport are being made possible by critical minerals found in Australia.
“With critical minerals essential to global economic development but geographically concentrated, Australia is well placed to extract and produce these high performance minerals,” she said. “Critical minerals are already a multi-billion dollar industry in Australia, with many new projects at advanced stages of development that will soon be ready to support the world’s growing needs.”
The next Baltic Exchange Advanced Freight Modelling & Trading course will take place 11-12 March 2020 in London. Click here for more information.