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Further informationFor more information on data or government initiatives please access the report from the Department’s website at: www.industry.gov.au/oce

EditorDavid Thurtell

Chapter AuthorsResource and energy overview: David Thurtell

Macroeconomic overview, oil: Nathan Pitts

COVID-19: Esther Harvey

Steel and iron ore, uranium: Mark Gibbons

Metallurgical and thermal coal: Nikolai Drahos

Gas: Monica Philalay

Gold, aluminium, alumina and bauxite: Thuong Nguyen

Copper, nickel: Kate Martin

Zinc, lithium: Caroline Lewis

AcknowledgementsThe authors would like to acknowledge the contributions of:

Matt Boyce, Melissa Bray, Lou Brooks, Russ Campbell, Ken Colbert, Lauren Pratley.

Cover image source: Shutterstock

ISSN 1839-5007

Vol. 10, no. 1

© Commonwealth of Australia 2020

Ownership of intellectual property rightsUnless otherwise noted, copyright (and any other intellectual property rights, if any) in this publication is owned by the Commonwealth of Australia.

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AttributionContent contained herein should be attributed as follows:

Department of Industry, Science, Energy and Resources, Commonwealth of Australia Resources and Energy Quarterly March 2020. The Commonwealth of Australia does not necessarily endorse the content of this publication.

Requests and inquiries concerning reproduction and rights should be addressed to [email protected]

Disclaimer The views expressed in this report are those of the author(s) and do not necessarily reflect those of the Australian Government or the Department of Industry, Science, Energy and Resources.

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 publication. Third parties rely upon this publication entirely at their own risk.

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Contents

Foreword 4

About the edition 5

Overview 6

Macroeconomic Outlook 15

Steel 26

Iron Ore 31

Metallurgical Coal 38

Thermal Coal 47

Gas 60

Oil 71

Uranium 79

Gold 85

Aluminium 92

Copper 101

Nickel 107

Zinc 113

Lithium 119

Macroeconomic Outlook 2.1: COVID–2019 18

Resources insights

Trade summary charts and tables 125

Appendix A: Definitions and classifications 133

Appendix B: Glossary 135

Appendix C: Contact details 141

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

Gas7.1: US-China trade deal — implications for Australian LNG 67

Oil8.1: Impacts of diplomatic tensions on oil markets 75

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Foreword Each March, the Resources and Energy Quarterly publishes an extended five-year commodity outlook. The annual ‘big picture’ forecast seeks to look beyond immediate issues — e.g., trade tensions, COVID-19 — and considers some of the underlying, longer-term factors which affect commodity markets. As the world continues 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. 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.

This edition shows Australia’s resources and energy exports are expected 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, the possibility remains for new records to be set if prices continue to surprise on the upside.

The classic case here is 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 a tonne in 2019, but were gradually correcting — until another 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 second surge in iron ore export revenue, making it likely that in 2019–20, iron ore will be the first commodity to exceed $100 billion 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.

Another major industry — and similarly critical to the global economy — is gas and oil. Here, too, Australia has become more important over time, emerging as the world’s top exporter of LNG in late 2019. Our exports of 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 good stead for the future.

Unavoidably, the outbreak of COVID-19 (coronavirus) will have some 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 effects largely playing out by June 2020, though at the time of writing, this remained a rapidly evolving issue.

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 potential and a host of new opportunities as development progresses over the longer term in Asia, Africa and South America. Australia’s prospects as a resource and energy commodity exporter continue to remain strong.

Resources and Energy Quarterly March 2020

5Resources and Energy Quarterly March 2020

About this edition The Resources and Energy Quarterly (REQ) contains the Office of the Chief Economist’s forecasts for the value, volume and price of Australia’s major resources and energy commodity exports.

A ‘medium term’ (five year) outlook is published in the March quarter edition of the Resources and Energy Quarterly. Each June, September and December edition of the Resources and Energy Quarterly features a ‘short term’ (two year) outlook for Australia’s major resource and energy commodity exports. The December Resources and Energy Quarterly also includes the annual Major Projects update.

Underpinning the forecasts/projections contained in the Resources and Energy Quarterly is the Office of the Chief Economist’s outlook for global resource and energy commodity prices, demand and supply. The forecasts/projections for Australia’s resource and energy commodity exporters are reconciled with this global context.

The global environment in which Australia’s producers compete can change rapidly. Each edition of the Resources and Energy Quarterly factors in these changes, and makes appropriate alterations to the forecasts/projections, by estimating the impact on Australian producers and the value of their exports.

In this report, commodities are grouped into two broad categories, referred to as ‘resources’ and ‘energy’. ‘Energy’ commodities comprise metallurgical and thermal coal, oil, gas and uranium. ‘Resource’ commodities in this report are all other mineral commodities.

Unless otherwise stated, all Australian and US dollar figures in this report are in real (2020) terms. Inflation and exchange rate assumptions are provided in tables 2.1 and 2.2 in the macroeconomic outlook chapter.

The impacts of the COVID-19 outbreak are assumed to affect Chinese and global commodity demand over the first half of 2020, with a return to 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)


1.1 Summary In the first quarter of 2020, the COVID-19 outbreak has moved the

prices of some commodities — notably, oil and base metals (down) and gold (up). Assuming China’s economy is largely back to normal by the second half of 2020, these moves are likely to be fully unwound by then. Thereafter, supply issues will largely drive price moves.

Iron ore prices have steadied at high levels, as supply problems offsetdemand worries. Coal prices have steadied after the sharp declines of2019. Base and precious metal prices have wavered (in oppositedirections), on concerns about the COVID-19 outbreak.

Offsetting the impact of weaker prices, both higher export volumes anda lower-than-expected Australian dollar are likely to see Australia’sresource and energy exports set a record $299 billion in 2019–20(Figure 1.1). A stronger Australian dollar and price falls are likely toreduce export earnings over the outlook period to 2024–25.

1.2 Export values Australia’s export values forecast to reach almost $300 billion in 2019–20 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 quarter 2020. A 4.2 per cent fall in prices was more than offset by a 13.1 per cent rise in volumes. In 2019–20, resource and energy exports are 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 rising Australian dollar are expected to lower export earnings (in real terms) to $265 billion in 2021–22, after which earnings flatten (Figure 1.2).

Ongoing weakness in the Australian dollar is helping to support earnings 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, and was 3.3 per cent lower than a year ago. In US dollar terms, the index rose by 0.2 per cent in the quarter, but was 7.7 per cent lower than a year before. The index of prices for resource commodity exports (in Australian dollars) rose by 10.7 per cent in the year to the March quarter 2020, while an index of prices of energy commodities fell by 17.5 per cent (Figure 1.3).

Figure 1.1: Australia’s resource and energy export values/volumes

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

Figure 1.2: Annual growth in Australia’s resources and energy export values, contributions from prices and volumes


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Figure 1.3: Resource and energy export prices, AUD terms

Notes: The export price index is based on Australian dollar export unit values (EUVs, export values divided by volumes); the export price index is a Fisher price Index, which weights each commodity’s EUV by its share of total export values. Source: ABS (2020) International Trade in Goods and Services, 5368.0; Department of Industry, Science, Energy and Resources (2020)

1.3 Macroeconomic, policy, trade and other factors Just as the world economy looked to be responding to an easing in US-China trade tensions — and to prior measures by several major central banks aimed at stemming the impact of those trade tensions — activity has been affected by the outbreak of COVID-19. Originating in China, at the time of writing the viral outbreak has spread globally and has not been totally contained. The Chinese government has taken measures to offset the economic impact of the outbreak.

The impact of the COVID-19 outbreak on the Chinese economy stems largely from its timing — during Lunar New Year (LNY) holidays, when hundreds of millions of Chinese workers travel across the country to visit relatives. Movement restrictions imposed by the Chinese government during the LNY holidays inhibited the return to work of over two thirds of internal migrant workers. The number of new cases has now peaked in China, and it seems likely that, as factories restart, Chinese activity will quickly rebound. It is assumed that the overwhelming majority of work places in China will be fully operational by the end of June 2020. The

major central banks are likely to adopt a stimulatory monetary stance in 2020, aided by disinflationary impact of the COVID-19 outbreak.

The COVID-19 outbreak is a timely illustration of the huge influence that China has on world resource and energy commodity markets. China consumes a large portion of world industrial metal output, and is also a major miner and refiner of some metal and energy commodities. So disruptions to resource and energy commodity supply and demand have 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 outbreak, may impact China’s economy adversely over the outlook period.

Assuming the impact of the COVID-19 outbreak has passed by the second half of 2020, it is expected that annual growth in the Chinese economy will drift lower over the outlook period, but remain above 5 per cent per annum. Coming on a higher base than a decade ago — when Chinese growth was routinely double digit — this still implies enormous commodity demand in absolute terms. Strong growth in emerging Asia is likely to partially compensate for the impact of slower Chinese growth.

The US 2020 (Presidential, House of Representatives and part Senate) elections on 3 November 2020 may have some impact on a number of resource and energy commodity markets from 2021. The US President has committed to formally leaving the Paris Agreement on 4 November 2020, the day after the US elections. Wins by the Democratic Party for the Presidency, and majorities in both houses of US Congress, could see policy moves affecting carbon emissions, fracking and other environmental regulations governing energy commodity usage and production.

A rise in the number of nations committing to phase out the sale of internal combustion engine vehicles and becoming carbon net neutral by 2050 could start to impact (adversely) on commodities such as oil and thermal coal, but have positive implications for metals used in renewable energy technology and electric vehicles, such as copper, nickel and lithium.

Continued trade tensions pose a significant risk to world growth and resource and energy commodity trade over the outlook period.

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1.4 Prices After reaching US$120 in July 2019, the iron ore price has consolidated in US$81-97 a tonne range since the December 2019 Resources and Energy Quarterly. Supply disruptions in Australia and Brazil have offset the impact of reduced Chinese demand arising from the COVID-19 outbreak. The price is forecast to fall during 2020 (Figure 1.4), as growth in Chinese steel output eases and (Brazilian) iron ore supply recovers.

After declines through 2019, the prices of metallurgical and thermal coal steadied in the March quarter 2020. Metallurgical coal prices benefited from supply problems in some of the major producing nations. A rise in prices is likely over the latter half of the outlook period, as supply is slightly outpaced by demand. Rising supply and softer demand has put pressure on the thermal coal price. Prices are likely to rise modestly in the first few years of the outlook period, as shortages build (Figure 1.4).

Oil prices have declined sharply over the past quarter, as the COVID-19 outbreak and associated movement restrictions in China spark demand concerns. The price should recover in the second half of 2020 assuming the impact of the COVID-19 outbreak recedes. Over the balance of the outlook period, oil prices should experience minor gains, staying below US$80 a barrel. The value of Australia’s growing oil, condensate and LNG exports will all move with the oil price as 75 per cent of our LNG is sold under contract at prices linked to Japanese customs cleared oil prices.

The gold price pushed to a 7-year high above the US$1,600 an ounce 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 strong scrap supply and deter jewellery demand in price sensitive markets such as India and China. After receiving a boost with the announcement of the US-China Phase One trade deal in December 2019, base metal prices have declined significantly on the back of the COVID-19 outbreak. Copper and zinc have been particularly hard hit. Base metals should recover once the COVID-19 outbreak is largely contained, with nickel and copper likely to rise on low supply and strong demand for metals needed in electric vehicle and renewable energy generation (Figure 1.5).

Figure 1.4: Bulk commodity prices

Notes: Prices are in US dollars, and are the international benchmark prices Source: Bloomberg (2020)

Figure 1.5: Base metal prices

Notes: Prices are in US dollars, and are the international benchmark prices Source: Bloomberg (2020)

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1.5 Export volumes Export volumes to grow, driven by growing energy exports The OCE’s Resources and Energy Export Volumes Index (preliminary estimate) rose by 0.4 per cent in the March quarter 2020 from the 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 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 more tepid growth over the rest of the outlook period output growth slows.

1.6 Contribution to growth and investment Mining industry continues to support overall economic growth Australia’s real Gross Domestic Product (GDP) grew by 0.5 per cent in the December quarter 2019, and by 2.2 per cent though the year. The mining industry directly accounted for 28 per cent of the growth in Australia’s GDP in the year to the December quarter 2019. Mining value-added rose by 1.8 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.

After being the largest contributor to mining industry value-added growth in the last few years, the contribution of oil and gas extraction was relatively low in the December quarter. In the coming few years, it is likely that this sector will make a much smaller contribution to GDP growth than over the 2010s, as the fruits of the LNG expansion of the 2010’s diminish in size.

Since the global financial crisis, swings in Australian resource and energy export earnings have correlated very closely with swings in nominal GDP (Figure 1.6). The rising share of resource and energy commodity export earnings in Australia’s nominal GDP — driven by favourable gains in our terms of trade and the fruits of the resource commodity investment boom — appears to have made resource and energy exports a significant swing factor in the economy. With growth in resource and energy export values likely having peaked in the second half of 2019, if the correlation persists, a sharp slowing in resource export earnings growth could have significant implications for nominal GDP growth.

Figure 1.6: Australia’s nominal GDP vs resource and energy commodity export earnings, annual per cent change


Mining investment is picking up The ABS Private New Capital Expenditure and Expected Expenditure survey shows that investment by Australia’s mining industry was $9.4 billion in the December quarter 2019, up 4 per cent over the year. Total investment for 2018–19 summed to $33 billion, down by 8.3 per cent from the year before.

Higher commodity prices in the past two years appear to have encouraged some recovery in capital spending over the most recent quarters. This has been led by growth in investment by the metal ore mining sector (Figure 1.7), which may have been encouraged by surging iron ore and steel prices in mid and late 2019.

Expenditure across the mining sector as a whole was driven by higher investment in machinery and equipment, which was up by 34 per cent over the year to the December quarter (Figure 1.8).

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Figure 1.7: Mining industry capital expenditure by commodity

Notes: Other mining includes non-metallic mineral mining and quarrying and exploration and other mining support services; chart data is in nominal terms Source: ABS (2020) Private New Capital Expenditure and Expected Expenditure, 5625.0

Figure 1.8: Mining industry capital expenditure by type, quarterly

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Forward expectations (Figure 1.9) suggest that mining companies 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 quarter 2019 — the second quarter of the 2019–20 financial year — was 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 the re-opening of mines. However, investment in new greenfield projects remains well below the levels of early this decade.

Figure 1.9: Mining industry capital expenditure, fiscal year

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

Data on exploration spending (adjusted for inflation) suggests that a recovery in mining capital expenditure is underway (Figure 1.10). Exploration spending for all commodities grew by 23 per cent through the year, to reach $970 million in the December quarter in real terms.

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Figure 1.10: Mining capital expenditure vs exploration, quarterly

Notes: Chart data is in real terms Source: ABS (2020) Private Capital Expenditure Survey, Mining, Chain Volume measure, 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.

Figure 1.11: Resource and energy exports, by forecast release

Notes: Chart data is in real (2019–20) terms Source: Department of Industry, Science, Energy and Resources (2020)

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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)


2.1 Summary The IMF forecasts world GDP growth will slowly recover over the outlook

period, due to improving performances in developing economies. However, the IMF has suggested that 2020 growth will be revised down due to the impact of the COVID-19 outbreak.

Stimulatory monetary policy is pushing down global 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.

Global economic outlook Over the outlook period, world economic growth is expected to recover 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 in 2009. Growth is forecast to recover to 3.3 per cent in 2020, with further marginal increases over the rest of the outlook period. The IMF forecasts global GDP will rise by 3.4 per cent in 2021 and 3.5 per cent by 2025. These projected values are still below the long-term average growth rate of 3.8 per cent recorded between 2000 and 2018.

The IMF expects growth in advanced economies to fall from 1.7 per cent in 2019 to 1.6 per cent in 2020, remaining around these levels out to 2025. While there is significant uncertainty over Chinese growth in 2020 due to the COVID-19 outbreak (Box 2.1), growth in emerging markets and developing economies is forecast to rise from 3.7 per cent in 2019 to 4.4 per cent in 2020, and to 4.6 per cent in 2021. Some countries currently affected by domestic macroeconomic issues — including Argentina, India and Turkey — are expected to see a recovery in growth over 2020. An assumed easing in trade tensions is also expected to drive a recovery in developing Asia, with overall growth improving from 2022 (Figure 2.1).

Figure 2.1: Annual growth in global GDP

Sources: Bloomberg (2020), IMF (2020)

Easing US-China trade tensions are expected to contribute to a pick-up in global industrial production growth over coming months (Figure 2.2). The global Purchasing Managers Index (PMI) moved above 50 in January 2020— indicating expansionary conditions (Figure 2.3). This improvement has been temporarily disrupted by the COVID-19 outbreak, and the resulting impacts are assumed to persist over the first half of 2020 (see Box 2.1). COVID-19 has had a notable impact on industrial production in China, with the Chinese manufacturing PMI falling from 50 in January to 35.7 in February. World industrial production is expected to be constrained for the first half of 2020 due to the importance of China in international supply chains, and the global spread of the virus. The Chinese government is expected to embark on measures to cushion the impact of the COVID-19 outbreak, with industrial production growth expected to receive a boost as a result. Assuming the economic impacts of the COVID-19 outbreak ease in the second half of 2020, global industrial production growth is expected to return to pre-2019 levels.

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Sources: CPB Netherlands Bureau for Economic Policy Analysis (2020)

Figure 2.3: World industrial production and manufacturing Purchasing Managers’ Indices

Source: Bloomberg (2020)

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 urbanisation would usually be associated with rapid industrialisation. However, a high proportion of population growth is expected to occur in Sub-Saharan Africa, where the historical linkages between urbanisation and industrialisation are lower than in other regions. As a result, medium-term global industrial production growth is likely to be less influenced by population growth drivers over the outlook period.

Global trade fell in 2019, as a result of trade tensions between several major economies. Trade was notably lower for key manufacturing economies including China, the EU and Japan. Over the medium term, trade tensions are expected to ease, as China and the US continue bilateral negotiations (see Box 2.2) and the UK leaves the EU. If trade barriers are wound back and business confidence improves, global trade can be expected to return towards trend growth.

Slowing industrialisation in parts of the world is likely to slightly reduce the demand growth for cement, coal, steel, and associated materials over the outlook period. However, technological change and a need for less polluting energy sources are driving growth in other areas including minerals used in ‘high tech’ applications: copper, nickel and rare earths.

China Chinese economic growth fell to 6.1 per cent in 2019 — the lowest rate in 29 years. Lower growth rates were driven by US-China trade tensions and slowing Chinese consumer demand. The IMF is forecasting that Chinese growth will continue trending downward, falling to 6.0 per cent in 2020. However, this reflects structurally slowing Chinese growth rather than impacts of the trade tensions that affected the Chinese economy in 2018 and 2019. The IMF revised Chinese growth estimates upwards by 0.2 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 Chinese economy remains uncertain, with the IMF suggesting on 22 February 2020 that COVID-19 would decrease 2020 Chinese growth by

-15-12-9-6-303691215

-25-20-15-10-505

10152025

Dec-01 Dec-04 Dec-07 Dec-10 Dec-13 Dec-16 Dec-19

Imports Industrial production (rhs)

Annu

al p

er c

ent c

hang

e

Annu

al p

er c

ent c

hang

e

35

40

45

50

55

60

65

Aug-17 Feb-18 Aug-18 Feb-19 Aug-19 Feb-20

Inde

x

US China Japan

Australia Eurozone World


0.4 percentage points from their baseline forecasts, with world growth being 0.1 percentage points lower.

To offset the impacts of COVID-19 and, more generally, to prevent a further decline from the current 29-year growth low, the Chinese 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 announced plans to inject US$173 billion into the money supply to increase liquidity and offset some of the economic impacts of the COVID-19 outbreak on consumer spending.

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 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 result, the food price index rose by 17 per cent and the consumer price index by 4.5 per cent. COVID-19 is also driving inflationary pressures, with stockpiling and transport restrictions raising prices for consumer goods. This may increase the concerns of the Chinese central bank in adopting more expansionary monetary policies over the medium term.

Over the medium term, the Chinese government is expected to continue targeting economic growth, poverty reduction and addressing pollution. These policies will influence China’s energy consumption and the level of industrial production, with mixed results for Australia’s resource and energy exports.

Chinese economic growth is expected to continue trending slightly downward, falling to 5.5 per cent in 2025. Assumed actions to reign in debt levels (Figure 2.4) and reduce risks to the Chinese financial sector are expected to increase economic stability, somewhat at the expense of economic growth.

Figure 2.4: Share of Chinese debt to GDP


Box 2.1: COVID-19 On 31 December 2019, China reported the COVID-19 outbreak to the World Health Organisation (WHO). As at 9 March 2020 the WHO have reported 109,577 confirmed cases, with 80,904 in China and 28,673 outside of China. While the majority of COVID-19 cases have been reported from mainland China, a significant number of cases are now being reported outside of mainland China including in Iran, Italy, Japan, and South Korea. In response to the outbreak, the Chinese Government put in place a number of measures (including travel restrictions, delayed return to work for many; and non-essential industries remaining closed) to 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,

0

50

100

150

200

250

300

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Shar

e of

GD

P

Corporate debt Household debt Government debt Bank debt


along with other business disruptions in China including to shipping movements and manufacturing capacity.

Businesses that have operations in China and/or rely on Chinese inputs for their goods and services are experiencing supply chain disruptions. The COVID-19 outbreak could result in further falls in commodity prices within China, with potentially significant implications given resources and energy exports accounted for $103 billion of Australia’s $153 billion of exports to China in 2018–19.

While the medium and longer term impacts remain unclear, at the time of writing, oil prices had fallen by more than 20 percent since January 2020. This fall will drive commensurate falls in oil price-linked LNG contract 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-intensive industries and the potential for an offsetting influence from further Chinese stimulatory measures. Gold, however, is the notable exception, benefitting from a flight to safety by investors. In addition, the Australian dollar has declined as a result of these commodity price falls, partly cushioning the impact of the outbreak on the Australian economy.

World economic growth is likely to fall as a result of COVID-19, with the outbreak having a global effect on consumption patterns, supply chains and travel. On 22 February 2020, the IMF suggested that COVID-19 would reduce their forecasts for Chinese economic growth by 0.4 percentage points, and world economic growth by 0.1 percentage points. These forecasts are likely to be revised in the next IMF World Economic Outlook, which is expected in April.

The OECD has also revised their forecasts in response to COVID-19. Economic growth in China has been revised down 0.8 percentage points in the latest forecast, and world growth has been revised down 0.5 percentage points. The OECD has also forecast significant impacts on several other economies (Table 2.1).

Table 2.1: OECD economic growth projections

Economy Interim 2020 growth projections

Change from previous release

World 2.4 -0.5

Australia 1.8 -0.5

Euro Area 1.2 -0.3

Japan 0.2 -0.4

Korea 2.0 -0.3

China 4.9 -0.8

India 5.1 -1.1 Source: OECD (2020)

United States US economic growth slowed to 2.1 per cent in 2019, as trade tensions negatively affected business spending and investment. This has been partially offset by strong household and government spending, and the impact of solid growth in employment (Figure 2.4).

To head off a potential slowdown in the US economy, the US Federal Reserve cut rates three times in 2019. Economic growth stabilised in late 2019, with key economic indicators improving. These improvements were short lived, and the impacts of COVID-19 resulted in the US Federal Reserve cutting rates by a further 50 basis points on 3 March 2020. This cut came out-of-cycle, and is the first time such a cut has occurred since 2008. Further cuts are possible if COVID-19 continues to weigh on US economic growth. Interest rates are expected to rise modestly over the medium term. Rate increases could be constrained by high household debt, which is likely to amplify the impacts of interest rate rises on consumer spending.


Figure 2.5: Contributions towards US GDP growth


US policy priorities and levels of government spending over the outlook period are less certain as the 2020 US general elections approach.

Despite the recent Phase One deal between China and the US, trade tensions have the potential to reduce US economic activity over the outlook period. Ongoing issues include potential tariffs on EU automobile imports, the January 2020 US tariff increases on aluminium and steel imports from numerous major producers, and US sanctions on Iran and Venezuela.

US growth is forecast to slow to 2.0 per cent in 2020 and decline further to 1.7 per cent in 2021. Growth is projected to stabilise at 1.6 per cent between 2022 and 2025. Slowing economic growth is expected largely due to falling consumption and employment 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 which reduced some US tariffs on Chinese goods in exchange for Chinese pledges to purchase more American products. As part of the deal, China agreed to purchase an additional US$200 billion of US goods and services in 2020 and 2021, relative to 2017 levels. Of this amount, US$52 billion is to be met through imports of energy products — including LNG, crude oil (including refined products), and coal (including metallurgical coal). The extent of increases in Chinese imports of US energy products remains unclear, as does the subsequent impact on global trade flows. US supply constraints may also limit any increases in Chinese purchases of US energy products. Crude oil and LNG are expected to account for the majority of higher US energy exports to China, with potential negative flow-on implications to some of Australia’s resource and energy exports.

