Australia’s resource and energy export earnings are forecast to hit a record of $425 billion in 2021–22. While new waves of COVID-19 cases and the Russian invasion of Ukraine are likely to have checked the global economic recovery (and hence commodity demand), Australian resource and energy export earnings are likely to be lifted by surging energy prices.
While this financial year’s result will represent a big increase on 2020–21, exports are expected to ease to around $370 billion in 2022–23, with further falls (in both real and nominal terms) out to 2027. Driving the fall will be a retreat of bulk commodity prices from current historical highs towards more typical levels.
A number of significant events have affected the global resources and energy sector since the publication of the December 2021 edition of the Resources and Energy Quarterly, with the most significant being the Russian invasion of Ukraine. Global commodity markets are likely to be affected not just by war itself, but by the expanding array of sanctions now being applied to Russia. It is too early to tell how broad and long-lasting these sanctions will be, but it does appear that world trade and investment flows will become more bifurcated in line with geopolitical alliances over the outlook period. Commodity supply chains will be forced to adjust.
China has relaxed macroeconomic policies in recent months, in an attempt to boost economic growth following last year’s slowdown. In January 2022, the IMF forecast China’s GDP growth to be 4.8% in 2022 and 5.2% in 2023 — a cut from prior forecasts, and one with significant implications for resource and energy commodity demand. Rising gas and coal prices caused by the Russian invasion of Ukraine will also affect China, given its high sensitivity to energy prices. China has also been forced to manage renewed outbreaks of the COVID-19 pandemic in the March quarter 2022, with recent lockdowns affecting tens of millions of people.
Inflation has picked up in most major economies, and many major central banks have begun tightening monetary policy. With global energy prices at record levels, and energy inventories in the Northern Hemisphere well below normal, prices (and thus inflation) will face more upward pressure in the near term.
Risks to forecast export earnings in 2021–22 and 2022–23 exist in both directions. A severe disruption to commodity supply emanating from Russia’s invasion of Ukraine could push prices up further. There is potential for a (related) further rise in global inflation, and a risk of tighter monetary policy in response. New, vaccine-resistant COVID-19 strains could emerge. In the latter half of the outlook period, global efforts to build energy and transport systems based on low emission sources may help to offset the impact of energy exports coming off their peak.
International coal and gas/LNG prices are at record levels — on the back of both supply and demand factors — which promises to boost Australia’s export earnings sharply in the short term. However, these high prices will impact growth in nations that are net fossil fuel consumers, and provide an incentive to minimise exposure to a range of energy sources. Australian iron ore earnings are forecast to decline noticeably in the outlook period. The global economic recovery and constrained supply saw prices exceed US$230 a tonne in mid-2021, but sharp cuts in Chinese steel output contributed to large price declines in the latter half of 2021.
Australia’s export values are estimated at $425 billion in 2021–22
In the March quarter 2022, the Office of the Chief Economist’s (OCE) Resources and Energy Export Values Index rose 49% from the March quarter 2021; a 6% rise in volumes added to a 42% gain in prices. Exports are forecast at a record $425 billion in 2021–22, up from $320 billion in 2020–21 (Figure 1.1). Exports should fall to $370 billion (real terms) in 2022–23. With volumes growing modestly, price changes are forecast to account for much of the move in future earnings (Figure 1.2). Commodity prices are set to fall as demand growth slows and supply rises.
Energy shortages and supply deficit concerns to help boost earnings
In Australian dollar terms, the OCE’s Resources and Energy Commodity Price Index rose by 24% (preliminary estimate) in the March quarter 2022, and was up 49% on a year ago. In US dollar terms, the index rose by 22% in the quarter, and was 32% higher than a year ago. The index of prices for resource (mainly metals) commodity exports (Australian dollar terms) fell by 9% in the year to the March quarter 2022. Energy commodity prices rose by 171% (Figure 1.3) from March quarter 2021, as market deficit concerns (primarily due to supply problems) added to existing shortages.
Mining industry expanded while the overall economy contracted
Australia’s real Gross Domestic Product (GDP) rose by 3.4% in the December quarter 2021, and was up 4.2% over the year since the December quarter 2020. Mining value-added fell by 1.0% in the December quarter, and was down 0.1% over the previous twelve months. Coal mining was impacted by bad weather, and the oil/gas sector by operational problems. In the coming five years, it is likely that the resources and energy sectors will make a significant contribution to real GDP growth. In the short run, coal producers will lift output and exports in response to high prices and margins. However, absent significant investment, coal production is likely to struggle to grow significantly in the latter half of the outlook period. Ferrous and non-ferrous metal production should show stronger growth than energy production, as the global energy transition gathers pace.