The extent that Chinese imports of US of energy products increase is also complicated by impacts of the COVID-19 outbreak. At the time of writing, the outbreak has significantly reduced Chinese LNG and oil demand. This will likely reduce Chinese purchases of US energy products, although trade flows could still be diverted if Chinese purchasers were to prioritise purchasing US commodities.

US oil exports to China could increase significantly under the Phase One trade deal. Between 2017 and 2019, US total oil exports rose dramatically, but exports to China were constrained by trade tensions. Phase One purchase targets may offset this constraint, though export growth could still be contingent on further investments to refine more US oil, and expected minimal 2020 Chinese oil consumption growth as a result of COVID-19. The largest impacts to Australia are likely to be through higher competition for imports of US oil, since the US is now the second largest source of Australian crude oil and refinery feedstock imports.

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

-2

-1

0

1

2

3

4

5

Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19

Perc

enta

ge p

oint

s

Personal consumption Private investment

Government consumption Exports

Imports GDP


exports to China are on long-term contracts. On 17 February 2020, the Chinese government allowed firms to apply for exemptions from tariffs on 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).

US thermal coal exports to China are unlikely to increase notably. US coal is relatively high cost, which is a barrier to bilateral trade growth.

The Phase One deal could offer limited upsides to Australian exports, notably for commodities where Australia is not in competition with the US. The IMF is forecasting that the Phase One deal will increase world economic growth slightly in 2020. China is Australia’s largest export market for Australian commodities, while the US is an important consumption market for products using Australian commodities. As a result, Australia would likely benefit from any lowering in trade tensions.

India Indian economic growth slowed to an annualised 4.7 per cent in the December quarter, the lowest value recorded in over six years (Figure 2.6). Growth has been affected by ongoing weakness in the financial sector, as a result of financially stressed Indian nonbank finance companies (NBFCs). Financial sector weakness also appears to be materially affecting household consumption.

In response to slowing economic growth and financial sector stress, the Reserve Bank of India cut interest rates five times in consecutive meetings during 2019. The Reserve Bank of India is likely to consider further rate cuts in 2020. However, this will be complicated by consumer inflation being above the central bank’s target band, driven by soaring food prices.

The Indian government’s 2020–21 budget included moderate fiscal stimulus measures, mostly tax cuts. However, ongoing government intentions to rein in the fiscal deficit reduce the likelihood of the Indian government introducing large scale fiscal stimulus packages over the medium term.

Figure 2.6: Indian quarterly GDP growth


As a result of lower interest rates and the assumed passing of liquidity pressures on NBFCs, the IMF is forecasting that Indian economic growth will marginally recover to 5.8 per cent in 2020. Growth is forecast to increase further to 6.5 per cent between 2021 and 2025. These values are marginally lower than the 2018 growth rate of 6.8 per cent.

Europe Eurozone GDP growth slowed to 1.2 per cent in 2019, with growth in the December quarter falling to 0.1 per cent (on a quarterly annualised basis). Growth in the December quarter was minimal in France and Italy, and fell in Germany, with industrial production negatively affected by Brexit uncertainty and global trade tensions. However, there are signs that conditions in the region are improving, with the EU Composite PMI recently stabilising (Figure 2.7), indicating that the outlook for the EU manufacturing sector is beginning to turn. Remaining risks include the threat of US tariffs on imports of EU cars, as the automotive sector is a significant contributor to the EU economy, and the US the number one destination for EU automotive exports.

0

2

4

6

8

10


Annu

al p

er c

ent c

hang

e


Figure 2.7: Eurozone composite PMI and GDP


On 31 January 2020, the UK formally left the EU, and a trade agreement between the two economies is being negotiated. These negotiations will have implications for EU and UK growth over the medium term, and ongoing negotiations are likely to affect investment and consumption in the next year or two. The UK and the EU are also negotiating separate trade deals with the US, a major export market for both economies. Ratified agreements would deepen economic linkages between the economies, and likely increase economic growth.

In November 2019, the European Central Bank re-commenced a quantitative easing program, purchasing €20 billion of bonds a month. The 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 the short term, due to expected low EU growth rates and minimal opportunity for fiscal stimulus due to high debt levels.

The IMF expects EU economic growth to rise slowly, reaching 1.3 per cent in 2020, 1.4 per cent in 2021, and 1.5 per cent by 2025.

Japan Japanese economic growth in 2019 was estimated to be 1.0 per cent. This represented a three-fold increase over the previous year, reflecting improved household consumption and impacts of the Japanese government’s fiscal stimulus packages. Consumption growth is expected to be more subdued over the medium term, with the October 2019 rise in the national sales tax expected to weigh on household consumption, particularly early in 2020. Partially offsetting this should be the stimulatory impacts of the Tokyo 2020 Olympic Games, and planned infrastructure investment beyond the Olympic Games — part of the Japanese government’s recently announced US$120 billion stimulus package.

Figure 2.8: Japanese Industrial production and manufacturing PMI

Source: Markit (2020)

The Japanese composite PMI increased in January 2020, suggesting expansion across key industries. This rise was largely driven by the Japanese services industry, with Japanese households slowly adjusting to 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

-2.8

-2.1

-1.4

-0.7

0.0

0.7

1.4

22

29

36

43

50

57

64


Qua

rterly

per

cen

t cha

nge

Inde

x

Eurozone Composite PMIEurozone GDP lagged one month (rhs)

-8

-6

-4

-2

0

2

4

6

44

46

48

50

52

54

56

Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20

Annu

al p

er c

ent c

hang

e

Inde

x

Manufacturing PMI Industrial production (rhs)


resulted in a PMI values falling in February (Figure 2.8), with the impacts amplified by the disease spreading throughout Japan and the deep economic ties between China 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 per cent in 2021, stabilising at this level out to 2025. Economic growth in Japan will be constrained for the foreseeable future by the nation’s declining population and aging workforce.

South Korea In 2019, South Korean economic growth fell to 1.9 per cent, as global trade tensions weighed on South Korean exports. Growth recovered partially in the December quarter as a result of higher government infrastructure spending. The Bank of Korea reduced rates twice in 2019, taking the official interest rate to a record low 1.25 per cent. These expansionary policies are expected to support growth in 2020, though strong growth is likely to be contingent on export demand and a recovery from COVID-19.

There are signs that South Korean exports are beginning to increase, particularly for semi-conductors, which accounted for 21 per cent of South Korean exports in 2018. However, exports will continue to be affected by trade tensions, including between Japan and South Korea. Tensions arose between South Korea and Japan in July 2019, when Japan placed trade restrictions on three chemical materials widely used by South Korean companies that make semiconductors. South Korea retaliated by removing Japan from the list of countries that receive stream-lined export protocols. Recent developments indicate trade tensions are easing, with the South

Korean government suspending its WTO case against Japan, and Japan removing restrictions on one of the three targeted chemicals. The outcome of ongoing negotiations is likely to have a significant influence on medium term economic growth in both South Korea and Japan.

The IMF expects South Korean growth to recover to 2.2 per cent in 2020, as a result of ongoing impacts of government stimulus and a gradual improvement in global economic activity. Over the medium term, growth is expected to increase further as trade tensions recede and higher global demand supports the export-oriented South Korean economy.

ASEAN Growth in the ASEAN-5 economies (Indonesia, Malaysia, the Philippines, Singapore and Thailand) is estimated by the IMF to be 4.8 per cent in 2019. Global trade tensions have weighed on the export-oriented region, particularly in Indonesia and Thailand. Furthermore, Malaysian economic growth has been affected by trade tensions with India, which has imposed restrictions on imported Malaysian palm oil.

Industrialisation is expected to be a key driver of ASEAN growth. In response to US tariffs on imports of Chinese goods, a number of companies have reportedly shifted supply chains into other parts of developing Asia, particularly Cambodia and Vietnam.

ASEAN-5 growth is forecast by the IMF to increase marginally to 4.8 per cent in 2020, and to 5.3 per cent by 2025. Growth in 2020 may be negatively affected by COVID-19 due to the presence of China in regional supply chains, and the virus spreading further throughout South East Asia.


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

European Union 28

Germany

France

0.9

1.5

0.5

1.2

0.7

1.3

1.3

1.1

0.5

1.4

1.4

1.4

0.5

1.6

1.3

1.4

0.5

1.6

1.2

1.4

0.5

1.5

1.2

1.4

0.5

1.5

1.2

1.4

United Kingdom

South Korea

1.2

2.0

1.3

2.2

1.3

2.7

1.5

2.9

1.5

2.9

1.5

2.9

1.5

2.9

New Zealand 2.5 2.7 2.6 2.6 2.5 2.5 2.5

Emerging economies

Emerging Asia

South East Asiad

3.9

5.9

4.8

4.4

5.8

4.8

4.6

5.9

5.1

4.8

6.1

5.2

4.8

6.0

5.3

4.8

6.0

5.3

4.8

6.0

5.3

Chinae 6.1 6.0 5.8 5.7 5.6 5.5 5.5

Chinese Taipei

India

2.0

6.1

1.9

5.8

2.1

6.5

2.1

7.4

2.1

7.4

2.0

7.3

2.0

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)


Table 2.3: Exchange rate and inflation assumptions

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

AUD/USD exchange rate

Inflation rate

0.70

0.69

0.72

0.72

0.72

0.72

0.72

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

27


3.1 Summary World steel consumption appears to be softening early in 2020, and is

expected to grow by 1.1 per cent over the year. However, longer term trends are more positive, with urbanisation and industrialisation across 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 of the outlook period.

World steel production is forecast to grow by around 17 per cent between 2020 and 2025, with significant growth early in the outlook period as capacity utilisation rises.

3.2 World consumption and production Steel markets face significant pressure from a range of factors Steel demand appears to be easing in the early part of 2020. Some of this is due to long-term factors, including softening automotive production over the second half of 2019 and trade tensions between the US and China, which have weighed on steel markets for months. Building on the downward pressure, the COVID-19 outbreak in China has begun to affect demand in early 2020.

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 steelmakers are facing difficult market conditions. Production growth is stabilising in early 2020, and is expected to pick up after 2021, with India and other emerging Asian economies leading the growth (Figure 3.2).

Chinese steel markets are softening after years of strong growth

Chinese steel consumption has grown strongly in recent years, supported by a rising property market and state infrastructure spending, and this is expected to continue over the outlook period. However, growing concerns over pollution and air quality are leading to cuts and closures among some inefficient steel smelters, and overall steel production remains under pressure from trade tensions with the US.

Figure 3.1: Steel production, monthly change

Notes: Monthly average for integrated basic oxygen furnace (BOF) steel mills

Source: Bloomberg (2020) China BOF Steel Profit Index

Figure 3.2: Steel production by region

Source: World Steel Association (2020); Bloomberg (2020)

-20

-10

0

10

20

2016 2017 2018 2019 2020

Year

-on-

year

per

cen

t cha

nge

EU US India Japan

0

200

400

600

800

1,000

1,200

2004 2007 2010 2013 2016 2019 2022 2025To

nnes

(milli

on)

European Union India ChinaJapan United States ROW

28


Property markets now appear to be flattening, though infrastructure spending is likely to remain strong as the Chinese government seeks to increase economic stimulus.

However, the start of 2020 has been dominated by the effects of the COVID-19 outbreak. Many Chinese industries temporarily close during the Chinese New Year holiday. However, the outbreak has forced many industries to extend the standard shut-down period. Affected industries include construction, steel fabrication, machinery, automotive and parts, white goods, hardware, containers and shipbuilding, which all face sustained disruption as a result of COVID-19. Impacts appearing to be particularly severe for construction, which has long been a key driver for Chinese steel demand.

Overall steel demand in China is expected to fall by 1 per cent in 2020 following years of strong growth, though with a resumption of growth —albeit at a slower pace — expected over the outlook period.

Global steel markets are entering an uncertain period Global steel consumption faces sluggish growth, as a result of recent softness in industrial production, ongoing trade tensions between the US and China, and slowing automotive manufacturing, which is likely linked with downturns in consumer confidence. While it is too early to tell what the full impact will be, if the COVID-19 outbreak has limited impacts, steel production is likely to grow more rapidly in 2020, encouraged by tight inventories.

Use and production of steel is shifting towards new growth sources (see Figures 3.3 and 3.4), mostly in Asia. Manufacturing and industrial production indexes for China, Japan, and the EU all appear to be sluggish as the global economy moves further into 2020.

Chinese steel production — which has long dominated global markets — is expected to grow at a slower rate in 2020. Mills in Gansu, Shaanxi, Shanxi and Sichuan provinces have recently announced significant output cuts (of almost 60,000 tonnes a day) in response to slowing demand

Figure 3.3: Steel consumption growth by region


Figure 3.4: Steel production growth by region


-25

0

25

50

-25 0 25 50

2020

-202

5 (to

tal p

er c

ent g

row

th

over

per

iod)

2014-2019 (total per cent growth over period)

China (989 Mt)

ROW (604 Mt) India

USA

Sth KoreaJapan

EU

-25

0

25

50

-25 0 25 50

2020

-202

5 (to

tal p

er c

ent g

row

th o

ver

perio

d)

2014-2019 (total per cent growth over period)

ROW(750 Mt)

India

EU)

Japan Sth. Korea

Other Europe

China(1,100 Mt)

29


following the COVID-19 outbreak. A range of other steel mills are delaying returns to operation beyond the New Year holiday. Liuzhou Steel and Chanjiang Steel have announced plans to shut down facilities by 2021, and production is scheduled to fall at the Tianjin Rochcheck Steel Group, where a blast furnace plant is set to close.

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 likely to check production in the near-term. However, steel profits in China remain relatively sound, supporting high capacity utilisation and strong production (Figure 3.5). There is also a possible upside for steel in the form of potential stimulus measures in the wake of COVID-19.

Figure 3.5: China’s steel consumption, production and exports

Source: Bloomberg (2020) World Steel Association; Department of Industry, Science, Energy and Resources (2020)

Emerging economies in Asia are becoming increasingly important Over the next five years, growth is expected to be led by Asian economies. India and Vietnam have recently unveiled plans to develop domestic steel industries, with significant growth in output over the next five years.

Indian steel production has grown by around 75 per cent over the past 10 years, with the country expected to become an even more significant player in global steel markets in the near-term. Production over the next five years is expected to grow by 28 per cent. Risks to this growth are considerable, however, and include tight margins, ample international supply, a potential domestic economic slowdown, and trade tensions.

Steel production is easing elsewhere Steel production across most OECD nations is likely to decline over the outlook period. In the EU, profitability is under threat from trade tensions and slowing global demand, with several high-profile closures occurring in recent months. These include Tata Steel — a large steelmaker headquartered in Mumbai — which announced 3,000 jobs would likely be cut in the United Kingdom (UK) and the Netherlands, as a result of the soft global steel outlook. British Steel — the second largest steelmaker in the UK — entered liquidation in 2019, and has subsequently been taken over by the Chinese-owned Jingye Group.

In Japan, the Nippon Steel Corporation confirmed that it will close down three blast furnaces and cut back output at some smaller facilities, reducing its total capacity by almost 10 per cent over the next four years. The announcement follows years of falling domestic demand and rising export competition from China. Japan’s declining population is significantly reducing the future pipeline for steel consumption, and this trend — in 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 been scheduled to conclude by September 2023, and will lead to 5 million tonnes in steel output cuts over the long-term.

Steel production around the world will likely continue to track closely with global industrial production and automotive construction, making these measures crucial to the fortunes of global steelmakers. Growth is likely to become less dependent on China, as other countries in Asia, South America and Africa continue to urbanise and industrialise.

Global steel production is expected to increase, from an estimated 1,904 million tonnes in 2020 to 2,233 million tonnes by 2025.

0

20

40

60

80

100

120

140

0

200

400

600

800

1,000

1,200

1,400

2007 2010 2013 2016 2019 2022 2025To

nnes

(milli

on)

Tonn

es (m

illion

)

Steel production Steel consumption

Implied net exports

30


Table 3.1: World steel consumption and production Million tonnes

Crude steel consumption

China 2019

898

2020s

876

2021f

888

2022z

907

2023z

933

2024z

961

2025z

989

CAGRr

1.6 gEuropean Union 28

United States 207

115

209

119

212

120

217

122

225

125

232

127

240

130

2.5

2.1

India 112 116 120 125 133 141 149 4.8

Japan Russia

70

47

70

45

69

45

69

44

68

44

67

43

65

42

-1.2

-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 Crude steel production

1901

2019

1922

2020s

1957

2021f

2008

2022z

2080

2023z

2155

2024z

2232

2025z

2.7

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)

32


4.1 Summary Iron ore prices remain at unusually high levels as a result of persistent

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.

The real iron ore price is forecast to decline to average US$70 a tonne (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 market returning closer to balance.

Export volumes are expected to grow from 874 million tonnes in 2019–20 to 898 million tonnes by 2020–21, and to 996 million tonnes by 2024–25. The growth is largely a result of production commencing at several large new mines in Western Australia.

Australia’s iron ore export values are set to rise from $79 billion in 2018–19 to $101 billion in 2019–20 (in real terms), as volumes and prices grow. Over the rest of the outlook period, as prices ease, exports are forecast to fall to $84 billion in 2020–21, and $72 billion by 2024-25.

4.2 Prices Iron ore prices have reversed some of their early 2019 surge Iron ore prices have continued on a volatile trajectory in recent months (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 production gradually recovered.

However, subsequent supply disruptions saw prices spiking again in late 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 — and this has increased the responsiveness of prices even to small shifts in production.

The FOB Australia iron ore price (62% iron content) — at which most Australian iron ore is sold — peaked above $110 a tonne in July 2019, but subsequently eased to around $75 a tonne by November. Prices rose back above US$85 a tonne over most of January and February 2020,

Figure 4.1: China's iron ore port stocks and spot price

Notes: China import Iron ore fines 62% Fe spot (CFR Tianjin port) Source: Bloomberg (2019) Antaike iron ore port stocks and Metal Bulletin

Figure 4.2: Iron ore price spread between grades

Notes: *Benchmark used is 62 per cent iron fines CFR Source: Bloomberg (2019) China import prices

0

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40

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2015 2016 2017 2018 2019 2020

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Weekly port stocks Iron ore price 62% CFR (rhs)

0

15

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45

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-30

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60

2015 2016 2017 2018 2019 2020

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read

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ent d

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ence

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k*Discount 58% fine ores Premium 66% fine ores

Spread (rhs)

33


and show few signs of losing ground in the short-term. The price premium for high quality iron ore rose sharply in late-2018 (see Figures 4.2 and 4.3), as Chinese demand increased and high-quality ore supply from Brazil tightened. Subsequently, markets have adjusted to use greater quantities of lower grade ore, with the price premium between grades easing recently.

Iron ore prices remain subject to supply disruptions and events in China China currently imports more than two-thirds of global seaborne iron ore, 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 currently represents a significant risk to iron ore prices, port access, and trade. Other influences include the progress of trade negotiations between the US and China (see the Macroeconomic Outlook chapter), the pace of global urbanisation, and the scale of transformation among key economies such as India. Construction will affect iron ore demand, as will changes in automotive builds away from steel and towards lighter aluminium.

Prices face downward pressure in the near term, due to the impact of the COVID-19 outbreak and flat global steel demand. Uncertainty created by 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 the end of March. Rising supply in Brazil will likely put considerable downward pressure on prices over coming quarters. However, further disruptions among major producers, unexpected delays in restoring production, or additional Chinese stimulus measures could each put countervailing upward pressure on prices over the next year.

A gradual price decline is expected over the next few years. Real prices are expected to fall from about US$86 a tonne in the March quarter 2020, to US$78 a tonne in the June quarter 2020, and US$71 a tonne by the March quarter 2021. The market balance is forecast to move from a 20 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 result in further price falls in the latter half of the outlook period, with prices reaching US$56 a tonne by 2025 in real terms.

Figure 4.3: Iron ore price by grade and China steel price index

Notes: The OCE forecasts the FOB (free on board) Australia iron ore price, not the benchmark CFR (cost and freight) North China iron ore price. Source: Bloomberg (2019) Metal Bulletin; Department of Industry, Science, Energy and Resources (2020)

Figure 4.4: Iron ore price vs China steel production growth

Notes: China import Iron ore fines 62% Fe spot (CFR Tianjin port) Source: Bloomberg (2019) China import prices; World Steel Association (2019)

0

1,000

2,000

3,000

4,000

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CFR 58% CFR 62%CFR 66% FOB 62%China steel price index (rhs)

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China steel production Iron ore price (rhs)

34


4.3 World trade Export growth is recovering despite some recent setbacks 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 rainfall in early January 2020, leading to floods which have affected Brazilian production. Vale has announced scaled-down output for the first quarter of 2020 as a result of disruptions across several sites. However, the emergence of more information on the precise timing of repairs to facilities affected by the Brunhildo tailings dam collapse is expected to reduce some uncertainty in iron ore markets, potentially stabilising prices to a degree. Vale has announced an intention to meet its US$436 million construction costs without requiring any outside equity. Outside of short-term recovery, little growth is expected in exports from Brazil.

In China, demand is likely to be constrained to some degree by increasing checks on air pollution. Iron ore cargoes are also being offloaded in China at a noticeably slower rate than was the case a year ago, with the COVID-19 outbreak being the most likely cause.

Increased supply elsewhere should gradually help ease the market deficit Supply is rising from new sources, including a range of projects in Africa. These include the Glencore and Zanga joint venture in the Democratic Republic of Congo (DRC), which is expected to jointly supply 2 million tonnes of high grade iron ore over 2019 to 2020. The Sapro group also commenced a project in the DRC in mid-2019, and output is now ramping up, with the company projecting annual output of 12 million tonnes by 2022.

The Société Minière de Boké–Winning consortium — which includes Chinese, French, Singaporean and Guinean interests — has announced a large bid for the Simandou deposit in Guinea.

Tacora’s Wabush high grade iron ore mine in Canada is on track to restart in June 2020, gradually ramping up to 6 million tonnes per annum. The mine previously closed in 2014, when iron prices fell to historical lows.

Figure 4.5: Outlook for global iron ore exports

Source: World Steel Association (2019); Department of Industry, Science, Energy and Resources (2020)

4.4 Australia Australia’s export earnings are set to rise despite short-term setbacks Australia’s iron ore export earnings are set to reach a new record in 2019–20, rising to $101 billion amidst unexpectedly strong prices and significant growth in volumes. As prices return to more typical levels, export earnings are expected to ease back to reach $72 billion by 2024–25 (in real terms). Growth in volumes after 2021 should act as a partial offset to declining prices.

The recent surge in export revenues comes despite weather disruptions, which continue to affect production and exports from Western Australia. Rio Tinto revised its 2020 guidance for iron ore production down in February (from 330-343 million tonnes to 324-333 million tonnes). The company has linked its lower production to Tropical Cyclone Damien, which disrupted operations across the Pilbara in early February.

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Brazil Australia ROW

35


The company notes that road access, communications, accommodation, and electrical infrastructure have all been affected by the recent weather. Mine sites across the region have been hit by more than 200mm of rainfall, leading to flooding of some mines, along with minor slippages in pit walls. Shipments from connected ports have also been delayed, with no ships leaving between the 7th and 10th of February. At this stage, it is not clear when full production will resume, though overall damage is currently less than that caused by Cyclone Veronica in 2019.

BHP production has edged back in recent quarters, and was towards the lower end of guidance at the end of 2019. Weather disturbances from the ongoing cyclone season threaten to push 2019–20 production below target. However, the company has invested significantly in its iron ore network in recent months, which should improve operational robustness and support a rebound in production over time.

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 several significant projects in the Pilbara region of Western Australia, including BHP’s South Flank project (from 2021), Fortesce’s Eliwana project (from 2021), Brockman’s Maraillana mine (from 2021) and Australasian Resources’ Balmoral South project (from 2024).

Australia’s iron ore export volumes are forecast to grow Export volumes are expected to follow the trajectory of production, 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 offset falling prices, and could lead to new records for export earnings should prices lift again over the next few years.

Iron ore exploration expenditure is solid, but has room to grow Australia’s iron ore exploration expenditure increased by 12 per cent year-on-year to $84.6 million in the December quarter 2019.

Iron ore exploration has benefited from the surge in prices early in 2019, and robust demand from key markets including China.

Iron ore exploration is overwhelmingly concentrated in Western Australia, where a range of deposits are being investigated.

Figure 4.6: Australia’s iron ore export volumes and values

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

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Resources and Energy Quarterly March 2020 1

Table 4.1: World trade in iron ore Million tonnes

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

Total world trade

Iron ore imports 1,760

1,775

1,795

1,817

1,843

1,872

1,908

1.4

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

Brazil

836

473

892

451

907

453

938

449

938

462

953

470

1,033

447

3.6

-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)

37


Table 4.2: Iron ore outlook

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

Prices bc

– nominal

d – real

Australia

US$/t

US$/t

Unit

80.1

81.9

2018–19

62.3

62.3

2019–20s

60.5

59.2

2020–21f

56.2

53.8

2021–22z

57.7

54.0

2022–23z

59.0

53.9

2023–24z

59.8

53.4

2024–25z

-4.8

-6.9

Production hs – Steel 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

– real value i 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)


5.1 Summary The premium HCC spot price is forecast to ease from US$183 a tonne

in 2019 to average around US$155 in 2022 (in real terms), due to a combination of soft demand growth and the ramp up of new capacity. The price is then expected to gradually recover, reaching around US$167 a tonne in 2025 (in real terms).

Australia’s export volumes are forecast to grow from 184 million tonnes 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 offset by the impact of the depletion of resources at several mines.

The real value of Australia’s metallurgical coal exports is projected to 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.

5.2 Prices Metallurgical coal prices declined rapidly last year before stabilizing The premium Australian hard coking coal (HCC) spot price stabilised in the US$150-165 range over the first quarter of 2020, after declining rapidly during 2019 to lows of around US$135 a tonne in November 2019 (Figure 5.1). In 2019, seaborne demand was weighed down by slowing global economic growth and weak ex-China steel production. In India — the world’s 2nd largest steel producer and metallurgical coal buyer — growth in steel output slowed sharply, causing metallurgical coal imports to flatten out. In the meantime, new capacity continued to come online in Australia, Russia and Mongolia. The Australian HCC spot price averaged US$183 a tonne in 2019 (in real terms), down from US$217 a tonne in 2018.

The uptick in metallurgical coal prices in early 2020 (Figure 5.1) appears to have been driven by supply disruptions stemming from weather conditions in Canada, the collapse of a roof at Anglo American’s Moranbah North mine in Queensland in late January 2020, and the outbreak of COVID-19.

COVID-19 affected China’s domestic production with miners unable to return to work due to restrictions on the movement of people, although most of China’s coal mining capacity was reportedly back online by the

end of February 2020. Mongolia’s decision to close its border with China until at least 30 March 2020, in order to prevent the spread of COVID-19, also appears to have supported Chinese seaborne import demand. Mongolia accounts for almost half of Chinese metallurgical coal imports, and the border closure reportedly disrupted crossings of coal trucks. 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 production and thus reducing its metallurgical coal needs.

Figure 5.1: Metallurgical coal prices, monthly

Notes: HCC stands for hard coking coal. PCI stands for pulverized coal for injection. Source: Platts (2020)

Metallurgical coal prices are forecast to gradually decline to average around US$155 in real terms in 2022 (Figure 5.2). Demand growth is expected to be subdued against the backdrop of slowing growth in steel production. Meanwhile, supply is expected to grow solidly, with Australia the main source of new capacity. Over the medium term, the price is projected to recover. A modest lift in the real price to US$167 a tonne by 2025 is projected, as supply growth slows relative to demand.

Chinese demand remains the key risk to the outlook for metallurgical coal prices, due to the sheer size of its domestic coal market and ongoing uncertainty over its import policy. A fall in Chinese imports would push

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HCC Peak Downs Low Vol PCI Semi-soft


prices lower than forecast. Countering this, the supply side of metallurgical coal markets remains highly concentrated, and supply chain disruptions have the potential to drive periodic price spikes. The price impacts of a supply chain disruption in Australia — which accounts for over half of seaborne supply — would be particularly pronounced.

Figure 5.2: Australian premium HCC spot price, quarterly

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

5.3 World trade World trade in metallurgical coal is estimated to have remained broadly stable in 2019 at around 340 million tonnes. China’s imports increased on the back of robust growth in steel production, but weak growth in steel production outside of China weighed on seaborne demand.

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 sources of demand growth. Australia is expected to comfortably remain the dominant exporter of metallurgical coal, holding its share of world imports steady at around 55 per cent over the outlook period.

Additional supplies of metallurgical coal are expected to come online from Russia, Mongolia and Mozambique. Canada’s exports are expected to remain flat. The US should continue to act as a swing supplier, with US producers near the top of the cost curve (Figure 5.3). The strength of the US dollar is currently undermining the competitiveness of US exporters.

Figure 5.3: Metallurgical (including hard coking, PCI and semi-soft) coal FOB cost curve and average annual prices, 2019

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)

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300

Dec-11 Dec-13 Dec-15 Dec-17 Dec-19 Dec-21 Dec-23 Dec-25

2020

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a to

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020406080

100120140160180200

0 100 200 300

US$

a to

nne

Million tonnes

Australia Russia US Mongolia Other Premium HCC Low vol PCI

41


5.4 World imports China’s metallurgical coal imports projected to climb China is the world’s largest steel producer and metallurgical coal importer. China’s metallurgical coal imports increased by 14 per cent to an estimated 75 million tonnes in 2019. Demand was supported by robust growth in Chinese steel production, which reached virtually 1 billion tonnes, thanks to a resilient property market, a push on infrastructure spending by the Chinese government and solid profit margins at steel mills (see steel chapter). Relatively low seaborne prices encouraged metallurgical coal imports, although imports appear to have fallen sharply towards the end of the year as policymakers tightened import restrictions to limit total coal imports to the 300 million tonne mark (Figure 5.4).

Figure 5.4: China’s metallurgical coal imports, monthly

Source: Bloomberg (2020) China customs

China’s annual metallurgical coal imports are forecast to remain around 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 years, albeit at a slower pace in the short term, driving metallurgical coal

demand. Chinese metallurgical coal production is also expected to lift but is not expected to keep pace with demand growth given that China has limited reserves, particularly of higher quality grades. China’s next phase of supply-side reforms could adversely affect domestic metallurgical coal production, supporting imports. The reforms are aimed at shutting down and stopping the approval of small-scale coal mines, and China’s metallurgical coal output is more reliant on smaller mines than its thermal coal production.

Nevertheless, a number of factors are expected to constrain growth in metallurgical coal imports. The first is the growing use of scrap steel in steel production in China, which reduces the amount of metallurgical coal 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 have sought to limit total coal import volumes (see thermal coal chapter for further discussion), and a continuation of this policy would limit the scope for growth in China’s metallurgical coal imports.

China represents the biggest risk to the outlook for metallurgical coal, as a result of ongoing uncertainty surrounding its import policies, the pace of its economic growth and the unfolding impacts of COVID-19, and the pace at which scrap steel usage grows.

India to rapidly increase its imports to support steel production India is the world’s second largest steel producer and metallurgical coal importer. India’s metallurgical coal imports are estimated to have remained broadly unchanged in 2019 at around 53 million tonnes. After solid increases in steel production in 2018, growth in India’s steel output slowed markedly in 2019, with weak domestic demand from key sectors, particularly automotive and construction. In recent months, India, which sources the majority of its metallurgical coal from Australia, has held discussions with a number of other suppliers about diversifying its imports, including the United States, Mongolia and Russia.

India’s metallurgical coal imports are projected to increase to 79 million 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

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Australia Mongolia Russia Canada United States Rest of world

42


tonnes per year by Indian fiscal year 2030–31. However, India has very limited domestic reserves of metallurgical coal, and will need to increase imports to support the rapid growth of its domestic steel sector.

The pace at which India’s steel sector is able to expand remains uncertain, and presents a risk to the outlook for India’s metallurgical coal imports, with the sector facing ongoing financial, regulatory and other challenges.

Figure 5.5: Metallurgical coal imports, annual

Notes: s Estimate f Forecast z Projection Source: IHS (2020); IEA (2019) Coal 2019; Department of Industry, Science, Energy and Resources (2020)

Japan, South Korea and Taiwan’s imports to remain subdued Japan is the world’s third largest metallurgical coal importer. Japan’s imports were broadly unchanged at an estimated 47 million tonnes in 2019, despite a fall in Japan’s steel production. Metallurgical coal imports are expected to be broadly unchanged over the outlook period, as steel production stagnates.

South Korea is the world’s fourth largest metallurgical coal importer, and imports were stable at an estimated 37 million tonnes in 2019. South

Korea’s imports are projected to be broadly flat over the outlook period, in line with steel production.

Taiwan’s imports of metallurgical coal were steady at 7 million tonnes in 2019, and are projected to remain flat over the next five years.

Metallurgical coal imports projected to rise in emerging economies Metallurgical coal imports are projected to grow in emerging economies, although from a low base. A number of countries, including Vietnam, have blast furnace steel plants coming online over the outlook period, which should drive an increase in the imports of emerging economies.

5.5 World exports The US is expected to remain the swing producer in met coal markets The US is the world’s second largest exporter of metallurgical coal. US exports grew substantially between 2016 and 2018. Exporters responded to higher prices initially induced by a tighter market, and then exacerbated by the impact of Cyclone Debbie on Australian production in 2017. However, US exports fell back by 10 per cent to about 50 million tonnes in 2019, as falling prices curbed profitability.

US metallurgical coal exports are projected to decline gradually in line with prices, before lifting from around 2023 as prices rise. The US is a swing producer in metallurgical coal markets — due to higher freight and production costs — and growing supply from other producing nations will likely eat into US market share in the short term.

Russia’s exports to lift on the back of recent investment Russia’s metallurgical coal exports are estimated to have remained broadly unchanged in 2019 at around 26 million tonnes. Over the next five years, however, Russia’s metallurgical coal exports are projected to grow to 36 million tonnes in 2025 (Figure 5.6), driven by new additions to mining capacity, and by rail and port expansions. In September 2019, a third export line came online at Russia’s largest coal terminal at the port of Vostochny, expanding capacity from 22 mtpa to 40 mtpa.

0102030405060708090

China Japan SouthKorea

Taiwan India EU28

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2018 2019s 2020f 2021f 2022f 2023z 2024z 2025z

43


Canada’s exports to remain stable Canada’s metallurgical coal exports were stable at an estimated 29 million tonnes in 2019. Canada’s metallurgical coal exports are expected to remain largely unchanged over the next five years, with few new projects in the pipeline.

Figure 5.6: Metallurgical coal exports, annual

Notes: s Estimate f Forecast z Projection Source: IHS (2020); IEA (2019) Coal 2019; Department of Industry, Science, Energy and Resources (2020)

Mongolia to lift exports by addressing infrastructure constrains Mongolia appears to have surpassed both Russia and Canada to become the world’s third largest metallurgical coal exporter in 2019, with exports climbing to 31 million tonnes. Mongolia primarily exports coal by trucking it to China through the Gants Mod and Ceke border crossings, and exports surged over the first eleven months of the year before the Chinese government ordered tighter controls on imports. In late January 2020, Mongolian authorities announced the closure of its border with China to contain the COVID-19 outbreak, which has reportedly disrupted crossings of coal trucks.

Mongolia’s exports are expected to continue to climb over the next five years, reaching 44 million tonnes in 2025. There are plans to develop Tavan Tolgoi — the world’s largest undeveloped coking coal mine — and a 30 mtpa railway line from Tavan Tolgoi to the Chinese border is currently under construction. A smaller 3 mtpa expansion is planned at TerraCom’s Baruun Noyon Uul coking coal mine complex. Mongolia is also cooperating with Russia on a 10 mtpa coal terminal at Posyet Bay. The port project is scheduled to begin operations in 2023, and could facilitate exports to both China and the broader Asia-Pacific market.

Mozambique’s exports to grow but challenges remain Mozambique currently has two exporting metallurgical coal mines: Vale’s Moatize and Jindal Steel’s Songa mines. Mozambique — once touted as the next major supplier of metallurgical coal — has faced a number of challenges in growing its exports, which are estimated to have fallen by 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 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 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, driven by the ramp up of Vale-Mozambique’s Moatize mine, and facilitated by the Nacala logistics corridor rail line and Nacala port expansion.

5.6 Australia Metallurgical coal export earnings forecast to reach record highs The value of Australia’s metallurgical coal exports reached a record high for a second consecutive year in 2018–19. Export earnings increased to $44 billion in real terms, driven by high prices and, to a lesser extent, growing export volumes. Metallurgical coal export earnings are projected to decline in real terms to $35 billion in 2021–22, as prices ease, before recovering to $38 billion in 2024–25. Export volumes are projected to grow solidly over the next five 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

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up of production at a number of mines, the largest of which is Qcoal’s 10 mtpa Byerwen mine in the Bowen Basin in Queensland. The closure of a number of mines due to resource depletion is expected to weigh on export volumes towards the end of the outlook period. The collapse of a roof at Anglo American’s Moranbah North mine in Queensland in late January 2020 will weigh on production in the short term. Anglo American has revised down its metallurgical coal production guidance to 19-21 million tonnes for 2020 as a result of the accident, after producing 23 million tonnes last year.

Figure 5.7: Australia’s metallurgical coal exports

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

Coal exploration expenditure rebounds Australia’s coal exploration expenditure reached $234 million in 2019, up by around $60 million on 2018. Coal exploration expenditure has been on the rise since reaching record lows over 2016 and 2017 (Figure 5.8).

Figure 5.8: Australian coal exploration expenditure and prices

Source: Source: ABS (2020); IHS (2020); Platts (2020)

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Exploration expenditure (rhs) Newcastle 6,000 kcal

Premium Australian HCC


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)


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)


6.1 Summary The Newcastle benchmark thermal coal spot price is projected to

average US$60-75 a tonne in real terms over the five years to 2025,down on US$76 a tonne in 2019. Seaborne imports are expected toedge down slightly, but the lack of new thermal coal projects in thepipeline should provide some support to prices.

Australia’s export volumes are forecast to grow from 210 million tonnesin 2018–19 to 224 million tonnes by 2024–25, as a number of minesramp up production. The continued shift in world coal trade towards theAsia-Pacific should favour Australia’s thermal coal exporters overcompetitors like the United States and Colombia.

The real value of Australia’s thermal coal exports is projected to declinesharply from $26 billion in 2018–19 to $21 billion in 2019–20, as a resultof the recent price decline. Export earnings are then expected to edgedown and level out in the $17-20 billion range through to 2024–25, inreal terms.

6.2 Prices Thermal coal prices stabilized in early 2020 after declining over 2019

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 range in the first quarter of 2020, after steadily falling from a peak of US$120 a tonne in mid-2018 (Figure 6.1). The 2018 price spike was driven by supply constraints in Indonesia (due to monsoonal rains), South Africa (where exports were diverted for domestic use) and China (due to coal industry restructuring), combined with strong demand from China (due to weak hydro output and hotter than average summer temperatures) and South Korea (where nuclear reactors were offline). As China increased domestic production and temporary influences receded, prices declined over 2019. Low LNG prices also encouraged coal-to-gas switching, particularly in Europe, and further weighed on thermal coal consumption. The Newcastle spot price averaged US$76 a tonne in 2019 in real terms.

The impact of COVID-19 on thermal coal prices has been modest so far

To date, COVID-19 appears to have had a modest impact on the supply-demand balance in thermal coal markets. Both Chinese domestic and international benchmark prices have lifted slightly since the spread of the virus began to accelerate from late January, with the most significant price rises for the 5,500 kcal coal that China tends to import (Figure 6.1). China’s domestic output was initially affected by the spread of the virus, with miners unable to return to work due to restrictions on people movements. However, at the same time, slower economic activity as a result of COVID-19 kept power consumption low and thus reduced thermal coal demand. By late February 2020, the vast majority of China’s thermal coal capacity had reportedly resumed production.

Figure 6.1: Thermal coal prices

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

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Newcastle 6,000 kcal Newcastle 5,500 kcalIndonesia 4,700 kcal QHD 5,500 kcal (domestic)


Thermal coal prices to remain subdued as seaborne demand edges down

The Newcastle 6,000 kcal spot price is expected to remain relatively steady over the next five years, averaging between US$60-75 a tonne on 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 also forecast to decline from US$95 for 2019–20 (April 2019 to March 2020), but settle at a premium relative to the spot price. At the time of writing, the 2020–21 (April 2020 to March 2021) contract price had not yet been settled.

Relatively weak seaborne thermal coal demand is expected to weigh on prices over the next five years. Europe and developed Asian economies look set to reduce thermal coal usage, while the world’s two largest consumers (China and India) have signalled their intention to reduce thermal coal imports by increasing domestic production. Growing demand from South and Southeast Asia should mostly offset declining thermal coal imports elsewhere. Competition from LNG is also expected to weigh on thermal coal demand by encouraging coal-to-gas switching, especially while LNG prices remain near record lows in spot and short-term markets (see gas chapter).

The supply-side of seaborne thermal coal markets is expected to remain relatively tight, providing some support to prices. Most thermal coal projects in the investment pipeline are designed to sustain production at existing mines and greenfield expansions are rare. Country-specific factors help to explain the tight supply outlook. Indonesia is aiming to reduce thermal coal exports to preserve its coal reserves for domestic use. Domestic challenges have resulted in underinvestment in Colombia’s thermal coal sector in recent years.

Uncertainty over the longer-term demand for thermal coal also appears to be deterring investment in new mines and infrastructure capacity. Climate policies are the key source of uncertainty. A ratcheting up of current climate targets, as envisaged in the Paris Agreement, would have implications for thermal coal demand. Under the Paris Agreement, countries have agreed to submit updated climate targets as part of their

Nationally Determined Contributions (NDCs) every five years, with each NDC expected to contain more ambitious targets than the last. Stronger-than-expected emissions reductions targets and policy are a key risk to the outlook for thermal coal demand.

Difficulties obtaining finance for new thermal coal projects could also constrain the development of new thermal coal supply. A growing list of lenders have announced they will no longer finance thermal coal projects, and pension and equity funds are divesting from thermal coal. State-owned enterprises and private equity have, to some extent, stepped into the gap to finance new projects and expansions. Other projects such as Carmichael have self-financed. However, financing is likely to be a challenge for some thermal coal project developers moving forward.

Figure 6.2: Thermal coal price outlook

Notes: JFY is Japanese Fiscal Year (April to March). Source: IHS (2020), Department of Industry, Science, Energy and Resources (2020)

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eNewcastle 6,000 kcal JFY contract price


6.3 World trade World thermal coal trade continued to climb in 2019, increasing by an estimated 3 per cent to around 1.1 billion tonnes. This was the fourth consecutive annual increase after the seaborne market contracted in 2015 for the first time this century. Emerging Asia — led by China and India — drove imports higher, offsetting lower demand in Europe, Japan, South Korea and Taiwan.

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

Figure 6.3: Thermal coal imports

Notes: s Estimate f Forecast z Projection Source: IHS (2020); IEA (2019) Coal Market Report; Department of Industry, Science, Energy and Resources (2020)

The continued shift of thermal coal consumption away from the Atlantic Basin market and towards the Pacific Basin should see supply increase from Australia, and from producers who can pivot eastward such as Russia and South Africa. Exporters in the US and Colombia, which have historically sold into the declining Atlantic market, are expected to face difficulties securing a foothold in the Pacific market (Figure 6.4).

Figure 6.4: Thermal coal exports

Notes: s Estimate f Forecast z Projection Source: IHS (2020); IEA (2019) Coal Market Report; ABS (2019); Department of Industry, Science, Energy and Resources (2020)

6.4 World imports China’s imports to fall driven by government policy

As the world’s largest thermal coal consumer and importer, China has exerted a profound influence on seaborne markets. After declining between 2014 and 2016, China’s thermal coal consumption appears to have risen for a third straight year in 2019, driven by growing electricity demand. China imported an estimated 241 million tonnes of thermal coal

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Indonesia Australia Russia Colombia SouthAfrica

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in 2019, up around 5 per cent on 2018, and domestic output also increased over this period.

China’s thermal coal imports are projected to decline gradually to 218 million tonnes in 2025, with increases in domestic output slightly outpacing consumption growth. China’s coal usage is expected to rise over the next two years, before plateauing. Electricity demand in China continues to grow rapidly. While the bulk of new installed capacity is likely to come from hydro and renewable generation, coal-fired power generation is also expected to rise to meet China’s growing electricity demand.

China has a substantial pipeline of coal-fired power stations, following the approval of a large amount of new capacity between September 2014 and March 2016. During this period, China’s central government delegated permitting for coal-fired power stations to provincial authorities, which had strong incentives to approve new coal-fired power stations to meet 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 further 116 GW under construction or in planning (Figure 6.5). Other data puts these figures higher, at around 121 GW under construction and a further 74 GW at other stages of development, although not all this capacity is expected to proceed.

While China’s central government has subsequently acted to rein in the permitting of new coal-fired capacity and cancellations of projects in the pipeline have been rising, the current pipeline is enough to support increased coal-fired power generation over the outlook period to 2025. Given the pipeline of coal projects in China, it is possible that the central government will raise the coal power cap in the country’s 14th Five Year Plan (2021-2025) to be released in 2020. China’s 13th Five-Year Plan (2016-2020) set a coal power cap of 1,100 GW. State planning bodies 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 offset by falls in coal consumption in residential, commercial and small-scale industry sectors, as a result of China’s efforts to reduce air pollution.

China’s coal production is expected to increase over the outlook 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 have been completed and approvals for new coal mine capacity surged in 2019. While the National Development and Reform Commission (NDRC) has announced a new phase of supply-side reforms, targeting the closure of smaller mines with capacity of less than 0.3 million tonnes per annum (mtpa) and continuing industry consolidation, these are not expected to have the same impact on domestic production as previous reforms. Domestic production will be supported by infrastructure improvements and expansions, including the 60 mtpa Haoji railway commissioned in October 2019, which are increasingly connecting domestic supplies with demand centres.

Figure 6.5: Pipeline of coal-fired power stations in Asia

Source: S&P Global Market Intelligence (2019)

0 20 40 60 80 100 120

ChinaIndia

IndonesiaVietnam

JapanBangladeshSouth Korea

PhilippinesPakistan

CambodiaTaiwan

MongoliaThailandMalaysia

Gigawatts

Construction Planned


Chinese policymakers are expected to shape developments on seaborne thermal coal markets over the outlook period to 2025. China’s government has actively sought to manage coal import levels over the past few years, since its efforts to restructure its domestic coal industry led to Chinese miners arguing that imports were being favoured over domestic production. Although no official target was set, China reportedly sought to cap total coal imports at around 280 million tonnes in 2019, at times implementing measures that resulted in extended customs clearance times for vessels at Chinese ports. China’s combined (thermal and metallurgical) coal imports easily exceeded this quota in 2019, with Chinese government data putting total coal imports at 300 million tonnes — 225 million tonnes of thermal and 75 million tonnes of metallurgical coal. Nevertheless, moving forward, similar limits — if more strictly enforced — would limit the scope for import growth.

Figure 6.6: China’s thermal coal production and imports

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)

Chinese policymakers have also sought to use policy measures to keep domestic thermal coal prices within the ‘green zone’ — a price band of 500 to 570 Renminbi (RMB) (Figure 6.7). Prices in this range are understood to be broadly acceptable to China’s power generators and industrial consumers, while also providing high enough margins for domestic coal producers. Thermal coal import policy has been a key tool for stabilising domestic prices in the green zone: China’s government has tended to ease import restrictions when domestic prices are high, and tighten restrictions when domestic prices are at more acceptable levels.

Figure 6.7: China’s domestic thermal coal price

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

The outlook for China’s thermal coal imports remain highly uncertain, with small swings in domestic production and consumption having a large impact on imports. Policy uncertainty has been — and will continue to be — a key risk. China’s coal policies will continue to be driven by the sometimes competing priorities of economic growth and supporting domestic production, reducing air pollution and minimising electricity prices, against the backdrop of international climate commitments.

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India’s imports to fall back from highs as production growth resumes

India is the world’s second largest thermal coal importer and consumer. After declining in 2015 and 2016, India’s thermal coal imports recorded their third consecutive annual increase in 2019, rising by 12 per cent to reach an estimated 211 million tonnes — a record high. Higher imports were the result of increasing consumption coupled with a decline in domestic production, on the back of heavy rain in an extended monsoon season.

In February 2020, India’s Minister for Coal and Mines announced India would aim to stop importing thermal coal from Indian fiscal year 2023–24. India faces considerable barriers to achieving this goal. In 2014, Indian government officials indicated that India would become self-sufficient in thermal coal within 2-3 years, but imports have since climbed. However, the announcement signals a renewed intent to cut thermal coal imports.

India’s thermal coal imports are expected to fall from current highs, as production growth resumes — driven by government targets and policy. Annual imports should level out in the 185-190 million tonne range over the next five years.

India’s coal consumption is expected to grow rapidly over the next five years, as the country’s electricity demand grows. Under India’s 2018 national electricity plan, renewable generation and hydro account for the majority of new capacity, but coal-fired power generation is expected to grow from 204 GW in November 2019, reaching 217 GW in 2021–22 and 238 GW in 2026–27 (Figure 6.8). Increasing utilisation of existing coal-fired stations will also drive thermal coal demand. India has built a large amount of coal generation capacity in recent years and coal-fired power plants in India are running well below capacity.

To meet rising coal demand, India is aiming to increase coal production. The Indian government’s strategy has several elements. The first is to boost production by state-owned companies, particularly Coal India —which currently accounts for 85 per cent of production. Coal India has a

production target of 1 billion tonnes by Indian fiscal year (April-March) 2023–24, up from 607 million tonnes in 2018–19.