Australian metallurgical coal spot price, quarterly
Despite the downwards trend, risks remain weighted to prices remaining high for longer. Factors that could hold prices high include further developments in the war against Ukraine, changes in Chinese government policy, the ongoing La Niña weather event and associated weather disruptions (which often peak in Australia each March quarter), and new developments in the COVID-19 pandemic. Risks remain mostly on the supply side, with low inventories likely to exacerbate the impact of any further supply disruptions in 2022.
Metallurgical coal export earnings have risen despite supply issues
As previously noted, disruptions to Australian output have accounted for much of the recent lift in metallurgical coal prices. These disruptions included the ongoing La Niña event and recent floods in New South Wales and Queensland. Production has also been affected by the rapid growth of COVID-19 cases.
This rise has led to unpredictable worker absences in mines across Queensland, though the recent decline in new COVID cases may help to contain further effects. Metallurgical coal exports appear to be gradually recovering, with volumes lifting by 3% in December 2021. This left export volumes for 2021 broadly the same as in 2020, though the underlying supply chains have reorganised. India is now the top destination for Australian coal (accounting for almost a third of all exports in December), with significant growth also recorded in exports to South Korea, Brazil, Taiwan and Vietnam.
These supply chains are expected to remain in place over the outlook period, leaving Australian suppliers with a more diverse market in the wake of informal import restrictions by the Chinese Government. BHP has reduced its guidance for metallurgical coal output for 2022 (from 39-44 million tonnes to 38-41 million tonnes), as a result of ‘significant La Niña related wet weather impacts during the December 2021 quarter coupled with COVID-19 related labour constraints’.
These factors are expected to ease over the rest of the year, but are not expected to disappear entirely. Output from BHP is likely to be firmed by the successful completion of a complex longwall move at the company’s Broadmeadow site. Maintenance at BHP’s Caval Ridge plant was also successfully concluded in the December quarter 2021, clearing the way for stronger output at the site from 2022. Production at South32’s Dendrobium mine in 2022 is likely to fall temporarily, with the company noting that ‘Illawarra Metallurgical Coal saleable production decreased by 23% (or 951kt) to 3.1Mt in H1 FY22 as we completed an extended longwall move at the Dendrobium mine in Q2 FY22. Metallurgical coal production declined 15% to 2.8Mt, while energy coal declined by 55% to 0.4Mt. Other projects, including Appin, are also planning longwall moves, though overall production guidance remains relatively solid. Glencore has announced that metallurgical coal production across Australia reached an estimated 9.1 million tonnes in 2021: around 20% higher than in 2020. With COVID cases stabilising and producers adjusting to them, the primary risk to Australian production is now weather disruptions, with cyclones often peaking off the Queensland coast during March-April.
Floods in New South Wales and Queensland are also leading to uncertainties over supply, though the Bowen Basin, where floods have been particularly significant, is primarily a producing region for thermal coal. Over the longer term, renewed stimulus measures around the world are expected to offset some of the risk associated with potential further waves of the COVID-19 pandemic, though the timing of this remains unclear (see Macro economy chapter). Changes in consumption patterns (as countries seek to reduce carbon emissions) could have unpredictable effects on both supply and demand, with greater risks on the demand side. On balance, Australian export earnings are expected to remain well above pre-COVID levels through much of the outlook period (Figures 5.8 and 5.9), despite some short-term constraints on volumes.
Higher demand from India is expected to support Australian exports over the outlook period, though buyers in Japan, South Korea and Taiwan have also expressed interest in increased Australian supply. Metallurgical coal export earnings were $24 billion in 2020–21 (Figure 5.8). Prices are set to deliver a large windfall to metallurgical coal producers in 2021–22, with export values forecast to rise to over $60 billion, a new record level. A decline to a still-high $26 billion (in real terms) is expected by 2026–27, as seasonal and short-term supply issues pass and supply and demand come into balance.
Coal exploration expenditure has declined
Australia’s coal exploration expenditure decreased to $53 million in the December quarter, to be 9% off the level recorded in December 2020. Prices have risen markedly for Australian coal in recent months, but thermal coal in particular remains subject to significant policy and financial uncertainty. Price increases may improve rates of exploration over coming quarters, particularly for metallurgical coal.
The forecast for export earnings has been revised up by $10 billion (nominal terms) in 2021–22, but slightly reduced in 2022–23, reflecting the impact of unusually severe weather disruptions and the Russian invasion of Ukraine. The forecast for earnings in 2025–26 has been lowered by around $4 billion from the March 2021 Resources and Energy Quarterly. This reflects lower estimates for mine production in some areas, and a recent greater frequency of disruptive weather events, which have been factored in to the long-term forecast.
For more information: Australian Government • Office of the Chief Economist
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