Figure 6.8: India’s installed electricity generation capacity and national electricity plan targets

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. Source: Central Electricity Authority (2020)

Second, the Indian government is looking to increase production by the private sector, and has introduced a number of reforms to encourage private investment. In February 2018, the Indian government changed the rules governing coal mine auctions to allow private producers to develop new mines. In August 2019, the Indian government opened up the country’s coal sector to 100 per cent foreign direct investment. Then, in January 2020, the Indian government introduced a raft of reforms that included removing end-use restrictions on coal blocks, allowing captive producers — private end users such as electricity generators, who produce their own coal — to sell coal on the open market. India faces substantial barriers to achieving its production targets, especially around approvals and land acquisition for new coal projects. While India will likely

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2010–11 2018–19 2026–27*

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acity

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fall short of its production targets, government policy is nevertheless expected to propel Indian coal production higher over the next five years.

Overall, the outlook for India’s imports remains finely balanced. With India’s coal consumption and production both dwarfing import requirements, small swings in either would exert a huge influence over the trajectory of India’s thermal coal imports. The long-term outlook for India’s thermal coal imports is discussed in the Office of the Chief Economist’s Coal in India 2019 publication.

Competing trends to leave Japan’s imports broadly unchanged

Japan is the world’s third largest thermal coal importer, importing an 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.

Competing trends are at work in Japan. There is around 6 GW of new coal-fired coal capacity under construction, and few coal-fired power station retirements are expected before 2025. However, energy demand in Japan is expected to decline slightly over the next five years, and Japan is planning to shift its power generation mix towards nuclear and renewable energy, and away from natural gas and coal. The 2011 Fukushima disaster resulted in the closure of Japan’s nuclear fleet. At the time of writing, nine of Japan’s 42 nuclear reactors had gained approval to restart. More reactors are likely to come back online over the next five years, with 18 reactors having submitted applications to Japan’s Nuclear Regulation Authority to restart. If realised, Japan’s energy plan would see coal’s share of power generation fall from 33 per cent in Japanese Fiscal Year (April-March) 2017–18 to 26 per cent in 2030–31 (see Figure 6.9).

The pace of nuclear restarts is the main uncertainty affecting the outlook for Japan’s thermal coal imports. Nuclear energy in Japan continues to face public opposition and legal challenges. There remain significant risks of delays and slippages in nuclear restarts. The outlook for nuclear generation is further complicated by new counterterrorism measures that require nuclear reactors to complete additional upgrades to meet the new security requirements.

Figure 6.9: Japan and Taiwan’s power generation mix targets

Notes: Japanese fiscal years (April-March) 2017-18 and 2030-31. Source: Taiwan Bureau of Energy (2019); Ministry of Economy, Trade and Industry (2018)

South Korea’s coal imports to decline as energy transition accelerates

South Korea is the world’s fourth largest thermal coal importer, purchasing an estimated 99 million tonnes of thermal coal in 2019. South Korea’s thermal coal imports are projected to fall steadily over the next five years, reaching 87 million tonnes in 2025.

South Korea’s long-term plan is to shift its energy mix towards renewables and gas, and away from nuclear and coal. Under South Korea’s energy plan, no new coal-fired power or nuclear capacity will be added, aside from that already under construction.

The South Korean government has introduced strong environmental regulations to improve air quality and reduce emissions. Sixty coal-fired power stations across the country are limited to operating at 80 per cent capacity when air pollution reaches a certain threshold. Since 2018, older coal-fired power stations have been closed between March and June each year. In late 2019, South Korea stepped up this approach, announcing that

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2030

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anJa

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Per centCoal Gas Nuclear Renewables Other


operations would be suspended at between 8 and 15 plants in the December 2019 to February 2020 period. A number of coal-fired power plants will close over the outlook period, although this will be offset by the commissioning of new coal generation capacity.

South Korea’s government also introduced new tax arrangements in May 2019 aimed at encouraging gas use over coal: it lowered consumption and import taxes on LNG, and raised consumption taxes on coal.

Taiwan’s imports projected to decline under national energy plan

Taiwan’s thermal coal imports remained broadly steady in 2019, at an estimated 58 million tonnes. Taiwan’s thermal coal imports are projected to decline over the outlook period to around 52 million tonnes. Taiwan is aiming to shift its power generation mix towards gas and renewables, and away from nuclear and coal (Figure 6.9). Under Taiwan’s energy plan, coal’s share of power generation would fall from 46 per cent at present to 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 plants should be built.

However, Taiwan faces challenges in achieving such a rapid energy 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. Taiwan’s energy plan also envisages a 10-fold expansion in solar photovoltaic capacity, but Taiwan is densely populated, and access to land to support the ramp up remains a major challenge. To date, Taiwan’s expansion of offshore wind generation has gone relatively smoothly, with greater government control over offshore development rights.

Southeast and South Asia to be a key source of import growth

In 2018, Southeast and South Asia imported a combined 129 million tonnes of thermal coal. The largest importers of thermal coal in Southeast Asia were Malaysia (33 million tonnes), Thailand (25 million tonnes), the Philippines (24 million tonnes) and Vietnam (22 million tonnes). In South Asia, Pakistan was the largest thermal coal buyer (14 million tonnes), followed by Bangladesh (3 million tonnes).

While countries in Southeast and South Asia are relatively small importers individually, collectively, the region is expected to play a substantial role in thermal coal markets going forward. The thermal coal imports of Southeast 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). Strong economic and population growth is driving robust growth in demand for electricity, and coal-fired power generation is expected to play a key role in meeting growing usage. Southeast and South Asia’s share of world imports is expected to increase from 12 per cent in 2018 to 19 per cent in 2025.

In South Asia, Pakistan has recently commissioned a number of new coal-fired power stations and has around 2 gigawatts (GW) under construction and a further 7 GW planned. Bangladesh has around 5 GW under construction and a further 15 GW at the planning stage.

Figure 6.10: South and South East Asia thermal coal imports

Source: IEA (2019) Coal Market Report; IEA (2019) Coal Information; Department of Industry, Science, Energy and Resources (2020)

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In Southeast Asia, around 12 GW of new coal-based generation capacity is under construction in key importing countries, with another 46 GW at the planning stage. Vietnam is expected to be a key driver of import demand growth. Under Vietnam’s Power Development Plan, coal-fired power would account for 49 per cent of the country’s generation capacity by 2025. 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 outlook, with the country’s National Steering Committee for Power Developing reportedly recommending that the Vietnamese government scale back the target for coal-fired power to 37 per cent in 2025.

Overall, while project cancellations appear to have been rising in recent years, the completion of coal-fired power stations currently under construction is expected to drive the region’s demand for thermal coal imports higher over the next five years (Figure 6.10).

6.5 World exports Indonesia’s exports to decline as coal is directed to the domestic market

Indonesia is the world’s largest thermal coal exporter. In 2019, Indonesia’s exports grew by 7 per cent to an estimated 466 million tonnes — a record high. Coal production reached around 610 million tonnes, exceeding the government’s coal production target of 550 million tonnes. The Indonesian government is targeting an output cap of 550 million tonnes for 2020. Whether this target can be achieved remains to be seen, with output having exceeded the target for the past few years. Indonesian producers tend to be responsive to price rises, and the government has sometimes relaxed output restrictions at times of high prices to help ease the current account deficit.

Even if targets are not fully achieved, however, government policy should drive Indonesia’s thermal coal exports lower over the next five years. The Indonesian government is expected to limit annual production at lower levels over the outlook period, in order to safeguard coal reserves for future use. The government is also expected to continue to increase the Domestic Market Obligation (DMO), under which Indonesian producers

are obliged to sell at least 25 per cent of production into the domestic market at capped prices. With constrained production and supply being increasingly diverted to the domestic market, Indonesia’s thermal coal exports are projected to fall to about 394 million tonnes by 2025.

South Africa to seek out new markets and increase exports

South Africa exported an estimated 77 million tonnes of thermal coal in 2019. South Africa’s thermal coal exports are projected to rise over the next five years, reaching 92 million tonnes in 2025, as several new mines commence operations. South Africa is expected to increase its exports to India, and increasingly target other Asian markets — such as Pakistan and South Korea — as European coal consumption declines. A modest decline in domestic consumption should also help free up thermal coal for export. In October 2019, the South African government approved the National Development Plan, which foresees coal-fired power generation capacity falling from 37 GW at present to 33 GW by 2030.

Russia’s exports forecast to grow on the back of recent investment

Russia’s thermal coal exports increased for the fourth consecutive year in 2019, up by around 5 per cent to a record high of an estimated 181 million tonnes. Russia has been investing heavily in transportation infrastructure to the country’s eastern ports — targeting the Asian premium market, where Japan’s utilities are diversifying their sources of supply, and South Korea’s new regulations are increasing demand for Russia’s low sulphur coal. The low Russian ruble has also helped Russian coal miners.

Russia’s thermal coal exports are expected to reach 192 million tonnes by 2025. Export growth will be supported by ongoing government plans to invest in the coal industry and in rail and port infrastructure. Russia’s Ministry of Energy has announced plans to expand its total coal production (metallurgical and thermal) from around 420 mtpa to 480 mtpa by 2030.

US exports to decline due to cost and infrastructure challenges

Falling prices saw US thermal coal exports fall sharply in 2019, to an estimated 34 million tonnes — down around 30 per cent on the previous


year. The US is a price-sensitive swing supplier in the seaborne thermal coal market, with most US producers considered high cost. A strong US dollar, falling demand in Europe (traditionally the destination for US coal), and a lack of infrastructure on the US west coast (near Asian markets) have added to the difficulties facing US producers. These challenges are expected to result in US thermal coal exports declining from current levels to reach 20 million tonnes in 2025.

Colombia’s thermal coal exports to remain stable

Colombia’s thermal coal exports declined from 80 million tonnes in 2018 to 75 million tonnes in 2019. Exports are projected to rebound slightly and then remain stable at around 80 million tonnes. A lack of investment in Colombia’s coal sector in recent years and falling coal consumption in Europe — where Colombian producers have historically sold their coal — are expected to limit the export growth. Most of Colombia’s coal mines are on the Caribbean coast, and its producers face high shipping costs to growing demand centres in Asia.

6.6 Australia Thermal coal exports earnings are expected to decline

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 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 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 the Asia-Pacific should favour Australian producers, as well as exporters that can pivot eastward such as South Africa and Russia.

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 10–15 mtpa Carmichael coal mine is expected to produce first coal in 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

increase production to 27 mtpa. Glencore’s Rolleston mine in the Bowen Basin in Queensland — which produced around 16 million tonnes in 2018–19 — has approval to scale up production to 19 mtpa. New Hope’s New Acland mine in the Darling Downs region in Queensland has applied for approval for an expansion that would see the mine’s capacity increased to 7.5 mtpa. MACH Energy’s Mount Pleasant mine in New South Wales 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 within the outlook period, increased output from a number of established mines with relatively low production costs does appear likely.

Increases in output from new and established mines are expected to be partly offset by the closure of several mines over the outlook period due to resource depletion. The forecast for relatively low thermal coal prices presents a downside risk for higher cost mines. Yancoal has announced it will place its Austar underground mine in New South Wales on care and maintenance from 31 March 2020 as the current mining area reaches completion.

Figure 6.11: Australia’s thermal coal exports

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

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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

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India Mt 211 202 185 188 190 186 185 -2.2

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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)


Table 6.2: Thermal coal outlook

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)


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


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

61


7.1 Summary Australian LNG export prices are expected to decline in

2020, before gradually rising then falling again, tracking oil price-linked contract prices (at which most Australian LNG is sold). Asian LNG spot prices are forecast to recover from current record lows as the market rebalances, before declining as a new wave of LNG projects ramp up.

Australia’s LNG export volumes are forecast to rise from 75 million tonnes in 2018–19 to 81 million tonnes in 2020–21, as the last two projects in Australia’s recent wave of LNG investment ramp up, before edging back down to 80 million tonnes by 2024–25.

The real value of Australia’s LNG exports is forecast to decline from $51 billion in 2018–19 to $49 billion in 2019–20 and $44 billion in 2020–21, and remain in the $44 to $47 billion range to 2024–25.

7.2 Prices Asian LNG spot prices expected to recover from current record lows A range of factors have continued to place downward pressure on Asian 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 same time, demand growth has been slowing from the traditional Asian buyers. Weak demand has been further exacerbated by a warmer-than-usual northern hemisphere winter, and the impacts of COVID-19 in China.

COVID-19 has reduced gas demand in China, with LNG imports more heavily affected than domestic gas production and pipeline imports. There were reports of some LNG cargoes destined for China being diverted, and some Chinese LNG buyers issuing force majeure notices to LNG suppliers (although some these were reportedly rejected), driving Asian LNG spot prices to a new record low of US$2.68 per MMbtu in mid-February.

The Asian LNG spot price averaged US$3.94 per MMbtu (A$5.47/GJ) in the first two months of 2020, 31 per cent lower from the December 2019 quarter and 47 per cent lower year-on-year. Asian LNG spot prices are forecast to remain low over the first half of 2020, before lifting in the second half of the year (Figure 7.1), and average US$3.70 per MMbtu

(A$5.10/GJ) in 2020. This forecast is sensitive to how quickly China’s economic activity recovers from the impacts of COVID-19 (see the macroeconomic outlook chapter). While Asian LNG spot prices are forecast to recover from the current record lows, ongoing overcapacity in global LNG markets is expected to constrain the extent of any price recovery over the next two years.

After 2021, rising demand is expected to gradually close the gap on expanding global production capacity and support a rise in the Asian LNG spot price. LNG spot prices are expected to increase to US$6.30 per MMbtu (A$8.30/GJ) in real terms in 2023, reflecting a tighter global market. In the final years of the outlook period, a new wave of LNG projects is expected to drive growth in LNG capacity (see Section 7.3). A 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.

Figure 7.1: LNG prices, quarterly

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 indicative only, and is estimated at 14 per cent of the 3-month lagged Japan Customs-cleared crude oil price plus shipping. Source: Argus (2020); Bloomberg (2020); Department of Industry, Science, Energy and Resources (2020)

0

18

36

54

72

90

0

3

6

9

12

15


2020

US$

a b

arre

l

2020

US$

per

MM

btu

Asian LNG spot price Indicative oil-linked contract priceBrent crude oil (rhs)


Asian LNG contract prices are forecast to decline Most LNG traded in Asia is sold on long-term contracts (70 per cent in 2018). These contracts link the price of LNG to the price of oil (commonly the Japan customs-cleared crude, or JCC) with a time lag of several months. Figure 7.1 shows how the indicative oil-linked contract price has followed oil prices lower over the last six months. LNG contract prices are likely to fall further in 2020, reflecting the impacts of COVID-19 on oil prices (see the oil chapter).

After 2020, LNG contract prices in Asia are forecast to gradually rise and then fall, tracking the projected movements in oil prices. If the large differential between spot and long-term contract prices persists, contract prices may come under downward pressure. Buyers are reportedly pushing to have contract prices lowered during the periodic price reviews that are built into long-term supply agreements, reducing purchases on long-term contracts and increasing spot cargo purchases where their contract permits. In the longer term as contracts expire, low spot prices relative to oil-linked prices may encourage buyers to push for shorter, more flexible, or more favourably-priced contracts. The average oil-linked contract slope has been trending down over time (Figure 7.2).

Figure 7.2: Oil-linked contract slopes by signing year

Notes: The oil-linked contract slope measures the extent to which the LNG contract price changes with respect to oil price changes. Only shows contracts where data is available. Source: BloombergNEF (2018) Global LNG contracts database; Nexant (2020) World Gas Model

7.3 World trade LNG trade has grown rapidly over the last few years, as the wave of projects commissioned between 2009 and 2015 have come online. In 2019, LNG trade totalled an estimated 348 million tonnes, an increase of 38 million tonnes, or 12 per cent, from 2018. Growth in global LNG supply capacity (of around 40 mtpa) has rapidly outpaced demand growth, and the supply glut will likely persist in the short-term.

In 2021, the global LNG market is expected to begin rebalancing, as demand growth absorbs new supply. Growth in supply capacity is expected to slow dramatically, while demand is expected to grow rapidly, driven by China and emerging Asia (Figure 7.3).

Growth in global LNG capacity is expected to begin accelerating in the final two years of the outlook period as a new wave of LNG projects come online. Global LNG trade is projected to reach the 460 million tonne mark by 2025, a third higher than current levels.

Figure 7.3: Annual change in LNG demand and world supply capacity

Notes: 2019 data is an estimate. Shaded areas indicate the years where oversupply is expected during the outlook period, i.e. where the annual growth in LNG supply capacity is greater than the annual growth in demand. Source: Department of Industry, Science, Energy and Resources (2020); Nexant (2020) World Gas Model

8

10

12

14

16

18

2008 2010 2012 2014 2016 2018 2020

Slop

e (p

er c

ent)

Contract signing yearOil-linked contract slope Linear trend

-40

-20

0

20

40

60

80

2015 2017 2019 2021 2023 2025

Mill

ion

tonn

esJapan South Korea ChinaEmerging Asia Europe Rest of worldWorld supply capacity

63


7.4 World imports Japan’s LNG imports to receive a temporary boost, before falling Japan imported an estimated 75 million tonnes of LNG in 2019, a decline of 7.5 per cent from 2018 due to the ongoing return of nuclear power generation, and relatively mild winter and summer seasons — reducing energy demand for heating and cooling.

Japan’s LNG imports are forecast to increase to 77 million tonnes in 2020, supported by the temporary closure of nuclear reactors to complete security upgrades (see below). Japan’s LNG imports are then forecast to 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 1970s) to China by 2022. Overall Japanese energy demand is expected to fall slightly, due to subdued economic growth, a declining population and improvements in energy efficiency. The share of gas in energy usage is also expected to decline, as nuclear and renewable power sources take market share in the electricity generation sector in Japan.

The shrinking role for gas in Japan’s energy mix is reflected in the country’s 10 year energy plan. The share of gas in Japan’s primary energy 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 gas in electricity generation is expected to fall from 40 per cent to 27 per cent over the same period.

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 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 reactors have applications to restart with the Nuclear Regulation Authority, and further nuclear restarts appear likely over the next five years. However, there is no firm schedule for restarts, and there are significant risks of delays. The outlook for nuclear generation is further complicated by counterterrorism security measures. At least four nuclear reactors will be offline in 2020 to complete the upgrades to meet the new security requirements, which will likely provide a short-term boost to LNG demand.

Figure 7.4: LNG import projections

Notes: 2019 data is an estimate. Source: Nexant (2020) World Gas Model; Department of Industry, Science, Energy and Resources (2020)

Figure 7.5: Japan’s future energy mix

Notes: Japanese fiscal years (April to March) 2017–18 and 2030–31 Source: Japan Agency for Natural Resources and Energy (2019)

0

20

40

60

80

100

120

140

Japan SouthKorea

China EmergingAsia (exChina)

Europe Rest ofworld

Mill

ion

tonn

es

2019 2025

0

20

40

60

80

100

2017 2030 2017 2030

Primary energy mix Electricity generationPe

r cen

t

Gas Coal Nuclear Oil LPG Renewables

64


China’s LNG imports expected to grow, but at a slower pace China — currently the world’s second largest buyer of LNG — imported an estimated 60 million tonnes of LNG in 2019, an increase of 18 per cent from 2018. The pace of growth has slowed considerably from previous years, due to both weaker economic growth and the relaxation of policies to encourage coal-to-gas switching.

The start of 2020 saw a decline in China’s imports of LNG of an estimated 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, with LNG more heavily affected than pipeline imports and domestic production. LNG cargoes have been delayed and diverted amidst rising inventories — already high due to a mild winter — and transportation bottlenecks, the latter due to road blocks and reduced trucking capacity. The impacts of COVID-19 may make it harder for China to meet the terms of the recent US-China Phase One trade deal (see Box 7.1).

Despite these short-term setbacks, China’s LNG imports are projected to rise to 99 million tonnes by 2025 (Figure 7.4), overtaking Japan as the world’s largest importer of LNG by 2022. LNG accounted for around 27 per cent of China’s gas consumption in 2019, and is expected to continue to play a major role in meeting China’s rapidly rising needs for gas. Growth in gas demand is expected to be driven by government policies to reduce air pollution and raise the share of gas in the overall energy mix, up from 7 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 year.

China’s gas demand will also be met by growth in domestic gas production (57 per cent of gas consumption in 2019) and pipeline imports (16 per cent of gas consumption in 2019) (Figure 7.6). China produced 175 bcm of gas in 2019, an increase of 10 per cent from 2018. Domestic gas production will need to increase by 18 per cent this year in order for the country to meet the 2020 production target of 207 bcm. China faces difficulties — such as challenging geological conditions — in raising domestic output, and there is significant uncertainty over whether the target will be met.

China’s pipeline gas imports were largely flat in 2019, at 49 bcm, but pipeline imports are expected to rise over the next few years. Russia’s Power of Siberia pipeline to north-eastern China opened on 2 December 2019, and is expected to ramp up towards full capacity of 38 bcm by 2025. The Central Asia-China gas pipeline expansion, which would add 30 bcm 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 proceeds, this may reduce the need for LNG imports in the future.

Figure 7.6: China’s gas consumption by source

Source: Nexant (2020) World Gas Model, Department of Industry, Science, Energy and Resources (2020)

South Korea’s LNG imports projected to rise South Korea imported an estimated 35 million tonnes of LNG in 2019, a decrease of 14 per cent from 2018, driven by temporary factors. These factors include the return of nuclear generation capacity, after reactors were offline in 2018, and milder winter and summer seasons relative to 2018, reducing energy demand. South Korea’s LNG imports are projected to rise over the outlook period to reach 43 million tonnes by 2025, driven by supportive government policies. In 2019, the South Korean government lowered consumption and import taxes on LNG and raised consumption taxes on coal. The South Korean government’s third Basic Energy Plan envisages gas demand growing by 51 per cent between 2017 and 2040, as coal and nuclear in power generation is phased out.

0

100

200

300

400

500

2005 2010 2015 2020 2025

Billi

on c

ubic

met

res

Production Net pipeline importsLNG Imports Consumption

65


LNG to play a larger role in Taiwan’s energy mix Taiwan imported an estimated 16 million tonnes of LNG in 2019, an increase of 7.3 per cent from 2018. Taiwan’s LNG imports are projected to increase to 22 million tonnes by 2025. Taiwan’s energy plan envisages the share of gas in the energy mix rising from 34 per cent to 50 per cent by 2025. To support this growth, 6 mtpa of LNG import capacity is expected to be added to existing capacity of 16.5 mtpa. However, there is some uncertainty about achieving this target, given the history of significant delays to major infrastructure projects in Taiwan.

Emerging Asia will be a key driver of LNG demand growth Outside of the traditional LNG buyers in Asia, emerging Asian economies are expected to make a substantial contribution to growing global LNG demand over the outlook period (Figure 7.7). These countries include already established buyers — such as India, Pakistan, Bangladesh and Thailand — and new markets — such as Sri Lanka, Vietnam and the Philippines. While these countries are relatively small importers of LNG individually, collectively they are expected to account for a significant share of global LNG demand, and are expected to import 121 million tonnes of LNG by 2025, making the collective region the world’s second largest importer of LNG by 2025.

Figure 7.7: Projected LNG demand from emerging Asia

Source: Nexant (2020) World Gas Model, Department of Industry, Science, Energy and Resources (2020)

India is expected to account for a large share of the growth in emerging Asian demand, with LNG imports forecast to almost double from 23 million tonnes in 2019 to 40 million tonnes in 2025. The Indian government is aiming to lift the share of gas in its energy mix from around 6 per cent currently to 15 per cent by 2030, although the target is considered ambitious. The precise scale of growth in India’s LNG imports over the next five years is subject to uncertainty, and depends on the pace of infrastructure development and the progress of policy reforms, which will impact on the domestic gas production and consumption balance. While India’s domestic gas production is projected to grow, it is not expected to keep pace with demand; the country’s gas sector is constrained by a range of challenges.

Growth in gas demand in other emerging Asian economies is expected to be largely driven by the power sector. While some of these countries have domestic gas reserves, production is either in decline or not keeping pace with consumption growth. As a result, LNG imports are projected to rise to fill this gap. Key risks to the outlook relate to infrastructure constraints, uncertainties regarding the profile of domestic gas production in some countries (notably in Thailand and Vietnam), and competition from cheaper coal and renewables.

Europe’s LNG imports projected to decline from record highs Europe imported an estimated 86 million tonnes of LNG in 2019, a record high, and 69 per cent higher than 2018 volumes. Europe — known as the ‘destination of last resort’ for LNG due to its extensive storage capacity — absorbed a large share of the increase in global LNG production in 2019.

However both storage capacity and opportunities for coal-to-gas switching are beginning to be stretched. Europe’s LNG imports are projected to decline from current levels over the outlook period. European gas consumption is expected to remain relatively flat, and LNG imports are expected to face increasing competition from pipeline gas, offsetting the impacts of declining European gas production. The Nord Stream II gas pipeline, with a capacity of 55 bcmpa (40 mtpa), is expected to commence operations by late 2020 or early 2021.

020406080

100120140

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Mill

ion

tonn

es

India Pakistan Bangladesh Thailand Malaysia Other emerging Asia

66


7.5 World exports The current wave of LNG capacity additions is drawing to a close The rapid expansion in global LNG supply capacity seen over the last few years is expected to continue in 2020 — although at a slower pace — 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 2021 as these projects finish ramping up (Figure 7.8).

A new wave of LNG projects is on the horizon Growth in global LNG capacity is expected to begin accelerating again in the final years of the outlook period. A record 71 million tonnes of new capacity was approved in 2019, reflecting confidence about long-term LNG demand growth. Most projects that received final investment decisions (FIDs) in 2018 and 2019 are scheduled to come online in 2024 and 2025, driving a new wave of capacity additions. This second expansion in global LNG capacity is expected to outpace growth in demand, and lead to a fall in the average capacity utilisation rate of LNG operations.

At the time of writing, there was around 143 million tonnes of LNG capacity that could come online by 2025, including projects currently under construction and pre-FID projects. The list of potential projects is dominated by the US, with a number of projects also being considered elsewhere around the world, discussed in further detail below.

Some project FIDs scheduled for 2019 were delayed, and postponements could persist in 2020. While the US-China Phase One trade deal may encourage more FIDs for US projects this year, the impacts of COVID-19 could further stall negotiations for projects in the US and elsewhere. Buyers are also reportedly reluctant to commit to long-term agreements against a backdrop of record low spot prices and the global supply glut.

The US is expected to be a key source of LNG export growth US exports surged by 47 per cent to 34 million tonnes in 2019, underpinned by the ramp up of new LNG projects. Three new liquefaction facilities commissioned their first trains in 2019, and production is expected to continue to ramp up in 2020 and 2021.

Figure 7.8: Annual change in LNG supply capacity and demand

Notes: Nameplate capacity is the theoretical maximum annual production capacity of an LNG plant. 2019 data is an estimate. Source: Department of Industry, Science, Energy and Resources (2020); Nexant (2020) World Gas Model

Figure 7.9: LNG export projections

Source: Department of Industry, Science, Energy and Resources (2020); Nexant (2020) World Gas Model

-10

0

10

20

30

40

50

60

2013 2015 2017 2019 2021 2023 2025

Mill

ion

tonn

es

Australia North AmericaMiddle East AfricaSouth East Asia Rest of the worldWorld demand

0102030405060708090

100

Australia Qatar UnitedStates

Russia SouthEast Asia

Africa Rest ofworld

Mill

ion

tonn

es

2019 2025


Towards the end of the outlook period, US LNG exports are projected to reach 90 million tonnes — which will likely make the US the world’s largest LNG exporter (Figure 7.9) — as the second wave of LNG projects begin to ramp up. Two new LNG projects reached FID in 2019, including the 16.5 mtpa Golden Pass LNG project. All US LNG projects currently under construction are expected to be completed by 2025.

Qatar’s LNG exports expected to grow Qatar exported an estimated 75 million tonnes of LNG in 2019, making it 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 tonnes, before beginning to grow from 2024 onwards. In November 2019, Qatar Petroleum announced plans to construct another two LNG ‘mega trains’, which is expected to boost exports to 85 million tonnes by 2025. Beyond the outlook period, the planned expansion could increase LNG production capacity by 64 per cent to 126 million tonnes by 2027.

Russia to increase its share of global LNG exports Russia exported an estimated 29 million tonnes of LNG in 2019, more than double the previous year, reflecting growth from the Yamal LNG project which reached full capacity at the end of 2018. Russia’s LNG exports are projected to reach 37 million tonnes by 2025. The first train of the 19.8 mtpa Arctic LNG 2 project is expected to start by 2023, with the second and third train to start up by 2024 and 2026, respectively.

There is a strong pipeline of projects elsewhere in the world Several LNG projects elsewhere in the world are also expected to contribute to the expansion of global LNG capacity. Petronas FLNG 2 in Malaysia and Tangguh LNG Train 3 in Indonesia are scheduled to start 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 was approved in 2019, which is expected to start by 2025, and an FID is expected for the Rovuma LNG project in Mozambique this year. Other LNG projects in Africa face challenges relating to financing and cost-competitiveness, and are not expected to materialise in the short-term.

Box 7.1: US-China trade deal: Implications for Australian LNG On 15 January 2020, the US and China signed a Phase One trade deal, which included a commitment from China to purchase US$52 billion of energy products from the US in 2020 and 2021 (see Box 1.2). While LNG could contribute to this target, substantial uncertainty remains around the extent to which US LNG exports to China — which have halted since April 2019 — could rise. At the time of writing, the impacts of COVID-19 had resulted in weaker Chinese demand for LNG, which further complicates understanding of how China could meet the terms of the deal.

The 25 per cent tariff (increased from 10 per cent in June 2019) on US LNG imports to China remains in place, reducing the competitiveness of US LNG relative to other sources. However, the impacts of the tariff could be softened by an announcement by Chinese authorities in February that firms will be able to apply for tariff exemptions, subject to approval.

The impact of the trade deal on Australian LNG is tempered by the long-term LNG contracts between Australia and China (Table 7.1). An estimated 70 per cent of Australian LNG exports to China are sold on long-term contracts, leaving about 30 per cent of Australia’s LNG exports to China potentially impacted. This equates to around 8 million tonnes based on 2019 exports, or 10 per cent of Australia’s total LNG exports, much of which could be redirected to other destinations. In short, while the trade deal could result in greater competition, the direct impact on Australian LNG exports will likely be relatively contained in the short to medium term.

Table 7.1: Australia-China long-term LNG contracts

Project Buyer Volume Start End

NWS T1-T5 PetroChina 3.30 mtpa 2005 2030

Gorgon LNG PetroChina 2.25 mtpa 2016 2036

Australian Pacific LNG Sinopec 7.60 mtpa 2016 2036

Queensland Curtis LNG CNOOC 3.60 mtpa 2014 2034 Source: Petroleum Economist (2018), GIIGNL (2019)

68


7.6 Australia Australia’s LNG capacity expansion is coming to an end A wave of LNG investment in Australia saw over US$200 billion invested in seven new LNG projects, which were commissioned between 2009 and 2012. The ramp up of these projects has seen Australia’s LNG exports 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 2019.

Australia’s LNG export volumes to begin edging down after 2020–21 Prelude and Ichthys are the last two remaining projects that are ramping up production following the wave of LNG investment. The Prelude project — which shipped its first LNG cargo in June 2019 — is expected to ramp up over the course of 2019–20. Ichthys has ramped up faster than expected, and is already producing at close to full capacity.

Australia’s LNG exports are expected reach 81 million tonnes in 2020-21, before edging down towards 79 million tonnes by 2022–23 (Figure 7.10). Production at the Darwin LNG plant is expected to halt after 2021, as gas from the Bayu-Undan field is exhausted. The Darwin operation will require backfill from the Barossa project to continue production, although infill drilling at Bayu-Undan may extend its lifespan and narrow the time between its closure and the start-up of the Barossa backfill project. An FID is expected for the Barossa project in the June quarter 2020, with first gas expected in 2023.

Production at the North West Shelf project is also likely to decline from around 2022 onwards. The development of Equus — which is on track for first gas by 2024 — is a potential source of gas for the North West Shelf project. However, due to timing issues, it is likely that there will be fall in production for a period of time. In the longer term, backfill resources for the North West Shelf project will likely come from the Browse Basin project fields of Calliance, Torosa and Brecknock. The FID for the Browse Basin project has been delayed from late 2020 to late 2021, with first production targeted for 2026.

Figure 7.10: Australia’s LNG exports and export capacity

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

There is upside potential for Australia’s LNG exports in the medium term There are a number of projects in the pipeline that could see Australia’s LNG export capacity rise towards the end of the outlook period and beyond (Table 7.2).

An FID is expected in 2020 for the Pluto LNG expansion project, with first production targeted for 2024. Building an additional train at the Pluto LNG plant forms part of Woodside’s plans to develop the Scarborough gas field in the Carnavon Basin, connecting the offshore resource to the Pluto LNG plant via a 430 kilometre pipeline. The expansion of Pluto LNG is expected to offset the impacts of the halt in production at the North West Shelf operation and enable a rise in Australian LNG export volumes to 80 million tonnes in 2024–25.

The Beetaloo sub-basin, a substantial shale gas resource in the Northern Territory, represents a longer-term opportunity for Australia. However, given exploration is only just commencing, it remains uncertain what proportion of the resource will be technologically and economically viable to extract.

0

20

40

60

80

100

2010–11 2013–14 2016–17 2019–20 2022–23

Mill

ion

tonn

es

Existing Capacity additions Export volume

69


Australia’s LNG export earnings projected to decline from record highs Australia exported $51 billion of LNG in 2018–19 in real terms, up from $32 billion in 2017–18. Higher export earnings were driven by a recovery in oil prices relative to 2017–18, and growing export volumes, particularly from the Ichthys and Wheatstone (which began producing at full capacity in the second half of 2018) LNG projects.

The value of Australia’s LNG exports is forecast to decline to $49 billion in 2019–20 and fall back further to $44 billion in 2020–21, in real terms, driven by declining oil-linked contract prices (at which most Australian LNG is sold).

Australia’s LNG export earnings are projected to remain in the $44 to $47 billion range, in real terms, over the remainder of the outlook period to 2024–25 (Figure 7.11). The impacts of declining gas production from the North West Shelf and Darwin projects are expected to be offset by a 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.

Figure 7.11: Australia’s LNG exports

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 Power, Tokyo Gas

NT Sustaining n/a 2024+

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

0

6

12

18

24

30

36

42

48

54

0

10

20

30

40

50

60

70

80

90

2004-05 2009-10 2014-15 2019-20 2024-25

2019

–20

$bill

ion

Mill

ion

tonn

es


70


Table 7.3: Gas outlook

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

JCC oil pricea

– nominal

– realh gAsian LNG spot price

– nominal

– realh

Gas productions

Gas consumptions

LNG tradeds

US$/bbl

US$/bbl

US$/MMbtu

US$/MMbtu

Bcm

Bcm

Mt

66.4

67.9

5.4

5.6

4,041

4,059

348

57.1

57.1

3.7

3.7

4,116

4,131

370

63.9

62.6

4.8

4.7

4,196

4,210

387

67.6

64.7

5.6

5.4

4,292

4,300

400

70.8

66.2

6.8

6.3

4,394

4,392

414

70.6

64.6

6.1

5.6

4,481

4,491

429

69.5

62.1

5.3

4.7

4,550

4,593

460

0.8

-1.5

-0.4

-2.6

2.0

2.1

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


8.1 Summary Oil prices are forecast to fall to average US$60 a barrel in 2020, as the

COVID–19 outbreak impacts global air and vehicular travel, especiallyin China. Over the medium term, price gains are likely to be minimal,due to slow demand growth and rapidly rising US shale oil supply.

Over the outlook period, global oil consumption growth is expected toslow further, and to be concentrated in China and India.

Annual real earnings from Australian oil exports are expected to peak in2021–22 at $11 billion, before declining to a projected $9.6 billion in2024–25.

8.2 Prices Oil prices are expected to recover, but remain relatively low Oil prices have recently declined to 13 month lows, largely driven by fears of lower consumption growth. The negative impact of the COVID-19 outbreak in China has more than offset the impact of OPEC+ production cuts and the December 2019 US-China Phase One trade deal.

The COVID-19 outbreak has affected oil prices in early 2020. Brent oil prices fell by 15 per cent in January, when the majority of cases were confined to China. Despite the localised impacts, global oil prices fell significantly as China accounted for around 14 per cent of 2019 global consumption, and around 80 per cent of global consumption growth. 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 first quarter of 2020 has been negatively affected by quarantine actions that have reduced travel demand, and by many refineries scaling back operations.

Oil prices in 2020 are also expected to be negatively affected by assumed higher OPEC+ production. After numbers in this report were finalised, OPEC+ members met on 6 March 2020, but could not agree on production 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 the first quarter of 2020. These events resulted in Brent oil prices falling by

24 per cent on 9 March 2020, down to a three-year low of US$34 a barrel. As of 10 March 2020, it is uncertain if future negotiations will address tensions between OPEC+ members. While OPEC+ production is assumed to increase for the second quarter of 2020 and remain elevated for the remainder of 2020, this outlook is subject to considerable uncertainty. Higher OPEC+ production is expected to weigh on prices in 2020, particularly in the first half of 2020 when global oil consumption is assumed to be constrained by COVID-19. These developments are also expected to increase competition in export markets, and low global prices are likely to affect the investment decisions of higher-cost producers.

Also affecting oil prices are the impacts of the International Maritime Organisation 2020 (IMO 2020) regulations. IMO 2020 came into force in January 2020, reducing the maximum amount of sulphur that can be included in shipping fuels. These regulations have created price premiums for oils suited to refining into low-sulphur fuels, including Brent and WTI grades. These price premiums are expected to be sustained over the medium term.

Figure 8.1 Historical and projected real oil prices

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

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Assuming the economic impacts of COVID-19 ease in the first half of 2020, prices are expected to increase in the second half of 2020. The price of Brent crude oil is expected to fall by 6.6 per cent to average US$60 a barrel in 2020, while the West Texas Intermediate (WTI) price is expected to fall by 4.6 per cent to average US$54 a barrel. Both prices in real terms are well below the long-term averages between 2009 and 2019 (Figure 8.1). Tensions in the Middle East & North Africa (MENA) may lead to temporary production disruptions, which could increase prices (see Box 8.1). However, over the rest of the outlook period, prices are expected to grow slowly. Slowing consumption growth and rapid growth in US production will continue to weigh on prices, and limit the effectiveness of OPEC+ efforts to increase them. In 2021, the Brent oil price is forecast to average $US62 a barrel (in 2020 dollars).

Oil prices are expected to increase modestly over the outlook period, but remain lower than historical averages. Higher US production is likely to limit the influence of OPEC+ actions to support global prices. The Brent oil price is expected to rise steadily to reach $US65 a barrel in 2025.

Figure 8.2: Supply and demand outlook

Sources: Department of Industry, Science, Energy and Resources (2020); International Energy Agency (2020).

Gains in oil output (mainly from the US, which has seen production costs fall and technology improve) are expected to exceed oil consumption growth over the outlook period (Figure 8.2). As a result, prices are unlikely to be sustained above US$70 a barrel in real terms. The potential for unexpected outages in MENA output, and resolutions to current MENA tensions will remain influential factors in the oil market.

8.3 World oil consumption After negligible growth in 2019, global oil consumption is projected to increase from 100 million barrels a day in 2019 to 107 million barrels a day by 2025. This growth is expected to be driven by non-OECD nations, most notably China and India. Global consumption growth is forecast to vary significantly between years, with consumption growth in 2020 expected to be constrained by lower travel demand as a result of COVID-19 impacts.

Should Chinese oil consumption conditions return to more usual conditions, growth is likely to pick up after 2020. Late in the outlook period, growth is expected to moderate due to structural slowdowns in developing Asia’s oil consumption growth and higher expected global electric vehicle sales (see Lithium chapter).

Higher non-OECD consumption expected 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.

China’s consumption is forecast to increase from 13 million barrels a day 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 outbreak is expected to limit 2020 consumption growth. Late in the projection period, Chinese consumption growth is expected to slow due to the Chinese government’s 2025 target that electric vehicles account for 25 per cent of new vehicle sales (see Lithium chapter).

Indian consumption growth is projected to increase by 20 per cent between 2019 and 2025 to reach 6.0 million barrels a day in 2025. Growth is expected to pick up in 2021 as economic growth gathers momentum.

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Consumption growth in other non-OECD nations is expected to increase due to ongoing economic development. The majority of this growth is expected to come from developing Asia and Africa. Higher Asian consumption growth is expected to be met through more diversified sources of supply. In recent years, major Asian importers have been substituting away from Middle Eastern oil and towards US product.

This trend is expected to continue, due to both the geopolitical risks associated with Middle Eastern oil supply chains and growing availability of US oil exports. China is expected to lift imports of US products, in order to contribute towards purchase targets for US energy products as part of the US–China Phase One trade agreement (see Box 2.1).

OECD consumption is expected to remain flat OECD consumption is expected to remain steady at 48 million barrels a day over the outlook period, as energy efficiency improves. With US consumption expected to sit at around 21 million barrels a day, this should result in US exports increasing.

8.4 World oil production In recent years, global oil production growth has faced countervailing pressures between rapidly expanding US production and production limiting actions from OPEC+. A consequence of this has been the US accounting for a higher share of global production, which has constrained the ability of OPEC+ to influence prices (Figure 8.4).

Figure 8.4: World production growth


OPEC+ production to recover in late 2020 In 2019, OPEC+ production fell by 2 per cent due to over-compliance with OPEC+ production cuts and unexpected outages in Iran and Venezuela. Production in 2020 is forecast to increase, due to the assumed ending of OPEC+ production targets in the second quarter of 2020. As of 10 March 2020, the extent and likelihood of these increases remains uncertain, increasing the uncertainty of price and production forecasts. Libyan production is forecast to fall as a result of instability in the country.

Beyond 2020, OPEC+ production is expected to increase due to higher production targets. Production from the largest OPEC+ producers is expected to increase moderately over the outlook period.

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Box 8.1: Impacts of diplomatic tensions on oil markets Geopolitical tensions in the Middle East have historically affected global oil markets, with developments in tensions having ripple effects on oil production, trade and subsequently global prices. For most of 2019, it appeared that the tensions were posed by US sanctions on Iran and Venezuela. However, in September 2019 an attack on Saudi oil infrastructure resulted in new concerns over global oil security. The threat of production disruptions increased further in January 2020, due to escalating tensions between Iran and the US, and domestic political conflict in Libya.

In 2018, the US government announced it was withdrawing from the Joint Comprehensive Plan of Action, and would re-introduce sanctions on international purchasers of Iranian oil. Several importers were granted extensions on purchases of Iranian oil until May 2019 before facing US sanctions. As a result of these sanctions, Iranian exports and production have fallen. At the time of writing, negotiations between Iran and the US have made little progress, and tensions escalated further in January 2020.

On 3 January 2020, the US government announced that the US military had conducted a strike that killed General Qasem Soleimani. On 8 January 2020, the Iranian government announced that they it was responsible for the airstrikes at multiple Iraqi airbases housing US troops. These tensions saw the US government announce new sanctions on Iran on 10 January 2020. These sanctions target multiple sectors, including construction, manufacturing, textiles and mining. Any further output disruptions in Iran are unlikely to significantly affect global oil prices, as existing US sanctions are already limiting Iranian exports. But disruptions to production in other countries have the potential to quickly tighten the world market.

Regional tensions may also affect oil trade, due to the potential for Iran to disrupt ships passing through the Strait of Hormuz. This narrow channel connects Middle Eastern oil exporters with global consumers, with an estimated 20 per cent of global trade passing through the Strait. The proportion of OPEC+ exports passing through the Strait is higher still, and

any disruption to trade could thus raise prices. This price gain would be significant, since most OPEC+ spare capacity would be unavailable to global consumers.

US sanctions have also played a role in the decline of the Venezuelan oil industry. Venezuelan production has been on a long-term decline, due to the nationalisation of the oil sector and low infrastructure investment. This decline has been accelerated by the steady escalation of US sanctions from 2015. As a result, Venezuelan production declined by 63 per cent between 2015 and 2019.

On 14 September 2019, a terrorist attack on Saudi Arabian oil infrastructure caused fires and extensive damage. News of the attack caused Brent oil futures contracts to rise by $12 a barrel when Asian markets next opened. This was the largest intraday move since the futures contract started trading in 1988. The attack reduced Saudi production by 8.2 per cent month-on-month in September. This disruption has proven to be temporary, with production recovering in October, to be above pre-attack levels. Nonetheless, this event has highlighted risks and vulnerabilities around Saudi oil production infrastructure.

In January 2020, a number of Libyan oil terminals and oil fields were subject to a military blockade as part of a wider struggle for control of the Libyan government. On 18 January 2020, the state-owned oil company declared ‘force majeure’ on oil exports from affected ports. As of 14 February 2020, export suspensions were estimated to have cost the government US$1.4 billion, impacting heavily on the economy.

Resolutions to these tensions would likely have a significant impact on total OPEC+ production, since all countries facing tensions are members of the bloc. With these countries exempt from current production targets, if tensions ease, production targets for OPEC+ members are likely to come under pressure as the organisation seeks to sustain prices. In any case, all OPEC+ members are expected to be negatively impacted, either through lower production targets or lower global prices.

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Russian production is projected to increase significantly in 2020, due to the assumed ending of OPEC+ production targets. Between 2021 and 2025, Russian production is forecast to increase further due to higher condensate production. Saudi Arabia accounted for a high proportion of OPEC+ cuts in the first quarter of 2020, and Saudi production over the rest of the year is expected to increase significantly. Saudi production is forecast to remain relatively steady over the rest of the projection period.

Production in countries exempt from current OPEC+ targets is expected to grow, although the growth rate remains uncertain. With these countries granted exemptions because of political tensions, future production growth will be dependent on diplomatic negotiations. Iran is the OPEC+ member with the greatest potential to increase production over the medium term. Sanctions on Iranian oil are assumed to remain over the outlook period, and production is projected to remain around current levels. With Iran 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. This would further complicate OPEC+ intentions to set global prices.

Production in Venezuela is forecast to remain relatively subdued, with out-dated oil infrastructure making it unlikely that production will notably increase over the outlook period. However, there are signs that reforms are beginning in the Venezuelan oil sector, and production in Libya is forecast to recover in 2021, due to an assumed passing of blockades that are affecting production in the first quarter of 2020.

Strong non-OPEC+ production growth expected

In 2019, gains in non-OPEC+ production growth exceeded the drop in OPEC+ production. Despite higher OPEC+ production forecast for 2020, higher global production is expected to be largely driven by non-OPEC+ countries, particularly the US. Strong growth is also expected in Brazil, Canada and Norway. Non-OPEC+ growth is expected to slow over the outlook period, but to remain the key driver of global output growth. In the US, improving oil well efficiency continues to drive this growth, despite some infrastructure capacity constraints. The US is currently the largest oil producer in the world, and is expected to drive world output growth over

the medium-term (Figure 8.4) on the back of a long period of investment in exploration, wells and infrastructure. After hitting 17 million barrels a day in 2019 (growth of 11 per cent on 2018), US output is projected to reach 20 million barrels a day in 2025 (average annual growth of 3.1 per cent).

8.5 Australia’s production and trade Export earnings grow strongly on output surge Quarterly crude and condensate export earnings in the December quarter 2019 reached $3.0 billion, a year-on-year increase of 18 per cent. The majority of this increase was due to a 16 per cent rise in export volumes. Australian export earnings are expected to be $10 billion in 2019–20 in real terms, and decrease marginally in 2020–21. Export values are projected to peak at $11 billion in 2021–22 before easing to $9.6 billion in 2024–25 (Figure 8.5). This trajectory largely reflects changes to real oil prices in in Australian dollar terms.

Figure 8.5: Australia’s annual oil export volumes and values

Notes: Includes crude oil and condensate, but excludes LPG. Source: ABS (2020); Department of Industry, Science, Energy and Resources (2020)

Production growth to slow Australian crude and condensate production reached 429,000 barrels a day in December 2019. This was 34 per cent higher than a year ago, and reflected higher crude oil and condensate production. Crude oil output rose by 51 per cent as a result of a ramp up in production at Woodside’s

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Greater Enfield project. Condensate output rose by 26 per cent, largely as a result of production ramp ups at the Prelude and Ichthys LNG projects.

Crude oil production is expected to increase in 2020–21 as the Greater Enfield project reaches peak production. Over the outlook period, crude oil production is expected to fall. No new projects are expected due to low global oil prices and Equinor’s decision in February 2020 to discontinue their exploration drilling plan in the Great Australian Bight.

Growing condensate output is expected to drive Australia’s petroleum production and export earnings over the outlook period. Production is 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 2024–25 (Figure 8.6). This is lower than growth over the last five years, as only a few projects from the recent wave of LNG investment are still ramping up production. Forecast higher production will largely be from the Prelude and Ichthys projects. Production may increase late in the outlook period due to a number of LNG projects in the pipeline. These projects include Scarborough and Pluto LNG (see LNG chapter).

LPG production is also expected to rise strongly in 2019–20, gaining by 50 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 is expected to stay around these levels. Despite strong growth in the short term, output of condensate, crude and LPG is not expected to increase beyond 2020–21, a legacy of declining exploration expenditure, project economics and geological factors (Figure 8.6). Taking a longer historical perspective, even with strong volume growth described above, Australian crude oil, condensate and LPG production is expected to be at least 25 per cent below the peak recorded in 2002–03.

Australian consumption Australian oil consumption has grown steadily in recent years, in contrast to stagnant consumption in most OECD nations. Oil consumption is expected to be around 9 per cent over the full outlook period, with the result driven by rising population.

Australia’s refinery production steady Australia’s refinery production averaged 490,000 barrels a day in 2019, slightly below than the 2018 average of 498,000 barrels a day. To meet Australian demand, 60 per cent of refined product was imported from overseas in 2018–19, including around 71 per cent of diesel and 35 per cent of automotive gasoline. Over the outlook period Australian refinery production is expected to vary with scheduled maintenance, and is projected to average 485,000 barrels a day in 2024–25. With domestic production volumes steady over the outlook period, imports are expected to continue to increase to accommodate higher consumption.

Figure 8.6: Australia’s petroleum production outlook

Source: EnergyQuest (2020); Australian Petroleum Statistics (2020); Department of Industry, Science, Energy and Resources (2020)

Exploration Australia’s petroleum exploration expenditure was $410 million in the December quarter, on a trend basis, and increase of 33 per cent year-on-year. Petroleum exploration expenditure totalled $1.4 billion in 2019, 25 per cent higher than in 2018. With the 2018 total the lowest in nominal terms since 2005, there are signs that sentiment in the oil and gas sector is beginning to improve.

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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 aConsumption 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

bReal 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

bReal 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 aExport volume 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 aImports kb/d 375 350 342 345 365 366 377 0.1

acLPG production kb/d 66 99 101 101 100 99 98 6.9

Refined products a Refinery production kb/d 502 482 486 479 484 478 485 -0.6

ad Export volume 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).


9.1 Summary Uranium prices remain low, but tight supply conditions are expected to

force a lift in prices as demand edges up. Spot prices are expected to rise from around $US25 per pound in early 2020, to over US$40 per pound by 2025 in real terms.

Uranium production in Australia is expected to decline, following the scheduled closure of the Ranger uranium mine in 2021. However, new prospects, including Boss Resources’ Honeymoon mine, could help to lift production towards the end of the outlook period.

The value of Australia’s uranium exports is forecast to lift from a low of $558 million in 2019–20 to $652 million (real terms) by 2024–25.

9.2 Prices Uranium prices are largely stable, but change is in prospect Uranium prices have hovered at around US$25 a pound since large producers in Kazakhstan and Canada cut their output in 2018. While this price remains relatively low, risks around further falls have abated in recent months. Buying has picked up among smaller firms, and recent geopolitical tensions appear not to have led to any policy interventions which significantly affect uranium trade and prices.

With supply remaining constrained, reactor constructions in Asia, the Middle East and Eastern Europe should push prices up slowly, with a levelling out above $US40 a pound by 2024 (Figure 9.1). Nuclear constructions are rising (see Figure 9.2), but large inventories of uranium and planned reactor closures in 2024 and 2025 will offset some upward pressure on prices.

Overall risks to prices have shifted to the upside, with many mining projects having been abandoned or placed in hiatus in recent years. 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 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.

Figure 9.1: Uranium real price outlook

Source: Cameco Corporation (2020) Uranium Spot Price; Ux Consulting (2020) Uranium Market Outlook

Figure 9.2: World nuclear power generation

Source: International Energy Agency (2019); World Nuclear Association (2019); Department of Industry, Science, Energy and Resources (2020)

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9.3 World consumption Nuclear power growth faces a significant potential upside Global nuclear generation capacity edged down slightly in 2019, from 393 to 392 Gigawatts electrical. Six new reactors were connected over the year, and construction commenced on a further three. Of the six newly connected reactors, two were in China, and two were in Russia. One of the Russian reactors was the world’s first floating nuclear plant, and is intended to be a working prototype for floating modular plants.

However, nine aging reactors were formally closed in 2019. These included Taiwan’s Chinshan 2 reactor, Japan’s Genkai 2, Russia’s Bilibino 1, and the Three Mile Island 1 and Pilgrim reactors in the USA. Germany and South Korea also closed reactors in 2019, with both countries committed to a phase-down of nuclear power.

China, India and Russia remain the most significant developers of nuclear power. China has built a formidable nuclear export industry in recent years, and Russia and India have signalled new cooperation in constructing power plants in Africa, following previous cooperative work by both countries in Bangladesh. The United Arab Emirates and Belarus 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 connection to the electricity grid will be some years off.

Over the next 5 years, uranium use in nuclear reactors is expected to broadly match supply, though demand sources are expected to diversify (Figures 9.3 and 9.4). Growth prospects remain mixed across much of the world, with nations moving in markedly different directions. In January 2020, the European Commission announced that one trillion euros would be invested in low-carbon energy through its European Green Deal Investment Plan, which aims to make the EU carbon neutral by 2050. However, the final version of this plan excludes nuclear power projects from being funded though the Green Deal mechanism. This cuts off one potential avenue of funding for EU nuclear power over the coming years.

Figure 9.3: World uranium consumption and inventory build (U3O8)

Source: International Energy Agency (2019); World Nuclear Association (2020); Ux Consulting (2020)

Figure 9.4: New nuclear capacity: medium-term expansion

Source: International Energy Agency (2020); World Nuclear Association (2020); Department of Industry, Science, Energy and Resources (2020)

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The United Kingdom (UK) government has recently commenced a plan to ‘turbo-charge’ investment in low-carbon energy. The plan, announced on 20 January 2020, will support all forms of low-carbon energy domestically and overseas, and could provide new funding for nuclear power.

In Asia, connection for units 5 and 6 of the Hongyanhe nuclear plant in China has been delayed to late 2021 and early 2022 (respectively), to allow for additional safety measures to be incorporated. This continues a trend towards a slower construction pace in China, with the country expected to connect only four new reactors between 2021 and 2025.

Restarts in Japan have also faced delays. Units 2 and 3 of the Tokai plant will now be kept offline for two extra years, to allow for additional safety measures, while extended inspections are likely to take Takahama units 3 and 4 offline in the second half of 2020.

Technological progress in reactor development continues, with GE Hitachi commencing a licencing process for its new BWRX-300 reactor model. This model, for a small, portable, modular reactor capable of mass production, is now being assessed by the US Nuclear Regulatory Commission.

Nuclear generation has also been utilised recently in other fields, creating new potential avenues for the technology. In Senegal, nuclear techniques have been used to reduce tsetse fly populations, which have long spread serious diseases across farms and cities. The technique does not harm 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 insights into how atomic nuclei are held together.

Overall, global demand for uranium is expected to remain relatively steady over the outlook period. Downward pressure is expected as a result of slowing construction in China and reconnection delays in Japan. A wave of reactor closures is also expected in Canada, the UK and Belgium over the second half of the outlook period. Offsetting this will be growth from Asia and various new and emerging markets where reactors are being connected for the first time.

9.4 World production Production is set to remain tight as producers try to lift prices Kazatomprom — the world’s largest supplier of uranium — has again confirmed that production will be kept lower out to 2021. Constraints on supply may be applied for a longer period should prices remain low. Production cuts by the company have already removed almost 6,000 tonnes of uranium from annual global supply, though prices have thus far risen only modestly. Supply cuts have also occurred in Canada, with the possibility of these cuts being extended too.

These cuts should ensure that overall supply remains tight over the outlook period, with few new mines entering operation, and many remaining in hiatus. However, further gradual increases in prices are expected to see some easing in supply restrictions over the next three 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 2025 (Figure 9.5).

Figure 9.5: World uranium production and secondary supply (U3O8)

Source: International Energy Agency (2020); World Nuclear Association (2020); Ux Consulting (2020)

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9.5 Australia Low prices have sharply reduced uranium exploration Only $2.3 million was invested in uranium exploration in Australia in the 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 above $40 million.

Production is set to decline in the early part of the outlook period

The Ranger uranium mine in the Northern Territory is now entering its final year of operation, with closure scheduled for January 2021. Output is trending down as a result (Figure 9.6), as activity at the site shifts towards rehabilitation. Elsewhere, facilities at Olympic Dam are set to be upgraded over coming years, ensuring more robust long-term production from the mine, which is expected to remain operational for many decades.

A recent feasibility study has been released, which suggests that Boss Resources’ Honeymoon uranium mine may become viable in the near future. The mine has been in ‘care and maintenance’ since 2013, but the 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 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 be viable. A return to prices near this level is expected by around 2023 or 2024, which would provide a solid grounding for the mine to reopen around the end of the outlook period.

Conditions for exporters remain difficult, but price growth should help 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 Honeymoon project late in the outlook period would see export values and volumes rise above forecast levels.

Figure 9.6: Australia’s uranium production

Source: BHP (2019); Operational Review, Department of Industry, Science, Energy and Resources (2020); Energy Resources of Australia (2018); ASX Announcements — Operations Review; company media announcements (2019)

Figure 9.7: Australia's uranium exports


0

2

4

6

8

10

12

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

Thou

sand

tonn

es

0

300

600

900

1200

0

3

6

9

12

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

A$ m

illio

n

Thou

sand

tonn

esVolume Value (rhs)


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

China

kt

kt

83.6

12.9

84.1

13.5

81.7

14.7

82.9

15.1

83.2

15.2

84.1

15.2

83.6

15.6

0.0

3.2

European Union 28

Japan

Russia

kt

kt

kt

22.5

1.9

7.7

22.4

1.9

7.4

23.1

– 0.6

7.6

20.3

1.4

7.6

20.3

1.4

6.8

20.9

1.4

8.3

18.2

1.4

8.1

-3.4

-5.1

1.0

United States kt 21.8 21.7 18.8 21.0 21.2 21.2 21.3 -0.4

Spot price

realc

US$/lb

US$/lb

25.7

26.2

27.7

27.7

37.0

36.2

43.3

41.4

46.1

43.1

47.3

43.3

47.2

42.2

10.7

8.3

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

Mine production

Export volume

– nominal value

t

t

A$m

7,618

7,571

734

7,000

7,000

558

6,500

6,500

597

5,800

5,800

623

5,800

5,800

692

5,800

5,800

719

5,800

5,800

731

-4.4

-4.3

-0.1

– real valued A$m 748 558 585 598 649 657 652 -2.3

Average price

– realdA$/kg

A$/kg

96.9

98.8

79.7

79.7

91.8

90.0

107.5

103.2

119.4

111.9

123.9

113.3

126.0

112.4

4.5

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


10.1 Summary The gold price is forecast to reach a 7-year high of US$1,475 an ounce

(in real terms) in 2020, due to uncertainties over the COVID-19 outbreak and its impacts on the world economy, particularly China. A global rebound is projected to see the price slide to US$1,220 an ounce by 2025.

Australia is expected to overtake China as the world’s largest gold producing country in 2021, with high prices encouraging an expansion in production.

The real value of Australia’s gold exports is forecast to set a record of $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.

10.2 Prices Gold prices rose strongly in 2019 The London Bullion Market Association (LBMA) gold price averaged US$1,420 an ounce in 2019 (in 2020 price terms), a rise of 7.7 per cent from 2018. The price was largely propelled by the impact of trade tensions between the US and China. The same trade tensions helped push the Australian dollar to an 11-year low of US$0.6756 on 5 August 2019. The lower Australian dollar, in combination with a higher US dollar gold price, pushed the Australian dollar gold price to a new annual average record of A$2,045 an ounce in 2019 (Figure 10.1).

Gold prices to rise in 2020, then fall in the medium term Gold prices are forecast to average US$1,475 an ounce in 2020. This represents a rise of 3.7 per cent (in real terms) on 2019, driven by higher investor demand for gold as a safe haven asset. The COVID-19 outbreak is likely to have an impact on Chinese and global economic growth. Geopolitical tensions in the Middle East and the Korean peninsula are unlikely to be resolved in the short term. The low interest rate environment is likely to continue be a major factor driving institutional investment demand for gold. With (real) interest rates remaining low in

historical terms, the opportunity cost of holding gold is low, raising its attractiveness as an investment asset in times of uncertainty.

The gold price could exceed expectations in the short term if the ––19 outbreak turns out to have a larger than expected adverse impact on the world economy.

Figure 10.1: US and Australian dollar real gold prices

Source: LBMA (2020) Gold price PM; Department of Industry, Science, Energy and Resources (2020)

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 global economy and a higher interest rate environment. These factors are expected to undermine some of gold’s appeal to institutional investors. Funds are expected to move out of safe haven assets like gold into riskier assets. The pace of central bank gold buying is expected to decrease at an annual rate of 4.0 per cent over the outlook period, amidst a modestly lower appetite for gold reserves (Figure 10.2).

The lower US dollar gold price, in combination with higher Australian 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.

0

600

1,200

1,800

2,400

0

400

800

1,200

1,600

2015 2017 2019 2021 2023 2025

2020

pric

es A

$ an

oun

ce

2020

pric

es U

S$ a

n ou

nce

Real US dollar gold price Real Australian dollar gold price (rhs)


10.3 Consumption World gold consumption fell in 2019 World gold consumption declined by 1.0 per cent in 2019, to 4,356 tonnes (Figure 10.2), as higher gold prices reduced the demand for gold jewellery (which accounts for 48 per cent of global gold consumption) by 5.9 per 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 9 per cent over this period, to 637 and 545 tonnes, respectively. In China, the trade tensions with the US, slowing economic growth, and higher gold prices all contributed to weaker consumer sentiment and reduced demand for jewellery. In India, high Rupee gold prices, higher import duties, and concerns about the country’s economic slowdown all impacted negatively on the country’s demand for jewellery.

Figure 10.2: World gold consumption by sector

Source: World Gold Council (2020) Gold Demand Trends; Department of Industry, Science, Energy and Resources (2020)

Central banks and other government institutions (the “official sector”) continued to purchase gold in 2019, but net official sector purchases fell by 0.9 per cent to 650 tonnes. Economic uncertainty, and a desire to diversify out of the US dollar, appear to have been the main driving factors for continued strong central bank gold buying.

Gold used in industrial fabrication fell by 2.4 per cent in 2019, to 327 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 cent to 263 tonnes. Higher gold prices also affected the demand for gold used in the dental sector, which was down by 6.7 per cent in 2019, as consumers substituted ceramics for gold for their dental requirements.

Offsetting falling jewellery consumption, gold-backed exchange traded funds (ETF) holdings rose by 428 per cent in 2019 to 401 tonnes — the largest inflows since 2016. Lower interest rates, and rising US–China trade tensions drove investment flows into ETFs.

Gold consumption expected to rise after 2020 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 weigh on the sale of gold jewellery. As a result, global jewellery demand is expected to fall by 3.0 per cent in 2020 to 2,044 tonnes.

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 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 reserves. The US–Iran tensions are expected to encourage gold buying from central banks in the Middle East region.

After 2020, world gold consumption is projected to rise at an annual rate of 2.1 per cent, to 4,712 tonnes in 2025 (Figure 10.2), as lower gold prices boost jewellery demand and retail investment.

Global jewellery consumption is projected to rise at an annual rate of 5.0 per cent over the 5-year outlook. Consumption should reach 2,608 tonnes by 2025, driven by lower gold prices and stronger economic growth. Demand from China is expected to pick up, as price-sensitive Chinese consumers react to price falls. Economic growth, ongoing urbanisation, and rising incomes are all expected to contribute to higher jewellery demand in India. In addition, compulsory branding by Indian jewellery

0

1,000

2,000

3,000

4,000

5,000

2015 2017 2019 2021 2023 2025

Tonn

es

Total Fabricated Investment Official sector


retailers in 2020 could support consumer confidence and stimulate demand for gold.

In the US and Europe, an improvement in consumer confidence is also likely to support the demand for gold jewellery in those markets.

Gold retail investment is expected to grow at an annual rate of 2.2 per cent 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 gold bar and coin markets.

After reaching a peak of 702 tonnes in 2020, the pace of central bank gold 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 reach 20 per cent of total reserves. However, it is highly unlikely these two countries will actively increase gold’s share of their total reserves over the outlook period, as an improvement in world trade and a recovery in the global economy are expected to reduce central banks’ desire to diversify their reserves.

10.4 Production World gold supply increased in 2019 World gold supply grew by 2.2 per cent in 2019 to 4,776 tonnes (Figure 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 of the growth, as low cost and convenient online gold recycling platforms boosted gold buy backs.

World gold mine production fell by 1.3 per cent in 2019 to 3,464 tonnes. Production in China — the world’s largest gold producer — declined by 5.9 per cent, to 380 tonnes, with stricter environmental regulation leading to 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. However, production in Australia and Canada increased by 4.1 and 7.9 per cent in 2019, to 326 and 208 tonnes, respectively, with output in both nations benefiting from production from new mines.

Figure 10.3: World gold supply

Source: World Gold Council (2020) Gold Demand Trends; Department of Industry, Science, Energy and Resources (2020)

World gold supply expected to peak in 2021 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 term, increasing total gold supply will be propelled by higher mine production and scrap output.

Global mine production is forecast to increase by 2.0 per cent (to 3,533 tonnes) in 2020 and by 1.9 per cent (to 3,600 tonnes) in 2021. An expected upward movement in gold prices in 2020 — in both US dollar and other major currency terms — and a solid pipeline of projects in Australia, Russia and Canada — are all likely to drive higher global gold mine output, with miners focusing on expansions and extending the life of existing mines.

Australia is expected to overtake China as the world’s largest gold producing country in 2021, producing 383 tonnes, as miners respond to record prices (see Section 10.5 Australia’s exports and production). In China, the COVID–19 outbreak and stricter environmental regulation are

0

1,000

2,000

3,000

4,000

5,000

2015 2017 2019 2021 2023 2025

Tonn

es

Mine production Scrap


likely to reduce Chinese gold mine production by 2.9 per cent in 2020 to 369 tonnes. After 2020, China’s gold mine production is forecast to rebound modestly and then steady at around 2019 levels (Figure 10.4).

Figure 10.4: Top 5 global gold producing countries

Source: China Gold Association (2020); Refinitiv (2020); Department of Industry, Science, Energy and Resources (2020).

Gold scrap supply is forecast to rise at an average annual rate of 2.0 per cent over the next two years, to 1,357 tonnes in 2021, as high gold prices — both in US dollar and local currency terms — encourage gold selling in major jewellery consuming markets such as China and India.

World gold supply is set to decline over latter half of the outlook period After 2021, world gold supply is projected to fall at an average annual rate of 1.1 per cent, due to lower scrap supply. World recycled gold supply is 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 selling.

World mine production is expected to grow until 2022, and is then projected to decline at an annual rate of 0.5 per cent between 2023 and 2025, to 3,596 tonnes in 2025, as ore grades decline.

10.5 Australia’s exports and production Export values expected to peak in 2019–20 The value of Australia’s gold exports is forecast to set a record peak of $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, reaching 389 tonnes (Figure 10.5). Rising export volumes will be driven by 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 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 Australian dollar gold prices (see Section 10.2 Prices) and, to a lesser extent, lower export volumes.

Figure 10.5: Australia’s gold exports

Source: ABS (2020) International Trade, 5464.0; Department of Industry, Science, Energy and Resources (2020)

Higher production in the short term Australian gold mine production is forecast to increase by 7.1 per cent in 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 expansions and production from new mines. Five gold projects reached final investment decision stage in 2019, including Newcrest’s $685 million Cadia Stage 1 Expansion project in New South Wales (NSW), Regis

0

100

200

300

400

500

2015 2017 2019 2021 2023 2025

Tonn

es

China Australia Russia US Canada

0481216202428

060

120180240300360420

2014–15 2016–17 2018–19 2020–21 2022–23 2024–25

2019

-20

A$ b

illio

n

Tonn

es

Volume Real value (rhs)


Regis Resources’ $200 million McPhillamys gold project in NSW, Resolute Mining’s $134 million Ravenswood expansion project in Queensland, Capricorn Metals’ $132 million Karlawinda gold project in Western 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 production per year over the outlook period. Lower production in the medium term

After reaching a peak in 2021–22, Australian mine output is projected to decline by 0.8 per cent annually to 370 tonnes in 2024–25 (Figure 10.6). Production will be weighed down by lower grade ores, reserve exhaustion and closures, as prices fall back. Ramelius’ 1.9 tonne per year Edna May 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 from 12 tonnes in 2019 to about 9 tonnes in 2025.

Figure 10.6: Australia’s gold production


Figure 10.7 shows gold production all-in sustaining costs (AISC) — a measure of all direct and recurring costs required to mine a unit of ore — of select major gold producing countries between 2020 and 2025. Australian gold producers are less competitive (have a higher AISC) than Chinese, Russian, the US and Canadian gold producers.

Figure 10.7: Gold mine AISC costs by country

500

600

700

800

900

1,000

2020 2021 2022 2023 2024 2025

US$

a tr

oy o

unce

China Australia Russia US Canada

Source: AME (2020)

Exploration expenditure continued to increase 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 minerals exploration expenditure during the year — driven by a seven-year high US dollar gold prices and record high Australian dollar gold prices. Western Australia remained the centre of gold exploration activity in Australia, accounting for 68 per cent (or $726 million) of total gold exploration expenditure (Figure 10.8).

Figure 10.8: Australian gold exploration expenditure

Source: ABS (2020) Mineral and Petroleum Exploration, Australia, 8412.0

0

100

200

300

400

2014–15 2016–17 2018–19 2020–21 2022–23 2024–25

Tonn

es

0100200300400500600700800

2009 2011 2013 2015 2017 2019

A$ m

ilion

WA Rest of Australia


Table 10.1: Gold outlook


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


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)

93

11.1 Summary Slowing demand and strong supply are expected to see aluminium and

alumina prices fall in the short term, before recovering as globaleconomic growth picks up. Prices are projected to average US$1,640a tonne for aluminium and US$307 a tonne for alumina in 2025 (in realterms).

With no planned expansions to smelter or refinery capacity, annualAustralian output is expected to be broadly steady over the outlookperiod, at 1.6 million tonnes of aluminium and 20 million tonnes ofalumina.

After reaching a peak of $16 billion in 2018–19, the total value ofAustralian exports of aluminium, alumina and bauxite is projected to fallat an average annual rate of 4.6 per cent, to $12 billion (in real terms) in2024–25, due to softening prices for aluminium and alumina, and lowerbauxite export volumes.

11.2 Prices Aluminium and alumina prices fell strongly in 2019 The London Metal Exchange (LME) spot price for aluminium fell by 17 per cent in 2019, averaging US$1,830 a tonne (Figure 11.1). Prices were affected by US-China trade tensions, US aluminium import tariffs, and slowing world economic growth. The US government lifted sanctions on United Company Rusal — a major producer — in late January 2019, easing supply concerns and causing the aluminium spot price to fall.

The free on board (FOB) Australian alumina price was also lower in 2019, averaging US$342 a tonne (Figure 11.1). The price decline was driven by rising supply — with the return to full production of Brazil’s Alunorte refinery after 19 months of restricted operation — and lower aluminium demand.

Aluminium and alumina prices to fall in 2020 and 2021 and then rebound The LME aluminium spot price is forecast to decrease by 7.1 per cent to average US$1,699 a tonne in 2020, and to fall by a further 7.0 per cent in 2021 to average US$1,581 a tonne in real terms (Figure 11.1). The fall

Figure 11.1: World aluminium and alumina prices

Source: LME (2020) spot prices; Metals Bulletin (2020) Alumina monthly price; Department of Industry, Science, Energy and Resources (2020).

reflects the combination of growing aluminium production — which is projected to increase at an annual average rate of over 2.5 per cent over the outlook period — and weaker aluminium consumption — which is expected to decrease at an average rate of 1.2 per cent a year in 2020 and 2021. A consequent build-up of aluminium stocks is expected in the short term (Figure 11.2).

The COVID-19 (coronavirus) outbreak is expected to reduce aluminium demand in China — which accounts for 57 per cent of global aluminium consumption — by 2.5 per cent in 2020. Despite a recent easing of monetary policy in China, there will be considerable lags before a boost in demand shows through in the construction sector. Adding further pressure to aluminium prices is the impact of falling input costs, with alumina prices forecast to continue declining through the outlook period.

The FOB Australian alumina price is forecast to fall by 5.9 per cent to average US$322 a tonne in 2020, and then to US$305 a tonne in 2021 (in

0

100

200

300

400

500

0

500

1,000

1,500

2,000

2,500

2015 2017 2019 2021 2023 2025

2020

SU

$ a

tonn

e (F

OB

Aust

ralia

)

2020

pric

es U

S$ a

tonn

e

Average LME aluminium real price

Average FOB Australia alumina real price (rhs)


94

Figure 11.2: Aluminium real prices and stocks

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

real terms) (Figure 11.1). The price decline is expected to be driven by growing global alumina supply (due to the return to full production of Alunorte) and slowing global demand from aluminium producers. Slowing demand growth from the world automotive sector is having a considerable impact on global aluminium demand and prices.

After 2021, the LME aluminium spot price is projected to rise at an annual 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 Chinese aluminium consumption is expected to be a driver of the recovery in aluminium prices.

World alumina production is projected to grow at an annual rate of 1.5 per cent after 2021, falling below demand. As a result, the FOB Australian alumina price is projected to rise at 0.2 per cent a year to US$307 a tonne in 2025 in real terms (Figure 11.1).

11.3 Consumption Falls in global aluminium and alumina demand in 2019 Global aluminium consumption fell by 3.3 per cent in 2019, to be just under 64 million tonnes (Figure 11.3). US–China trade tensions and a related slowing in global economic growth resulted in softer demand for aluminium. China — the world’s largest aluminium consumer — consumed 36 million tonnes of aluminium in 2019, a fall of 3.8 per cent.

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 units. The fall in car sales in China was due to the withdrawal of government subsidies for low priced hybrid and electric cars.

World alumina usage declined by 2.2 per cent in 2019 to 117 million tonnes (Figure 11.4), driven by lower global aluminium production, which 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 Chinese aluminium demand.

World bauxite usage rose by 2.6 per cent in 2019 to 299 million tonnes, propelled by increased global alumina production (up 6.0 per cent in 2019). The growth in alumina production was driven by the resumption to full production at Brazil’s Alunorte alumina refinery and a production ramp-up at the UAE’s 4 million tonnes per year Al Taweelah alumina refinery.

Short term decline in aluminium demand, but medium term rises for aluminium, alumina and bauxite demand World primary aluminium demand is forecast to fall at an average annual rate of 1.2 per cent in 2020 and 2021, to 62 million tonnes by 2021 (Figure 11.3). The decline is expected to be driven by slowing demand from the automotive industry. The COVID-19 outbreak is likely to postpone 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.

0

400

800

1,200

1,600

2,000

2,400

0

2

4

6

8

10

12

2015 2017 2019 2021 2023 2025

US$

a to

nne

Wee

ks o

f con

sum

ptio

n

Stocks (Weeks of consumption) LME aluminium real prices (rhs)


95

After 2021, global aluminium consumption is projected to grow at an annual rate of 3.5 per cent to reach over 71 million tonnes in 2025, driven by rising infrastructure spending and demand from the transport and consumer durable sectors. Global industrial production, strongly correlated with aluminium demand, is projected to increase at an average of 2.3 per cent per annum over the outlook period.

Figure 11.3: World aluminium production, consumption and prices

Source: International Aluminium Institute (2020); AME (2020); World Bureau of Metal Statistics (2020); Department of Industry, Science, Energy and Resources (2020)

The production of automobiles is expected to be a significant driver of aluminium demand going forward, as the auto sector attempts to improve energy-efficiency by switching from steel to aluminium components. Growing electric vehicle production will add to this trend. Bloomberg New Energy Finance estimates that passenger electric vehicle (EV) sales will 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).

China is expected to be a major driver of higher energy-efficient vehicle output, with passenger EV sales projected to grow at an annual rate of 21 per cent, to 4.7 million units in 2025.

Figure 11.4: World alumina production, consumption and prices

Source: International Aluminium Institute (2020); AME (2020); World Bureau of Metal Statistics (2020); Department of Industry, Science, Energy and Resources (2020)

World alumina consumption is projected to increase at an average annual rate of 1.2 per cent over the outlook period, reaching nearly 126 million tonnes by 2025 (Figure 11.4). Alumina demand is driven by primary aluminium production, which is projected to increase by 2.3 per cent a year between 2021 and 2025.

World bauxite consumption is projected to grow at an average annual rate of 1.8 per cent over the next five years, reaching 337 million tonnes by 2025. This is expected to be driven by new alumina capacity in China and Indonesia.

0

700

1,400

2,100

2,800

0

20

40

60

80

2015 2017 2019 2021 2023 2025

2020

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nne

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ion

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es

World productionWorld consumptionAverage LME aluminium real price (rhs)

0

100

200

300

400

500

0

30

60

90

120

150

2015 2017 2019 2021 2023 2025 2020

US$

a to

nne

(FO

B Au

stra

lia)

Mill

ion

tonn

es

World productionWorld consumptionAverage FOB Australia alumina real prices (rhs)


96

Figure 11.5: Global electric vehicle sales and aluminium demand

Source: Bloomberg New Energy Finance (2020); Aluminium Insider (2020); Department of Industry, Science, Energy and Resources (2020)

11.4 Production Aluminium production fell, but alumina and bauxite output grew in 2019 World aluminium production for 2019 was nearly 64 million tonnes (Figure 11.3), a 1.2 per cent fall from 2018, due to lower output in China. Production in China — the world’s largest aluminium producer — decreased by 1.9 per cent in 2019 — the first yearly fall in a decade — to just under 36 million tonnes. Trade tensions with the US and the Chinese government’s stricter environmental regulations slowed production growth in China.

World alumina supply rose by 6.0 per cent in 2019, to above 122 million tonnes (Figure 11.4). The Alunorte alumina refinery in Brazil operated at half of its 6.3 million tonne per annum capacity between March 2018 and June 2019, due to restrictions imposed by Brazilian environmental authorities (amid concerns of water contamination). The refinery’s return to full production has brought three million tonnes per year of alumina capacity back online. The two million tonne per year Al Taweelah alumina

refinery in the UAE has produced around 1.0 million tonnes of alumina since commencing production in April 2019.

World bauxite production increased by 4.9 per cent in 2019 to nearly 345 million tonnes (Figure 11.6), driven by the production ramp-up at the Amrun bauxite project in Western Australia and Aluminium Corporation of China’s 12 million tonnes a year Boffa bauxite mine in Guinea which started production in December 2019.

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 the outlook period, reaching nearly 74 million tonnes by 2025 (Figure 11.3). The gains will be driven by additional capacity in China, Iran and Indonesia. In China, more greenfield aluminium smelters are anticipated, located in regions (such as Yunnan province) where power is cheap and abundant. The 396,000 tonnes per annum Baiyinhua aluminium smelter is 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.

Outside of China, Iran is implementing a plan to increase its annual aluminium production to 1.5 million tonnes by 2025, with the first phase (300,000 tonnes) of the 1 million tonnes per year SALCO aluminium smelter commencing production in 2019. In July 2019, PT Indonesia Asahan Aluminium (Inalum) announced plans to increase production at the Asahan aluminium smelter in Indonesia from 250,000 tonnes to 2.0 million tonnes per year by 2035.

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 tonnes by 2025 (Figure 11.4). This growth is expected to be driven by China, India and Cameroon. In India, bauxite sourcing has improved, with Vedanta planning to increase production capacity at its Lanjigarh refinery to 2.7 million tonnes in the short term, and 6.0 million tonnes in the medium term.

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Figure 11.6: World bauxite production


In China, greenfield alumina refineries are expected to be constructed in order to comply with the Chinese government’s stricter environmental regulation. Notably, Aluminium Corporation of China’s Chalco Guangxi Huasheng alumina refinery is expected to commence production (of around 2 million tonnes per year) from 2023. In Cameroon, the 3 million tonnes per year joint-venture CAL alumina refinery project (Emirates Global Aluminium, Hindalco and Hydromine) is expected to come online in 2022.

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 (Figure 11.6). The gains are expected to be driven by newly added capacity in Australia — the world’s largest bauxite producer — and Guinea, where production is rising rapidly. The Compagnie des Bauxites de Guinée (CBG) mine in Guinea, which expanded from 13 to 18 million tonnes per annum in 2019, is due to expand to 28 million tonnes per annum by 2022. Emirates Global Aluminium is planning to ramp up production at its bauxite mine in Guinea, with a goal of 12 million tonnes per year by the second half of the outlook period.

11.4 Australia’s production and exports 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 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 (Figure 11.7). Alumina production is expected to remain at around 20 million tonnes per annum over the outlook period (Figure 11.9).

Figure 11.7: Australia’s aluminium exports and production


A recent power outage — caused by severe weather conditions during summer — poses a risk for aluminium production. Any power blackout that lasts for more than three hours has the potential to damage production infrastructure. On 31 January 2020, Alcoa’s Portland aluminium smelter in Victoria operated at 55 per cent of capacity, after a storm cut power lines for more than three hours.

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Other risks to the aluminium outlook include the operating costs of aluminium smelters. Figure 11.8 shows the total operating costs of 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. 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 Aluminium smelter in Victoria. Rio Tinto has also announced a review of its aluminium smelter operation in New Zealand.

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 be driven by the attainment of full production capacity at Amrun (23 million 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 planned expansions or major disruptions expected at existing operations.

Lower aluminium and alumina prices lead to weaker export outlook 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 average annual rate of 4.6 per cent, to $12 billion (in real terms) in 2024–25. The decline is due to softening prices for aluminium and alumina, and lower bauxite export volumes, which will only be partially offset by increased export volumes of alumina.

Risks to the aluminium outlook include trade protection policies that have the potential to slow global demand and prices in the short term. On 24 January 2020, the US Administration introduced additional tariffs on steel and aluminium imports, which commenced on 8 February 2020. The announced tariff measures are small but targeted imported steel and aluminium from Taiwan, China, Japan and the European Union. Australia, Canada and Mexico have been exempted from the additional tariffs. The announced tariffs cover 1 per cent of the steel and aluminium trade that were covered in the March 2018 tariffs — US$450 million of US imports of

Figure 11.8: Aluminium smelter total operating costs

Source: AME (2020)

steel and aluminium bumpers, steel nails, aluminium wires, and body stamping for tractors.

Australian bauxite exports could be affected by the rise of Guinea as a major producer and exporter of bauxite. Guinea is China’s second largest supplier of bauxite (after Australia), accounting for 44 per cent of China’s total bauxite imports in 2019. Over the last few years, Chinese and European companies have invested heavily in Guinea to build up the country’s bauxite production capacity.

The Chinese government’s environmental policies for curbing air pollution are likely to remain an important influence on aluminium and alumina production. Chinese smelters and refineries that fail to meet new regulations are likely to close. This could tighten global aluminium and alumina supply, creating an opportunity for Australian producers, but could also reduce demand for Australian alumina and bauxite in the short term.

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Figure 11.9: Australia’s alumina exports and production


Figure 11.10: Australia’s bauxite exports and production


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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 -1.8Prices 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 rCAGR

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 -5.0Alumina 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 -4.9Bauxite 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 -1.9Total 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)



12.1 Summary Copper prices are expected to increase over the outlook period, as

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).

Australia’s copper exports are projected to rise from 929,000 tonnes in2018–19 to around 1.1 million tonnes (in metal content terms) in2024–25, driven by growing production from new and existing mines.

As prices and output grow, Australia’s copper export earnings areprojected to lift from $10 billion in 2018–19 to $13 billion in 2024–25 (inreal terms).

12.1 Prices

After a lacklustre 2019, copper prices continue to face headwinds After a poor period in mid-2019, copper prices showed signs of recovery towards the end of the year, with confirmation of the US-China Phase One trade deal improving market sentiment. In 2019, the London Metal Exchange (LME) copper spot price averaged US$6,000 a tonne, 8.0 per cent lower than the previous year (Figure 12.1).

So far, prices have continued to be challenged in 2020, with copper prices 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, 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. Efforts to support the economy and boost activity, including lower interest rates and stimulus, have provided some support for prices.

While the impacts of COVID-19 are still evolving, lower copper consumption in China over the start of the year could facilitate China’s full year consumption growth to be negative in 2020. Copper price growth forecasts have consequently been revised down, and in 2020 the copper spot price is forecast to average US$5,990 a tonne.

Figure 12.1: Recent copper prices and stock movements

Source: LME (2020) official cash price; Bloomberg (2020) inventories LME, COMEX, SHFE

Figure 12.2: Outlook for copper stocks and prices

Source: LME (2020) official cash price; Bloomberg (2020) Department of Industry, Science, Energy and Resources (2020)

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Over the rest of the outlook period, rising consumption and constrained production are expected to drive inventories lower and result in a modest recovery in copper prices. Prices are projected to increase at an average rate of 2.0 per cent a year, to reach US$6,900 a tonne by 2025, in real terms (Figure 12.2).

These price projections are sensitive to the balance of world copper production and consumption, which in turn will be affected by the pace of world economic growth. Markets will be influenced by US-China trade negotiations, the impacts of COVID-19 (including offsetting stimulatory policy measures), and changes in China’s usage.

12.2 World consumption

Moderating consumption growth surrounded by risks World GDP growth, and subsequently copper consumption, were weighed down by trade tensions and slowing activity in 2019. The stagnant consumption of 2019 could continue into 2020, as the impacts of COVID– 19 filter through the world economy. World consumption is forecast to increase by 2.2 per cent in 2020, to reach 24 million tonnes (Figure 12.3).

World copper consumption is expected to increase further over the 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 point to a weakening in China’s consumption, which will likely be compounded by impacts related to COVID–19. These factors are expected to see China’s copper consumption growth remain stagnant over 2020, at around 12 million tonnes. Provided conditions do not deteriorate further than current expected impacts, COVID-19 could reduce China’s copper consumption by as much as 1-2 per cent over 2020, although stimulus spending may offset some of this decline. Delayed copper imports to China, slow restarts, and supply chain interruptions have reduced consumption in the March quarter. At the time of writing, industrial production and economic activity in China is assumed to recover in the

second half of 2020. The copper market is expected to remain in deficit over 2020, though the size of this deficit has been revised down, due to the impact from the COVID-19 outbreak.

Energy transition and growing applications to support consumption In the medium term, copper consumption is likely to be bolstered by an ongoing energy transition towards lower carbon-intensive power generation and transport. Copper’s conductivity, malleability and durability make it vital to electric vehicles, batteries and renewable energy generation. Electric vehicles (EV) use around 80 kilograms of copper, compared to around 22 kilograms used in internal combustion engines. Expanding EV charging infrastructure will also support demand for copper. The level of adoption, and subsequent consumption trajectories for these markets is difficult to determine with high precision, as the uptake is dependent on rapidly changing cost profiles and government policies. World copper consumption is projected to grow at an average 2.3 per cent a year over the outlook period, to reach 27 million tonnes in 2025. This projection is heavily dependent on China’s future economic growth, as well as the health of the world economy and world trade.

Figure 12.3: Outlook for refined copper consumption

Source: World Bureau of Metal Statistics (2020); Department of Industry, Science, Energy and Resources (2020)

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12.3 World production

Outages and declining ore grades weigh on copper production World copper production contracted slightly in 2019, after healthy growth in 2018. In 2020, production is expected to grow again, supported by the ongoing ramp up of the Cobre Panama mine in Peru, which started production in October 2019. World mine production is forecast to expand to 21 million tonnes in 2020, up 2.2 per cent on 2019.

Copper production constrained by numerous factors over the outlook Many of the world’s major copper producers are facing production challenges. Rising electricity costs, civil unrest and changes to tax regimes are having a significant impact on operations and profitability in the current low price environment. Mine production is nonetheless projected to 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 significant uncertainty, particularly on the downside.

Chile is expected to maintain its status as the world’s largest producer of mined copper over the outlook period. Production from the state-owned 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 be obtained.

Copper prices, as well as the prices of common co-products like cobalt, will determine the pace of mine expansions and restarts over the outlook period. Low cobalt prices prompted the temporary closure of Glencore’s 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 two years.

Refined production growth dependant on China’s capacity Output of refined copper is forecast pick-up in 2020, increasing by less than 1 per cent over the year to reach 24 million tonnes (Figure 12.5).

Figure 12.4: Outlook for copper mine production


Figure 12.5: Outlook for refined copper production


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Production from China, which accounts for about 40 per cent of world refined production, is expected to be constrained, as COVID-19 impacts reduce operating capacity. Supply chain interruptions, including concentrate availability and the sale of sulphuric acid by-products, pose a threat to production rates. The impact of this has led to a downward revision in expected refinery output in 2020.

Refinery production is forecast to increase at an average annual rate of 1.8 per cent over the outlook period, to reach a projected 27 million tonnes in 2025. Over the outlook period, new refinery capacity is expected to come online in China, Peru, Russia and Indonesia. Refined copper production also faces expansion challenges, concentrate and electricity cost pressures, increasingly tight emission and sulphur capture limits, as well as generally tighter approval processes. New capacity in China may be delayed due to the ongoing impacts of COVID–19.

12.4 Australia

Short-term decreases overcome with higher prices and production In 2019–20, subdued copper prices are expected to weigh on export 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 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 real terms) (Figure 12.6).

Copper exports to grow, supported by higher production After significant growth in 2018–19, Australia’s mined copper production is 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 some of Australia’s operations, as evidenced by the closure of Metals X’s Nifty mine and suspended operations at EMR’s Golden Grove mine, both in Western Australia, in late 2019.

As prices recover, production is expected to grow steadily, with new projects and expansions coming online. Copper production is projected to

grow by 2.6 per cent a year to exceed 1 million tonnes in 2024–25. A ramp-up in production at Oz Mineral’s Carrapateena mine in South Australia — which started operations in late 2019, and has an annual capacity of 65,000 tonnes — is expected to contribute to this growth.

There are also a number of mine life extension projects underway, which are expected to come online over the medium term. These include Newcrest’s Telfer and Sandfire’s DeGrussa projects. Havilah Resources’ Kalkaroo project, which is Australia’s largest undeveloped open pit copper deposit, is also being investigated. Greenfield exploration projects, such as BHP’s Oak Dam project in South Australia, are currently under review. Development of these projects will depend on improving world prices. Strong gold prices and booming gold production are also likely to have positive flow-on effects in areas where copper is co-produced.

Figure 12.6: Australia’s copper export volumes and values


Interest in gold continues to help spur copper exploration Copper exploration has continued to trend up, reaching $125 million in the December quarter, 53 per cent higher year-on-year. An increase in gold interest could be spurring activity in co-existing gold and copper deposits.

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Table 12.1: Copper outlook


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 c–ores and cons. 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)


13.1 Summary Strong nickel consumption is expected to support price rises over the

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 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 in 2024–25.

Export earnings are expected to strengthen with higher prices and growing volumes. Australia’s export earnings are projected to reach $6.6 billion in 2024–25, up from $3.7 billion in 2018–19 (in real terms).

13.2 Prices

Market disruptions expected to support prices 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 Indonesia’s announcement of a ban on exports of nickel ore. Despite a 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.

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 US$14,200 a tonne in 2019.

Medium term price growth dependant on existing and new battery demand Nickel consumption is expected to drive price growth over the forecast period. Solid demand for stainless steel will likely continue, with growing momentum in nickel consumption for battery manufacturing. Nickel prices are projected to increase by an average 1.8 per cent year to reach US$15,800 a tonne in 2025, in real terms (Figure 13.2).

Figure 13.1: Recent nickel prices and LME stock level trends

Source: Bloomberg (2020), London Metal Exchange (2020)

Figure 13.2: Projected nickel spot prices and stock levels

Notes: Total stocks include warehouse and privately held stocks. Source: Bloomberg (2020) London Metal Exchange (2020); S&P Platts Global (2020), Department of Industry, Science, Energy and Resources (2020)

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13.3 World consumption

Strong consumption growth supported by stainless steel production Supported by ongoing stainless steel production, nickel consumption is 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 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 growth. Higher nickel prices may also weigh on consumption growth.

China drives consumption growth Higher usage in China is expected to account for most of the growth in nickel consumption over the outlook period. China currently accounts for just over half of world consumption, which is expected to continue to grow, driven by rising stainless steel production and growing battery manufacturing (Figure 13.3). However, in the short-term there are challenges imposed by the impacts of the COVID-19 outbreak and the Indonesian export ban. Reduced industrial activity in February and March are expected to weigh on 2020 consumption, which may be partially offset by Chinese government stimulus. China’s nickel pig iron processing is heavily reliant on imports of Indonesian nickel ore, which may be constrained by Indonesian export restrictions introduced in January 2020. Imports may be substituted with imports from the Philippines, China’s existing stocks or more expensive ‘class 1’ nickel.

Nickel’s growing role in battery manufacturing The use of nickel in battery manufacturing is expected to expand over the outlook period, as both the scale of battery manufacturing expands and the nickel intensity of battery technologies rises. Technological advances are facilitating the manufacture of batteries with a higher amount of nickel, which is favoured for its efficiency, longevity and cost-effectiveness. The share of nickel used in battery manufacturing currently accounts for about 4 per cent of nickel usage. Growth in battery manufacturing is dependent 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.

Figure 13.3: Refined nickel consumption by major country

Source: International Nickel Study Group (2019), Department of Industry, Science, Energy and Resources (2019)

13.4 World production Healthy production growth in 2019 Nickel mine production grew rapidly for the third successive year in 2019, growing 7.3 per cent to reach 2.6 million tonnes (Figure 13.4). Indonesia’s mine production has continued to gain momentum, with output increasing 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 ore export ban in January 2020. Indonesia now accounts for around a third of world mined production.

Mine production growth expected to continue Mine production is expected to continue expanding over the outlook period, rising by an average 2.0 per cent a year to reach 2.9 million tonnes in 2025. However, this growth path is not expected to be linear, with production contracting in the nearer term. Higher output from China, Brazil and Australia will be offset by lower production in Indonesia, as an expected reaction to the export ban in the short-term.

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Figure 13.4: World nickel production


Refinery capacity to grow over outlook period The outlook for refined nickel production is also positive. Growth in 2019 was significant, expanding by 8.6 per cent over the year to reach 2.4 million tonnes (Figure 13.5). Ongoing growth in refined production is expected, however at a less rapid pace.

China’s refined nickel production has declined at the start of 2020, partly constrained by COVID-19 impacts. While there are no nickel pig iron plants in Hubei province, interrupted input supply-chains have disrupted production. As such, world refined production is forecast to be broadly stagnant in 2020 at 2.4 million tonnes, before increasing later in the outlook period.

New refining capacity in China, as well as expected investment in Indonesia, are likely to come online over the outlook period, provided short-term delays due to COVID-19 are overcome.

Refined production is projected to grow an average 2.4 per cent over the outlook period to reach 2.7 million tonnes in 2025. Indonesia currently

accounts for around 16 per cent of world refinery production, which is 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.

Figure 13.5: Refined nickel production by major country


13.5 Australia Strong prices and growing output expected to boost export earnings Nickel export earnings are expected to grow significantly over the outlook period, bolstered by stronger nickel prices and investment in new capacity.

In 2019–20, export earnings are forecast to be $5.4 billion, 46 per cent 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 export earnings growing just over 10 per cent a year to reach a projected $6.6 billion by 2024–25. While stronger prices are a significant driver behind this growth, export volumes are also expected to grow steadily. Export volumes are projected to reach 436,000 tonnes by 2024–25, up from 225,000 tonnes in 2018–19.

0

1000

2000

3000

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Thou

sand

tonn

es

World mined production World refined production

0

50

100

150

200

Dec–16 Jun–17 Dec–17 Jun–18 Dec–18 Jun–19 Dec–19

Thou

sand

tonn

es

China Rest of world Indonesia Japan Russia


Positive market growth support expansions and restarts Stronger nickel prices and expectations of (battery led) demand growth have stimulated investment in nickel capacity, as well as a number of potential mine restarts. Going forward, Australia’s mine production is 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 Nickel West projects in Western Australia, including the Yakadindie and Venus deposits, as well as parallel investment in processing at the Kwinana Refinery, is expected to support volumes growth. Panoramic Resources’ Savannah mine, which restarted operations in late 2018, is expecting higher production over the outlook as ore grades improve.

There are a number of potential restarts on the cards, including Mincor’s Long and Cassini projects, First Quantum’s Ravensthorpe mine and Poseidon Nickel’s Black Swan project. This upside potential will be influenced by nickel prices.

In response to growing consumption of battery-grade nickel, there are a number of refinery capacity expansion plans are underway. Australia’s nickel sulphate capacity is expected cater to this growing demand, producing product for export to battery manufacturing facilities in China and elsewhere in Asia. With new investment in BHP’s Kwinana refinery, 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 per cent a year. BHP have indicated the potential for further expansions at the Kwinana refinery, depending on market conditions.

Exploration expenditure Nickel and cobalt exploration continued to increase in the December quarter, reaching $63 million, 25 per cent higher year-on-year (Figure 13.7). Higher nickel prices and Australia’s geological resource potential, as well as interest in co-products copper and cobalt, may have stimulated exploration activity.

Figure 13.6: Australia’s nickel export volumes and values


Figure 13.7: Quarterly nickel and cobalt exploration expenditure

Source: Source: ABS (2020) Mineral and Petroleum Exploration 8412.0

0.0

1.6

3.2

4.8

6.4

8.0

0

100

200

300

400

500

2008–09 2011–12 2014–15 2017–18 2020–21 2023–24

2019

-20

A$ b

illio

n

Thou

sand

tonn

es

Export volumes Export value (rhs)

0

15

30

45

60

75

90

2009 2011 2013 2015 2017 2019A$

mill

ion


Table 13.1: Nickel outlook


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

Stocks

kt

kt

2,432

679

2,468

600

2,530

531

2,585

471

2,645

409

2,700

353

2,768

317

2.2

-11.9

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

Price LME

– nominal

– realb

US$/t

Usc/lb

US$/t

Usc/lb

13,904

631

14,203

644

15,270

693

15,270

693

15,864

720

15,538

705

16,225

736

15,529

704

16,629

754

15,557

706

17,128

777

15,666

711

17,642

800

15,776

716

4.0

4.0

1.8

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

– nominal values

kt

$m

225

3,631

336

5,391

398

6,206

439

6,927

433

6,960

438

7,247

436

7,430

11.7

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)


14.1 Summary Zinc prices are expected to decline in real terms over the next five years,

as production starts to respond to the high prices of recent years. Adown-tick in prices in real 2020 terms is projected by the end of theoutlook period as production comes on line and stocks build with mostprice reduction in the short term. Prices are projected to decrease fromUS$2,605 a tonne in 2019 to US$1,864 a tonne in 2025, in real terms.

Australia’s zinc production is projected to increase from 1.2 milliontonnes (in metallic content) in 2018–19 to 1.8 million tonnes in 2024–25.

Increasing production, combined with falling prices is expected to seethe real value of Australia’s zinc exports decrease from $4.0 billion in2018–19 to $3.1 billion by 2024–25.

14.2 Prices Price declines reflect macroeconomic uncertainty Zinc has been affected by US-China trade tensions and resultant dampening manufacturing and automotive activity but has benefitted from the Phase One deal. The average London Metals Exchange (LME) zinc price in 2019 was 16 per cent lower than in 2018, ending the year at 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 outbreak.

Zinc stocks remain low Inventories of zinc remain low, despite recent price falls on the back of the COVID-19 outbreak. This suggests that market participants are anticipating — rather than actually experiencing — a swing towards a 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. Shanghai Futures Exchange (SHFE) inventories ended 2019 at 46,000 tonnes, having peaked in March 2019 at 110,000 tonnes. Supply shortages reflect environmental constraints on smelter production and a consequent failure by smelters to keep pace with concentrate supply.

The LME zinc spot price is forecast to average US$2,045 a tonne during 2020 (Figure 14.1). The impact of COVID-19 is expected to weigh on prices in the first half of the year. Much will depend on the depth and length of the COVID-19 outbreak: China refines a large amount of the world’s zinc, and could be impacted by worker shortages.

Beyond 2020, rising inventories are expected to place a tight cap on prices. The price should come under downward pressure over the outlook period, averaging a projected US$1,864 a tonne in real terms in 2025.

Figure 14.1: Zinc prices and stocks

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

Zinc price upside wildcard A wildcard for zinc prices includes the increasing potential for zinc-bromine based batteries as an alternative to lithium ion batteries, particularly in the energy storage space. It is early days yet, but towards the end of the outlook period, this potential source of demand may see consumption rise, putting upward pressure on prices.

0

1,000

2,000

3,000

4,000

0

2

4

6

8

2015 2017 2019 2021 2023 2025

2020

US$

a to

nne

Wee

ks o

f con

sum

ptio

n

Stocks Price (rhs)


14.3 World consumption The COVID-19 outbreak is assumed to affect China’s GDP growth in the first half of 2020 with the IMF suggesting that COVID-19 would decrease 2020 Chinese growth by 0.4 percentage points from their baseline forecasts. This may lower Chinese zinc consumption in the short term with potential for a 2 per cent annual drop in Chinese zinc consumption, depending on Chinese government stimulus measures (see the macro chapter). This, despite February inventory levels at the LME and the 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 medium-term for global zinc demand a boost. However, this is tempered by the outlook for its uses.

Zinc’s primary use is galvanising steel, either through hot dipping or cold plating. Therefore consumption is expected to move with steel production (Figure 14.2), which is in turn influenced by global industrial production, construction spending and vehicle production. On the vehicle production front, apart from the electric vehicle component, the automotive industry is very sluggish; producers have been impacted by delayed purchases by consumers who are worried about uncertain economic conditions and changing emission requirements in major countries/regions.

Other applications for zinc are in aerospace and the emerging field of energy storage in domestic and commercial applications, according to ASX listed Redflow, United States based Aerojet Rocketdyne and ZAF Energy and Canadian, Zinc8. Zinc8 recently won a competition for storage with the New York State Power Authority. Zinc energy storage has pros and cons compared with lithium energy storage but may find increased use with utilities. This is likely to start playing out towards the end of the outlook period, as the demand for lithium rises and prices potentially increase for that metal (see the lithium chapter). Additionally, as zinc can often be a by-product of other mining — compared to largely singular production for lithium — this has price implications for the metal, and consequently makes other applications potentially more attractive.

China is expected to continue to dominate global zinc consumption, though rising construction spending in India is expected to boost its market share over the outlook period.

Global zinc consumption is projected to rise modestly over the outlook period, from 14 million tonnes in 2019 to 15 million tonnes in 2025. However, with mine supply of concentrate set to increase and smelter capacity for uptake limited, this may place mines under pressure to review output to match offtake agreements or scale back production.

Figure 14.2: Annual change in global steelmaking and zinc consumption

Source: International lron and Steel Institute (2020); Department of Industry, Science, Energy and Resources (2020)

14.4 World production Mine production is set to rise slowly over the outlook period Global mine output is expected to rise slowly over the outlook period, reaching 13 million tonnes by 2025. Production gains are predominantly from Africa, with Canada assisting towards the end of the outlook period but higher grade production in diverse locations is a specific feature of the outlook period.

-10

-5

0

5

10

-10

-5

0

5

10

2015 2017 2019 2021 2023 2025 Stee

l -pe

r cen

t cha

nge

(ann

ual)

Zinc

-pe

r cen

t cha

nge

(ann

ual)

Global zinc consumption Steel production (rhs)


High grade production is due to come online in 2020–21 from a number of deposits. Production from Peru is set to decline slightly, based on minor movements from numerous deposits but higher grade ore at Antamina will see output recover from the 2019 dip. Antamina’s production should be more than 450,000 tonnes per annum of zinc over the outlook period. High grade production is also scheduled to come on line from the Dairi project in Indonesia. The resource grade of 11.5 per zinc and is one of the higher grade undeveloped resources.

High grade production is also due from the refurbishment of Kipushi in the Democratic Republic of Congo. Resource grades average just below 11 per cent but higher grade zinc rich sections average over 35 per cent zinc. Production is likely to initiate around 130,000 tonnes per annum, increasing to 200,000 tonnes per annum over the outlook period. In 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. Gamsberg in South Africa is ramping up in 2020 towards 200,000 tonnes per annum and higher beyond the outlook period. Production in southern Africa is also growing, providing further concentrate supply for processing.

Canadian production is likely to be bolstered towards the end of the outlook period as a result of by-product from other polymetallic deposits, where these deposits contain other ‘battery metals’ required for electric vehicle manufacture. Prairie Creek in Canada’s Northwest Territories is likely to head towards production soon, after receiving final permits in 2019. Production from the United States remains relatively flat, despite movements in individual mines. Additionally, IMIDRO’s Mehdiabad Mine in Iran is slated for production in 2020 ramping up over the outlook period towards 400,000 tonnes per annum of zinc.

Refinery production may struggle to keep pace with mine output Refinery production is expected to largely follow the trajectory of mined production. Capacity utilisation at smelters in China is currently high, reported at 85 per cent in late 2019. Smelter utilisation is expected to remain above 80 per cent in 2020, with output rising by around 200,000 tonnes, encouraged by high treatment and refining charges of around

US$240 a tonne. With mine supply of concentrate set to increase and smelter capacity for uptake limited, this may place mines under pressure to review output to match offtake agreements or scale back production.

India’s smelter capacity is expected to increase over the outlook period, with expansions across several smelters owned by Hindustan Zinc expected to add 113,000 tonnes per annum in new capacity.

14.5 Australia’s exploration, production and exports Exploration expenditure declined The outlook for exploration for zinc is subdued based on the present outlook for the metal. As exploration for copper continues on the back of battery materials demand, zinc is likely to be a side beneficiary. This may depress the price of zinc but give an impetus for other uses.

Exploration expenditure for silver, lead and zinc has declined 38 per cent based on a quarter to quarter comparison between December 2018 and December 2019, following a decline in zinc prices. Zinc prices have declined further since and the decline in exploration expenditure is in the same order of magnitude as the zinc price.

Figure 14.3: Australia’s exploration expenditure on silver, lead and zinc versus zinc prices

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

0

10

20

30

40

0

1,000

2,000

3,000

4,000

Dec-10 Dec-13 Dec-16 Dec-19

A$ m

illio

n

US$

a to

nne

Silver, lead, and zinc exploration expenditure (rhs)

LME Zinc Price


Australian mine production is increasing Australia’s zinc mine production was largely unchanged during the December quarter 2019 at 344,000 tonnes (in metal content terms). Production is projected to expand towards around 1.8 million tonnes a year (in metallic content terms) over the outlook period (Figure 14.4).

Increasing production at McArthur River, in the Northern Territory, as well as the ramp-up of Century in Queensland (capitalising on the low capital cost processing of tailings), is likely to continue to support Australian production growth, albeit with a limited mine life based on tailings. Offsetting this, Mt Isa is expected to decline over the outlook period with production at Cannington and Dugald River expected to remain steady.

However, production from smaller deposits outside Queensland and the Northern Territory is forecast to decline and then cease at Jaguar, Elura and Rosebery. Meanwhile, production may be initiated at Sulphur Springs. Increasing production for Queensland in particular is expected to be seen 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 deposits, particularly where these deposits contain other ‘battery metals’ required for electric vehicle manufacture.

Refined production of zinc projected to rise modestly Australia refines about 3.4 per cent of the world’s zinc. There are two zinc refiners in Australia: Nyrstar, which refines zinc at its Hobart refinery, and Korean-owned Sun Metals, which operates a smelter near Townsville.

At around 500,000 tonnes, Australian refined zinc production has remained largely flat — with occasional small declines — since 2001. This trend is expected to persist over the outlook period, although there is potential for a small increase from 2021, following an expansion at the Sun Metals facility.

Exports declining in real terms Increasing production, combined with falling prices is expected to see the 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.

Figure 14.4: Australia’s zinc exports, metallic content


Figure 14.5: Australia’s zinc mine production by state

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

0

2

4

6

8

0

500

1,000

1,500

2,000

2014–15 2016–17 2018–19 2020–21 2022–23 2024–25

2019

–20

A$ b

illio

n

Thou

sand

tonn

es

Volume Value (rhs)

0

500

1,000

1,500

2,000

2014–15 2016–17 2018–19 2020–21 2022–23 2024–25

Thou

sand

tonn

es

QLD NT NSW WA TAS SA VIC


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 a – real 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


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 b– ore and concentrate 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$m 3,952 3,542 3,128 3,277 3,187 3,360 3,456 -2.2 c– real A$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)

120


15.1 Summary The lithium hydroxide price (delivered to China) eased by 18 per cent,

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 terms) amidst higher electric vehicle uptake, with shortages possible from 2023.

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 sharp pullback in late 2019 and early 2020 due to falling prices.

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 earnings to $3.0 billion (in real terms) by 2024–25.

15.2 Prices Lithium prices have declined across the board Lithium carbonate prices (delivered to China) declined by 14 per cent over the December quarter. The price averaged US$7,110 a tonne in 2019, 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 US$11,150 a tonne delivered.

Lithium hydroxide prices (delivered to China) declined by 18 per cent over 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 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 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 sharp pullback in Australian production in recent months has helped ease downward pressure on prices. The market is expected to tighten over the second half of the outlook period, with prices expected to rise after 2021 (Figure 15.1).

Figure 15.1: Prices of spodumene ore and lithium hydroxide

Source: Roskill (2019); Brokers (2019), Department of Industry, Science, Energy and Resources (2020)

Figure 15.2: Lithium production and consumption

Source: Roskill (2019); BloombergNEF (2020); Department of Industry, Science, Energy and Resources (2020)

0

250

500

750

1,000

0

5,000

10,000

15,000

20,000

2018 2019 2020 2021 2022 2023 2024 2025

2020

US$

a to

nne

2020

US$

a to

nne

Lithium hydroxide Spodumene (rhs)

0

250

500

750

1,000

2018 2019 2020 2021 2022 2023 2024 2025Th

ousa

nd to

nnes

Production Consumption

121


15.3 World consumption Strong consumption growth is likely over the outlook period Global lithium consumption is projected to rise from 291,000 tonnes (lithium carbonate equivalent) in 2019 to around 750,000 tonnes by 2025 (Figure 15.2).

Tesla and Volkswagen are increasingly competing with each other China has increased its electric vehicle target to 25 per cent of all new automobile sales by 2025, despite a slowdown of sales in 2019 (caused by 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 production chain. Battery cell and pack manufacturing has started up in India, with the country seeking to expand into the battery manufacture and chemicals industries. Meanwhile multiple vehicle manufacturers are attempting large scale roll outs with models designed for the mass market.

Tesla began production of its Tesla 3 at its Shanghai factory in late 2019, with order books filling rapidly. Production was halted initially with the COVID-19 outbreak but resumed in mid-February 2020. The factory was 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 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, 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 increases its volumes of vehicle manufacturing.

Whilst COVID-19 has been slowing down production in China, it has presented an opportunity for Volkswagen, who might otherwise have been battery constrained. Volkswagen is now planning to deliver their ID.3 into the market in the United Kingdom in late March 2020, ahead of schedule.

The United Kingdom accelerated its banning of internal combustion engines from 2040 to 2035. The ban excludes hybrid vehicles.

Vehicle makers continue to focus on battery prices to drive down vehicle costs and drive vehicle volumes up (Figure 15.4). Barring changes in 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 and Tesla, but the financial investment decision on the project has been put on hold until the first quarter of 2021. It is worth noting that in early automotive history Ford invested in mining.

Electric vehicle sales are expected to expand significantly over the longer term as manufacturers develop facilities and the prices reach the ‘crossover’ point which will make electric vehicles cheaper than internal combustion vehicles. This draws closer at mid US$20,000’s. In battery terms, the crossover is mooted at US$100 a kilowatt hour.

Figure 15.3: World monthly electric vehicle sales

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 & matthewturner.co.uk/wp (Jan 2020).

0

100

200

300

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov DecTh

ousa

nds

2016 2017 2018 2019

122


Figure 15.4: Long-term electric vehicles sales projection

Source: International Energy Agency (2019), BloombergNEF (2019), Department of Industry, Science, Energy and Resources (2020)

15.4 World production Production is set to grow rapidly over the outlook period At 495,000 tonnes of lithium carbonate equivalent in 2019, production 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 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 brine assets, along with existing production from Olaroz in Argentina. South American production is growing, but continues to face significant water issues in the Atacama region, with one tonne of lithium requiring 70,000 litres of water. Less water-intensive methods of extraction via ion-exchange beads and nano-filtration are being trialled for brine deposits as well.

World production is projected to rise to 858,000 tonnes (lithium carbonate equivalent) by 2025. However, given the current level of over-supply, and the rapidly accelerating scale of vehicle manufacture capacity, producers are likely to pay close attention to offtake agreements, vertical integration opportunities and strategic considerations before embarking on expansion.

Medium term – carbonate versus hydroxide Lithium carbonate is likely to remain well supplied, but the demand for lithium hydroxide may exceed supply by 2023. Lithium hydroxide is suitable for use in batteries with high levels of nickel cathode. However, Tesla announced a move to using lithium phosphate batteries in China, rather than the nickel cobalt chemistry that is still used in its US factories. This chemistry is suitable for shorter travel ranges typical in China. Sociedad Quimica y Minera de Chile (SQM) at Salar Del Carmen in Chile produce lithium hydroxide and carbonate. Piedmont in the US and Keliber in Finland also plan to produce lithium hydroxide by 2025. Australia’s share of global lithium hydroxide output (Figure 15.5) hinges on project development plus transport issues from potential moisture absorption.

Figure 15.5: World lithium hydroxide production

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

0

5

10

15

20

25

30

0

5

10

15

20

25

30

2018 2020 2022 2024 2026 2028 2030

Per c

ent

Mill

ions

Electric vehicle sales Share of all vehicle sales (rhs)

0

10

20

30

0

200

400

600

2020 2021 2022 2023 2024 2025

Perc

ent o

f glo

bal

Thou

sand

tonn

es

Global production Australian production (rhs)

123


15.5 Australia Production forecast to dip before recovering 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 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 manufacturers needs for low-cost batteries to gain economies of scale.

Production forecasts are particularly difficult to make as a result of the suspension of two major projects (Mt Holland and Wodgina) and the shift to ‘care and maintenance’ for Bald Hill and possibly Mt Marion. Production has also been scaled back at Mt Cattlin and Pilgangoora (Pilbara Minerals). This leaves Greenbushes still operating normally, while Pilgangoora (Altura) has just undertaken operational refinancing.

Spodumene production in Australia has scaled back sharply in recent quarters, but capacity to refine lithium hydroxide is ramping up. Export earnings are projected to more than double by 2025, as world battery 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 commissioning risks for some plants. Export earnings forecasts do not include any incremental income to Pilbara Minerals from the development of offshore hydroxide and or carbonate processing with POSCO in Korea.

The key risk to the forecast is that margins in the production of lithium hydroxide will not be sufficient to attract capital. Whilst lithium hydroxide is a high value product, it is costly to produce. Margins between lithium carbonate and lithium hydroxide are around US$500 a tonne (on a tonne for tonne basis). This, coupled with direct conversion from spodumene to 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 reliance on Asia for battery chemicals and battery cells which may present opportunities for Australian producers.

Figure 15.6: Australian spodumene ore production

Notes: Lithium hydroxide is not included. Source: Company reports, Roskill (2020), Department of Industry, Science, Energy and Resources (2020)

Figure 15.7: Australian spodumene concentrate exports

Notes: Income figures include lithium hydroxide and spodumene volumes contain hydroxide. Source: Company reports, Roskill (2020), Department of Industry, Science, Energy and Resources (2020).

0

100

200

300

400

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Thou

sand

tonn

e LC

E

0

2,000

4,000

6,000

0

1,000

2,000

3,000

2014–15 2016–17 2018–19 2020–21 2022–23 2024–25

2019

–20

A$ m

illio

n

Thou

sand

tonn

esSpodumene volumes Spodumene values (rhs)

124


Table 15.1: Lithium Outlook

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

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

Consumption kt 291 343 409 493 606 675 753 17.2

bStocks 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

c– real 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

c– real 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 r CAGR

aMine production kt 244 191 141 224 339 382 393 8.3

dExport volume 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)

125

Trade summary charts and tables

126

Figure 16.1: Industry shares of GDP

29 8 7

58

210 6 8

61

0

20

40

60

80

Agriculture,forestry and

fishing

Mining Manufacturing Building andconstruction

Services

Per c

ent

2008–09 2018–19

GDP: $1462 b

GDP: $1887 b

Source: ABS (2020) Australian National Accounts, National Income, Expenditure & Production, 5204.0 Figure 16.2: Principal markets for Australia’s resources and energy exports, 2019–20 dollars

19

28

1410 9 8 10

1

40

18

9 8 6 5 41

0

10

20

30

40

50

China Japan Other SouthKorea

OtherAsia

India EU28 UnitedStates

Per c

ent

2008–09 2018–19

Exports: $287 b

Exports: $205 b

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

Figure 16.3: Principal markets for Australia’s resources exports, 2019–20 dollars

32

18

813

711 8

3

53

1711

6 5 51 2

0

20

40

60

China Other OtherAsia

Japan SouthKorea

EU28 India Thailand

Per c

ent

2008–09 2018–19

Exports: $107 b

Exports: $151 b

Source: ABS (2020) International Trade in Goods and Services, 5368.0 Figure 16.4: Principal markets for Australia’s energy exports, 2019–20 dollars

44

610 13

9 118

3125

12 10 9 93

0

20

40

60

Japan China OtherAsia

SouthKorea

India Other EU28Pe

r cen

t

2008–09 2018-19

Exports: $98 b

Exports: $135 b



127

Figure 16.5: Principal markets for Australia's total exports, 2019–20 dollars

2317

8 7 5 5 4

3136

16

7 4 4 3 3

27

0

20

40

60


India UnitedStates

HongKong

NewZealand

Other

Per c

ent

2008-09 2018-19

Exports: $290 b

Exports: $380 b


Figure 16.6: Australia's total imports by country of origin, 2019–20 dollars

1712

8 6 5 5

47

25

117 5 5 4

43

0

20

40

60

China UnitedStates

Japan SouthKorea

Thailand Germany Other

Per c

ent

2008–09 2018–19

Imports: $275 b

Imports: $312 b


Figure 16.7: Proportion of goods and services exports by sector

13

48

1424

12

53

1222

12

55

1222

10

58

1121

0

20

40

60

80

Rural Mineralresources

Othermerchandise

Services

Per c

ent

2015–16 2016–17 2017–18 2018–19

Source: ABS (2020) Balance of Payments and International Investment Position, 5302.0

Figure 16.8: Proportion of merchandise exports by sector

Source: ABS (2020) Balance of Payments and International Investment Position, 5302.0

18

63

1916

68

1615

70

1513

73

14

0

20

40

60

80

Rural Mineral resources Other merchandise

Per c

ent

2015–16 2016–17 2017–18 2018–19



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


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



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


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


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

South Korea

$m

$m

7,288

4,405

5,027

3,278

5,686

4,125

5,521

3,735

5,865

4,754

Taiwan

India

$m

$m

1,412

118

1,097

7

1,511

6

1,279

310

1,801

242

Indonesia $m 30 58 46 46 44

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


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

South Korea

Thailand

$m

$m

$m

1,586

836

312

748

1,197

288

984

782

324

1,422

874

387

1,344

782

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


131


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

Malaysia

India

$m

$m

$m

2,166

573

398

1,533

663

526

1,432

908

471

1,579

901

301

1,868

1,264

696

South Korea $m 273 236 419 173 623

Philippines

Total

$m

$m

3,968

9,217

3,851

8,707

2,848

7,989

3,901

8,751

3,674

9,953


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


132

Appendices


Appendix A Definitions and classifications A.1 Exchange rates In this report, the AUD/USD exchange rate (Australian dollar relative to the US dollars) is based on the median of economic forecasters at the time that the report is prepared. The source is the Bloomberg survey of economic forecasters.

World commodity prices are typically denominated in US dollars, and exchange rate movements can have a significant effect on the actual outcomes of commodity prices and export earnings. A change in the value of the US dollar against other floating international currencies can influence movements in world resources and energy prices. A change in the Australian dollar against the US dollar will impact on export earnings for domestic commodity exporters and producers. There is substantial uncertainty surrounding any exchange rate forecast, with changes to exchange rates influenced by changes in financial market sentiment, sometimes resulting in strong volatility.

A.2 Conversion to real dollars Nominal values and prices are converted to real dollars using Australian and US consumer price indexes (CPI). The Australian and US CPI forecasts are based on the median of economic forecasters at the time that the report was prepared. The source is the Bloomberg survey of economic forecasters.

A.3 Time periods The terms ‘estimate’, ‘forecast’ and ‘projection’ refer to different time periods in this report. Estimate refers to a time period that has passed, but for which full historical data is not yet available, while ‘forecast’ and ‘projection’ refer to different periods in the future. It is important to distinguish between different future time horizons, as factors affecting production, consumption and prices in the short-term differ from factors affecting these components in the medium to long-term. Forecasts also become increasingly imprecise over longer time horizons, due to increased risk and uncertainty. For these reasons, the Department of Industry, Science, Energy and Resources’ Office of the Chief Economist (DISER OCE) uses different terminology to distinguish between short-term forecasts and medium to long-term projections, as outlined in Table A2.

Table A1: OCE terminology for different time periods/horizons

Period Years Terminology

Historical Time period has passed but complete for data for the period is not yet available

Estimate

Short-term 1 to 2 years Forecast

Medium-term 3 to 5 years Projection

Long-term Beyond 5 years n/a



A.4 Commodity classifications The DISER OCE defines exports for each commodity by a selected set of 8-digit Australian Harmonised Export Commodity Classification (AHECC) codes. Where possible, the choice of AHECC codes is based on alignment 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.

In this report, benchmark prices and Australian production and exports are forecast for 21 commodities, as shown in Table A3. In estimating a total for Australia’s resources and energy exports, the remaining commodities, defined as ‘other resources’ and ‘other energy’, are forecast as a group.

Table A2: Resources and energy commodities groupings and definitions

Resources (non-energy) Energy

Definition Resource commodities are non-energy minerals and semi-manufactured products produced from non-energy minerals

Energy commodities are minerals and petroleum products that are typically used for power generation

Australian Harmonised Export Commodity Classification (AHECC) chapters

25 (part); 26 (part); 28 (part); 31 (part); 73 (part); 74; 75; 76; 78; 79; 80; 81 27 (part)

Commodities for which data is published, forecasts made and analysed in detail in this report

are Aluminium; alumina; bauxite; copper; gold; iron ore; crude steel; nickel; zinc, lithium

Crude oil and petroleum products; LNG; metallurgical 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)


Appendix B Glossary

Term Description

A$ Australian dollar

ABS Australian Bureau of Statistics

AHECC

AISC

Base metals

Bbl

Australian Harmonized Export Commodity Classification

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

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

Barrel

Bcm Billion cubic metres

Benchmark

BF and BOF

Bulks

CAGR

Capex

CFR

CIF

Coal Seam Gas (CSG)

Coke

A standard specification used to price commodities.

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

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

Compound annual growth rate

Capital expenditure

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

Cost, Insurance, and Freight

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

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


Conventional gas Natural gas that can be produced from reservoirs using traditional techniques. Contrasts with unconventional gas.

COVID-19 2019 Novel Coronavirus

CPB

CPI

Crude steel

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 expenditure by the CPI population group (i.e. metropolitan households).

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

Economic growth

EIA

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 nominal or real gross domestic product (GDP).

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


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

HCC

IEA

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 industry benchmark.

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

JCC

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 LNG contracts.

JFY Japanese fiscal year

kcal/kg Kilocalories per kilogram


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)


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

PCI

PCI

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 amount of coke required.

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

PPP

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 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

SSCC

Tariff

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 quality and more impurities.

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


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


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]

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